Survey of Accounting, 3rd Edition Paul D Kimmel Solution Manual by Ace Test Banks

Survey of Accounting, 3rd Edition BY Paul D. Kimmel

CHAPTER 1 Introduction to Financial Statements Learning Objectives 1. Identify the forms of business organization and the uses of accounting information. 2. Explain the three principal types of business activity. 3. Describe the four financial statements and how they are prepared. *4. Explain the career opportunities in accounting.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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1-1

ANSWERS TO QUESTIONS 1.

The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and (3) corporation.

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

Advantages of a corporation are limited liability (stockholders not being personally liable for corporate debts), easy transferability of ownership, and ease of raising funds. Disadvantages of a corporation are increased taxation and government regulations.

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: one AICPA BB: Legal/Regulatory Perspective

Proprietorships and partnerships receive favorable tax treatment compared to corporations and are easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships and partnerships are unlimited liability (proprietors/partners are personally liable for all debts) and difficulty in obtaining financing compared to corporations.

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

Yes. Companies can choose one of the hybrid business forms, limited liability corporations (LLCs) or subchapter S corporations, which combine the tax advantages of partnerships with the limited liability of corporations.

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

Yes. A person cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing financial information. Accounting provides financial information to interested users through the preparation and distribution of financial statements.

LO 1 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

Internal users are managers who plan, organize, and run a business. To assist management, accounting provides timely internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, forecasts of cash needs for the next year, and financial statements.

LO 1 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

External users are those outside the business who have either a present or potential direct financial interest (investors and creditors) or an indirect financial interest (taxing authorities, regulatory agencies, labor unions, customers, and economic planners).

LO 1 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

The four most common types of data analytics and the basic question each addresses are: Descriptive (What happened?), Diagnostic (Why did it happen?), Predictive (What is likely to happen?), and Prescriptive (What should we do about it?).

LO 1 BT: K Difficulty: E TOT: 2 min. AACSB: None AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 1 (Continued) 9.

The three types of business activities are financing activities, investing activities, and operating activities. Financing activities include borrowing money and selling shares of stock. Investing activities include the purchase and sale of property, plant, and equipment. Operating activities include selling goods, performing services, and purchasing inventory.

LO 2 BT: C Difficulty: M TOT: 2 min. AACSB: None AICPA FC: Reporting

10. (a) Income statement. (b) Balance sheet. (c) Income statement.

(d) Balance sheet. (e) Balance sheet. (f) Balance sheet.

LO 3 BT: K Difficulty: M TOT: 2 min. AACSB: None AICPA FC: Reporting

11. When a company pays dividends, it reduces the amount of assets available to pay creditors. Therefore, banks and other creditors monitor dividend payments to ensure they do not put a company’s ability to make debt payments at risk. LO 3 BT: C Difficulty: M TOT: 2 min. AACSB: None AICPA FC: Reporting

12. Yes. Net income does appear on the income statement—it is the result of subtracting expenses from revenues. In addition, net income appears in the retained earnings statement—it is shown as an addition to the beginning-of-period retained earnings. Indirectly, the net income of a company is also included in the balance sheet. It is included in the retained earnings account which appears in the stockholders’ equity section of the balance sheet. LO 3 BT: C Difficulty: E TOT: 1 min. AACSB None AICPA FC: Reporting

13. The primary purpose of the statement of cash flows is to provide financial information about the cash receipts and cash payments of a business for a specific period of time. LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

14. The three categories of the statement of cash flows are operating activities, investing activities, and financing activities. The categories were chosen because they represent the three principal types of business activities. LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

15. Retained earnings is the net income retained in a corporation. Retained earnings is increased by net income and is decreased by dividends and a net loss. LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

16. The basic accounting equation is Assets = Liabilities + Stockholders’ Equity. LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

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Questions Chapter 1 (Continued) 17. (a) Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put more simply, liabilities are existing debts and obligations. Stockholders’ equity is the ownership claim on net assets. (b) The items that affect stockholders’ equity are issuance of common stock and the components of retained earnings (dividends, revenues, and expenses). LO 3 BT: K Difficulty: E TOT: 2 min. AACSB: None AICPA FC: Reporting

18. The liabilities are (b) Accounts payable and (g) Salaries and wages payable. LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

19. (a) Net income from the income statement is reported as an increase to retained earnings on the retained earnings statement. (b) The ending amount on the retained earnings statement is reported as the retained earnings amount on the balance sheet. (c)

The ending amount on the statement of cash flows is reported as the cash amount on the balance sheet.

LO 3 BT: C Difficulty: M TOT: 2 min. AACSB: None AICPA FC: Reporting

20. The purpose of the management discussion and analysis section is to provide management’s views on its ability to pay short-term obligations, its ability to fund operations and expansion, and its results of operations. The MD&A section is a required part of the annual report. LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

21. An unqualified opinion shows that, in the opinion of an independent auditor, the financial statements have been presented fairly, in conformity with generally accepted accounting principles. This gives investors more confidence that they can rely on the figures reported in the financial statements. LO 3 BT: C Difficulty: E TOT: 2 min. AACSB: None AICPA FC: Reporting

22. Information included in the notes to the financial statements clarifies information presented in the financial statements and includes descriptions of accounting policies, explanations of uncertainties and contingencies, and statistics and details too voluminous to be reported in the financial statements. LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

23. Using dollar amounts, Apple’s accounting equation (in millions) is: Assets $323,888

Liabilities $258,549

Stockholders’ Equity $65,339

LO 3 BT: AP Difficulty: E TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 1 (Continued) 24. A critical audit matter is an audit issue that was material in size and that involved challenging, subjective, or complex auditor judgement. LO 3 BT: K Difficulty: E TOT: 2 min. AACSB: None AICPA FC: Reporting

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1.1 (a)

Shared control, tax advantages, increased skills and resources.

(b)

Simple to set up and maintains control with owner.

(c)

Easier to transfer ownership and raise funds, no personal liability.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

BRIEF EXERCISE 1.2 (a) (b) (c) (d) (e)

4 3 2 5 1

Investors in common stock Marketing managers Creditors Chief Financial Officer Internal Revenue Service

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1.3 a. b. c. d.

Diagnostic Prescriptive Descriptive Predictive

Past or Present Past Future Past Future

Rank 2 4 1 3

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1.4 O F F O I

(a) (b) (c) (d) (e)

Cash received from customers. Cash paid to stockholders (dividends). Cash received from issuing new common stock. Cash paid to suppliers. Cash paid to purchase a new office building.

LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 1.5 E R E E D R E NSE C

(a) (b) (c) (d) (e) (f) (g) (h) (i)

Advertising expense Service revenue Insurance expense Salaries and wages expense Cash distributed to stockholders. Rent revenue Utilities expense Cash purchase of equipment Cash received from investors.

LO 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1.6 KAROL COMPANY Balance Sheet December 31, 2027 Assets Cash ............................................................................... Accounts receivable ..................................................... Total assets ...................................................................

$22,000 71,000 $93,000

Liabilities and Stockholders’ Equity Liabilities Accounts payable .................................................. Stockholders’ equity Common stock ....................................................... Retained earnings.................................................. Total stockholders’ equity ............................................ Total liabilities and stockholders’ equity.....................

$65,000 $18,000 10,000 28,000 $93,000

LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

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BRIEF EXERCISE 1.7 IS BS BS BS BS IS IS BS BS IS

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Income tax expense Inventory Accounts payable Retained earnings Equipment Sales revenue Cost of goods sold Common stock Accounts receivable Interest expense

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1.8 IS BS SCF BS

(a) (b) (c) (d)

Revenue during the period. Supplies on hand at the end of the year. Cash received from issuing new bonds during the period. Total debts outstanding at the end of the period.

LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1.9 (a) $90,000 + $230,000 = $320,000 (Total assets) (Liabilities + Stockholders’ equity = Assets) ($90,000 + $230,000 = $320,000)

(b) $170,000 – $80,000 = $90,000 (Total liabilities) (Assets – Stockholders’ equity = Liabilities) ($170,000 – $80,000 = $90,000)

(c) $800,000 – 0.25($800,000) = $600,000 (Stockholders’ equity) (Assets – (0.25 × Assets) = Stockholders’ equity) [$800,000 – (0.25 × $800,000) = $600,000] LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA: FC: Measurement

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 1.10 (a) ($800,000 + $150,000) – ($500,000 – $80,000) = $530,000 (Stockholders’ equity) [(Assets ± Change in assets) – (Liabilities ± Change in liabilities) = Stockholders’ equity] [($800,000 + $150,000) – ($500,000 – $80,000) = $530,000]

(b) ($500,000 + $100,000) + [($800,000 – $500,000) – $70,000] = $830,000 (Assets) [(Liabilities ± Change in liabilities) + (Stockholders’ equity ± Change in stockholders’ equity) = Assets] [($500,000 + $100,000) + [($800,000 – $500,000) – $70,000] = $830,000]

(c) ($800,000 – $80,000) – [($800,000 – $500,000) + $110,000] = $310,000 (Liabilities) [(Assets ± Change in assets) – (Stockholders’ equity ± Change in stockholders’ equity) = Liabilities] [($800,000 – $80,000) – [($800,000 – $500,000) + $110,000] = $310,000] LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 1.11 A L A A SE L

(a) (b) (c) (d) (e) (f)

Accounts receivable Salaries and wages payable Equipment Supplies Common stock Notes payable

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1.12 (d) All of these are required. LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

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SOLUTIONS TO DO IT! EXERCISES DO IT! 1.1a (a) Easier to transfer ownership: corporation (b) Easier to raise funds: corporation (c) More owner control: sole proprietorship (d) Tax advantages: sole proprietorship and partnership (e) No personal legal liability: corporation LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

DO IT! 1.1b _3_ _5_ _2_ _1_ _4_

(a) Accounting (b) Internal users of financial information (c) Element of Sarbanes-Oxley Act (d) External users of financial information (e) Steps in solving an ethical dilemma

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

DO IT! 1.2 (a) Issuance of ownership shares is classified as common stock. (b) Land purchased is classified as an asset. (c) Amounts owed to suppliers are classified as liabilities. (d) Bonds payable are classified as liabilities. (e) Amount recorded from selling a product is classified as revenue. (f) Cost of advertising is classified as expense. LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

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DO IT! 1.3a GRAY CORPORATION Income Statement For the Year Ended December 31, 2027 Revenues Service revenue ........................................... Expenses Rent expense................................................ Advertising expense .................................... Supplies expense ......................................... Total expenses .................................. Net income ...........................................................

$25,000 $10,000 4,000 1,700 15,700 $ 9,300

[Serv. rev. – Tot. expenses = Net inc. or (loss)] [$25,000 – ($10,000 + $4,000 + $1,700) = $9,300]

GRAY CORPORATION Retained Earnings Statement For the Year Ended December 31, 2027 Retained earnings, January 1 .................................. Add: Net income .................................................... Less: Dividends ....................................................... Retained earnings, December 31 ............................

$ –0– 9,300 9,300 2,500 $6,800

(Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) ($0 + $9,300 – $2,500 = $6,800)

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DO IT! 1.3a (Continued) GRAY CORPORATION Balance Sheet December 31, 2027 Assets Cash .......................................................................... Accounts receivable................................................. Supplies .................................................................... Equipment ................................................................. Total assets...............................................................

$ 3,100 2,000 1,900 26,800 $33,800

Liabilities and Stockholders’ Equity Liabilities Notes payable .................................................... Account payable ............................................... Total liabilities......................................... Stockholders’ equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity ..................... Total liabilities and stockholders’ equity ................

$ 7,000 5,000 $12,000 15,000 6,800 21,800 $33,800

(Assets = Liabl. + SE) [($3,100 + $2,000 + $1,900 + $26,800) = (($7,000 + $5,000) + ($15,000 + $6,800))] LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

1-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 1.3b (a) Description of ability to pay near-term obligations: MD&A (b) Unqualified opinion: auditor’s report (c) Details concerning liabilities, too voluminous to be included in the statements: notes to the financial statements (d) Description of favorable and unfavorable trends: MD&A (e) Certified public accountant (CPA): auditor’s report (f) Descriptions of significant accounting policies: notes to the financial statements LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

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SOLUTIONS TO EXERCISES EXERCISE 1.1 (a) (b) (c) (d) (e) (f) (g) (h) (i)

8. 1. 6. 7. 3. 2. 9. 5. 4.

Auditor’s opinion Corporation Common stock Accounts payable Accounts receivable Creditor Hybrid organizational form Stockholder Partnership

LO 1-3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

EXERCISE 1.2 Sole Proprietorship Partnership Corporation 1. 2.

3. 4.

No personal liability. Owners pay personal income tax on company income. Generally the easiest form of organization to raise capital. Ownership indicated by shares.

Owned by one person.

Limited life.

Usually the easiest form of organization to set up.

LO 1 BT: C Difficulty: Medium TIME: 10 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 1.3

Investor Marketing manager Creditor Chief financial officer Internal Revenue Service Labor union

(a) Type of Evaluation

(b) Type of User

5 4 1 6 2

External Internal External Internal External

External

LO 1 BT: C Difficulty: Easy TIME: 5 min. AACSB: None AICPA FC: Reporting

EXERCISE 1.4 a. 4 Explains what future actions the company should take. b. 1 Explains what happened in the past. c. 3 Explains what will probably happen in the future. d. 2 Explains why past events occurred. LO 1 BT: K Difficulty: Easy TIME: 5 min. AACSB: None AICPA FC: Reporting

EXERCISE 1.5 a. 8 b. 1 c. 4 d. 9 e.10 f. 2 g. 6 h. 3 i. 11 j.

k. 5

Assets = Liabilities + Stockholders’ Equity. An individual who has met certain criteria and is thus allowed to perform audits of corporations. Payments of cash from a corporation to its stockholders. The cost of assets consumed or services used in the process of generating revenues. Amounts owed to creditors in the form of debts and other obligations. A section of the annual report that presents management’s views on the company’s ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations. The amount by which expenses exceed revenues. The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business. Regulations passed by Congress to reduce unethical corporate behavior. A business owned by one person. The owner’s claim to assets.

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EXERCISE 1.6 (a)

Answers will vary. (1) Financing Sale of stock

Abitibi-Consolidated Inc. California State Borrow money University—Northridge from a bank Student Union Oracle Corporation Sale of bonds

Aquilini Investment Group Grant Thornton LLP

Southwest Airlines

Payment of dividends to stockholders Distribute earnings to partners Sale of stock

(2) Investing Purchase long-term investments Purchase office equipment Purchase other companies Purchase hockey equipment Purchase computers Purchase airplanes

(3) Operating Sale of newsprint Payment of wages and benefits Payment of research expenses Payment for ice rink rentals Bill clients for professional services Payment for jet fuel

(b) Financing Sale of stock is common to all corporations. Borrowing from a bank is common to all businesses. Distribution of earnings to partners would only be common to partnerships. Payment of dividends is common to all corporations. Sale of bonds is common to large corporations. Investing Purchase and sale of property, plant, and equipment would be common to all businesses—the types of assets would vary according to the type of business and some types of businesses require a larger investment in long-lived assets. A new business or expanding business would be more apt to acquire property, plant, and equipment while a mature or declining business would be more apt to sell it. Purchase of long-term investments and other companies would be common to all businesses. Operating The general activities identified would be common to most businesses, although the service or product would differ. LO 2 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Reporting

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EXERCISE 1.7 1. 2. 3. 4. 5. 6. 7. 8.

O I O F F F O F

LO 2 BT: K Difficulty: Easy TIME: 5 min. AACSB: None AICPA FC: Reporting

EXERCISE 1.8 Accounts payable Accounts receivable Equipment Sales revenue Service revenue Inventory Mortgage payable Supplies expense Rent expense Salaries and wages expense

L A A R R A L E E E

LO 2, 3 BT: C Difficulty: Easy TOT: 3 min AACSB: None AICPA FC:, Reporting

EXERCISE 1.9 1. 2. 3. 4. 5. 6. 7. 8.

IS BS, SCF SCF IS BS RE RE BS

9. 10. 11. 12. 13. 14. 15.

BS IS IS SCF BS BS BS

LO 3 BT: K Difficulty: Easy TIME: 10 min. AACSB: None AICPA FC: Reporting

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EXERCISE 1.10 BENSER CO. Income Statement For the Year Ended December 31, 2027 Revenues Service revenue ..................................................... Expenses Salaries and wages expense ................................. Rent expense ......................................................... Utilities expense .................................................... Advertising expense .............................................. Total expenses ............................................... Net income .....................................................................

$58,000 $30,000 10,400 2,400 1,800 44,600 $13,400

(Serv. rev. – Tot. exp. = Net inc.) [$58,000 – ($30,000 + $10,400 + $2,400 + $1,800) = $13,400]

BENSER CO. Retained Earnings Statement For the Year Ended December 31, 2027 Retained earnings, January 1 .......................................................... Add: Net income ............................................................................. Less: Dividends ............................................................................... Retained earnings, December 31 ....................................................

$67,000 13,400 80,400 6,000 $74,400

(Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) ($67,000 + $13,400 – $6,000 = $74,400) LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1.11 (a)

MERCK AND CO. Income Statement For the Year Ended December 31, 2027 (in millions) Revenues Sales revenue.................................................. Expenses Cost of goods sold ......................................... Selling and administrative expenses ............ Research and development expense ............ Income tax expense ........................................ Total expenses ............................................ Net income ...............................................................

$38,576.0 $ 9,018.9 8,543.2 5,845.0 2,267.6 25,674.7 $12,901.3

(Sales rev. – Tot. exp. = Net inc.) [$38,576.0 – ($9,018.9 + $8,543.2 + $5,845.0 + $2,267.6) = $12,901.3]

MERCK AND CO. Retained Earnings Statement For the Year Ended December 31, 2027 (in millions) Retained earnings, January 1 ................................. Add: Net income.................................................... Less: Dividends ...................................................... Retained earnings, December 31 ...........................

$43,698.8 12,901.3 56,600.1 3,597.7 $53,002.4

(Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) ($43,698.8 + $12,901.3 – $3,597.7 = $53,002.4]

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1-19

EXERCISE 1.11 (Continued) (b) The short-term implication would be a decrease in expenses of $2,922.5 ($5,845 × 50%) resulting in a corresponding increase in income (ignoring income taxes). If all other revenues and expenses remain unchanged, decreasing research and development expenses would produce 22.7% more net income ($2,922.5 ÷ $12,901.3). The long-term implications would be more difficult to quantify but it is safe to predict that a reduction in research and development expenses would probably result in lower sales revenues in the future. Pharmaceutical companies are usually able to charge higher prices for newly developed products while lower cost generic versions usually replace older products. Decreasing research and development activities will probably mean fewer new products. The stock market’s initial reaction might be positive since Merck’s net income would increase significantly. Such a reaction would probably be very short-lived as more knowledgeable investors reviewed Merck’s financial statements and discovered the cause of the increase. LO 3 BT: AP Difficulty: Hard TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1.12 ZHENG INC. Retained Earnings Statement For the Year Ended December 31, 2027 Retained earnings, January 1 .................................. Add: Net income ....................................................

$130,000 225,000* 355,000 65,000 $290,000

Less: Dividends ....................................................... Retained earnings, December 31 ............................ *Service revenue ...................................................... *Total expenses ........................................................ *Net income ..............................................................

$400,000 175,000 $225,000

(Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) [$130,000 + ($400,000 – $175,000) – $65,000 = $290,000] LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1.13 RANDALL INC. Balance Sheet December 31, 2027 Assets Cash .......................................................................... Accounts receivable ................................................ Inventory ................................................................... Supplies .................................................................... Equipment (net) ........................................................ Total assets ..........................................................

Kimmel, Survey of Accounting, 3e, Solutions Manual

6,250 2,400 2,840 3,760 108,200 $123,450

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EXERCISE 1.13 (Continued) Liabilities and Stockholders’ Equity Liabilities Notes payable .............................................. Accounts payable ........................................ Interest payable ........................................... Salaries and wages payable ....................... Unearned service revenue .......................... Total liabilities ................................................ Stockholders’ equity Common stock............................................. Retained earnings** ..................................... Total stockholders’ equity* ............................ Total liabilities and stockholders’ equity ..........

$31,500 3,700 580 745 850 $ 37,375 50,700 35,375 86,075 $123,450

*Tot. assets – Total liabl. = Total SE $123,450 – $37,375 = $86,075 **Tot. SE – Common stk. = Ret. earn. $86,075 – $50,700 = $35,375 LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1.14 (a) Lee Corporation is distributing nearly all of this year’s net income as dividends. This suggests that Lee is not pursuing rapid growth. Companies that have a lot of opportunities for growth pay low dividends. (b) Steele Corporation is not generating sufficient cash provided by operating activities to fund its investing activities. Instead, it generates additional cash through financing activities. This is common for companies in their early years of existence. LO 3 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1.15 (a)

(b)

A SE E E A A A R L L R E

Cash Retained earnings Cost of goods sold Salaries and wages expense Prepaid insurance Inventory Accounts receivable Sales revenue Notes payable Accounts payable Service revenue Interest expense LONYEAR INC. Income Statement For the Year Ended December 31, 2027

Revenues Sales revenue...................................... Service revenue .................................. Total revenues ................................. Expenses Cost of goods sold ............................. Salaries and wages expense.............. Interest expense ................................. Total expenses ................................ Net income ..................................................

$584,951 4,806 $589,757 438,458 115,131 1,882 555,471 $ 34,286

[Tot. rev. – Tot. exp. = Net inc.] [($584,951 + $4,806) – ($438,458 + $115,131 + $1,882) = $34,286] LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1.16 (a) E L L R A E (b)

Interest expense Interest payable Notes payable Sales revenue Cash Salaries and wages expense

A E A SE E

Equipment, net Depreciation expense Supplies Common stock Supplies expense

FAMILIA INC. Income Statement For the Year Ended December 31, 2027 Revenues Sales revenue ...................................... Expenses Salaries and wages expense .............. Depreciation expense ......................... Interest expense.................................. Supplies expense ................................ Total expenses ................................ Net income.…………………………………….

$44,300 $15,600 3,200 2,200 900 21,900 $22,400

[Tot. rev. – Tot. exp. = Net inc.] [$44,300 – ($15,600 + $3,200 + $2,200 + $900) = $22,400] LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 1.17 First note that the retained earnings statement shows that (b) equals $27,000. Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders’ equity

$5,000 + a + $27,000 = $62,000 a + $32,000 = $62,000 a = $30,000 Common stock Beginning retained earnings + Net income – Dividends = Ending retained earnings

$12,000 + e – $5,000 = $27,000 $7,000 + e = $27,000 e = $20,000 Net income From above, we know that net income (d) equals $20,000. Revenues – Cost of goods sold – Salaries and wages expense = Net income

$85,000 – c – $10,000 = $20,000 $75,000 – c = $20,000 c = $55,000 Cost of goods sold LO 3 BT: AN Difficulty: Hard TOT: 7 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1.18 (c) $37,000 (given) (d) $97,000 = ($22,000 + $38,000 + $37,000) (b) $97,000 (See (d)) (a) $3,000 = ($97,000 – $29,000 – $65,000) (e) $17,000 = [$53,000 – ($25,000 + $1,000 + $10,000)] (g) $25,000 (given) (f) $18,000 = ($37,000 + $6,000 – $25,000) LO 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1.19 (a) Service revenue ............................................ Sales revenue................................................ Total revenues ....................................... Expenses ....................................................... Net income ....................................................

$132,000 25,000 $157,000 126,000 $ 31,000

(Tot. rev. – Exp. = Net inc.) [($132,000 + $25,000) – $126,000 = $31,000]

(b)

OTAY LAKES PARK Retained Earnings Statement For the Year Ended December 31, 2027 Retained earnings, January 1 ................................................ Add: Net income ................................................................... Less: Dividends ..................................................................... Retained earnings, December 31 ...........................................

$ 5,000 31,000 36,000 9,000 $27,000

(Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) ($5,000 + $31,000 – $9,000 = $27,000)

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 1.19 (Continued) OTAY LAKES PARK Balance Sheet December 31, 2027 Assets Cash.................................................................... Supplies ............................................................. Equipment .......................................................... Total assets ........................................................

8,500 5,500 114,000 $128,000

Liabilities and Stockholders’ Equity Liabilities Notes payable ............................................. Accounts payable ...................................... Total liabilities..................................... Stockholders’ equity Common stock ........................................... Retained earnings ...................................... Total stockholders’ equity ................. Total liabilities and stockholders’ equity .........

$50,000 11,000 $ 61,000 40,000 27,000 67,000 $128,000

(Assets = Liabl. + SE) [($8,500 + $5,500 + $114,000) = (($50,000 + $11,000) + ($40,000 + $27,000))]

(c) The income statement indicates that revenues from the general store were only about 16% ($25,000 ÷ $157,000) of total revenues which tends to support Walt’s opinion. In order to decide if the store is “more trouble than it is worth,” I would need to know the amount of expenses attributable to the general store. The income statement reports all expenses in a single category rather than separating them into camping and general store expenses to correspond with revenues. A break down into two categories would help me decide if the general store is generating a profit or loss. Even if the general store is operating at a loss, I might recommend retaining it if campers indicated that the convenience of having a general store on site was an important amenity in selecting a campground. LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1.20 (a)

(b)

SE E E A L E L A R L SE E

Retained earnings Cost of goods sold Selling and administrative expenses Cash Notes payable Interest expense Bonds payable Inventory Sales revenue Accounts payable Common stock Income tax expense KELLOGG COMPANY Income Statement For the Year Ended December 31, 2027 (in millions)

Revenues Sales revenue ........................................... Expenses Cost of goods sold ................................... Selling and administrative expenses ...... Income tax expense ................................. Interest expense ....................................... Total expenses .................................. Net income .......................................................

$12,575 $7,184 3,390 498 295 11,367 $ 1,208

[Sales rev. – Tot. exp. = Net inc.] [$12,575 – ($7,184 + $3,390 + $498 + $295) = $1,208] LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 1.21 (a)

WILLIAMS CORPORATION Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Cash received from customers ...................... $ 50,000 Cash paid to suppliers .................................... (16,000) Net cash provided by operating activities ..... $ 34,000 Cash flows from investing activities Cash paid for new equipment ........................ (28,000) Net cash used by investing activities ............ (28,000) Cash flows from financing activities Cash received from lenders ........................... 20,000 Cash dividends paid ....................................... (8,000) Net cash provided by financing activities ..... 12,000 Net increase in cash ............................................... 18,000 Cash at beginning of period ................................... 12,000 Cash at end of period ............................................. $ 30,000

(Cash flows from oper., invest., and fin. act. = Net change in cash) [($50,000 – $16,000) – $28,000 + ($20,000 – $8,000) = $18,000]

(b) As a creditor, I would feel reasonably confident that Williams has the ability to repay its lenders. During 2027, Williams generated $34,000 of cash from its operating activities. This amount more than covered its expenditures for new equipment but not both equipment purchases and dividends. LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1.22 (a)

SOUTHWEST AIRLINES Statement of Cash Flows For the Year Ended December 31, 2027 (in millions) Cash flows from operating activities Cash received from customers ......................... Cash paid for goods and services .................... Net cash provided by operating activities ........ Cash flows from investing activities Cash paid for property and equipment ............. Net cash used by investing activities ............... Cash flows from financing activities Cash received from issuance of long-term debt ................................................. Cash received from issuance of common stock................................................. Cash paid for repurchase of common stock ..... Cash paid for repayment of debt........................ Cash paid for dividends...................................... Net cash used by financing activities ................ Net increase in cash.................................................. Cash at beginning of period ..................................... Cash at end of period................................................

$9,823 (6,978) $2,845 (1,529) (1,529) 500 144 (1,001) (122) (14) (493) 823 1,390 $2,213

(Cash flows from oper., invest., and fin. act. = Net change in cash) [($9,823 – $6,978) – $1,529 + ($500 + $144 – $1,001 – $122 – $14) = $823]

(b) Southwest reported $2,845,000,000 cash from operating activities but spent $1,529,000,000 to invest in new property and equipment. Its cash from operating activities was sufficient to finance its investing activities. Southwest supplemented the cash from operating activities by issuing long-term debt and additional shares of common stock. It used excess cash to repurchase stock, pay down debt, and pay dividends. In total, it generated more cash from operating activities than it paid for investing and financing activities resulting in a net increase in cash for 2027. LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 1.23 BEESON COMPANY Balance Sheet December 31, 2027 Assets Cash .............................................................................. Accounts receivable .................................................... Supplies ........................................................................ Equipment..................................................................... Total assets ..................................................................

$18,000 12,000 9,500 40,000 $79,500

Liabilities and Stockholders’ Equity Liabilities Accounts payable ................................................. Stockholders’ equity Common stock ...................................................... Retained earnings................................................. Total stockholders’ equity ........................................... Total liabilities and stockholders’ equity....................

$16,000 $40,000 23,500* 63,500 $79,500

*$31,500 – $8,000 (Assets = Liabl. + SE) [($18,000 + $12,000 + $9,500 + $40,000) = ($16,000 + ($40,000 + ($31,500 – $8,000)))] LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1.24 All dollars are in millions. (a) Assets Cash ........................................................................................... $ 2,291.1 Accounts receivable ................................................................. 2,883.9 Inventory ................................................................................... 2,357.0 Equipment ................................................................................. 1,957.7 Buildings ................................................................................... 3,759.9 Total assets ............................................................................... $13,249.6 Liabilities Notes payable ........................................................................... $ 342.9 Accounts payable ..................................................................... 2,815.8 Mortgage payable ..................................................................... 1,311.5 Income taxes payable ............................................................... 86.3 Total liabilities ........................................................................... $ 4,556.5 Stockholders’ Equity Common stock .......................................................................... $ 2,874.2 Retained earnings ..................................................................... 5,818.9 Total stockholders’ equity........................................................ $ 8,693.1 (b)

Assets Liabilities Stockholders’ Equity = + $13,249.6 $4,556.5 $8,693.1

(c) Nike has relied more heavily on equity than debt to finance its assets. Debt (liabilities) financed 34% of its assets ($4,556.5 ÷ $13,249.6) compared to equity financing of 66% ($8,693.1 ÷ $13,249.6). LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 1.25 (a)

Assets $110,000 (a)

= = =

Liabilities $70,000 $40,000

+ +

Stockholders’ Equity (a)

(b)

Assets (b) (b)

= = =

Liabilities $120,000 $180,000

+ +

Stockholders’ Equity $60,000

(c)

Beginning Stockholders’ Equity $40,000(a)

Revenues –

Expenses

– Dividends

$215,000 $ 90,000

– –

$165,000 (c) (c)

– (c)

= = =

Ending Stockholders’ Equity $60,000 $60,000 $30,000

(d)

Assets $150,000 (d)

= = =

Liabilities (d) $80,000

+ +

Stockholders’ Equity $70,000

(e)

Assets $180,000 (e)

= = =

Liabilities $ 55,000 $125,000

+ +

Stockholders’ Equity (e)

(f)

Beginning Stockholders’ Equity $70,000 (f)

Revenues –

+ =

(f) $140,000

–

Expenses

– Dividends

$80,000

– $5,000

Ending Stockholders’ Equity $125,000(e)

LO 3 BT: AN Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1.26 (a) (b) (c) (d) (e) (f)

Financial statements Auditor’s opinion Notes to the financial statements Financial statements Management discussion and analysis Not disclosed

LO 3 BT: K Difficulty: Easy TOT: 3.0 min. AACSB: None AICPA FC: Reporting

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EXERCISE 1.27 (a) L A A A SE A L A A L L SE A

Accounts payable Accounts receivable Buildings Cash Common stock Equipment, net Income taxes payable Inventory Land Mortgage payable Notes payable Retained earnings Supplies

(b) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders’ equity classifications as they have not yet learned how to classify/order accounts.

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EXERCISE 1.27 (Continued) AVENTURA INC. Balance Sheet November 30, 2027 Assets Cash Accounts receivable Inventory Supplies Land Buildings Equipment, net Total assets

$ 20,000 19,500 18,000 700 44,000 100,000 30,000 $232,200

Liabilities and Stockholders’ Equity Liabilities Accounts payable Income taxes payable Notes payable Mortgage payable Total liabilities Stockholders’ equity Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

$ 26,200 6,000 34,000 97,500 $163,700 20,000 48,500 68,500 $232,200

(Assets = Liabilities + Stockholders’ equity) LO 3 BT: AP Difficulty: Medium TIME: 20 min. AACSB: Analytic AICPA FC: Reporting

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SOLUTIONS TO PROBLEMS PROBLEM 1.1

(a) The concern over legal liability would make the corporate form a better choice over a partnership. Also, the corporate form will allow the business to raise cash more easily, which may be of importance in a rapidly growing industry. (b) Bob should run his business as a sole proprietor. He has no real need to raise funds, and he doesn’t need the expertise provided by other partners. The sole proprietorship form would provide the easiest form. One should avoid a more complicated form of business unless the characteristics of that form are needed. (c) The fact that the combined business expects that it will need to raise significant funds in the near future makes the corporate form more desirable in this case. (d) It is likely that this business would form as a partnership. Its needs for additional funds would probably be minimal in the foreseeable future. Also, the three know each other well and would appear to be contributing equally to the firm. Service firms, like consulting businesses, are frequently formed as partnerships. (e) One way to ensure control would be for Don to form a sole proprietorship. However, in order for this business to thrive it will need a substantial investment of funds early. This would suggest the corporate form of business. In order for Don to maintain control over the business he would need to own more than 50 percent of the voting shares of common stock. In order for the business to grow, he may have to be willing to give up some control. LO 1 BT: C Difficulty: Medium TOT: 20 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 1.2

(a) In deciding whether to extend credit for 30 days, The North Face would be most interested in the balance sheet because the balance sheet shows the assets on hand that would be available for settlement of the debt in the near-term. (b) In purchasing an investment that will be held for an extended period, the investor must try to predict the future performance of Amazon.com. The income statement provides the most useful information for predicting future performance. (c) In extending a loan for a relatively long period of time, the lender is most interested in the probability that the company will generate sufficient income to meet its interest payments and repay its principal. The lender would therefore be interested in predicting future net income using the income statement. It should be noted, however, that the lender would also be very interested in both the balance sheet and statement of cash flows—the balance sheet because it would show the amount of debt the company had already incurred, as well as assets that could be liquidated to repay the loan. And the company would be interested in the statement of cash flows because it would provide useful information for predicting the company’s ability to generate cash to repay its obligations. (d) The president would probably be most interested in the statement of cash flows since it shows how much cash the company generates and how that cash is used. The statement of cash flows can be used to predict the company’s future cash-generating ability. LO 3 BT: C Difficulty: Medium TOT: 15 min AACSB: None AICPA FC: Reporting

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PROBLEM 1.3

(a)

ELITE SERVICE CO. Income Statement For the Month Ended June 30, 2027 Revenues Service revenue .............................................. Expenses Salaries and wages expense .......................... Supplies expense............................................ Maintenance and repairs expense ................. Advertising expense ....................................... Utilities expense.............................................. Total expenses ........................................ Net income ...............................................................

$7,500 $1,400 1,000 600 400 300 3,700 $3,800

(Serv. rev. – Tot. exp. = Net inc.) [$7,500 – ($1,400 + $1,000 + $600 + $400 + $300) = $3,800]

ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2027 Retained earnings, June 1 ....................................................... Add: Net income..................................................................... Less: Dividends ....................................................................... Retained earnings, June 30 .....................................................

$ 0 3,800 3,800 1,400 $2,400

(Beg. ret. earn. – Net inc. – Div. = End. ret. earn.) ($0 + $3,800 – $1,400 = $2,400)

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 1.3 (Continued) ELITE SERVICE CO. Balance Sheet June 30, 2027 Assets Cash ........................................................................... Accounts receivable .................................................. Supplies ..................................................................... Equipment .................................................................. Total assets ................................................................

$ 4,600 4,000 2,400 26,000 $37,000

Liabilities and Stockholders’ Equity Liabilities Notes payable .................................................... $12,000 Accounts payable .............................................. 500 Total liabilities ............................................ Stockholders’ equity Common stock ................................................... 22,100 Retained earnings .............................................. 2,400 Total stockholders’ equity ......................... Total liabilities and stockholders’ equity ....................

$12,500

24,500 $37,000

(Assets = Liabl. + SE) [($4,600 + $4,000 + $2,400 + $26,000) = (($12,000 + $500) + ($22,100 + $2,400))]

(b) Elite had a very successful first month, earning $3,800 or about 51% of service revenues ($3,800 ÷ $7,500). Its net income represents a little over 17% return on the initial investment ($3,800 ÷ $22,100). (c) Distributing a dividend after only one month of operations is probably unusual. Most new businesses choose to build up a cash balance to provide for future operating and investing activities or pay down debt. Elite distributed approximately 37% ($1,400 ÷ $3,800) of its first month’s income but it had adequate cash to do so and still showed a significant increase in retained earnings. LO 3 BT: AP Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

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PROBLEM 1.4 REESE INC. Income Statement For the Month Ended October 31, 2027 Revenues: Service revenue ................................................. Expenses: Salaries and wages expense ............................ Interest expense ................................................ Supplies expense .............................................. Depreciation expense ....................................... Total expenses .............................................. Net Income………………………………………….

$20,920 $2,500 410 380 270 3,560 $17,360

(Serv. rev. – Tot. exp. = Net inc.) [$20,920 – ($2,500 + $410 + $380 + $270) = $17,360]

REESE INC. Retained Earnings Statement For the Month Ended October 31, 2027 Retained earnings, October 1 ................................ Add: Net income ..................................................... Retained earnings, October 31……………………….

0 17,360 $17,360

(Beg. ret. earn. + Net inc. = End. ret. earn.) ($0 + $17,360 = $17,360)

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PROBLEM 1.4 (Continued) REESE INC. Balance Sheet October 31, 2027 Assets Cash......................................................................... Accounts receivable ............................................... Supplies .................................................................. Equipment (net) ...................................................... Total assets .............................................................

$ 3,950 1,300 2,460 48,200 $55,910

Liabilities and Stockholders’ Equity Liabilities Bonds payable ................................................... Accounts payable .............................................. Unearned service revenue ................................ Salaries and wages payable ............................. Interest payable ................................................. Total liabilities........................................... Stockholders’ Equity Common stock................................................... Retained earnings.............................................. Total stockholders’ equity ....................... Total liabilities and stockholders’ equity ...............

$21,500 3,300 4,065 445 140 $29,450 9,100 17,360 26,460 $55,910

(Assets = Liabl. + SE) [($3,950 + $1,300 + $2,460 + $48,200) = (($21,500 + $3,300 + $4,065 + $445 + $140) + ($9,100 + $17,360))] LO 3 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

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PROBLEM 1.5

(a) ROJO CORPORATION Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Cash received from customers ........................ $132,000 Cash paid to suppliers ...................................... (104,000) Net cash provided by operating activities ....... $28,000 Cash flows from investing activities Cash paid to purchase equipment ................... (12,000) Net cash used by investing activities .............. (12,000) Cash flows from financing activities Cash received from issuing common stock .... 22,000 Cash dividends paid.......................................... (7,000) Net cash provided by financing activities ....... 15,000 Net increase in cash ................................................ 31,000 Cash at beginning of period .................................... 9,000 Cash at end of period .............................................. $40,000 (Cash flows from oper., invest., and fin. act. = Net change in cash) [($132,000 – $104,000) – $12,000 + ($22,000 – $7,000) = $31,000]

(b) Rojo Corporation’s operating activities provided $28,000 of cash which was adequate to fund its investing activities $12,000 and make $7,000 of dividend payments. LO 3 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 1.6

(a) 1.

Since the boat actually belongs to Miko Liu—not to Micado Corporation—it should not be reported on the corporation’s balance sheet. Likewise, the boat loan is a personal loan of Miko’s—not a liability of Micado Corporation.

The inventory should be reported at $25,000, the amount paid when it was purchased. Micado Corporation will record $36,000 as revenues when the inventory is sold.

The $10,000 receivable is not an asset of Micado Corporation—it is a personal asset of Miko Liu.

(b)

MICADO CORPORATION Balance Sheet December 31, 2027 Assets Cash.......................................................................... Accounts receivable ................................................ Inventory .................................................................. Total assets ..............................................................

$20,000 40,000* 25,000 $85,000

Liabilities and Stockholders’ Equity Liabilities Notes payable ...................................................... Accounts payable ............................................... Total liabilities .......................................................... Stockholders’ equity ............................................... Total liabilities and stockholders’ equity ...............

$15,000 30,000 $45,000 40,000** $85,000

*$50,000 – $10,000 **$85,000 – $45,000 (Total assets minus total liabilities) (Assets = Liabl. + SE) [($20,000 + ($50,000 – $10,000) + $25,000) = (($15,000 + $30,000) + ($85,000 – $45,000))] LO 3 BT: AN Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

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CT1.1

FINANCIAL REPORTING PROBLEM

(a) Apple’s total assets at September 26, 2020 were $323,888 million and at September 28, 2019 were $338,516 million. (b) Apple had $38,016 million of cash and cash equivalents at September 26, 2020. (c) Apple had accounts payable totaling $42,296 million on September 26, 2020 and $46,236 million on September 28, 2019. (d) Apple reported net sales in 2020 of $274,515 million, in 2019 of $260,174 million, and in 2018 of $265,595 million. (e) Apple’s net income increased by $2,155 million from 2019 to 2020, from $55,256 million to $57,411 million. LO 3 BT: AN Difficulty: Medium TOT: 5.0 min. AACSB: Analytic AICPA FC: Reporting

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CT1.2

COMPARATIVE ANALYSIS PROBLEM

(a) (amounts in thousands)

1. Total liabilities 2. Net property, plant and equipment 3. Net cash provided (used) by investing activities. 4. Net income(loss)

Columbia Sportswear Company $1,003,800

Under Armour, Inc. $3,354,635

$309,792

$ 658,678

$(27,171) $108,013

$ 66,345 $(549,177)

(b) Columbia is profitable, while Under Armour is not. Under Armour’s net property, plant, and equipment and total liabilities suggest that it is substantially bigger than Columbia. Under Armour’s liabilities are more than three times as big as Columbia’s. LO 3 BT: AN Difficulty: Medium TOT: 8.0 min. AACSB: Analytic AICPA FC: Reporting

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CT1.3

INTERPRETING FINANCIAL STATEMENTS

(a) Creditors lend money to companies with the expectation that they will be repaid at a specified point in time in the future. If a company is generating cash from operations in excess of its investing needs, it is more likely that it will be able to repay its creditors. Not only did Xerox actually have negative cash from operations, but all of the cash it received in order to meet its cash deficiency was from issuing new debt. Both of these facts would be of concern to the company’s creditors, since it would suggest it will be less likely to be able to repay its debts. (b) As a stockholder, you are interested in the long-term performance of a company and how that translates into its stock price. Often during the early years of a company’s life its cash provided by operations is not sufficient to meet its investment needs, so the company will have to get cash from outside sources. However, in the case of Xerox, the company has operated for many years and has a well-established name brand. The negative cash from operations might suggest operating deficiencies. (c) The statement of cash flows reports information on a cash basis. An investor cannot get the complete story on the company’s performance and financial position without looking at the income statement and balance sheet. Also, investors would want to look at more than one year’s worth of data. The current year might not be representative of past or future years. (d) Xerox is a well-known company. It has a past record of paying dividends. Its management probably decided to continue to pay a dividend to demonstrate confidence in the company’s future. They may have felt that by not paying the dividend for the year they would send a negative message to investors. However, by choosing to pay a cash dividend the company obviously weakened its cash position, and decreased its ability to repay its debts. LO 3 BT: S Difficulty: Hard TOT: 15.0 min. AACSB: Analytic AICPA FC: Reporting AICPA PC: Problem Solving and Decision Making

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CT1.4

REAL-WORLD FOCUS

Answers to this question will differ depending on the companies chosen by the student, and the year. We provide the following solution for Netflix for the year ended December 31, 2020. (a) During the year ended December 31, 2020, Netflix reported net income of $2,761,395 thousand. (b) During the year ended December 31, 2020. Netflix reported sales of $24,996,056 thousand. (c) The “Industry” label on the left side of the Profile site tells us that Netflix is in the CATV systems. (d) Companies also in this industry would include DirecTV, Hulu, Dish Network, and Comcast Corporation. (e) We chose Dish Network. During the year ended December 31, 2020, Dish reported sales of $15,493,435 thousand and net income of $1,762,673 thousand. LO 3 BT: AP Difficulty: Medium TOT: 15.0 min. AACSB: Technology AICPA FC: Reporting

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CT1.5

REAL-WORLD FOCUS

(a) The old auditor’s report focused primarily on whether or not a company’s numbers were “fairly presented”. (b) The new report requires auditors to tell investors about any “critical audit matters” – areas of their audit that were especially challenging or complex or forced them to make tough decisions in evaluating a company’s books. Examples include: assessing how a company sets aside loan-loss reserves when it introduces a new loan product; evaluation of a company’s estimates; and, evaluation of the valuations used for acquired assets. (c) The new report requirements will bring the U. S. closer to the U. K. and other European countries where such disclosures in the audit report are already required. (d) To be disclosed, an item must be material and significant enough to be reported to the company’s audit committee. LO 3 BT: S Difficulty: Medium TOT: 15.0 min. AACSB: Technology, Communication AICPA FC: Reporting AICPA PC: Communication

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CT1.6

DECISION-MAKING ACROSS THE ORGANIZATION

(a) The Report of Independent Registered Public Accounting Firm indicates that PricewaterhouseCoopers LLP performed the audit of Johnson & Johnson’s financial statements. (b) The Consolidated Statements of Operations states that its basic earnings per share were $5.59 for the year ended January 3, 2021. (c) In the Selected Financial Data (Part II, Item 6 and Note to Financial Statements No. 17), shows that customer – international sales was $39,451 ($82,584 – $43,133) million in 2020. (d) In the Consolidated Income Statement, sales to customers for 2018 was $81,581 million. (e) The Shareholders’ Equity section of the Consolidated Balance Sheets states that 4,320,000,000 common shares were authorized. (f) Per the Consolidated Statements of Cash Flows, $3,347 million was spent on additions to property, plant, and equipment. (g) Note 1 states that building and building equipment depreciation is based on 20–30 years using straight-line depreciation. (h) Per the Consolidated Statement of Financial Position, inventories were $9,020 million in 2019. LO 3 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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CT1.7

COMMUNICATION ACTIVITY

To:

Marci Ling

From:

Student

I have received the balance sheet of Samco Company, Inc. as of December 31, 2027. The purpose of a balance sheet is to report a company’s financial position at a point in time. It reports what the company owns (assets) and what it owes (liabilities) and the net amount attributed to owners (stockholders’ equity). A number of items in this balance sheet are not properly reported. They are: (1) The balance sheet should be dated as of a specific date, not for a period of time. Therefore, it should be stated “December 31, 2027.” (2) Equipment should be below Supplies on the balance sheet. (3) Accounts receivable should be shown as an asset and reported between Cash and Supplies on the balance sheet. (4) Accounts payable should be shown as a liability, not an asset. Therefore, it should be reported in the liability section, after notes payable. (5) Liabilities and stockholders’ equity should be shown separately on the balance sheet. Common stock, Retained earnings, and Dividends are not liabilities. (6) Common stock, Retained earnings, and Dividends are part of stockholders’ equity. The Dividends account is not reported on the balance sheet but is subtracted from beginning Retained earnings to arrive at the ending balance. A correct balance sheet is as follows:

1-50

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT1.7 (Continued) SAMCO COMPANY, INC. Balance Sheet December 31, 2027 Assets Cash .............................................................................. Accounts receivable .................................................... Supplies ........................................................................ Equipment..................................................................... Total assets ..................................................................

$ 9,000 6,000 1,000 18,000 $34,000

Liabilities and Stockholders’ Equity Liabilities Notes payable ....................................................... Accounts payable ................................................. Total liabilities ............................................... Stockholders’ equity Common stock ...................................................... Retained earnings................................................. Total stockholders’ equity ............................ Total liabilities and stockholders’ equity.................... *Retained earnings ....................................................... Less: Dividends ........................................................... Ending retained earnings ............................................

$10,000 4,000 $14,000 12,000 8,000* 20,000 $34,000 $10,000 2,000 $ 8,000

(Assets = Liabl. + SE) [($9,000 + $6,000 + $1,000 + $18,000) = (($10,000 + $4,000) + ($12,000 + ($10,000 – $2,000)))] LO 3 BT: AN Difficulty: Medium TOT: 15.0 min. AACSB: Anallytic AICPA FC: Reporting AICPA PC: Communication

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CT1.8

ETHICS CASE

(a) Investors rely on auditors to perform an independent assessment of a company. If the auditor owns stock in that company, he or she might not be able to act in an independent and impartial manner. (b) There are pros and cons to this argument. On the positive side, it could be argued that as long as a person has no direct relationship with a client company, that person will not influence the findings of the work. However, a counter argument is that an influential partner within a firm, who had an investment in a client that he or she didn’t work on, might be tempted to try to influence the findings of the audit if he or she feared that the findings were going to negatively affect the value of his or her investment. (c) The fact that four firms have become so big means that prohibiting employees of those accounting firms from buying stock in clients of the firm would bar those employees from investing in roughly 25% of publicly traded companies. Some have argued that such restrictive rules would create undue hardship, and unfairly restrict the investment options of these people. They also argue that in such a large organization it is increasingly unlikely that an individual who does not work on a particular audit will be able to influence the outcome of that audit. As a consequence, rules that focus on restricting investments by those employees actually involved in the audit of a client may be most reasonable and most effective. (d) Answers to this question will vary. This is a particularly difficult issue since the rule effectively eliminates the individual’s control over their investment portfolio. They did nothing wrong when they bought the shares, but now they are being forced to sell when it is not advantageous. (e) The management of PricewaterhouseCoopers noted that auditor independence is vitally important to the audit function. If investors don’t think the auditor is independent of the client they will lose faith in auditing, which would have dire consequences for securities markets. Therefore, it was important that the firm make a bold, unambiguous response to address this problem. LO 3 BT: E Difficulty: Hard TOT: 30.0 min. AACSB: Ethics and Communication AICPA FC: Reporting AICPA PC: Professional Demeanor

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT1.9

ETHICS CASE

Students responses to each topic will vary. The responses presented below include points that should appear, in some way, to each topic. a. Yes, companies, specifically the management, should be held accountable for the accuracy of their communications. In fact, the Sarbanes-Oxley Act, requires that the top management certify the fairness of the information contained in a company’s financial statements. b. The steps taken to ensure that a company’s financial communications are accurate should include: 1. Hire managers with the appropriate education and experience. 2. Install an accounting information system that will ensure that accounting transactions are recorded and reported accurately. 3. Assuming the company being discussed is a corporation, require the Board of Directors have oversight responsibilities of the reporting system. 4. Hire a CPA firm to conduct an annual audit of the information contained in the annual financial statements. 5. To ensure that interested outside parties receive timely information, issue periodic (quarterly) financial information. c. The comments presented here are based on the following web addresses: https://www.sec.gov/news/press-release/2018-226; https://www.cnbc.com/2019/03/19/tesla-and-elon-musk-lawsuitsoverview.html; https://www.washingtonpost.com/technology/2020/02/13/tesla-sec/ A summary of the charges levied against Elon Musk and Tesla and the subsequent settlement include: In 2018, the SEC claimed that Mr. Musk had intentionally tweeted misleading information about Tesla that negatively impacted the stock market. Additionally, the SEC claimed that Tesla failed to have the required disclosure requirements and procedures related to the accuracy of Mr. Musk’s tweets.

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CT1.9 (Continued) In 2019, a settlement was reached that required that: Mr. Musk step down as Tesla’s Chairman. Tesla would appoint two new independent directors to the board. Tesla would create a new committee of independent directors with additional controls and procedures to oversee Mr. Musk’s communications. Both Mr. Musk and Tesla would each pay a $20 million penalty that would be used to compensate harmed investors. In 2020, the SEC issued a subpoena for Tesla financial records due to Mr. Musk making another misleading tweet regarding Tesla’s production estimates that was not approved in advance by securities experts. d. If investors and creditors cannot rely on the accuracy of the information contained in company financial statements then capital markets would, at best, be greatly reduced, or, at worst, cease to exist. Without accurate, reliable information, investors and creditors would be unable to assess the risk of investing or lending. As a result, companies seeking cash inflows from investors/creditors to run and grow their operations, would have to rely solely on the owner(s) personal assets. The result would be to reduce the size of company operations, which would affect employment, and result in a stultifying effect on the economy. LO 1 BT: S Difficulty: Hard TOT: 45.0 min. AACSB: Ethics and Communication AICPA FC: Reporting AICPA PC: Professional Demeanor

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CT1.10 (a)

ALL ABOUT YOU

Answers to the following will vary depending on students’ opinions. 1.

(b)

(c)

(d)

This does not represent the hiding of assets, but rather a choice as to the order of use of assets. This would seem to be ethical. 2. This does not represent the hiding of assets, but rather is a change in the nature of assets. Since the expenditure was necessary, although perhaps accelerated, it would seem to be ethical. 3. This represents an intentional attempt to deceive the financial aid office. It would therefore appear to be both unethical and potentially illegal. 4. This is a difficult issue. By taking the leave, actual net income would be reduced. The form asks the applicant to report actual net income. However, it is potentially deceptive since you do not intend on taking unpaid absences in the future, thus future income would be higher than reported income. Companies might want to overstate net income in order to potentially increase the stock price by improving investors’ perceptions of the company. Also, a higher net income would make it easier to receive debt financing. Finally, managers would want a higher net income to increase the size of their bonuses. Sometimes companies want to report a lower income if they are negotiating with employees. For example, professional sports teams frequently argue that they cannot increase salaries because they aren’t making enough money. This also occurs in negotiations with unions. For tax accounting (as opposed to the financial accounting in this course) companies frequently try to minimize the amount of reported taxable income. Unfortunately, many times people who are otherwise very ethical will make unethical decisions regarding financial reporting. They might be driven to do this because of greed. Frequently it is because their superiors have put pressure on them to take an unethical action, and they are afraid to not follow directions because they might lose their job. Also, in some instances top managers will tell subordinates that they should be a team player, and do the action because it would help the company, and therefore would help fellow employees.

LO3 BT: E Difficulty: Hard TOT: 30.0 min. AACSB: Reflective Thinking AICPA FC: Reporting AICPA PC: Problem Solving and Decision Making

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CT1.11

(a)

CONSIDERING ENVIRONMENTAL, SOCIAL, AND GOVERNANCE PERFORMANCE

The 5 aspirations relate to the company’s goals: (1) sustaining its business, (2) its brands, (3) its people, (4) its community, and (5) the planet.

LO 3 BT: AN Difficulty: Medium TOT: 15.0 min. AACSB: Analytic and Technology AICPA FC: Reporting

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CHAPTER 2 A Further Look at the Balance Sheet Learning Objectives 1. 2.

Identify the sections of a classified balance sheet. Use ratios to evaluate a company’s balance sheet.

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2-1

ANSWERS TO QUESTIONS 1.

A company’s operating cycle is the average time that is required to go from cash to cash in producing revenue.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Measurement

Current assets are assets that a company expects to convert to cash or use up within one year of the balance sheet date or the company’s operating cycle, whichever is longer. Current assets are listed in the order in which they are expected to be converted into cash.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

Long-term investments are investments in stocks and bonds of other corporations that are held for more than one year, and long-term assets such as land or buildings that a company is not currently using in its operating activities. Property, plant, and equipment are assets with relatively long useful lives that are currently used in operating the business.

LO 1 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

Current liabilities are obligations that will be paid within the coming year or operating cycle, whichever is longer. Long-term liabilities are obligations that will be paid after one year.

LO 1 BT: C Diff: M TOT: 1 min. AACSB: None AICPA FC: Reporting

The two parts of stockholders’ equity and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business.

LO 1 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

Intangible assets include goodwill, patents, trademarks, tradenames, and copyrights.

LO 1 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

(a) Geena is not correct. There are three characteristics: liquidity, profitability, and solvency. (b) The three parties are not primarily interested in the same characteristics of a company. Short-term creditors are primarily interested in the liquidity of the company. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company.

LO 2 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Reporting

(a) Liquidity ratios: Working capital and current ratio. (b) Solvency ratio: Debt to assets.

LO 2 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

2-2

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Questions Chapter 2 (Continued) 9.

Debt financing is riskier than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. Thus, the higher the percentage of assets financed by debt, the riskier the company.

LO 2 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

10. (a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Profitability ratios measure the income or operating success of a company for a given period of time. (c)

Solvency ratios measure the company’s ability to survive over a long period of time.

LO 2 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

11. (a) An increase in the current ratio signals good news because the company improved its ability to meet maturing short-term obligations. (b) The increase in the debt to assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity “buffer.” LO 2 BT: AN Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

12. At September 26, 2020 Apple’s largest current asset was Marketable securities of $52,927 million, its largest current liability is Other current liabilities of $42,684 million and its largest item under “Assets” was Marketable securities under Non-current assets of $100,887 million. LO 1 BT: AN Diff: M TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

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2-3

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2.1 CL Accounts payable CA Accounts receivable PPE Accumulated depreciation PPE Buildings CA Cash IA Goodwill

CL Income taxes payable LTI Investment in long-term bonds PPE Land CA Inventory IA Patent CA Supplies

LO 1 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 2.2 CHIN COMPANY Partial Balance Sheet Current assets Cash ......................................................................................... Debt investments .................................................................... Accounts receivable ............................................................... Supplies ................................................................................... Prepaid insurance ................................................................... Total current assets ........................................................

$10,400 8,200 14,000 3,800 2,600 $39,000

LO 1 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 2.3 2 5 7 4 1 6 3

Long-term investments Current liabilities Stockholders’ equity Intangible assets Current assets Long-term liabilities Property, plant, and equipment

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

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BRIEF EXERCISE 2.4 ALBERTA COMPANY Partial Balance Sheet December 31, 2027 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 8,200 Current maturity of long-term note payable 2,900 Interest payable 3,200 Total current liabilities $ 14,300 Long-term liabilities Bonds payable 24,900 Notes payable* 13,000 Total long-term liabilities 37,900 Total liabilities 52,200 Stockholders’ equity Common stock 76,100 Retained earnings 54,500 Total stockholders’ equity 130,600 Total liabilities and stockholders’ equity $182,800 *($15,900 - $2,900) LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

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BRIEF EXERCISE 2.5 TEXAS INSTRUMENTS, INC. Balance Sheet December 31, 2027 (in millions) Assets Current assets Cash ......................................................................... Debt investments ..................................................... Accounts receivable ................................................ Inventory .................................................................. Prepaid rent .............................................................. Total current assets ......................................... Long-term investments Stock investments ................................................... Property, plant, and equipment Equipment ............................................................... Less: Accumulated depreciation—equipment...... Intangible assets Patents...................................................................... Total assets......................................................................

$ 1,182 1,743 1,823 1,202 164 $ 6,114 637 6,705 3,547

3,158 2,210 $12,119

(Tot. current assets + L-T invest. + Prop., plant and equip. + Intang. assets)

Liabilities and Stockholders’ Equity Current liabilities Accounts payable .................................................... $1,459 Income taxes payable .............................................. 128 Total current liabilities ..................................... Long-term liabilities Notes payable .......................................................... Total liabilities .......................................................... Stockholders’ equity Common stock ......................................................... 2,826 Retained earnings .................................................... 6,896 Total stockholders’ equity ............................... Total liabilities and stockholders’ equity .......................

$ 1,587 810 2,397

9,722 $12,119

(Tot. current liab. + Notes pay. + Tot. stock. equity)

LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

2-6

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BRIEF EXERCISE 2.6 Working capital = Current assets – Current liabilities Current assets Current liabilities Working capital

($ 102.5 million (201.2) million ($ 98.7) million (Current assets – Current liab.)

Current ratio: Commented [MY1]: This font should be changed. I cannot change as it is in a math editor.

Current assets $𝟏𝟎𝟐,𝟓 = Current liabilities $𝟐𝟎𝟏,𝟐 = 0.51:1 (Current assets ÷ Current liab.)

LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA ACC: Reporting

BRIEF EXERCISE 2.7 (a)

Current assets $262,787 = = 0.89 :1 Current liabilities $293,625

Current ratio

(Current assets ÷ Current liab.)

(b) Debt to assets ratio

Total liabilities $376,002 = = 85.5% Total assets $439,832 (Tot. liab. ÷ Tot. assets)

LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

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2-7

SOLUTIONS TO DO IT! EXERCISES DO IT! 2.1a MYLAR CORPORATION Balance Sheet (partial) December 31, 2027 Assets Current assets Cash .................................................................. Accounts receivable......................................... Inventory ........................................................... Supplies ............................................................ Total current assets ............................... Property, plant, and equipment Equipment ......................................................... Less: Accumulated depreciation— equipment .............................................. Total assets...............................................................

$ 13,000 22,000 58,000 7,000 $100,000 180,000 50,000

130,000 $230,000

(Cash + Accts. rec. + Inv. + Sup. + Equip. – Acc. dep.) LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 2.1b IA CL NA CL LTI CL

Trademarks Notes payable (current) Interest revenue Income taxes payable Debt investments (long-term) Unearned sales revenue

CA PPE PPE SE NA LTL

Inventory Accumulated depreciation Land Common stock Advertising expense Mortgage payable (due in 3 years)

LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

2-8

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DO IT! 2.2 (a)

Current assets:

2027 2026 2027 2026

$6,700 (1,700 + 900 + 3,700 + 400) $8,500 (2,400 + 1,200 + 4,200 + 700) $6,100 (3,900 + 2,200) $4,600 (3,000 + 1,600)

Working capital

2027 2026

$6,700 – $6,100 = $600 $8,500 – $4,600 = $3,900

Current ratio

2027 2026

$6,700 ÷ $6,100 = 1.10:1 $8,500 ÷ $4,600 = 1.85:1

(c)

Debt to assets ratio

2027 2026

$42,100 ÷ $72,700 = 57.91% $34,600 ÷ $80,500 = 42.98%

(d)

The company’s working capital and current ratio decreased. This suggests that its ability to pay its short-term obligations declined. The company’s debt to assets ratio increased. This suggests that its ability to pay interest and principal on its debts as they come due has declined.

Current liabilities: (b)

LO 2 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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SOLUTIONS TO EXERCISES EXERCISE 2.1 CL CA

Accounts payable Accounts receivable

CA CA

PPE PPE CA CL IA CL

Accumulated depreciation—equip. Buildings Cash Interest payable Goodwill Income taxes payable

Inventory Stock investments (To be sold in 7 months) PPE Land (in use) LTL Mortgage payable CA Supplies PPE Equipment CA Prepaid rent

LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

EXERCISE 2.2 CA Prepaid advertising PPE Equipment IA Trademarks CL Salaries and wages payable CL Income taxes payable SE Retained earnings CA Accounts receivable LTI Land (held for future use)

IA Patents LTL Bonds payable SE Common stock PPE Accumulated depreciation—equipment CL Unearned sales revenue CA Inventory

LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

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EXERCISE 2.3 THE BOEING COMPANY Partial Balance Sheet December 31, 2027 (in millions) Assets Current assets Cash....................................................................... Debt investments .................................................. Accounts receivable ............................................. Notes receivable ................................................... Inventory ............................................................... Total current assets ...................................... Long-term investments Notes receivable ................................................... Property, plant, and equipment Buildings ............................................................... Less: Accumulated depreciation—buildings.....

$ 9,215 2,008 5,785 368 16,933 $34,309 5,466 21,579 12,795

Intangible assets Patents .................................................................. Total assets ..................................................................

8,784 12,528 $61,087

(Current assets + Long-term invest. + Prop., plant, and equip. + Intang. assets)

LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 2.4 H. J. HEINZ COMPANY Partial Balance Sheet April 30, 2027 (in thousands) Assets Current assets Cash .................................................. Accounts receivable ........................ Inventory ........................................... Prepaid insurance ............................ Total current assets .................. Property, plant, and equipment Land .................................................. Buildings........................................... $4,033,369 Less: Accumulated depreciation— buildings ................................... 2,131,260 Intangible assets Goodwill ............................................ Trademarks....................................... Total assets.............................................

$ 373,145 1,171,797 1,237,613 125,765 $ 2,908,320 76,193 1,902,109 3,982,954 757,907

1,978,302

4,740,861 $ 9,627,483

(Current assets + Prop., plant, and equip. + Intang. assets)

LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

2-12

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EXERCISE 2.5 LONGHORN COMPANY Balance Sheet December 31, 2027 Assets Current assets Cash..................................................... Accounts receivable ........................... Prepaid insurance............................... Total current assets ................................... Property, plant, and equipment Land ..................................................... Buildings ............................................. Less: Accumulated depreciation— buildings .................................. Equipment ........................................... Less: Accumulated depreciation— equipment ................................ Total assets .................................

$11,840 12,600 3,200 $ 27,640 61,200 $105,800 45,600 82,400

60,200

18,720

63,680

185,080 $212,720

(Tot. current assets + Tot. prop., plant, and equip.)

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................... $ 9,500 Current maturity of note payable ........ 13,600 Interest payable .................................. 3,600 Total current liabilities ................ Long-term liabilities Note payable ($93,600 – $13,600) ...... Total liabilities ............................. Stockholders’ equity Common stock .................................... 60,000 Retained earnings ($40,000 + $6,020*) ............................ 46,020 Total stockholders’ equity .......... Total liabilities and stockholders’ equity ...........................................

$ 26,700 80,000 106,700

106,020 $212,720

(Tot. current liab. + Note pay. + Com. stock + Ret. earn.)

*Net income = $14,700 – $780 – $5,300 – $2,600 = $6,020 LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 2.6 CARMEN CO. Balance Sheet December 31, 2027 Assets Current assets Cash ..................................................... $11,840 Debt investments ................................ 4,100 Accounts receivable ........................... 21,700 Notes receivable ................................. 5,300 Supplies ............................................... 9,200 Total current assets …………..... Long-term investments Stock investments……………………… Property, plant, and equipment Land ..................................................... 195,600 Buildings ............................................. $261,200 Less: Accumulated depreciation—buildings .............. 32,600 228,600 Equipment ........................................... 82,400 Less: Accumulated depreciation—equipment ........... 18,720 63,680 Land improvements ............................ 45,780 Less: Accumulated depreciation—land improvements 12,600 33,180 Total property, plant, and equipment …………………… Intangible assets Patents ......................................... Total assets …………….

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Kimmel, Survey of Accounting, 3e, Solutions Manual

$ 52,140 71,500

521,060 46,700 $691,400

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EXERCISE 2.6 (Continued) Liabilities and Stockholders’ Equity Current liabilities Accounts payable .................................................... $ 9,500 Current portion of mortgage payable ..................... 9,100 Income taxes payable .............................................. 14,700 Interest Payable ....................................................... 3,600 Total current liabilities ..................................... $36,900 Long-term liabilities* ....................................................... Mortgage payable .................................................... 84,500 Total liabilities .................................................. 121,400 Stockholders’ equity Common stock ......................................................... 75,000 Retained earnings.................................................... 495,000 Total stockholders’ equity ............................... 570,000 Total liabilities and stockholders’ equity ....................... $691,400 *($93,600 - $9,100) [(current assets. + L-T invest + Prop., plant, & equip. + Intang.assets) = (Current liable. + L-T liable. +SE)] [(($11,840 + $4,100 + $21,700 + $5,300 + $9,200) + $71,500 + ($195,600 + ($261,200-$32,600) + ($82,400-$18,720) + ($45,780-$12,600)) + $46,700) = (($9,500 + $9,100 +$14,700 + $3,600) + $84,500 + ($75,000 + $495,000))] LO 1 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 2.7 (a)

FAIRVIEW CORPORATION Income Statement For the Year Ended July 31, 2027 Revenues Service revenue ............................................. Rent revenue ................................................. Total revenues ....................................... Expenses Salaries and wages expense ........................ Supplies expense .......................................... Depreciation expense ................................... Total expenses ....................................... Net loss ..................................................................

$66,100 8,500 $74,600 57,500 15,600 4,000 77,100 $ (2,500) (Tot. rev. – Tot. exp.)

FAIRVIEW CORPORATION Retained Earnings Statement For the Year Ended July 31, 2027 Retained earnings, August 1, 2026 ...................... Less: Net loss ..................................................... Dividends .................................................. Retained earnings, July 31, 2027 .........................

$34,000 $2,500 4,000

6,500 $27,500

(Beg. ret. earn. – Net loss – Div.)

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EXERCISE 2.7 (Continued) (b)

FAIRVIEW CORPORATION Balance Sheet July 31, 2027 Assets Current assets Cash ............................................................... Accounts receivable ..................................... Total current assets .............................. Property, plant, and equipment Equipment ..................................................... Less: Accumulated depreciation— equipment ...................................... Total assets ...........................................................

$29,200 9,780 $38,980) 18,500 6,000

12,500) $51,480)

(Tot. current assets + Tot. prop., plant and equip.)

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................................ $ 4,100 Salaries and wages payable ........................... 2,080 Total current liabilities................................. Long-term liabilities Notes payable .................................................. Total liabilities .............................................. Stockholders’ equity Common stock................................................. 16,000 Retained earnings ........................................... 27,500 Total stockholders’ equity .......................... Total liabilities and stockholders’ equity ...............

$ 6,180 1,800 7,980

43,500 $51,480

(Tot. current liab. + Notes pay. + Tot. stock. equity)

LO 1 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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2-17

EXERCISE 2.8 RANDAL INC. Balance Sheet (partial) October 28, 2027 (in millions) Liabilities and Stockholders' Equity Current liabilities Accounts payable……………………………... Income taxes payable………………………… Unearned sales revenue……………………... Current portion of long-term debt………….. Total current liabilities……………………. Long-term liabilities Long-term debt………………………………… Other long-term liabilities…………………… Total long-term liabilities………………… Total liabilities…………………………………….. 2,049.7 Stockholders' equity Common stock………………………………… Retained earnings…………………………….. Total stockholders’ equity……………….. Total liabilities and stockholders' equity……..

$ 431.6 14.8 16.0 254.9 $

717.3

$1,209.8 122.6 1,332.4

$ 642.4 979.8 1,622.2 $3,671.9

LO 1 BT: AP Difficulty: Medium Time: 20 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 2.9 a.

Net income .................. = Revenues – Expenses =$183,040 – $158,680 – $4,550 – $5,200 = $14,610 Retained earnings = Beginning retained earnings + Net income – Dividends declared = $116,520 + $14,610 – $0 = $131,130

2-18

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EXERCISE 2.9 (Continued) b. SUMMIT LTD. Balance Sheet December 31, 2027 Assets Current assets Cash....................................................................... Accounts receivable ............................................. Supplies ................................................................ Prepaid insurance................................................. Total current assets ...................................... Long-term investments ................................................ Property, plant, and equipment ................................... Land ...................................................... Buildings .............................................. $133,800 Less: Accumulated depreciation – buildings ............................... 50,600 Equipment ............................................ 66,100 Less: Accumulated depreciation – equipment ............................ 21,470 Total property, plant, and equipment .......... Total assets ..................................................................

$ 24,040 20,780 1,240 1,420 $47,480 28,970 194,000 83,200 44,630 321,830 $398,280

Liabilities and Stockholders' Equity Current liabilities Accounts payable ................................................. $21,050 Interest payable .................................................... 2,100 Current portion of mortgage payable .................. 30,500 Total current liabilities .................................. $ 53,650 Mortgage payable ($104,000 – $30,500) ...................... 73,500 Total liabilities .............................................................. 127,150 Stockholders' equity Common stock ...................................................... 140,000 Retained earnings................................................. 131,130 Total stockholders’ equity ............................ 271,130 Total liabilities and stockholders' equity .................... $398,280 LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic AICPA FC: Reporting

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2-19

EXERCISE 2.10 BATRA CORPORATION Income Statement Year Ended July 31, 2027 Revenues Service revenue .................................................... $113,600 Rent revenue ......................................................... 18,500 Total revenues ............................................... Expenses Salaries and wages expense ................................ 44,700 Operating expenses.............................................. 32,500 Rent expense ........................................................ 10,800 Depreciation expense ........................................... 3,000 Utilities expense ................................................... 2,600 Interest expense ................................................... 2,000 Supplies expense.................................................. 900 Total expenses .............................................. Income before income tax ........................................... Income tax expense .................................................... Net Income ...................................................................

$132,100

96,500 35,600 5,000 $30,600

[Revenues – Expenses = Net income or (loss)]

BATRA CORPORATION Retained Earnings Statement Year Ended July 31, 2027 Retained earnings, August 1, 2026 ............................. Add: Net income ........................................................... Less: Dividends ............................................................ Retained earnings, July 31, 2027.................................

2-20

$17,940 30,600 48,540 12,000 $36,540

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EXERCISE 2.10 (Continued) BATRA CORPORATION Balance Sheet July 31, 2027 Assets Current assets Cash....................................................................... Debt investments (short-term) ............................. Accounts receivable ............................................. Supplies ................................................................ Total current assets ...................................... Property, plant, and equipment Equipment ............................................................. Less: Accumulated depreciation – equipment .............................................. Total property, plant, and equipment .......... Total assets ..................................................................

$ 5,060 20,000 17,100 1,500 $ 43,660 62,900 6,000 56,900 $100,560

Liabilities and Stockholders' Equity Current liabilities Accounts payable ................................................. Interest payable .................................................... Unearned sales revenue....................................... Bank loan payable ................................................ Total liabilities ............................................... Stockholders' equity Common stock ...................................................... Retained earnings................................................. Total stockholders’ equity ............................ Total liabilities and stockholders' equity ....................

$ 4,220 1,000 12,000 21,800 $ 39,020 25,000 36,540 61,540 $100,560

(Assets = Liabilities + Stockholders’ equity)

LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic AICPA FC: Reporting

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2-21

EXERCISE 2.11 (a)

Beginning of Year

End of Year

Working capital

$3,361 – $1,635 = $1,726

$3,217 – $1,601 = $1,616

Current ratio

$3,361 = 2.06:1 $1,635

$3,217 = 2.01:1 $1,601

(Current assets – Current liab.) and (Current assets ÷ Current liab.)

(b) Nordstrom’s liquidity decreased slightly during the year. Its current ratio decreased from 2.06:1 to 2.01:1. Also, Nordstrom’s working capital decreased by $110 million. (c) Nordstrom’s current ratio at both the beginning and the end of the recent year exceeds Best Buy’s current ratio for 2020 (and 2019). Nordstrom’s end-of-year current ratio (2.01) exceeds Best Buy’s 2020 current ratio (1.10*). Nordstrom would be considered much more liquid than Best Buy for the recent year. *Per Illustration 2.6 LO 2 BT: AP Difficulty: Medium TOT: 10 min. Difficulty: Analytic AICPA FC: Reporting

2-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 2.12 (a) Current ratio =

$60,000 = 2.0 :1 $30,000

(Current assets ÷ Current assets)

Working capital = $60,000 – $30,000 = $30,000 (Current assets – Current liab.)

(b) Current ratio =

$40,000* = 4.0 :1 $10,000**

(Current assets ÷ Current liab.)

Working capital = $40,000 – $10,000 = $30,000 (Current assets – Current liab.)

*$60,000 – $20,000

**$30,000 – $20,000

(c) Liquidity measures indicate a company’s ability to pay current obligations as they become due. Satisfaction of current obligations usually requires the use of current assets. If a company has more current assets than current liabilities, it is more likely that it will meet obligations as they become due. Since working capital and the current ratio compare current assets to current liabilities, both are measures of liquidity. Payment of current obligations frequently requires cash. Neither working capital nor the current ratio indicate the composition of current assets. If a company’s current assets are largely comprised of items such as inventory and prepaid expenses, it may have difficulty paying current obligations even though its working capital and current ratio are large enough to indicate favorable liquidity. In Myeneke’s case, payment of $20,000 of accounts payable will leave only $5,000 cash. Since salaries payable will require $10,000, the company may need to borrow in order to make the required payment for salaries and wages. (d) The CFO’s decision to use $20,000 of cash to pay off accounts payable is not in itself unethical. However, doing so just to improve the year-end current ratio could be considered unethical if this action misled creditors. Since the CFO requested preparation of a “preliminary” balance sheet before deciding to pay off the liabilities he seems to be “managing” the company’s financial position, which is usually considered unethical. LO 2 BT: AP Difficulty: Medium TOT: 15 min. Difficulty: Analytic AICPA FC: Reporting

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2-23

EXERCISE 2.13 2027

(a) Current ratio

$925,359 = 2.30 : 1 $401,763

2026 $1,020,834 = 2.71 : 1 $376,178

(Current assets ÷ Current liab.)

(b) Debt to assets ratio

$554,645 $1,963,676

= 28.2%

$527,216 $1,867,680

= 28.2%

(Tot. liab. ÷ Tot. assets)

(c) Using the debt to assets ratio as a measure of solvency for American Eagle Outfitters shows that solvency remained constant from 2026 to 2027. LO 2 BT: AP Difficulty: Medium TOT: 15 min. Difficulty: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO PROBLEMS PROBLEM 2.1 YAHOO! INC. Balance Sheet December 31, 2027 (Amounts are in millions) Assets Current assets Cash..................................................... Debt investments ................................ Accounts receivable ........................... Prepaid rent......................................... Total current assets .................... Long-term investments Stock investments .............................. Property, plant, and equipment Equipment ........................................... Less: Accumulated depreciation— equipment ...................................... Intangible assets Goodwill .............................................. Patents ............................................... Total assets ................................................

$ 2,292 1,160 1,061 233 $ 4,746 3,247 1,737 201 3,927 234

1,536 4,161 $13,690

(Tot. current assets + L-T. Invest. + Tot. prop., plant, and equip. + Tot. intang. assets)

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PROBLEM 2.1 (Continued) Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................... $ 152 Unearned sales revenue .................... 413 Total current liabilities ................ Long-term liabilities Notes payable ..................................... Total liabilities .......................... Stockholders’ equity Common stock .................................... 6,283 Retained earnings ............................... 6,108 Total stockholders’ equity .............. Total liabilities and stockholders’ equity ...................................................

565 734 1,299

12,391 $13,690

(Tot. current liab. + L-T. liab. + Com. stock + Ret. earn.)

LO 1 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

2-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 2.2

MARTIN CORPORATION Income Statement For the Year Ended December 31, 2027 Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Depreciation expense ........................................... Insurance expense ............................................... Utilities expense ................................................... Maintenance and repairs expense ....................... Total expenses .............................................. Net income ....................................................................

$68,000 $37,000 3,600 2,200 2,000 1,800 46,600 $21,400

(Serv. rev. – Tot. exp.)

MARTIN CORPORATION Retained Earnings Statement For the Year Ended December 31, 2027 Retained earnings, January 1, 2027 .............................................. Add: Net income .......................................................................... Less: Dividends ............................................................................. Retained earnings, December 31, 2027 ........................................

$31,000 21,400 52,400 12,000 $40,400

(Beg. ret. earn. + Net inc. – Div.)

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2-27

PROBLEM 2.2 (Continued) MARTIN CORPORATION Balance Sheet December 31, 2027 Assets Current assets Cash ....................................................................... Accounts receivable ............................................. Prepaid insurance ................................................. Total current assets ...................................... Property, plant, and equipment Equipment ............................................................. Less: Accumulated depreciation—equipment... Total assets...................................................................

$10,100 11,700 3,500 $25,300 66,000 17,600

48,400 $73,700

(Tot. current assets + Equip. – Acc. depr.-equip.)

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ................................................. $18,300 Salaries and wages payable................................. 3,000 Total current liabilities .................................. Stockholders’ equity Common stock ...................................................... 12,000 Retained earnings ................................................. 40,400 Total stockholders’ equity ............................ Total liabilities and stockholders’ equity ....................

$21,300

52,400 $73,700

(Tot. current liab. + Com stock + Ret. earn.)

LO 1 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 2.3

(a)

LAZURIS ENTERPRISES Income Statement For the Year Ended April 30, 2027 Sales revenue .......................................................

$5,100

Expenses Cost of goods sold ....................................... Salaries and wages expense ....................... Interest expense ........................................... Depreciation expense ................................... Insurance expense ....................................... Income tax expense ...................................... Total expenses ....................................... Net income ............................................................

$1,060 700 400 335 210 165 2,870 $2,230

(Sales rev. – Tot. exp.)

LAZURIS ENTERPRISES Retained Earnings Statement For the Year Ended April 30, 2027 Retained earnings, May 1, 2026 ........................... Add: Net income .................................................

$1,600 2,230 3,830 325 $3,505

Less: Dividends ................................................... Retained earnings, April 30, 2027 ........................ (Beg. ret. earn. + Net inc. – Div.)

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PROBLEM 2.3 (Continued) (b)

LAZURIS ENTERPRISES Balance Sheet April 30, 2027 Assets Current assets Cash ...................................................... Stock investments ................................ Accounts receivable............................. Inventory ............................................... Prepaid insurance ................................ Total current assets...................... Property, plant, and equipment Land....................................................... Equipment ............................................. $2,420 Less: Accumulated depreciation—equipment.................. 670 Total assets..................................................

$1,270 1,200 810 967 60 $4,307 3,100 1,750

4,850 $9,157

(Tot. current assets + Land + Equip. – Acc. depr.-equip.)

Liabilities and Stockholders’ Equity Current liabilities Notes payable .................................................... Accounts payable ............................................. Salaries and wages payable ............................. Income taxes payable ....................................... Total current liabilities .............................. Long-term liabilities ................................................. Mortgage payable.............................................. Total liabilities............................................ Stockholders’ equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity ........................ Total liabilities and stockholders’ equity ...............

61 834 222 135 $1,252 3,500 4,752

900 3,505 4,405 $9,157

(Tot. current liab. + Mort. pay. + Com. stock + Ret. earn.)

LO 1 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

2-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 2.4

(a) Loeb appears to be more liquid. Loeb’s 2027 working capital of $340,875 ($407,200 – $66,325) is more than twice as high as Bowsh’s working capital of $156,620 ($190,336 – $33,716). In addition, Loeb’s 2027 current ratio of 6.1:1 ($407,200 ÷ $66,325) is higher than Bowsh’s current ratio of 5.6:1 ($190,336 ÷ $33,716). (b) Loeb appears to be slightly more solvent. Loeb’s 2027 debt to assets ratio of 18.6% ($174,825 ÷ $939,200)a is lower than Bowsh’s ratio of 22.5% ($74,400 ÷ $330,064)b. The lower the percentage of debt to assets, the lower the risk is that a company may be unable to pay its debts as they come due. a

$174,825 ($66,325 + $108,500) is Loeb’s 2027 total liabilities. $939,200 ($407,200 + $532,000) is Loeb’s 2027 total assets.

$74,400 ($33,716 + $40,684) is Bowsh’s 2027 total liabilities. $330,064 ($190,336 + $139,728) is Bowsh’s 2027 total assets.

LO 2 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

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2-31

PROBLEM 2.5

(a) (i)

Working capital = $458,900 – $195,500 = $263,400. (Current assets – Current liab.)

(ii) Current ratio =

$458,900 = 2.35:1. $195,500

(Current assets ÷ Current liab.)

(iii) Debt to assets ratio =

$395,500 = 38.2%. $1,034,200

(Tot. liab. ÷ Tot. assets)

(b) During 2027, the company’s current ratio increased from 1.65:1 to 2.35:1 and its working capital increased from $160,500 to $263,400. Both measures indicate an improvement in liquidity during 2027. The company’s debt to assets ratio increased from 31.0% in 2026 to 38.2% in 2027 indicating that the company is less solvent in 2027. LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

2-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 2.6

2026

2027

(a) Working capital. ($20,000 + $62,000 + $73,000) – $70,000 = $85,000

($28,000 + $70,000 + $90,000) – $75,000 = $113,000

(Current assets – Current liab.)

(b) Current ratio.

$155,000 = 2.2:1 $70,000

$188,000 = 2.5:1 $75,000

(Current assets ÷ Current liab.)

$160,000 = 23.4% $685,000

$155,000 = 20.4% $760,000

(Tot. liab. ÷ Tot. assets)

(d) The liquidity of the corporation as shown by the working capital and the current ratio has improved slightly. Also, the corporation improved its solvency by improving its debt to assets ratio. LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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PROBLEM 2.7

Ratio

(a)

Working capital

Target Walmart (All Dollars are in Millions) $17,488 – $10,512 = $6,976

$48,949 – $55,390 = ($6,441)

(Current assets – Current liab.)

(b)

Current ratio

1.66:1 ($17,488 ÷ $10,512)

0.88:1 ($48,949 ÷ $55,390)

(Current assets ÷ Current liab.)

(c)

Debt to assets ratio

68.9% ($30,394 ÷ $44,106)

60% ($98,144 ÷ $163,429)

(Tot. liab. ÷ Tot. assets)

(d) The comparison of the two companies shows the following: Liquidity—Target’s current ratio of 1.66:1 is much better than Walmart’s 0.88:1 and Target has significantly higher working capital than Walmart. Solvency—Walmart’s debt to assets ratio is lower than Target’s, indicating that Walmart is more solvent than Target. LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT2.1

FINANCIAL REPORTING PROBLEM

(a) Total current assets were $143,713 million at September 26, 2020, and $162,819 million at September 28, 2019. (b) Current assets are properly listed in the order of liquidity. As you will learn in a later chapter, inventories are considered to be less liquid than receivables. Thus, they are listed below receivables and before prepaid expenses. (c) The asset classifications are similar to the text: (a) current assets, (b) long-term marketable securities, (c) property, plant, and equipment, and (d) other non-current assets. (d) Total current liabilities were $105,392 million at September 26, 2020, and $105,718 million at September 28, 2019. LO 1 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

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CT2.2

(a)

COMPARATIVE ANALYSIS PROBLEM

($ in thousands) 1. Working capital

2. Current ratio

Columbia Sportswear $1,855,621 – $552,622 = $1,302,999

Under Armour

(Current assets – Current liab.)

$3,222,975 – $1,413,276 = $1,809,699

$1,855,621 ÷ $552,622 = 3.36:1

$3,222,975 ÷ $1,413,276 = 2.28:1

(Current assets ÷ Current liab.)

3. Debt to assets ratio

$1,003,800 ÷ $2,836,571 = 35.4%

$3,354,635 ÷ $5,030,628 = 66.7%

(Tot. liab. ÷ Tot. assets)

(b) Liquidity Under Armour appears more liquid since it has more working capital than Columbia; however, looking at the current ratios, we see that Columbia’s ratio is greater than that of Under Armour. Solvency Based on the debt to assets ratio, Columbia is more solvent. Columbia’s debt to assets ratio is significantly lower than Under Armour’s and, therefore, Columbia would be considered better able to pay its debts as they come due. LO 2 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT2.3

INTERPRETING FINANCIAL STATEMENTS

(a) The percentage decrease in Gap’s total assets during this period is calculated as:

$7,065 – $8,544 = (17.3%) $8,544 The average decrease per year can be approximated as:

(17.3%) = (4.3%) per year 4 years (2027 Total assets – 2023 Total assets) ÷ 2023 Total assets)

(b) Gap’s working capital and current ratio decreased (2024), increased (2025 and 2026) and then decreased (2027) during this period, indicating a decline, an improvement and then another decline in liquidity. The current ratio is a better measure of liquidity because it provides a relative measure; that is, current assets compared to current liabilities. Working capital only tells us the net amount of current assets less current liabilities. It is hard to say whether a given amount of working capital is adequate or inadequate without knowing the size of the company. (c) The debt to assets ratio suggests that Gap’s solvency didn’t change much during the period. Debt to assets was 0.39 in 2023, rose to 0.45 in 2024 and then bounced between 39% and 42% the next three years. LO 2 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

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REAL-WORLD FOCUS

CT2.4 Answers will vary depending on the company chosen and the date. LO 2 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic and Technology AICPA AC: Reporting

CT2.5 Answers will vary depending on the company chosen and the date. LO 1, 2 BT: E Difficulty: Hard TOT: 25 min. AACSB: Analytic, Technology AICPA FC: Reporting AICPA BB: Critical Thinking

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CT2.6

DECISION MAKING ACROSS THE ORGANIZATION

The current ratio increase is a favorable indication as to liquidity, but alone tells little about the prospects of the client. From this ratio change alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The working capital increase is also a favorable indication as to liquidity, but again the amount and direction of the changes in individual current assets and current liabilities cannot be determined from this measure. The decrease in the debt to assets ratio is a favorable indicator for solvency and going-concern prospects. The lower the percentage of debt to assets, the lower the risk that a company may be unable to pay its debts as they come due. A decline in the debt to assets ratio is also a positive sign regarding going-concern potential. The increase in net income is a favorable indicator for both solvency and profitability prospects although much depends on the quality of receivables generated from sales and how quickly they can be converted into cash. A significant factor here may be that despite a decline in sales the client’s management has been able to reduce costs to produce this increase. Indirectly, the improved income picture may have a favorable impact on solvency and going-concern potential by enabling the client to borrow currently to meet cash requirements. LO 2 BT: E Difficulty: Hard TOT: 20 min. AACSB: Communication AICPA PC: Interaction, Leadership, and Communication

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CT2.7

COMMUNICATION ACTIVITY

To:

BPPalmer@FutureProducts.com

From:

AStudent@StateUniversity.edu

Subject:

Financial Statement Analysis

(a) Ratios can be classified into three types, which measure three different aspects of a company’s financial health: 1.

Liquidity ratios—These measure a company’s ability to pay its current obligations.

Solvency ratios—These measure a company’s ability to pay its long-term obligations and survive over the long-term.

Profitability ratios—These measure the ability of the company to generate a profit.

(b) 1.

Examples of liquidity measures are: Working capital = Current assets – Current liabilities Indicates the absolute differences between a company’s current assets and its current liabilities. Current ratio =

Current assets Current liabilities

Indicates the relative amount of current assets available to cover each dollar of current liabilities. 2.

Example of solvency measures are:

Total liabilities Total assets Measures the percentage of total financing provided by creditors instead of stockholders. Debt to assets ratio =

2-40

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CT2.7 (Continued) (c) There are three bases for comparing a company’s results: The bases of comparison are: 1.

Intracompany—This basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years.

Industry averages—This basis compares an item or financial relationship of a company with industry averages (or norms).

Intercompany—This basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies.

LO 2 BT: AP Difficulty: Medium TOT: 18 min. AACSB: Communication AICPA PC: Communication

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CT2.8

ETHICS CASE

(a) The stakeholders in this case are: Boeing’s management; CEO, public relations manager, Boeing’s stockholders, McDonnell Douglas stockholders, other users of the financial statements; especially potential investors of the new combined company. (b) The ethical issues center around full disclosure of financial information. Management attempted to “time” the release of bad news in order to complete a merger that would have been revoked if cost overruns had been disclosed as soon as management became aware of them. (c) It is not ethical to “time” the release of bad news. GAAP requires that all significant financial information be released to allow users to make informed decisions. (d) Answers will vary. One possibility: Release the information regarding cost overruns as it became available. Describe the causes of such overruns and explain how Boeing would address them (probably by improving production methods to eliminate the inefficiencies alluded to in the text). (e) Investors and analysts should be aware that Boeing’s management will probably “manage” information in the future in ways that will interfere with full disclosure. LO 3 BT: E Difficulty: Hard TOT: 20 min. AACSB: Ethics AICPA FC: Reporting AICPA PC: Professional Demeanor

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT2.9

ALL ABOUT YOU

Answers will vary. LO - BT: S Difficulty: Hard TOT: 30 min. AACSB: Communication AICPA BB: Critical Thinking AICPA PC: Communication

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CT2.10

CONSIDERING ENVIRONMENTAL, SOCIAL, AND GOVERNANCE REPORTING

(a)

The existence of different forms of certification would most likely create confusion for coffee purchasers. It would be difficult to know what aspects of the coffee growing process each certification covered. Similarly, if there were multiple groups that certified financial statements, each with different criteria, it would be difficult for financial statement users to know what each certification promised.

(b)

The certifications have multiple objectives including organic farming as a means to protect bird species, biodiversity and wildlife habitat. Some included requirements are to improve workers’ living conditions, ensure that farmers are paid a premium over costs that will allow them to make a profit, provide running water in worker housing, child labor regulations and education requirements. Certifications can also be financially beneficial because companies can benefit from the positive public relations effects of either producing or buying coffee produced using sustainable practices.

LO - BT: S Difficulty: Hard TOT: 30 min. AACSB: Technology and Communication AICPA FC: Measurement and Reporting AICPA BB:Resource Management

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CHAPTER 3 The Accounting Information System Learning Objectives 1. 2.

Discuss financial reporting concepts. Analyze the effect of business transactions on the basic accounting equation.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-1

ANSWERS TO QUESTIONS 1.

(a) Generally accepted accounting principles (GAAP) are a set of rules and practices, having substantial support, that are recognized as a general guide for financial reporting purposes. (b) The body that provides authoritative support for GAAP is the Financial Accounting Standards Board (FASB).

LO 1 BT: K Diff: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

(a) The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital. (b) The fundamental qualitative characteristics are relevance and faithful representation. The enhancing qualities are comparability, consistency, verifiability, timeliness, and understandability.

LO 1 BT: K Diff: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

Dietz is correct. Consistency means using the same accounting principles and accounting methods from period to period within a company. Without consistency in the application of accounting principles, it is difficult to determine whether a company is better off, worse off, or the same from period to period.

LO 1 BT: AN Diff: Moderate TOT: 2 min. AACSB: None AICPA FC: Measurement and Reporting

Comparability results when different companies use the same accounting principles. Consistency means using the same accounting principles and methods from year to year within the same company.

LO 1 BT: C Diff: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

The cost constraint allows accounting standard setters to weigh the costs that companies will incur to provide information against the benefits that financial statement users will gain from having the information available.

LO 1 BT: K Diff: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

Accounting standards are not uniform because individual countries have separate standard-setting bodies. Currently, many non-U.S. countries are choosing to adopt International Financial Reporting Standards (IFRS). The FASB and IASB are working closely together to minimize the differences between their standards.

LO 1 BT: C Diff: Moderate TOT: 2 min. AACSB: None AICPA FC: Measurement

Accounting relies primarily on two measurement principles. Fair value is sometimes used when market price information is readily available. However, in many situations, reliable market price information is not available. In these instances, accounting relies on cost as its basis.

LO 1 BT: C Diff: Moderate TOT: 2 min. AACSB: None AICPA FC: Measurement

3-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 3 (Continued) 8.

The economic entity assumption states that every economic entity can be separately identified and accounted for. This assumption requires that the activities of the entity be kept separate and distinct from (1) the activities of its owners (the shareholders) and (2) all other economic entities. A shareholder of a company charging personal living costs as expenses of the company is an example of a violation of the economic entity assumption.

LO 1 BT: C Diff: Moderate TOT: 2 min. AACSB: None AICPA FC: Measurement

The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system.

LO 2 BT: K Diff: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting

10.

Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. An increase in the equipment account which is offset by a decrease in the cash account is a specific example.

LO 2 BT: K Diff: Moderate TOT: 2 min. AACSB: None AICPA FC: Reporting

11.

Accounting transactions are the economic events of the company recorded by accountants because they affect the basic accounting equation. (a) The death of a major stockholder of the company is not an accounting transaction as it does not affect the basic accounting equation. (b) Supplies purchased on account is an accounting transaction because it affects the basic accounting equation. (c) An employee being fired is not an accounting transaction as it does not affect the basic accounting equation. (d) Paying a cash dividend to stockholders is an accounting transaction as it does affect the basic accounting equation.

LO 2 BT: C Diff: Moderate TOT: 3 min. AACSB: None AICPA FC: Reporting

12.

(a) (b) (c) (d)

Decrease assets and decrease stockholders’ equity. Increase assets and decrease assets. Increase assets and increase stockholders’ equity. Decrease assets and decrease liabilities.

LO 2 BT: AP Diff: Moderate TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-3

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3.1 a. True. b. False. Substantial authoritative support for GAAP usually comes from two standard-setting bodies: the FASB and the IASB. LO 1 BT: K Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 3.2 (a) (b) (c) (d) (e) (f) (g (h)

Predictive value. Confirmatory value. Materiality. Complete. Free from material error. Comparability. Verifiability. Timeliness.

LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 3.3 a. b. c.

Relevant. Faithful representation. Consistency.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 3.4 a. b. c. d.

1. 2. 3. 4.

Predictive value. Neutral. Verifiable. Timely.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

3-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 3.5 (c) Financial statements should disclose all events and circumstances that would matter to users of financial statements. LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 3.6

a. b. c.

Assets + + –

Liabilities + NE NE

Stockholders’ Equity NE + –

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 3.7

a. b. c.

Assets + – NE (+/-)

Liabilities NE NE NE

Stockholders’ Equity + – NE

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 3.8 Decrease Increase Decrease Decrease Decrease Increase Decrease

a. Advertising expense b. Service revenue c. Insurance expense d. Salaries and wages expense e. Dividends f. Rent revenue g. Utilities expense

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-5

BRIEF EXERCISE 3.9 R NSE E

a. b. c.

Received cash for services performed. Paid cash to purchase equipment. Paid employee salaries.

LO 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 3.10 Assets

Accounts Cash

(1)

Receivable

Liabilities Accounts

Supplies

Payable

+$60,000

(2)

-9,000

(3)

+13,000

+ Notes

Payable

Stockholders' Equity Common

Stock

Retained Earnings + Rev. - Exp. -

Div.

+$60,000 -$9,000 -$13,000

(4)

+$3,100

LO 2 BT: AP Difficulty: Moderate TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 3.11 Assets

Liabilities

Accounts Cash

Inventory

(1) -$286,176 (2) (3)

Equipment

Payable

Stockholders' Equity Common

Stock

Retained Earnings +

Rev. -

Exp.

- Div.

+$286,176

+137,590

+$137,590 +$68,480

+$68,480

LO 2 BT: AP Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

3-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DO IT! EXERCISES DO IT! 3.1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

e Monetary unit assumption b Faithful representation f Economic entity assumption l Cost constraint d Consistency i Historical cost principle a Relevance g Periodicity assumption j Full disclosure principle k Materiality h Going concern assumption c Comparability

LO 1 BT: K Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

DO IT! 3.2a Assets = Accounts Cash + Receivable = (1) (2)

+$20,000 +$20,000

+ +

Common Stock

Stockholders’ Equity Retained Earnings + Revenues – Expenses – Dividends +$20,000

–20,000

(3) (4)

Liabilities Accounts Payable

+$1,800

–$1,800

–3,000

–$3,000

LO 2 BT: AP Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-7

DO IT! 3.2b VORTEX CORP. Income Statement For the Year Ended December 31, 2027 Revenues Service revenue…………………………….. Expenses Salaries and wages expense…………... Maintenance and repairs expense……. Utilities expense………………………….. Total expenses……………………….. Net income…………………………………….

$8,715 $2,860 370 190 3,420 $5,295

VORTEX CORP. Retained Earnings Statement For the Year Ended December 31, 2027 Retained earnings, January 1………………………………… Add: Net income……………………………………

$ 965 5,295 6,260 250 $6,010

Less: Dividends……………………………………… Retained earnings, December 31……………… VORTEX CORP. Balance Sheet December 31, 2027 Assets Current assets Cash………………………………………… Accounts receivable…………………….. Supplies……………………………………. Total current assets………………….. Equipment………………………………………... Total assets…………………………………….

$480 648 295

Liabilities and Stockholders' Equity Current liabilities Notes payable…………………… ………… $ 800 Accounts payable……………….………… 270 Total current liabilities…….. ………… Stockholders' equity Common stock………………….. ………… 5,000 Retained earnings……………… ………… 6,010 Total stockholders' equity… Total liabilities and stockholders' equity…

$ 1,423 10,657 $12,080

$ 1,070

11,010 $12.080

LO 2 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

3-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 3.1 (a) (b) (c) (d) (e) (f)

2 6 3 4 5 1

Going concern assumption Economic entity assumption Monetary unit assumption Periodicity assumption Historical cost principle Full disclosure principle

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

EXERCISE 3.2 (a) This is a violation of the historical cost principle. The inventory was written up to its market value when it should have remained at cost. (b) This is a violation of the economic entity assumption. The treatment of the transaction treats Victor Lopez and Lopez Co. as one entity when they are two separate entities. The cash used to purchase the truck should have been treated as part of salaries and wages expense. (c) This is a violation of the periodicity assumption. This assumption states that the economic life of a business can be divided into artificial time periods (months, quarters, or a year). By adding two more weeks to the year, Lopez Co. would be misleading financial statement readers. In addition, 2027 results would not be comparable to previous years’ results. The company should use a 52 week year to be consistent. LO 1 BT: C Difficulty: Moderate TOT: 5 min. AACSB: None AICPA FC: Measurement

EXERCISE 3.3 a. b. c. d. e. f.

7 10 11 3 2 8

g. h. i. j. k. l.

1 6 4 5 9 12

LO 3 BT: K Difficulty: Moderate Time: 10 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-9

EXERCISE 3.4 1. 2. 3. 4.

5. 6. 7. 8.

(d) (b) (e) (f)

LO 2 BT: C Difficulty: Moderate TOT: 4 min. AACSB: None AICPA FC: Reporting

EXERCISE 3.5 Increase in assets and increase in stockholders’ equity. Decrease in assets and decrease in stockholders’ equity. Increase in assets and increase in stockholders’ equity. Increase in assets and increase in stockholders’ equity. Decrease in assets and decrease in stockholders’ equity. Increase in liabilities and decrease in stockholders’ equity. Increase in assets and decrease in assets. Increase in assets and decrease in assets. Increase in assets and increase in liabilities.

1. 2. 3. 4. 5. 6. 7. 8. 9.

LO 2 BT: C Difficulty: Moderate TOT: 5 min. AACSB: None AICPA FC: Reporting

EXERCISE 3.6 Assets Cash

Liabilities

Accounts Payable

Common Retained Earnings + Stock + Revenues – Expenses –

(1) +$40,000 +$30,000

+$30,000

–4,000

(3)

–$4,000

(4)

+$19,000

(5)

+5,000

(6)

–8,000

(7)

–30,000

Div.

+$40,000

(2)

Rent Exp.

+$19,000

Svc. Rev.

+5,000

Svc. Rev. –8,000

Util. Exp.

–1,300

Advert. Exp.

–30,000

(8) (9)

Stockholders’ Equity

Accounts + Receivable + Equipment =

+1,300 –12,000

+12,000 $15,000 +

$7,000 +

$30,000 =

$ 1,300

$52,000

$40,000 + $24,000

– $13,300

$52,000

LO 2 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

3-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3.7

Cash

Kimmel, Survey of Accounting, 3e, Solutions Manual

(1)

+$100,000

(2)

+45,000

(3)

–60,000

(4)

+16,000

Assets Accounts + Receivable + Supplies +

Equipment

Liabilities Accounts Notes = Payable + Payable

+ Common + Stock

Stockholders’ Equity Retained Earnings + Revenues – Expenses – Dividends

+$100,000 +$45,000 +$60,000 +$16,000

(5) (6)

+$4,700

–5,200

(7)

–$5,200 +$10,000

(8)

–28,000

(9)

–11,000 $ 56,800 +

Service Revenue

Rent Expense

+10,000

Service Revenue –28,000

Salaries and Wages Expense –$11,000

$10,000

$4,700

$131,500

$60,000

$4,700

$45,000 +

$100,000 +

$26,000 –

$131,500

(For Instructor Use Only)

LO 2 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

$33,200

–

$11,000

3-11

EXERCISE 3.8

Assets

Liabilities

Stockholders' Equity

Unearned Accounts Date

Cash

Mar. 2

+$11,000

-1,000

Receivable

Accounts +

Equipment

Payable

Retained Earnings

Service +

Revenue

Common +

Stock

+$10,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

+1,000

-9,000

+700

-300 $2,175

Exp.

Div.

+$9,000

+$2,300 -225

+$11,000

10 13

Rev.

Service Rev. Advert. Exp.

+$2,300 -$225

-1,000 -9,000 +$700 -$300 +

$1,300

$10,000

$700

$13,475 LO 2 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

$11,000

$13,475

$2,300

$225

$300

(For Instructor Use Only)

EXERCISE 3.9

Assets

Liabilities

Stockholders' Equity Retained Earnings

Transaction

Accounts Cash

Prepaid

Notes

+ Receivable + Insurance + Equipment = Payable + Payable +

1. 2.

Accounts +$8,000

Common Stock

Rev.

Kimmel, Survey of Accounting, 3e, Solutions Manual

-300

+20,000

-8,000

-500

+3,000

-500

10.

-250 $11,850 +

Div. Rent Exp. Service Rev. Utilities Exp.

-$1,600 +$3,800

+$8,000

-$1,600

Exp.

+$3,800 -300 +$20,000 -8,000 +$500

-3,000 -$500 Income Tax Exp.

-250 $800 +

$500 +

$8,000 =

$0 +

$20,000 +

$21,150

(For Instructor Use Only)

LO 2 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

$21,150

$3,800 -

$2,150 -

$500

3-13

EXERCISE 3.10 (a)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Issued shares of common stock to investors in exchange for $20,000 cash. Purchased equipment for $5,000, paying $1,000 in cash and the balance of $4,000 on account. Paid $750 cash for supplies. Performed services worth $9,500, receiving $4,100 cash and $5,400 on account. Paid $1,500 cash on accounts payable. Paid $2,000 cash dividends to stockholders. Paid $800 cash for rent. Collected $450 cash from customers on account. Paid salaries and wages of $3,000. Incurred $300 of utilities expense on account.

(b) Issued common stock ............................................................ Service revenue ...................................................................... Dividends ................................................................................ Rent expense .......................................................................... Salaries and wages expense .................................................. Utilities expense ..................................................................... Increase in stockholders’ equity............................................

$20,000 9,500 (2,000) (800) (3,000) (300) $23,400

[Serv. rev. – Total exp. = Net inc. (loss)] (Changes in stock. equity = Additional investment ± Net income or loss – Dividends)

(c) WOLFE COMPANY Income Statement For the Month Ended August 31, 2027 Revenues Service revenue ................................................... Expenses Salaries and wages expense .......................... $3,000 Rent expense .................................................. 800 Utilities expense ............................................. 300 Total expenses ........................................ Net income ..............................................................

$9,500

4,100 $5,400

(Serv. rev. – Total exp.) LO 2 BT: AP Difficulty: Moderate TOT. 12 min. AACSB: Analytic AICPA FC: Reporting

3-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3.11 (a)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Issued shares of common stock to investors in exchange for $15,000 cash. Purchased office equipment for $5,000, paying $2,000 in cash and the balance of $3,000 on account. Paid $750 cash for supplies. Performed services worth $9,400, receiving $4,900 cash and $4,500 on account. Paid $1,500 cash on accounts payable. Paid $2,000 cash dividends to stockholders. Paid $850 cash for rent. Collected $450 cash from clients on account. Paid salaries and wages of $3,900. Incurred $500 of utilities expense on account.

(b) Issued common stock ............................................................ Service revenue ...................................................................... Dividends ................................................................................ Rent expense .......................................................................... Salaries and wages expense ................................................. Utilities expense ..................................................................... Increase in stockholders’ equity ...........................................

$15,000 9,400 (2,000) (850) (3,900) (500) $17,150

[Serv. rev. – Total exp. = Net inc. (loss)] [Chgs. in stkhldrs’ equity = Add’l invest. – Div. ± Net inc. (loss)]

(c) FOLEY & CO. Income Statement For the Month Ended August 31, 2027 Revenues Service revenue ....................................................... Expenses Salaries and wages expense .................................. Rent expense ........................................................... Utilities expense ...................................................... Total expenses ................................................. Net income .......................................................................

$9,400 $3,900 850 500 5,250 $4,150

(Serv. rev. – Tot. exp.)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-15

EXERCISE 3.11 (Continued) FOLEY & CO. Retained Earnings Statement For the Month Ended August 31, 2027 Retained earnings, August 1 ............................................................ Add: Net income .............................................................................. Less: Dividends ................................................................................ Retained earnings, August 31 ..........................................................

$ 0 4,150 4,150 2,000 $2,150

(Beg. ret. earn. + Net inc. – Div.)

FOLEY & CO. Balance Sheet August 31, 2027 Assets Cash .............................................................................. Accounts receivable..................................................... Supplies ........................................................................ Equipment ..................................................................... Total assets ...........................................................

$ 9,350 4,050 750 5,000 $19,150

Liabilities and Stockholders’ Equity Liabilities Accounts payable ................................................. Stockholders’ equity Common stock ...................................................... Retained earnings ................................................. Total stockholders’ equity.................................... Total liabilities and stockholders’ equity ............

$ 2,000 $15,000 2,150 17,150 $19,150

[(Cash + Accts. rec. + Supp. + Equip.) = Accts. pay. + (Com. stock + Ret. earn.)] LO 2 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

3-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3.12 RAPID DELIVERY SERVICE Income Statement For the Month Ended July 31, 2027 Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Maintenance and repairs expense ....................... Insurance expense ............................................... Total expenses .............................................. Net income ....................................................................

$15,500 $7,428 1,958 900 10,286 $ 5,214

(Serv. rev. – Tot. exp. = Net inc.) [$15,500 – ($7,428 + $1,958 + $900) = $5,214]

RAPID DELIVERY SERVICE Retained Earnings Statement For the Month Ended July 31, 2027 Retained earnings, July 1 ............................................ Add: Net income ........................................................... Less: Dividends ........................................................... Retained earnings, July 31 ..........................................

$ 5,200 5,214 10,414 700 $ 9,714

(Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) ($5,200 + $5,214 - $700 = $9,714)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-17

EXERCISE 3.12 (Continued) RAPID DELIVERY SERVICE Balance Sheet July 31, 2027 Assets Current assets Cash ....................................................................... Accounts receivable ............................................. Prepaid insurance ................................................. Total current assets ...................................... Equipment ..................................................................... Total assets...................................................................

$12,424 13,400 2,200 $28,024 59,360 $87,384

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ................................................. Salaries and wages payable................................. Total current liabilities .................................. Notes payable ............................................................... Total liabilities ............................................... Stockholders’ equity Common stock ...................................................... Retained earnings ................................................. Total stockholders’ equity ............................ Total liabilities and stockholders’ equity ....................

$ 8,400 820 $ 9,220 28,450 37,670 40,000 9,714 49,714 $87,384

[((Cash + Accts. rec. + Prepd. ins.) + Equip.) = ((Accts. pay. + S & W pay.) + Notes pay. + (Common stk. + Ret. earn.))] [(($12,424 + $13,400 + $2,200) + $59,360) = (($8,400 + $820) + $28,450 + ($40,000 + $9,714))] LO 2 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

3-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3.1

(a)

Accounting information is the compilation and presentation of financial information for a company. It provides information in the form of financial statements and additional disclosures that are useful for decision making. The accounting rules and practices that have substantial authoritative support and are recognized as a general guide for financial reporting purposes are referred to as generally accepted accounting principles (GAAP). The biotechnology company that employs Saira will follow GAAP to report its assets, liabilities, stockholders’ equity, revenues, and expenses as it prepares financial statements.

(b) Saira is correct in her understanding that the low success rate for new biotech products will be a cause of concern for investors. Her suggestion that detailed scientific findings be reported to prospective investors might offset some of their concerns, but it probably won’t conform to the qualitative characteristics of accounting information. These characteristics consist of relevance, faithful representation, comparability, consistency, verifiability, timeliness, and understandability. They apply to accounting information rather than the scientific findings that Saira wants to include. LO 1 BT: E Difficulty: Moderate TOT: 15 min. AACSB: Communication AICPA FC: Measurement and Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-19

3-20 WONDER TRAVEL AGENCY INC. Assets Cash +$30,000

–900

–3,400

Retained Earnings Common Stock + Revenues – Expenses – Dividends +$30,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

–$900

Rent Expense

–200

Advertising Expense

+$3,400

+$200

(For Instructor Use Only)

–500

+3,000

–400

–200

–1,800

10.

+9,000

–9,000

$34,800 +

+$500

+$9,000

+$12,000

Service Revenue

–$400

–200

–1,800

$38,700

$500

$3,400

$30,000 +

$12,000

$38,700

–

$2,900

Salaries and Wages Expense

–

$400

SOLUTIONS TO PROBLEM 3-3A

Stockholders’ Equity

= Liabilities +

Accounts Accounts + Receivable + Supplies + Equipment = Payable +

PROBLEM 3.2 OLUTIONS TO PROBLEMS

(a)

PROBLEM 3.2 (Continued) (b) Service Revenue ...................................................... Expenses Salaries and Wages Expense .......................... Rent Expense ................................................... Advertising Expense ........................................ Total expenses.......................................... Net Income ................................................

$12,000 $1,800 900 200 2,900 $ 9,100

OR Revenues.................................................................. Less: Expenses....................................................... Net Income ...............................................................

$12,000 2,900 $ 9,100

[Serv. rev. – Total exp. = Net inc. (loss)] LO 2 BT: AP Difficulty: Hard TOT: 45 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-21

(a)

CURRY CONSULTING INC. Assets

Date

Cash

Liabilities

Accounts Notes Accounts Common Retained Earnings + Receivable + Supplies + Equipment = Payable + Payable + Stock + Revenues – Expenses – Dividends

May 1 +$15,000 2

Stockholders’ Equity

+$15,000

–600

+$500 –150

+1,400

–200

15 –2,500

–500

+1,200

+5,000

–200

–180

–150

Advertising Expense

+$500

+$1,400

Service Revenue –$200

+4,200

Rent Expense

+4,200

Service Revenue –2,500

Salaries and Wages Expense

(For Instructor Use Only)

$18,270 +

–500 –1,200 +$5,000 +$2,000

+1,800 –180

$3,000

$23,770

$500

$2,000

$5,000 +

$1,800

$15,000 +

$23,770

$5,600

–

$3,430

Utilities Expense –

$200

PROBLEM 3.3

Kimmel, Survey of Accounting, 3e, Solutions Manual

–$600

PROBLEM 3.3 (Continued) (b) CURRY CONSULTING INC. Income Statement For the Month Ended May 31, 2027 Revenues Service revenue ($1,400 + $4,200) ....................... Expenses Salaries and wages expense ............................... Rent expense ........................................................ Utilities expense ................................................... Advertising expense ............................................. Total expenses .............................................. Net income ................................................................

$5,600 $2,500 600 180 150 3,430 $2,170

[Serv. rev. – Total. exp = Net inc. (loss)]

CURRY CONSULTING INC. Retained Earnings Statement For the Month Ended May 31, 2027 Retained earnings, May 1 ........................................... Add: Net income .........................................................

$ 0 2,170 2,170 200 $1,970

Less: Dividends .......................................................... Retained earnings, May 31 ......................................... (Beg. ret. earn. + Net inc. – Div.)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-23

PROBLEM 3.3 (Continued) (c) CURRY CONSULTING INC. Balance Sheet May 31, 2027 Assets Current assets Cash …… .............................................................. Accounts receivable............................................. Supplies ................................................................ Total current assets ...................................... Equipment ……. ............................................................ Total assets…… ...........................................................

$18,270 3,000 500 $21,770 2,000 $23,770

Liabilities and Stockholders’ Equity Current liabilities Notes payable ....................................................... Accounts payable ................................................. Total liabilities ............................................... Stockholders’ equity Common stock ..................................................... Retained earnings ................................................ Total stockholders’ equity ............................ Total liabilities and stockholders’ equity ....................

$ 5,000 1,800 $ 6,800 15,000 1,970 16,970 $23,770

(Current assets + Equip. = Current liabl. + Stock. equity) LO 2 BT: AP Difficulty: Hard TOT: 45 min. AACSB: Analytic AICPA FC: Reporting

3-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

(a)

BINDY CRAWFORD INC. Assets

Accts.

Notes

Cash

Rec.

Supplies

Equip.

$4,000

$2,500

$500

$5,000

Pay.

Accts. +

Pay.

Stockholders' Equity

Com. +

$4,200

Stock

$6,200

$1,600 +

Aug. 1

+1,100

-2,700

+3,600

-700

-2,450

-700

+5,000

Retained Earnings

Rev.

Div.

-1,100 -2,700 +1,800

+$5,400 +4,000

Service Rev.

+3,300 Sal. & Wages Exp.

-$1,400 -700

Rent Exp.

-350

Advert. Exp. -$700

+$5,000

+380 $7,150

Exp.

$3,200

(For Instructor Use Only)

$19,850

$500

$9,000

$5,000

$5,180

-380 +

$6,200

$19,850

$5,400

$2,830

Util. Exp. -

$700

PROBLEM 3.4

Kimmel, Survey of Accounting, 3e, Solutions Manual

7/31 Bal.

Liabilities

3-25

PROBLEM 3.4 (Continued) (b) BINDY CRAWFORD INC. Income Statement For the Month Ended August 31, 2027 Revenues Service revenue ....................................................... Expenses Salaries and wages expense ................................... Rent expense ........................................................... Utilities expense ...................................................... Advertising expense ................................................ Total expenses ................................................. Net income … ..................................................................

$5,400 $1,400 700 380 350 2,830 $2,570

(Serv. rev − Tot. exp.)

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2027 Retained earnings, August 1 ............................................................ Add: Net income ...................................................................... Less: Dividends ................................................................................ Retained earnings, August 31 ..........................................................

$1,600 2,570 4,170 700 $3,470

(Beg. ret. earn. + Net inc. − Div.)

3-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3.4 (Continued) BINDY CRAWFORD INC. Balance Sheet August 31, 2027 Assets Current assets Cash …………….. .................................................... Accounts receivable ............................................... Supplies .................................................................. Total current assets ........................................ Equipment ………. .......................................................... Total assets….…… .........................................................

$7,150 3,200 500 $10,850 9,000 $19,850

Liabilities and Stockholders’ Equity Current liabilities Notes payable ......................................................... Accounts payable ................................................... Total liabilities ................................................. Stockholders’ equity Common stock ........................................................ Retained earnings................................................... Total stockholders’ equity .............................. Total liabilities and stockholders’ equity......................

$5,000 5,180 $10,180 6,200 3,470 9,670 $19,850

(Current assets + Equip. = Current liabl. + Stock. equity) LO 2 BT: AP Difficulty: Hard TOT: 55 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-27

(a)

Cash

FREDONIA REPAIR INC. Assets = Liabilities + Stockholders’ Equity Accounts Accounts Common Retained Earnings + Receivable + Supplies + Equipment = Payable + Stock + Revenues – Expenses – Dividends

1. +$10,000

–5,000

–400

+$10,000

+$5,000

(a)

–250

(b)

0 4.

–300

+$300

+$250 +4,700

+$4,700

(c)

6. –700

–$700

7. –1,000

–1,000

(d)

–140

(e)

(For Instructor Use Only)

10.

+$1,100 +120

11.

$ 7,280 +

+1,100

(f)

–120 $980

$300

$13,560

$5,000

$250

$10,000 +

$5,800 –

$13,560

$1,790

–

$700

PROBLEM 3.5

Kimmel, Survey of Accounting, 3e, Solutions Manual

–$400

PROBLEM 3.5 (Continued) Key to Retained Earnings Column (a) Rent expense (b) Advertising expense (c) Service revenue (d) Salaries and wages expense (e) Utilities expense (f) Service revenue (b) Revenues Service revenue ($4,700 + $1,100).................. Expenses Salaries and wages expense .......................... Rent expense................................................... Advertising expense ....................................... Utilities expense .............................................. Total expenses......................................... Net income ..............................................................

$5,800 $1,000 400 250 140 1,790 $4,010

(Serv. rev. – Tot. exp.); ($5,800 - $1,790) LO 2 BT: AP Difficulty: Hard TOT: 45 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-29

3-30 Assets

Accts.

Bal.

Liabilities

Notes

Cash

Rec.

Supplies

Equip.

$9,000

$1,700

$600

$6,000

Pay.

Accts. +

Pay.

Stockholders' Equity

Com. +

$3,600

Stock

$13,000

$700 +

-2,900

+1,300

Kimmel, Survey of Accounting, 3e, Solutions Manual

-800

+2,500

-400

-2,800

Retained Earnings

Rev.

+2,100

Bal.

$15,900

Div.

+1,300

+4,800

+$7,300

Service Rev. -$400

+170 +10,000

-1,300

7. 8.

Exp.

-2,900

-$1,700 -900

Sal. & wages Exp. Rent Exp.

-200

Advert. Exp.

-170

Util. Exp.

+$10,000 +

$5,200

$600

$8,100

$10,000

$2,170

$13,000

$7,300

(For Instructor Use Only)

3-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

$2,970

$400

PROBLEM 3.6

LA BRAVA VETERINARY CLINIC

(a)

PROBLEM 3.6 (Continued) (b)

LA BRAVA VETERINARY CLINIC Income Statement For the Month Ended September 30, 2027

Revenues Service revenue ......................................................... Expenses Salaries and wages expense .................................... Rent expense ............................................................. Advertising expense .................................................. Utilities expense ........................................................ Total expenses ................................................... Net income…… ..................................................................

$7,300 $1,700 900 200 170 2,970 $4,330

(Serv. rev. – Tot. exp.)

LA BRAVA VETERINARY CLINIC Retained Earnings Statement For the Month Ended September 30, 2027 Retained earnings, September 1 ................................................... Add: Net income .......................................................................... Less: Dividends ............................................................................. Retained earnings, September 30 .................................................

$ 700 4,330 5,030 400 $4,630

(Beg. ret. earn. + Net inc. − Div.)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-31

PROBLEM 3.6 (Continued) LA BRAVA VETERINARY CLINIC Balance Sheet September 30, 2027 Assets Current assets Cash ………….............................................................. $15,900 Accounts receivable ................................................... 5,200 Supplies ...................................................................... 600 Total current assets .................................................... $21,700 Equipment …………........................................................... 8,100 Total assets ...................................................................... $29,800 Liabilities and Stockholders’ Equity Current liabilities Notes payable ............................................................ Accounts payable ...................................................... Total liabilities .................................................... Stockholders’ equity Common stock ........................................................... Retained earnings ...................................................... Total stockholders’ equity ................................. Total liabilities and stockholders’ equity .........................

$10,000 2,170 $12,170 13,000 4,630 17,630 $29,800

(Tot. assets = Tot. liabl. + Stock. equity) LO 2 BT: AP Difficulty: Hard TOT: 55 min. AACSB: Analytic AICPA FC: Reporting

3-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

(a)

TERCEK DELIVERIES Assets

Accounts Date

Cash

Liabilities Notes

+ Receivable + Supplies + Equipment =

Accounts

Payable + Payable +

June 1 +$10,000

Common

Retained Earnings

Stock

+ Revenues – Expenses – Dividends

+$10,000

June 2 + –2,000

+$14,000

–500

June 3 +

Stockholders’ Equity

+$12,000 –$ 500

(a)

+$4,800

(b)

PROBLEM 3.7

Kimmel, Survey of Accounting, 3e, Solutions Manual

+ June 5 + June 9 +

–300

–$300

+ +050

June 12

+$150

– June 15 + +1,250

+ -1,250

+00 +

June 17

–100

+100 +

(c)

June 20 + +1,500

+1,500

(d)

+ June 23

–500

(For Instructor Use Only)

+ June 26+

–250

June 29

–100

June 30

–1,000

+0 +0

–250

(e)

–1,000

(f)

$ 8,100

–100

$3,550

$150

3-33

$25,800

$14,000

$11,500 +

$150

$10,000 +

$25,800

$6,300 –

$1,850

–

$300

PROBLEM 3.7 (Continued) Key to Retained Earnings Column (a) Rent expense (b) Service revenue (c) Gasoline expense

(b)

(d) (e) (f)

Service revenue Utilities expense Salaries and wages expense

TERCEK DELIVERIES Income Statement For the Month Ended June 30, 2027

Revenues Service revenue ......................................................... Expenses Salaries and wages expense ..................................... $1,000 Rent expense ............................................................. 500 Utilities expense ........................................................ 250 Gasoline expense ...................................................... 100 Total expenses ................................................... Net income … ................................................................... .

$6,300

1,850 $4,450

(Serv. rev. – Tot. exp.)

TERCEK DELIVERIES Retained Earnings Statement For the Month Ended June 30, 2027 Retained earnings, June 1 ............................................ Add: Net income............................................................ Less: Dividends ............................................................ Retained earnings, June 30 ..........................................

0 4,450 4,450 300 $4,150

3-34

(For Instructor Use Only)

Kimmel, Survey of Accounting, 3e, Solutions Manual

PROBLEM 3.7 (Continued) (c)

TERCEK DELIVERIES Balance Sheet June 30, 2027 Assets

Current assets Cash ……………. ......................................................... Accounts receivable ................................................... Supplies ...................................................................... Total current assets .................................................... Equipment …. ...................................................................... Total assets… .....................................................................

$8,100 3,550 150 $11,800 14,000 $25,800

Liabilities and Stockholders’ Equity Current liabilities Notes payable ............................................................ $11,500 Accounts payable ...................................................... 150 Total liabilities .................................................... Stockholders’ equity Common stock ........................................................... 10,000 Retained earnings...................................................... 4,150 Total stockholders’ equity ................................. Total liabilities and stockholders’ equity.........................

$11,650

14,150 $25,800

(Tot. assets = Tot. liabl. + Stock. equity) LO 2 BT: AP Difficulty: Hard TOT: 55 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-35

CT3.1

FINANCIAL REPORTING PROBLEM

(a) 1. 2. 3.

Cash is increased. Cash is decreased. Cash is decreased or Accounts Payable is increased.

(b) 1. 2.

Cash is increased. Cash is decreased or Notes (or Accounts) Payable is increased.

LO 2 BT: C Difficulty: Moderate TOT: 5 min. AACSB: None AICPA FC: Reporting

3-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT3.2

COMPARATIVE ANALYSIS PROBLEM

The following other accounts are ordinarily involved: a.

Increase in Accounts Receivable: Service Revenue or Sales Revenue is increased.

Decrease in Notes Payable: Cash is decreased.

Increase in Equipment: Notes (or Accounts) Payable is increased or Cash is decreased.

Increase in Prepaid Insurance: Cash decreased.

LO 2 BT: C Difficulty: Moderate TOT: 5 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-37

CT3.3

INTERPRETING FINANCIAL STATEMENTS

CHIEFTAIN INTERNATIONAL, INC. (a) One of the primary advantages to Chieftain of having no long-term debt is that there is room for growth through the use of debt and the company’s financial risk is greatly reduced. Another advantage is that profitability is enhanced when there is no interest expense. A possible disadvantage is that the company could expand more and earn a greater return if the growth had been financed with long-term debt. (b) An advantage to Chieftain from having a large cash balance is that cash is available to finance such things as the drilling of new wells and the investment in new technology. New opportunities may be seized and expansions may be undertaken at the time most advantageous for the business. A disadvantage is that cash earns little or no interest. A higher rate of return might be generated on excess cash by some other type of investment. (c) Accounts payable, as purchases on credit, represent interest-free loans. Business enterprises don’t pay cash unless the supplier requires immediate payment. Nearly all exchange transactions are conducted on 30-day or more credit. LO 2 BT: E Difficulty: Hard TOT: 15 min. AACSB: Communication AICPA FC: Reporting

3-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT3.4

REAL-WORLD FOCUS

(a) CPAs work in public accounting, business and industry, government, and education. (b) A CPA needs: strong leadership, communication skills, tech know-how, business savvy. (c) Salary ranges are: $63,250 – $83,250 during the first three years for a CPA at a large firm; $207,000 – $465,750 for Chief Financial Officer at a large corporation. LO N/A BT: C Difficulty: Easy TOT: 20 min. AACSB: Analytic and Technology AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-39

CT3.5

REAL-WORLD FOCUS

(a) The reason the Green Bay Packers issue an annual report is because they are a publicly owned, nonprofit company. They issue the report to the more than 100,000 shareholders who hold shares. None of the other teams are publicly owned, so they have no obligation to make their financial information available except to their small group of owners. (b) At the time that the article was written the owners of the NFL teams and the players’ labor union were negotiating a new contract. Knowing how profitable the NFL teams are would be useful information for the players to know so that they would have a better sense of how much the teams could afford to pay. The Packers are obviously a “small market” team, they are not necessarily representative of teams in general. However, the Packers’ annual report does give the players some sense of the profitability of other teams. (c) Since some of the cost of the stadium that the Packers play in is covered by taxpayers, the county and state government has an interest in the team’s finances. (d) The Packers’ revenues increased during recent years. However, because the cost of players’ salaries increased at a faster rate than revenues, the Packers’ operating profit actually declined. LO 2 BT: C Difficulty: Hard TOT: 25 min. AACSB: Analytic, Technology and Communication AICPA FC: Reporting AICPA PC: Communication

3-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT3.6

ETHICS CASE

(a) The chief executive is accused of misappropriating investor funds for himself. He stated he was operating an online market place for hiring private investigators. He provided investors with detailed financial statements which falsely inflated its results. He also sent an investment memo that cited results of previous Trustify affiliated private investigations. The veracity of these claims could not be verified. He also sent false emails that pretended to verify funds sent from other investors, and he told one investor the company had $18 million in cash when it had less than $10,000. (b) If a company’s financial statements have not been audited by a CPA firm, then the investor is relying solely on the honesty and financial reporting ability of the company’s management. Companies that are in the early stages of operations are often in dire need of financing to remain in business. Sometimes otherwise honest managers will be tempted to engage in fraudulent activities in order to help the company survive. (c)

The article explains that sometimes investors are afraid to ask for supporting documents because they don’t want to offend company managers, and they don’t want to be left out of investment opportunities. They say that this is particularly likely when a venture capital market becomes “overheated” with too many investor dollars chasing too few good investment opportunities. Making investment decisions without good data is risky. In this case, the investor should be asking whether the risk is justified by the opportunity. Clearly, in the case of Trustify, the answer is no.

LO 3, 4 BT: E Difficulty: Hard TOT: 20 min. AACSB: Ethics and Communication AICPA FC: Reporting AICPA PC: Communication and Professional Demeanor

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

3-41

CT3.7

ALL ABOUT YOU

Our primary interest in this exercise is to engage students in a discussion regarding the general nature of the financial statement elements (assets, liabilities, equity, revenues and expenses). (a)

By taking out the bank loan, your friend has incurred a liability. You do not have a liability unless your friend defaults, or unless it becomes clear that he will default. The loan application may, however, require you to disclose any guarantees that you have signed, since they represent potential liabilities.

(b) Accounting standards have specific requirements regarding accounting for situations where there is uncertainty regarding whether a liability has been incurred. Those standards require an evaluation of the probability of an amount being owed. Without going into detail regarding those standards, the basic idea is that if it is probable that you will owe money, then you should record a liability. If it is not probable, but it is possible that you will owe money, then you should disclose facts regarding the situation. The most important point is that this event has the potential to materially impact your finances, and therefore you have a responsibility to disclose it to the bank in some form. (c)

Losing your job would not create a financial liability, although it would most certainly reduce your earnings/income. You are obviously concerned that you might lose your job, but you don’t have specific information that would suggest that it will happen. Therefore, you probably don’t have an obligation to disclose this information to the bank. However, unless you are relatively certain that you would be able to find suitable employment relatively quickly, you might want to wait until your job situation has stabilized before pursuing a loan of this size.

LO N/A BT: E Difficulty: Hard TOT: 30 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication

3-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CHAPTER 4 Accrual Accounting Concepts Learning Objectives 1. 2. 3. 4.

Explain the accrual basis of accounting and the reasons for adjustments. Prepare adjustments for deferrals. Prepare adjustments for accruals. Prepare financial statements from adjusted amounts.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-1

ANSWERS TO QUESTIONS 1.

(a) Under the periodicity assumption, an accountant is required to determine the effect of each accounting transaction on a specific accounting period. (b) An accounting time period that is one year in length is referred to as a fiscal year.

LO 1 BT: C Diff: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

The two generally accepted accounting principles that pertain to adjusting the accounts are: The revenue recognition principle, which states that revenue should be recognized in the time period in which the performance obligation is satisfied. The expense recognition principle, which states that expenses be recognized in the period when a company makes efforts to generate revenues.

LO 1 BT: K Diff: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

The law firm should recognize the revenue in April. The revenue recognition principle states that revenue should be recognized in the accounting period in which the performance obligation is satisfied.

LO 1 BT: C Diff: Moderate TOT: 2 min. AACSB: None AICPA FC: Measurement

Expenses of $4,700 ($2,500 + $2,200) should be deducted from the revenues in April. Under the expense recognition principle, efforts (expenses) should be matched with results (revenues).

Exp. ($2,500 + $2,200) LO 1 BT: AP Diff: Moderate TOT: 2 min. AACSB: Analytic AICPA FC: Measurement

No, adjustments are required by the revenue and expense recognition principles.

LO 1 BT: C Diff: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

The financial information in the unadjusted accounts may not be up to date because: (1) Some events are not recorded daily because it is not useful or efficient to do so. (2) The expiration of some costs occurs with the passage of time rather than as a result of recurring daily transactions. (3) Some items may be unrecorded because the transaction data are not known.

LO 1 BT: C Diff: Moderate TOT: 3 min. AACSB: None AICPA FC: Measurement

The two categories of adjustments are deferrals and accruals. Deferrals consist of revenues collected before services are performed and expenses paid before they are incurred. Accruals consist of revenues for services performed prior to collection and expenses incurred prior to payment.

LO 1 BT: C Diff: Moderate TOT: 3 min. AACSB: None AICPA FC: Measurement

In a prepaid expense adjustment, expenses are increased, and assets are decreased.

LO 2 BT: K Diff: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting

No. Depreciation is the process of allocating the cost of an asset to expense over its useful life. Depreciation results in the presentation of the book value of the asset, not its fair value.

LO 2 BT: C Diff: Moderate TOT: 2 min. AACSB: None AICPA FC: Measurement and Reporting

4-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 4 (Continued) 10.

Depreciation expense is an expense account that shows the cost that has expired during the current accounting period. Accumulated depreciation is a contra asset account. The balance in this account is the depreciation that has been recognized from the date of acquisition to the balance sheet date.

LO 2 BT: C Diff: Moderate TOT: 3 min. AACSB: None AICPA FC: Reporting

11.

Equipment ............................................................................... Less: Accumulated depreciation—equipment .........................

$15,000 7,000

$8,000

LO 2 BT: AP Diff: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

12.

In an unearned revenue adjustment, liabilities are decreased, and revenues are increased.

LO 2 BT: K Diff: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting

13.

The sale of a three-year maintenance contract on December 29, 2026 will have no effect on the 2026 income statement but receipt of $100,000 on December 29, 2026, 2027, and 2028 will increase an asset, Cash, and a liability, Unearned Service Revenue. As Abe Technologies provides service to its customer during 2027, 2028, and 2029, the liability will decrease, and revenue will be increased. Accrual accounting rules require that revenue be recognized as the performance obligation is satisfied rather than when cash is received.

LO 2 BT: AN Diff: Hard TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

14.

This promotion plan sounds like a bad idea for two reasons: (1) GAAP requires that the sale of a gift card be recorded as Unearned Sales Revenue (a liability) rather than Sales Revenue. Revenue recognition is delayed until the gift card is used or expires. Ed’s plan will not help the company meet its target revenue unless customers use the cards by year-end. (2) Selling a $50 card for $45 will probably not help the company meet its target net income. Although this promotion may result in additional sales revenue as the cards are used, the income resulting from the cards will be much less than usual since they eliminate $5 of normal gross profit.

LO 2 BT: AN Diff: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

15.

An asset is increased and a revenue is increased.

LO 3 BT: C Diff: Moderate TOT: 1 min. AACSB: None AICPA FC: Reporting

16.

An expense is increased and a liability is increased.

LO 3 BT: C Diff: Moderate TOT: 1 min. AACSB: None AICPA FC: Reporting

17.

Net income was understated $270 because prior to adjustment revenues are understated by $780 and expenses are understated by $510. The difference in this case is $270 ($780 – $510).

LO 3 BT: AN Diff: Hard TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

18.

The transaction of January 9 increases Salaries and Wages Expenses $5,100, decreases Salaries and Wages Payable $1,100 and decreases Cash $6,200.

LO 3 BT: AP Diff: Moderate TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-3

Questions Chapter 4 (Continued) 19.

(a) Accrued revenues. (b) Unearned revenues. (c) Accrued expenses.

(d) Accrued expenses or prepaid expenses. (e) Prepaid expenses. (f) Accrued revenues or unearned revenues.

LO 2, 3 BT: AN Diff: Moderate TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

20.

(a) Salaries and Wages Payable. (b) Accumulated Depreciation-Equipment. (c) Interest Expense.

(d) (e) (f)

Supplies Expense. Service Revenue. Service Revenue.

LO 2, 3 BT: C Diff: Moderate TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

21.

Disagree. An adjustment entry affects only one balance sheet account and one income statement account.

LO 1 BT: K Diff: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting

22.

Apple reports Accounts Receivable. This suggests that it records revenue when it has delivered goods, even though it hasn’t received payment. If it used a cash basis it wouldn’t record revenue until cash was received, and it would therefore not establish receivables.

LO 1 BT: C Diff: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

23.

(a) Information presented on an accrual basis is useful because it reveals important information about the relationship between efforts and results. This information is useful in predicting future results. Trends in revenues and expenses are thus more meaningful. (b) Information presented on a cash basis is useful for predicting the future availability of cash. Cash basis financial statements provide useful information about a company’s sources and uses of cash.

LO 1 BT: C Diff: Moderate TOT: 3 min. AACSB: None AICPA FC: Reporting

4-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 4.1

(a) (b) (c) (d) (e) (f)

Cash $–100 0 0 +800 –2,500 0

Net Income $0 –20 +1,300 0 0 –600

LO 1 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 4.2 (a) Prepaid Insurance—to recognize insurance expired during the period. (b) Depreciation Expense—to allocate the cost of an asset to expense during the current period. (c) Unearned Service Revenue—to account for unearned revenue for which services were performed during the period. (d) Interest Payable—to recognize interest accrued but unpaid on notes payable during the current period. LO 2, 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-5

BRIEF EXERCISE 4.3 Item

(1) Type of Adjustment

(2) Accounts Before Adjustment

(a)

Prepaid Expense

Assets Overstated Expenses Understated

(b)

Accrued Revenue

Assets Understated Revenues Understated

(c)

Accrued Expense

Expenses Understated Liabilities Understated

(d)

Unearned Revenue

Liabilities Overstated Revenues Understated

LO 1 BT: AN Difficulty: Hard TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4.4 Assets

Bal. Dec. 31 Adj. Bal.

= Liabilities

Stockholders’ Equity

+ Com. Stock

Supplies = 8,800 −7,700 1,100

−

Rev.

Exp. (Supplies) − Div. −0 −7,700 −7,700

(Supp. exp = Beg. supp. bal. – End. supp. bal.) LO 2 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4.5 Assets Accum. Depr. Equipment − - Equip. Bal. Dec. 31 Adj. Bal.

22,000 22,000

Liabilities

Stockholders’ Equity

+ Com. Stock

Rev.

−

0 −2,750 −2,750

Exp. (Depr.)

−

Div.

0 −2,750 −2,750

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

4-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 4.6 Assets

Jul. 1 Dec. 31 Adj. Bal.

Cash −12,400

= +

−12,400

Prepaid Insurance +12,400 −3,100 +9,300

Liabilities

Stockholders’ Equity

Com. Stock

Rev.

−

Exp. (Ins.)

−

Div.

−

Div.

−3,100 −3,100

(Ins. exp. = Amt. pd. × Fraction used) LO 2 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4.7

Jul. 1 Dec. 31 Adj. Bal.

Assets

Cash +12,400

+12,400

Liabilities + Unearned Com. Serv. Rev. + Stock +12,400 −3,100 +9,300

Stockholders’ Equity +

Serv. Rev.

−

Exp.

+3,100 +3,100

(Serv. rev = Amt. pd. × Fraction used) LO 2 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-7

4-8 Adjustment (a) (b) (c)

Accts. Rec.

= =

Liabilities Int. Pay. +300

Stockholders’ Equity

+ +

Sal. & Wages Pay.

Com. Stock

+1,700

Rev.

−

Exp. −300

−

Div. Interest expense

+1,700 +780

LO 3 BT:AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

−780

Salaries & wages exp.

BRIEF EXERCISE 4.8

Assets

Kimmel, Survey of Accounting, 3e, Solutions Manual (For Instructor Use Only)

BRIEF EXERCISE 4.9 Account

(1) Type of Adjustment

(2) Related Account

(a)

Accounts Receivable

Accrued Revenues

Service Revenue

(b)

Prepaid Insurance

Prepaid Expenses

Insurance Expense

(c)

Cash

Not required

(d)

Accum. Depreciation— Equipment

Prepaid Expenses

(e)

Dividends

Not required

(f)

Interest Payable

Accrued Expenses

Interest Expense

(g)

Unearned Service Revenue

Unearned Revenues

Service Revenue

Depreciation Expense

LO 2, 3 BT: AN Difficulty: Hard TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4.10 LEVIN CORPORATION Income Statement For the Year Ended December 31, 2027 Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Rent expense ........................................................ Insurance expense ............................................... Supplies expense ................................................. Depreciation expense ........................................... Total expenses .............................................. Net income ....................................................................

$32,000 $14,000 3,900 1,800 1,500 1,000 22,200 $ 9,800

[Serv. rev – Tot. exp. = Net inc. (loss)] LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-9

BRIEF EXERCISE 4.11 Revenues Service revenue ................................................... $45,000 Interest revenue ................................................... 3,100 Expenses Rent expense ....................................................... (4,800) Depreciation expense ......................................... (2,500) Salaries and wages expense .............................. (18,200) Net income .........................................................

$48,100

(25,500) $22,600

PEPPER CORP. Retained Earnings Statement For the Year Ended December 31, 2027 Retained earnings, January 1 ............................... Add: Net Income ....................................................

$21,000 22,600 43,600 3,000 $40,600

Less: Dividends ..................................................... Retained earnings, December 31 ......................... LO 4 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4.12 RAINFOREST INC. Balance Sheet December 31, 2027 Assets Current assets Cash ............................................................. Accounts receivable .................................... Inventory ...................................................... Supplies ....................................................... Total current assets Property, plant, and equipment Land.............................................................. Equipment .................................................... Less: Accumulated depreciation-equipment Total Property, plant, and equipment....... Total assets....................................................

4-10

$ 1,300 1,700 3,700 400 $7,100 26,000 $50,000 6,000 44,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

70,000 $77,100

(For Instructor Use Only)

BRIEF EXERCISE 4.12 (Continued) Liabilities and Stockholders’ Equity Current liabilities Notes payable-current ................................ $ 2,200 Accounts payable........................................ 3,900 Total current liabilities .............................. Long-term liabilities Bonds payable ............................................. 31,000 Notes payable-long-term ............................ 5,000 Total long-term liabilities .......................... Total liabilities ......................................... Stockholders’ equity Common stock ............................................ 20,000 Retained earnings ....................................... 15,000 Total stockholders’ equity ........................ Total liabilities and stockholders’ equity.....

$ 6,100

36,000 42,100

35,000 $77,100

LO 4 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4.13 Account (a) (b) (c) (d) (e) (f) (g)

Financial Statement

Accumulated Depreciation Depreciation Expense Retained Earnings (beginning) Dividends Service Revenue Supplies Accounts Payable

Balance Sheet Income Statement Retained Earnings Statement Retained Earnings Statement Income Statement Balance Sheet Balance Sheet

LO 4 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-11

SOLUTIONS TO DO IT! EXERCISES DO IT! 4.1 1. (d)

2. (e)

3. (h)

4. (c)

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

4-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Unadj. Bal. Adj. 1 Adj. 2 Adj. 3 Adj. 4 Adj. Bal.

Supplies +2,500

Prepd. Ins. +2,400 −300

Equip. +30,000

−

Accum. Depr. Equip −4,800

Liabilities

Unearned Serv. Rev. +10,000

Stockholders’ Equity

Rev.

−200

2,100

30,000

−5,000

Exp. −300 −1,600 −200

−1,600

900

−

−4,000 6,000

Adj. 2 = Beg. supplies bal. – End. supplies bal. = Supplies used Adj. 4 = Beg. unearn. svc. rev. bal. × Fraction of svcs. performed = Rev. earned LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

4,000 4,000

−2,100

Insurance expense Supplies expense Depreciation expense Service revenue

DO IT! 4.2

Kimmel, Survey of Accounting, 3e, Solutions Manual

Assets

(For Instructor Use Only)

4-13

DO IT! 4.3 Assets Sample 1. 2. 3.

No effect No effect No effect Increase

Liabilities Increase Increase Increase No effect

Stockholders’ Equity Rev. Exp. No effect Increase No effect Increase No effect Increase Increase No effect

LO 3 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 4.4 Income statement: Service Revenue, Utilities Expense Balance sheet: Accounts Receivable, Accumulated Depreciation, Notes Payable, Common Stock. LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

4-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 4.1 The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. (a) Since the performance obligation is not satisfied until the flight actually occurs, revenue should not be recognized until December. Southwest Airlines should recognize the revenue in December when the customer has been provided with the flight. (b) Sales revenue should be recognized at the time of delivery. (c) Revenue should be recognized on a per game basis over the season from April through October. (d) Interest revenue should be accrued and recognized by RBC evenly over the term of the loan. (e) Revenue should be recognized when the sweater is shipped to the customer in September. LO 1 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement

EXERCISE 4.2 The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. a.

Receipt of cash on June 1 creates a performance obligation to provide advertising services. The performance obligation is satisfied as advertising services are provided during the month. Revenue will be recognized in an adjusting entry on June 30 adjustment.

The revenue will be recognized when the goods are delivered on July 12.

Receipt of cash on September 1 creates a performance obligation to provide online movie viewing services. The performance obligation is satisfied as viewing services are provided during the month. Revenue will be recognized in an adjusting entry on September 30.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-15

EXERCISE 4.2 (Continued) d.

The revenue will be recognized when the goods are delivered on March 14.

Receipt of cash on October 1 creates a performance obligation to provide online video conferencing services for a 12-month period. The performance obligation is satisfied as video conferencing services are provided each month. Revenue will be recognized evenly with 12 monthly adjustments.

LO 1 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement

EXERCISE 4.3 (a) (b) (c) (d) (e) (f) (g) (h)

8. 1. 7. 3. 6. 4. 2. 5.

Going concern assumption. Economic entity assumption. Full disclosure principle. Monetary unit assumption. Materiality. Periodicity assumption. Expense recognition principle. Historical cost principle.

LO 1 BT: K Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Reporting

EXERCISE 4.4 (a) (b) (c) (d) (e) (f)

Revenue recognition principle. Periodicity assumption. No violation. Going concern assumption. Historical cost principle. Economic entity assumption.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

4-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4.5 $ 33,640 + 3,400 – 2,800 + 1,300 – 1,460 – 2,000 + 2,400 – 1,400 + 1,100 $ 34,180

Cash basis earnings. Accounts receivable arise from sales that have been made, thus revenue must be recognized for the balance outstanding at the end of the current year. Accounts receivable collected in the current year, for sales made in the previous year must be deducted from earnings. Supplies on hand at year-end should be set up as an asset rather than expensed, this increases earnings. Supplies on hand at the end of the previous year should be expensed this year, this decreases earnings. Wages owing at the end of the current year should be accrued, thus reducing earnings. Wages owed at the end of the previous year should not be deducted from the current year’s earnings, thus increasing earnings. Other unpaid amounts owed at the end of the current year should be accrued, thus reducing earnings. Other unpaid amounts owed at the end of the previous year should not be deducted from the current year’s earnings, thus increasing earnings. Accrual basis earnings.

LO 1-3 BT: AP Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4.6 (a) Service Revenue – Operating Expenses – Insurance Expense Net Income

Cash Basis $22,000 12,000 2,400 $ 7,600

Accrual Basis $28,000 15,800 — $12,200

(Cash basis = Cash received – Cash paid); (Accrual Basis = Rev. recognized. – Exp. incurred)

(b) The accrual basis of accounting provides more useful information for decision makers because it recognizes revenues when the performance obligation is satisfied and expenses when incurred. LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-17

EXERCISE 4.7 (a)

FRANKEN COMPANY Income Statement For the Six Months Ended April 30, 2027 Revenues Service revenue ($32,150 + $540) ................... Expenses Income tax expense ......................................... Salaries and wages expense ($2,600 + $420) . Depreciation expense [($9,200 ÷ 4) X 6/12] .... Rent expense ($1,225 – $175).......................... Utilities expense............................................... Advertising expense ........................................ Total expenses .......................................... Net income ...............................................................

$32,690 $5,500 3,020 1,150 1,050 970 375 12,065 $20,625

[Serv. rev.−Tot. exp. = Net inc. or (loss)]

(b)

FRANKEN COMPANY Balance Sheet April 30, 2027 Assets Current assets Cash ............................................................... Accounts receivable ..................................... Prepaid rent ................................................... Total current assets ............................... Property, plant, and equipment Equipment...................................................... Less: Accumulated depreciation—equipment .......................... Total assets ............................................

4-18

$32,280 540 175 $32,995 9,200 1,150

Kimmel, Survey of Accounting, 3e, Solutions Manual

8,050 $41,045

(For Instructor Use Only)

EXERCISE 4.7 (Continued) Liabilities and Stockholders’ Equity Current liabilities Salaries and wages payable......................... Stockholders’ equity Common stock .............................................. $20,000 Retained earnings ......................................... 20,625 Total stockholders’ equity .............. Total liabilities and stockholders’ equity ...................................................

420

40,625 $41,045

(Stkhldrs. equity = Tot. assets – Tot. liable.); ($40,625 = $41,045 - $420) (Ret. earn. = Tot. stkhldrs. equity – com. stk.); ($20,625 = $40,625 - $20,000) LO 1-4 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-19

EXERCISE 4.8 (a) Event 180-day financing for customers

Cash Accounting Revenue is recorded as cash is received.

Accrual Accounting Revenue is recorded when the performance obligation is satisfied. BizCon records revenue (and a receivable) as soon as services are provided but may wait up to 180 days to receive cash.

Payment to Equipment is equipment recorded as an suppliers upon expense as soon as delivery of goods equipment is received and paid for.

Equipment is recorded as an asset and depreciated.

Prepayment for 2 years of insurance coverage

Insurance expense is recorded as soon as payment is made.

Prepayment is recorded as an asset and recognized as an expense as time passes.

One month’s salaries owed at year-end

No salary expense is recorded until salaries are paid.

Salary expense is recorded as employees perform work. Amounts owed at year-end would be recorded as a liability.

Proper accrual accounting would require adjusting entries for depreciation, prepaid insurance, and accrued salaries.

4-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4.8 (Continued) (b) Accrual accounting rules require that revenue be recognized as a company performs services and expenses be matched with the revenue they help produce. Receipt or payment of cash does not influence the calculation of net income. BizCon has provided many services during the year and thus, has a positive net income. Since BizCon allowed its largest customers to take up to 180 days to pay but was forced to pay cash for all purchases, it is likely that the company has very little cash at year-end. New companies frequently experience cash shortages because they extend credit to attract customers but are unable to receive credit from their suppliers. As time passes, the cash supply should increase as payments on accounts receivable come in and offset current purchases. LO 1-3 BT: C Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 4.9 Item

(1) Type of Adjustment

(2) Accounts Before Adjustment

(a)

Accrued Revenue

Assets Understated Revenues Understated

(b)

Prepaid Expense

Assets Overstated Expenses Understated

(c)

Accrued Expense

Expenses Understated Liabilities Understated

(d)

Unearned Revenue

Liabilities Overstated Revenues Understated

(e)

Accrued Expense

Expenses Understated Liabilities Understated

(f)

Prepaid Expense

Assets Overstated Expenses Understated

LO 1-3 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-21

EXERCISE 4.10

Assets

Kimmel, Survey of Accounting, 3e, Solutions Manual

Supplies + Prepd. Ins. + Equip. − Bal. 1. 2. 3. 4. 5.

+3,000

+3,600

+25,000

Liabilities

Accum. Depr. Unearned - Equip = Int. Pay. + Notes Pay. + Rent Rev. + Com. Stock −8,400 −840

+20,000

Stockholders’ Equity Retained Earnings Rev.

−

Exp.

− Div.

+12,400 −840 −6,200

+400 −2,150 −1,200

1. (Depr. exp. = Monthly amt. × 3); ($280 × 3) 2. (Rent. rev. = Unearned rent rev. × 1/2); ($12,400 × 1/2) 4. (Supp. used = Beg. supp. – end. supp.); ($3,000 - $850) 5. (Ins. exp. = Monthly ins. amt. × 3); ($400 × 3)

LO 2, 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

+6,200 −400 −2,150 −1,200

Depreciation expense Rent revenue Interest expense Supplies expense Insurance expense

(For Instructor Use Only)

1. 2. 3.

Accts. Rec. +760

Supplies

Equip.

−

Accum. Depr. Equip

Liabilities

Accts. Pay.

Int. Pay.

Stockholders’ Equity Retained Earnings Com. Stock

Rev. +760

−

Exp. −450 −400

+450 −400

4. 5.

Kimmel, Survey of Accounting, 3e, Solutions Manual

Prepd. Ins.

+500 −2,000 −1,200

5. (Ins. exp. = Amt. purch. ÷ Length of policy); ($24,000 ÷ 12) 6. (Sup. exp. = Amt. purch. − Amt. on hand); ($1,750 − $550) LO 2, 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4.11

Assets

−500 −2,000 −1,200

−

Div. Service revenue Utilities expense Depreciation expense Interest expense Insurance expense Supplies expense

(For Instructor Use Only)

4-23

Liabilities

EXERCISE 4.12

4-24 Assets

Stockholders’ Equity Retained Earnings

Accts. Prepd. Cash + Rec. + Supplies + Ins. + Equip. − Bal.

15,200

2,500

600

Accum. Depr. − Equip

5,000

Notes Accts. Int. = Pay. + Pay. + Pay. + 5,000

2,500

1,200

Com. + Stock + Rev. − Exp. − Div. 10,000

10,000

−100

−75

−800

Kimmel, Survey of Accounting, 3e, Solutions Manual

+1,400 500

500

5,000

−75

5,000

2,500

400

1. (Sup. exp. = Bal. − Amt. on hand); ($2,500 − $500) LO 2, 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

1,400

10,000

11,080

500 Supplies expense

−100

Insurance expense

−75

Depreciation expense Service revenue

+280 +70

280

4,900 −2,000

+800

+280

Adj. Bal. 15,200

Sal. & Wages Pay.

−2,000

Unearned Serv. Rev. +

Service revenue −70

Interest expense

−1,400

Salaries & wages expense

−8,545

−500

(For Instructor Use Only)

EXERCISE 4.13

Assets

Notes Rec. Bal.

Kimmel, Survey of Accounting, 3e, Solutions Manual

1. 2. 3.

+20,000

Int. Rec. 0

+ Supplies +

Prepd. Rent

+24,000

+3,600

Bldgs.

−

+250,000

Accum. Depr. Bldgs.

Liabilities

Accts. Unearned = Pay. + Serv. Rev.

−140,000

Sal. & Wages Pay.

Stockholders’ Equity Retained Earnings

Com. + Stock +

Rev.

−

Exp.

+100

+100 −5,400 −900

4. 5.

+3,100 -500 −4,700

6. 7.

− Div.

+11,500

+2,300

1. (Int. rev. = Prin. × Rate × Time); ($20,000 × 6% × $1/2) 2. (Supp. exp. = Bal. – Amt. on hand); ($24,000 − $18,600) 3. (Rent exp. = Bal. ÷ No. of months); ($3,600 ÷ 4) 5. (Depr. exp. = Ann. amt. ÷ 12); ($6,000 ÷ 12) LO 2, 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Interest revenue −5,400

Supplies expense

−900

Rent expense

−3,100

Salaries & wages expense

−500

Depreciation expense

+4,700

Service revenue −2,300

Maintenance & repairs expense

(For Instructor Use Only)

4-25

Liabilities

Accum. Accts. Rec. Bal.

4,775

+800

Prepaid + Supplies + 1,400

1,500

+ Equip. + Equip. = 15,000

6,000

Notes Pay.

Int. +

Pay.

Unearn.

Wages + Service +

Pay.

1,000

Stockholders' Equity

Rev.

Common +

Stock

Retained Earnings +

Rev.

Exp.

Kimmel, Survey of Accounting, 3e, Solutions Manual

−750 −900

- Div.

3,500 +800

Rent

Depr. -

Sal./

EXERCISE 4.14

4-26 Assets

−250

(For Instructor Use Only)

2. (Rent exp. = Prepaid rent ÷ No. of mos.); ($1,500 ÷ 2) 3. (Supp. exp. = Bal. - On hand); ($1,400 - $500)

LO 2,3 BT: AP Difficulty: Medium Time: 15 min. AACSB: Analytic AICPA FC: Reporting

Svc. Rev. −750

Rent Exp.

−900

Supp. Exp.

−250

Depr. Exp.

−2

Int. Exp.

−2,500

+2,500 −2,000

+2,000

Sal./Wages Exp.

Svc. Rev.

EXERCISE 4.15 NORSKI CO. Income Statement For the Month Ended July 31, 2027 Revenues Service revenue ($5,500 + $700) ............................. Expenses Salaries and wages expense ($2,100 + $360) ........ Supplies expense ($900 – $200) ............................. Utilities expense ...................................................... Insurance expense .................................................. Depreciation expense .............................................. Total expenses ................................................. Net income .......................................................................

$6,200 $2,460 700 500 350 150 4,160 $2,040

[Serv. rev. – Tot. exp. = Net inc. or (loss)]; ($6,200 - $4,160) LO 1-4 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4.16 Answer

Computation

(a) Supplies balance = $1,350

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

$ 950) 700) 300) $1,350)

(End. bal. + Amt. used − Amt. purch.); ($950 + $700 − $300)

(b) Total premium = $6,240

Purchase date = May 1, 2026

Total premium = Monthly premium × 12; $520 × 12 = $6,240 Purchase date: On Jan. 31, there are 3 months coverage remaining ($520 × 3) = $1,560. Thus, the purchase date was 9 months earlier on May 1, 2026.

(Tot. prem. = Monthly exp. × 12); ($520 × 12)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-27

EXERCISE 4.16 (Continued) (c) Salaries and wages payable = $1,760

Cash paid Salaries and wages payable (1/31/27)

$2,500 1,060 3,560

Less: Salaries and wages expense Salaries and wages payable (12/31/26)

1,800 $1,760

(Cash pd. + Sal. & wages pay − Sal. & wages exp.); ($2,500 + $1,060 − $1,800)

(d) Unearned service revenue = $2,950

Service revenue Unearned revenue (1/31/27) Less: Cash received in Jan. Unearned revenue (12/31/26)

$4,000 750 4,750 1,800 $2,950

(Serv. rev. + Unearned rev. − Cash rec'd); ($4,000 + $750 − $1,800) LO 1-3 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4.17

Item Incorrect balances Effects of: Salaries and Wages Rent Revenue Depreciation Correct balances

Net Income $70,000 (10,000) 4,000 (9,000) $55,000

Total Total Stockholders’ Assets Liabilities Equity $150,000 $70,000 $80,000 10,000 (4,000) (9,000) $141,000

$76,000

(10,000) 4,000 (9,000) $65,000

LO 2, 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

4-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Kimmel, Survey of Accounting, 3e, Solutions Manual

Liabilities

2027 June. 1 Aug. 31

Cash −1,800 −6,500

Sept. 4 Nov. 30 Dec. 5 (b) Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31

+3,600 −2,000 +1,500

Prepd. Ins. +1,800

Prepd. Rent

Prepd. Clean.

Unearned Serv. Rev.

EXERCISE 4.18

Assets

Stockholders’ Equity Retained Earnings

(a) Com. Stock

Rev.

−

Exp.

−

Div.

+6,500 +3,600 +2,000 +1,500 −1,050

−1,050 −5,200

−5,200 −1,600

+1,600

−1,025

+1,025

−1,000

(Ins. exp. = Amt. × Time passed); ($1,800 × 7/12) (Rent exp. = Amt. pd. × Time passed); ($6,500 × 4/5) (Serv. rev. = Amt. rec’d. × Fraction of service performed); ($3,600 × 4/9) (Repairs & maint. exp. = Prepd. clean. amt. × Fraction of services rec’d); ($2,000 × 1/2) (Serv. rev. = Amt. rec’d − Amt. not played); ($1,500 - $475)

(For Instructor Use Only)

LO 2, BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Insurance expense Rent expense Service revenue Repairs and maint. expense Service revenue

4-29

Liabilities

Kimmel, Survey of Accounting, 3e, Solutions Manual

2027 Dec. 31 31 31 31 31 Totals (b) 2028 Jan. 11 4 1 4 2 Totals

Cash

Accts. Rec.

Accts. Pay +425

Int. Pay.

Sal. & Wages Pay.

Stockholders’ Equity Retained Earnings Com. Stock

Rev.

−

+2,000 +188 +300 +6,000 6,300

−425 −3,500 −188 300 6,000 2,187

425

188

EXERCISE 4.19

4-30 Assets (a)

2,000

+ +

+300 6,000 6,300

Exp. −425 −2,000 −188

−

Div Utilities expense Salaries & wages expense Interest expense Service revenue Rent revenue

−2,613

−425 −2,000

−1,500

−188 −300 −6,000 0

(Sal. & wages exp. = weekly amt. × Fraction of week); ($3,500 × 4/7) (Int. exp = Prin. × lnt. rate × Fraction of a yr.); ($45,000 × 5% × 1/12) LO 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

6,300

4,113

Salaries & wages expense

(For Instructor Use Only)

EXERCISE 4.20 (a)

SKOLNICK CO. Income Statement For the Quarter Ended June 30, 2027 Revenues Service revenue ......................... Rent revenue ............................. Total revenues ......................... Expenses Salaries and wages expense .... Rent expense ............................. Depreciation expense ............... Utilities expense ........................ Supplies expense ...................... Interest expense ........................ Total expenses ........................ Net income ...................................

$14,200 800 $15,000 9,400 1,500 850 510 200 50 12,510 $ 2,490

(b)

SKOLNICK CO. Retained Earnings Statement For the Quarter Ended June 30, 2027 Retained earnings, April 1 .............................................. Add: Net income .............................................................. .......................................................................................... Less: Dividends ............................................................... Retained earnings, June 30 ............................................

Kimmel, Survey of Accounting, 3e, Solutions Manual

0 2,490 2,490 600 $ 1,890

(For Instructor Use Only)

4-31

EXERCISE 4.20 (Continued) (c)

SKOLNICK CO. Balance Sheet June 30, 2027 Assets Current assets Cash ................................................... $ 6,700 Accounts receivable .......................... 600 Supplies ............................................. 1,000 Prepaid rent ....................................... 900 Total current assets ....................... Property, plant, and equipment Equipment .......................................... 15,000 Less: Accumulated depreciation-equipment 850 Total assets.......................................... Liabilities and Stockholders’ Equity Current liabilities Accounts payable .............................. Unearned rent revenue ..................... Salaries and wages payable ............. Interest payable ................................. Total current liabilities .................... Long-term liabilities Notes payable .................................... Total liabilities ................................. Stockholders’ equity Common stock .................................. Retained earnings ............................. Total stockholders’ equity .............. Total liabilities and stockholders’ equity

$ 9,200 14,150 $23,350

$ 1,510 500 400 50 $ 2,460 5,000 7,460 14,000 1,890 15,890 $23,350

LO 4 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

4-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO PROBLEMS PROBLEM 4.1 (a)

Assets

Cash Beg. Bal. 1. 2. 3.

Accts. Rec. 19,000

+19,000

Liabilities

Unearned Sales Rev.

+44,000 −24,000 +151,000

+136,000

(b) End. Bal.

199,000

Rev.

Exp.

Div.

23,000

−23,000

Com. Stock

−19,000

+44,000

Stockholders’ Equity Retained Earnings

+23,000

Sales revenue

+24,000 +151,000

Sales revenue Service revenue

−136,000

(Sales rev. = Tickets sold − Sept. 30, 2027 unearned sales rev. bal.); ($44,000 − $20,000) (Cash rec’d in yr. ended Sept. 30, 2027 = Dues billed – End. accts. rec. bal.); ($151, 000 − $15,000) LO 1, 2, 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-33

Assets

Liabilities

Stockholders’ Equity

Retained Earnings Cash

Bal.

6,850

+ Accts. Rec. + Supplies + Prepd. Ins. + Equip. − 7,000

2,000

2,880

15,000

Accum. Depr.Equip. −0

Accts. Pay. 4,230

Unearned Serv. Rev.

Com. Stock

22,000

5,200

Rev. 8,300

−1,280

1. 2.

+180

-240

-4,100

10,900

−

Div. 0

−1,280

Supplies expense

−180

Utilities expense

−240

Insurance expense Service revenue Salaries & wages expense

−250

+3,900 6,850

Exp. −6,000

−1,250

−250

−

+4,100 +1,250

Totals

Sal. & + Wages Pay. +

Depreciation expense

+3,900 720

2,640

15,000

−250

4,410

1,100

1,250

(b) Assets = Liabilities + Stockholders’ Equity $35,860 = $6,760 + $29,100 $35,860 = $35,860 (Supplies exp. = Beg. bal. − End. bal.); ($2,000 − $720) (Ins. exp. = Amt. pd. ÷ Policy length); ($2,880 ÷ 12)

(For Instructor Use Only)

LO 2, 3 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

22,000

16,300

Service revenue −9,200

PROBLEM 4.2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(a)

Liabilities

Stockholders’ Equity

Retained Earnings

(a)

Cash

Kimmel, Survey of Accounting, 3e, Solutions Manual

Unadj. Bal.

2,500

+ Supplies + 2,600

Prepd. Ins. 1,800

+ Land + Bldgs. 15,000

Accum. Depr. – Bldgs. −0

70,000

Equip. 16,800

Accum. Accts. Depr. - Equip. = Pay. + 0

4,700

Sal. & Wages + Pay.

Int. Pay. 0

Unearned Notes + Rent Rev. + Pay 0

3,300

36,000

Com. Stock +

Rev.

60,000

9,000

−

Exp. −4,300

−

Div. 0

Adj. −450

(A1) −1,550

(A2)

−1,550 −300

(A3)

−250 (A4)

+180 −2,500

(A5) (A6) Adj. Bal.

1,050

1,350

15,000

70,000

−300

16,800

−250

(For Instructor Use Only)

A2: (Supplies exp. = Beg. bal. − End. bal.) ($2,600 − $1,050) A3: [Depr. exp. = Ann. amt. × (1/12)]; ($3,600 ÷ 12); ($3,000 ÷ 12) A4: (Int. exp. = Prin. × Int. rate × Fraction of yr.); ($36,000 × 6% × 1/12) (b) Assets = Liabilities + Stockholders’ Equity $106,150 = $42,580 + $63,570 $106,150 = $106,150

4,700

180

900

Supplies expense

−300

Depreciation expense

−250

Depreciation expense

−180

Interest expense

+2,500

Rent revenue Salaries & wages expense

−900

+900 2,500

Insurance expense

−450

800

36,000

60,000

11,500

−7,930

PROBLEM 4.3

Assets

4-35

PROBLEM 4.3 (Continued) (c)

MOTO HOTEL Income Statement For the Month Ended May 31, 2027 Revenues Rent revenue .................................................. Expenses Salaries and wages expense ......................... Supplies expense ........................................... Utilities expense ............................................. Depreciation expense .................................... Advertising expense ...................................... Insurance expense ......................................... Interest expense ............................................. Total expenses ........................................ Net income .............................................................

$11,500 $3,900 1,550 800 550 500 450 180 7,930 $ 3,570

(Rent rev. – Tot. exp.); ($11, 500 − $7,930)

MOTO HOTEL Retained Earnings Statement For the Month Ended May 31, 2027 Retained earnings, May 1 ...................................... Add: Net income .................................................. Retained earnings, May 31 ....................................

0 3,570 $3,570

(Beg. ret. earn. + Net inc.); ($0 + $3,570)

4-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 4.3 (Continued) MOTO HOTEL Balance Sheet May 31, 2027 Assets Current assets Cash................................................... Supplies ............................................ Prepaid insurance ............................ Total current assets.................. Property, plant, and equipment Land ................................................... Buildings ........................................... Less: Accumulated deprec.—Buildings ........................ Equipment ......................................... Less: Accumulated deprec.—equipment ...................... Total assets ...............................

$ 2,500 1,050 1,350 $

4,900

$15,000 70,000 300 16,800

69,700

250

16,550

101,250 $106,150

(Current assets + Prop., plant, and equip.); ($4,900 + $101,250)

Liabilities and Stockholders’ Equity Current liabilities Accounts payable........................................... Salaries and wages payable .......................... Unearned rent revenue .................................. Interest payable .............................................. Total current liabilities ............................ Long-term liabilities Notes payable ................................................. Total liabilities ......................................... Stockholders’ equity Common stock ............................................... Retained earnings .......................................... Total stockholders’ equity ............... Total liabilities and stockholders’ equity ...................................................

$ 4,700 900 800 180 $

6,580 36,000 42,580

60,000 3,570 63,570 $106,150

(Current liabl. + Notes pay. + Stock. equity); ($6,580 + $36,000 + $63, 570) LO 2-4 BT: AP Difficulty: Hard TOT: 60 min, AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

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Assets

Liabilities

Sal. & Wages Pay.

Stockholders’ Equity

Retained Earnings

(a) Unadj. Bal.

Cash 6,700

Accts . Rec. 400

Supplies 1,200

Prepd. Rent

1,800

Equip. 15,000

−

Accum. Depr. Equip. −0

Notes Pay. 5,000

Accts. Pay. 1,070

Int. Pay.

+ 0

Unearned Rent Rev. 1,000

Com. Stock

14,000

Rev. 14,800

−

Exp. −10,170

Div. −600

Adj. (A1)

+600

(A2) (A3)

−350

(A5)

+50

(A6)

-200

(A7) 1,000

180

900

15,000

−350

5,000

1,070

600

Kimmel, Survey of Accounting, 3e, Solutions Manual

Depreciation expense

−50

Interest expense Rent revenue

−600 50

800

14,000

(For Instructor Use Only)

4-38

Supplies expense

−350

+200

+600 6,700

Rent expense

−1,020

-1,020

(A4)

Adj. Bal.

Service revenue −900

-900

(For Instructor Use Only)

15,600

−13,090

Salaries & wages expense −600

PROBLEM 4.4

Kimmel, Survey of Accounting, 3e, Solutions Manual

PROBLEM 4.4 (Continued) (b)

SALT CREEK GOLF INC. Income Statement For the Quarter Ended September 30, 2027 Revenues Service revenue............................................... Rent revenue ................................................... Total revenues ......................................... Expenses Salaries and wages expense .......................... Rent expense ................................................... Supplies expense ............................................ Utilities expense .............................................. Depreciation expense ..................................... Interest expense .............................................. Total expenses......................................... Net income ..............................................................

$14,700 900 $15,600 9,400 1,800 1,020 470 350 50 13,090 $ 2,510

(Tot. rev.−Tot. exp.); (Serv. rev. = $14,100 + $600); (Rent rev. = $700 + $200); (Sal. & wages exp. = $8,800 + $600); (Rent exp. = $900 + $900)

SALT CREEK GOLF INC. Retained Earnings Statement For the Quarter Ended September 30, 2027 Retained earnings, July 1, 2027 ................................................ Add: Net income ...................................................................... Less: Dividends ........................................................................ Retained earnings, September 30, 2027...................................

0 2,510 2,510 600 $1,910

(Beg. ret. earn + Net. inc. − Div.); ($0 + $2,510 − $600)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-39

PROBLEM 4.4 (Continued) SALT CREEK GOLF INC. Balance Sheet September 30, 2027 Assets Current assets Cash ............................................................... Accounts receivable ..................................... Supplies ......................................................... Prepaid rent ................................................... Total current assets ............................... Property, plant, and equipment Equipment...................................................... Less: Accumulated depreciation— equipment .......................................... Total assets ............................................

$ 6,700 1,000 180 900 $ 8,780 15,000 350

14,650 $23,430

(Current assets + Property, plant, and equip.); ($8,780 + $14,650)

Liabilities and Stockholders’ Equity Current liabilities Notes payable ................................................ Accounts payable.......................................... Unearned rent revenue ................................. Salaries and wages payable ......................... Interest payable ............................................. Total current liabilities........................... Stockholders’ equity Common stock .............................................. Retained earnings ......................................... Total stockholders’ equity ................. Total liabilities and stockholders’ equity ..................................................

$ 5,000 1,070 800 600 50 $ 7,520 14,000 1,910 15,910 $23,430

(Current liabi. + Stock. equity); ($7,520 + $15,910)

(c)

The note has been outstanding one month $5,000 × 12% × 1/12 = $50 interest expense.

LO 2-4 BT: AP Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

4-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Liabilities

Stockholders’ Equity Retained Earnings

Prepd. Ins. = Unearned Ret Rev. + Notes Pays. + Sal. & Wages Pay. + Int. Pay. + Com. Stock + Unadj. Bal.

15,200

429,000

40,000

Rev.

− Exp. − Div

Adj. (A1)

−8,000

(A2)

−8,000 -84,000

+84,000

(A3) (A4)

−3,060

+3,060

[Ins. exp. = ($9,600 ÷ 36 mos. × 12 mos.) + ($7,200 ÷ 18 mos. × 12 mos.)] [Rent. rev. = (Nov. leases: $5,000 × 2 mos. × 5) + (Dec. leases: $8,500 × 1 mo. × 4)] (Int. exp. = $40,000 × 7% × 3/12) [Sal. & wages exp. = (5 × $600 × 3/5) + (3 × $700 × 3/5)]

(For Instructor Use Only)

LO 2, 3 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

Rent revenue −700

+700

(For Instructor Use Only)

4-41

Insurance expense

Interest expense Salaries & wages expense

PROBLEM 4.5

Kimmel, Survey of Accounting, 3e, Solutions Manual

Assets

(a)-(d) 11/1/Bal.

Cash 2,790

Accts. Rec. 2,910

Supplies

1,120

Equip. 10.000

Accum. Depr.Equip. −500

Liabilities Accts. Pay.

2,300

Unearned Serv. Rev.

Stockholders’ Equity

400

Sal. & Wages Pay. 620

Com. Stock

Retained Earnings

10,000

3,000 +

Nov. 8

−1,220

+1,800

+3,700

Rev.

−620

−

Exp. −600

−

Div. Salaries & wages expense

−1,800 +3,700

+3,600

Service revenue

+3,600

+1,300

−2,500

−480

Rent expense

−1,000

Salaries & wages expense

+900

+750

Unadj. Bal.

3,840

+900

Service revenue

+750 2,010

2,420

13,600

−500

4,700

1,150

10,000

4,600

−2,080

Adj. −1,320

(A1)

−1,320

(A2)

480 −250

(A3)

−500

(A4) Adj. Bal.

3,840

2,010

1,100

13,600

−750

4,700

650

10,000

5,100

(Supplies exp. = Unadj. Bal. − End. bal.); ($2,420 − $1,100)

(For Instructor Use Only)

4-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

−480

Salaries & wages expense

−250

Depreciation expense

+500 480

(For Instructor Use Only)

Supplies expense

Service revenue −4,130

PROBLEM 4.6

Kimmel, Survey of Accounting, 3e, Solutions Manual

−2,500

PROBLEM 4.6 (Continued) (e)

SOHO EQUIPMENT REPAIR Income Statement For the Month Ended November 30, 2027 Revenues Service revenue............................................... Expenses Salaries and wages expense .......................... Supplies expense ............................................ Rent expense ................................................... Depreciation expense ..................................... Total expenses......................................... Net income ..............................................................

( $5,100) $2,080 1,320 480 250 4,130) $ 970

(Serv. rev − Tot. exp.); ($5,100 − $4,130)

SOHO EQUIPMENT REPAIR Retained Earnings Statement For the Month Ended November 30, 2027 Retained earnings, November 1 ........................... Add: Net income .................................................... Retained earnings, November 30 .........................

$3,000 970 $3,970

(Beg. ret. earn. + Net. inc.); ($3,000 + $970)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-43

PROBLEM 4.6 (Continued)

SOHO EQUIPMENT REPAIR Balance Sheet November 30, 2027 Assets Current assets Cash ................................................................... Accounts receivable ......................................... Supplies ............................................................. Total current assets ................................... Property, plant, and equipment Equipment.......................................................... Less: Accumulated depreciation— equipment .............................................. Total assets ................................................

$ 3,840 2,010 1,100 $ 6,950 13,600 750

12,850 $19,800

[(Cash + Accts. rec. + Supp.) + (Equip. − Accum depr. − equip.)]; [($3,840 + $2,010 + $1,100) + ($13,600 - $750)]

Liabilities and Stockholders’ Equity Current liabilities Accounts payable.............................................. Unearned service revenue ................................ Salaries and wages payable ............................. Total current liabilities............................... Stockholders’ equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity .................... Total liabilities and stockholders’ equity .......................................................

$ 4,700 650 480 $ 5,830 10,000 3,970 13,970 $19,800

[(Accts. pay. + Unearn. serv. rev. + Sal. wages pay) + (Com. stock + Ret. earn.)] [($4,700 + $650 + $480) + ($10,000 + $3,970)] LO 2-4 BT: AP Difficulty: Hard TOT: 60 min. AACSB: Analytic AICPA FC: Reporting

4-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT4.1

FINANCIAL REPORTING PROBLEM

(a) Items that may result in adjustments entries for deferrals are: 1. 2. 3. (b) 1. 2.

Other current assets (prepaid expenses). Property, plant, and equipment accumulated depreciation. Deferred revenue. Accrued expenses (interest expense, provision for income taxes, and other expense) Accrued revenues (other income)

(c) The statement of cash flows reports depreciation and amortization expense was $11,056 (millions) in 2020 and $12,547 (millions) in 2019 as an adjustment in the cash flows from operating activities section. Accumulated depreciation was reported in Note 4 to the consolidated financial statements. (d) The statement of cash flows (at the bottom) reports income taxes paid in 2020 of $9,501 (millions). The income statement reports income tax expense (Provision for income taxes) of $9,680 (millions). LO 2-4 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Communication and Analytic AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-45

CT4.2

COMPARATIVE ANALYSIS

Accounts that provide evidence of the use of accrued accounting are: Balance Sheet

Income Statement

(a) Columbia Sportswear Company 1. Accounts receivable, net 2. Prepaid expenses 3. Income taxes payable 4. Short-term investments

1. Net sales 2. Selling, general, and administrative expenses 3. (Insurance expense) 4. Income tax expense Interest income, net

(b) Under Amour, Inc. 1. Property and equipment, net 2. Accrued expenses 3. Deferred income taxes

1. Selling, general, and administrative expenses 2. (Depreciation expense) 3. Interest expense Other income (expense), net

LO 1 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

4-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT4.3

INTERPRETING FINANCIAL STATEMENTS

LASER RECORDING SYSTEMS (a)

Laser Recording is handling legal expenses via an accrued expense adjustment. This is explained by the fact that accrued professional services increased during the year.

(b)

Each of the three adjustments is an accrued expense adjustment. Since this type of adjustment increases expenses, net income is decreased by each adjustment.

(c)

In recording accrued interest, Laser Recording increased Interest Expense and increased Interest Payable.

LO 3 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

4-47

CT4.4

REAL-WORLD FOCUS

(a) The SEC was created by Congress after the stock market crash of 1929. The SEC was created to restore investor confidence in our capital markets by providing more structure and government oversight. (b) Corporation Finance: In support of the Commission’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, the Division of Corporation Finance seeks to ensure that investors are provided with material information in order to make informed investment decisions, both when a company initially offers its securities to the public and on an ongoing basis as it continues to give information to the marketplace. The Division also provides interpretive assistance to companies with respect to SEC rules and forms and makes recommendations to the Commission regarding new rules and revisions to existing rules. Examinations: The Division of Examinations conducts the SEC’s National Exam Program. The Division's mission is to protect investors, ensure market integrity and support responsible capital formation through riskfocused strategies that: (1) improve compliance; (2) prevent fraud; (3) monitor risk; and (4) inform policy. The results of the Division's examinations are used by the SEC to inform rule-making initiatives, identify and monitor risks, improve industry practices and pursue misconduct. Economic and Risk Analysis The Division of Economic and Risk Analysis (DERA) was created in September 2009 to integrate financial economics and rigorous data analytics into the core mission of the SEC. The Division is involved across the entire range of SEC activities, including policy-making, rulemaking, enforcement, and examination.

4-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT4.4 (Continued) Investment Management The Division of Investment Management supports the Commission in its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The Division has primary responsibility for administering the Investment Company Act of 1940 and Investment Advisers Act of 1940, which includes developing regulatory policy for investment companies ( e.g., mutual funds, including money market funds, closed-end funds, business development companies, unit investment trusts, variable insurance products, and exchange-traded funds) and for investment advisers. The work of the Division of Investment Management touches the lives of Main Street investors. We oversee mutual funds and other investment products and services that investors may use to help them buy a home, send kids to college, or prepare for retirement. Enforcement: The Division of Enforcement was created in August 1972 to consolidate enforcement activities that previously had been handled by the various operating divisions at the Commission's headquarters in Washington. The Commission's enforcement staff conducts investigations into possible violations of the federal securities, laws, and prosecutes the Commission's civil suits in the federal courts as well as its administrative proceedings. Trading and Markets The Division of Trading and Markets establishes and maintains standards for fair, orderly, and efficient markets. The Division regulates the major securities market participants, including broker-dealers, selfregulatory organizations (such as stock exchanges, FINRA, and clearing agencies), and transfer agents

Kimmel, Survey of Accounting, 3e, Solutions Manual

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4-49

CT4.4 (Continued) (c) The Office of the Chief Accountant (OCA) is responsible for accounting and auditing matters arising in the Commission’s administration of the federal securities laws, particularly with respect to accounting policy determinations, the form and content of financial statements to be filed with the Commission, and internal control over financial reporting (ICFR) matters. The Chief Accountant is the principal adviser to the Commission on matters related to accounting and auditing. OCA staff works closely with domestic and international private-sector accounting and auditing standards-setting bodies, and consults with registrants, auditors, and other Commission staff regarding the application of accounting standards, auditing standards, and financial disclosure requirements. The typical staff person in OCA has ten to fifteen years of public accounting, industry and/or regulatory experience. LO None BT: S Communication

4-50

Difficulty: Hard

TOT: 60 min.

AACSB: Communication and Technology AICPA PC:

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT4.5

(a)

DECISION-MAKING ACROSS THE ORGANIZATION

ABBEY PARK Income Statement For the Quarter Ended March 31, 2027 Revenues Rent revenue ($83,000 – $21,000) ................ Expenses Salaries and wages expense [$27,600 + ($290 × 3)] ............................. Advertising expense ($4,200 + $110) ........... Supplies expense ($4,500 – $600) ................ Maintenance and repairs expense ($2,800 + $1,040) .................................... Insurance expense ($7,200 × 3/12) ............... Utilities expense ($1,500 + $240) .................. Depreciation expense ................................... Interest expense ($20,000 × 7% × 3/12)........ Total expenses....................................... Net income ............................................................

$62,000 $28,470 4,310 3,900 3,840 1,800 1,740 800 350 45,210 $16,790

(b) The generally accepted accounting principles pertaining to the income statement that were not recognized by Trudy were the revenue recognition principle and the expense recognition principle. The revenue recognition principle states that revenue cannot be recognized until Abbey Park satisfies its obligation to provide rental services for summer occupancy in summer months. The revenue of $21,000 for summer rentals has not been recognized and, therefore, should not be reported in income for the quarter ended March 31. The expense recognition principle dictates that efforts (expenses) be matched with results (revenues) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts incurred in March but not paid until April. The difference in expenses was $8,310 ($45,210 – $36,900). The overstatement of revenues ($21,000) plus the understatement of expenses ($8,310) equals the difference in reported income of $29,310 ($46,100 – $16,790). LO 2-4 BT: AN Difficulty: Hard Tot: 60 min. AACSB: Communication and Analytic AICPA PC: Interaction, Leadership and Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT4.6

COMMUNICATION ACTIVITY

(a) Accrual-basis accounting records the events that change an entity’s financial statements in the periods in which the events occur, rather than in the periods in which the entity receives or pays cash. Information presented on an accrual-basis is useful because it reveals relationships that are likely to be important in predicting future results. Conversely, under cash-basis accounting, revenue is recorded only when cash is received, and an expense is recognized only when cash is paid. As a result, the cash-basis of accounting often results in misleading financial statements. (b) Politicians might desire a cash-basis accounting system over an accrualbasis system because if an accrual accounting system is used, it could mean that billions in government liabilities presently unrecorded would have to be reported in the federal budget immediately. Currently, the federal government is facing a huge budget deficit. The recognition of these additional liabilities would make the deficit even worse. This is not what politicians would like to see and be held responsible for. (c) From: Student’s email address To:

Senator’s email address

Subject: The Need for Accrual-Basis Accounting Senator (insert senator’s name): It is my understanding, after having taken a beginning course in accounting principles, that the federal government uses a cash-basis accounting system rather than an accrual-basis accounting system. I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts that have not been recorded because they haven’t been paid yet. I realize that the deficit would dramatically increase if we were to implement an accrual system, but in all fairness, we citizens should be given a more accurate picture of what our government is up to. Sincerely, Student’s name LO 1 BT: S Difficulty: Hard TOT: 45 min. AACSB: Communication AICPA PC: Communication AICPA BB: Legall/Regulatory Perspective

4-52

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT4.7

ETHICS CASE

(a) The stakeholders in this situation are: • • •

Tim Allen, controller. The president of Wells Company. Company stockholders and potential stockholders.

(b) 1.

It is unethical for the president to place pressure on Tim to misstate net income by requesting him to prepare incorrect adjusting entries.

It is customary for adjusting entries to be dated as of the balance sheet date although the entries are prepared at a later date. Tim did nothing unethical by dating the adjusting entries December 31.

(c) Tim can accrue revenues and defer expenses through the preparation of adjusting entries and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting the company’s financial condition and its results of operations is unethical (it is also illegal). LO 2, 3 BT: E Difficulty: Hard TOT: 30 min. AACSB: Ethics AICPA PC: Professional Demeanor

Kimmel, Survey of Accounting, 3e, Solutions Manual

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4-53

CT4.8

ALL ABOUT YOU ACTIVITY

The following is a personal balance sheet using the classified presentation. Note that the earnings from the part-time job as well as the tuition costs are not listed since neither of those items is an asset, liability, or equity item. Assets Current assets Cash ................................................................. Money market account ................................... Certificate of deposit ....................................... Accounts receivable from brother .................. Total current assets .................................

$1,200 1,800 3,000 300

Property, plant, and equipment Automobile ...................................................... Video and stereo equipment .......................... Home computer ............................................... Total assets ..............................................

7,000 1,250 800

$ 6,300

9,050 $15,350

[(Cash + Money mkt. acct. + CD + Accts. rec.) + (Auto. + Video equip. + Comp.)] [($1,200 + $1,800 + $3,000 + $300) + ($7,000 + $1,250 + $800)]

4-54

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT4.8 (Continued) Liabilities and Owner’s Equity Current liabilities Current portion of automobile loan ............... Current portion of credit card payable .......... Total current liabilities ............................ Long-term liabilities Student loan .................................................... Automobile loan .............................................. Credit card payable ......................................... Total long-term liabilities ........................ Total liabilities ...................................

$1,500 150 $ 1,650 5,000 4,000 1,650 10,650 12,300

Equity M. Y. Own, Capital ($15,350 – $12,300) ..........

3,050

Total liabilities and equity ...................

$15,350

[(Current portion auto loan + Current portion credit card pay.) + (Student loan + Auto. loan + Credit card pay.) + Capital]; (Capital = Tot. assets – Tot. liabl.) [($1,500 + $150) + ($5,000 + $4,000 + $1,650) + $3,050]; ($15,350 – $12,300) LO None BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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4-55

CT4.9

CONSIDERING ENVIRONMENTAL, SOCIAL, AND GOVERNANCE REPORTING

a. Microsoft has developed environmental, social and governance policies over many years, including numerous environmental and workplace diversity disclosures. It plans to compensate for all its historical greenhouse-gas emissions. Its recent environmental report included more than 90 data items. In contrast, at the time the article was written, Activision had only provided an ESG report for one year, and that report did not disclose any environmental metrics. b. It was estimated that it could take two years for Activision’s ESG reporting to attain the same level as Microsoft’s. The primary challenge is data collection and analysis. c. Activision had numerous, highly publicized ESG problems. These included accusations of sexual harassment and workplace misconduct. As investors became aware of the extent of these issues Activision’s stock price suffered. The low stock price that resulted from these ESG issues may well have prompted Microsoft’s interest in the acquisition. d. Microsoft has a target of getting 100% of its electricity from renewable sources by 2025. Activision’s online video games employ servers which consume vast amounts of electricity. It is estimated that emissions from video gaming could rise between 30% and 112% over the next decade. e. Activision might need to provide social disclosures related to data breaches, player privacy, and potential illicit activity on its online video games. LO None BT: AP Difficulty: Medium TOT: 30 min. AACSB: Communication AICPA FC: Reporting

4-56

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CHAPTER 5 Fraud, Internal Control, and Cash Learning Objectives 1. 2. 3. 4.

Define fraud and the principles of internal control. Apply internal control principles to cash. Identify the control features of a bank account. Explain the reporting of cash and the basic principles of cash management.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-1

ANSWERS TO QUESTIONS 1.

Fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. An example of fraud that might occur at a bank would be a computer operator embezzling funds by transferring a customer’s deposits into another account.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

The three main factors that contribute to employee fraud are opportunity, financial pressure, and rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying fraud because they believe they are underpaid while their employer is making lots of money.

LO 1 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

The five components of a good internal control system are: (1) A control environment, (2) Risk assessment, (3) Control activities, (4) Information and communication, and (5) Monitoring.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

This statement is false because internal control is also concerned with the safeguarding of company assets, increasing efficiency of operations, and ensuring compliance with laws and regulations.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

The Sarbanes-Oxley Act requires that a company develop sound principles of internal control over financial reporting and continually verify that these controls are working. The Act specifically requires top management to attest that the company’s internal controls are reliable and effective.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

The principles of internal control that apply to most businesses are: (a) establishment of responsibility, (b) segregation of duties, (c) documentation procedures, (d) physical controls, (e) independent internal verification, and (f) human resource controls.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA: Reporting

Yes, this is a violation of the internal control principle of establishing responsibility. In this case, each salesclerk should have a separate cash register or cash register drawer.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

The two applications of segregation of duties are: (1) The responsibility for related activities should be assigned to different individuals. (2) The responsibility for record keeping for an asset should be separate from the physical custody of that asset.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

5-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 5 (Continued) 9.

Documentation procedures contribute to good internal control by providing evidence of the occurrence of transactions and events and, when signatures (or initials) are added, the documents establish responsibility for the transactions. The prompt transmittal of documents to accounting contributes to recording transactions in the proper period, and the prenumbering of documents helps to ensure that a transaction is not recorded more than once or not at all.

LO 1 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

10. Safes, vaults, and locked warehouses contribute to the safeguarding of company assets. Cash registers and computerized accounting equipment contribute to the accuracy and reliability of the accounting records, and electronic burglary systems and sensors help to safeguard assets. LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

11. (a) Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees. (b) Maximum benefit is obtained from independent internal verification when: (1) The verification is made periodically or on a surprise basis. (2) The verification is done by an employee who is independent of the personnel responsible for the information. (3) Discrepancies and exceptions are reported to a management level that can take appropriate corrective action. LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

12. (a) The concept of reasonable assurance means that the costs of establishing control procedures should not exceed their expected benefit. Ordinarily, a system of internal control provides reasonable but not absolute assurance, since absolute assurance would be too costly. (b) The human element is an important factor in a system of internal control. A good system may become ineffective as the result of employee fatigue, carelessness, or indifference. Moreover, internal control may become ineffective as a result of collusion. LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

13. The human resources department plays an important role in internal control by (a) bonding employees who handle cash, (b) rotating employees’ duties and requiring employees to take vacations, (c) conducting thorough background checks. LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

14. Daily cash counts pertain primarily to the principles of segregation of duties, documentation procedures, and independent internal verification. Daily cash counts also involve the establishment of responsibility for performing the counts. LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-3

Questions Chapter 5 (Continued) 15. Cash registers are readily visible to the customer. Thus, they prevent the salesclerk from ringing up a lower amount and pocketing the difference. In addition, the customer receives an itemized receipt, and the cash register tape is locked into the register for further verification, providing documentation and enabling independent internal verification. LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

16. Two mail clerks contribute to a more accurate listing of mail receipts and to the endorsement of all checks “For Deposit Only.” In addition, two clerks reduce the likelihood of mail receipts being diverted to personal use. LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

17. True. Payment by check or EFT - contributes to effective internal control over cash disbursements. Illustration 5-5 in the text shows how payment by check or ETF is related to the six principles of internal control. However, effective control is also possible when small payments are made from petty cash. LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

18. The procedure and related principle are: Procedure

Principle

(1) Treasurer signs checks. (2) Checks imprinted by a checkwriter. (3) Comparing check with approved invoice before signing.

• • •

Establishment of responsibility. Physical controls. Independent internal verification.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

19. (a) Physical controls apply to cash disbursements when blank checks are stored in a safe, and access to the safe is restricted to authorized personnel, and a check-writing machine is used to print amounts on checks with indelible ink. (b) Human resource controls apply when the company bonds personnel who handle cash, requires employees to take vacations, and conducts background checks. LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

20. Electronic funds transfer is a cash disbursement system that uses wire, telephone, or computers to transfer cash balances from one location to another. LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

21. True. A bank contributes significantly to internal control over cash because it: (1) safeguards cash on deposit, (2) minimizes the amount of cash that must be kept on hand, and (3) provides a double record of all bank transactions. LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

5-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 5 (Continued) 22. The lack of agreement between the balances may be due to either: (1) Time lags—a check written in July does not clear the bank until August. (2) Errors—a check for $110 is recorded by the depositor as $101. LO 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

23. The basic principles of cash management are: (1) increase the speed of receivables collection, (2) keep inventory low, (3) monitor payment of liabilities, (4) plan timing of major expenditures, and (5) invest idle cash. LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

24. (a) An NSF check occurs when the check writer’s bank balance is less than the amount of the check. (b) In a bank reconciliation, a customer’s NSF check is deducted from the balance per books. (c) An NSF check results in an adjustment in the company’s books, as an increase to Accounts Receivable and a decrease to Cash. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

25. (a) Cash equivalents are short-term highly liquid investments that may be converted to a specific amount of cash. Cash equivalents may be reported with cash in the current assets section of the balance sheet. (b) Cash restricted for a special purpose should be reported separately as a current or noncurrent asset depending on when the cash is expected to be used. LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

26. Cash should be reported at $21,100 ($8,000 + $1,100 + $12,000). (Cash in bank – sav. acct + Cash on hand + Ckg. acct. bal.) LO 4 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

27.

At September 26, 2020, Apple reported cash and cash equivalents of $38,016 (millions). It reported restricted cash as other assets in the Consolidated Balance Sheet ($36 million as current and $1,737 million as noncurrent in Note 3). In Note 1 to its financial statements it defines cash equivalents as “All highly liquid investments with maturities of three months or less at the date of purchase.”

LO 4 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5.1 (a) (b) (c) (d)

Financial Pressure Rationalization Financial Pressure Opportunity

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 5.2 The purposes of internal control are to: 1.

Safeguard a company’s assets from employee theft, robbery, and unauthorized use. An application for Young Co. is the use of a cash register to safeguard cash.

Enhance the accuracy and reliability of a company’s accounting records by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process. An application for Young Co. is preparation of a bank reconciliation.

Increase efficiency of operations. An application is assignment of responsibility to specific employees.

Ensure compliance with laws and regulations. An application is use of cash register tapes to document sales and applicable sales taxes.

All of these purposes are important to the success of any business endeavor. LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 5.3 (a) Segregation of duties. (b) Independent internal verification. (c) Documentation procedures. LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

5-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 5.4 (a) (b) (c) (d) (e)

Physical controls. Human resource controls. Independent internal verification. Segregation of duties. Establishment of responsibility.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 5.5 Assets Cash +$975.74

= Liabilities

Stockholders' Equity

Rev. -$988.62

Exp. -$12.88

Sales revenue Cash over and short

(Cash = Cash on hand – Opening cash bal.)

LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5.6 (a) (b) (c) (d) (e)

Documentation procedures. Independent internal verification. Physical controls. Establishment of responsibility. Segregation of duties.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 5.7 (a) The use of a checking account minimizes the amount of currency that must be kept on hand. Therefore, cash is safeguarded by using the bank as a depository and clearinghouse for checks written and received. (b) A bank statement provides a double record of a depositor’s bank transactions. It also is used in making periodic independent bank reconciliations. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-7

BRIEF EXERCISE 5.8 (a) Outstanding checks—deducted from cash balance per bank. (b) Bank debit memorandum for service charge—deducted from cash balance per books. (c) Bank credit memorandum for EFT—added to cash balance per books. (d) Deposit in transit—added to cash balance per bank. LO 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 5.9 (1) The reconciling items per the books that will require adjustment on the books of the depositor are bank memorandum for service charge and bank credit memorandum for collecting an electric funds transfer. (2) The other reconciling items, deposits in transit and outstanding checks, do not require adjustment because they have already been recorded on the depositor’s books. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 5.10 Cash balance per bank statement ................................................ Add: Deposits in transit .............................................................. Less: Outstanding checks ........................................................... Adjusted cash balance per bank ..................................................

$7,291 1,350 8,641 762 $7,879

(Bal. per bank stmt. + Dep. in trans. – Outstdg. cks.)

LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

5-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 5.11 Checks written in November ........................................................ Less: Checks paid by bank in November .................................. Checks outstanding at the end of November .............................. Add: Checks written in December............................................. Less: Checks paid by bank in December .................................. Checks outstanding at the end of December ..............................

$ 9,750 8,800 950 11,762 10,889 $ 1,823

(Nov. outstdg. cks. = Cks. written in Nov. - Cks. pd. in Nov.); (Dec. outstdg. cks. = Nov. outstdg. cks. + Cks. written in Dec Cks. pd. in Dec.)

LO 3 BT: AP Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5.12 Spahn Company should report cash in bank and payroll bank account as part of cash and cash equivalents in current assets. Plant expansion fund cash should be reported as restricted cash, a non-current asset, assuming the fund is not expected to be used during the next year. LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 5.13 BONKERS COMPANY Cash Budget For the Month of January Beginning cash balance ............................................................... Add: Cash receipts ..................................................................... Total available cash ...................................................................... Less: Cash disbursements .......................................................... Excess of available cash over cash disbursements ................... Add: Borrowings .......................................................................... Ending cash balance.....................................................................

$12,000 59,000 71,000 67,000 4,000 5,000 $ 9,000

(Beg. cash bal. + Cash rec. – Cash disb. + Borrowings)

LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-9

SOLUTIONS TO DO IT! EXERCISES DO IT! 5.1 1.

Violates the control activity of documentation procedures. Source documents should be promptly forwarded to the accounting department so accounting entries can be made. This control activity helps to ensure timely recording of sales transactions and contributes directly to the accuracy and reliability of the accounting records.

Violates the control activity of segregation of duties. Different individuals should be responsible for related activities, such as these three related purchasing activities. Many abuses could occur: placing orders with friends and getting kickbacks; approving fictitious invoices for payment.

Violates the control activity of establishment of responsibility. Draper’s would be unable to determine who was responsible for a cash shortage; this lapse could even encourage employee theft.

LO 1 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement

DO IT! 5.2 All mail receipts should be opened in the presence of two mail clerks. Those mail clerks should immediately stamp each check “For Deposit Only.” The mail clerks should prepare, in triplicate, a list of the checks received each day. The checks and the original copy of the list should be sent on to the cashier’s department each day. A copy of the list is sent to the accounting department for recording. The clerks also keep a copy. LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA PC: Measurement

5-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 5.3 Ned should treat the reconciling items as follows: 1.

Outstanding checks: Deduct from balance per bank.

A deposit in transit: Add to balance per bank.

The bank charged to our account a check written by another company: Add to balance per bank and notify the bank of its error.

A debit memorandum for a bank service charge: Deduct from balance per books.

LO 3 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

DO IT! 5.4a 1. 2. 3. 4.

True. ($40,000 + $22,000) False. A company that has received NSF checks should report these checks as a current asset (accounts receivable) on the balance sheet. False. Restricted cash that is a current asset is not reported as part of cash and cash equivalents. True. ($50,000 + $400)

LO 4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 5.4b Beginning cash balance ............................................... Add: Cash receipts for September .............................. Total available cash ...................................................... Less: Cash disbursements for September ................. Excess (deficiency) of available cash over cash disbursements ............................................................ Add: Borrowings .......................................................... Ending cash balance.....................................................

$ 12,270 97,200 109,470 115,000 (5,530) 13,530 $ 8,000

To maintain the desired minimum cash balance of $8,000 Stern must borrow $13,530 of cash. (Beg. cash bal. + Cash rec. – Cash disb. = Excess (deficiency) + Borrowings = End. cash bal.)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-11

SOLUTIONS TO EXERCISES EXERCISE 5.1 The principles of internal control inherent in the “maker-checker” procedure are: 1.

Segregation of duties. The employee records the transactions. The supervisor verifies and approves the transactions.

Physical controls. Access to the computer system is passwordprotected and task-specific.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

EXERCISE 5.2 1.

Establishment of responsibility. The counter clerk is responsible for handling cash. Other employees are responsible for making the pizzas.

Segregation of duties. Employees who make the pizzas do not handle cash.

Documentation procedures. The counter clerk uses your order invoice (ticket) in registering the sale on the cash register. The cash register produces a tape of all sales.

Physical controls. A cash register is used to record the sale.

Independent internal verification. The counter clerk, in handling the pizza, compares the size of the pizza with the size indicated on the order.

Human resource controls. No visible application possible.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement

5-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 5.3 (a)

(b) Recommended Change

Principle Violated

Procedure

Weakness

Cashiers are not bonded and background checks are not conducted.

Human resource controls.

Cashiers should be bonded and background checks should be performed.

Inability to establish responsibility for cash on a specific clerk.

Establishment of responsibility.

There should be separate cash drawers and register codes for each clerk.

Cash is not adequately protected from theft.

Physical controls. Cash should be stored in a safe until it is deposited in bank.

Cash is not independently counted.

Independent internal verification.

A cashier office supervisor should count cash, and reconcile the total to the cash register tape.

The accountant should not handle cash.

Segregation of duties.

The cashier’s department should make the deposits.

LO 2 BT: E Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-13

EXERCISE 5.4 (a)

(b) Principle Violated

Recommended Change

Procedure

Weakness

Checks are not stored in a secure area.

Physical controls.

Checks should be stored in a safe or locked file drawer.

The approval and payment of bills is done by the same individual.

Segregation of duties.

The store manager should approve bills for payment and the treasurer should sign and issue checks.

Unauthorized employees making purchases.

Establishment of responsibility.

Only employees granted authority should make purchases for the store.

Use of cash instead of checks; no prenumbered invoices.

Documentation procedures.

Purchases should be paid with prenumbered checks and the purchases should be documented by a prenumbered invoice signed by the seller.

Filing does not Documentation prevent a bill from procedures. being paid more than once.

Bills should be stamped PAID after payment.

The bank reconciliation is not independently prepared.

Someone with no other responsibilities relating to cash should prepare the bank reconciliation.

Independent internal verification.

LO 2 BT: E Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

5-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 5.5 (a) Weaknesses

(b) Suggested Improvement

Checks are not prenumbered. (Documentation procedures)

Use prenumbered checks.

The purchasing agent signs checks. (Establishment of responsibility)

Only the treasurer’s department personnel should sign checks.

Unissued checks are stored in unlocked file cabinet. (Physical controls)

Unissued checks should be stored in a locked file cabinet with access restricted to authorized personnel.

Purchasing agent approves and pays for goods purchased. (Segregation of duties)

Purchasing should approve bills for payment by the treasurer.

After payment, some invoices are just filed. (Documentation procedures)

All invoices should be stamped PAID.

The purchasing agent records purchase transactions. (Segregation of duties)

Only accounting department personnel should record transactions.

The treasurer records all other transactions. (Segregation of duties)

Same as answer to No. 6 above.

The treasurer reconciles the bank statement. (Independent internal verification)

An internal auditor should reconcile the bank statement.

LO 2 BT: E Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

5-15

EXERCISE 5.6 (a) Cash balance per bank statement .................. Add: Deposits in transit ................................

$3,677.20 590.00 4,267.20 770.00 $3,497.20

Less: Outstanding checks ............................. Adjusted cash balance per bank .................... (Cash bal. per bank stmt. + Dep. In trans. – Outstdg. cks.)

(b) Cash balance per books .................................. Less: NSF check ............................................. Bank service charge ............................. Adjusted cash balance per books ..................

$3,975.20 $450.00 28.00

478.00 $3,497.20

(Cash bal. per books – NSF ck. – Bank serv. chg.)

= Liabilities

+ Stockholders' Equity

Rev.

Exp. −$28 Bank charge exp.

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5.7 The outstanding checks are as follows: No. 255 261 264

Amount $ 700 500 360 Total $1,560

LO 3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

5-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 5.8 (a)

LANCE COMPANY Bank Reconciliation July 31, 2027 Cash balance per bank statement ................................. Add: Deposits in transit ...............................................

$7,328 2,700 10,028 686 $9,342

Less: Outstanding checks ............................................ Adjusted cash balance per bank ................................... Cash balance per books................................................. Add: Electronic funds transfer received .....................

$7,364 2,016 9,380 38 $9,342

Less: Bank service charge............................................ Adjusted cash balance per books ................................. (Cash bal. per bank + Dep. in trans. – Outstdg. cks = Adj. cash bal. per bank)

(b) Assets Accts. Cash + Rec. July 31 31

+$2,016 −38

= Liabilities =

Stockholders' Equity Rev.

Exp.

−$2,016 −$38

Bank charge exp.

LO 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-17

EXERCISE 5.9 (a)

HOWARD COMPANY Bank Reconciliation September 30, 2027 Cash balance per bank statement ......................... Add: Deposits in transit .......................................

$16,500 4,738 21,238 2,383 $18,855

Less: Outstanding checks .................................... Adjusted cash balance per bank ........................... Cash balance per books ......................................... Add: Electronic funds transfer received ............ Interest earned .............................................

$17,600 $1,830 45

Less: NSF check .................................................... Safety deposit box rent ............................... Adjusted cash balance per books .........................

560 60

1,875 19,475 620 $18,855

(Cash bal. per bank + Dep. In trans. – Outstdg. cks = Adj. cash bal. per bank)

(b)

Assets

Sept. 30 30 30 30

Cash + +$1,830 +45 −560 −60

= Liabilities + Accts. Rec. = −$1,830

Stockholders' Equity Rev.

Exp.

+$45

Interest revenue

+560 −$60

Bank charge exp.

LO 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

5-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 5.10 (a)

RAYDON COMPANY Bank Reconciliation July 31, 2027 Cash balance per bank statement ......................... Add: Deposits in transit .......................................

$8,732 3,500 12,232 1,486 $10,746

Less: Outstanding checks .................................... Adjusted cash balance per bank ........................... Cash balance per books......................................... Add: Electronic funds transfer received .............

$8,768 2,023 10,791 45 $10,746

Less: Bank service charge.................................... Adjusted cash balance per books .........................

[(Cash bal. per bank stmt. + Dep. in trans. – Outstdg. cks = Adj. cash bal. per bank); (Cash bal. per books + EFT – Bank serv. chrg. = Adj. cash bal. per books)]

Liabilities (b)

July. 31 31

Assets Cash + +$2,023 −45

Accts. Rec. = −$2,023

Stockholders' Equity Rev.

Exp. −$45

Bank charge exp.

LO 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

5-19

EXERCISE 5.11 (a) Deposits in transit: Deposits per books in July ........................... Less: Deposits per bank in July .................. Deposits in transit, June 30 ............... July receipts deposited in July .................... Deposits in transit, July 31 ...........................

$16,900 $15,600 (580) 15,020 $ 1,880

[July dep. per bks. – (July dep. per bank – June 30 dep. in trans.)]

(b) Outstanding checks: Checks per books in July ............................. Less: Checks clearing bank in July ............ Outstanding checks, June 30............ July checks cleared in July .......................... Outstanding checks, July 31 ........................

$17,500 $16,400 (940) 15,460 $ 2,040

[July cks. per bks.– (July cleared cks. – June outstdg. cks.)]

(c) Deposits in transit: Deposits per bank statement in September.................................................. Add: Deposits in transit, September 30..... Total deposits to be accounted for .............. Less: Deposits per books ............................ Deposits in transit, August 31 ......................

$25,900 2,200 28,100 26,400 $ 1,700

(Dep. per Sept. bank stmt. + Sept. 30 dep. In trans. – Dep. per bks.)

(d) Outstanding checks: Checks clearing bank in September ............ Add: Outstanding checks, September 30 ..................................... Total checks to be accounted for ................. Less: Cash disbursements per books ........ Outstanding checks, August 31 ...................

$24,000 2,100 26,100 23,500 $ 2,600

(Cks. clearing bank stmt. in Sept. + Outstdg. cks. Sept 30 – Cash disb. per bks.)

LO 3 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

5-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 5.12 (a) Deposits in transit = $74,000 – ($71,000 – $4,800) = $7,800 [Aug. cash receipts per bks. – (Aug. dep.–July dep. In trans.)

(b) Outstanding checks = ($73,570 + ($400 – $40)) – ($68,678 – $4,500) = $9,752 [(Cash disb. per bks. + Error in recording ck.) – (Cks. clearing bank in August–July 31, outstdg. cks.)

(c)

PERTH INC. Bank Reconciliation August 31, 2027 Cash balance per bank statement ...................... Add: Deposits in transit .....................................

$20,692* 7,800 28,492 9,752 $18,740

Less: Outstanding checks .................................. Adjusted cash balance per bank ........................ Cash balance per books...................................... Add: Interest earned .......................................... Less: Error in recording check ($400 – $40) ..... Service charge .......................................... Safety deposit box rent ............................ Adjusted cash balance per books ......................

$19,130** 45 19,175 $360 50 25

435 $18,740

*Proof of cash balance per bank statement: $18,400 + $71,000 – $68,678 + $45 – $25 – $50 = $20,692 **Proof of cash balance per books: $18,700 + $74,000 – $73,570 = $19,130 (Cash bal. per bks. + Int. earned – Error in recording ck. – Serv. chg. – Safe. dep. box rent = Adj. cash bal. per bks.)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-21

EXERCISE 5.12 (Continued) (d) Assets

Aug. 31 31 31

Cash +$45 −360 −75

= Liabilities + Accts. = Pay. +

Stockholders' Equity Rev. +$45

Exp. Interest revenue

-$360 −$75

Bank charge exp.

LO 3 BT:AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5.13 (a) Cash and Cash Equivalents 1. 2. 3. 5. 6.

Currency .......................................................................... U.S. Treasury bill............................................................. April checks .................................................................... Checking account ........................................................... Savings account ............................................................. Total ...........................................................................

$ 60 10,000 260 2,500 4,800 $17,620

(Currency + U.S. Treas. bill + Apr. cks. + Ckg. acct. + Sav. acct.)

(b) 4. Post-dated check—Accounts Receivable; Balance Sheet 7. Prepaid postage in postage meter—Prepaid Postage Expense; Balance Sheet, or Postage Expense; Income Statement 8. IOU from company receptionist—Other Receivable; Balance Sheet LO 4 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Analytic AICPA FC: Reporting

5-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 5.14 Suggestions to improve cash management practices for Lance, Art and Wayne: 1. 2. 3. 4.

Prepare a cash budget. Bill clients as work progresses. Establish a line of credit with bank. Arrange a long-term loan for renovations and equipment and plan the timing of major expenditures.

LO 4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5.15 RIGLEY COMPANY Cash Budget For the Two Months Ending February 28, 2027

Beginning cash balance ........................................ Add: Cash receipts Collections from customers ....................... Sale of short-term investments.................. Total receipts .............................................. Total available cash ............................................... Less: Cash disbursements Payments to suppliers ................................ Wages .......................................................... Administrative expenses (Total - Depreciation) ............................... Selling expenses ......................................... Total disbursements ................................... Excess (deficiency) of available cash over disbursements ..................................................... Financing Add: Borrowings .................................................. Less: Repayments ................................................ Ending cash balance..............................................

January

February

$ 46,000

$ 24,000

71,000 12,000 83,000 129,000

146,000 0 146,000 170,000

40,000 30,000

75,000 40,000

20,000 15,000 105,000

23,000 20,000 158,000

24,000

12,000

0 0 $ 24,000

8,000 0 $ 20,000

[(Beg. cash bal. + Coll. from cust. + Sale of s-t invest.) − (pmts. to supp. + Wages + Admin. exp. + Sell. exp.) = Excess (deficiency) of cash]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-23

SOLUTIONS TO PROBLEMS PROBLEM 5.1 (a) Principles

Application to Gary Theater

Establishment of responsibility.

Only cashiers are authorized to sell tickets. Only the manager and cashier can handle cash.

Segregation of duties.

The duties of receiving cash and admitting customers are assigned to the cashier and to the doorperson. The manager maintains custody of the cash, and the company accountant records the cash.

Documentation procedures.

Tickets are prenumbered. Cash count sheets are prepared. Deposit slips are prepared.

Physical controls.

A safe is used for the storage of cash and a machine is used to issue tickets.

Independent internal verification.

Cash counts are made by the manager at the end of each cashier’s shift. Daily comparisons are made by the company treasurer.

Human resource controls.

Cashiers are bonded.

(b) Actions by the doorperson and cashier to misappropriate cash include: (1) Instead of tearing the tickets, the doorperson could return the tickets to the cashier who could resell them, and the two could divide the cash. (2) The cashier could issue a lower price ticket than paid for and the doorperson would admit the customer. The difference between the price of the ticket issued and the cash received could be divided between the doorperson and cashier. LO 2 BT: C Difficulty: Medium TOT: 30 AACSB: None AICPA FC: Measurement

5-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5.2

Grant has created a situation that leaves many opportunities for undetected theft. Here is a list of some of the weaknesses in internal control. You may find others. 1.

Documentation procedures. The tickets were unnumbered. By numbering the tickets, the students could have been held more accountable for the tickets. See number 3 below.

Physical controls and establishment of responsibility. The tickets were left in an unlocked box on his desk. Instead, Grant should have assigned control of the tickets to one individual, in a locked box which that student alone had control over.

Documentation procedures. No record was kept of which students took tickets to sell or how many they took. In combination with items 1 and 2 above, the student assigned control over the tickets should have kept a record of which tickets were issued to each student for resale. (Note: This problem could have been largely avoided if the tickets had only been sold at the door on the day of the dance.)

Documentation procedures. There was no control over unsold tickets. This deficiency made it possible for students to sell tickets, keep the cash, and tell Grant that they had disposed of the unsold tickets. Instead, students should have been required to return the unsold tickets to the student maintaining control over tickets, and the cash to Grant. In each case, the students should have been issued a receipt for the cash they turned in and the tickets they returned.

Establishment of responsibility. Inadequate control over the cash box. In effect, it was operated like a petty cash fund, but too many people had the key. Instead, Grant should have had the key and dispersed funds when necessary for purchases.

Documentation procedures. Instead of receipts, students simply wrote notes saying how they used the funds. Instead, it should have been required that they provided a valid receipt.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-25

PROBLEM 5.2 (Continued) 7.

Segregation of duties. Lynn Dandi counted the funds, made out the deposit slip, and took the funds to the bank. This made it possible for Lynn Dandi to take some of the money and deposit the rest since there was no external check on his work. Grant should have counted the funds, with someone observing him. Then he could have made out the deposit slip and had Lynn Dandi deposit the funds.

Documentation procedures. Grant did not receive a receipt from Kray Zee. Without a receipt, there is no way to verify how much Kray Zee was actually paid. For example, it is possible that he was only paid $100 and that Grant took the rest.

Segregation of duties. Dana Uhler was collecting tickets and receiving cash for additional tickets sold. Instead, there should have been one person selling tickets at the door and a second person collecting tickets.

LO 2 BT: C Difficulty: Medium TOT: 30 AACSB: None AICPA FC: Measurement

5-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5.3

(a)

KEEDS COMPANY Bank Reconciliation July 31, 2027 Cash balance per bank statement .................... Add: Deposits in transit ..................................

$7,690.80 1,193.30 8,884.10 1,860.10 $7,024.00

Less: Outstanding checks ............................... Adjusted cash balance per bank ...................... Cash balance per books.................................... Add: Electronic funds transfer received ....................................

$6,140.00 1,520.00 7,660.00

Less: NSF check ............................................... Error in recording check No. 2480 ........ Bank service charge ............................... Adjusted cash balance per books ....................

$575.00 36.00 25.00

636.00 $7,024.00

[Cash bal. per bks. + EFT rec'd − (NSF ck. + Error in ck. no. 2480 + Bank serv. chg.) = Adj. cash bal. per bks.]

(b)

July 31 31 31 31

Assets = Liabilities + Accts. Accts. Cash + Rec. = Pay. + −$1,520 +$1,520 −575 +575 −36 −$36 −25

Stockholders' Equity Rev.

Exp.

−$25

Bank charge expense

LO 3 BT:AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-27

PROBLEM 5.4

(a)

BOGALUSA COMPANY Bank Reconciliation November 30, 2027 Cash Balance per bank statement ............... Add: Deposits in transit ............................. Less: Outstanding checks No. 2451 .......................................... No. 2472 .......................................... No. 2478 .......................................... No. 2482 .......................................... No. 2484 .......................................... No. 2485 .......................................... No. 2487 .......................................... No. 2488 .......................................... Adjusted cash balance per bank .................

$17,712.50 1,304.00 19,016.50 $1,260.40 426.80 538.20 612.00 829.50 974.80 398.00 800.00

Cash Balance per books .............................. Add: Electronic funds transfer received ................................ Less: Check printing charge ....................... Error in recording check No. 2479 ($1,750 – $1,705) ............. Error in 11-21 deposit ($2,954 – $2,945) ............................ Adjusted cash balance per books ...............

5,839.70 $13,176.80 $11,073.80 2,242.00 13,315.80

85.00 45.00 9.00

139.00 $13,176.80

[Cash bal. per bks. + ETF rec'd − (ck. print. chg. + Error in ck. No. 2479 + Error in 11–21 dep.) = Adj. cash bal. per bks.]

5-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5.4 (Continued) (b)

Assets

Cash + Nov. 30 +$2,242 −85 30 −45 30 −9 30

= Liabilities + Stockholders' Equity Accts. Accts. Rec. = Pay. + Rev. Exp. −$2,242 −$85 Bank charge exp. −$45 +9

LO 3 BT: AP Difficulty: Medium TOT: 50 AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-29

PROBLEM 5.5

(a)

TIMMINS COMPANY Bank Reconciliation May 31, 2027 Cash balance per bank statement .................... Add: Deposits in transit .................................. $1,880.15 Bank error—Tomins ............................... 360.00

$6,968.00 2,240.15 9,208.15 276.25 $8,931.90

Less: Outstanding checks ............................... Adjusted cash balance per bank ...................... Cash balance per books .................................... Add: Electronic funds transfer received ................................

$6,738.90 2,690.00 9,428.90

Less: NSF check ............................................... $ 380.00 Error in May 12 deposit .......................... 50.00 Error in recording check No. 1181......... 27.00 Check printing charge ............................ 40.00 Adjusted cash balance per books ....................

497.00 $8,931.90

[Cash bal. per bks. + EFT rec'd – (NSF ck. + Error in ck. no. 1181 + Ck. print. chg.) = Adj. cash bal. per bks.]

(b)

May 31 31 31 31 31

Assets Accts. Cash + Rec. +$2,690 −$2,690 −380 +380 −50 −27 −40

= =

Liabilities Accts. Pay.

Stockholders' Equity

Rev.

Exp.

−$50

Service revenue

−$27 −$40

Bank charge exp.

LO 3 BT: AP Difficulty: Medium TOT: 35 AACSB: Analytic AICPA FC: Reporting

5-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5.6

(a)

DAISEY COMPANY Bank Reconciliation October 31, 2027 Balance per bank statement .............................................. Plus: Undeposited receipts ..............................................

$18,380.00 3,795.51 22,175.51

Less: Outstanding checks No. 62 183 284

Amount $140.75 180.00 253.25

No. 862 863 864

Amount $190.71 226.80 165.28 ....................

1,156.79

Adjusted balance per bank ................................................

$21,018.72

Cash balance per books..................................................... Add: Bank credit (Electronic funds transfer) .................. Adjusted balance per books (before theft) ....................... Less: Theft ($22,062.72 – $21,018.72) ............................... Adjusted balance per books ..............................................

$21,877.72 185.00 22,062.72 1,044.00 $21,018.72

(Cash bal. per bks. + EFT − Theft = Adj. bal. per bks.)

(b) The cashier attempted to cover the theft of $1,044.00 by: 1. Not listing as outstanding three checks totaling $574.00 (No. 62, $140.75; No. 183, $180.00; and No. 284, $253.25). 2. Underfooting the outstanding checks listed by $100. (The correct total is $582.79.) 3. Subtracting the $185 credit from the bank balance instead of adding it to the book balance, thereby concealing $370 of the theft. (c) 1. 2.

The principle of independent internal verification has been violated because the cashier prepared the bank reconciliation. The principle of segregation of duties has been violated because the cashier had access to the accounting records and also prepared the bank reconciliation.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-31

PROBLEM 5.7

MOYNAHAN INC. Cash Budget For the Month Ending April 30, 2027 Beginning cash balance............................................. Add: Cash receipts Cash sales ....................................................... Collections from customers ........................... Total receipts................................................. Total available cash.................................................... Less: Cash disbursements Payment of March purchases ........................ April cash purchases ...................................... Cash operating costs...................................... Equipment purchase....................................... Total disbursements.................................... Excess (deficiency) of available cash over disbursements......................................................... Financing Add: Borrowings ...................................................... Less: Repayments .................................................... Ending cash balance ..................................................

$11,000 42,000 18,400 60,400 71,400 22,400 28,100 11,200 2,500 64,200 7,200 1,800 0 $ 9,000

[Beg. cash bal. + Cash sales + Coll. from cust. – (Pmt. March purch. + Apr. cash purch. + Cash oper. costs + Equip. purch.) = Excess (def.) of avail. cash over disb.]

LO 4 BT: AP Difficulty: Medium TOT: 35 AACSB: Analytic AICPA FC: Reporting

5-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5.8

BASTILLE CORPORATION Cash Budget For the Two Months Ending February 28, 2027

Beginning cash balance ....................................... Add: Cash receipts Collections from customers ...................... Notes receivable ......................................... Sale of securities ........................................ Total receipts ......................................................... Total available cash .............................................. Less:Cash disbursements Purchases ................................................... Salaries ....................................................... Administrative expenses (Jan. $72,000 – $1,000; Feb. $75,000 – $1,000) ................ Selling expenses ........................................ Dividends .................................................... Total disbursements ............................................. Excess (deficiency) of available cash over disbursements ................................................... Financing Add: Borrowings ................................................. Less: Repayments ................................................ Ending cash balance.............................................

January

February

$ 46,000

$ 43,000

326,000 15,000 0 341,000 387,000

378,000

110,000 84,000

135,000 81,000

71,000 79,000 0 344,000

74,000 88,000 10,000 388,000

43,000

37,000

0 0 $ 43,000

3,000 0 $ 40,000

4,000 382,000 425,000

[Jan beg. cash bal. + Coll. from cust. + Notes rec. + Sale of sec. – (Purch. + Sal. + Admin. exp. + Sell. exp. + Div.) = Excess (def.) of avail. cash over disb.]

LO 4 BT: AP Difficulty: Medium TOT: 35 AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-33

CT5.1

FINANCIAL REPORTING PROBLEM

(a) The first paragraph of the independent registered public accounting firm’s report states that: “We have audited the accompanying consolidated balance sheet of Apple Inc. as of September 26, 2020 and September 28, 2019, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 26, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Apple Inc. at September 26, 2020 and September 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 26, 2020, in conformity with U.S. generally accepted accounting principles.” (b) The consolidated balance sheet shows the combined cash and cash equivalent balances (in millions) at September 26, 2020 and September 28, 2019: 2020—$38,016 and 2019—$48,844 (c) The consolidated statement of cash flows indicates that three activities are responsible for the change in cash in 2020: (1) operating, (2) investing, and (3) financing. (d) In Note 1 under cash equivalents and marketable securities, it states: “All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.”

5-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT5.1 (Continued) (e) The management of Apple Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. After performing an evaluation of company procedures, management concluded that its internal control over financial reporting was effective. Management’s assessment of Apple’s internal control was audited by and addressed in the opinion of its public accounting firm, Ernst & Young LLP. LO 4 BT: AN Difficulty: Hard TOT: 30 min. AACSB: Technology and Communication AICPA FC: Reporting AICPA PC: Communication

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5-35

CT5.2

COMPARATIVE ANALYSIS PROBLEM

(In thousands) (a) Cash/cash equivalents balance (b) Cash as a percentage of total assets 2020: 2019:

Columbia Sportswear

Under Armour, Inc.

$790,725

$1,517,361

27.9%* 23.4%**

30.2%*** 16.3%****

Cash as a percentage of total assets increased 19% for Columbia Sportswear and increased by 85% for Under Armour. (c) Cash provided by operating activities

$276,077

$212,864

(d) The objective in cash management is to ensure that a company has sufficient cash to meet payments as they come due, yet minimize the amount of non-revenue-generating cash on hand. The increase in cash as a percentage of total assets experienced by both companies indicates that they have done an excellent job of managing their cash. *$790,725/$2,836,571 **$686,009/$2,931,591 ***$1,517,361/$5,030,628 ****$788,072/$4,843,531 LO 4 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Technology and Communication AICPA FC: Reporting AICPA PC: Communication

5-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT5.3

INTERPRETING FINANCIAL STATEMENTS

a. 38% of respondents stated that bribery/corrupt practices occur widely in business in their country. 13% of respondents would justify cash payments to win/retain business when helping a business survive an economic downturn. b. The survey found that younger respondents were more likely to justify cash payments. One in five respondents under age 35 felt justified, while only one in eight above age 35 felt justified. c. The following is the percentage of respondents that chose each party as being responsible for ensuring employees behave with integrity. Students’ responses to whom they think bears responsibility will vary. Legal and compliance department Human resources department Board of directors Individual responsibility Management

9% 11% 15% 22% 41%

LO 1 BT: AN Difficulty: Hard TOT: 30 min. AACSB: Technology, Communication, and Ethics AICPA FC: Reporting AICPA PC: Communication and Professional Demeanor

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5-37

CT5.4

REAL-WORLD FOCUS

(a) The steps in the standard-setting process are: 1. Identify topic. 2. Conduct pre-agenda research. 3. Make agenda decision. 4. Deliberate at public meeting. 5. Issue document for public comment. 6. Host public hearings or round tables (Major projects). 7. Re-deliberate based on comments & research. 8. Issue final standard. 9. Education. 10. Implementation. (b) The current advisory groups are: • Financial Accounting Standards Advisory Council (FASAC) • Investor Advisory Committee (IAC) • Not-for-Profit Advisory Committee (NAC) • Small Business Advisory Committee (SBAC) (c) Characteristics that make FASB’s procedures on “open” decision-make process: • Holding public meetings to deliberate reporting issues identified by the staff. • Issuing an Exposure Draft to solicit stakeholder input. • Holding public roundtable meeting to discuss the Exposure Draft. • Redeliberate, if necessary, proposed provisions based on stakeholder input and one or more public meetings. LO None BT: AP Difficulty: Hard TOT: 40 min. AACSB: Technology and Communication AICPA FC: Reporting AICPA PC: Communication

5-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT5.5

REAL-WORLD FOCUS

(a) The PCAOB mission is to oversee the audits of public companies and SEC-registered brokers and dealers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection. (b) The PCAOB inspects registered public accounting firms to assess compliance with the Sarbanes-Oxley Act, the rules of the Board, the rules of the Securities and Exchange Commission, and professional standards, in connection with the firm's performance of audits, issuance of audit reports, and related matters involving U.S. companies, other issuers, brokers and dealers. The inspections are designed to review portions of a firm’s issuer audits and evaluate elements of a firm’s quality control system. The process aims to drive improvement in the quality of audit services through a focus on effective prevention, detection, and deterrence of audit and quality control deficiencies—and oversight of firms’ remediation of identified deficiencies. (c) As stated in the PCAOB Strategic Plan, the Board prioritizes enforcement efforts that address those issues that pose the greatest risk to investors and are most likely to deter improper conduct. PCAOB staff focuses its work on significant audit violations, failures relating to auditor independence, and matters threatening the Board’s oversight integrity (e.g., noncooperation with PCAOB inspections and investigations). When violations are found, the PCAOB may impose sanctions, including censures, monetary penalties, and limitations on a firm’s or an individual’s ability to audit public companies or brokerdealers. As required by the Sarbanes-Oxley Act, PCAOB investigations and disciplinary proceedings are confidential and nonpublic. LO 1 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Technology, Communication and Ethics AICPA FC: Measurement AICPA PC: Communication and Professional Demeanor AICPA BB: Legal/Regulatory Perspective

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5-39

CT5.6

DECISION MAKING ACROSS THE ORGANIZATION

(a) The material weaknesses and the related principle(s) of internal control that was violated are as follows: Material Weakness

Internal Control Principle

•

Non-timely deposit of cash receipts

•

Physical controls—cash should be deposited in total daily

•

Excessive past due accounts receivable

•

Establishment of responsibility

•

Disregard of advantages offered by vendors for prompt payment of invoices

•

Establishment of responsibility

•

Absence of segregation of duties

•

Segregation of duties

•

Inadequate procedures for applying accounting principles

•

Documentation procedures

•

Lack of qualified management personnel

•

Establishment of responsibility

•

Lack of supervision by outside board of directors

•

Establishment of responsibility; independent internal verification

•

Overall poor recordkeeping

•

Documentation procedures

(b) Under the Sarbanes-Oxley Act, publicly traded companies are required to maintain adequate systems of internal control. Failure to comply with the Act can result in fines and imprisonment of officers. Managers should recognize that good internal control is necessary to stay in business. In addition, good internal control principles should benefit the company by safeguarding its assets and enhancing the accuracy and reliability of accounting records. LO 1, 2 BT: E Difficulty: Hard TOT: 60 min. AACSB: Communication and Ethics AICPA FC: Reporting AICPA PC: Communication and Professional Demeanor

5-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT5.7

COMMUNICATION ACTIVITY

From: Student’s email address To: Frank Simon’s email address Subject: Internal Controls Report Mr. Simon: During our audit of your financial statements, we reviewed the internal controls over cash receipts. The weaknesses we discovered and our suggested improvements are listed below. Weaknesses

Suggested Improvement

A list of checks received is not prepared by the person who opens the mail.

This list should be prepared so that it can later be compared with the daily cash summary. While this procedure does not assure that all checks will be listed, it does allow the company to verify that all checks on the list did get deposited.

Mail is opened by only one person.

All mail receipts should be opened in the presence of at least two mail clerks. The clerks will observe each other as they complete their tasks. A list of checks should be prepared each day, in triplicate, and each mail clerk signs the list to establish responsibility for the data.

The cashier is allowed to open the mail.

Under this arrangement, it is possible for the cashier to open the mail, prepare the cash summary and make the bank deposit. This involves no segregation of duties as the cashier controls the cash from the time it is received until it is deposited in the bank. The cashier should not open the mail. Instead it should be at least two mail clerks, following the procedures noted above in item number 2.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-41

CT5.7 (Continued) Weaknesses

Suggested Improvement

The accounts receivable clerk is allowed to open the mail.

Again, there is poor segregation of duties. In this case, the clerk could write off a customer’s account as uncollectible and then misappropriate the collection when it’s received. The mail should be opened by two mail clerks and processed as noted above in item number 2.

Mail receipts are deposited weekly.

This makes the receipts vulnerable to robbery and to misappropriation. The receipts should be deposited daily.

We would be pleased to discuss the weaknesses and our recommended improvements with you, at your convenience. Student’s name Blacke and Whyte Certified Public Accountants LO 2 BT: E Difficulty: Hard TOT: 40 min. AACSB: Communication and Analytic AICPA FC: Measurement and Reporting AICPA PC: Communication

5-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT5.8

ETHICS CASE

(a) The amount of fee revenue depending on order of processing would be: (1) Largest to smallest: (2) Smallest to largest: (3) In order of check number:

5 bounced checks × $30 = $150 1 bounced check × $30 = $30 2 bounced checks × $30 = $60

(b) Whether this is ethical is subject to debate. On the one hand, it can be argued that customers have a responsibility to maintain an adequate balance in their accounts. Some customers are frequently overdrawn; thus only severe penalties will persuade them to maintain an adequate balance. However, it could be argued that charging $30 for something that has a cost to the bank of $1.50 is “gouging”—that is, taking unfair advantage of the customer. (c) In deciding what approach to take, the bank must consider its relationship with the customer. Clearly, by adopting a “largest to smallest” approach, it is going to anger some customers, who may well decide to leave the bank and go to a more customer-friendly bank. However, it could be argued that some of the customers the bank may lose are customers that are frequently overdrawn and therefore costly to the bank. Also, it can be time-consuming to change banks, and most people don’t have the spare time to change banks unless they really need to. (d) Answer will vary depending on student’s opinion. LO 2 BT: E Difficulty: Hard TOT: 40 AACSB: Communication and Ethics AICPA FC: Measurement and Reporting AICPA PC: Communication and Professional Demeanor

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-43

CT5.9

ETHICS CASE

Answers will vary depending on item chosen. LO 1 BT: E Difficulty: Hard TOT: 40 min. AACSB: Ethics, Communication and Technology AICPA FC: Measurement and Reporting AICPA PC: Professional Demeanor

5-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT5.10

ALL ABOUT YOU

Answers are provided to students on the government website as they complete The Identity Theft Faceoff quiz. LO 1 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Communication and Technology AICPA FC: Measurement and Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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5-45

CT5.11

CONSIDERING ENVIRONMENTAL, SOCIAL, AND GOVERNMENTAL REPORTING

a. Greenwashing is when a fund misleadingly labels itself as “eco” or “sustainable” to attract environmentally minded investors. Greenwashing claims exaggerate or misrepresent an investment’s real environmental benefits—posing a thorn in the side of advocates of do-good, or sustainable, finance. b. Rules will require investment firms managing money in the European Union—many of which market funds that claim to focus on themes of environmental and social sustainability—to say whether they are reviewing the environmental and social impacts of their investments based on 18 metrics. c. The original proposal would have required 47 metrics. Opposition to the original proposal led to a reduction of the required reporting areas to18. Areas that are no longer mandatory include deforestation and the risk of incidents involving child labor and human trafficking. There are now 12 required environmental metrics and six social, down from the proposed 21 and 26, respectively. Asset managers then must choose for themselves two additional metrics to report out of a possible 36 remaining. d. Complying with the regulations might not be easy, but noncompliance could lead to regulatory fines, court costs and bad publicity. National regulators can use fines, naming and shaming, and finally, withdrawal of licenses to enforce the rules. e. These new rules will probably have a global impact because most large New York and Hong-Kong based assets managers do business in Europe and sell funds in that market. Also, there might be pressure to make the same disclosures for investments regulated outside of Europe. LO N/A BT: AP Difficulty: Hard TOT: 40 min. AACSB: Communication and Technology AICPA FC: Measurement and Reporting AICPA PC: Communication

5-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CHAPTER 6 Merchandising Operations and the Multiple-Step Income Statement Learning Objectives 1. 2. 3. 4.

Describe inventory systems and record purchases under a perpetual inventory system. Record sales under a perpetual inventory system. Prepare a multiple-step income statement. Compute and analyze gross profit rate and profit margin.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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6-1

ANSWERS TO QUESTIONS 1.

(a) This statement is false because the steps in the accounting cycle are the same for both a merchandising company and a service company. (b) The measurement of income is conceptually the same. In both types of companies, net income (or loss) results from the matching of expenses with revenues.

LO 1 BT: C Diff: Moderate TOT: 2 min. AACSB: None AICPA FC: Reporting

The components of revenues and expenses differ as follows:

Revenues Expenses

Merchandising Sales revenue Cost of Goods Sold and Operating

Service Fees, Rents, etc. Operating (only)

LO 1 BT: C Diff: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting

Under a periodic inventory system, the company does not keep track of how many units are on hand. Instead, it takes a physical count at the end of the period to determine ending inventory and cost of goods sold. Under a perpetual system, the company adjusts its inventory account each time it purchases or sells inventory. Thus, it always has a record of its available inventory. Having knowledge of inventory balances helps a company avoid lost sales due to “stock-outs” as well as carrying too much inventory on hand (which results in additional storage and handling costs). The purchasing department can make better decisions with the aid of perpetual inventory records.

LO 1 BT: C Diff: Moderate TOT: 4 min. AACSB: None AICPA FC: Reporting

Income measurement in a merchandising company differs from a service company as follows: (a) sales are the primary source of revenue and (b) expenses are divided into two main categories: cost of goods sold and operating expenses.

LO 1 BT: C Diff: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Sales revenue.......................................................................................................... Cost of goods sold ................................................................................................... Gross profit ..............................................................................................................

$100,000 70,000 $ 30,000

LO 1 BT: AP Diff: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

Marie is correct. In accordance with the revenue recognition principle, sales revenues are generally considered to be recognized when the goods are transferred from the seller to the buyer; that is, when the performance obligation is satisfied. The recognition of revenue is not dependent on the collection of credit sales.

LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement & Reporting

The primary source documents are (a) cash sales—cash register tapes and (b) credit sales—sales invoice.

LO 2 BT: K Diff: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

6-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 6 (Continued) 8.

Shipping unwanted goods to customers is generally considered unethical behavior. In addition, if proper accounting is applied, in most cases it won't achieve the desired result of increasing sales. If it is expected that the unwanted goods will be shipped back to the seller, then they should not be treated as sales in the first place. (Note: The practice of shipping more goods than were ordered in order to meet sales goals and get rid of extra inventory is referred to as channel stuffing.)

LO 2 BT: E Difficulty: Hard TOT: 5 min. AACSB: Analytic & Communication AICPA FC: Reporting

In most industries, returns are not significant, and they are therefore accounted for as they occur. When returns are expected to be significant, the company should make an adjusting entry at the end of the period to estimate the amount of returns that will result from the period’s sales, so that revenues will not be overstated during the period.

LO 2 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

10.

Its current terms of 1/10, n/30 means that customers get a 1% discount if they pay within 10 days, otherwise they have to pay the full amount within 30 days. If they switch to 2/10, n/45 customers would get a 2% discount for paying within 10 days, otherwise they have to pay the full amount in 45 days. By offering 2%, more of Mai’s customers would likely pay within the 10-day period. Management would have to determine whether it is worth the additional cost to be paid quicker. Also, by extending the full payment period from 30 to 45 days, Mai would end up receiving its money even later from its slow payers.

LO 2 BT: E Difficulty: Hard TOT: 5 min. AACSB: Analytic & Communication AICPA FC: Reporting

11.

Gross profit .................................................................................................... Less: Net income .......................................................................................... Operating expenses.......................................................................................

$560,000 230,000 $330,000

LO 3 BT: AP Diff: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

12.

The gain on the sale of the plant represents a one-time gain. That is, it won’t be recurring next year. If you eliminate the effect of this one-time gain, then the company’s income actually declined by $5 million relative to the prior year. When predicting future earnings, investors frequently place little weight on non-recurring events such as this.

LO 3 BT: AN Diff: Hard TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

13.

There are three distinguishing features in the income statement of a merchandising company: (1) a sales revenues section, (2) a cost of goods sold section, and (3) gross profit.

LO 3 BT: K Diff: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting

14.

Factors affecting a company’s gross profit rate include selling products with a higher (or lower) “markup,” increased competition that results in lower selling prices, and price increases or decreases from suppliers.

LO 4 BT: C Diff: Moderate TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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6-3

Questions Chapter 6 (Continued) 15.

Gross profit represents the amount by which sales exceeds cost of goods sold. In order for the company to be profitable, gross profit must exceed the company’s operating expenses. Before the selling price is cut, the company should do a careful analysis estimating what its gross profit and operating expenses would be if more units were sold at a lower selling price. Another concern is the likely reaction of competitors. If competitors also cut their price, then volume will not increase, and the company’s net income will be lower.

LO 4 BT: AN Diff: Moderate TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

6-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6.1

Date Apr. 5 7 8

Assets

Cash -$50

Inventory +$5,100 +50 -100

Liabilities Accounts Payable +$5,100

+ +

Stockholders' Equity Retained Earnings Common Stock + Rev. - Exp. Div.

-100

LO 1 BT: AP Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 6.2 Assets Date Sep. 3 6 13

Cash

-$597,800

Inventory +$700,000 -90,000 -12,200

Liabilities Accounts Payable +$700,000 -90,000 -610,000

+ +

Common Stock

Stockholders' Equity Retained Earnings + Rev. - Exp. Div.

LO 1 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 6.3 Assets Cash

Inv. +$590

Liabilities Accts. Pay. +$590

+$900

+ +

Stockholders' Equity Common Retained Earnings Stock + Rev. Exp. +$900

-590

-$590

Sales revenue Cost of goods sold

LO 1, 2 BT: AP Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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6-5

BRIEF EXERCISE 6.4 Assets

= Liabilities +

Accts. Cash (a) Mar. 2

Rec.

Accts. +

Inv.

Pay.

+$800,000

Stockholders' Equity Common

Stock

Retained Earnings +

Rev.

(c)

12 +660,000

Sales revenue −$540,000 Cost of goods sold

−140,000

(b)

Exp.

+$800,000 −$540,000

Sales returns & allowances

−140,000 +94,000

+94,000

−660,000*

(Cash received = Sales − Sales rtns. & allow.) *($800,000 − $140,000) LO 2 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 6.5 (a) (b) (c) (d) (e) (f)

Sales = $181,500 ($71,900 + $109,600). Cost of goods sold = $41,200 ($71,200 – $30,000). Gross profit = $38,000 ($108,000 – $70,000). Operating expenses = $17,900 ($30,000 – $12,100). Operating expenses = $8,500 ($38,000 (from c) – $29,500). Net income = $63,400 ($109,600 – $46,200).

LO 1, 4 BT: AP Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 6.6 BARTO COMPANY Income Statement (Partial) For the Month Ended October 31, 2027 Sales Sales revenue ($300,000 + $150,000) ..................... Less: Sales returns and allowances ..................... Sales discounts ............................................ Net sales ......................................................................

$450,000 $19,000 5,000

24,000 $426,000

LO 3 BT: AP Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

6-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 6.7 As the name suggests, numerous steps are required in determining net income in a multiple-step statement. Item

Section

Gain on disposal of plant assets Cost of goods sold Depreciation expense Sales returns and allowances

Other revenues and gains Cost of goods sold Operating expenses Sales

LO 3 BT: C Difficulty: Moderate TOT: 5 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 6.8 (a) Profit margin = $32,500 ÷ $250,000 = 13.0% The profit margin measures the extent by which selling price covers all expenses. In this case, 87% of sales revenues cover all expenses (cost of goods sold, operating expenses, and other expenses) leaving 13% of revenues as net income. Or, for every dollar of net sales, the company earns $0.13 in net income. (Net inc. ÷ Net sales) ($32,500 ÷ $250,000)

(b) Gross profit rate = ($250,000 – $150,000) ÷ $250,000 = 40.0% The gross profit rate measures the margin by which selling price exceeds cost of goods sold. In this case, 40% of sales revenues remain (after deducting cost of goods sold) to cover all other expenses and produce net income. Or, for every dollar of net sales, the company generates $0.40 in gross profit. [(Net sales − C.G.S.) ÷ Net sales] [($250,000 − $150,000) ÷ $250,000] LO 4 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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6-7

BRIEF EXERCISE 6.9 (a) Profit margin = $68,000 ÷ $800,000 = 8.5% The profit margin measures the extent by which selling price covers all expenses. In this case, 91.5% of sales revenues cover all expenses (cost of goods sold and operating expenses) leaving 8.5% of revenues as net income. Or, for every dollar of net sales, the company earns $0.085 in net income. (Net inc. ÷ Net sales) ($68,000 ÷ $800,000)

(b) Gross profit rate = ($800,000 – $520,000) ÷ $800,000 = 35.0% The gross profit rate measures the margin by which selling price exceeds cost of goods sold. In this case, 35% of sales revenues remain (after deducting cost of goods sold) to cover operating expenses and produce net income. Or, for every dollar of net sales, the company generates $0.35 in gross profit. [(Net sales − C.G.S.) ÷ Net sales] [($800,000 − $520,000) ÷ $800,000] LO 4 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

6-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO DO IT! EXERCISES DO IT! 6.1

Date Oct. 5 8

Assets

Cash

Inventory +$5,000 -640

Liabilities Accounts Payable +$5,000 -640

+ +

Stockholders' Equity Retained Earnings Common Stock + Rev. - Exp. - Div.

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 6.2 Assets

Date

Cash

Oct. 20

+$5,000

Inventory

Liabilities

Stockholders' Equity Common Stock

Retained Earnings +

Rev.

−$3,000 25

Exp.

+$5,000

Sales revenue

−$3,000

Cost of goods sold Sales return and allowances

+300

Cost of goods sold

−500

-500

Div.

+300

LO 2 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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6-9

DO IT! 6.3 BERLIN CORP. Income Statement For the Year Ended December 31, 2027 Sales Sales revenue............................................... Less: Sales returns and allowances........... Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses........................................... Income from operations .................................... Other revenues and gains ................................. Other expenses and losses............................... Income before income taxes ............................. Income tax expense ........................................... Net income .........................................................

$592,000 40,000 $552,000 156,000 396,000 186,000 210,000 12,700 (13,300)

(600) 209,400 41,880 $167,520

[(Sales rev. − Sales ret. and allow) − C.G.S. − Oper. exp. + Other rev. and gains − Other exp. and losses − Inc. tax exp. = Net inc.] [($592,000 − $40,000) − $156,000 − $186,000 + $12,700 − $13,300 − $41,880 = $167,520] LO 3 BT: AP Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

6-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 6.4 2027 Gross profit rate ($150,000 – $90,000) = 40% $150,000

2026 ($120,000 – $72,000) = 40% $120,000

Profit margin

$22,000 ÷ $120,000 = 18.3%

$10,000 ÷ $150,000 = 6.7%

The company’s gross profit rate remained constant, however, its profit margin decreased significantly due to sharp increase in its operating costs as a percentage of sales. They increased from 16.7% ($20,000 ÷ $120,000) to 29.3% ($44,000 ÷ $150,000). [Gross profit rate = (Net sales − C.G.S) ÷ Net sales]; [Profit margin = Net inc. ÷ Net sales] [2027 Gross profit rate = ($150,000 − $90,000) ÷ $150,000]; (2027 Profit margin = $10,000 ÷ $150,000] LO 4 BT: AN Difficulty: Moderate TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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6-11

SOLUTIONS TO EXERCISES EXERCISE 6.1 Assets

Date

Apr. 5 7 8 15

Cash

Inv. +$28,000

Equip

Liabilities Accts. Pay. +$28,000 +30,000 -3,600 -24,400

+$30,000 -3,600 −$24,400

Stockholders' Equity Retained Common Earnings + Stock + Rev. Exp.

(Cash pd. = Cost of inv. purch. − Cost of inv. rtnd.) ($28,000 − $3,600) LO 1 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 6.2 Assets Date Cash Oct. 8 9 −$500 11 18 −14,112

+ Inventory +$17,000 +500 -2,600 −288

= =

Liabilities Accounts Payable +$17,000

+ +

Common Stock

Stockholders' Equity Retained Earnings + Rev. - Exp. Div.

−2,600 −14,400

LO 1 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 6.3

Date June 10 11 12 19

Cash -$400 −8,148

Assets

Liabilities

+ Inventory +$9,000 +400 -600 -252

Accounts Payable +$9,000

Stockholders' Equity Retained Earnings Common Stock + Rev. - Exp. Div.

−600 −8,400

LO 1 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

6-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 6.4

Cash

Dec. 3

Assets

= Liabilities

Accts.

Rec.

Inv.

+$500,000

Pay.

Stockholders' Equity Common

Stock

Retained Earnings +

Rev.

Kimmel, Survey of Accounting, 3e, Solutions Manual

-25,000

Sales revenue -$330,000

Cost of goods sold Sales returns & allowances

+16,000

Cost of goods sold

-25,000 +16,000

13 +$475,000

Exp.

+$500,000 -$330,000

-475,000*

(Cash rec’d = Sales rev. − Sales rtn. & allow.) * ($500,000 − $25,000) LO 2 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

(For Instructor Use Only)

6-13

EXERCISE 6.5 DOQE COMPANY Income Statement (Partial) For the Year Ended October 31, 2027 Sales Sales revenue..................................................... Less: Sales returns and allowances ................ Sales discounts ...................................... Net sales ....................................................................

$900,000 $22,000 13,500

35,500 $864,500

Note: Freight-out is a selling expense. (Sales rev. − Contra rev. accts.) [$900,000 − ($22,000 + $13,500)] LO 3 BT: AP Difficulty: Moderate TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 6.6 LIEU CO. Income Statement For the Month Ended January 31, 2027 Sales Sales revenue ............................................. Less: Sales returns and allowances ........ Sales discounts .............................. Net sales ..................................................... Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses Salaries and wages expense ..................... Rent expense .............................................. Insurance expense ..................................... Freight-out .................................................. Total operating expenses................... Income before income taxes ............................. Income tax expense ........................................... Net income .........................................................

$370,000 $20,000 8,000

28,000 342,000 212,000 130,000

60,000 32,000 12,000 7,000 111,000 19,000 5,000 $ 14,000

[(Sales rev. – Contra-rev. accts.) –C.G.S. - Oper. exp. - Inc. tax exp.] [$370,000 – ($20,000 + $8,000) – $212,000 – $111,000 – $5,000] LO 3 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

6-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 6.7 DARREN COMPANY Income Statement For the Year Ended December 31, 2027 Sales Sales revenue .............................. Less: Sales discounts................. Net sales .............................................. Cost of goods sold ............................. Gross profit ......................................... Operating expenses Salaries and wages expense ...... Depreciation expense ................. Utilities expense .......................... Total operating expenses................... Income from operations ..................... Other revenues and gains Interest revenue .......................... Other expenses and losses Loss on disposal of plant assets .............................. Interest expense .......................... Income before income taxes .............. Income tax expense ............................ Net income ..........................................

$2,210,000 160,000 $2,050,000 987,000 1,063,000 465,000 310,000 110,000 885,000 178,000 65,000 (83,500) (71,000)

(154,500) 88,500 25,000 $ 63,500

[(Sales rev. – Sales disc.) – C.G.S. – Tot. oper. exp. + Int. rev. – Tot. other exp. and losses – Inc. tax exp.] [($2,210,000 – $160,000) – $987,000 – $885,000 + $65,000 – $154,500 – $25,000] LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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6-15

EXERCISE 6.8 LAINE INC. Income Statement For the Year Ended December 31, 2027 Net sales ............................................................... Cost of goods sold ............................................... Gross profit ........................................................... Operating expenses ............................................. Income from operations....................................... Other revenues and gains Interest revenue ................................................ Other expenses and losses Loss on disposal of plant assets ................. .. Interest expense ............................................... Income before income taxes ............................... Income tax expense ............................................. Net income ............................................................

$ 2,200,000 1,256,000 944,000 725,000 219,000 33,000 $(17,000) (70,000) $

(87,000) 165,000 47,000 118,000

[Net sales – C.G.S. – Oper. exp. + Int. rev. – Tot. other exp. and losses – Inc. tax exp.] ($2,200,000 – $1,256,000 – $725,000 + $33,000 – $87,000 – $47,000) LO 3 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

6-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 6.9 BLUE DOOR CORPORATION Income Statement For the Year Ended December 31, 2027

Sales ......................................................................... Less: Sales returns and allowances ...................... $ 41,000 Sales discounts ............................................. 8,500 Net sales ................................................................... Cost of goods sold .................................................. Gross profit .............................................................. Operating expenses: Salaries and wages expense.......................... 675,000 Depreciation expense ..................................... 125,000 Advertising expense ....................................... 55,000 Freight-out....................................................... 25,000 Insurance expense ......................................... 15,000 Total operating expenses .................................... Income from operations .......................................... Other revenues and gains Interest revenue ............................................. 30,000 Rent revenue .................................................. 24,000 Other expenses and losses Interest expense ............................................ Income before income taxes ............................ Income tax expense .......................................... Net income ........................................................

$2,400,000 49,500 2,350,500 1,085,000 1,265,500

895,000 370,500

54,000 (70,000) 354,500 70,000 $ 284,500

[(Sales – Sales rtns. & allow. – Sales disc.) – C.G.S. – Tot. oper. exp. + Tot. other rev. and gains – Int. exp. – Inc. tax exp.] [($2,400,000 – $41,000 - $8,500) – $1,085,000 – $895,000 + $54,000 – $70,000 – $70,000] LO 3 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

6-17

EXERCISE 6.10 ORLANDO CORPORATION Income Statement Year Ended December 31, 2027 Sales revenue .................................................... Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses Salaries and wages expense ........................ Depreciation expense ................................... Advertising expense ..................................... Freight-out ..................................................... Insurance expense........................................ Total operating expenses ........................ Income from operations .................................... Other revenue and gains Interest revenue ............................................ Rent revenue ................................................. Other expenses and losses Interest expense............................................ Income before income taxes ............................ Income tax expense .......................................... Net income .........................................................

$2,589,500 1,172,000 1,417,500 $705,000 125,000 55,000 25,000 23,000 933,000 484,500 30,000 24,000

54,000 (62,000) 476,500 70,000 $ 406,500

(Sales rev. – Cost of goods sold – Oper. exp. = Inc. from oper.) (Inc. from oper. + Other rev. and gains – Other exp. and loss. – Inc. tax. exp. = Net inc.) LO 3 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

6-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 6.11 (a) Yoste Company Sales ..................................................................................... *Sales returns and allowances ($90,000 – $84,000) ............ Net sales ...............................................................................

$ 90,000) (6,000) $ 84,000)

Net sales ............................................................................... Cost of goods sold .............................................................. *Gross profit ..........................................................................

$ 84,000) (58,000) $ 26,000)

Gross profit .......................................................................... Operating expenses ............................................................ *Net income ...........................................................................

$ 26,000) (14,380) $ 11,620

)

(Sales − Net sales); (Net sales − CGS); (Gross profit − Oper. exp.) ($90,000 − $84,000); ($84,000 − $58,000); ($26,000 − $14,380)

Noone Company *Sales ($100,000 + $5,000) .................................................... Sales returns and allowances ............................................. Net sales ...............................................................................

$105,000) (5,000) $100,000)

Net sales ............................................................................... *Cost of goods sold ($100,000 – $40,000) ........................... Gross profit ..........................................................................

$100,000) (60,000) $ 40,000)

Gross profit .......................................................................... *Operating expenses ($40,000 – $17,000) ........................... Net income ........................................................................... *Indicates missing amount

$ 40,000) (23,000) $ 17,000)

(Net sales + Sales returns and allow.); (Net sales − Gross profit); (Gross profit – Net inc.) ($100,000 + $5,000); ($100,000 − $40,000); ($40,000 − $17,000)

(b)

Yoste

Noone

Profit margin

$11,620 ÷ $84,000 = 14%

$17,000 ÷ $100,000 = 17%

Gross profit rate

$26,000 ÷ $84,000 = 31%

$40,000 ÷ $100,000 = 40%

(Profit margin = Net inc. ÷ Net sales); Gross profit rate = (Gross profit ÷ Net sales) (Yoste: $11,620 ÷ $84,000); (Yoste: $26,000 ÷ $84,000)

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6-19

EXERCISE 6.11 (Continued) (c) Noone has a higher profit margin than Yoste. Each dollar of net sales by Noone results in 17 cents of net income compared to only 14 cents for Yoste. Noone also has a higher gross profit rate. For each dollar of Noone’s net sales, 60 cents is required to cover cost of goods sold leaving 40 cents to cover other expenses and produce net income. Yoste’s gross profit of 31% indicates that only 31 cents of each dollar of net sales is available to cover other expenses and produce net income. LO 3, 4 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

EXERCISE 6.12 (a)

THE CLOROX COMPANY Income Statement For the Year Ended June 30, 2027 (amounts in millions) Sales Sales revenue............................................... Less: Sales returns and allowances........... Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses Advertising expense .................................. Salaries and wages expense ..................... Research and development expense ........ Rent expense .............................................. Depreciation expense ................................ Utilities expense ......................................... Total operating expenses................... Income from operations .................................... Other expenses and losses Interest expense ......................................... Loss on disposal of plant assets .............. Income before income taxes ............................. Income tax expense ........................................... Net income .........................................................

$5,730 280 $5,450 3,104 2,346 499 460 114 105 90 60 1,328 1,018 161 46

207 811 162 $ 649

[(Sales rev. – Sales rtns. & allow.) – C.G.S. – Tot. oper. exp.– Tot. other exp. and losses – Inc. tax exp.] [($5,730 – $280) – $3,104 – $1,328 – $207 – $162] 6-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 6.12 (Continued) (b) Gross profit rate: $2,346 ÷ $5,450 = 43.0% Profit margin: $649 ÷ $5,450 = 11.9% The gross profit rate indicates that about 57 cents of each dollar of net sales is required to cover the cost of goods sold, leaving about 43 cents to cover all remaining expenses and produce net income. The profit margin indicates that each dollar of net sales results in about 12 cents of net income. (Gross profit rate = Gross profit ÷ Net sales); (Profit margin = Net inc. ÷ Net sales) ($2,346 ÷ $5,450); ($649 ÷ $5,450)

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EXERCISE 6.12 (Continued) (c) THE CLOROX COMPANY Income Statement For the Year Ended June 30, 2027 (amounts in millions) Sales Net sales* .................................................... Cost of goods sold** .......................................... Gross profit ........................................................ Operating expenses Advertising expense*** .............................. Salaries and wages expense ..................... Research and development expense ........ Rent expense .............................................. Depreciation expense ................................ Utilities expense ......................................... Total operating expenses................... Income from operations .................................... Other expenses and losses Interest expense ......................................... Loss on disposal of plant assets .............. Income before income taxes ............................. Income tax expense ........................................... Net income .........................................................

$6,813 3,880 2,933 $839 460 114 105 90 60 1,668 1,265 161 46

207 1,058 212 $ 846

*$5,450 + (.25 x $5,450) **$3,104 + (.25 x $3,104) ***$499 + $340

Gross profit rate: $2,933 ÷ $6,813 = 43.1% Profit margin: $846 ÷ $6,813 = 12.4% The gross profit rate remained nearly unchanged at 43.1%. This result would be expected since advertising expense is not part of cost of goods sold. The profit margin increased from 11.9% to 12.4% because net income increased over 30% ($197 ÷ $649) while net sales rose only 25%. It appears that the marketing department’s plan has merit. If the expected increases in sales materialize, net income will increase $197 million ($846 – $649). (Net sales = Old net sales × 1.25); (C.G.S. = Old C.G.S. × 1.25) ($5,450 × 1.25); ($3,104 × 1.25) LO 3, 4 BT: AP Difficulty: Hard TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

6-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

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June 1 3

20 24 26 28

Stockholders' Equity Common Retained Earnings Stock + Rev. - Exp.

+$1,200 −720 −40 −$1,000 +1,200

+1,200 −700

Sales revenue −$720 Cost of goods sold

+1,200

Sales revenue −730 Cost of goods sold

+1,300

Sales revenue −780 Cost of goods sold Sales returns & allowances +80 Cost of goods sold

−40 −1,000

−1,200 +1,200 −730 +700

+$1,200

+700

−1,200 −700 +1,300 −780

−130

−130 +80

(For Instructor Use Only)

LO 1, 2 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

PROBLEM 6.1

Kimmel, Survey of Accounting, 3e, Solutions Manual

6 9 15 17

= Liabilities + Accts. + Inv. = Pay. + +$1,040 +$1,040

SOLUTIONS TO PROBLEMS

Cash

Assets Accts. Rec.

6-23

(a) Bal. Apr. 1 (b) 5 9 10

$2,500

Inv.

= Liabilities + Accts. = Pay. +

Stockholders' Equity Common Retained Earnings − Stock + Rev. Exp.

$3,500 +1,500 −200

$6,000 +$1,500 −200

+$1,340 −820 +830 −1,300 −30

+$1,340

Sales revenue −$820 Cost of goods sold

+810

Sales revenue −550 Cost of goods sold

+830 −1,300 −30

+810 −550

21 30

(b)

−800 +1,220

−800 −1,220

GRANITE HILLS PRO SHOP Income Statement (Partial) For the Month Ended April 30, 2027

(For Instructor Use Only)

Sales Sales revenue .................................................................... Cost of goods sold ................................................................... Gross profit ............................................................................... LO 1, 2, 3 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

$2,150 1,370 $ 780

PROBLEM 6.2

Kimmel, Survey of Accounting, 3e, Solutions Manual

12 14 17 20

Cash

Assets Accts. + Rec.

Assets

Accts. Date

Cash

Receivable +

Sep. 6 -$50

10 12

Accounts Inventory =

Payable

+$1,650

+50 −66

−66

Stockholders' Equity Retained Earnings

Common +

Stock

+$690

Rev.

-45

−$520 -45

+34 20

Exp.

+$690 −520

−

+760

+34 +760

−570 LO 1, 2 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

− Div.

Sales revenue Cost of goods sold Sales returns & allowances Cost of goods sold Sales revenue

−570

Cost of goods sold

PROBLEM 6.3

Kimmel, Survey of Accounting, 3e, Solutions Manual

Liabilities +

(For Instructor Use Only)

6-25

PROBLEM 6.4

WOLFORD DEPARTMENT STORE Income Statement For the Year Ended November 30, 2027 Sales Sales revenue .................................. Less: Sales returns and allowances ............................ Net sales .......................................... Cost of goods sold .................................. Gross profit .............................................. Operating expenses Salaries and wages expense .......... Rent expense ................................... Advertising expense ....................... Depreciation expense ..................... Utilities expense .............................. Insurance expense .......................... Freight-out ....................................... Total operating expenses ....... Income from operations .......................... Other revenues and gains Gain on disposal of plant assets.... Other expenses and losses Interest expense .............................. Income before income taxes .................. Income tax expense ................................ Net income ...............................................

$904,000 20,000 $884,000 614,380 269,620 117,000 34,000 33,500 13,500 10,600 9,000 6,200 223,800 45,820 2,000 (5,112) 42,708 10,000 $ 32,708

[(Sales rev − Sales rtns. & allow.) − C.G.S. − Tot. oper. exp. + Other rev. and gains − Other exp. and losses − Inc. tax exp.] [($904,000 − $20,000) − $614,380 − $223,800 + $2,000 − $5,112 − $10,000]

6-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 6.4 (Continued) WOLFORD DEPARTMENT STORE Retained Earnings Statement For the Year Ended November 30, 2027 Retained earnings, December 1, 2026 ..................................... Add: Net income ..................................................................... Less: Dividends ....................................................................... Retained earnings, November 30, 2027 ...................................

$14,200 32,708 46,908 12,000 $34,908

(Beg. ret. earn. + Net inc. − Div.) ($14,200 + $32,708 − $12,000)

WOLFORD DEPARTMENT STORE Balance Sheet November 30, 2027 Assets Current assets Cash...................................................... $ 8,000 Accounts receivable ............................ 17,008 Inventory .............................................. 26,200 Prepaid insurance................................ 6,000 Total current assets...................... $ 57,208 Property, plant, and equipment Equipment ............................................ $157,000 Less: Accumulated depreciation— equipment ................................. 68,000 89,000 Total assets ................................... $146,208

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PROBLEM 6.4 (Continued) WOLFORD DEPARTMENT STORE Balance Sheet (Continued) November 30, 2027 Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................................ $26,800 Salaries and wages payable ............................ 6,000 Total current liabilities .............................. Long-term liabilities Note payable due 2031 .................................... Total liabilities ........................................... Stockholders’ equity Common stock ................................................. 35,000 Retained earnings ............................................ 34,908 Total stockholders’ equity ........................ Total liabilities and stockholders’ equity ......................................................

$ 32,800 43,500 76,300

69,908 $146,208

[(Cash + Accts. rec. + Inv. + Prepaid ins.) + (Equip − Accum. depr.—equip.) = (Accts. pay + Sal. & wages pay) + Note pay. + (Com. stk + Ret. earn.)] [($8,000+ $17,008 + $26,200 + $6,000) + ($157,000 − $68,000) = ($26,800 + $6,000) + $43,500 + ($35,000 + $34,908)] LO 3 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

6-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 6.5

SIMON COMPANY Income Statement For the Year Ended December 31, 2027 Sales Sales revenue ...................................... Less: Sales returns and allowances ................................ Sales discounts ........................ Net sales ............................................... Cost of goods sold ...................................... Gross profit.................................................. Operating expenses Salaries and wages expense* ............. Freight-out............................................ Rent expense ($24,000 – $6,000) ........ Advertising expense ............................ Utilities expense .................................. Depreciation expense .......................... Total operating expenses ............ Income from operations.............................. Other revenues and gains Rent revenue ........................................ Other expenses and losses Interest expense .................................. Income before income taxes ...................... Income tax expense .................................... Net income ...................................................

$911,000 $28,000 18,000

46,000 865,000 555,000 310,000

136,000 33,000 18,000 13,000 12,000 10,000 222,000 88,000 4,000 (2,000) 90,000 22,500 $ 67,500

*($80,000 + $6,000 + $3,000 + $47,000) [(Sales − Sales rtns. & allow. – Sales disc.) − C.G.S. − Tot. oper. exp. + Other rev. and gains − Other exp. and losses − Inc. tax exp.] [($911,000 − $28,000 − $18,000) − $555,000 − $222,000 + $4,000 − $2,000 − $22,500] LO 3 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

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CT6.1

FINANCIAL REPORTING PROBLEM

(Note: All dollar amounts are in millions) (a) Percentage change in net sales: 2019 to 2020 ($274,515 – $260,174) ÷ $260,174 = 5.5% Percentage change in net income: 2019 to 2020 ($57,411 – $55,256) ÷ $55,256 = 3.9% (b) Profit margin: 2018 2019 2020

$59,531 ÷ $265,595 = 22.4% $55,256 ÷ $260,174 = 21.2% $57,411 ÷ $274,515 = 20.9%

The profit margin decreased by 6.7% from 2018 to 2020. (c) Gross profit rates: 2018 2019 2020

$101,839 ÷ $265,595 = 38.3% $98,392 ÷ $260,174 = 37.8% $104,956 ÷ $274,515 = 38.2%

The gross profit rate decreased slightly in 2019 due to the gross margin decreasing percentagewise more than net sales and in 2020, the rate returned to roughly what it was in 2018 due to the gross margin increasing percentagewise more than net sales. LO 6 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA AC: Reporting

6-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 6.2

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Profit margin

Columbia Sportswear Company

Under Armour, Inc.

$108,013 = 4.3% $2,501,554

$(549,177) = (12.3%) $4,474,667

(2) Gross profit (000’s)

$1,223,889

(3) Gross profit rate

$1,223,889 = 48.9% $2,501,554

$2,160,095 = 48.3% $4,474,667

(4) Operating income (000’s)

$137,049

($613,438)

(5) Percent change in operating income

$137,049 − $394,971 = (65.3%) $394,971

($613,438) − $236,770 = (359.1%) $236,770

$2,160,095

(Profit margin = Net inc. ÷ Net sales); (Gross profit rate = Gross profit ÷ Net sales); [% chg. in oper. inc. = (Current yr’s. oper. inc. − Prev. yr’s. oper. inc.) ÷ Prev. yr’s. oper. inc.]

(b) Columbia was significantly more profitable in 2020 than Under Armour as shown by a much higher profit margin, operating income, and net income. Even though Under Armour had a much higher gross profit amount, both companies had similar gross profit rates. Each company reported substantial decreases in operating income during 2020. LO 3, 4 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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CT6.3

INTERPRETING FINANCIAL STATEMENTS

(a) Carrefour (Euros) (€70, 486 – €54, 630)

Gross profit rate

€70, 486

Walmart (Dollars) = 22.5%

($256, 329 – $198, 747) $256, 329

= 22.5%

The ratio is the same for each company, indicating that they have similar markups on the cost of their products. [Gross profit rate = (Net sales − C.G.S.) ÷ Net sales] (b) Profit margin

€1,738 ÷ €70,486 = 2.5%

$9,054 ÷ $256,329 = 3.5%

Walmart is renowned for its efficiency—this is what has caused it to dominate its U.S. competitors. It would appear from this data that it is also more efficient in its ability to generate net income from each dollar of sales than Carrefour. (c)

Current ratio

€14,521 ÷ €13,660 = 1.06:1

$34,421 ÷ $37,418 = .92:1

Debt to assets ratio

€29,434 ÷ €39,063 = .75

$61,289 ÷ $104,912 = .58

Both companies report low current ratios. This is not surprising since in recent years most large companies have tried to reduce costs and increase profitability by limiting the amount of current assets that they hold. However, Walmart’s current ratio is less than 1:1 and might be cause for further investigation. The debt to assets ratio reveals that Carrefour relies more heavily on debt financing. This reduces Carrefour’s solvency and makes Carrefour more susceptible to swings in the economy. This could reduce its ability to compete head-to-head with Walmart. (Current ratio = Current assets ÷ Current liabl.); (Debt to assets ratio = Tot. liabl. ÷ Tot. assets)

6-32

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CT6.3 (Continued) (d) Ratios improve our ability to compare these two companies that report financial information using different currencies. However, other factors can still reduce our ability to compare them. Different accounting standards in the two countries might result in dramatically different results under the same circumstances. Also, differences in laws, such as bankruptcy laws, can affect the results. For example, if French bankruptcy laws favor shareholders more than U.S. bankruptcy laws, then it would be prudent for a French company to rely more on debt financing than a U.S. company. LO 3 BT: AN Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

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CT6.4

REAL-WORLD FOCUS

Answers will vary depending on the company and article chosen by the student. LO None BT: S Difficulty: Hard TOT: 60 min. AACSB: Technology and Communication AICPA FC: Reporting AICPA PC: Communication

6-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT6.5 (a) (1)

DECISION MAKING ACROSS THE ORGANIZATION GIGASALES DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2028 Net sales [$700,000 + ($700,000 × 4%)] ..... Cost of goods sold ($728,000 × 75%)* ...... Gross profit ($728,000 × 25%) ................... Operating expenses Selling expenses ................................ Administrative expenses ................... Total operating expenses ........... Net income..................................................

$728,000 546,000 182,000 $100,000 20,000 120,000 $ 62,000

**Alternatively: Net sales, $728,000 – gross profit, $182,000. (Net sales − C.G.S. − Tot. oper. exp.) ($728,000 − $546,000 − $120,000) (2)

GIGASALES DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2028 Net sales ..................................................... Cost of goods sold ..................................... Gross profit ................................................ Operating expenses Selling expenses ................................ Administrative expenses ................... Net income..................................................

$700,000 560,000 140,000 $68,000* 20,000*

88,000 $ 52,000

*$100,000 – $30,000 – ($40,000 × 40%) + ($700,000 × 2%) = $68,000. (b) Karen’s proposed changes will increase net income by $42,000. Reece’s proposed changes will reduce operating expenses by $32,000 and result in a corresponding increase in net income. Thus, if the choice is between Karen’s plan and Reece’s plan, Karen’s plan should be adopted. While Reece’s plan will increase net income, it may also have an adverse effect on sales personnel. Under Reece’s plan, sales personnel will be taking a cut of $16,000 in compensation [$60,000 – ($30,000 + $14,000)].

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CT 6.5 (Continued) (c)

GIGASALES DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2028 Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses Selling expenses ........................................ Administrative expenses ........................... Total operating expenses................... Net income .........................................................

$728,000 546,000 182,000 $68,560* 20,000* 88,560 $ 93,440

*$68,000 + [2% × ($728,000 – $700,000)] = $68,560. If both plans are implemented, net income will be $73,440 ($93,440 – $20,000) higher than the 2027 results. This is an increase of over 360%. Given the size of the increase, Reece’s plan to compensate sales personnel might be modified so that they would not have to take a pay cut. For example, if sales commissions were 3%, the compensation cut would be reduced to $8,160 [$60,000 – ($30,000 + ($728,000 × 3%))]. (d) A variety of factors might be presented by the student. For example, increasing the quantity of inventory purchased will increase warehousing and other costs of inventory. It will also increase the risk of holding obsolete or out-of-fashion inventory. Cutting salespersons’ salaries and making them more dependent on commissions might actually be viewed favorably by the sales staff if they have the potential to increase their total compensation. Reduced store deliveries may anger customers, especially if competitors provide more frequent service. LO 4 BT: S Difficulty: Hard TOT: 45 min. AACSB: Communication and Analytic AICPA FC: Reporting AICPA PC: Interaction, Leadership, and Communication

6-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT6.6

COMMUNICATION ACTIVITY

(a), (b) From: Student’s email address To: President’s email address Subject: Explaining the Revenue Recognition Process President’s title and name: As you know, the financial statements for Surfing Hawaii Co. are prepared in accordance with generally accepted accounting principles. One of these principles is the revenue recognition principle, which provides that revenues should be recognized when the performance obligation is satisfied. Typically, sales revenues are recognized when the goods are transferred from the buyer to the seller. At this point, the sales transaction is completed, and the sales price is established. Thus, in the typical situation, revenue on the surfboard ordered by Aikan is recognized at event No. 8, when Aikan picks up the surfboard. The circumstances pertaining to this sale may seem to you to be atypical because Aikan has ordered a specific kind of surfboard. From an accounting standpoint, this would be true only if you could not reasonably expect to sell this surfboard to another customer. In such case, it would be proper under generally accepted accounting principles to recognize sales revenue when you have completed the surfboard for Aikan. Whether Aikan makes a down payment with the purchase order is irrelevant in recognizing sales revenue because at this time, you have not done anything to earn the revenue. A down payment may be an indication of Aikan’s “good faith.” However, its effect on your financial statements is limited entirely to recognizing the down payment as unearned revenue. If you have further questions about the accounting for this sale, please let me know. Student’s name LO N/A BT: S Difficulty: Medium TOT: 30 min. AACSB: Communication and Analytic AICPA FC: Measurement AICPA PC: Communication Copyright © 2023 John Wiley & Sons, Inc.

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CT6.7

ETHICS CASE

a. The company was unable to make payments that were due on a large credit line from Commerzbank. It was able to avoid filing for “insolvency” by persuading Commerzbank to loan it an additional €8 million and by borrowing against its receivables (commonly referred to as pledging). Investigations showed that the company created fake invoices and delivery receipts using Photoshop as documentation for receivables that did not actually exist in order to increase the amount it received through factoring. b. Precision CastParts, the Berkshire Hathaway subsidiary, first became aware that its acquisition of Wilhelm Schulz might be problematic when it received an email from a Wilhelm Schulz employee which said that some of his co-workers had entered fake customer orders into the system. c. To inflate profits, an employee created a five-day outage of the company’s computer system that was used to track sales and orders. During this time, company employees created almost 50 fake orders worth tens of millions of euros. LO N/A BT: E Difficulty: Hard TOT: 45 min. AACSB: Ethics AICPA FC: Measurement and Reporting AICPA PC: Professional Demeanor and Communication

6-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT6.8

ETHICS CASE

(a)

Tabitha Andes, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue an unethical practice previously performed by him. The unethical practice is taking undeserved cash discounts. Her dilemma is either follow her boss’s unethical instruction or offend her boss and maybe lose the job she just assumed.

(b)

The stakeholders (affected parties) are: Tabitha Andes, the assistant treasurer. Pete Wilson, the treasurer. Southside Stores, the company. Creditors of Southside Stores (suppliers). Mail room employees (those assigned the blame).

(c)

Tabitha’s alternatives: 1. Tell the treasurer (her boss) that she will attempt to take every allowable cash discount by preparing and mailing checks within the discount period—the ethical thing to do. This will offend her boss and may jeopardize her continued employment. 2. Join the team and continue the unethical practice of taking undeserved cash discounts. 3. Go over her boss’s head and take the chance of receiving just and reasonable treatment from an officer superior to Pete. The company may not condone this practice. Tabitha definitely has a choice, but probably not without consequence. To continue the practice is definitely unethical. If Tabitha submits to this request, she may be asked to perform other unethical tasks. If Tabitha stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical things—if she isn’t fired. Maybe nobody has ever challenged Pete’s unethical behavior and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job.

LO 1 BT: E Difficulty: Hard TOT: 45 min. AACSB: Ethics AICPA FC: Measurement and Reporting AICPA PC: Professional Demeanor and Communication

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CT 6.9

ALL ABOUT YOU

In order for revenue to be recognized, the performance obligation must be satisfied. In this case FarWest has an obligation to provide goods with a value to the gift card. That obligation is not fulfilled until one of two things happens: Either the customer redeems the card for goods, or the card expires. Until either of those events occur, FarWest cannot record revenue. LO 2 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement and Reporting

6-40

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CHAPTER 7 Reporting and Analyzing Inventory and Receivables Learning Objectives 1. 2. 3. 4.

Discuss how to classify and determine inventory. Apply inventory cost flow methods and discuss their financial effects. Explain how companies recognize and value receivables. Explain the statement presentation and analysis of inventory.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-1

ANSWERS TO QUESTIONS 1. Agree. Effective inventory management is frequently the key to successful business operations. Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of anticipated sales. LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA PC: Communication

2. Inventory items have two common characteristics: (1) they are owned by the company and (2) they are in a form ready for sale to customers in the ordinary course of business. LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA PC: Communication

3. Just-in-time inventory management is the practice of manufacturing or purchasing inventory “just-intime” to fill a sales order. Since inventory quantities are kept at very low amounts, just-in-time management reduces the costs associated with carrying inventory as well as the risk of obsolescence. LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA PC: Communication

4. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand. Retailers, such as hardware stores, generally have thousands of different items to count. This is normally done when the store is closed. LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA PC: Communication

(a) (1) (2)

The goods will be included in Bonita Company’s inventory if the terms of sale are FOB destination. The goods will be included in Myan Corporation’s inventory if the terms of sale are FOB shipping point.

(b) Bonita Company should include goods that have been consigned to another company and not yet sold in its inventory. Goods held by Bonita Company on consignment should not be included in inventory. LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA PC: Communication

6. Inventoriable costs are $3,015 (invoice cost $3,000 + freight charges $75 − cash discount $60). The cost of inventory includes all expenditures necessary to acquire goods and place them in a condition ready for sale. This means that incoming freight charges are included in the inventoriable cost. LO 1 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement , Reporting

7. The primary basis of accounting for inventories is cost in accordance with the historical cost principle. LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA PC: Communication

8. Actual physical flow may be impractical because many items are indistinguishable from one another. Actual physical flow may be inappropriate because management may be able to manipulate net income through specific identification of items sold. LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication

7-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 7 (Continued) 9. The major advantage of the specific identification method is that it tracks the actual physical flow of the goods available for sale. The major disadvantage is that management could manipulate net income. LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication

10. This statement is false. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be consistently applied. LO 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication

11. (a) FIFO, (b) Average-cost, (c) LIFO. LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication

12.

Short Company is using the FIFO method of inventory costing, and King Company is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the balance sheet should be close to current costs. The reverse is true of the LIFO method. Short Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs.

LO 2 BT: C Difficulty: Medium TOT: 2 min. AACSB: None AICPA FC: Measurement , Reporting AICPA PC: Communication

13. Mamosa Corporation may experience severe cash shortages if this policy continues. All of its net income is being paid out as dividends, yet some of the earnings must be reinvested in inventory to maintain inventory levels. Some earnings must be reinvested because net income is computed with cost of goods sold based on older, lower costs while the inventory must be replaced at current, higher costs. Because of this factor, net income under FIFO is sometimes referred to as including “phantom profits.” In addition, Mamosa is also depleting cash more quickly under FIFO because FIFO results in higher income tax payments. LO 2 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting AICPA PC: Communication

14. Oscar is partially correct. In a period of inflation, FIFO produces higher net income because the lower unit costs of the first units purchased is matched against revenues. A switch from LIFO to FIFO will thus produce higher net income and a larger bonus for Oscar, which he perceives as being “better off”. It is more difficult to determine if the company would be “better off” if it used FIFO instead of LIFO. Using FIFO would mean higher reported income and higher inventory values which investors usually interpret as “better” results. On the other hand, the higher net income reported with FIFO would mean higher bonus and income tax expenses. Since both of these items require cash, switching to FIFO may leave the company with an inadequate amount of cash to meet normal operating needs. LO 2 BT: C Difficulty: Hard TOT: 4 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication

15. When prices are increasing, LIFO results in higher cost of goods sold, and lower income relative to FIFO. Because LIFO income is lower the company pays lower taxes, which results in higher cash flows. The quality of earnings ratio is net cash provided by operating activities divided by income. The use of LIFO will increase the numerator (net cash provided by operating activities) and decrease the denominator (net income), both of which increase the value of the ratio. LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication Copyright © 2022 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-3

Questions Chapter 7 (Continued) 16.

Accounts receivable are amounts customers owe on account. They result from the sale of goods and services (i.e., in trade). Notes receivable represent claims that are evidenced by formal instruments of credit. A note receivable normally requires the collection of interest and an account receivable does not.

LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

17.

Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

18.

The essential features of the allowance method of accounting for bad debts are: (1) Uncollectible accounts receivable are estimated and matched against revenues in the same accounting period in which the revenues are recorded. (2) Estimated uncollectibles increase Bad Debt Expense and increase Allowance for Doubtful Accounts through an adjustment at the end of each period. (3) Actual uncollectibles decrease Allowance for Doubtful Accounts and decrease Accounts Receivable at the time the specific account is written off as uncollectible.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

19.

Lance should realize that the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjustment. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change.

LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

20.

The adjustment will consist of an increase to Bad Debt Expense for $2,900 ($5,100 − $2,200) and an increase to Allowance for Doubtful Accounts.

LO 3 BT: AP Difficulty: Medium TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

21.

Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. When an account is determined to be uncollectible, the loss increases Bad Debt Expense and decreases Accounts Receivable. The direct write-off method makes no attempt to match bad debt expense to revenues or to show the cash realizable value of the receivables in the balance sheet.

LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

22.

An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory outages may also cause customer ill will and result in lost future sales.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA PC: Communication

7-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7.1 (a) Ownership of the goods belongs to the owner (Peete). Thus, these goods should be included in Peete’s inventory. (b) The goods in transit should not be included in the inventory count because ownership by Peete does not occur until the goods reach the buyer. (c) The goods in transit should not be included in the inventory count because ownership transferred to the buyer when the goods left Peete’s place of business. (d) Ownership of these goods rests with the other company (the owner). Thus, these goods should not be included in the physical inventory. LO 1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 7.2 Physical inventory Add: Goods purchased from Pelzer Goods sold to Alvarez Stallman ending Inventory

$200,000 25,000 22,000 $247,000

The goods purchased from Pelzer of $25,000 are included in ending inventory because the terms are F.O.B. shipping point which means Stallman takes title at the time the goods are shipped. Goods sold to Alvarez. F.O.B. destination means that the goods are still Stallman’s until delivered. LO 1 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement , Reporting

BRIEF EXERCISE 7.3 (a) The ending inventory under FIFO consists of 200 units at $9 for a total allocation of $1,800. (b) The ending inventory under LIFO consists of 200 units at $6 for a total allocation of $1,200. LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Reporting Copyright © 2022 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-5

BRIEF EXERCISE 7.4 Average unit cost is $8.00 computed as follows: 300 400 600 1,300

× × ×

$6 $8 $9

= $1,800 = 3,200 = 5,400 $10,400

$10,400 ÷ 1,300 = $8.00 The cost of the ending inventory is $1,600 (200 x $8.00). LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement, Reporting

BRIEF EXERCISE 7.5 FIFO Beginning inventory (10 × $11) ................................. Purchases May 5 (30 × $16) .................................................. Jul. 16 (15 × $19) ................................................. Dec. 7 (20 × $23) ................................................. Cost of goods available for sale ............................... Less: Ending inventory (20 × $23) + (5 × $19) ......... Cost of goods sold .....................................................

$ 110 $480 285 460

LIFO Cost of goods available for sale ............................... Less: Ending inventory (10 × $11) + (15 × $16) ........ Cost of goods sold .....................................................

1,225 1,335 555 $780

$1,335 350 $985

AVERAGE-COST $1,335 ÷ 75 = $17.80 weighted-average unit cost Cost of goods available for sale ................................ Less: Ending inventory (25 × $17.80) ........................ Cost of goods sold .....................................................

$1,335 445 $890

LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 7.6 (a) FIFO would result in the highest net income. (b) FIFO would result in the highest ending inventory. (c) LIFO would result in the lowest income tax expense (because it would result in the lowest taxable income). (d) Average cost would result in the most stable income over a number of years because it averages out any big changes in the cost of inventory. LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement, Reporting

BRIEF EXERCISE 7.7 Cost of goods sold under: Purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold *(100 × $6) + (80 × $7)

LIFO $6 × 100 $7 × 200 $8 × 140 $ 3,120 1,160* $ 1,960

FIFO $6 × 100 $7 × 200 $8 × 140 $ 3,120 1,400** $ 1,720

**(140 × $8) + (40 × $7)

Since the cost of goods sold is $240 ($1,960 – $1,720) less under FIFO that is the amount of the phantom profit. It is referred to as “phantom profit” because FIFO matches current selling prices with old inventory costs. To replace the units sold the company will have to pay the current price of $8 per unit, rather than the $6 per unit which some of the units were priced at under FIFO. Therefore, profit under LIFO is more representative of what the company can expect to earn in future periods. LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-7

BRIEF EXERCISE 7.8 (a) LIFO results in a higher quality of earnings ratio. (b) FIFO results in higher phantom profits. (c) FIFO results in higher net income. (d) LIFO results in lower taxes. (e) FIFO results in lower net cash provided by operating activities. LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement, Reporting

BRIEF EXERCISE 7.9 (a) Other receivables. (b) Notes receivable. (c) Accounts receivable. LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 7.10 Assets = Liabilities + Stockholders' Equity Accts. Common Retained Earnings Cash + Rec. = + Stock + Rev. - Exp. (a) Jul. 1 +$23,000 +$23,000 Sales revenue (b) 8 -2,400 -2,400 Sales returns & allowances (c ) 11 +$20,600 -20,600

(Cash received = Sales − Sales rtns. & allow.) ($23,000 − $2,400) LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

7-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 7.11 (a)

Beg. Bal. Adj. Bal.

Assets = Liabilities Allow. For Accts. Doubtful Rec. Accts = $700,000 -$25,000 -4,300 4,300 695,700 -20,700

(b) Accounts receivable Less: Allowance for doubtful accounts Cash realizable value

Stockholders' Equity

Common Retained Earnings + Stock + Rev. Exp.

(1) Before Write-Off $700,000

(2) After Write-Off $695,700

25,000 $675,000

20,700 $675,000

LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 7.12 Inventory turnover:

Days in inventory:

$349,114 $349,114 = = 2.54 times ($119,035+ $155,377) ÷ 2 $137,206

365 =144 days 2.54

LO 4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-9

SOLUTIONS TO DO IT! EXERCISES DO IT! 7.1 Inventory per physical count .................................................. Inventory out on consignment ............................................... Inventory sold, in transit at year-end ..................................... Inventory purchases, in transit at year-end ........................... Correct December 31 inventory .............................................

$300,000 28,000 0 13,000 $341,000

LO 1 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement, Reporting

DO IT! 7.2 Cost of goods available for sale = (3,000 × $5) + (7,000 × $7) = $64,000 Ending inventory = 3,000 + 7,000 – 8,400 = 1,600 units (a) FIFO: $64,000 – (1,600 × $7) = $52,800 (b) LIFO: $64,000 – (1,600 × $5) = $56,000 (c) Average-cost: $64,000/10,000 = $6.40 per unit 8,400 x $6.40 = $53,760 LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Measurement, Reporting

DO IT! 7.3 Assets

= Liabilities +

Stockholders' Equity

Allow. For Accts. Rec. Beg. Bal. $310,000 Adj.

Doubtful -

Accts.

Common =

-$5,700 -16,000

Stock

Retained Earnings +

Rev.

Exp.

$2,200,000 -$16,000 Bad debt expense

[Bad debt exp. = (Accts. rec. x Uncoll. percent.) − Unadj. bal in allow. for dbtful. accts.] [($310,000 × .07) − $5,700] LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

7-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

DO IT! 7.4 2026 Inventory turnover Days in inventory

2027

$1,200,000 $1,425,000 = 6.3 = 9.5 ($170,000 + $210,000)/2 ($210,000 + $90,000)/2 365 ÷ 6.3 = 57.9 days

365 ÷ 9.5 = 38.4 days

The company experienced a very significant decline in its ending inventory as a result of the just-in-time inventory. This decline improved its inventory turnover ratio and its days in inventory. Also, its sales increased by 19%. It is possible that this increase is the result of a more focused inventory policy. It appears that this change is a win-win situation for Fedor Company. LO 4 BT: AN Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-11

SOLUTIONS TO EXERCISES EXERCISE 7.1 Ending inventory⎯physical count ................................................ $275,000 1. No effect−title passes to purchaser upon shipment when terms are FOB shipping point............................... 0 2. No effect−title does not transfer to Pohl until goods are received .......................................................... 0 3. Add to inventory: Title passed to Pohl when goods were shipped ........................................................ 25,000 4. Add to inventory: Title remains with Pohl until purchaser receives goods .............................................. 51,000 5. Subtract from inventory: The goods did not arrive prior to year-end. The goods, therefore, cannot be included in the inventory .................................................................... (42,000) Correct inventory ........................................................................... $309,000 (Legal title determines if an item should be included in inventory) LO 1 BT: AN Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 7.2 Ending inventory as reported...................................................... 1.

7-12

$740,000

Subtract from inventory: The goods belong to Nader Corporation. Ryder is merely holding them on consignment. ...........................................

(228,000)

Add to inventory: The goods belong to Ryder as soon as they are shipped (December 28). ...................................................................

40,000

Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale. ........................

(17,000)

Add to inventory: The goods belong to Ryder until they are shipped (Jan. 1)............................................

29,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 7.2 (Continued) 5.

Subtract from inventory: GAAP requires that inventory be valued at the lower of cost or net realizable value. Obsolete parts should be adjusted from cost to zero if they have no other use. ....................

(50,000)

Correct inventory .........................................................................

$514,000

(Legal title determines if an item should be included in inventory) LO 1 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 7.3 (a) Do not include—Gato does not own items held on consignment. (b) Include in inventory—Gato still owns the items as they were only shipped on consignment. (c) Include in inventory—Shipping terms FOB destination means that Gato owns the items until they reach the customer. (d) Do not include in inventory—Because the shipping terms are FOB shipping point, ownership has transferred to the customer. Gato should record this amount as a sale on the income statement. (e) Do not include in inventory—Because the shipping terms are FOB destination, Gato does not own the goods until they arrive at Gato’s premises. (f) Include in inventory—Shipping terms FOB shipping point means that ownership transferred at the time of shipping and therefore, Gato owns the goods in transit. (g) Do not include in inventory. Record as Supplies on the balance sheet. LO 1 BT: C Difficulty: Medium TOT: 8 min. AACSB: None AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-13

EXERCISE 7.4 (a)

Ending inventory—physical count ................................ 1. The goods did not arrive prior to year-end. The goods, therefore, cannot be included in the inventory ............ 2. No effect—title passes to purchaser upon shipment when terms are FOB shipping point ............................. 3. No effect—title does not transfer to Bean until goods are received ......................................................... 4. Add to inventory: Title passed to Bean when goods were shipped................................................................... 5. Add to inventory: Title remains with Bean until purchaser receives goods ............................................. Correct inventory ............................................................

$326,000

Inventory………………………………………………………. Accounts Payable………………………………………….. 27,000

27,000

(49,000) 0 0 27,000 38,000 $342,000

(b)

LO 1 BT: AN Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 7.5 (a) There are 25 units (127 units available – 102 units sold) in ending inventory. FIFO Ending inventory (20 × $105) + (5 × $104)

$2,620

LIFO Ending inventory (12 × $100) + (13 × $103)

$2,539

AVERAGE-COST $13,135 ÷ 127 = $103.425 weighted-average unit cost Ending inventory (25 × $103.425)

7-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

$2,586

(For Instructor Use Only)

EXERCISE 7.5 (Continued) (b) FIFO Beginning inventory (12 × $100) .................................. Purchases Sept. 12 (45 × $103) ................................................ Sept. 19 (50 × $104) ................................................ Sept. 26 (20 × $105) ................................................ Cost of goods available for sale................................... Less: Ending inventory (20 × $105) + (5 × $104) ....... Cost of goods sold ........................................................

$ 1,200 $4,635 5,200 2,100

11,935 13,135 2,620 $10,515

LIFO Cost of goods available for sale........................................... Less: Ending inventory (12 × $100) + (13 × $103) ............ Cost of goods sold ................................................................

$13,135 2,539 $10,596

AVERAGE-COST Cost of goods available for sale........................................... Less: Ending inventory (25 × $103.425) .............................. Cost of goods sold ...............................................................

$13,135 2,586 $10,549

LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-15

EXERCISE 7.6 (a) Units in ending inventory = 100 units available – 74 units sold = 26 units FIFO Ending inventory (26 x $13)…………………………………..

$338

(b) LIFO Ending inventory (26 × $8) ..........................................................

$208

(c) AVERAGE-COST $1,100 ÷ 100 = $11.00 weighted-average unit cost Ending inventory (26 × $11.00) .....................................................

286

LO 2 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 7.7 (a) FIFO Cost of Goods Sold (#1012) $52 + (#1045) $48 = $100 (b) It could choose to sell specific units purchased at specific costs if it wished to impact earnings selectively. If it wished to minimize earnings it would choose to sell the units purchased at higher costs–in which case the Cost of Goods Sold would be $100. If it wished to maximize earnings it would choose to sell the units purchased at lower costs–in which case the cost of goods sold would be $88 ($40 + $48). (c) The FIFO method provides a more appropriate balance sheet valuation and reduces the opportunity to manipulate earnings. (The answer may vary depending on the method the student chooses.) LO 2 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-17

EXERCISE 7.8 (a)

(1) FIFO Beginning inventory (100 × $4) ................................. Purchases June 12 (400 × $6) ............................................... June 23 (250 ×$8) ................................................ Cost of goods available for sale................................ Less: Ending inventory (230 × $8)........................... Cost of goods sold .....................................................

$ 400 $2,400 2,000

4,400 4,800 1,840 $2,960

(2) LIFO Cost of goods available for sale................................ Less: Ending inventory (100 × $4) + (130 × $6) ...... Cost of goods sold .....................................................

$4,800 1,180 $3,620

(3) AVERAGE-COST Cost of Goods Total Units Weighted-Average Available for Sale ÷ Available for Sale = Unit Cost $4,800 750 $6.40 Ending inventory (230 × $6.40) $1,472 Cost of goods sold (520 × $6.40) $3,328 or $4,800 – $1,472 = $3,328 (b) The FIFO method will produce the highest ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. The LIFO method will produce the highest cost of goods sold for Jeters Company. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory. (c) The average-cost ending inventory ($1,472) is higher than LIFO ($1,180) but lower than FIFO ($1,840). For cost of goods sold, average cost ($3,328) is higher than FIFO ($2,960) but lower than LIFO ($3,620). (d) The simple average would be [($4 + $6 + $8)/3] = $6. However, the average cost method uses a weighted average unit cost, not a simple average of unit costs. LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 7.9 (a) Sales ...................................................................... Cost of goods sold ............................................... Operating expenses (including depreciation) .... Income before income taxes ............................... Income tax expense (30%) ................................... Net income ............................................................ (b) Sales ...................................................................... Less: Cash paid for inventory purchases .......... Cash paid for operating expenses ($27,000 – $10,000) ................................. Cash paid for income tax.......................... Net cash provided by operating activities ..........

LIFO $86,000 38,000 27,000 21,000 6,300 $14,700

FIFO $86,000 29,000 27,000 30,000 9,000 $21,000

LIFO $86,000 32,000

FIFO $86,000 32,000

17,000 6,300 $30,700

17,000 9,000 $28,000

LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-19

EXERCISE 7.10 Assets

Cash Beg. Bal. (a) +$763,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

(b) (c) (d)Adj. Bal. (e )

Liabilities

Allow. For Accts. Doubtful Rec. Accts. = $200,000 -$9,000 +800,000 -763,000 -7,300 +7,300 _______ -23,300 229,700 -25,000

Stockholders' Equity Common Stock

Accounts receivable Less: Allowance for doubtful accounts Net realizable value

Retained Earnings Rev. Exp. +$800,000

-$23,300 Bad debt expense

$229,700 25,000 $204,700

(Bad debt exp. = Est. uncoll. amt. − Unadj. bal. in allow. for dbtful. Accts.) [Bad debt exp. = $25,000 - ($9,000 − $7,300)]

LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

(For Instructor Use Only)

7-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

Sales revenue

(For Instructor Use Only)

EXERCISE 7.11 (a) $900, the amount of the account written off. (b) $6,700 Bad Debt Expense takes into account any existing balance in the allowance account. [(Accts. rec. × Est. uncoll. percent.) – Unadj. bal. in allow. for dbtfl. accts.] [($78,000 × 10%) − $1,100] LO 3 BT: AN Difficulty: Medium TOT: 5min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 7.12 (a)

Accounts Receivable Current 1–30 days past due 31–90 days past due Over 90 days past due

Amount $65,000 12,900 10,100 7,400

% 2 5 30 50

Estimated Uncollectible $1,300 645 3,030 3,700 $8,675

(b) $6,575 ($8,675 – $2,100) Bad Debt Expense takes into account any existing balance in the allowance account) (Est. uncoll. amt. − Unadj. bal. in allow. for dbtfl. accts.) ($8,675 − $2,100)

(c) The total balance of receivables increased from 2026 to 2027. However, of concern is the fact that each of the three categories of older accounts increased substantially during 2027. That is, customers are taking longer to pay and bad debts are likely to increase. Management needs to investigate the causes of this change. LO 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-21

EXERCISE 7.13 2025

2026

2027

$18,038

$20,351

$20,099

($1,926 + $2,290) ÷ 2

($2,290 + $2,522) ÷ 2

($2,522 + $2,618) ÷ 2

$20,351

$20,099

(a) Inventory turnover

$18,038

= 8.6 times

$2,108

(b) Days in inventory (c) Gross profit rate

365

= 42.4 days

= 8.5 times

$2,406

$2,570

365

= 42.9 days

$39,474 – $18,038 = 54.3% $39,474

$43,251 – $20,351 = 52.9% $43,251

= 46.8 days

7.8

8.5

8.6

= 7.8 times

$43,232 – $20,099 = 53.5% $43,232

(d) The inventory turnover decreased by approximately 10% from 2025 to 2027 while the days in inventory increased by a similar amount (10%) over the same time period. Both of these changes would be considered unfavorable since it’s better to have a higher inventory turnover with a corresponding lower days in inventory. PepsiCo., Inc.’s gross profit rate decreased by 1.5% from 2025 to 2027. LO 4 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

7-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 7.14 (a) Inventory Turnover (2027):

Days in Inventory (2027):

$1,552,000 = 2.8 times ($553,000 + $568,000) ÷ 2

365 2.8

= 130 days

Gross Profit Rate (2027):

($1,948,000 − $1,552,000) = 20.3% $1,948,000

Inventory Turnover (2026):

$1,288,000 = 2.9 times ($568,000 + $332,000) ÷ 2

365

= 126 days

Days in Inventory (2026):

2.9

Gross Profit Rate (2026):

$1,725,000-$1,288,000 = 25.3% $1,725,000

(b) In 2027, Zoe’s Activewear experienced a deterioration in liquidity and profitability. The liquidity has been deteriorated due to the increase in time required to turn over its inventory, from 126 days to 130 days. The company has experienced deteriorated profitability due to a significant drop in its gross profit rate from 25.3% to 20.3%. LO 4 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-23

SOLUTIONS TO PROBLEMS PROBLEM 7.1

Note: Legal title determines if an item should be included in inventory. (a) The goods should not be included in inventory as they were shipped FOB shipping point and shipped February 26. Title to the goods transfers to the customer February 26. Pitt should have recorded the transaction in the Sales Revenue and Accounts Receivable accounts at the sales price. (b) The amount should not be included in inventory as they were shipped FOB destination and not received until March 2. The seller still owns the inventory. No entry is recorded. (c) Include $500 in inventory. (d) Include $400 in inventory. (e) $750 should be included in inventory as the goods were shipped FOB shipping point. (f)

The sale will be recorded on March 2. The goods should be included in inventory at the end of February at their cost of $280.

(g) The damaged goods should not be included in inventory. They should be recorded in a loss account since they are not saleable. LO 1 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 7.2

(a) COST OF GOODS AVAILABLE FOR SALE Date March 1 5 13 21 26

Explanation Units Beginning inventory 2,500 Purchase 3,000 Purchase 3,500 Purchase 5,000 Purchase 2,000 Total 16,000

Unit Cost $ 6 7 8 9 10

Total Cost $ 15,000 21,000 28,000 45,000 20,000 $129,000

(b) FIFO (1)

Ending Inventory Unit Total Date Units Cost Cost March 26 2,000 $10 $20,000 21 2,000 9 18,000 4,000* $38,000

(2) Cost of Goods Sold Cost of goods available for sale $129,000 Less: Ending inventory 38,000 Cost of goods sold $ 91,000

*16,000 – 12,000 = 4,000 Proof of Cost of Goods Sold Unit Total Date Units Cost Cost March 1 2,500 $6 $15,000 5 3,000 7 21,000 13 3,500 8 28,000 21 3,000 9 27,000 12,000 $91,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-25

PROBLEM 7.2 (Continued) LIFO (1)

Ending Inventory Unit Total Date Units Cost Cost March 1 2,500 $6 $15,000 5 1,500 7 10,500 4,000 $25,500

(2) Cost of Goods Sold Cost of goods available for sale $129,000 Less: Ending inventory 25,500 Cost of goods sold $103,500

Proof of Cost of Goods Sold Unit Total Date Units Cost Cost March 26 2,000 $ 10 $ 20,000 21 5,000 9 45,000 13 3,500 8 28,000 5 1,500 7 10,500 12,000 $103,500 AVERAGE-COST (1)

Ending Inventory

$129,000 ÷ 16,000 = $8.06 Units 4,000

Unit Cost $8.06

Total Cost $32,240

(2) Cost of Goods Sold Cost of goods available for sale $129,000 Less: Ending inventory 32,240 Cost of goods sold $ 96,760

(c) (1) As shown in (b), FIFO produces the highest inventory amount, $38,000. (2) As shown in (b), LIFO produces the highest cost of goods sold, $103,500. LO 2 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 7.3

(a)

COST OF GOODS AVAILABLE FOR SALE Date

Explanation

Units

Unit Cost

Jan. 1 Feb. 20 May 5 Aug. 12 Dec. 8

Beginning inventory Purchase Purchase Purchase Purchase Total

100 600 500 400 200 1,800

$ 7 8 9 10 11

Total Cost $

700 4,800 4,500 4,000 2,200 $16,200

(b) FIFO (1) Date Dec. 8 Aug. 12

Ending Inventory Unit Units Cost 200 100 300*

$11 10

Total Cost

(2) Cost of Goods Sold Cost of goods available for sale $16,200

$2,200 1,000 $3,200

Less: Ending inventory Cost of goods sold

3,200 $13,000

*1,800 – 1,500 = 300 Proof of Cost of Goods Sold Unit Total Date Units Cost Cost Jan. 1 Feb. 20 May 5 Aug. 12

100 600 500 300 1,500

$ 7 8 9 10

700 4,800 4,500 3,000 $13,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-27

PROBLEM 7.3 (Continued) LIFO (1) Date Jan. 1 Feb. 20

Ending Inventory Unit Units Cost 100 200 300

$7 8

Total Cost

(2) Cost of Goods Sold Cost of goods available for sale $16,200

$ 700 1,600 $2,300

Less: Ending inventory Cost of goods sold

2,300 $13,900

Proof of Cost of Goods Sold Unit Total Date Units Cost Cost Dec. 8 Aug. 12 May 5 Feb. 20

200 400 500 400 1,500

$11 10 9 8

$ 2,200 4,000 4,500 3,200 $13,900

AVERAGE-COST (1) Ending Inventory (2) Cost of Goods Sold Cost of goods $16,200 ÷ 1,800 = $9 available for sale $16,200 Less: Ending Unit Total inventory 2,700 Units Cost Cost Cost of goods sold $13,500 300 $9 $2,700 (c) LIFO results in the lowest inventory amount for the balance sheet, $2,300. FIFO results in the lowest cost of goods sold for the income statement $13,000. LO 2 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 7.4

(a)

NATIONAL, INC. Condensed Income Statements For the Year Ended December 31, 2027 Sales..................................................................... Cost of goods sold Beginning inventory .................................... Cost of goods purchased ........................... Cost of goods available for sale ................. Less: Ending inventory .............................. Cost of goods sold ...................................... Gross profit.......................................................... Operating expenses ............................................ Income before income taxes .............................. Income tax expense (28%) .................................. Net income ........................................................... a

FIFO LIFO $750,000 $750,000 35,000 35,000 468,500 468,500 503,500 503,500 132,300a 116,400b 371,200 387,100 378,800 362,900 124,000 124,000 254,800 238,900 71,344 66,892 $183,456 $172,008

(25,000 @ $4.20) + (7,000 @ $3.90) = $132,300. (10,000 @ $3.50) + (22,000 @ $3.70) = $116,400.

(b) Answers to questions: (1) The FIFO method produces the inventory amount that most closely approximates the amount that would have to be paid to replace the inventory because the units are costed at the most recent purchases cost. (2) The LIFO method produces the net income amount that is a more likely indicator of next period’s net income because the costs of the most recent purchases are matched against sales. (3) The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-29

PROBLEM 7.4 (Continued) (4) There will be $4,452 additional cash available under LIFO because income taxes are $66,892 under LIFO and $71,344 under FIFO. (5) The phantom gross profit is $15,900 ($378,800 – $362,900) under FIFO. Under LIFO, National Inc. has recovered the current replacement cost of the units ($387,100), whereas under FIFO, it has only recovered the earlier costs ($371,200). This means that under FIFO, the company must reinvest $15,900 of the gross profit to replace the units sold. Answer in business-letter form: Dear National Inc. After preparing the comparative condensed income statements for 2027 under the FIFO and LIFO methods, we have found the following: The FIFO method produces the most meaningful inventory amount for the balance sheet because the units are costed at the most recent purchases. This method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. The LIFO method produces the most meaningful net income because the costs of the most recent purchases are matched against sales. There will be $4,452 additional cash available under LIFO because income taxes are $66,892 under LIFO and $71,344 under FIFO. There exists a phantom gross profit of $15,900 ($378,800 – $362,900) under FIFO. Under LIFO, you have recovered the current replacement cost of the units ($387,100) whereas under FIFO you have only recovered the earlier costs ($371,200). This means that under FIFO, the company must reinvest $15,900 of the gross profit to replace the units used. Sincerely, LO 2 BT: AN Difficulty: Medium TOT: 35 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 7.5

(a) (1) To maximize gross profit, Jewels Gems should sell the diamonds with the lowest cost. Sale Date March 5 March 25

Cost of goods sold 150 @ $310 $ 46,500 30 @ $350 10,500 170 @ $350 59,500 220 @ $375 82,500 570 $199,000

Sales Revenue 180 @ $600 $108,000 390 @ $650 570

253,500 $361,500

Gross profit $361,500 – $199,000 = $162,500 (2) To minimize gross profit, Jewels Gems should sell the diamonds with the highest cost. Sale Date March 5 March 25

Cost of goods sold 180 @ $350 $ 63,000 330 @ $375 123,750 20 @ $350 7,000 40 @ $310 12,400 570 $206,150

Sales Revenue 180 @ $600 $108,000 390 @ $650 253,500 570 $361,500

Gross profit: $361,500 – $206,150 = $155,350 (b) FIFO Cost of goods available for sale March 1 3 10

Beginning inventory Purchase Purchase

Goods available for sale Units sold Ending inventory

150 @ $310 200 @ $350 330 @ $375 680

$ 46,500 70,000 123,750 $240,250

680 570 110 @ $375

$41,250

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-31

PROBLEM 7.5 (Continued) Cost of goods available for sale – Ending inventory Cost of goods sold Gross profit:

$240,250 41,250 $199,000

$361,500 – $199,000 = $162,500.

$240,250 34,100 $206,150

$361,500 – $206,150 = $155,350.

(d) The choice of inventory method depends on the company’s objectives. Since the diamonds are marked and coded, the company could use specific identification. This could, however, result in “earnings management” by the company because, as shown, it could carefully choose which diamonds to sell to result in the maximum or minimum income. Employing a cost flow assumption, such as LIFO or FIFO, would reduce record-keeping costs; FIFO would result in higher income, but LIFO would reduce income taxes and provide better matching of current sales revenue with current costs. LO 2 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Assets

Liabilities

Stockholders' Equity

Allow. For Accts. Cash

(a) Beg. Bal. (b)

Doubtful

Rec.

$600,000

Accts.

Common =

Stock

Retained Earnings +

Rev. +$2,500,000

−50,000

$2,200,000

−2,200,000 −41,000

(c ) Adj. Bal.

Sales revenue Sales returns & allowances

809,000

+41,000 −50,000

−$50,000

−46,000

(Bad debt exp. = Est. uncoll. amt. + Unadj. bal. in allow. for dbtfl. accts.) [Bad debt exp. = ($41,000 − $37,000) + $46,000] (d)

SUISSE IMPORTS Balance Sheet (Partial)

(For Instructor Use Only)

Assets Current Assets: Accounts receivable Less: Allowance for Doubtful Accounts

$809,000 46,000

$763,000

LO 3 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Bad debt expense

PROBLEM 7.6

Kimmel, Survey of Accounting, 3e, Solutions Manual

+2,500,000

Exp.

−$37,000

−

7-33

PROBLEM 7.7

(a) Bad debt expense at December 31, 2026 is $34,400 ($42,400 − $8,000) Cash realizable value of accounts receivable at December 31, 2026: Accounts receivable Less: Allowance for doubtful accounts

$262,000 42,400 $219,600

(Bad debt exp. = Tot. est. bad debts – Unadj. bal. in allow. for dbtfl. accts.) ($42,400 – $8,000)

(b) Cash realizable value of accounts receivable after $600 write-off (January 5, 2027): Accounts receivable Less: Allowance for doubtful accounts

$261,400 ($262,000 - $600) 41,800 ($42,400 - $600) $219,600

(Cash real. value = Bal. of accts. rec. − Bal. of allow. for dbtfl. accts.) [($262,000 − $600) − ($42,400 − $600)] LO 3 BT: AP Difficulty: Easy TOT: 10 min AACSB: Analytic AICPA FC: Reporting

7-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 7.8

(a) $37,000. (b) $30,600 [($840,000 × 4%) – $3,000]. [(Accts. rec. × est. uncoll. percent.) – Unadj. bal. in allow. for dbtfl. accts.] (c) There are two major weaknesses with the direct write-off method. First, it does not match expenses with revenues. Second, the accounts receivable are not stated at cash realizable value at the balance sheet date. LO 3 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-35

PROBLEM 7.9

(a) $8,700 ($10,200 − $1,500) (Tot. est. uncoll. amt. − Unadj. bal. in allow. for doubtful accts.) ($10,200 − $1,500)

(b) $0

The write-off decreases Accounts Receivable and Allowance for Doubtful Accounts.

The advantages of the allowance method over the direct write-off method are: 1.

It attempts to match bad debts expense related to uncollectible accounts receivable with sales revenues on the income statement.

It attempts to show the cash realizable value of the accounts receivable on the balance sheet.

LO 3 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

7-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 7.10

(a) Inventory turnover

$166,259 ($13,921+ $14,939) ÷ 2

$166,259 = 11.5 times $14,430 Days in inventory (b) Current ratio

365 = 31.7 days 11.5

$60,135 = .86:1 $70,308

LO 4 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-37

ACR7

ACCOUNTING CYCLE REVIEW SOLUTION = Liabilities + Stockholders’ Equity Accum Income Sal. & Accts. Depr. Accts. Taxes Wages Com. Cash + Rec. + Inventory + Equip. - Equip. = Pay. + Pay. + Pay. + Stock + Retained Earnings Assets

12/1/Bal. $4,800

$3,900

$1,800

$21,000 -$1,500

$3,000

$10,000

$17,000 + Rev. -

Kimmel, Survey of Accounting, 3e, Solutions Manual

Dec. 3 5

+2,880 +3,960

-180

+3,960 -2,808

Sales revenue Cost of goods sold

+144

Sales rtns. & allow. Cost of goods sold

-180 +144 +1,760

+1,900 ____ 9,580

-1,440 2,336

- Div.

+2,880

-2,808

17 -1,760 22 ____ Unadj. 3,040 Bal.

Exp.

_____ 21,000

____ -1,500

____ 5,880

_____ 10,000

+1,900 ____ 5,680

-1,440 -4,104

Sales revenue Cost of goods sold

Adj. (A1)

(For Instructor Use Only)

(A2) (A3) ____ Adj. Bal. $3,040

7-38

____ $9,580

____ $2,336

-200 _____ ____ $21,000 -$1,700

____ $5,880

+$215 $215

Kimmel, Survey of Accounting, 3e, Solutions Manual

+$400

-400

___ $400

-200 -215 -$4,919

______ $10,000

____ $5,680

(For Instructor Use Only)

Salaries & wages payable Depreciation expense Income tax expense

ACR7 (Continued) a. (5)

WAYLON COMPANY Income Statement For the Month Ended December 31, 2027

Sales Sales revenue ........................................ Less: Sales returns & allowances ........ Net sales ................................................

$ 5,860 180

Cost of goods sold Beginning inventory .............................. Purchases Cost of goods available for sale ........... Less: Ending inventory Cost of goods sold ................................ Gross profit ................................................... Operating expenses Salaries and wages expense ................ Depreciation expense ........................... Income before income taxes ........................ Income tax expense ...................................... Net income ....................................................

$5,680 1,800 4,640 6,440 2,336 4,104 1,576 400 200

600 976 215 $761

WAYLON COMPANY Retained Earnings Statement For the Month Ended December 31, 2027 Retained earnings, December 1 ................... Add: Net income ........................................... Retained earnings, December 31 .................

Kimmel, Survey of Accounting, 3e, Solutions Manual

$17,000 761 $17,761

(For Instructor Use Only)

7-39

ACR7 (Continued) a. (5)

WAYLON COMPANY Balance Sheet December 31, 2027 Assets

Current assets Cash........................................................ Accounts receivable .............................. Inventory ................................................ Total current assets ......................... Property, plant, and equipment Equipment .............................................. Less: Accumulated depreciation— Equipment .................................. Total assets ...................................................

$ 3,040 9,580 2,336 $14,956 21,000 1,700

19,300 $34,256

Liabilities and Stockholders’ Equity Current liabilities Accounts payable .................................. Salaries and wages payable ................. Income taxes payable ............................ Total current liabilities .....................

$ 5,880 400 215

Stockholders’ equity Common stock ....................................... Retained earnings.................................. Total stockholders’ equity ............... Total liabilities and stockholders’ equity ....

10,000 17,761

$ 6,495

27,761 $34,256

[((Cash + Accts. rec. + Inv.) + (Equip. – Accum. depr.-equip.)) = ((Accts. pay. + Sal. & wages pay. + Inc. tax.) + (Common stk. + Ret. earn.))] [(($3,040 + $9,580 + $2,336) + ($21,000 - $1,700)) = (($5,880 + $400 + $215) + ($10,000 + $17,761))]

7-40

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ACR7 (Continued) b.

FIFO Method Units 3,000 4,000 2,200 9,200

Beg. Inventory Dec. 3 purchase Dec. 17 purchase

Cost of Goods Available for Sales $1,800 2,880 1,760 $6,440

Unit Cost $0.60 $0.72 $0.80

Ending Inventory

Cost of Goods Sold

Dec. 17 2,200 × $0.80 = $1,760 Dec. 3 800* × $0.72 = 576 3,000 $2,336

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$6,440 2,336 $4,104

*(9,200 – 4,400 + 200 – 2,000) – 2,200

LIFO Method Ending Inventory

Cost of Goods Sold

Dec. 1

Cost of goods available for sale Less: Ending inventory Cost of goods sold

3,000 × $0.60 = $1,800

$6,440 1,800 $4,640

LO 2 BT: AP Difficulty: Hard TOT: 120 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-41

CT7.1

FINANCIAL REPORTING PROBLEM

(Note: All dollar amounts are in millions) (a) Inventories were $4,061 at September 26, 2020, and $4,106 at September 28, 2019. (b) Inventories decreased $45 ($4,106 - $4,061) in 2020. Using 2019 as the base year, the decrease was approximately 1.1% ($45 ÷ $4,106). In 2020, inventories were approximately 2.8% of current assets ($4,061 ÷ $143,713). (c) Cost of sales was: 2020, $151,286; 2019, $144,996; and 2018, $148,164. In 2020, cost of sales was 68.5% of net sales ($151,286 ÷ $220,747). LO 4 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT7.2

COMPARATIVE ANALYSIS PROBLEM

(a) 1. Inventory turnover

Columbia Sportswear

Under Armour, Inc.

$1, 277,665

$2,314,572

($556,530 + $605,968) ÷ 2

($895,974 + $892,258)  2

$1,277,665

$2,314,572

$581,249

2. Days in inventory

365 2.20

= 2.20 times

= 165.9 days

$894,116

365 2.59

= 2.59 times

= 140.9 days

(b) Generally, companies that are able to keep their inventory at lower levels and higher turnovers and still satisfy customer needs are the most successful. Both companies have low inventory turnovers. As a result, both companies keep more than four months of inventory on hand. LO 4 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-43

CT7.3

INTERPRETING FINANCIAL STATEMENTS

(a) Finished goods are manufactured inventory items that are completed and ready for sale. Work in process is inventory that has been put into production but is not complete. Raw materials are the basic materials that have not yet been placed in production. (b) American Greetings may use LIFO for U.S. operations because of its tax advantages. Since many foreign countries do not allow the use of LIFO, American Greetings may use FIFO for non-domestic inventories. Using FIFO will result in higher reported profit and inventory values than LIFO. (c)

2027 Inventory turnover: $809, 956 ($216, 671 + $203, 873)/2 $809, 956 $210, 272

Days in inventory:

= 3.9 times

365/3.9 = 93.6 days

2026 $780, 771

($182, 618 + $216, 671)/2 $780, 771 $199, 644.5

= 3.9 times

365/3.9 = 93.6 days

The inventory turnover remains unchanged from 2026 to 2027. LO 4 BT: AN Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Measurement, Reporting

7-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT7.4

REAL WORLD FOCUS

(a)

MGA Entertainment Inc. cut Sears’ credit line and shortened its payment terms to 30 days from 60 days. LG Electronics and Samsung Electronics require Sears to pay cash upfront for some goods. Levi Strauss & Co. has stopped supplying women’s jeans to Sears. Clorox has adjusted its payment terms. Whirlpool quit supplying Sears with appliances.

(b)

As a consequence of steps by its suppliers to restrict or eliminate shipments, many of Sears’ shelves were empty. Also, the shorter payment terms required Sears to tie up more of its working capital and cash. It, therefore, had to borrow more money, which further restricted its ability to acquire goods and to operate profitably.

(c)

Factors no longer provide services for transactions with Sears. As a consequence, those suppliers that relied on factors are reluctant to do business with Sears, and will only do so with shortened payment terms to reduce their risk.

LO 1, 4 BT: S Difficulty: Hard TOT: 20 min. AACSB: Analytic, Communication and Technology AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-45

CT7.5

DECISION MAKING ACROSS THE ORGANIZATION

(a)

2027 Current ratio

$1,800

2026

= 3.00 : 1

$600

Gross profit rate

$1,183

= 2.41 : 1

$9,428 – $6,328

= 32.9%

$8,674 – $5,474

= 36.9%

$7,536 – $4,445

$8,674

= 41.0%

$7,536

$979

$987

$754

= 2.25 : 1

$525

$590

$9,428

Profit margin

$1,423

2025

= 13.0% $8,674 $7,536 Inventory turnover $5,474 $4,445 $6,328 = 8.1 times = 8.7 times = 7.5 times ($757 + $602)/2 ($602 + $418)/2 ($925 + $757)/2 = 11.4%

= 8.0%

$9,428

Days in inventory

365

= 48.7 days

7.5

365

= 45.1 days

8.1

365

= 42.0 days

8.7

(b) The company’s current ratio has increased steadily over this period. While this might be interpreted as a positive since it would normally represent improved liquidity, the company started this period with a current ratio in excess of 2, thus it already had good liquidity. With its current ratio now 3 it would appear that the company has too many funds tied up in current assets. In particular, it would appear that the company has a surplus of unsold inventory. This is supported by the fact that inventory as a percent of total assets has increased significantly. The gross profit rate has been steadily declining. From the CEO’s comments we learned that the company has frequently been forced to discount its products in order to move them off the shelves. This discounting will directly reduce the gross profit rate. The profit margin has also declined. Originally the company made a profit of 13 cents on each dollar of sales. Now it only makes 8 cents per sales dollar. A significant portion of this decline is most likely the result of the decline in the gross profit rate. Inventory turnover, as measured by the days in inventory has worsened considerably during this period. At the beginning of this period, it took 42 days to sell the average inventory item, now it takes 49.

7-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT7.5 (Continued) (c) The evaluation above suggests that many of the company’s problems stem from poor inventory management. As the company has grown, its ability to manage its inventory has declined. This has caused a decline in its profitability. By implementing a just-in-time inventory system the company could reduce the amount of resources that it has tied up in inventory, thus reducing its storage and handling costs. Also, it should reduce the need for product discounting, since the company will be less likely to be stuck with surplus inventory. (d) The marketing and sales department may well be concerned that a justin-time inventory system will result in more stock-outs. The company already is having stock-out problems, even though it has a lot of inventory. The company’s current inventory system appears to lack good technological support, which would allow it to identify which products are selling well. As discussed in the case of both Caterpillar and Dell computers in the chapter, a well-implemented just-in-time system, supported by technology and coordination with suppliers, would enable the company to reduce its inventory balance while actually increasing its ability to deliver products to customers in a timely fashion. LO 1, 3, 4 BT: E Difficulty: Hard TOT: 45 min. AACSB: Analytic and Communication AICPA FC: Measurement, Reporting AICPA PC: Interaction, Leadership, and Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-47

CT7.6

COMMUNICATION ACTIVITY

In a period of changing prices, the cost flow assumption can have a significant impact on income and on evaluations based on income. Under the FIFO method, the costs of the earliest goods purchased are the first to be recognized as cost of goods sold. Under the average-cost method, the calculation of cost of goods sold is made on the basis of the weightedaverage unit cost incurred. In a period of rising prices, FIFO will produce a lower cost of goods sold and a higher net income. Starbucks’ change from FIFO to average-cost will result in a higher cost of goods sold and a lower net income. Because of increasing competition, Starbucks probably is not able to pass the coffee bean price increase on to its customers. Using the average-cost method allows Starbucks to average its changing inventory prices and avoid a distortion of income. A possible disadvantage of the change is the related balance sheet effect. Since inventory is a current asset, Starbucks’ current ratio will be lower because of the change. In addition, the company’s inventory turnover and days in inventory could be adversely affected. LO 2 BT: E Difficulty: Hard TOT: 30 min. AACSB: Analytic, Communication AICPA FC: Measurement, Reporting AICPA PC: Communication AICPA BB: Strategic/Critical Thinking

7-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT7.7

ETHICS CASE

(a) The higher cost of the items ordered, received, and on hand at year-end will be charged to cost of goods sold, thereby lowering current year’s income and income taxes. Next year’s income will be increased because the inventory carried at lower costs from the earlier year will be charged to next year’s cost of goods sold. If the purchase at year-end had been made in the next year, the next year’s cost of goods sold would have absorbed the higher cost. (b) No. The president would not have given the same directive because the purchase under FIFO would have had no effect on net income of the current year. (c) The accountant has no grounds for not ordering the goods if the president insists. The purchase is legal and ethical, even though it allows the company to “manage” this year’s net income. LO 2 BT: E Difficulty: Medium TOT: 20 min. AACSB: Ethics, Communication AICPA FC: Measurement, Reporting AICPA PC: Communication, Professional Demeanor

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-49

CT7.8

(a)

ETHICS CASE

The stakeholders in this situation are: The president of Mendez Corp. The controller of Mendez Corp. The stockholders of Mendez Corp.

(b)

Yes. The controller is posed with an ethical dilemma—should he/she follow the president’s “suggestion” and prepare misleading financial statements (understated net income) or should he/she attempt to stand up to and possibly anger the president by preparing a fair (realistic) income statement.

(c)

No. Mendez Corp.’s growth rate should be a product of fair and accurate financial statements, not vice versa. That is, one should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of creative accounting.

LO 3 BT: E Difficulty: Hard TOT: 30 min. Communication, Professional Demeanor

7-50

AACSB: Analytic, Communication and Ethics

Kimmel, Survey of Accounting, 3e, Solutions Manual

AICPA PC:

(For Instructor Use Only)

CT7.9

ALL ABOUT YOU

(a) There are a number of sources that compare features of credit cards. Here are three: www.creditcards.com/, www.creditkarma.com, and www.nerdwallet.com. (b) Here are some of the features you should consider: annual percentage rate, credit limit, annual fees, billing and due dates, minimum payment, penalties and fees, premiums received (airlines miles, hotel discounts etc.), and cash rebates. (c) Answer depends on present credit card and student’s personal situation. LO N/A BT: S Difficulty: Hard TOT: 30 min. AACSB: Analytic, Communication and Technology AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

7-51

CT7.10

CONSIDERING ENVIRONMENTAL, SOCIAL, AND GOVERNANCE REPORTING

These responses are based on the 2021 sustainability report, use of other years may result in different responses. (a) The company has set a number of goals to be achieved by 2030. These consist of the following: ● To reduce absolute greenhouse gas emissions from our operations by 30% from 2018 to 2030. ● To implement water management strategies at 100% of facilities located in water high-risk areas by 2030. ● To reduce landfill intensity by 50% from 2018 to 2030. ● To increase sales and revenues from remanufacturing offerings by 25% from 2018 to 2030. ● To have 100% of Caterpillar’s new products through 2030 to be more sustainable than the previous generation through collaborating with customers, reduced waste, improved design for rebuild/remanufacturing, lower emissions or improved efficiency. ● To prevent all injuries and further our industry-leading safety results by reducing recordable injury frequency (RIF) by 50% from 2018 to 2030. ● To provide leadership in the safety of people who work in, on and around our products. (b) In 2021, driven on by our relentless focus on safety, we delivered our best recordable injury frequency (RIF) performance on record for the third year in a row. We improved our RIF rate by 23% from our 2018 base year and by 2% from the previous year. We accomplished this result while leading our organization through the global pandemic, effectively deploying enhanced safety measures and encouraging and making available vaccinations. Other safety highlights for 2021 include: • Provided safety counseling for 7,200+ customer employees. • Developed a National Safety Month campaign. • Hosted an Executive Leadership Safety Summit. (c) The measures of energy uses and how they are measured are: (1) Energy intensity: Absolute gigajoules energy use/million dollars of sales and revenues (2) Total energy consumption: Absolute energy use million gigajoules (3) Total Electricity consumption: Sum of purchased and self-generated electricity in million MWh (4) Renewable energy: Renewable electrical energy use/total electrical use × 100 7-52

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Overall, the company has improved in all four measures of energy usage. LO None BT: AP Difficulty: Hard TOT: 40 min. AACSB: Technology and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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7-53

CHAPTER 8 Reporting and Analyzing Long-Lived Assets Learning Objectives 1. 2. 3. 4. 5.

Explain the accounting for plant asset expenditures. Apply depreciation methods to plant assets. Explain how to account for the disposal of plant assets. Identify the basic issues related to reporting intangible assets. Discuss how long-lived assets are reported and analyzed.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-1

ANSWERS TO QUESTIONS 1.

For plant assets, the historical cost principle states that plant assets are recorded at cost, which consists of all expenditures necessary to acquire the asset and make it ready for its intended use.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

In a cash transaction, cost is equal to the cash paid. In a noncash transaction, cost is equal to the cash equivalent price paid, which is the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

When only the land is to be used, all demolition and removal costs of the building less any proceeds from salvaged materials are necessary expenditures to make the land ready for its intended use. Any costs for clearing, draining, filling, and grading are also part of the cost of the land. Also, any back taxes are included in the cost of the land. When both the land and building are to be used, necessary costs of the building include remodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, and plumbing.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

Ordinary repairs are made to maintain the operating efficiency and expected productive life of the asset. Capital expenditures are additions and improvements made to increase efficiency, productive capacity, or expected useful life of the asset. Ordinary repairs are recognized as expenses when incurred; capital expenditures are generally added to the plant asset affected.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

You should explain to the president that depreciation is a process of allocating the cost of a plant asset to expense over its service (useful) life in a rational and systematic manner. Recognition of depreciation is not intended to result in the accumulation of cash for replacement of the asset.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

(a) Salvage value is the expected cash value of the asset at the end of its useful life. (b) Salvage value is used in determining depreciable cost in the straight-line method by subtracting it from the plant asset’s cost.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

(a) Useful life is expressed in years under the straight-line method and in units of activity under the units-of-activity method. (b) The pattern of periodic depreciation expense over an asset’s useful life is constant under the straight-line method and variable under the units-of-activity method.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

8-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 8 (Continued) 8.

The effects of the three depreciation methods on annual depreciation expense are: Straight-line— constant amount; units-of-activity—varying amounts; declining-balance—decreasing amounts.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

A revision of depreciation is made in current and future years but not retroactively. The rationale is that continual restatement of prior periods would adversely affect the reader’s confidence in the financial statements.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

10.

In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale (Note that depreciation must be taken up to the date of the sale before this comparison is made). If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC; Reporting

11.

The plant asset and related accumulated depreciation should continue to be reported on the balance sheet without further depreciation or adjustment until the asset is retired. Reporting the asset and related accumulated depreciation on the balance sheet informs the reader of the financial statements that the asset is still being used by the company. However, once an asset is fully depreciated, even if it is still being used, no additional depreciation should be taken on this asset. In no situation can the depreciation on the plant asset exceed the cost of the plant asset.

LO 2, 5 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

12.

Apple depreciates its buildings over the lesser of 40 years or the remaining life of the building, and its machinery and equipment between 1 and 5 years.

LO 5 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

13.

Depreciation and amortization are both concerned with writing off the cost of an asset to expense over the periods benefited. Depreciation refers to allocating the cost of a plant asset to expense and amortization to allocating the cost of an intangible asset to expense.

LO 2, 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

14.

It is true that successful marketing campaigns often benefit multiple accounting periods in the future, enhancing the company’s value, and potentially creating goodwill. However, from an accounting perspective Bruce’s proposal is unacceptable. First of all, accounting standards only allow the recording of “purchased goodwill” that results from the purchase of another business. Internally created goodwill is not allowed to be recorded. Second, marketing expenditures are to be treated as expenses of the period in which they are incurred. They cannot be capitalized. It is unethical to capitalize costs simply to boost reported income by spreading the cost over multiple periods.

LO 4 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-3

Questions Chapter 8 (Continued) 15.

The intern is not correct. If an intangible asset has a limited life, the cost of the asset should be amortized over that asset’s useful life (the period of time when operations are benefited by use of the asset) or its legal life, whichever is shorter. The cost of intangible assets with indefinite lives should not be amortized.

LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

16.

The favorable attributes which could result in goodwill include exceptional management, desirable location, good customer relations, skilled employees, high quality products, fair pricing policies, and harmonious relations with labor unions.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

17.

Goodwill is the value of many favorable attributes that are intertwined in the business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill can only be sold if the entire business is sold.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

18.

Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business. Goodwill is the excess of cost over the fair value of the net assets (assets less liabilities) acquired. The recognition of goodwill without an exchange transaction would lead to subjective valuations which would reduce the reliability of financial statements. Goodwill is not amortized because it has an indefinite life. It remains at its original value as an intangible asset unless it is considered to be impaired. If it is impaired, it is written down.

LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

19.

Research and development costs present several accounting problems. It is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits. As a result, research and development costs are usually recorded as an expense when incurred.

LO 4 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

20.

Campbell Soup Company’s return on assets is computed as follows:

Net Income Average Total Assets

$736

= 11.7%

$6,265

(Net inc. ÷ Ave. tot. assets) LO 5 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

8-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 8 (Continued) 21.

The return on assets is closely monitored by management. It is the product of the profit margin and the asset turnover. At first glance, if this new product line has a lower profit margin, then it will reduce the company’s return on assets. As a consequence, it is not possible to know what effect the new product line will have on the company’s return on assets without knowing the expected effect on the company’s asset turnover.

LO 5 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

22.

(a) Grocery stores usually have a high asset turnover and a low profit margin. (b) Car dealerships normally have a low asset turnover and a high profit margin.

LO 5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

23.

Since Peyton uses the straight-line depreciation method, its depreciation expense will be lower in the early years of an asset’s useful life as compared to using an accelerated method. Rogers’ depreciation expense in the early years of an asset’s useful life will be higher as compared to the straight-line method. Peyton’s net income will be higher than Rogers’ in the first few years of the asset’s useful life.

LO 2 BT: AN Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

24.

Yes, the tax regulations of the IRS allow a company to use a different depreciation method on the tax return than is used in preparing financial statements. Mesa Corporation uses an accelerated depreciation method for tax purposes to minimize its income taxes in the early years of the assets’ lives.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

25.

By selecting a higher estimated useful life, Gore Corp. is spreading the plant assets’ cost over a longer period of time. The depreciation expense reported in each period is lower and net income is higher. Ross’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower net income.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8.1 All of the expenditures should be included in the cost of the land. Therefore, the cost of the land is $73,900 ($60,000 + $5,000 + $2,100 + $3,300 + $3,500). LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8.2 The cost of the truck is $26,780 (cash price $24,000 + sales taxes $1,080 + painting and lettering $1,700). The expenditures for insurance and motor vehicle license should not be added to the cost of the truck. (Cash price + Sales taxes + Painting and lettering) LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8.3 The cost of the special shelving units is a capital expenditure and should be added to the cost of the delivery truck. LO 1 BT: C Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8.4 The depreciable cost is $27,000 ($31,000 – $4,000). With a 4-year useful life, annual depreciation is $6,750 ($27,000 ÷ 4). Under the straight-line method, depreciation is the same each year. Thus, depreciation is $6,750 for both the first and second years. [(Cost − Salvage value) ÷ useful life] [($31,000 − $4,000) ÷ 4] LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

8-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 8.5 It is likely that management requested this accounting treatment to boost reported net income. Land is not depreciated; thus, by reporting land at $130,000 above its actual value the company increased yearly income by  $130,000  $6,500   or the reduction in depreciation expense. This practice is  20 years  not ethical because management is knowingly misstating asset values. LO 2 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8.6 Book value, 1/1/27 ($36,000 – $13,600) ........................................... Less: Salvage value ........................................................................ Depreciable cost .............................................................................. Remaining useful life ....................................................................... Revised annual depreciation ($20,400 ÷ 2) .....................................

$22,400 2,000 $20,400 2 years $10,200

[((Cost – Accum. depr.) − Sal. value) ÷ Remain. useful life] [(($36,000 − $13,600) − $2,000) ÷ 2] LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-7

BRIEF EXERCISE 8.7 (a)

Assets

Kimmel, Survey of Accounting, 3e, Solutions Manual

Bal.

Equip. − $41,000 −41,000

(b)

Assets

Cash

Cash Bal.

Equip. − $41,000 −41,000

= Liabilities Accum. Depr. − Equip. = −$41,000 +41,000

= Liabilities Accum. Depr. − Equip. = −$37,200 +37,200

Stockholders' Equity Retained Earnings Com. Stock

Rev.

−

Exp.

Com. Stock

Rev.

−

Exp. −$3,800

[(($41,000 − $37,200) − $0) = $3,800 Loss)

(For Instructor Use Only)

LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Div.

Stockholders' Equity Retained Earnings

[((Cost − Accum. depr.) − Proceeds) = Gain/loss]

8-8

−

Kimmel, Survey of Accounting, 2e, Solutions Manual

(For Instructor Use Only)

−

Div. Loss on disposal

BRIEF EXERCISE 8.8 Assets

Kimmel, Survey of Accounting, 3e, Solutions Manual

Bal. (a) (b)

= Liabilities +

Accum. Depr. − Cash + Equip. − Equip. = −$42,000 $72,000 −4,600 −72,000 +$21,000 +46,600

Stockholders' Equity Retained Earnings

Com. + Stock + Rev. −

Exp. −$4,600 −4,400

[((Cost − Accum. depr.) − Proceeds) = Gain/loss] [(($72,000 − $46,600) − $21,000) = $4,400 Loss) LO 3 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Analytic AICPA FC: Reporting

(For Instructor Use Only)

Kimmel, Survey of Accounting, 2e, Solutions Manual

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8-9

− Div. Depreciation expense Loss on disposal

BRIEF EXERCISE 8.9 (a) Amortization Expense = $26,000 ($156,000 ÷ 6) (Cost ÷ 6)

(b) Intangible Assets Patents (Net of $26,000 of amortization) .........

$130,000

LO 4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8.10 (a)

$4.55

Return on assets =

= 15.5%

($28.46 + $30.22)÷2 [Net inc. ÷ ((Beg. tot. assets + End. tot. assets) ÷ 2)]

(b) Asset turnover =

$22.74 = .78 times ($28.46 + $30.22) ÷ 2

[Net sales ÷ ((Beg. tot. assets + End. tot. assets) ÷ 2)] LO 5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement Analysis and Interpretation and Reporting

8-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 8.11 NIKE, INC. (Partial) Balance Sheet As of May 31, 2027 (in millions) Property, plant, and equipment Land ........................................................ Buildings ................................................ Machinery and equipment..................... Other plant assets ................................. Less: Accumulated depreciation ......... Total property, plant, and equip. .. Intangible assets Goodwill ................................................. Patents and trademarks ........................ $515.1 Less: Accumulated amortization ......... 47.7 Total intangible assets...................

$ 221.6 $ 974.0 2,094.3 965.8 2,298.0

1,736.1 1,957.7

193.5 467.4 660.9*

*Alternatively, many companies would simply show a single line for net intangibles. [(Land + (Bldgs. + Mach. and equip. + Other plant assets − Accum depr.)) + (Goodwill + (Patents and trademarks − Accum. amort.))] LO 5 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-11

SOLUTIONS TO DO IT! EXERCISES DO IT! 8.1 The following four items are expenditures necessary to acquire the truck and get it ready for use: Negotiated purchase price......................................... Installation of special shelving .................................. Painting and lettering ................................................. Sales tax...................................................................... Total cost .........................................................

$24,000 1,100 900 1,440 $27,440

The cost of the truck is $27,440. The cost of the motor vehicle license is an operating cost and is expensed in the year incurred. The two-year insurance policy would be recorded as prepaid insurance and then expensed over the two years of coverage. LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

DO IT! 8.2a Depreciation expense = Cost – Salvage = $15,000 – $1,000 = $1,400 Useful life 10 years

8-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 8.2a (Continued) The tabular summary entry to record the first year’s depreciation would be: Assets

Kimmel, Survey of Accounting, 3e, Solutions Manual

Cash Bal.

Equip. $15,000

= Liabilities + Accum. Depr. − Equip. =

Stockholders' Equity Retained Earnings

Com. + Stock + Rev. −

−$1,400

Exp. −$1,400

[(Cost − Sal. Value) ÷ Useful life] [($15,000 − $1,000) ÷ 10] LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

(For Instructor Use Only)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-13

Div. Depreciation expense

DO IT! 8.2b Original depreciation expense = ($50,000 – $2,000) ÷ 8 years = $6,000 Accumulated depreciation after three years = 3 x $6,000 = $18,000 Book value, $50,000 – $18,000 ............................................. Less: Salvage value ............................................................ Depreciable cost ................................................................... Remaining useful life ........................................................... Revised annual depreciation ($28,000 ÷ 7) .........................

$32,000 4,000 $28,000 7 years $ 4,000

[((Cost − Accum. depr.) − New sal. value)  Remaining useful life] [(($50,000 − $18,000) − $4,000) ÷ 7] LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

8-14

Kimmel, Survey of Accounting, 2e, Solutions Manual

(For Instructor Use Only)

DO IT! 8.3

(a)

Assets

Cash

Bal. Kimmel, Survey of Accounting, 3e, Solutions Manual

+25,000

Equip. +$50,000 −50,000

Accum. Depr. Equip. −$28,000 +28,000

Liabilities +

Stockholders' Equity Retained Earnings Com. Stock

Rev.

−

Exp.

−

Div.

+$3,000

Gain on disposal

[((Cost − Accum. depr.) − Proceeds) = Gain/loss] [(($50,000 − $28,000) − $25,000) = $3,000 Gain]

(b)

Assets

Cash Bal.

+$15,000

Equip. +$50,000 −50,000

Accum. Depr. Equip. −$28,000

Liabilities +

Stockholders' Equity Retained Earnings Com. Stock

Rev.

−

Exp. −$7,000

+28,000

(For Instructor Use Only)

[((Cost − Accum. depr.) − Proceeds) = Gain/loss] [(($50,000 − $28,000) − $15,000) = $7,000 Loss) LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

8-15

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-15

−

Div. Loss on disposal

DO IT! 8.4 1. 2. 3. 4. 5.

Intangible assets Amortization Franchise Research and development costs Goodwill

LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

DO IT! 8.5 Asset turnover = $400,000/[($300,000 + $340,000)/2] = 1.25 times [Net sales ÷ ((Beg. tot. assets + End. tot. assets) ÷ 2)]

Return on assets = $50,000 ÷ [($300,000 + $340,000) ÷ 2] = 15.6% [Net Inc. ÷ ((Beg. tot. assets + End. tot. assets) ÷ 2)] LO 5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement, Reporting

8-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 8.1 (a)

The following points explain the application of the historical cost principle to plant assets. 1. 2. 3.

(b)

1. 2. 3. 4.

Under the historical cost principle, the acquisition cost for a plant asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. Cost is measured by the cash paid in a cash transaction, or by the cash equivalent price paid when noncash assets are used in payment. The cash equivalent price is equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable. Land Equipment Equipment Land Improvements

5. 6. 7. 8.

Equipment Equipment Prepaid Insurance License Expense

LO 1 BT: C Difficulty: Medium TOT: 10 min AACSB: None AICPA FC: Measurement

EXERCISE 8.2 1. 2. 3. 4. 5. 6. 7. 8. 9.

Equipment Equipment Equipment Land Prepaid Insurance Land Improvements Land Improvements Land Building

LO 1 BT: C Difficulty: Medium TOT: 4 min AACSB: None AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-17

EXERCISE 8.3 (a)

(b)

Cost of land Cash paid .................................................................. Net cost of removing warehouse ($8,200 – $1,700) ... Attorney’s fee ........................................................... Real estate broker’s fee ........................................... Total....................................................................

$80,000 6,500 1,900 5,200 $93,600

The architect’s fee ($9,100) should increase to the Buildings account. The cost of the driveways and parking lot ($14,000) should increase Land Improvements.

LO 1 BT: AP Difficulty: Medium TOT: 5 min AACSB: None AICPA FC: Measurement, Reporting

EXERCISE 8.4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

False. Depreciation is a process of cost allocation, not asset valuation. True. False. The book value of a plant asset may be quite different from its market value. False. Depreciation applies to three classes of plant assets: land improvements, buildings, and equipment. False. Depreciation does not apply to land because its usefulness and revenue-producing ability generally remain intact over time. True. False. Recognizing depreciation on an asset does not result in an accumulation of cash for replacement of the asset. True. False. Depreciation expense is reported on the income statement, and accumulated depreciation is reported as a deduction from plant assets on the balance sheet. True.

LO 2 BT: C Difficulty: Medium TOT: 10 min AACSB: None AICPA FC: Measurement

8-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8.5

 $90,000 – $8,000  Straight-line method:   = $10,250 per year. 8   2027 depreciation = $10,250 × 3/12 = $2,562.50 2028 depreciation = $10,250. [(Cost − Salvage value) ÷ Useful life] [2027: (($90,000 − $8,000) ÷ 8) × 3/12] [2028: (($90,000 − $8,000) ÷ 8)] LO 2 BT: AP Difficulty: Medium TOT: 5 min AACSB: Analytic AICPA FC: Reporting

EXERCISE 8.6 Type of Asset Cost ................................................................ Less: Accumulated depreciation .................. Book value, 1/1/22 .......................................... Less: Salvage value ...................................... Depreciable cost (1) .......................................

Building $700,000 130,000 570,000 35,000 $535,000

Warehouse $120,000 23,000 97,000 3,600 $ 93,400

40*

15**

Revised remaining useful life in years (2) *(48 – 8)

**(20 – 5)

Revised annual depreciation (1) ÷ (2)

$13,375

$6,227

LO 2 BT: AN Difficulty: Hard TOT: 10 min AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-19

EXERCISE 8.7

(a)

Assets

Cash Bal.

= Liabilities

Accum. Depr. − + Equip. Equip. = −$24,000 +$50,000 −50,000 +24,000

Stockholders' Equity Retained Earnings Com. Stock

Rev.

−

Exp.

−

Div.

−$26,000

Loss on disposal

Kimmel, Survey of Accounting, 3e, Solutions Manual

[((Cost − Accum. depr.) − Proceeds) = Gain/loss] [(($50,000 − $24,000) − $0) = $26,000 loss]

(b)

Bal.

Assets

= Liabilities

Accum. Depr. − Cash + Equip. Equip. = −$24,000 +$50,000 −50,000 +$37,000 +24,000

Stockholders' Equity Retained Earnings Com. Stock

Rev.

−

Exp.

+$11,000

(For Instructor Use Only)

[((Cost − Accum. depr.) − Proceeds) = Gain/loss] [(($50,000 − $24,000) − $37,000) = $11,000 Gain]

8-20

Kimmel, Survey of Accounting, 2e, Solutions Manual

(For Instructor Use Only)

−

Div. Gain on disposal

EXERCISE 8.7 (Continued) (c)

Assets

Cash Bal.

Kimmel, Survey of Accounting, 3e, Solutions Manual

+$20,000

Accum. Depr. − Equip. Equip. −$24,000 +$50,000 −50,000 +24,000

Liabilities

Stockholders' Equity Retained Earnings Com. Stock

Rev.

−

Exp. −$6,000

[((Cost − Accum. depr.) − Proceeds) = Gain/loss] [(($50,000 − $24,000) − $20,000) = $6,000 Loss) LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

(For Instructor Use Only)

Kimmel, Survey of Accounting, 2e, Solutions Manual

(For Instructor Use Only)

8-21

−

Div. Loss on disposal

EXERCISE 8.8

Equip. − -$62,000

Equip. = +$62,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

+$5,000

−36,000

−6,000 +30,000

+9,000

−25,000

−4,200 +16,800

Assets

= Liabilities + Accum. Depr. -

Cash Jan. 1

June 30

Dec. 31

Stockholders' Equity Retained Earnings Com.

Stock

Rev.

−

Exp.

−$6,000 −1,000

Depreciation expense Loss on disposal

−4,200

Depreciation expense Gain on disposal

+800

[June 30 & Dec. 31 depr. exp. = (Cost − Sal. Value) ÷ Useful life) x Fraction of year used] [June 30 & Dec. 31 Gain/Loss on disposal = (Cost − Tot. accum. depr.) − Proceeds] LO 3 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

(For Instructor Use Only)

8-22

Kimmel, Survey of Accounting, 2e, Solutions Manual

− Div.

(For Instructor Use Only)

EXERCISE 8.9 (a) The amount paid for the equipment is $1,100. Jan.1

Equipment increased by $1,100, so cash decreased by $1,100.

(b) The amount of depreciation expense is $100. Dec. 31 Accumulated Depreciation—Equipment increased by $100, so Depreciation Expense increased by $100. (c) The amount of the gain on disposal is $50 and is derived from the disposal information that follows. Dec. 31 Equipment decreased by $440 and Accumulated Depreciation by $40, meaning that book value decreased by $400. Cash increased by $450, so the Gain on Disposal was $50 ($400 − $450). LO 1 – 3 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8.10 1.

Depreciation is the process of allocating the cost of a long-lived asset to expense over the asset’s useful life. Because the value of land generally does not decline with time and usage, its usefulness and revenue producing ability does not decline. In addition, the useful life of land is indefinite. Therefore, it would be incorrect for the student to depreciate the land.

Goodwill is an intangible asset with an indefinite life. According to generally accepted accounting principles, goodwill is not amortized but reviewed annually for impairment. If a permanent decline in value has occurred, the goodwill is written down and an impairment loss is recorded on the income statement. Therefore, the amortization adjustment should be reversed and no decline in value recorded until an impairment in value occurs.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-23

EXERCISE 8.10 (Continued) 3.

This is a violation of the historical cost principle. Because current market values are subjective and not reliable, they are not used to increase the recorded value of a building after acquisition. The appropriate accounting treatment is to leave the building on the books at its zero book value.

LO 1, 2, 3, 4 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement

EXERCISE 8.11 Amortization Expense on December 31, 2027: Copyright: ($120,000 ÷ 6) .......................................... Patents: ($54,000 ÷ 4) × 10/12 ................................... Total

$20,000 11,250 $31,250

The goodwill would not require an adjustment because it has an indefinite life. LO 4 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

8-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8.12

Assets

Liabilities

Stockholders' Equity Retained Earnings Com.

Cash

Patents

Franchise

Kimmel, Survey of Accounting, 3e, Solutions Manual

(a) Bal.

Goodwill

Stock

Rev.

−

Exp.

−

Div.

+$360,000

Jan. 2

−$280,000

July 1

−540,000

Sept. 1

−185,000

(b) Dec. 31

+$280,000 +$540,000 −$185,000 −56,000

−30,000

−86,000

[Amort. Exp. = (Patents ÷ useful life) + ((Franchise ÷ useful life) × 6/12)] [($280,000 ÷ 5) + (($540,000 ÷ 9) × 6/12)]

(For Instructor Use Only)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-25

Research & develop. exp. Amortization expense

EXERCISE 8.12 (Continued) (c)

Ending balances, 12/31/27: Patents = $224,000 ($280,000 – $56,000) Franchise = $510,000 ($540,000 – $30,000) Goodwill = $360,000

LO 4 BT: AN Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8.13 Alliance Atlantis Communications Inc.’s change of accounting policy to amortize broadcast rights will probably increase its reported income. Prior to the change, Alliance Atlantis had amortized broadcast rights over a maximum of two years. Their new policy calls for amortization over the contracted exhibition period. If this is greater than two years, annual amortization expense will decrease, and income will increase. A change of this nature will make comparison of financial results with previous years’ difficult. To evaluate the company’s performance, one will need to make an adjustment for such changes in estimated lives. LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Measurement

EXERCISE 8.14 (a)

A company should depreciate its buildings because depreciation is necessary in order to allocate the cost of the buildings to the periods in which they are in use. This allows the cost of the buildings to be matched against the revenues generated each year in accordance with the expense recognition principle.

(b)

A building can have a zero book value if it has no salvage value and it is fully depreciated—that is, if it has been used for a period at least as long as its expected life. Because depreciation is used to allocate cost rather than to reflect actual value, it is not at all unlikely that a building could have a low or zero book value, but a substantial fair value.

(c)

Examples of intangibles that might be found on a college campus are a franchise of a bookstore chain, the license to operate a radio station, a patent developed by professors, and a permit to operate a bus service.

8-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8.14 (Continued) (d)

Typical company or product trade names are: Clothes—Gap, Gitano, Dockers, Calvin Klein, Chaus, Guess. Perfume—Passion, Ruffles, Chanel No. 5, Diamonds. Cars—Accord, Charger, Mustang, Corvette. Shoes—Nike, Florsheim, L.A. Gear, adidas. Breakfast cereals—Cheerios, Wheaties, Frosted Mini-Wheats, Rice Krispies. Trade names and trademarks are reported on a balance sheet if there is a cost attached to them. If the trade name or trademark is purchased, the cost is the purchase price. If it is developed by the enterprise, the cost includes attorney’s fees, registration fees, design costs, successful legal defense costs, and other expenditures directly related to securing the trade name or trademark.

LO 2, 4 BT: C Difficulty: Medium TOT: 15 min. AACSB: None AICPA FC: Measurement, Reporting

EXERCISE 8.15 (a)

Asset turnover =

$35,497 = 1.42 times ($25,633 + $24,244) ÷ 2

[Net sales ÷ ((Beg. tot. assets + End. tot. assets) ÷ 2)]

(b)

Return on assets =

$98 = .4% ($25,633 + $24,244) ÷ 2

[Net inc. ÷ ((Beg. tot. assets + End. tot. assets) ÷ 2)] LO 5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-27

EXERCISE 8.16 (a)

Return on assets Profit margin

Asset turnover

Without new products $500,000 = 10% $5,0 00 ,0 00 $500,000 = 5% $10,0 00,000 $10,000,000 = 2.0 $5,0 00 ,00 0

With new products $960,000 = 8% $12,000,000 $960,000 = 6% $16,000,000 $16,000,000 = 1.3 $12,000,000

(b) The return on assets declined from 10% to 8%. This means that the company is not generating as much income from each dollar invested in assets. It is common for companies to try to maximize their return on assets. Thus, top management might not find this proposal very desirable. The new product line would increase the company’s profit margin (the amount of net income generated from each dollar of sales) from 5% to 6%. However, because of the huge investment in new assets that the proposal requires, the asset turnover plummets from 2.0 times down to 1.3 times. LO 5 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 8.17 (a) ($ in millions) 1. Return on assets

$264.8 = 6.2% ($4,312.6 + $4,254.3) ÷ 2

2. Asset turnover

$11,408.5 = 2.7 times ($4,312.6 + $4,254.3) ÷ 2

3. Profit margin

$264.8 = 2.3% $11,408.5

(b) Profit Margin × Asset Turnover = Return on Assets = 2.3% × 2.7 times = 6.2%

8-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8.17 (Continued) (c) Asset turnover and profit margin vary considerably across industries. Therefore, when you have a diverse group of businesses from several industry types combined into one company, such as in Linley Company, the ability to compare these ratios to other businesses becomes very difficult. Linley Company would almost need to calculate ratios for each of the separate industry segments to allow for a meaningful comparison. LO 5 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-29

SOLUTIONS TO PROBLEMS PROBLEM 8.1

Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Land

Buildings

Other Accounts

$ 23,000 33,000 640,000 $280,000 $29,000

Land Improvements

6,800

Land Improvements

6,400

Property Tax Expense

3,170 31,000 (12,000) $302,170

$696,000

LO 1 BT: C Difficulty: Easy TOT: 20 min. AACSB: Analytic AICPA FC: Measurement, Reporting

8-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 8.2

Assets

Cash

Land

Buildings

−

Accum.

Depr. -

Bldgs.

Equipment

−

Equip.

Liabilities

Stockholders' Equity Retained Earnings Com.

Stock

Rev.

−

Exp.

−

Div.

(a) Bal. 12/31/27

+$3,000,000

+$26,500,000

−$11,925,000

+$40,000,000

−$5,000,000

−600,000

+440,000

(b) 2028

Kimmel, Survey of Accounting, 3e, Solutions Manual

Apr. 1

−$2,200,000

+2,200,000 −20,000

May 1 1

+170,000

June 1

+1,600,000

July 1

−1,100,000

−1,000,000

−$20,000

Depreciation expense

+$10,000

Gain on disposal

+600,000

Gain on disposal

+1,100,000 −70,000

Dec. 31 −700,000

−70,000

Depreciation expense

−662,500

Depreciation expense

−3,925,000

Depreciation expense

+700,000

Dec. 31

−3,925,000

Bal.

$4,200,000

$26,500,000

−$12,587,500

$39,800,000

−$7,875,000

[May 1 depr. exp. = (Cost ÷ useful life) × Fraction of yr.]; [($600,000 ÷ 10) × 4/12] [May 1 accum. depr. − equip. = (Cost × Fraction of useful life expired at beg. of 2028) + 2028 depr.]; [($600,000 × 7/10) + $20,000]

(For Instructor Use Only)

[(c) Dec. 31 equip. depr. exp. = (Cost of old equip. ÷ useful life) + ((Cost of new equip. ÷ useful life) × Fraction of yr.)]; [(($40,000,000 − $600,000 − $700,000) ÷ 10) + (($1,100,000 ÷ 10) × 6/12)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-31

PROBLEM 8.2 (Continued) (d)

ARNOLD CORPORATION (Partial) Balance Sheet December 31, 2028 Plant Assets* Land ......................................................... Buildings ................................................. Less: Accumulated depreciation— buildings ...................................... Equipment ............................................... Less: Accumulated depreciation— equipment .................................... Total plant assets ..............................

$ 4,200,000 $26,500,000 12,587,500 39,800,000

13,912,500

7,875,000

31,925,000 $50,037,500

*See tabular summary above. LO 2, 3, 5 BT: AP Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

8-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 8.3 Jan. 1

There is no gain or loss on the equipment retired. The equipment is fully depreciated and the book value is zero. Cost Less: Accumulated depreciation Book value Proceeds Gain/loss on disposal

June 30

Depreciation for one half of 2027 is

$3,000 ($30,000 × 1/5 × 6/12)

Accumulated depreciation up to June 30, 2027

$21,000 [($30,000 × 1/5) × 3 + $3,000]

Cost Less: Accumulated depreciation Book value Proceeds Gain on disposal Dec. 31

$71,000 71,000 ($71,000 × 1/10 × 10) 0 0 $0

$30,000 21,000 9,000 12,000 $3,000

Depreciation for entire 2027

$3,800 [($33,400 − $3,000) × 1/8]

Accumulated depreciation up to Dec. 31, 2027

$22,800 [($33,400 − $3,000) × 1/8 × 6]

Cost Less: Accumulated depreciation Book value Proceeds Loss on disposal

$33,400 22,800 10,600 0 $10,600

LO 3 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-33

8-34

PROBLEM 8.4

Assets

Notes Cash

Rec.

= Liabilities

Interest +

Rec.

Land

Buildings

Stockholders' Equity

Accum.

Depr. -

Interest

Notes

Com.

Equip.

= Payable +

Payable

+ Stock +

Bldgs.

Equipment

Retained Earnings

Rev.

Exp.

- Div.

(a) Bal. 1/1/27

+$20,000,000

+$97,400,000 -$62,200,000

+$150,000,000

-$54,000,000

(b) 2027 Apr. 1 -$1,100,000

+4,400,000

+$3,300,000

May 1

Kimmel, Survey of Accounting, 3e, Solutions Manual

+300,000

June 1

+900,000

-2,800,000 +$2,700,000

-93,333

-$93,333

Depreciation expense

+2,333,333

-166,667

Loss on disposal

-1,400,000

+$2,200,000

July 1 -2,200,000

Gain on disposal

+2,200,000

Dec. 31

-100,000

-1,000,000

-100,000

Depreciation expense

-2,435,000

Depreciation expense

-14,730,000

Depreciation expense

+1,000,000

-2,435,000

-14,730,000

31 31 Bal.

+$148,500 +$78,750

-148,500 +78,750

$23,000,000

$97,400,000 -$64,635,000

$148,400,000

Interest expense Interest revenue

-$65,590,000

(For Instructor Use Only)

[(c) Depr. exp. for equip. = ((Tot. cost − Cost of equip. sold − Cost of equip. retired) ÷ useful life) + ((Cost of new equip. ÷ useful life) × Fraction of yr.)]; [(($150,000,000 − $2,800,000 − $1,000,000) ÷ 10) + (($2,200,000 ÷ 10) × 6/12)] (Int. exp. = Prin. × Int. rate × Fraction of yr.); ($3,300,000 × 6% × 9/12) (Int. rev. = Prin. × Int. rate × Fraction of yr.); ($2,700,000 × 5% × 7/12)

8-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 8.4 (Continued) (d) YOUNGSTOWN COMPANY Balance Sheet (Partial) December 31, 2027 Property, plant, and equipment1 Land ................................................................. Buildings ......................................................... Less: Accumulated depreciation ................... Equipment ....................................................... Less: Accumulated depreciation ................... Total property, plant, and equipment .....

$ 23,000,000 $97,400,000 64,635,000 $148,400,000 65,590,000

32,765,000 82,810,000 $138,575,000

1 See tabular summary above.

LO 1, 2, 3, 5 BT: AP Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 2e, Solutions Manual

(For Instructor Use Only)

8-35

8-36

PROBLEM 8.5

Assets

Liabilities

Stockholders' Equity Retained Earnings

Cash

Kimmel, Survey of Accounting, 3e, Solutions Manual

(a) Bal. (b) 2028 Jan. 2 Jan-June July 1 Sept. 1 Oct. 1 (c) Adj. Dec. 31 31 Bal.

−$46,800 -230,000 −20,000

Patents +$54,000

Copyrights +$10,800

Com. Stock

Rev.

−

Exp.

−

Div.

+46,800 −$230,000

Research & develop. exp.

+20,000

-40,000 −200,000

−40,000

Advertising expense

−11,700 −4,600

Amortization expense Amortization expense

+200,000 −11,700 −4,600 +$109,100

+$206,200

[Patents amort. exp. = (Orig. cost ÷ Orig. useful life) + (Legal costs ÷ remaining useful life) + (New product legal costs ÷ legal life)]; [($60,000 ÷ 10) + (($46,800 ÷ 9) + (($20,000 ÷ 20) × 6/12)] [Copyrights amort. exp. = (Orig. cost ÷ Orig. useful life) + (New cost ÷ useful life)]; [($36,000 ÷ 10) + (($200,000 ÷ 50) × 3/12)]

(For Instructor Use Only)

8-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 8.5 (Continued) (d) AMATO COMPANY Balance Sheet (Partial) December 31, 2028 Intangible Assets Patents less $17,700 amortization) (1) .................................. Copyrights less $29,800 amortization) (2) ............................. Total intangible assets .................................................. (1) (2)

$109,100 206,200 $315,300

Cost ($60,000 + $46,800 + $20,000) - amortization ($6,000 + $11,700). Cost ($36,000 + $200,000) - amortization ($25,200 + $4,600).

(Patents cost − Amort.); (Copyrights cost − Amort.) [($60,000 + $46,800 + $20,000) − ($6,000 + $11,700); [($36,000 + $200,000) − ($25,200 + $4,600)]

(e)

The intangible assets of Amato Corporation consist of two patents and two copyrights. One patent with a cost of $60,000 is being amortized over 10 years. In addition, legal costs of $46,800 incurred in the successful defense of this patent are being amortized over the remaining useful life, 9 years. The other patent with a cost of $20,000 is being amortized over 20 years. A copyright with a cost of $36,000 is being amortized over 10 years; the other copyright with a cost of $200,000 is being amortized over 50 years.

LO 4, 5 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-37

PROBLEM 8.6

Research and Development Expense will have to be increased by $160,000 and Patents decreased by $160,000 to correct the error of capitalizing an expense. In addition, Patents will have to be increased by $8,000 and Amortization Expense decreased by a like amount to correct the error of overstating Amortization Expense.

Goodwill has to be increased by $2,000 and Amortization Expense decreased by $2,000 for erroneously amortizing Goodwill which has an indefinite life.

LO 4 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

8-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 8.7

(a)

Blythe

Jacke

Return on assets

$240,000 = 7.5% $3,200,000

$300,000 = 10.0% $3,000,000

Profit margin

$240,000 = 20.9% $1,150,000

$300,000 = 25.0% $1,200,000

Asset turnover

$1,150,000 = .36 times $3,200,000

$1,200,000 = .40 times $3,000,000

(Rtn. on assets = Net inc. ÷ Ave. tot. assets); (Profit margin = Net inc. ÷ Net sales); (Asset turnover = Net sales ÷ Ave. tot. assets)

(b)

Based on the asset turnover, Jacke Corp. is more effective in using assets to generate sales. Its asset turnover is 11% higher than Blythe’s ratio. A factor that inhibits comparing the two companies is the differing composition of total assets for each company. Eighty-four percent [($2,400,000 + $300,000) ÷ $3,200,000] of Blythe’s total assets are plant or intangible assets compared to only sixty percent ($1,800,000 ÷ $3,000,000) for Jacke. Also, Jacke reports no intangible assets.

LO 5 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-39

ACR8 Comprehensive Accounting Cycle Review MILO CORPORATION

Assets

= Accum.

Prepaid $22,000

$102,600

$3,600

$60,000

$-24,000

Stockholders’ Equity

+ Pay. + Com. Stock +

Retained Earnings

Sal. &

Depr.

Accts.

Cash + Inventory + Insurance + Equip. - Equip. + Patents = 12/1 Bal.

Liabilities

$9,600

Pay.

Wages

$27,300

$90,000

$56,500 +

Kimmel, Survey of Accounting, 3e, Solutions Manual

Dec. 2

-16,800

Rev.

-990 +4,500

-6,000

-990

+3,150

+1,650

+75,000 -6,600

Unadj. Bal.

78,100

Div.

50,100

3,600

70,800

-21,840

9,600

27,300

90,000

76,650

Depr. exp.- equip. Gain on disposal of plant asset

+75,000 -52,500

Exp.

+16,800

Sales revenue -52,500

Cost of goods sold

-6,600

Sal. & wages exp.

60,090

Adjustments (A1)

-600

Ins. exp

(A2)

-600 -810

-810

Depr. exp.

(A3)

-250

Depr. exp.

-100

Amort. exp.

(A4)

-100

(A5) (For Instructor Use Only)

Adj. Bal.

8-40

+2,200 $78,100

$50,100

$3,000

$70,800

$-22,900

$9,500

$27,300

$2,200

Kimmel, Survey of Accounting, 3e, Solutions Manual

-2,200 $90,000

$76,650

(For Instructor Use Only)

$64,050

Sal. & wages exp.

ACR8 (Continued) (b)

MILO CORPORATION Income Statement For the month ended December 31, 2027 Sales revenue Cost of gold sold Gross profit Operating expenses Salaries and wages expense Depreciation expense Insurance expense Amortization expense Total operating expenses Income from operations Other revenues and gains Gain on disposal of plant assets Net income

$75,000 52,500 22,500 $8,800 2,050 600 100 11,550 10,950 1,650 $12,600

MILO CORPORATION Statement of Retained Earnings For the month ended December 31, 2027 Retained earnings, 12/1/27 Add: Net income Retained earnings, 12/31/27

Kimmel, Survey of Accounting, 3e, Solutions Manual

$56,500 12,600 $69,100

(For Instructor Use Only)

8-41

ACR8 (Continued) (c)

MILO CORPORATION Balance Sheet December 31, 2027 Assets Current Assets Cash Inventory Prepaid Insurance Total current assets Property plant and equipment Equipment Less: Accum. depr. – equipment Intangible assets Patents Total Assets

$ 78,100 50,100 3,000 $131,200 $70,800 22,900

Liabilities and Stockholders’ Equity Current liabilities $27,300 Accounts payable 2,200 Salaries and wages payable Total liabilities Stockholders’ equity Common stock 90,000 Retained earnings 69,100 Total stockholders’ equity Total liabilities and stockholders’ equity

47,900 9,500 $188,600

$ 29,500

159,100 $188,600

LO 2, 3, 4, 5 BT: AP Difficulty: Medium TOT: 70 min. AACSB: Analytic AICPA FC: Measurement, Reporting

8-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT8.1

FINANCIAL REPORTING PROBLEM

(All amounts are in millions) (a)

At September 26, 2020, total cost of property, plant and equipment was $103,526; book value was $36,766 per Note 4.

(b)

Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets.

(c)

Depreciation and amortization was: 2020, $11,056; 2019, $12,547; 2018, $10,903.

(d)

The Company did not report any goodwill or intangible assets in 2020, 2019, or 2018.

LO 1, 2, 4, 5 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic, Communication and Technology AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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8-43

CT8.2

COMPARATIVE ANALYSIS PROBLEM

(a)

Columbia Sportswear

1. Return on assets

$108,013 = 3.7% ($2, 836,571 + $2,931,591) ÷ 2

2. Profit margin

$108,013 = 4.3% $2,501,554

3. Asset turnover

$2,501,554 = 0.87 times ($2,836,571 + $2,931,591) ÷ 2

Under Armour, Inc. ($549,177) = –11.1% ($5,030,628 + $4,843,531) ÷ 2 ($549,177) = – 12.3% $4,474,667

$4,474,667 = 0.91 times ($5,030,628 + $4,843,531) ÷ 2

(Rtn. on assets = Net inc. ÷ Ave. tot. assets); (Profit margin = Net inc. ÷ Net sales); (Asset turnover = Net sales ÷ Ave. tot. assets)

(b) The asset turnover measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. Both companies generated roughly the same asset turnover. However, Columbia was more effective in generating profit from its sales (4.3%) than Under Armour (-12.3%). This resulted in Columbia generating a much higher return on assets than Under Armour. LO 5 BT: AN Difficulty: Medium TOT: 25 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

8-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT8.3 (a)

INTERPRETING FINANCIAL STATEMENTS

Online retailers, such as Amazon, have large investments in sophisticated warehouses, but they have no money tied up in massive stores, such as those of Best Buy. This would mean that, all else equal, an online retailer would have lower total assets, which would increase the asset turnover as well as the return on assets. We would also expect that the online retailer’s operating costs would be lower since it doesn’t incur salary and other costs of running a store. This should increase its net income, which would increase the profit margin ratio. 2027

(b)

$1,277

Profit Margin

Asset Turnover

$50,272

2022

$50,272 ($17,849 + $18, 302)  2

Return on Assets

$1,140

= 2.5%

$30,848

= 2.78 times

$1,277 ($17,849 + $18, 302)  2

= 7.1%

= 3.7%

$30,848 ($11,864 + $10,294)  2 $1,140 ($11,864 + $10,294)  2

= 2.78 times

= 10.3%

(Profit margin = Net inc. ÷ Net sales); (Asset turnover = Net sales ÷ Ave. tot. assets); (Rtn. on assets = Net inc. ÷ Ave. tot. assets)

(c)

Profit Margin 2022 3.7% 2027 2.5%

× × ×

Asset Turnover = 2.78 = 2.78 =

Return on Assets 10.3% 7.0%*

*Difference due to rounding. (d)

It is interesting to note that the asset turnover stayed the same, at 2.78 times between 2022 and 2027. This means that the company generates the same amount of sales per dollar invested in assets. However, the profit margin declined from 3.7% down to 2.5%. This means that the company previously generated 3.7 cents on each dollar of sales, but it now only generates only 2.5 cents. From the presentation in part (c) we can clearly see that the decline in the return on assets is due to the decline in the profit margin. This is consistent with the suggestion that the company is having a hard time competing with online retailers. The online retailers can offer lower prices because they have lower operating costs. Best Buy lowers its prices to meet the competition which then cuts into its profit margin.

LO 5 BT: AN Difficulty: Hard TOT: 30 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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8-45

CT8.4

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by student. LO 2, 5 BT: AN Difficulty: Medium TOT: 25 min. AACSB: Analytic, Technology, and Communication AICPA FC: Reporting AICPA PC: Communication

8-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT8.5

REAL-WORLD FOCUS

According to the author, if you were interested in purchasing a Subway franchise, you would not find much information about what you could expect to make as a franchise owner. A company spokesperson said that prospective franchisees could get information from specific franchise owners. The article suggests that Subway’s lack of disclosure differs from many other franchises that have increased the amount of financial disclosure that they provide. It suggests that this could make potential franchisees more likely to choose other franchises, rather than Subway. It notes that at the time of the article Subway had shrunk by 2,300 locations. The Franchise Grade study notes that, during the 7-year period of study, the 870 franchise systems that did not disclose financial performance information saw the number of locations decline by 0.2%, while the 652 franchise systems that did provide financial details experienced an increase of 13%. A report by FRANdata found that 97% of lenders said that they were more likely to provide funding for a franchise purchase if the franchise brand provides financial performance information.

LO 4, 5 BT: S Difficulty: Hard TOT: 40 min. AACSB: Analytic, Technology, and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

8-47

CT8.6

DECISION-MAKING ACROSS THE ORGANIZATION

(a) (in thousands)

Proposed results Proposed results Current results without cannibalization with cannibalization

Return on assets

$12,000 = .12 $100,000

$13,500 = .135 $100,000

$12,000 = .12 $100,000

Profit margin

$12,000 = .27 $45,000

$13,500 = .225 $60,000

$12,000 = .24 $50,000

Asset turnover

$45,000 = .45 $100,000

$60,000 = .60 $100,000

$50,000 = .50 $100,000

(Rtn. on assets = Net inc. ÷ Ave. tot. assets); (Profit margin = Net inc. ÷ Net sales); (Asset turnover = Net sales ÷ Ave. tot. assets)

(b)

If there is no cannibalization, return on assets increases from 12% to 13.5%. This occurs even though the profit margin decreases from 27% to 22.5% because the asset turnover increases significantly, from .45 times to .60 times. However, if there is cannibalization, the return on assets remains unchanged at 12% because the increase in the asset turnover is offset by the decrease in the profit margin.

(c)

Yes, there are other alternatives. Here are some examples. 1.

Increase spending on marketing in an effort to increase sales of the high-end product, without offering the new, low-end product line. If this was successful it would increase the asset utilization, thus increasing the asset turnover and return on assets.

Consider marketing the new line under a different name, so as to minimize the cannibalization. This might substantially increase the marketing costs, and therefore reduce the profit margin. But the benefit of reducing cannibalization might make up for the increased marketing costs.

If neither of 1. or 2. seem feasible, they should consider closing a plant. This would increase the asset turnover and return on assets.

LO 5 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

8-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT8.7

COMMUNICATION ACTIVITY

Answers will depend on the position selected by the student. Some points that should be considered include: From: Email address of sending party To:

Email address of receiving party

Subject: Accounting Standards for Research and Development Name of receiving party: 1.

Some relatively small companies may spend less on R&D because they must expense these costs. However, the vast majority of companies realize that for continued growth and stability, R&D expenditures are a high priority regardless of how they are recorded for accounting purposes. Requiring companies to expense R&D costs instead of allowing them to be capitalized could leave U.S. companies at a competitive disadvantage as compared to non-U.S. companies. U.S. companies may be more reluctant to invest millions of dollars on research and development since the costs would negatively impact their financial statements in the short run.

The tangible future benefits of R&D costs may not be realized for several years, if ever. As a result, companies are required to record research and development costs as an expense when incurred, whether the R & D is successful or not. Conversely, the purchase of a long-lived asset (i.e., equipment, building) will provide benefits immediately as well as in future years.

Name of sending party LO 4 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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8-49

CT8.8

ETHICS CASE

(a)

The stakeholders in this situation are: Wade Truman, president of Clean Aire Anti-Pollution Company. Kate Rollins, controller. The stockholders of Clean Aire Anti-Pollution Company. Potential investors in Clean Aire Anti-Pollution Company.

(b)

The intentional misstatement of the life of an asset or the amount of the salvage value is unethical for whatever the reason. There is nothing unethical per se about changing the estimates used for the life of an asset or of an asset’s salvage value if the change is an attempt to better match cost and revenues and is a better allocation of the asset’s depreciable cost over the asset’s useful life. In this case, it appears from the controller’s reaction that the revision in the life is intended only to improve earnings which would be unethical. The fact that the competition uses a longer life for its equipment is not necessarily relevant. The competition’s maintenance and repair policies and activities may be different. The competition may use its equipment fewer hours a year (e.g., one shift rather than two shifts daily) than Clean Aire Anti-Pollution Company.

(c)

Income before income taxes in the year of change is increased $155,000 ($387,500 – $232,500) by implementing the president’s proposed changes. Old Estimates Asset cost ............................................................. Estimated salvage ................................................ Depreciable cost................................................... Depreciation per year (1/8) ..................................

$3,500,000 (400,000) 3,100,000 $ 387,500 Revised Estimates

Asset cost ............................................................. Estimated salvage ................................................ Depreciable cost................................................... Depreciation taken to date ($387,500 × 2)........... Remaining life in years ........................................ Depreciation per year ($2,325,000 ÷ 10) ..............

$3,500,000 (400,000) 3,100,000 (775,000) 2,325,000 10 years $ 232,500

LO 2 BT: E Difficulty: Hard TOT: 50 min. AACSB: Analytic, Communication, and Ethics AICPA FC: Reporting AICPA PC: Communication, Personal Demeanor

8-50

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT8.9

(a) 1 c

ALL ABOUT YOU

(b) For the most part, the value of a brand is not reported on a company’s balance sheet. Most companies are required to expense all costs related to the maintenance of a brand name. Also, any research and development that went into the development of the related product is generally expensed. The only way significant costs related to the value of the brand are reported on the balance sheet is when a company purchases another company that has a significant tradename (brand). In that case, given an objective transaction, companies are able to assign value to the brand and report it on the balance sheet. A conservative approach is used in this area because the value of the brand can be extremely difficult to determine. It should be noted that international rules permit companies to report brand values on their balance sheets. LO 4, 5 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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8-51

CT8.10

CONSIDERING ENVIRONMENTAL, SOCIAL, AND GOVERNANCE REPORTING

(a)

Airbus developed a wing attachment called a Sharklet that is designed to reduce fuel consumption. It is quite similar to a device that is sold by Aviation Partners called a Winglet. Aviation Partners has a patent on the device. Airbus filed a lawsuit against Aviation Partners claiming that the patent should be declared invalid.

(b)

Aviation Partners says that its Winglets will reduce fuel consumption by 5 to 7 percent. It says that the total amount of jet fuel that its device has saved is approximately 3 billion gallons.

(c)

Airbus and Aviation Partners were involved in discussions for about 5 years before they reached a memorandum of understanding to form a joint venture to design a device for use on Airbus aircraft. However, Airbus then developed the Sharklet, which Aviation Partners says violates its patent.

(d)

If Aviation Partners loses the lawsuit it would have to expense the cost of the lawsuit. It would also have to review the recorded value of its patent to determine whether the loss of the lawsuit has caused the value of the patent to be impaired.

LO 4 BT: S Difficulty: Medium TOT: 45 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement, Reporting AICPA BB: International/Global Perspective,

8-52

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CHAPTER 9 Reporting and Analyzing Liabilities and Stockholders’ Equity Learning Objectives 1. 2. 3. 4. 5.

Explain how to account for current liabilities. Explain how to account for bonds. Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock. Explain how to account for cash dividends. Discuss how stockholders’ equity is reported and analyzed.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-1

ANSWERS TO QUESTIONS 1.

While this is generally true, more precisely a current liability is a debt that can reasonably be expected to be paid: (a) from existing current assets or through the creation of other current liabilities and (2) within one year or the operating cycle, whichever is longer.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

In the balance sheet, Notes Payable of $20,000 and Interest Payable of $450 ($20,000 × 9% × 3/12) should be reported as current liabilities. In the income statement, Interest Expense of $450 should be reported under other expenses and losses.

LO 1 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

(a) Disagree. The company only serves as a collection agent for the taxing authority. It does not report sales taxes as an expense; it merely forwards the amount paid by the customer to the government. (b) Assets = Liabilities + Stockholders' Equity Sales Retained Earnings Taxes Com. Cash = Pay. + Stock + Rev. - Exp. - Div. +$8,550 +$550 +$8,000 Sales revenue

LO 1 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

(a) When the tickets are sold: Cash and Unearned Ticket Revenue should both be increased. (b) After each game: Unearned Ticket Revenue should be decreased and Ticket Revenue should be increased.

LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Three taxes commonly withheld by employers from employees’ gross pay are (1) federal income taxes, (2) state income taxes, and (3) social security and Medicare (FICA) taxes.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

(a) Three taxes commonly paid by employers on employees’ salaries and wages are (1) social security and Medicare (FICA) taxes, (2) state unemployment taxes, and (3) federal unemployment taxes. (b) Taxes withheld from employees’ gross pay and not yet remitted to the appropriate government agency are reported in the balance sheet as current liabilities.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

9-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 9 (Continued) 7.

The liabilities that Apple identified as current are: Accounts payable, Other current liabilities, Deferred revenue, Commercial paper, and Term debt.

LO 1 BT: AN Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

(a) Long-term liabilities are obligations that are expected to be paid after one year. Examples include bonds and long-term notes. (b) Bonds are a form of interest-bearing notes payable used by corporations, universities, and governmental agencies.

LO 2 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

(a) Face value is the amount of principal due at the maturity date. (b) The contractual interest rate is the rate used to determine the amount of cash interest the borrower pays and the investor receives. This rate is also called the stated interest rate because it is the rate stated on the bonds. (c)

A bond certificate is a legal document that indicates the name of the issuer, the face value of the bonds, and such other information as the contractual interest rate and maturity date of the bonds.

LO 2 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

10.

The two major obligations incurred by a company when bonds are issued are the interest payments due on a periodic basis and the principal which must be paid at maturity.

LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

11.

Less than. Investors were required to pay more than the face value; therefore, the market interest rate is less than the contractual rate.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

12.

No, Lee is not right. The market interest rate changes daily. It is affected by: (1) the type of bond used, (2) the state of the economy, (3) current industry conditions, and (4) the company’s individual performance.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

13.

$48,000 ($800,000 × 6% × 1 year)

LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

14.

$664,000 ($700,000 − $36,000). The balance of the Bonds Payable account minus the balance of the Discount on Bonds Payable account (or plus the balance of the Premium on Bonds Payable account) equals the carrying value of the bonds.

LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-3

Questions Chapter 9 (Continued) 15.

In the absence of restrictive provisions, the basic ownership rights of common stockholders are the rights to: (1) (2) (3) (4)

vote in the election of the board of directors and in corporate actions that require stockholders’ approval. share in corporate earnings. maintain the same percentage ownership when additional shares of common stock are issued (the preemptive right). share in assets upon liquidation.

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting AICPA BB: Governance Perspective

16.

Legally, a corporation is an entity, separate and distinct from its owners. As a legal entity, a corporation possesses most of the privileges and is subject to the same duties and responsibilities as a natural person. For example, it must abide by the law and it must pay taxes.

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting AICPA BB: Governance Perspective

17.

The principal components of stockholders’ equity for a corporation are paid-in capital and retained earnings.

LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

18.

The maximum number of shares that a corporation is legally allowed to issue is the number authorized. Gage Corporation is authorized to sell 100,000 shares. Of these shares, 70,000 shares have been issued. Outstanding shares are those issued shares which have not been reacquired by the corporation; in other words, issued shares less treasury shares. Gage has 66,000 shares outstanding (70,000 issued less 4,000 treasury).

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

19.

The relative par values should have no effect on the investment decision. The par value of common stock has no effect on its market value. Par value used to be a legal amount per share which usually indicated the minimum amount at which a share of stock can be issued. Therefore, either stock mentioned in the question could be the better investment.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

20.

A corporation may acquire treasury stock (1) to reissue the shares to officers and employees under bonus and stock compensation plans, (2) to increase trading of the company’s stock in the securities market in the hopes of enhancing its market value, (3) to have additional shares available for use in the acquisition of other companies, (4) to reduce the number of shares outstanding and, thereby, increase earnings per share, or (5) to avoid a takeover of the company by investors that are hostile to management.

LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

9-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 9 (Continued) 21.

When treasury stock is purchased, Treasury Stock is increased and Cash is decreased at cost ($11,000 in this example). Treasury stock is a contra stockholders’ equity account and cash is an asset. Thus, this transaction has (a) no effect on net income, (b) decreases total assets, (c) has no effect on total paid-in capital, and (d) decreases total stockholders’ equity.

LO 3 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

22.

(a)

Common stock and preferred stock both represent ownership of the corporation. Common stock signifies the basic residual ownership; preferred stock is ownership with certain privileges or preferences. Preferred stockholders typically have a preference as to dividends and as to assets in the event of liquidation. However, preferred stockholders generally do not have voting rights.

(b)

Some preferred stocks possess the additional feature of being cumulative. Cumulative preferred stock means that preferred stockholders must be paid both current year dividends and unpaid prior year dividends before common stockholders receive any dividends.

(c)

Dividends in arrears are disclosed in the notes to the financial statements.

LO 3, 4 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

23.

The answers are summarized in the table below:

(a) (b) (c) (d)

Account Common Stock Paid-in Capital in Excess of Par Value Retained Earnings Treasury Stock

(e) (f)

Paid-in Capital in Excess of Stated Value Preferred Stock

Classification Paid-in capital—capital stock Paid-in capital—additional paid-in capital Retained earnings Deducted from total paid-in capital and retained earnings Paid-in capital—additional paid-in capital Paid-in capital—capital stock

LO 3,5 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

24.

For a cash dividend to be paid, a corporation must have retained earnings, adequate cash, and a dividend declared by the board of directors.

LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-5

Questions Chapter 9 (Continued) 25.

May 1 is the date on which the board of directors formally declares (authorizes) and announces the cash dividend. May 15 is the record date which marks the time when ownership of outstanding shares is determined for dividend purposes from the stockholders’ records. May 31 is the date when the dividend checks are mailed to stockholders. Accounting transactions are made on May 1 (increasing Cash Dividends and increasing Dividends Payable), and on May 31 (decreasing Dividends Payable and decreasing Cash). See tabular summary below. BALANCE SHEET Assets = Liabilities + Stockholders' Equity Paid-in-Capital + Retained Earnings Dividends Common Cash = Payable + Stock + Rev. – Exp. – May 1 +XXX 31 –XXX –XXX

Div. –XXX

LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

26.

Par value is a legal amount per share, set at an arbitrarily selected amount, which usually indicates the minimum amount at which a share of stock can be issued. Market value is unrelated to par value. A stock’s market value will reflect many factors, including the company’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

27.

The payout ratio is computed by dividing cash dividends declared on common stock by net income. The payout ratio indicates the percentage of earnings distributed as cash dividends to common stockholders.

LO 5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

28.

Debt financing will increase the return on common stockholders’ equity when the return on assets exceeds the interest rate paid on debt.

LO 5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

29.

The return on assets will equal the return on common stockholders’ equity when a company has no preferred dividends or debt.

LO 5 BT: C Difficulty: Medium TOT: 2 min. AACSB: None AICPA FC: Reporting

30.

The issuance of bonds combined with a reduction in outstanding shares increases the company’s reliance on debt financing which will be reflected in an increase of the debt to assets ratio. The return on common stockholders’ equity should increase because the company’s return on assets exceeds the interest rate on the new debt and because the amount of stockholders’ equity in the denominator of the ratio has been reduced.

LO 5 BT: AN Difficulty: Hard TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

9-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9.1 (a) A note payable due in two years is a long-term liability, not a current liability. (b) $20,000 of the mortgage payable is a current maturity of long-term debt. This amount should be reported as a current liability. The remaining $180,000 should be reported as a long-term liability. (c) Interest payable is a current liability because it will be paid out of current assets in the near future. (d) Accounts payable is a current liability because it will be paid out of current assets in the near future. LO 1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement , Reporting

BRIEF EXERCISE 9.2

(a)July 1

Assets

Cash

+$90,000

Liabilities Notes Pay.

Interest Pay.

Stockholders' Equity Retained Earnings Com. Stock

Rev.

Exp.

- Div.

+$90,000

(b)Dec. 31

+$3,150

−$3,150

Interest expense

(Int. exp. = Face value x Int. rate x Fraction of a yr.) (Int. exp. = $90,000 × 7% × 6/12)

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-7

BRIEF EXERCISE 9.3 Sales tax payable (1) Sales = ($10,388 ÷ 1.06) = $9,800 (2) Sales taxes payable = ($9,800 × 6%) = $588 or $10,388 – $9,800 = $588 Assets

Mar. 16

= Liabilities + Sales Taxes Cash = Pay. + +$10,388 +$588

Stockholders' Equity Retained Earnings Com. Stock

Rev. +$9,800

Exp.

Div. Sales revenue

[Sales rev. = Tot. receipts ÷ (1 + Sales tax rate)] [Sales rev. = $10,388 ÷ 1.06)]

LO 1 BT: AP Difficulty: Easy TOT: 7 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9.4

(a) (b)

Assets

Cash +$280,000

Liabilities Unearned Ticket Revenue +$280,000 −28,000*

Stockholders' Equity Retained Earnings Com. Stock

Rev.

Exp.

Div.

+$28,000

Ticket revenue

*(3,500 x $80) ÷ 10 LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9.5 Gross earnings: Regular pay (40 × $16) ........................................... Overtime pay (7 × $24) ........................................... Gross earnings .............................................................. Less: FICA taxes payable ($808 × 7.65%) ................... Federal income taxes payable........................... Net pay ...........................................................................

$640.00 168.00

$808.00 $808.00

$ 61.81 95.00

156.81 $651.19

LO 1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

9-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 9.6 Assets

Cash

Jan. 15 15

Liabilities Salaries Fed. Inc. & Wages Taxes Pay. + Pay. +$651.19

+$95.00

FICA Taxes Pay.

Stockholders' Equity Retained Earnings Com. Stock

Rev.

Exp.

Div. Salaries & wages expense

−$808.00

+$61.81

−651.19

-$651.19

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9.7 Assets

Cash

Liabilities

Salaries

Fed. Inc.

FICA

& Wages

Taxes

Pay.

Jan. 15

Pay.

Stockholders' Equity Retained Earnings Com.

Stock

Rev.

Exp.

+$61.81

-$61.81

Div. Payroll tax expense

LO 1 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9.8 Assets

Liabilities + Disc. on Bonds Bonds Cash = Pay. Pay. + −$6,000 +$294,000 +$300,000

Stockholders' Equity Retained Earnings Com. Stock

Rev.

Exp.

Div.

(Cash rec'd = Bond face value x Percent. of face value) (Cash rec'd = $300,000 × .98) LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-9

BRIEF EXERCISE 9.9 Assets

Cash = +$404,000

Liabilities + Prem. on Bonds Bonds Pay. + Pay. + +$400,000 +$4,000

Stockholders' Equity Retained Earnings Com. Stock

Rev.

Exp.

Div.

(Cash rec'd = Bond face value x Percent. of face value) (Cash rec'd = $400,000 × 1.01) LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9.10 Assets

Liabilities

Stockholders' Equity Retained Earnings

Cash

Bonds Pay.

Interest Pay.

Com. Stock

Rev.

Exp.

Div.

2027 Jan. 1

+$3,000,000*

+$3,000,000

Dec. 31

+$210,000

−$210,000

Interest expense

2028 Jan. 1

−210,000

*3,000 x $1,000 (Int. exp. = Bond face value x Int. rate x Fraction of yr.) (Int. exp. = $3,000,000 × 7% × 12/12) LO 2 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9.11 Long-term liabilities Bonds payable (due 2031) ............................... Less: Discount on bonds payable ................. Notes payable (due 2029) ................................ Total long-term liabilities .........................

$700,000 28,000

$672,000 80,000 $752,000

LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

9-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 9.12 O’BRIAN INC. Balance Sheet (Partial) December 31, 2027 Current liabilities Notes payable (due May 1, 2028) ............. Accounts payable ..................................... Unearned rent revenue ............................ Interest payable ........................................ FICA taxes payable................................... Income taxes payable .............................. Sales taxes payable.................................. Total current liabilities ......................... Long-term liabilities Bonds payable (due 2031) ....................... Less: Discount on bonds payable .......... Notes payable (due 2029)......................... Total long-term liabilities ................... Total liabilities ..................................................

$ 20,000 157,000 240,000 40,000 7,800 3,500 1,700 $ 470,000 900,000 41,000

859,000 80,000 939,000 $1,409,000

LO 1, 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9.13 Assets

= Liabilities +

Cash = May 10 +$32,500

Stockholders' Equity Paid-in-Capital + Retained Earnings PIC in Excess of Com. Par Value + Stock + Com. + Rev. - Exp. - Div. +$12,500 +$20,000

(Com. stk. = No. of shs. Issued × Par value per sh.) (Com. stk. = 2,500 × $5) LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-11

BRIEF EXERCISE 9.14 Assets

= Liabilities +

Cash = June 1 +$21,000

Stockholders' Equity Paid-in-Capital + Retained Earnings Com. Stock +$21,000

Rev.

Exp.

Div.

LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9.15 Assets

= Liabilities +

Cash = +$848,000

Stockholders' Equity Paid-in-Capital + Retained Earnings Pd.-inPref. Cap. Stock + Pref. + Rev. - Exp. - Div. +$800,000 +$48,000

(Pref. stk. = No. of shs. Issued × Par value per sh.) (Pref stk. = 8,000 × $100) LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9.16 Assets

Cash Nov. 1 Dec. 31

−$7,000

= Liabilities

Div. Pay. +$7,000 −7,000

Paid-in-Capital Common Stock

Stockholders' Equity + Retained Earnings +

Rev.

Exp.

Div. −$7,000

LO 4 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

9-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 9.17

Transaction (a) Declared cash dividend (b) Paid cash dividend declared in (a) (c) Issued shares of common stock for cash (d) Purchased shares of stock to hold as treasury stock

Total Total Total Stockholders’ Assets Liabilities Equity N/A + – – – N/A +

N/A

–

N/A

–

LO 3,4 BT: K Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 9.18 Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 5,000 shares issued, and 4,500 shares outstanding................... $ 50,000 Additional paid-in capital Paid-in capital in excess of par value— common stock ................................ ....................... 22,000 Total paid-in capital ............................................. 72,000 Retained earnings ..................................................................... 42,000 Total paid-in capital and retained earnings ....... 114,000 Less: Treasury stock (500 shares) ...................................... 11,000 Total stockholders’ equity .................................. $103,000 LO 5 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-13

BRIEF EXERCISE 9.19 Payout ratio—last year =

$120,000 = 20% $600,000

Dividends paid this year = $1,600,000 × .20 = $320,000 (assuming the same payout ratio) Maintaining a constant payout ratio may be considered a sign of stability from the stockholders’ perspective. However, maintaining a constant payout ratio may have a negative impact on the company’s cash flow and its ability to grow. LO 5 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement , Reporting

BRIEF EXERCISE 9.20 Return on common stockholders’ equity =

Net income–Preferred dividends Average common stockholders’ equity $393 − $0 = 14.37% ($2,581+ $2,887) ÷ 2

Supervalu’s 14.37% return on stockholders’ equity indicates that about 14 cents of net income was earned for each dollar invested by common stockholders. LO 5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement , Reporting

9-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 9.21 Income before interest and taxes Interest ($2,000,000 × 6%) Income before income taxes Income tax expense (30%) Net Income (a) Outstanding shares (b) Earnings per share (a) ÷ (b)

Issue Stock $1,500,000 0 1,500,000 450,000 $1,050,000

Issue Bonds $1,500,000 120,000 1,380,000 414,000 $ 966,000

900,000 $1.17

700,000 $1.38

Net income is higher if stock is issued. However, earnings per share is lower than earnings per share if bonds are issued because of the additional shares of stock that are outstanding. Issuance of bonds is preferable since earnings per share is higher under this alternative. LO 5 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-15

SOLUTIONS TO DO IT! EXERCISES DO IT! 9.1a 1. 2.

$60,000 × 10% × 5/12 = $2,500 $42,000/1.05 = $40,000; $40,000 × 5% = $2,000 OR $42,000 – $40,000 = $2,000

(Sales revenue = Total receipts ÷ (1 + sales tax rate))

$42,000 × 2/6 = $14,000

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

9-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

DO IT! 9.1b Assets

Kimmel, Survey of Accounting, 3e, Solutions Manual

Cash

Liabilities

+ Fed.

State

Salaries

Fed. Inc.

FICA

St. Inc.

Unemp.

& Wages

Taxes

Pay.

Stockholders' Equity Pd. in Cap.

Retained Earnings

Com. +

Stock

Rev.

Exp.

Div.

(a) Feb. 28

+$59,339

(b)

+$7,100

+$5,661 +5,661

–$74,000

+$1,900 +110

–5,931

+160

Feb. 28

LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

(For Instructor Use Only)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-17

Salaries & wages expense Payroll tax expense

DO IT! 9.2 (a)

Assets

Cash

+$315,000

(b)

Liabilities + Prem. on Bonds Bonds Pay. + Pay. + +$300,000

Stockholders' Equity Pd. in Cap. + Retained Earnings Com. Stock + Rev. - Exp. - Div.

+$15,000

Long-term liabilities Bonds payable ................................................ Plus: Premium on bonds payable.................

$300,000 15,000 $315,000

LO 2 BT: AP Difficulty: 5 min. AACSB: Analytic AICPA FC: Reporting

9-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

DO IT! 9.3a Assets

= Liabilities +

Kimmel, Survey of Accounting, 3e, Solutions Manual

Cash = Apr. 1 +$715,000 1 +6,000

Stockholders' Equity Paid-in-Capital + Retained Earnings PIC in PIC in Excess Excess Com. of Par Pref. of Par + Stock + Com. + Stock + Pref. + Rev. - Exp. - Div. +$275,000 +$440,000 +$1,000 +$5,000

(Cash rec’d = No. shs. issued × Price per sh.) (Cash rec’d = 55,000 × $13) (Common stk. = No. of shs. issued × Par value per sh.) (Common stk. = 55,000 × $5) (Pref. stk. = No. of shs. issued × Par value per sh.) (Pref. stk. = 1,000 × $1) LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

(For Instructor Use Only)

9-19

DO IT! 9.3b

Aug. 1

Assets

= Liabilities

Cash -$76,000

Stockholders' Equity Paid-in-Capital + Retained Earnings Com. Treasury Stock Stock + Rev. - Exp. - Div. -$76,000

LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 9.4 (1) The company has not missed past dividends and the preferred stock is noncumulative; thus, the preferred stockholders are paid only this year’s dividend. The dividend paid to preferred stockholders would be $24,000 (3,000 × .08 × $100). The dividend paid to common stockholders would be $81,000 ($105,000 – $24,000). (2) The preferred stock is noncumulative; thus, past unpaid dividends do not have to be paid. The dividend paid to preferred stockholders would be $24,000 (3,000 × .08 × $100). The dividend paid to common stockholders would be $81,000 ($105,000 – $24,000). (3) The preferred stock is cumulative; thus, dividends that have been missed in the past (dividends in arrears) must be paid. The dividend paid to preferred stockholders would be $72,000 (3 × 3,000 × .08 × $100). The dividend paid to common stockholders would be $33,000 ($105,000 – $72,000). LO 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

9-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

DO IT! 9.5 2026

(a)

($100,000 − $30,000) Return on common = 10.4% stockholders’ equity ($600,000 + $750,000) /2

2027 ($110,000 − $30,000)

= 10.1%

($750,000 + $830,000)/2

[2026 (Net inc. − Pref. stk.) ÷ Ave. com. stkhldrs.’ equity] [2026 ($100,000 − $30,000) ÷ (($600,000 + $750,000) ÷ 2)]

(b) Between 2026 and 2027, return on common stockholders’ equity decreased from 10.4% to 10.1%. It is important to note that even though net income increased during this period average common stockholders’ equity increased more causing the return percentage to slightly decrease. LO 5 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement , Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-21

SOLUTIONS TO EXERCISES EXERCISE 9.1 Assets

Cash

Liabilities Notes Pay.

Interest Pay.

Stockholders' Equity Pd. in Cap. Com. Stock

+ +

Retained Earnings Rev.

Exp.

Div.

2027 (a) June 1

+$15,000

(b) June 30

Interest expense

−$100

+$100

2028 (d) Jan. 1

−15,700

−15,000

−700

[(b) Int. exp. = Face value × Int. rate ×Fraction of a yr.] [(b) Int. exp. = $15,000 × .08 × 1/12]

(c) Interest payable accrued each month ...................... Number of months from borrowing to year end.............................................................. Balance in interest payable account ........................

$100 × 7 $700

LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.2 Assets

Cash

Liabilities Notes Pay.

Interest Pay.

Stockholders' Equity

Pd. in Cap. + Com. + Stock +

Retained Earnings Rev.

Exp.

Div.

2027 (a) June 1

+$60,000

(b) June 30 (c) Dec. 1

+$400 −62,400

−60,000

−$400

Interest expense

−2,400

[(b) Int. exp. = Face value × Int. rate × Fraction of a yr.]; ($60,000 × .08 × 1/12) [(c) Int. exp. = Face value × Int. rate × Fraction of a yr.]; ($60,000 × .08 × 6/12)

9-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 9.2 (Continued) (d) Interest expense accrued each month ........................ $ 400 Number of months of loan ........................................... × 6 Total interest expense .................................................. $2,400 LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.3 Assets

Cash

Apr. 10 +$23,100

= Liabilities + Stockholders' Equity Sales Pd. in Cap. + Retained Earnings Taxes Com. = Pay. + Stock + Rev. - Exp. - Div. CERVIQ COMPANY +$1,100

+$22,000

Sales revenue

+$13,000

Sales revenue

QUARTZ COMPANY 15 +$13,780

+$780

[Apr. 15 Sales rev. = Tot. receipts ÷ (1 + sales tax rate)]; [$13,780 ÷ (1 + .06)] LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-23

EXERCISE 9.4 Assets

Cash (a)Mar. 31

Liabilities

Salaries & Wages Pay.

Fed. Inc. Taxes + Pay. +

FICA Taxes Pay.

+$48,104

+$7,500

+$4,896

(b)Mar. 31

St. Inc. Taxes Pay. +$3,100

Union Dues Pay.

State Unemp. Taxes Pay.

Stockholders' Equity Pd. in Cap.

Com. Stock

Retained Earnings

Rev.

+$400

+4,896

+700

Kimmel, Survey of Accounting, 3e, Solutions Manual

LO 1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

(For Instructor Use Only)

9-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Exp.

Div.

-$64,000

Salaries & wages expense

-5,596

Payroll tax expense

EXERCISE 9.5 Assets

Cash (a)

Nov.

+$176,400

Liabilities

Unearned Subscrip. Revenue

Stockholders' Equity Pd. in Cap. Com. Stock

Retained Earnings

Rev.

Exp.

Div.

+$176,400 −14,700

(b) Dec. 31

+$14,700

Sub. rev.

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.6 Assets

Cash

Liabilities Bonds Pay.

Interest Pay.

Stockholders' Equity Pd. in Cap.

Com. Stock

Retained Earnings Rev.

Exp.

Div.

2027 (a) Aug. 1

+$600,000

(b) Dec. 31

+$17,500

−$17,500

Int. exp.

−17,500

−24,500

Int. exp.

2028 (c) Aug. 1

−42,000

[(b) Int. exp. = Face value × Int. rate × Fraction of a yr.]; ($600,000 × .07 × 5/12) [(c) Int. exp. = Face value × Int. rate × Fraction of a yr.]; ($600,000 × .07 × 7/12) LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.7 Assets

Cash (a) Jan. 1

+$300,000

Liabilities Bonds Pay.

Interest Pay.

Stockholders' Equity Pd. in Cap.

Com. Stock

Retained Earnings Rev.

Exp.

Div.

+$300,000

(b) Dec. 31 (c) Jan. 1

−$24,000

Int. exp.

(For Instructor Use Only)

9-25

+$24,000 −24,000

−24,000

[(b) Int. exp. = Face value × Int. rate × Fraction of a yr.]; ($300,000 × .08 × 12/12) LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

EXERCISE 9.8 (a)

Jan. 1

Assets

Cash +$618,000

Liabilities

Bonds Pay. + +$600,000

Prem. on Bonds Pay. + +$18,000

Stockholders' Equity Pd. in Cap. Com. Stock

+ +

Retained Earnings Rev.

Exp.

- Div.

(Cash received = Bond face value × 1.03); ($600,000 × 1.03)

(b) Long-term Liabilities Bonds Payable, due 2037...................... Add: Premium on Bonds Payable ........

$600,000 10,800

$610,800

(c) The bonds sold for more than their face amount because the contract interest rate (6%) was higher than the market interest rate. When the contract rate is higher than the market rate, bonds will sell at a premium. LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.9 (a)

Assets

Liabilities + Disc. on Bonds Bonds Cash = Pay. Pay. + Jan. 1 +$480,000 +$500,000 -$20,000

Stockholders' Equity Pd. in Cap. + Retained Earnings Com. Stock + Rev. - Exp. - Div.

(Cash received = Bond face value × .96); ($500,000 × .96)

(b) Long-term Liabilities Bonds Payable, due 2042...................... Less: Discount on Bonds Payable .......

9-26

$500,000 12,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

$488,000

(For Instructor Use Only)

EXERCISE 9.9 (Continued) (c) The bonds sold for less than their face value because the contract interest rate (7%) was lower than the market interest rate. When the contract rate is lower than the market rate, the bonds will sell at a discount. LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.10 (a) The General Electric bonds were issued at a premium and the Boeing bonds were issued at a discount. (b) The prices of the two bonds differed because bond price is based on the market rate of interest, not the stated rate of interest. Market interest rates must have been different when the two bonds were issued causing the selling prices to differ. (c) Assets

Cash +$888,960

GENERAL ELECTRIC Liabilities + Pd. in Prem. on Cap. Bonds Bonds Com. Pay. + Pay. + Stock +$800,000 +$88,960

Stockholders' Equity + +

Retained Earnings Rev.

Exp.

Div.

(Cash received = Bond face value × Issue percent.); ($800,000 × 111.12%)

BOEING Assets

Cash +$792, 640

Liabilities

Bonds Pay. +$800,000

Disc. on Bonds Pay. −$7,360

Stockholders' Equity Pd. in Cap. Com. Stock

+ +

Retained Earnings Rev.

Exp.

Div.

(Cash received = Bond face value × Issue percent.); ($800,000 × 99.08%)

LO 2 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-27

EXERCISE 9.11 Assets

Cash

Liabilities

Bonds Pay.

Interest Pay.

Stockholders' Equity Pd. in Cap.

Com. Stock

Retained Earnings Rev.

Exp.

Div.

2027 (a)Jan. 1

+$350,000

(b)Dec. 31

+$28,000

-$28,000

Interest expense

2028 (c)Jan. 1

-28,000

2047 (d)Jan. 1

-350,000

(b) (Int. exp. = Bond face value × Int. rate × Fraction of yr.) (b) (Int. exp. = $350,000 × 8% × 12/12)

LO 2 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.12 (a)

Assets

Jan. 10 July 1

Cash +$150,000 +420,000

Liabilities +

Stockholders' Equity Paid-in-Capital + Retained Earnings PIC in Excess of Com. Par Value + Stock + Com. + Rev. - Exp. - Div. +$150,000 +300,000 +$120,000

(Com. stk. = No. of shs. Issued × Par value per sh.) (July 1 com. stk. = 60,000 × $5)

9-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 9.12 (Continued) (b)

Assets

= Liabilities +

Cash = Jan. 10 +$150,000 July 1 +420,000

Stockholders' Equity Paid-in-Capital + Retained Earnings PIC in Excess of Com. Stated Value + Stock + Com. + Rev. - Exp. - Div. +$30,000 +$120,000 +60,000 +360,000

(Com. stk. = No. of shs. Issued × Stated value per sh.) (July 1 com. stk. = 60,000 × $1)

LO 3 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-29

EXERCISE 9.13 Assets

Liabilities

Stockholders' Equity Paid-in-Capital PIC in Excess of Par Value

Com. Cash

Kimmel, Survey of Accounting, 3e, Solutions Manual

June 12

+$300,000

July 11

+318,000

Nov. 28

−9,000

Stock +$80,000

Com.

PIC in Excess of Par Value

Pref. +

Stock

Pref.

Treasury -

Stock

+$220,000 +$300,000

(Com. stk. or Pref. stk. = No. of shs. Issued × Par value per share) (Com. stk. = 80,000 × $1) (Pref. stk. = 3,000 × $100) LO 3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Retained Earnings

+$18,000 −$9,000

Rev.

Exp.

Div.

(For Instructor Use Only)

EXERCISE 9.14

(a)

Assets

Liabilities

Stockholders' Equity Paid-in-Capital

Kimmel, Survey of Accounting, 3e, Solutions Manual

Cash

Com. Stock

PIC in Excess of Par Value Com.

Pref. Stock

PIC in Excess of Par Value Pref.

Feb. 1

+$2,040,000

+$2,000,000

+$ 40,000

July 1

+3,360,000

+3,000,000

+360,000

(Pref. stk. = No. of shs. Issued × Par value per sh.) (Feb. 1 Pref. stk. = 40,000 × $50)

Retained Earnings

Rev.

Exp.

Div.

(For Instructor Use Only)

9-31

EXERCISE 9.14 (Continued) (b) Preferred Stock—listed first in paid-in capital under capital stock. Paid in Capital in Excess of Par Value—Preferred Stock—listed first under additional paid-in capital. LO 3, 5 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.15 (a) Common stock outstanding is 574,000 shares. (Issued shares 580,000 less treasury shares 6,000.) (b) The stated value of the common stock is $5 per share. (Common stock issued $2,900,000 ÷ 580,000 shares.) (c) The par value of the preferred stock is $100 per share. (Preferred stock $600,000 ÷ 6,000 shares.) (d) The dividend rate is 6% ($36,000 ÷ $600,000). (e) The Retained Earnings balance is still $1,158,000. Cumulative dividends in arrears are only disclosed in the notes to the financial statements. LO 3, 4 BT: C Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.16 (a)

Assets

= Liabilities

Stockholders' Equity Paid-in-Capital + Retained Earnings

Div. Cash = Pay. + Common Stock June 15 +$103,500 −103,500 July 10 −$103,500 Dec. 15 +116,800

Rev. - Exp. -

Div. −$103,500 −116,800

(Div. = No. of shs. Outstdg. × div. per sh.) [July 10 div. = (60,000 + 9,000) × $1.50] [Dec. 15 div. = (69,000 + 4,000) × $1.60]

9-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 9.16 (Continued) (b) In the retained earnings statement, dividends of $220,300 ($103,500 + $116,800) will be deducted. In the balance sheet, Dividends Payable of $116,800 will be reported as a current liability. LO 4 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9.17 PAISAN INC. Partial Balance Sheet December 31, 2027 Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $50 par value, 40,000 shares authorized, 14,000 shares issued and outstanding ............................... Common stock, no-par, $1 stated value, 400,000 shares authorized, 250,000 shares issued and 241,000 outstanding ...................................... Total capital stock ....................... Additional paid-in capital Paid-in capital in excess of par value—preferred stock .................... Paid-in capital in excess of stated value—common stock ..................... Total additional paid-in capital ... Total paid-in capital ..................... Retained earnings ............................................. Total paid-in capital and retained earnings ...................... Accumulated other comprehensive loss ......... Less: Treasury stock (9,000 common shares) ........................ Total stockholders’ equity ..........

$ 700,000

250,000 $ 950,000 24,000 1,200,000 1,224,000 2,174,000 920,000 3,094,000 31,000 64,000 $2,999,000

LO 5 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-33

EXERCISE 9.18 Payout ratio Return on common stockholders’ equity

2027 $298 = 59.1% $504

2026 $611 = 110.1% $555

$504 − $40 = 18.3% $2,532

$555 − $40 = 19.9% $2,591

Flintlock Corporation’s common stock dividends decreased over 51% even though its net income decreased only 9% and return on stockholders’ equity decreased 8%. The company’s dividend policies should be reviewed for an explanation of these inconsistencies. [Rtn. on com. stk. equity = (Net inc. – Pref. div.) ÷ Ave. com. stk. equity] LO 5 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 9.19 Payout ratio Return on common stockholders’ equity

2027 $471 = 23.5% $2,006

2026 $394 = 18.3% $2,157

$2,006 – $0 = 14.7% $13,622.5

$2,157 – $0 = 18% $11,986.5

Walgreen’s payout ratio increased 28% even though its return on common stockholders’ equity and net income decreased by 18% and 7% respectively. The company’s dividend policies should be reviewed for an explanation. (Payout ratio = Com. div. ÷ Net inc.) LO 5 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement

9-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 9.20 (a) 2027:

$182,000– $8,000 = 17.4% $1,000,000

2026:

$150,000 – $8,000 = 20.3% $700,000

[Rtn. on com. stk. equity = (Net inc. – Pref. div.) ÷ Ave. com. stk. equity]

(b) Kojak Corporation’s net income increased in part because it retired bonds and eliminated the interest expense associated with the bonds. Such an increase in income would produce an increase in return on common equity if stockholders’ equity had remained constant. In this example, common stockholders’ equity increased by 43% [($1,000,000 – $700,000) ÷ $700,000] while income increased by only 21%. (c) 2027:

$200,000 = 16.7% $1,200,000

2026:

$500,000 = 41.7% $1,200,000

Kojak Corporation retired all of its long-term bonds on January 1, 2027. This decreased its debt to assets ratio from 41.7% to 16.7%. Kojak Corporation would be considered to be very solvent. (Debt to assets ratio = Tot. liabl. ÷ Tot. assets) LO 5 BT: AN Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-35

EXERCISE 9.21

Income before interest and taxes ......... Interest ($2,000,000 × 12%) ................... Income before taxes .............................. Income tax expense (30%) .................... Net income ............................................. Outstanding shares ............................... Earnings per share ................................

(a) Plan One Issue Stock $800,000 800,000 240,000 $560,000 140,000 $4.00

(b) Plan Two Issue Bonds $800,000 240,000 560,000 168,000 $392,000 90,000 $4.36

(EPS = Net inc. ÷ No. of shs. outstdg.) (Plan 1 EPS = $560,000 ÷ 140,000); (Plan 2 EPS = $392,000 ÷ 90,000) LO 5 BT: AN Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

9-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO PROBLEMS PROBLEM 9.1 (a)

Assets

Kimmel, Survey of Accounting, 3e, Solutions Manual

Cash

Accts. Rec.

Liabilities

Notes Pay.

Bal.

Accts. Pay.

Salaries Unearned & Wages Serv. + Pay. + Rev. +

+$42,500

Jan. 1 +$18,000 5

+$19,000

+6,254

State Pd. in Cap. + FICA Fed. Inc. St. Inc. Unemp. Interest Taxes Taxes Taxes Taxes Com. + Pay. + Pay. + Pay. + Pay. + Pay. + Stock +

Retained Earnings

Rev.

Exp.

- Div.

+$6,600

+354 -10,000

-6,600

Stockholders' Equity

+$18,000

12 14

Sales Taxes Pay.

+$5,900

Sales revenue

+10,000

Service revenue

+24,000

Sales revenue

-6,600 +$25,440

+1,440

Adj. 31

+$75

+$58,145

+$5,355

31 Bal.

-$75 +$5,000

+$1,500

+5,355 $17,654 +

$25,440 =

$18,000 +

$42,500 +

$58,145 +

$9,000 +

$1,794 +

$75 + $10,710 +

$5,000 + $1,500

+ $39,900

(For Instructor Use Only)

[Jan. 5 Sales rev. = Tot. proceeds ÷ (1 + sales tax percent.)]; [$6,254 ÷ (1 + .06)] (Jan. 20 Sales tax pay = No. units sold × Unit sales price × Sales tax percent.); (500 × $48 × 6%) (Jan. 31 Int. exp. = Face value × Int. rate × Fraction of a yr.); ($18,000×5% × 1/12)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

9-37

-70,000

Interest expense Salaries & wages expense

-5,355

Payroll tax expense

- $75,430

PROBLEM 9.1 (Continued) (b) Current liabilities Notes payable ................................................................. Accounts payable........................................................... Salaries and wages payable .......................................... FICA taxes payable ($5,355 × 2) .................................... Unearned service revenue ($19,000 – $10,000) ............ Federal income taxes payable ....................................... Sales taxes payable ....................................................... State income taxes payable........................................... Interest payable .............................................................. Total current liabilities............................................

$ 18,000* 42,500* 58,145* 10,710* 9,000* 5,000* 1,794* 1,500* 75 $146,724*

*($6,600 + $354 – $6,600 + $1,440) LO 1 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

9-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9.2

Assets

Cash

Liabilities

Bonds Pay.

Interest Pay.

Stockholders' Equity Pd. in .Cap.

Com. Stock

Retained Earnings Rev.

Exp.

Div.

(a) 2026 Oct. 1

+$700,000

Dec. 31

+$8,750

-$8,750

Int. exp.

-8,750

-26,250

Int. exp..

-35,000

(d) 2036 Oct. 1

-700,000

[(a) Int. exp. = Face value × Int. rate × Fraction of a yr.]; ($700,000 × 5% × 3/12) [(c) Int. exp. = Face value × Int. rate × Fraction of a yr.]; ($700,000 × 5% × 9/12)

(b) Current Liabilities Interest Payable ............................................ Long-term Liabilities Bonds Payable ..............................................

8,750 700,000

LO 1, 2 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-39

PROBLEM 9.3

(a)

Assets

2027 Cash Jan. 1 +$5,880,000

Liabilities + Stockholders' Equity Disc. on Pd. in Cap. + Retained Earnings = Bonds Pay. - Bonds Pay. + Com. Stock + Rev. - Exp. - Div. +$6,000,000 -$120,000

(b) Long-term Liabilities Bonds Payable, due 2042 ....................... Less: Discount on bonds payable (c)

Assets

$6,000,000 112,000

$5,888,000

Liabilities + Stockholders' Equity Disc. on Pd. in Cap. + Retained Earnings 2042 Cash = Bonds Pay. - Bonds Pay. + Com. Stock + Rev. - Exp. - Div. Jan. 1 -$6,000,000 -$6,000,000 LO 1, 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

9-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9.4

(a)

Assets

Liabilities

Stockholders' Equity Paid-in-Capital

Cash

Kimmel, Survey of Accounting, 3e, Solutions Manual

Jan. 10

+$280,000

Mar. 1

+636,000

Com. Stock

+$70,000

PIC in Excess of Stated Value Com.

May 1

+720,000

+120,000

+600,000

+25,000

+5,000

+20,000

Nov. 1

+168,000 $1,829,000

$195,000

Pref. Stock

PIC in Excess of Par Value Pref.

+$210,000

Sept. 1

Bal.

$830,000

+$600,000

+$36,000

+150,000

+18,000

$750,000

$54,000

[Jan 10 PIC in excess of std. value-com. = No. of shs. issued × (mkt. price per sh. - std. value per sh.)]; [70,000 × ($4 - $1)] [Mar. 1 PIC in excess of par value-pref. = No. of shs. issued × (mkt. price per sh. - par value per sh.)]; [12,000 × ($53 - $50)]

Retained Earnings

Rev.

Exp.

Div.

(For Instructor Use Only)

9-41

PROBLEM 9.4 (Continued) (b)

TIDAL CORPORATION Partial Balance Sheet December 31, 2027 Stockholders’ equity Paid-in capital Capital stock 6% Preferred stock, $50 par value, 20,000 shares authorized and 15,000 shares issued .............................. Common stock, no-par, $1 stated value, 500,000 shares authorized, 195,000 shares issued .......................................... Total capital stock .................. Additional paid-in capital Paid-in capital in excess of par value—preferred stock ............... Paid-in capital in excess of stated value—common stock ................ Total additional paid-in capital ................................... Total paid-in capital ................

$750,000

195,000 $ 945,000 54,000 830,000 884,000 $1,829,000

LO 3, 5 BT: AP Difficulty: Medium TOT: 35 min. AACSB: Analytic AICPA FC: Reporting

9-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9.5

Assets

Liabilities

Stockholders' Equity Paid-in-Capital

Cash

Div. Pay.

(a) Bal.

Com. Stock

PIC in Excess of Stated Value Com.

Kimmel, Survey of Accounting, 3e, Solutions Manual

+$1,000,000

+$480,000

+20,000

+10,000

Pref. Stock +$300,000

PIC in Excess of Par Value Pref. +$15,000

Treasury Stock

Retained Earnings

Rev.

Exp.

Div.

−$40,000

(b) Feb. 1

+$30,000

Mar. 20

−7,000

Oct. 1 Nov. 1

+$21,000 −21,000

Dec. 1 31

−7,000 −21,000 +124,500

−124,500

−$21,000

–124,500

(Div. on com. stk. = No. of shs. outstdg. × Div. per sh.) [Div. on com. stk. = (($1,000,000 ÷ $4) + 5,000 - (5,000 + 1,000)) × $.50]

−124,500

(For Instructor Use Only)

9-43

PROBLEM 9.5 (Continued) (c)

CYRUS CORPORATION Partial Balance Sheet December 31, 2027 Stockholders’ equity Paid-in capital Capital stock 7% Preferred stock, $100 par value, noncumulative, 5,000 shares authorized, 3,000 shares issued and outstanding ................................. Common stock, no-par, $4 stated value, 300,000 shares authorized, 255,000 shares issued and 249,000 shares outstanding ................................. Total capital stock .................. Additional paid-in capital Paid-in capital in excess of par value—preferred stock .............. Paid-in capital in excess of stated value—common stock ............... Total additional paid-in capital ................................... Total paid-in capital ................ Retained earnings ........................................ Total paid-in capital and retained earnings ................. Less: Treasury stock (6,000 common shares) ............................................... Total stockholders’ equity .....

$ 300,000

1,020,000 $1,320,000 15,000 490,000 505,000 1,825,000 822,500 2,647,500 47,000 $2,600,500

(End. ret earn = Beg. ret earn.+ Net inc. – Div.) ($688,000 + $280,000 – $21,000 – $124,500)

9-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 9.5 (Continued) (d) Payout ratio =

$124,500 = 44.5% $280,000

Earnings per share = *250,000 – 5,000

$280,000 – $21,000 $259,000 = = $1.05 (245,000 * + 249,000 * *) ÷ 2 247,000

**255,000 – 6,000

Return on common stockholders’ equity =

$280,000 – $21,000 $259,000 = = 11.7% a b ($2,128,000 + $2,285,500 ) ÷ 2 $2,206,750 a

Beginning common stockholders’ equity: $1,000,000 + $480,000 + $688,000 – $40,000

Ending common stockholders’ equity: $1,020,000 + $490,000 + $822,500 – $47,000

[EPS = (Net inc. – Pref. div.) ÷ Ave. no. of com. shs. outstdg.] LO 3–5 BT: AP Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-45

PROBLEM 9.6 JONS COMPANY Partial Balance Sheet December 31, 2027 Stockholders’ equity Paid-in capital Capital stock 9% Preferred stock, $100 par value, cumulative, 120,000 shares issued and outstanding ............................... $12,000,000 Common stock, $5 par value, 1,300,000 shares issued and 1,285,000 shares outstanding ......... 6,500,000 Total capital stock ....................... $18,500,000 Additional paid-in capital Paid-in capital in excess of par value—preferred stock .................... 840,000 Paid-in capital in excess of par value—common stock ..................... 1,800,000 Total additional paid-in capital ... 2,640,000 Total paid-in capital ..................... 21,140,000 Retained earnings ............................................. 2,178,000* Total paid-in capital and retained earnings ...................... 23,318,000 Less: Treasury stock (15,000 shares) ............ 165,000 Total stockholders’ equity........... $23,153,000 *$1,200,000 + $3,600,000 – $1,542,000a – $1,080,000 a

1,300,000 shares issued less 15,000 shares in treasury = 1,285,000 shares outstanding; 1,285,000 × $1.20 = $1,542,000.

(End. ret. earn. = Beg. ret. earn. + Net inc. – Div. declared) LO 3–5 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

9-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9.7

KIMBEL INC. Partial Balance Sheet December 31, 2027 Stockholders’ equity Paid-in capital Common stock, $1 par value, 2,000,000 shares authorized, 710,000* shares issued, and 690,000 shares outstanding .................................... Additional paid-in capital Paid-in capital in excess of par value— common stock ................................................ Total paid-in capital ..................................... Retained earnings ............................................................. Total paid-in capital and retained earnings .................................................... Accumulated other comprehensive income ($60,000 + $17,000) ......................................................... Less: Treasury stock—common (20,000 shares) .......... Total stockholders’ equity ..........................

$ 710,000 1,780,000** 2,490,000 903,000*** 3,393,000 77,000 76,000 $3,394,000

***600,000 + 50,000 + 60,000 = 710,000 shares ***$1,500,000 + (50,000 × $2) + (60,000 × $3) = $1,780,000 ***$700,000 – $207,000 + $410,000 = $903,000 (End. ret. earn. = Beg. ret. earn. + Net inc. – Div. declared) LO 3–5 BT: AP Difficulty: Easy TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-47

PROBLEM 9.8 (a) (1)

2027 Return on assets

$2,240,000 $15,687,500

(2)

Return on common stockholders’ equity

(3)

Payout ratio

(4)

Debt to assets ratio

2026 = 14.3%

$2,240,000 – $300,000 $9,400,000

$890,000 $2,240,000 $6,000,000 $14,500,000

= 20.6%

= 39.7%

= 41.4%

$2,500,000 $17,763,000

= 14.1%

$2,500,000 – $300,000 $14,100,000 $1,026,000 $2,500,000 $3,000,000 $16,875,000

= 15.6%

= 41.0%

= 17.8%

(b) Spahn’s net income declined from $2,500,000 to $2,240,000. Its return on assets increased slightly, and its return on common stockholders’ equity increased 32%. Based on these two measures, profitability improved. The payout ratio declined about 3%. (c) Spahn’s debt to assets ratio increased from 17.8% to 41.4%. This indicates that Spahn is less solvent in 2027 than 2026. (d) It appears that the decision to issue debt to purchase common stock was wise. Spahn’s 10% interest rate was less than its return on assets of 14.3%. This resulted in the 32% increase in return on common stockholders’ equity. Although the solvency ratio declined, Spahn does not appear to be in trouble covering the extra debt. If Spahn’s earnings start to drop, it could consider reissuing the treasury stock and paying off debt. LO 5 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement, Reporting

9-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT9.1

FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at September 26, 2020, $105,392 millions. Apple's total current liabilities decreased by $326 million ($105,392 – $105,718) relative to the prior year. (b) Apple's accounts payable at September 26, 2020, $42,296 million. (c) The other components of current liabilities are: Other current liabilities................................................ Deferred revenue ......................................................... Commercial paper ....................................................... Term debt .....................................................................

$42,684 million 6,643 4,996 8,773

LO 1 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-49

CT9.2

COMPARATIVE ANALYSIS PROBLEM

(a)

Columbia Sportswear Company Return on common stockholders’ equity

$108,013 ÷ $1,841,109,* = 5.9%

*($1,832,771 + $1,849,447) ÷ 2

Under Armour, Inc. ($549,177) ÷ $1,913,040** = (28.7%)

**($1,675,993 + $2,150,087) ÷ 2

Debt to assets

$1,003,800 ÷ $2,836,571 = 35.4%

$3,354,635 ÷ $5,030,628 = 66.7%

Return on assets

$108,013 ÷ $2,884,081* = 3.7%

($549,177) ÷ $4,937,079.5** = (11.1%)

*($2,836,571 + $2,931,591) ÷ 2

**($5,030,628 + $4,843,531) ÷ 2

(b) Columbia’s return on assets, 3.7%, is larger than Under Armour’s (11.1%) indicating that it is more profitable. Comparing the return on common stockholders’ equity indicates that Columbia is more profitable because its shareholders earned 5.9% on each dollar invested while Under Armour’s investors lost 28.7%. Under Armour relies much more on debt to provide a return to its investors. However, its reliance on debt increases its risk of default and decreases its solvency.

Columbia Sportswear Company

Under Armour, Inc.

$17,195 = 15.9% $108,013

Columbia pays out a higher portion of its earnings as dividends. LO 5 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement, Reporting

9-50

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT9.3

INTERPRETING FINANCIAL STATEMENTS

(a) This is a dividend transaction—a property dividend. (b) Debt to assets ratio

Host Marriott

Marriott International

$3,112 = 81.4% $3,822

$2,440 = 76.1% $3,207

$(25) = (.7%) $3,822

$200 = 6.2% $3,207

$(25) = (3.5%) $710

$200 = 26.1% $767

(d) The debtholders were concerned that by splitting the company and leaving most of the debt with only one half of the original company the likelihood that the debtholders would be repaid was reduced—that is, the probability that Marriott would default on the debt increased. This reduces the value of the debt investment. LO 5 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-51

CT9.4

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by the student. LO 3 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic and Technology AICPA FC: Reporting

9-52

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT9.5

DECISION-MAKING ACROSS THE ORGANIZATION

Year ended After Purchase of Before Purchase of Treasury Stock Treasury Stock (a) Earnings per share

Return on common stockholders’ equity Return on assets

$193.6 − $0 = $1.76 109.7

$123.4 − 0 = $1.03 119.9

$193.6 = 18% $1,078

$123.4 = 11% $1,126.2

$193.6 = 9.6% $2,016.9

$123.4 = 6.5% $1,889.8

All three measures indicate a significant increase in profitability. (b) Payout ratio

Average cash dividend paid per share

$26.8 = 13.8% $193.6

$31.0 = 25.1% $123.4

$26.8 = $.24 109.7

$31.0 = $.26 119.9

Wendy’s paid less of its earnings as dividends after the purchase of treasury shares than the year before. Wendy’s appeared to be retaining more of its earnings to invest in its operations. (c) Debt to assets ratio

$1,046.3 = 50.4% $2,076.0

$769.9 = 41.9% $1,837.9

Wendy’s debt to assets ratio increased from 41.9% to 50.4% indicating a decrease in its solvency. This increase may not be cause for concern since Wendy’s times interest earned decreased only slightly.

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9-53

CT9.5 (Continued) (d) Since Wendy’s return on assets and its return on common stockholders’ equity both increased, it can be concluded that the improvement was due partially to increased reliance on debt financing and partially to improved profitability in use of assets. (e) It appears that Wendy’s International acted wisely in purchasing treasury stock and taking on more debt. Its profitability improved significantly and it appears to be handling its debt payments comfortably. Wendy’s has been able to increase its earnings per share and return to its stockholders. LO 3, 5 BT: E Difficulty: Medium TOT: 40 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

9-54

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT9.6

COMMUNICATION ACTIVITY

From:

Student’s email address

To:

Uncle Earl’s email address

Subject: Difference between stock terms Hi Uncle Earl: Thanks for your recent letter and for asking me to explain four terms. Here are my explanations: (1) Authorized stock is the total amount of stock that a corporation is given permission to sell as indicated in its charter. If all authorized stock is sold, a corporation must obtain the consent of the state to amend its charter before it can issue additional shares. (2) Issued stock is the amount of stock that has been sold either directly to investors or indirectly through an investment banking firm. (3) Outstanding stock is capital stock that has been issued and is being held by stockholders. It represents the difference between the stock issued by the company and the stock repurchased by the company. (4) Preferred stock is capital stock that has contractual preferences over common stock in certain areas. I really enjoy my accounting classes and especially like the accounting instructors. I hope your corporation does well, and I wish you continued success with your inventions. Student’s name LO 3 BT: C Difficulty: Easy TOT: 6 min. AACSB: Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-55

CT9.7

ETHICS CASE

(a) The stakeholders in this situation are: The director of Pele’s R&D division. The president of Pele. The shareholders of Pele. Those who live in the environment to be sprayed by the new (untested) chemical. (b) The president is risking the environment and everything and everybody in it that is exposed to this new chemical in order to enhance his company’s sales and to preserve his job. Presidents and entrepreneurs frequently take risks in performing their leadership functions, but this action appears to be irresponsible and unethical. (c) A parent company may protect itself against loss and most reasonable business risks by establishing separate subsidiary corporations, but whether it can insulate itself against this type of action is a matter of state corporate law and criminal law. LO N/A BT: E Difficulty: Medium TOT: 10 min. AACSB: Ethics and Communication AICPA FC: Reporting AICPA PC: Professional Conduct

9-56

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT9.8

ALL ABOUT YOU

Student responses will vary depending on the organization chosen by the student. LO N/A BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic, Ethics and Communication AICPA FC: Reporting AICPA PC: Ethical Conduct

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-57

CT9.9

CONSIDERING ENVIRONMENTAL, SOCIAL, AND GOVERNANCE REPORTING

Under normal circumstance about 5% of Dvara Trust’s small loans default. During the pandemic approximately 90% of borrowers were unable to pay loans. Many borrowers who had available cash were not able to pay because repayments for traditional microfinance is in cash payments made in person to debt-collectors. Since much of India was in lockdown, in-person payments were not possible.

According to the World Bank, MSMEs represent 90 percent of businesses. It is estimated that these MSMEs provide more than 50% of global employment. Microfinance institutions serve approximately 140 million customers.

Between 2011 and 2017 the number of unbanked people in the world fell from 2.5 billion to 1.7 billion.

One way to reduce default rates and increase microfinance opportunities is through mobile-money accounts so that loans could be serviced on phones.

LO - BT: S Difficulty: Medium TOT: 60 min. AACSB: Analytic, Technology, and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

9-58

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT9.10

CONSIDERING ENVIRONMENTAL, SOCIAL, AND GOVERNANCE REPORTIING

a. Public Benefit Corporation is a legal incorporation status (like a C Corporation or LLC). Public benefit corporations describe in their charter how they will consider the interests of multiple stakeholders (society, workers, the community, and the environment) in addition to shareholders when making decisions. In contrast “B Corp” status is a simply a certification that a company can earn by meeting certain social and environmental criteria. The certification is administered by a nonprofit group known as B Lab. Patagonia and AltSchool have both labels. b. Public benefit corporations (PBC) and non-profit corporations are actually quite different. PBCs are actually for-profit companies. While they must spell out in their charter the extra societal benefits they will provide, they still have an obligation to their shareholders to meet financial objectives. They are taxed like any other corporation. Nonprofit companies exist solely for a specified charitable purpose. They are not taxed, as long as they don’t begin to operate like a for-profit organization. c. If shareholders do not feel that the company is meeting its stated public benefit goals they can launch a proceeding against the company. A minimum of 5% of the shareholders must do this in order for the proceeding to go forward. d. Public benefit corporation status can protect a company from being sued by shareholders for engaging in charitable activities that go beyond the normal goals of maximizing company profits. In the article they mention that Patagonia’s decision to donate its Black Friday profits to nonprofit organizations was more easily justified to its shareholders because of its PBC status. LO 1 BT: C Difficulty: Medium TOT: 40 min. AACSB: Technology, Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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9-59

CHAPTER 10 Financial Analysis: The Big Picture Learning Objectives 1. 2. 3.

Apply the concepts of sustainable income and quality of earnings. Apply horizontal analysis and vertical analysis. Analyze a company’s performance using ratio analysis.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-1

ANSWERS TO QUESTIONS 1.

Sustainable income is defined as the most likely level of income to be obtained in the future. It is the amount of regular income that a company can expect to earn from its normal operations. In order to distinguish a company’s net income from its sustainable income, unusual revenues, expenses, gains, and losses are separated from operating transactions. In addition, information on unusual items such as gains and losses on discontinued operations and components of other comprehensive income are disclosed separately.

LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

This would not be considered a favorable trend for Hogan Inc. The relevant earnings per share figures are the $3.26 in 2026 and the $2.99 in 2027. These figures indicate that, unless there was an additional issuance of common stock, the earnings from the continuing operations of the company decreased during 2027. This should give the company’s management some concern because they will not always be able to count on income or gains from discontinued operations.

LO 1 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Companies report a change from the FIFO method to the average-cost method for inventory costing, retroactively. That is, they report both the current period and any previous periods reported on the face of the statement using the new principle. As a result, the same principle applies to all periods reported. This treatment improves the ability to compare results across years.

LO 1 BT: C Difficulty: Easy TOT: 3 AACSB: None AICPA FC: Reporting

Apple reported “Total other comprehensive income” of $42 million for year ended September 26, 2020. “Comprehensive income” was more than “Net income” by 0.1% [($57,453 – $57,411) ÷ $57,411]

LO 1 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Factors that affect the quality of earnings include: (1) Use of alternative accounting methods. Variations among companies in the application of generally accepted accounting principles may hamper comparability. (2) Use of pro forma income measures that do not follow GAAP. Pro forma income is calculated by excluding items that the company believes are unusual or nonrecurring. It is often difficult to determine what was included and excluded. (3) Improper revenue and expense recognition. Many high-profile cases of inappropriate accounting involve recording items in the wrong period.

LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

10-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 10 (Continued) 6.

(a) During a period of inflation, net income will be less under the LIFO inventory costing method than it will be using the FIFO method because LIFO results in the larger cost of goods sold amount. (b) Inflation does not affect the amount of depreciation taken (except through its effect on salvage value) since the depreciable amount is based on the acquisition cost. A six-year life produces greater depreciation for the first six years (thus, less net income) and less depreciation in years 7, 8, 9 (thus, more net income in those years) than a nine-year life. (c)

Inflation does not affect the amount of depreciation taken. Use of the straight-line method results in less depreciation in the earlier years (thus, more net income) than the decliningbalance method but more depreciation in the later years.

LO 1 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Horizontal analysis, (also called trend analysis), measures the dollar and percentage increase or decrease of an item over a period of time. In this approach, the amount of the item on one statement is compared with the amount of that same item in one or more earlier periods. Vertical analysis, (also called common-size analysis), expresses each item within a financial statement as a percent of a relevant base amount, such as total assets for the balance sheet and net sales for the income statement.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

(a) $300,000 × 1.245 = $373,500, 2027 net income. (b) $300,000 ÷ .06 = $5,000,000, 2026 revenue.

LO 2 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

(a) Gina is not correct. There are three characteristics: liquidity, profitability, and solvency. (b) The three parties are not primarily interested in the same characteristics of a company. Shortterm creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company.

LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

10. (a) Comparison of financial information can be made on an intracompany basis, an intercompany basis, and an industry average basis. 1. An intracompany basis compares the same item with prior periods, or with other financial items in the same period within a company. 2. An intercompany basis compares the same item with other companies’ published reports. 3. The industry average compares the item with the industry average as compiled by Dun & Bradstreet or by trade associations. (b) The intracompany basis of comparison is useful in detecting changes in financial relationships and significant trends within a company. The intercompany basis of comparison provides insight into a company’s competitive position. The industry average basis provides information about a company’s relative position within the industry. LO 2 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Reporting Copyright © 2023 John Wiley & Sons, Inc.

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10-3

Questions Chapter 10 (Continued) 11.

(a) Liquidity ratios: current ratio, inventory turnover, days in inventory, accounts receivable turnover, and average collection period. (b) Solvency ratios: Debt to assets ratio, times interest earned, and free cash flow.

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

12.

Tina is correct. A single ratio by itself may not be very meaningful and is best interpreted by comparison with (1) past ratios of the same company, (2) ratios of other companies, or (3) industry norms or predetermined standards. In addition, other ratios of the company are necessary to determine overall financial well-being.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

13.

(a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Solvency ratios measure the company’s ability to survive over a long period of time. (c) Profitability ratios measure the income or operating success of a company for a given period of time.

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

14.

Working capital and the current ratio both relate current assets to current liabilities. Working capital produces a dollar amount that indicates the difference between current assets and current liabilities. The current ratio produces a ratio that indicates the proportional relationship between current assets and current liabilities.

LO 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

15.

Handi Mart does not necessarily have a problem. The accounts receivable turnover can be misleading in that some companies encourage credit and revolving charge sales and slow collections in order to earn a healthy return on the outstanding receivables in the form of high rates of interest.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

16.

(a) (b) (c) (d)

Asset turnover Inventory turnover and days in inventory Return on common stockholders’ equity Times interest earned

LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

17.

The price earnings (P-E) ratio is a reflection of investors’ assessments of a company’s potential future earnings. The P-E ratio takes into account such factors as relative risk, stability of earnings, trends in earnings, and the market’s perception of the company’s growth potential. In this question, investors favor Microsoft because it has the higher P-E ratio. The investors feel that Microsoft will be able to generate even higher future earnings and thus investors are willing to pay more for the stock.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

10-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 10 (Continued) 18.

The payout ratio is cash dividends paid on common stock divided by net income. In a growth company, the payout ratio is often low because the company is reinvesting earnings in the business instead of distributing earnings to its investors.

LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

19.

(a) An increase in the profit margin is good news because it means that a greater percentage of net sales is resulting in income. (b) A decrease in inventory turnover signals bad news because it is taking the company longer to sell the inventory and consequently, there is a greater chance of inventory obsolescence. (c)

An increase in the current ratio signals good news because the company improved its ability to meet maturing short-term obligations.

(d) Earnings per share is a deceptive ratio. A decrease might be bad news to the company because it could mean a decrease in net income. Or the decrease might be good news to the company because of an increase in stockholders’ investment. (e) An increase in the price-earnings ratio is generally good news because it means that the market price per share of stock has increased and investors are willing to pay that higher price for the stock. (f)

An increase in the debt to assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity “buffer.”

(g) A decrease in the times interest earned is bad news because it means that the company’s ability to meet interest payments as they come due has weakened. LO 3 BT: C Difficulty: Hard TOT: 6 min. AACSB: None AICPA FC: Reporting

20.

Net Income Return on assets = Average Total Assets (7.6%) Net Income - Preferred dividends Return on common stockholders’ equity = Average common stockholders’ equity (12.8%)

The difference between the two rates can be explained by looking at the denominator value and by remembering the basic accounting equation, A = L + SE. The asset value will be the larger of the two denominator values; therefore, it will also give the smaller rate of return. LO 3 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-5

Questions Chapter 10 (Continued) 21.

(a) Times interest earned, which is an indication of the company’s ability to meet interest charges, and the debt to assets ratio, which indicates the company’s ability to withstand losses without impairing the interests of creditors. (b) The current ratio and accounts receivable turnover, which indicate a company’s liquidity and short-term debt-paying ability. (c)

The earnings per share of common stock and the return on common stockholders’ equity, both of which indicate the earning power of the investment.

LO 3 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

22.

Net income - Preferred dividends = Earnings per share. Average common shares outstanding $200,000 – $20,000

= $4.50

40,000

EPS of $4.50 is high relative to what? Is it high relative to last year’s EPS? The president may be comparing the EPS of $4.50 to the market price of the company’s stock, which is inappropriate. LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

10-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10.1 FLORES CORPORATION Partial Income Statement Discontinued operations: Income from operations of Mexican facility, net of $50,000 income tax ($200,000 × 25%)………… $150,000 Loss on disposal of Mexican facility, net of $160,000 income tax savings ($640,000 × 25%) 480,000

($330,000)

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 10.2 SILVA CORPORATION Partial Statement of Comprehensive Income Net Income .................................................................................. Other comprehensive income Unrealized gain on available-for-sale securities, net of $17,500 income taxes ($70,000 × 25%)………… ...... Comprehensive income ..............................................................

$337,500 52,500 $390,000

LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 10.3 The change in inventory costing for Bryce should be reported retroactively. That is, it should report both the current period and previous periods included on the face of the statement using the new principle. As a result, the same principle applies in all periods. The treatment improves the ability to compare results across years. LO 1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-7

BRIEF EXERCISE 10.4 Horizontal analysis:

Dec. 31, 2027 Dec. 31, 2026

Increase or (Decrease) Amount Percent*

$ 460,000 780,000 3,164,000

$ 60,000 130,000 364,000

Accounts receivable (net) Inventory Total assets

*$60,000 = .15 $400,000

$ 400,000 650,000 2,800,000

$130,000 = .20 $650,000

15% 20% 13%

$364,000 = .13 $2,800,000

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 10.5 Vertical analysis:

Accounts receivable (net) Inventory Total assets

•

Dec. 31, 2027 Amount Percent*

Dec. 31, 2026 Amount Percent**

$ 460,000 780,000 3,164,000

$ 400,000 650,000 2,800,000

14.5% 24.7% 100%

14.3% 23.2% 100%

*$460,000 = .145 $3,164,000

**$400,000 = .143 $2,800,000

$780,000 = .247 $3,164,000

* * * $650,000 * = .232 $2,800,000

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement

10-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 10.6

Net income

2027 $518,400

2026 $485,000

2025 $500,000

Increase or (Decrease) Amount Percent* ($15,000) (3%) $33,400) 7%)

(a) 2025–2026 (b) 2026–2027

*($15,000) = (.03) $500,000

$33,400 = .07 $485,000

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 10.7

Net income .16 =

2027 $382,800

2026 X

Increase 16%

$382,800 – X X

.16X = $382,800 – X 1.16X = $382,800 X = $330,000 2026 Net Income = $330,000 (% inc. in net inc. = (2027 net inc. – 2026 net inc.) ÷ 2026 net inc.) (16% = ($382,800 – 2026 net inc.) ÷ 2026 net inc.) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-9

BRIEF EXERCISE 10.8

Net sales Cost of goods sold Expenses Net income

2027 100.0 60.5 26.0 13.5

2026 100.0 62.9 26.6 10.5

2025 100.0 64.8 27.5 7.7

Net income as a percent of net sales for Palau increased over the three-year period because cost of goods sold and expenses both decreased as a percent of net sales every year. LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 10.9 Comparing the percentages presented results in the following conclusions: The net income for Phoenix increased in 2026 because of the combination of an increase in net sales and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2027 as net sales decreased, while both cost of goods sold and expenses increased. This resulted in a decrease in net income. LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

BRIEF EXERCISE 10.10 Current ratio: 2027

2026

$80,260 Current assets = = .33:1 $245,805 Current liabilities

$70,874 = .22:1 $326,203

The current ratio increased by 50% indicating that Bob Evans Farms is more liquid in 2027; however, the current ratio is very low for both years. LO 3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement

10-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 10.11 Accounts receivable turnover = 2027 (a)

Net credit sales Average net accounts receivable 2026

$4,300,000 = 7.9 times $545,000* *($540,000 + $550,000) ÷ 2

$4,000,000 = 7.5 times $530,000**

**($520,000 + $540,000) ÷ 2

(b) Average collection period

365 = 46.2 days 7.9

365 = 48.7 days 7.5

Colby Company can be somewhat pleased with the effectiveness of its credit and collection policies. The company has decreased the average collection period by more than two days and the collection period of approximately 46 days almost equals the 45 days allowed in the credit terms. LO 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic and Communication AICPA FC: Measurement AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-11

BRIEF EXERCISE 10.12 (a) Inventory turnover =

Cost of goods sold Average inventory

2027

2026

$4,780,000* = 4.8 times  $960,000 + $1,020,000 

 

 

$4,541,000**  $840,000 + $960,000    2  

2027 $ 960,000 4,840,000 5,800,000 1,020,000 $4,780,000*

Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold

= 5.0 times

2026 $ 840,000 4,661,000 5,501,000 960,000 $4,541,000**

(Inv. turnover = CGS ÷ Ave. inv.) [2027: 4.8 times = ($960,000 + $4,840,000 – $1,020,000) ÷ (($960,000 + $1,020,000) ÷ 2)]

(b) Days in inventory 2027

365 = 76 days 4.8

2026

365 = 73 days 5.0

Management should be concerned with the fact that inventory moved slower in 2027 than it did in 2026. The decrease in inventory turnover could be because of poor pricing decisions or because the company is stuck with obsolete inventory it is unable to sell. LO 3 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic and Communication AICPA FC: Measurement AICPA PC: Communication

10-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 10.13 (a) Asset turnover = =

Net sales Average total assets

$24,275.5  $13,073.1 + $13,717.3    2  

= 1.81 times Staples generated $1.81 of net sales for each dollar it had invested in assets. (Asset turnover = Net sales ÷ Ave. tot. assets) [1.81 times = $24,275.5 ÷ (($13,073.1 + $13,717.3) ÷ 2)]

(b) Profit margin =

Net income Net sales

$738.7 $24,275.5

= 3.0% Each dollar of net sales resulted in about 3 cents of net income. LO 3 BT: AN Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-13

BRIEF EXERCISE 10.14

Cash dividends paid on common stock Net income

Payout ratio =

X $72,000

.18 =

X = $72,000 (.18) = $12,960 Cash dividends paid = $12,960 (Cash div. paid = Net inc. × Payout ratio) ($12,960 = $72,000 × .18)

Return on assets

.20 =

Net income Average total assets

$72,000 X

.20X = $72,000 X =

$72,000 .20

X = $360,000 Average total assets = $360,000 (Ave. tot. assets = Net inc. ÷ Rtn. on assets) ($360,000 = $72,000 ÷ .20) LO 3 BT: AN Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Measurement

10-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 10.15 Free cash flow = Net cash provided by operating activities – Capital expenditures – Cash dividends $10.4 – $3.7 – $6.2 = $0.5 Topps Company generated enough cash from operating activities to maintain its current productive capacity and pay dividends. The free cash flow that remained could have been used to expand operations, pay additional dividends, or reduce debt. LO 3 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-15

SOLUTIONS TO DO IT! EXERCISES DO IT! 10.1 HRABIK CORPORATION Income Statement (Partial) For the Year Ended December 31, 2027 Income before income taxes ........................................ Income tax expense ...................................................... Income from continuing operations ............................. Discontinued operations Loss from operations of music division, net of $12,000 income tax savings ($60,000 × 20%)..................................................... Gain from disposal of music division, net of $8,000 income taxes ($40,000 × 20%) ...... Net income .....................................................................

$500,000 100,000 400,000

$48,000 32,000

(16,000) $384,000

HRABIK CORPORATION Statement of Comprehensive Income For the Year Ended December 31, 2027 Net income ..................................................................... Other comprehensive income: Unrealized loss on available-for-sale securities, net of $30,000 income tax savings ($150,000 × 20%) Comprehensive income ................................................

$384,000 120,000 $264,000

(Discont. Oper. = Loss from oper. of music div., net of inc. tax savings + Gain from disp. of music div., net of inc. tax.) [($16,000) = (($60,000) × (1.00 −.20)) + ($40,000 × (1.00 −.20))] LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

10-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 10.2 Increase or (Decrease) in 2027 Amount Current assets Plant assets Total assets

Percent

$ (20,000) (9.1)% [($ 200,000 – $ 220,000) ÷ $ 220,000] 260,000 33.3% [($1,040,000 – $ 780,000) ÷ $ 780,000] $240,000 24% [($1,240,000 – $1,000,000) ÷ $1,000,000]

LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

DO IT! 10.3 2027

2026

(a) Current ratio: $1,380 ÷ $900 = $1,310 ÷ $790 =

1.53:1

(b) Inventory turnover: $955/ [($460 + $390) ÷ 2)] = $890/ [($390 + $340) ÷ 2)] =

2.25 times

7.7%

(d) Return on assets: $294/[($2,340 + $2,210) ÷ 2)] = $154/[($2,210 + $1,900) ÷ 2)] =

12.9%

(e) Return on common stockholders’ equity: $294/[($1,030 + $1,040) ÷ 2)] = $154/[($1,040 + $900) ÷ 2)] =

28.4%

(f)

1.66:1

2.44 times

4.5%

Debt to assets ratio: ($900 + $410) ÷ $2,340 = ($790 + $380) ÷ $2,210 =

(g) Times interest earned: ($294 + $126 + $25) ÷ $25 = ($154 + $66 + $20) ÷ $20 =

7.5%

15.9% 56.0% 52.9% 17.8 times 12.0 times

LO 3 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

10-17

SOLUTIONS TO EXERCISES EXERCISE 10.1 (a)

HAAS CORPORATION Income Statement (Partial) For the Year Ended October 31, 2027 Income before income taxes .................................................. Income tax expense ($540,000 × 20%)................................... Income from continuing operations ...................................... Discontinued operations Loss from operations, net of $10,000 income tax savings ($50,000 × 20%) ................. $40,000 Loss on disposal, net of $14,000 income tax savings ($70,000 × 20%) .................. 56,000 Net income ..............................................................................

$540,000 108,000 432,000

96,000 $336,000

(Discont. Oper. = Loss from oper., net of inc. tax. savings + Loss on disp., net of inc. tax savings) [($96,000) = (($50,000) × (1.00 − .20)) + (($70,000) × (1.00 − .20))]

(b) From: Independent Auditor’s email address To: Chief Accountant’s email address Subject: Explanation of Misleading Items on Income Statement Chief Accountant’s name: After reviewing your income statement for the year ended 10/31/27, we believe it is misleading for the following reasons: The amount reported for income from continuing operations is overstated by $24,000. The income tax expense should be 20% of $540,000, or $108,000, not $84,000. Also, the effect of the loss on discontinued operations on net income is only $96,000, not $120,000. An income tax savings of $24,000 should be netted against the loss. Independent Auditor’s name LO 1 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication 10-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 10.2 TRAYER CORPORATION Income Statement (Partial) For the Year Ended December 31, 2027 Income from continuing operations ...................... Discontinued operations Loss from operations, net of $2,000 income tax savings ($10,000 × 20%) .......... Gain from disposal, net of $8,000 income taxes ($40,000 × 20%) ................... Net income ..............................................................

$290,000 $ 8,000 32,000

24,000 $314,000

TRAYER CORPORATION Statement of Comprehensive Income For the Year Ended December 31, 2027 Net income ...................................................................................... Other comprehensive income Unrealized loss on available-for-sale securities, net of $16,000 income tax savings ($80,000 × 20%) ....... Comprehensive income .........................................................

$314,000 64,000 $250,000

(Discont. Oper. = Loss from oper., net of inc. tax. savings + Gain on disp., net of inc. tax.) [$24,000 = (($10,000) × (1.00 − .20)) + ($40,000 × (1.00 − .20))] LO 1 BT: AP Difficulty: Medium Communication

TOT: 15 min.

AACSB: Analytic

AICPA AC: Measurement AICPA PC:

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-19

EXERCISE 10.3 GLITTER INC. Condensed Balance Sheets December 31 Increase or (Decrease) Amount Percent

2027

2026

Assets Current assets Plant assets (net) Total assets

$106,000 400,000 $506,000

$ 90,000 350,000 $440,000

($16,000 50,000 ($66,000

(17.8%) (14.3%) (15.0%)

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 99,000 122,000 $221,000

$ 65,000 90,000 $155,000

($34,000 32,000 $66,000

(52.3%) (35.6%) (42.6%)

130,000 155,000

115,000 170,000

15,000 (15,000)

(13.0%) (8.8%)

285,000

–0–

(–0–

$506,000

$440,000

($66,000

(15.0%)

Stockholders’ Equity Common stock, $1 par Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

10-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 10.4 JOSHUA CORPORATION Condensed Income Statements For the Years Ended December 31

Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income

2027 Amount Percent $800,000 100.0% 520,000 65.0% 280,000 35.0% 120,000 15.0% 60,000 7.5% 180,000 22.5% 100,000 12.5% 30,000 3.7% $ 70,000 8.8%

2026 Amount Percent $600,000 100.0% 408,000 68.0% 192,000 32.0% 72,000 12.0% 48,000 8.0% 120,000 20.0% 72,000 12.0% 24,000 4.0% $ 48,000 8.0%

LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 10.5 (a)

NIKE, INC. Condensed Balance Sheets May 31 ($ in millions)

Assets Current assets Property, plant, and equipment (net) Other assets Total assets

Increase or (Decrease) Amount Percent

2027

2026

$ 9,734

$ 8,839

$895

10.1%

1,958 1,558 $13,250

1,891 1,713 $12,443

67 (155) $807

3.5% (9.0)% 6.5%

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-21

EXERCISE 10.5 (Continued) NIKE, INC. Condensed Balance Sheets (Continued) May 31 2027

2026

$ 3,277

$ 3,322

$(45)

(1.4%)

1,280

1,296

(16)

(1.2%)

8,693

7,825

868

11.1%

$13,250

$12,443

$807

6.5%

$ (in millions)

Percent

Assets Current assets Property, plant, and equipment (net) Other assets Total assets

$ 9,734 1,958 1,558 $13,250

73.5% 14.8% 11.7% 100.0%

Liabilities and stockholders’ equity Current liabilities Long-term liabilities Stockholders’ equity Total liabilities and stockholders’ equity

$ 3,277 1,280 8,693 $13,250

24.7% 9.7% 65.6% 100.0%

Liabilities and stockholders’ equity Current liabilities Long-term liabilities Stockholders’ equity Total liabilities and stockholders’ equity

(b)

Increase or (Decrease) Amount Percent

NIKE, INC. Condensed Balance Sheet May 31, 2027

LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Measurement

10-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 10.6 (a)

DELANEY CORPORATION Condensed Income Statement For the Years Ended December 31

2027 $598,000 477,000 121,000 80,000 $ 41,000

Net sales Cost of goods sold Gross profit Operating expenses Net income (b)

2026 $500,000 420,000 80,000 44,000 $ 36,000

Increase or (Decrease) During 2027 Amount Percentage $98,000 19.6% 57,000 13.6% (41,000) (51.3% 36,000) 81.8% $ 5,000) (13.9%

DELANEY CORPORATION Condensed Income Statements For the Years Ended December 31 2027 $ Percent $598,000 100.0% 477,000 79.8% 121,000 20.2% 80,000 13.4% $ 41,000 6.8%

Net sales Cost of goods sold Gross profit Operating expenses Net income

2026 $ Percent $500,000 100.0% 420,000 84.0% 80,000 16.0% 44,000 8.8% $ 36,000 7.2%

LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 10.7 Current ratio = 2.01:1 ($4,054 ÷ $2,014) Accounts receivable turnover = 4.2 times ($8,258 ÷ $1,988.5a) Average collection period = 86.9 days (365 days ÷ 4.2) Inventory turnover = 5.9 times ($5,328 ÷ $899b) Days in inventory = 61.9 days (365 days ÷ 5.9) a

[($2,035 + $1,942) ÷ 2]

[($898 + $900) ÷ 2]

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-23

EXERCISE 10.8 Current ratio as of February 1, 2027 = 3.00:1 ($120,000 ÷ $40,000) Feb. 3 7 11 14 18

3.00: No change in total current assets or liabilities. 2.43: ($97,000a ÷ $40,000) 2.43: No change in total current assets or liabilities. 3.04: ($85,000b ÷ $28,000c) 2.66: ($85,000 ÷ $32,000d)

$120,000 − $23,000 = $97,000

$120,000 − $23,000 − $12,000 = $85,000

$40,000 − $12,000 = $28,000

$28,000 + $4,000 = $32,000 LO 3 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 10.9 (a) Current ratio =

( $15,000 + $70,000 + $60,000 ) = 2.90:1 $50,000

(b) Accounts receivable turnover = (1)

(c)

( $375, 000 – $ 25 ,000 ) = 5.4 times $ 6 5 , 0 0 0(1)

($70,000 + $60,000) 2

Average collection period = 365 days ÷ 5.4 = 67.6 days

(d) Inventory turnover = (2)

$198,000 = 3.6 times $55,000( 2)

( $60,000 + $50,000 ) 2

(e)

Days in inventory = 365 days ÷ 3.6 = 101.4 days

(f)

Free cash flow = $48,000 – $25,000 – $10,000 = $13,000

LO 3 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement

10-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 10.10

$75.9 = 1.5% $5,121.8

(a) Profit margin

$5,121.8 = 1.64 times  $2,993.9 + $3,249.8    2

(b) Asset turnover

(Asset turnover = Net sales ÷ Ave. tot. assets) [1.64 times = $5,121.8 ÷ (($2,993.9 + $3,249.8) ÷ 2)]

$75.9 = 2.4%  $2,993.9 + $3,249.8    2

(Rtn. on assets = Net inc. ÷ Ave. tot. assets) [2.4% = $75.9 ÷ (($2,993.9 + $3,249.8) ÷ 2)]

(d) Return on common stockholders’ equity

($75.9–$0) = 7.6%  $921.6 + $1,074.7    2

(Rtn. on CSE = (Net inc. – Pref. div.) ÷ Ave. common stockholders' equity) [7.6% = ($75.9 − $0) ÷ (($921.6 + $1,074.7) ÷ 2)]

(e) Gross profit rate

( $5,121.8 − $3,540.6 ) = 30.9% $5,121.8

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 10.11 (a) Earnings per share

$72,000 − $0 $72,000 = = $2.00 36,000  32,000 + 40,000     2  

(EPS = (Net inc. – Pref. div.) ÷ Wtd.-ave. no. of common shs. outstanding) [$2.00 = ($72,000 – $0) ÷ ((32,000 + 40,000) ÷ 2)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-25

EXERCISE 10.11 (Continued) (b) Price-earnings ratio

$14.00 = 7.0 times $2.00

$21,000 = 29.2% $72,000

(d) Times interest earned

( $72,000 + $16,000 + $24,000 ) = $112,000 = 7.0 times $16,000

$16,000

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 10.12 (a) Inventory turnover = 3.8 =

Cost of goods sold  $200,000  $180,000     2  

3.8 × $190,000 = Cost of goods sold Cost of goods sold = $722,000. (CGS = Ave. inv. × Inv. turnover) [$722,000 = (($200,000 + $180,000) ÷ 2) × 3.8]

(b) Accounts receivable turnover = 11.2 =

Net credit sales  $126,000  $72,500     2  

11.2 × $99,250 = Net credit sales = $1,111,600. (Net credit sales = Ave. accts. rec. × Accts. rec. turnover) [$1,111,600 = (($126,000 + $72,500) ÷ 2) × 11.2]

.22 × $507,250 = Net income = $111,595. (Net inc. = Ave. common stockholders' equity × Rtn. on common stockholders' equity) [$111,595 = (($400,000 + $113,500 + $400,000 + $101,000) ÷ 2) × .22]

10-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 10.12 (Continued) (d) Return on assets = 18% =

Average assets =

Net income $111,595 [see (c) above] = Average assets Average assets = $619,972

Total assets (Dec. 31, 2027) + $605,000 = $619,972 2 Total assets (Dec. 31, 2027) = [($619,972 × 2) – $605,000] = $634,944 (Ave. assets = Net inc. ÷ Rtn. on assets) ($619,972 = $111,595 ÷ 18%) LO 3 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 10.13 2027 (a) Current ratio: $1,390 ÷ $820 = $1,310 ÷ $790 =

1.70:1

(b) Inventory turnover: $970/[($460 + $390) ÷ 2)] = $890/[($390 + $340) ÷ 2)] =

2.28 times

2026 1.66:1

2.44 times

(Inv. turnover = CGS ÷ Ave. inv.) [2027: 2.28 = $970 ÷ (($460 + $390) ÷ 2)]

6.6% 3.8%

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-27

EXERCISE 10.13 (Continued) (d) Return on assets: $252/[($2,340 + $2,210) ÷ 2)] = $132/[($2,210 + $1,900) ÷ 2)] =

11.1% 6.4%

(Rtn. on assets = Net inc. ÷ Ave. tot. assets) [2027: 11.1% = $252 ÷ (($2,340 + $2,210) ÷ 2)]

(e) Return on common stockholders’ equity: $252/[($1,040 + $1,040) ÷ 2)] = $132/[($1,040 + $900) ÷ 2)] =

24.2% 13.6%

(Rtn. on common stockholders' equity = Net inc. ÷ Ave. common stockholders' equity) [2027: 24.2% = $252 ÷ (($1,040 + $1,040) ÷ 2)]

(f) Debt to assets ratio: ($820 + $480) ÷ $2,340 = ($790 + $380) ÷ $2,210 =

55.6%

(g) Times interest earned: ($252 + $168 + $10) ÷ $10 = ($132 + $88 + $20) ÷ $20 =

43 times

52.9%

12 times

LO 3 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Measurement

10-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO PROBLEMS PROBLEM 10.1

(a)

Condensed Income Statement For the Year Ended December 31, 2027 Duke Company Lord Company Dollars Percent Dollars Percent $1,849,000 100.0% $546,000 100.0% 1,063,200 57.5% 289,000 52.9% 785,800 42.5% 257,000 47.1% 240,000 13.0% 82,000 15.0% 545,800 29.5% 175,000 32.1%

Net sales Cost of goods sold Gross profit Operating expenses Income from operations Other expenses and losses Interest expense 6,800 Income before income taxes 539,000 Income tax expense 62,000 Net income $ 477,000 (b)

.4% 3,600 29.1% 171,400 3.3% 28,000 25.8% $143,400

.7% 31.4% 5.1% 26.3%

From an analysis of only dollar amounts, Duke Company seems more profitable than Lord Company; Duke Company’s gross profit, income from operations, and net income all far exceed those of Lord Company. A vertical analysis, however, yields a different conclusion. Lord Company’s gross profit, income from operations and net income as a percent of net sales exceed those of Duke Company. Also, Lord Company’s return on assets of 67.0% ($143,400 ÷ $214,172)b exceeds Duke Company’s return on assets of 57.3% ($477,000 ÷ $832,593)a; and Lord Company’s return on common stockholders’ equity of 93.1% (143,400 ÷ $154,047)d exceeds Duke Company’s return on common stockholders’ equity of 72.3% ($477,000 ÷ $659,528)c. Both the vertical analysis and the two ratios indicate that Lord Company is more profitable.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-29

PROBLEM 10.1 (Continued) a

$477,000 is Duke's 2027 net income. $832,593 is Duke's 2027 average assets: 2027 2026 $325,975 $312,410 526,800 500,000 $852,775 + $812,410 = $1,665,185

Current assets Plant assets (net) Total assets

b a

$143,400 is Lord's 2027 net income. $214,172 is Lord's 2027 average assets: 2027 2026 $ 83,336 $ 79,467 139,728 125,812 $428,343 $223,064 + $205,279 =

Current assets Plant assets (net) Total assets

$477,000 is Duke's 2027 net income. $659,528 is Duke's 2027 average common stockholders’ equity: Common stock Retained earnings Common stockholders’ equity

2027 $500,000 172,460

2026 $500,000 146,595

$672,460 + $646,595 =

$1,319,055 2

$143,400 is Lord's 2027 net income. $154,047 is Lord's 2027 average common stockholders’ equity: Common stock Retained earnings Common stockholders’ equity

2027 $120,000 38,096

2026 $120,000 29,998

$158,096 + $149,998 =

$308,094 2

LO 2, 3 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic and Communication AICPA FC: Measurement AICPA PC: Communication

10-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 10.2

(a) Earnings per share =

(1)

($218,000 – $0) = $3.69 59,000(1)

 60,000* + 58,000**    2  

*$300,000 $5

**$290,000 $5

Note: There was no treasury stock, so the number of shares issued equals the number of shares outstanding. (b) Return on common stockholders’ equity =

($218,000 – $0)  $465,400 + $603,400    2 $218,000 $534,400

= 40.8% (Rtn. on common stockholders' equity = (Net inc. − Pref. div.) ÷ Ave. common stockholders' equity) [40.8% = ($218,000 − $0) ÷ (($465,400 + $603,400) ÷ 2)]

$218,000 $218,000 = = 23.2% $939,850  $852,800 + $1,026,900    2

(Rtn. on assets = Net inc. ÷ Ave. tot. assets) [23.2% = $218,000 ÷ (($852,800 + $1,026,900) ÷ 2)]

(d) Current ratio = $377,900 = 1.86:1 $203,500

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-31

PROBLEM 10.2 (Continued)

(e) Accounts receivable turnover =

$1,890,540 ($102,800 + $117,800)    2 $1,890,540 = 17.1 times $110,300

(Accts. rec. turnover = Net credit sales ÷ Ave. net accts. rec.) [17.1 times = $1,890,540 ÷ (($102,800 + $117,800) ÷ 2)]

(f)

Average collection period = 365 days ÷ 17.1 = 21.3 days

(g) Inventory turnover =

$1,058,540 $1,058,540 = = 8.8 times $120,750  $115,500 + $126,000    2

(Inv. turnover = CGS ÷ Ave. inv.) [8.8 times = $1,058,540 ÷ (($115,500 + $126,000) ÷ 2)]

(h) Days in inventory = 365 days ÷ 8.8 = 41.5 days (i)

Times interest earned = $218,000 + $92,000+ $22,000 = 15.1 times $22,000

(j)

Asset turnover = 

    

$1,890,540 = 2.01 times $1,026,900 + $852,800    2 

(Asset turnover = Net sales ÷ Ave. tot. assets) [2.01 times = $1,890,540 ÷ (($1,026,900 + $852,800) ÷ 2)]

(k) Debt to assets ratio = $423,500 = 41% $1,026,900 (l)

Free cash flow = $220,000 – $136,000 – $70,000 = $14,000

LO 3 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement

10-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 10.3

(a)

2027 (1)

Profit margin $95,000 $700,000

(2)

= 13.6%

$70,000 $570,000

= 12.3%

Gross profit rate

$275,000 = 39.3% $700,000 (3)

2026

$220,000 = 38.6% $570,000

Asset turnover

$700,000 = 1.06 times  $ 600 ,000 + $725,000    2

$570,000 = 1.01 times  $533,000 + $600,000    2

(Asset turnover = Net sales ÷ Ave. tot. assets) [2027: 1.06 times = $700,000 ÷ (($600,000 + $725,000) ÷ 2)]

(4)

Earnings per share $95,000 = $3.02  3 1 ,000 + 32,000    2

$70,000 = $2.30  3 0 ,000 + 3 1,000    2

Note: There was no treasury stock, so number of shares issued equals number of shares outstanding. Divide the total amount for common stock each year by the $10 par value. (5)

Price-earnings ratio

$8.50 $3.02 (6)

= 2.8 times

$7.50 $2.30

= 3.3 times

Payout ratio $45,000** $95,000

= 47%

$58,000* $70,000

= 83%

*($113,000 + $70,000 – $125,000) (2025 Ret.earn. + 2026 Net inc. – 2026 Ret. earn.)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-33

PROBLEM 10.3 (Continued) (7)

Debt to assets ratio

($85,000 + $145,000) = 32% $725,000

($80,000 + $85,000) = 28% $600,000

(b) The underlying profitability of the corporation appears to have improved. For example, profit margin and earnings per share have both increased. The corporation’s debt to assets ratio has increased but the improvements in profitability indicate that taking on more debt was a wise move. LO 3 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic and Communication AICPA FC: Measurement AICPA PC: Communication

10-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 10.4

(a) LIQUIDITY 2027

2026

% Change

Current ratio

$484,000 = 1.76:1 $275,000

Accounts receivable turnover

$882,000 $790,000 = 9.1 times = 9.0 times $97,000 $88,000

Inventory turnover

$640,000 $575,000 = 3.2 times = 4.1 times $197,500 $140,000

(22%)

$383,000 = 1.81:1 $212,000

(3%)

An overall decrease in liquidity has occurred. (Both accts. rec. and inv. turnovers have an ave. in their denominator)

PROFITABILITY Profit margin Asset turnover Return on assets Earnings per share

$52,000 = 5.9% $882,000

$48,000 = 6.1% $7990,000

(3%)

$882,000 = 1.12 times [($698,000 + $874,000) / 2]

$790,000 = 1.16 times [($660,000 + $698,000) / 2]

(3%)

$52,000 = 6.6% [($698,000 + $874,000) / 2]

$48,000 = 7.1% [($660,000 + $698,000) / 2]

(7%)

$52,000 = $2.60 20,000 shs.

$48,000 = $2.40 20,000 shs.

Note: Since there was no treasury stock, number of shares issued is equal to number shares outstanding 20,000 (200,000 ÷ $10). (Both asset turnover and rtn. on assets have the same ave. in their denominator)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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10-35

PROBLEM 10.4 (Continued) (b)

2027 1.

(a) (b) (c)

2028

%Change

Return on $52,000 common = 15.6% stockhold- $332,500(a) ers’ equity

$54,000 = 11.6% $466,000(b)

(26%)

Debt to assets ratio

$525,000 = 60% $874,000

$355,000 = 39% $900,000

(35%)

Priceearnings ratio

$9.00 = 3.5 times $2.60

$12.00 = 4.4 times $2.70(c)

26%

[($200,000 + $149,000) + ($200,000 + $116,000)] ÷ 2 [($380,000* + $203,000**) + ($200,000 + $149,000)] ÷ 2 $54,000 ÷ 20,000 **$200,000 + (18,000 × $10/share) **$149,000 + $54,000

Note: Since there was no treasury stock, shares issued is equal to shares outstanding. (Rtn. on common stockholders' equity has an ave. in its denominator) LO 3 BT: AN Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Measurement

10-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 10.5

(a)

Ratio

Target

Walmart

(All Dollars Are in Millions) (1) Current ratio 1.63:1 ($18,424 ÷ $11,327) .87:1 ($48,331 ÷ $55,561) (2) Accounts receivable turnover 8.7 ($65,357 ÷ $7,525) 101.4 ($408,214 ÷ $4,025) (3) Average collection period (in days) 42.0 (365 ÷ 8.7) 3.6 (365 ÷ 101.4) (4) Inventory turnover 6.6 ($45,583 ÷ $6,942) 9.0 ($304,657 ÷ $33,836) (5) Days in inventory 55.3 (365 ÷ 6.6) 40.6 (365 ÷ 9.0) (6) Profit margin 3.8% ($2,488 ÷ $65,357) 3.5% ($14,335 ÷ $408,214) (7) Asset turnover 1.5 ($65,357 ÷ $44,319.5a) 2.4 ($408,214 ÷ $167,067.5d) (8) Return on assets 5.6% ($2,488 ÷ $44,319.5a) 8.6% ($14,335 ÷ $167,067.5d) (9) Return on common stockholders’ equity 17.1% ($2,488 ÷ $14,529.5b) 21.0% ($14,335 ÷ $68,369e) (10) Debt to assets ratio 66% ($29,186 ÷ $44,533) 58% ($99,650 ÷ $170,706) (11) Times interest earned 6.5 ($4,579c ÷ $707) 11.4 ($23,539f ÷ $2,065) (12) Free cash flow $3,656 ($5,881 – $1,729 – $496) $9,848 ($26,249 – $12,184 – $4,217) a

($44,533 + $44,106) ÷ 2 ($15,347 + $13,712) ÷ 2 c ($2,488 + $1,384 + $707)

($170,706 + $163,429) ÷ 2 ($71,056 + $65,682) ÷ 2 f ($14,335 + $7,139 + $2,065)

(b) The comparison of the two companies shows the following: Liquidity—Target’s current ratio of 1.63:1 is better than Walmart’s .87:1. However, Walmart has a better inventory turnover than Target and its accounts receivable turnover is significantly better than Target’s. Solvency—Walmart surpasses Target in all of the solvency ratios. Thus, it is more solvent than Target. Profitability—With the exception of profit margin, Walmart exceeds Target in all of the profitability ratios. Thus, it is more profitable than Target. LO 3 BT: AN Difficulty: Medium TOT: 60 min. AACSB: Analytic and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

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10-37

CT 10.1

FINANCIAL REPORTING PROBLEM

(a)

APPLE INC. Trend Analysis of Net Sales and Net Earnings For the Five Years Ended 2020 Base Period 2016—($ in millions) 2020

2019

2018

2017

2016

(1) Net sales Trend

$274,515 127%

$260,174 121%

$265,595 $229,234 $215,639 123% 106% 100%

(2) Net income Trend

$57,411 126%

$55,256 121%

$59,531 130%

$48,351 106%

$45,687 100%

Both net sales and net income increased in 2017 and 2018, decreased in 2019 (although above 2016), and then, increased again in 2020. In each of the years 2017, 2019, and 2020, the change in net income matched that of net sales, indicating that costs and expenses were increasing at the same rate. However, in 2018, net income increased at a higher rate than net sales, indicating that costs and expenses increased at a slower rate than net sales. (Amounts for 2016 and 2017 can be found in Part II Item 6 of the 10-K.) (b) (in millions) 1.

Debt to Assets Ratio 2020: 2019:

$258,549 ÷ $323,888 = 80% $248,028 ÷ $338,516 = 73%

Times Interest Earned 2020: 2019:

($57,411 + $9,680 + $2,873) ÷ $2,873* = 24.4 times ($55,256 + $10,481 + $3,576) ÷ $3,576* = 19.4 times

*Interest expense was found in Note 4 to the consolidated financial statements. The debt to assets ratio indicates that creditors are financing approximately 80% of Apple's total assets, up from 73%, a decrease in solvency. However, the times interest earned has increased, indicating that Apple easily has the ability to pay interest payments when they come due as indicated by the times interest earned of approximately 24 times. 10-38

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CT 10.1 (Continued) (c) ($ in millions) 1.

Profit Margin 2020: $57,411 ÷ $274,515 = 20.9% 2019: $55,256 ÷ $260,174 = 21.2%

Asset Turnover 2020: $274,515 ÷ [($323,888 + $338,516) ÷ 2] = .83 times 2019: $260,174 ÷ [($338,516 + $365,725) ÷ 2] = .74 times

Return on Assets 2020: $57,411 ÷ [($323,888 + $338,516) ÷ 2] = 17.3% 2019: $55,256 ÷ [($338,516 + $365,725) ÷ 2] = 15.7%

Return on Common Stockholders’ Equity 2020: $57,411 ÷ [($65,339 + $90,488) ÷ 2] = 73.7% 2019: $55,256 ÷ [($90,488 + $107,147) ÷ 2] = 55.9%

Because the profit margin decreased only 1.4%, which is less than the 12.1% increase in the asset turnover, the return on assets increased 10%. However, the return on common stockholders’ equity increased 32%. Considering that Apple is primarily in a high-price business where the margin above costs is historically high, the profit margins for both 2020 and 2019 are still good. (d) Substantial amounts of important information about a company are not in its financial statements. Events involving such things as industry changes, management changes, competitors’ actions, technological developments, governmental actions, and union activities are often critical to the successful operation of a company. Financial reports in the media and publications of financial service firms (Standard & Poors, Dun & Bradstreet) will provide additional relevant information not usually found in the annual report. LO 2, 3 BT: AN Difficulty: Hard TOT: 60 min. AACSB: 60 min. AACSB: Analytic and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

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10-39

CT 10.2

COMPARATIVE ANALYSIS PROBLEM

(a) Columbia Sportswear 1. (i) Percent age increase (decrease) in net sales

(ii)

Under Armour, Inc.

( $2,501,554 − $3,042, 478 ) = (17.8%) ( $4, 474,667 − $5,267,132 ) = (15.0%)

Percent age increase (decrease) in net income

$3,042, 478

( $108,013 − $330, 489 ) = (67.3%)

2. (i) Percent age increase (decrease) in t ot al asset s

$330, 489

$5,267,132

( $(549,177) − $92,139 ) = (696%) $92,139

( $2,836,571 − $2,931,591) = (3.2%) $2,931, 591

( $5,030,628 − $4,843,531) = 3.9% $4,843,531

(ii) Percent age increase (decrease) in t ot al st ockholders’ equit y

( $1,832,771 − $1,849, 447 ) = (0.9%)

3. Basic earnings per share

$1,849, 447

$1.63*

( $1,675,993 − $2,150,087 ) = (22.1%) $2,150,087

$(1.21)*

*Given on income statement

(b) It is evident from the decreases shown above for both companies 2020 was not a banner year because of the COVID-19 pandemic. However, Under Armour’s loss was caused by a $601,599 restructuring charge. Without this charge, it would have had net income of $52,422 which would have been a decrease of 43.1% instead of 696%. Compared to Columbia’s (67.3%), this is better. The restructuring charge also had a negative impact on the rest of the financial ratios for Under Armour as well. LO 2 BT: AN Difficulty: Medium TOT: 30 min. AACSB: 60 min. AACSB: Analytic and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

10-40

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CT 10.3 (a)

INTERPRETING FINANCIAL STATEMENTS Liquidity Ratios

Coca-Cola

PepsiCo

(1) Current ratio

1.28:1 ($17,551 ÷ $13,721)

1.44:1 ($12,571 ÷ $8,756)

(2) Accounts receivable turnover

9.1 times ($30,990 ÷ $3,424)

9.3 times ($43,232 ÷ $4,654)

(3) Average collection period

40.1 days (365 ÷ 9.1)

39.2 days (365 ÷ 9.3)

(4) Inventory turnover

4.9 times ($11,088 ÷ $2,271)

7.8 times ($20,099 ÷ $2,570)

(5) Days in inventory

74.5 (365 ÷ 4.9)

46.8 (365 ÷ 7.8)

PepsiCo is more liquid than Coca-Cola. PepsiCo betters Coca-Cola in all of the ratios. (b)

Solvency Ratios to assets (1) Debt ratio interest (2) Times earned

(3) Free cash flow

Coca-Cola $23,872 = 49% $48,671

PepsiCo $23,044 = 58% $39,848

( $6,824 + $2,040 + $355 ) ( 5,946 + $2,100 + $397 ) $397

$355 = 26.0 times

= 21.3 times

$8,186 – $1,993 – $3,800 = $2,393

$6,796 – $2,128 – $2,732 = $1,936

Coca-Cola is more solvent than PepsiCo.

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10-41

CT 10.3 (Continued) (c)

Profitability Ratios

Coca-Cola

PepsiCo

(1) Profit margin

22.0% ($6,824 ÷ $30,990)

13.8% ($5,946 ÷ $43,232)

(2) Asset turnover

.69 times ($30,990 ÷ $44,595)

1.14 times ($43,232 ÷ $37,921)

(3) Return on assets

15.3% ($6,824 ÷ $44,595)

15.7% ($5,946 ÷ $37,921)

(4) Return on common stockholders’ equity

30.1% ($6,824 ÷ $22,636)

40.8% ($5,946 ÷ $14,556)

PepsiCo, Inc. has a lower profit margin than the Coca-Cola Company. However, PepsiCo, Inc. has a higher asset turnover, return on assets, and return on common stockholders’ equity. LO 3 BT: AP Difficulty: Medium TOT: 45 min. AACSB: Analytic AICPA FC: Measurement

10-42

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CT 10.4

REAL-WORLD FOCUS

(a), (b), and (c) Answers will vary depending on the companies chosen by the student. LO 3 BT: AN Difficulty: Hard TOT: 60 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

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10-43

CT 10.5

REAL-WORLD FOCUS

a. EBITDA is a non-GAAP performance metric that excludes many costs included in the determination of GAAP based net income. EBITDA stands for earnings before interest, taxes, depreciation and amortization. Kraft’s “adjusted operating earnings” adjusts EBITDA by excluding some additional expenses such as costs incurred to integrate and restructure the company after Kraft and Heinz merged, as well as costs related to compensating company employees with Kraft Heinz stock. b. They are similar in some respects, for example both numbers exclude depreciation and amortization. They differ in that cash flow from operations is a cash-based number that is reported in the statement of cash flows. EBITDA is an accrual based number that is based on numbers reported in the income statement. EBITDA completely excludes interest and tax costs. In contrast, cash flow from operations includes interest and tax costs, but on a cash as opposed to accrual basis (that is, the actual cash paid for interest and taxes, as opposed to including accrued interest and taxes). c. The Securities and Exchange Commission allows companies to report non-GAAP metrics, but they must provide sufficient supporting detail so that investors understand how the numbers were determined. Also, they can’t be presented in a fashion that makes them more prominent or visible than GAAP-based numbers. The SEC has publicly criticized many companies for what the SEC considered inappropriate presentation and emphasis of non-GAAP metrics. d. Companies argue that their tailored numbers provide a truer picture of their finances. In its reports, Kraft Heinz says that its adjusted EBITDA is useful to investors because it removes items “that management believes don’t directly affect our underlying operations.”

10-44

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CT 10.5 (Continued) e. Responses to this question should discuss the potential benefits and drawbacks to non-GAAP measures. It can be argued that allowing companies to adjust numbers to take account of specific company attributes and circumstances could potentially result in information that is more representationally faithful, and therefore, more useful. However, because managers have an obvious motivation to report numbers that are beneficial to them, tailored numbers risk being biased and even in some cases deceptive. The pros and cons of allowing companies to report non-GAAP measures is an area that the SEC continues to study. LO 3 BT: E Difficulty: Hard TOT: 60 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

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10-45

CT 10.6

DECISION MAKING ACROSS THE ORGANIZATION

(a) Lenders prefer that financial statements are audited because an audit gives independent assurance that the financial statements give a reasonable representation of the company’s financial position and results of operations. With this independent assurance, they feel more comfortable making a decision. (b) The current ratio increase is a favorable indication as to liquidity but alone tells little about the going-concern prospects of the client. From this ratio change alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The change in asset turnover cannot alone tell anything about either solvency or going-concern prospects. There is no way to know the amount and the direction of the changes in the two items. An increase in sales would be favorable for going-concern prospects, while a decrease in assets could represent a number of possible scenarios and would need to be investigated further. The increase in net income is a favorable indicator for both solvency and going-concern prospects although much depends on the quality of receivables generated from sales and how quickly they can be converted into cash. Indirectly, the improved income picture may have a favorable impact on solvency and going-concern potential by enabling the client to borrow currently to meet cash requirements. The 32 percent [($3.30 – $2.50) ÷ $2.50] increase in earnings per share, which is identical to the percentage increase in net income, is an indication there has probably been no change in the number of shares of common stock outstanding. This in turn indicates that financing was not obtained through the issuance of common stock. It is not possible to reach conclusions about solvency and going-concern prospects without additional information about the nature and extent of financing. The collective implications of these data alone are that the client entity is about as solvent and viable as a going concern at the end of the current year as it was at the beginning although there may be a need for short-term operating cash.

10-46

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CT 10.6 (Continued) Although a quick evaluation of a reporting entity can be made using only a few ratios and comparing these with past ratios and industry statistics, the creditors should realize the limitations of such analysis even from the best prepared statements carrying a CPA’s unqualified opinion. A limitation on comparisons with industry statistics or other companies within the industry exists because material differences can be created through the use of alternative (but acceptable) accounting methods. Further, when evaluating changes in ratios or percentages, the evaluation should be directed to the nature of the item being evaluated because very small differences in ratios or percentages can represent significant changes in dollar amounts or trends. The creditors should evaluate conclusions drawn from ratio analysis in light of the current status of, and expected changes in, such things as general economic conditions, the client’s competitive position, the public’s demand (for the product itself, increased quality of the product, control of noise and pollution, etc.), and the client’s specific plans. (c) 1.

Accounts receivable turnover—indicates liquidity.

Debt to assets ratio—indicates solvency.

Times interest earned—indicates ability to repay interest when due.

Other answers are possible. LO 3 BT: E Difficulty: Hard TOT: 60 min. AACSB: Analytic and Communication AICPA FC: Measurement and Reporting AICPA PC: Interaction, Leadership and Communication

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10-47

CT 10.7

COMMUNICATION ACTIVITY

From: Student’s email address To: Larry Dundee’s email address Subject: Financial Statement Analysis Hi Larry: There are two fundamental considerations in financial statement analysis: (1) the bases of comparison and (2) the limitations of financial statement analysis. Each of these considerations is explained below. 1. Bases of comparison. The bases of comparison are:

Intracompany—This basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years.

Intercompany—This basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies.

Industry averages—This basis compares an item or financial relationship of a company with industry averages (or norms).

Three factors that affect quality of earnings are: a.

Alternative accounting methods—Variations among companies in the application of generally accepted accounting principles (GAAP) can cause variation in earnings quality across companies.

Pro forma income—Many companies now report non-GAAP income measures in addition to GAAP income. There is little guidance regarding these measures, thus, the earnings quality of these measures is difficult to determine.

Improper recognition—In order to meet earnings targets, some companies record revenues and expenses in the wrong period. This directly reduces earnings quality.

Student’s name LO 1, 2 BT: C Difficulty: Medium TOT: 30 min. AACSB: Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

10-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 10.8

ETHICS CASE

(a) The stakeholders in this case are: René Kelly, president of RL Industries. Erin Lourdes, public relations director. You, as controller of RL Industries. Stockholders of RL Industries. Potential investors in RL Industries. Any readers of the press release. (b) The president’s press release is deceptive and incomplete and to that extent her actions are unethical. (c) As controller you should at least inform Erin, the public relations director, about the biased content of the release. She should be aware that the information she is about to release, while factually accurate, is deceptive and incomplete. Both the controller and the public relations director (if she agrees) have the responsibility to inform the president of the bias of the about-to-be-released information. LO 3 BT: E Difficulty: Medium TOT: 20 min. AACSB: Communication and Ethics AICPA FC: Reporting AICPA PC: Communication and Professional Demeanor

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10-49

CT 10.9

ALL ABOUT YOU

Student responses will vary. We suggest that in class you ask for a few students to share their responses in order to increase students’ understanding of the reasons why different people will choose different investment vehicles. LO - BT: AN Difficulty: Easy TOT: 20 min. AACSB: Analytic and Technology AICPA FC: Reporting

10-50

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CHAPTER 11 Managerial Accounting Learning Objectives 1. 2. 3. 4.

Identify the features of managerial accounting and the functions of management. Describe the classes of manufacturing costs and the differences between product and period costs. Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer. Discuss trends in managerial accounting.

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11-1

ANSWERS TO QUESTIONS 1.

(a) Not true. Managerial accounting is a field of accounting that provides economic and financial information for managers and other internal users. (b) Joe is incorrect. Managerial accounting applies to all types of businesses—service, merchandising, and manufacturing.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Reporting

(a) Financial accounting is concerned primarily with external users such as stockholders, creditors, and regulators. In contrast, managerial accounting is concerned primarily with internal users such as officers and managers. (b) Financial statements are the end product of financial accounting. These statements are prepared quarterly and annually. In managerial accounting, internal reports may be prepared as frequently as needed. (c) The purpose of financial accounting is to provide general-purpose information for external users. The purpose of managerial accounting is to provide special-purpose information for specific internal decisions.

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA AC: Measurement IMA: Reporting

Differences in the content of the reports are as follows: Financial

Managerial

• Pertains to business as a whole and is highly aggregated. • Limited to accrual accounting and cost data. • Generally accepted accounting principles.

• Pertains to subunits of the business and may be very detailed. • Extends beyond accrual accounting system to any relevant data. • Standard is relevance to decisions.

In financial accounting, financial statements are verified annually through an independent audit by certified public accountants. There are no independent audits of internal reports prepared by managerial accountants. LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Reporting

Linda should know that the management of an organization performs three broad functions: (1) Planning requires management to look ahead and to establish objectives. (2) Directing involves coordinating the diverse activities and human resources of a company to produce a smooth-running operation. (3) Controlling is the process of keeping the company’s activities on track.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Reporting

Not true. Decision-making is not a separate management function. Rather, decision-making involves the exercise of good judgment in performing the three management functions explained in the answer to question four above.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Reporting

11-2

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Questions Chapter 11 (Continued) 6.

Employees with line positions are directly involved in the company’s primary revenue generating operating activities. Examples would include factory managers and supervisors, and the vice president of operations. In contrast, employees with staff positions are not directly involved in revenue-generating operating activities, but rather serve in a support capacity to line employees. Examples include employees in finance, legal, and human resources.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Reporting

The difference in balance sheets pertains to the presentation of inventories in the current asset section. In a merchandising company, only inventory is shown. In a manufacturing company, three inventory accounts are shown: finished goods, work in process, and raw materials.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Reporting

Manufacturing costs are classified as either direct materials, direct labor, or manufacturing overhead.

LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

No, Mel is not correct. The distinction between direct and indirect materials is based on two criteria: (1) physical association and (2) the convenience of making the physical association. Materials which cannot be easily associated with the finished product are considered indirect materials.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

10.

Product costs, or inventoriable costs, are costs that are a necessary and integral part of producing the finished product, they are classified as manufacturing costs. Period costs are costs that are identified with a specific time period rather than with a salable product. These costs relate to nonmanufacturing activities and therefore are not inventoriable costs, they are expensed as incurred.

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

11.

A merchandising company that uses the periodic inventory system reports beginning inventory, cost of goods purchased, and ending inventory in the cost of goods section of the income statement. A manufacturing company reports beginning finished goods inventory, cost of goods manufactured, and ending finished goods inventory in its determination of cost of goods sold.

LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Reporting

12.

(a) (b)

X = total cost of work in process X = cost of goods manufactured

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Reporting

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11-3

Questions Chapter 11 (Continued) 13.

Raw materials inventory, beginning…………………………………………………… Raw materials purchases...................................................................................... Less: Total raw materials available for use ........................................................... Raw materials inventory, ending ........................................................................... Direct materials used ...................................................................................

$12,000 170,000 182,000 15,000 $167,000

LO3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Reporting ($12,000 + $170,000 - $15,000 = $167,000) (Beg. RM + RM purch. – End. RM = DM used)

14.

Direct materials used ............................................................................................ Direct labor .......................................................................................................... Total manufacturing overhead .............................................................................. Total manufacturing costs ............................................................................

$240,000 220,000 180,000 $640,000

LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Reporting ($240,000 + $220,000 + $180,000 = $640,000) (DM used + DL used + Tot. MOH = Tot. mfg. costs)

15.

(a) (b)

Total cost of work in process ($26,000 + $640,000) ..................................... Cost of goods manufactured ($666,000 – $32,000) .....................................

$666,000 $634,000

LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Reporting [(a: $26,000 + $640,000 = $666,000); (b: $666,0000 - $32,000 = $634,000)] [(a: Beg. WIP + Tot. mfg. costs = Tot. cost of WIP); (b: Tot. cost of WIP – End. WIP = COGM)]

16.

The order of reporting is finished goods inventory, work in process inventory, and raw materials inventory.

LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Reporting

17.

The products differ in how each are consumed by the customer. Services are consumed as they are provided; and not capitalized into inventory. Meals at a restaurant are the best example where they are consumed immediately by the customer. There could be a long lead time before the product is sold to a customer in a manufacturing environment.

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Reporting

18.

The product costing techniques apply equally well to manufacturers and service companies. Each needs to keep track of the cost of production or services in order to know whether it is generating a profit. The techniques shown in this chapter, to accumulate manufacturing costs to determine manufacturing inventory, are equally useful for determining the cost of services.

LO4 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

19.

The value chain refers to all activities associated with providing a product or service. For a manufacturer, these include research and development, product design, acquisition of raw materials, production, sales and marketing, delivery, customer relations, and subsequent service. The value chain includes both manufacturing and nonmanufacturing activities and costs.

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Decision Modeling IMA: Strategic Planning

11-4

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Questions Chapter 11 (Continued) 20.

An enterprise resource planning (ERP) system is an integrated software system that provides a comprehensive, centralized resource for information. Its primary benefits are that it replaces the many individual systems typically used for receivables, payables, inventory, human resources, etc. Also, it can be used to get information from, and provide information to, the company’s customers and suppliers.

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Decision Modeling IMA: Strategic Planning

21.

In a just-in-time inventory system, the company has no extra inventory stored. Consequently, if some units that are produced are defective, the company will not have enough units to deliver to customers.

LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Strategic Planning

22.

The balanced scorecard is called “balanced” because it strives to not over emphasize any one performance measure, but rather uses both financial and non-financial measures to evaluate all aspects of a company’s operations in an integrated fashion.

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Performance Management

23.

Budgets are prepared by companies to provide future direction. Because the budget is also used as an evaluation tool, some managers may try to game the budgeting process by underestimating their division’s predicted performance so that it will be easier to meet their performance targets. On the other hand, if the budget is set at unattainable levels, managers sometimes take unethical actions to meet targets to receive higher compensation or in some cases to keep their jobs.

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: Ethics AICPA PC: Professional Demeanor IMA: Business Applications

24.

According to the Sarbanes-Oxley Act of 2002, CEOs and CFOs must now certify that financial statements give a fair presentation of the company’s operating results and its financial condition and that the company maintains an adequate system of internal controls. In addition, the composition of the board of directors and audit committees receives more scrutiny, and penalties for misconduct have increased.

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: Ethics AICPA FC: Measurement AICPA PC: Professional Demeanor IMA: Internal Controls

25.

Activity-based costing is an approach used to allocate overhead based on each product’s relative use of activities in making the product. Activity-based costing is beneficial because it results in more accurate product costing and in more careful scrutiny of all activities in the value chain.

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

11-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11.1 Financial Accounting

Managerial Accounting

Primary users

External users

Internal users

Types of reports

Financial statements Quarterly and annually

Internal reports As frequently as needed

Frequency of reports

Quarterly and annually

As frequently as needed

Purpose of reports

General-purpose

Special-purpose information for specific decisions

Content of reports

Pertains to business as a Pertains to subunits of the whole business Highly aggregated Very detailed Limited to accrual Extends beyond accrual accounting and cost data accounting to any relevant data Generally accepted Evaluated based on relevance accounting principles to decisions

Verification process

Annual audit by certified No independent audits public accountant

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Reporting

BRIEF EXERCISE 11.2 (a) 1. Planning (b) 2. Directing (c) 3. Controlling LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Reporting

BRIEF EXERCISE 11.3 (a) (b) (c) (d)

DM DL MO MO

Frames and tires used in manufacturing bicycles. Wages paid to production workers. Insurance on factory equipment and machinery. Depreciation on factory equipment.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

11-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 11.4 (a) (b) (c) (d) (e) (f) (g) (h)

Direct materials Direct materials Direct labor Manufacturing overhead Manufacturing overhead Direct materials Direct materials Manufacturing overhead

LO2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE 11.5 (a) (b) (c) (d) (e) (f)

Product Period Period Period Product Product

LO2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA AF: Measurement IMA: Cost Management

BRIEF EXERCISE 11.6

Direct Materials (a) (b) (c) (d)

Product Costs Direct Manufacturing Labor Overhead X

X X X

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-7

BRIEF EXERCISE 11.7 (a) Direct materials used............................................................ Direct labor ............................................................................ Total manufacturing overhead ............................................. Total manufacturing costs............................................

$180,000 209,000 208,000 $597,000

(b) Beginning work in process .................................................. Total manufacturing costs ................................................... Total cost of work in process .......................................

$ 25,000 597,000 $622,000

($25,000 + $597,000 = $622,000) (Beg. WIP + Tot. mfg. costs = Tot. cost in WIP) LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Reporting

BRIEF EXERCISE 11.8 ROLAND COMPANY Balance Sheet (Partial) December 31, 2027 ASSETS Current assets Cash ................................................................... Accounts receivable ......................................... Inventories Finished goods .......................................... Work in process ........................................ Raw materials ............................................ Prepaid expenses ............................................. Total current assets ...........................

$ 62,000 200,000 $91,000 87,000 83,000

261,000 38,000 $561,000

[$62,000 + $200,000 + ($91,000 + $87,000 + $83,000) + $38,000 = $561,000] [Cash + Accts. rec. + (Fin. gds. + WIP + Raw mat.) + Prepd. exp. = Tot. current assets] LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

11-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 11.9 Direct Materials Used (1) (2) (3)

Direct Labor

Total Manufacturing Costs $151,000(a)

Manufacturing Overhead

$81,000(b) $144,000(c)

(a) $40,000 + $61,000 + $50,000 = $151,000 (b) $296,000 - $140,000 - $75,000 = $81,000 (c) $310,000 - $55,000 - $111,000 = $144,000 LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Reporting

BRIEF EXERCISE 11.10 Total Work in Work in Manufacturing Process Process Costs (January 1) (December 31) (1) $151,000* (2) $133,000(b) (3) $58,000(c) *$40,000 + $61,000 + $50,000 (data from BE 11.9)

Cost of Goods Manufactured $189,000(a)

(a) $151,000 + $120,000 - $82,000 = $189,000 (b) $331,000 + $98,000 - $296,000 = $133,000 (c) ($310,000 + $463,000) - $715,000 = $58,000 LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Reporting

BRIEF EXERCISE 11.11 One implication of Sarbanes-Oxley Act of 2002 (SOX) was to clarify top management’s responsibility for the company’s financial statements. CEOs and CFOs must certify that financial statements give a fair presentation of the company’s operating results and its financial condition. In addition, top managers must certify that the company maintains an adequate system of internal controls to ensure accurate financial reports. Also, more attention is now paid to the composition of the company’s board of directors. In particular, the audit committee of the board of directors must be comprised entirely of independent members (that is, non-employees) and must contain at least one financial expert. Finally, to increase the likelihood of compliance with these and other new rules, the penalties for misconduct were substantially increased to include not only fines but also incarceration. LO4 BT: C Difficulty: Easy TOT: 6 min. AACSB: Ethics, Communication AICPA PC: Professional Demeanor, Communication IMA: Internal Controls

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-9

SOLUTIONS FOR DO IT! EXERCISES DO IT! 11.1 1. 2. 3. 4.

False. The board of directors’ primary responsibility is to formulate the operating policies of the company. False. Financial accounting reports pertain to the business as a whole and are highly aggregated (condensed). False. Managerial account reports do not have to follow GAAP and are not audited by CPAs. True

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Reporting

DO IT! 11.2 Period costs: Advertising Salaries of sales representatives Product costs: Blank CDs (DM) Depreciation of CD image burner (MO) Salary of factory manager (MO) Factory supplies used (MO) Paper inserts for CD cases (DM) CD plastic cases (DM) Salaries of factory maintenance employees (MO) Salaries of employees who burn music onto CDs (DL) LO2 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

11-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 11.3 TOMLIN COMPANY Cost of Goods Manufactured Schedule For the Month Ended April 30, 2027 Work in process, April 1 ................................ Direct materials .............................................. Raw materials, April 1 ............................... $ 10,000 Raw materials purchases .......................... 98,000 Total raw materials available for use........ 108,000 Less: Raw materials, April 30 .................. 14,000 Direct materials used ................................ $ 94,000 Direct labor ..................................................... 80,000 Manufacturing overhead ................................ 160,000 Total manufacturing costs............................. Total cost of work in process ........................ Less: Work in process, April 30 ................... Cost of goods manufactured .........................

5,000

334,000 339,000 3,500 $335,500

[$5,000 + (($10,000 + $98,000 - $14,000) + $80,000 + $160,000) - $3,500 = $335,500] [Beg. WIP + ((Beg. raw mat. + Raw mat. purch. – End. raw mat.) + DL + MOH) – End. WIP = COGM] LO3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

DO IT! 11.4 1. 2. 3. 4. 5. 6. 7.

f a c d e b g

LO4 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: None IMA: Strategic Planning, Internal Controls

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-11

SOLUTIONS TO EXERCISES EXERCISE 11.1 1. False. Financial accounting focuses on providing information to external users. 2. False. Line positions are directly involved in the company's primary revenue-generating operating activities. 3. False. Preparation of budgets is part of managerial accounting. 4. False. Managerial accounting applies to service, merchandising and manufacturing companies. 5. True. 6. False. Managerial accounting reports are prepared as frequently as needed. 7. True. 8. True. 9. False. Financial accounting reports must comply with generally accepted accounting principles. 10. False. The company treasurer reports directly to the vice president of finance/chief financial officer. LO1 BT: C Difficulty: Easy TOT: 6 min. AACSB: None AICPA FC: Measurement IMA: Reporting

EXERCISE 11.2 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Manufacturing overhead Manufacturing overhead Manufacturing overhead Manufacturing overhead Direct materials Direct labor Manufacturing overhead Manufacturing overhead Manufacturing overhead Direct materials

LO2 BT: C Difficulty: Easy TOT: 6 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

11-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 11.3 (a) Bicycle components .............. DM Depreciation on factory ...... MOH Property taxes on retail store ........................ Period Labor costs of assemblyline workers ........................... DL Factory supplies used ........ MOH

Advertising expense ...............Period Property taxes on factory......... MOH Customer delivery expense ...................................Period Sales commissions ................Period Salaries paid to sales clerks ..Period

(b) Product costs are recorded as a part of the cost of inventory because they are an integral part of the cost of producing the bicycles. Product costs are not expensed until the bicycles are sold. Period costs are recognized as an expense when incurred. LO2 BT: C Difficulty: Easy TOT: 8 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

EXERCISE 11.4 (a) Factory utilities ....................................................................... Depreciation on factory equipment ...................................... Indirect factory labor .............................................................. Indirect materials.................................................................... Factory manager’s salary ...................................................... Property taxes on factory building ....................................... Factory repairs ....................................................................... Manufacturing overhead ........................................................

$ 15,500 12,650 48,900 80,800 8,000 2,500 2,000 $170,350

($15,500 + $12,650 + $48,900 + $80,800 + $8,000 + $2,500 + $2,000 = $170,350) (Fact. util. + Depr. on fact. equip. + Ind. fact. labor + Ind. mat. + Fact. mgr’s. sal. + Prop. tax. on fact. bldg.. + Fact. repairs = MOH)

(b) Direct materials used ............................................................. Direct labor ............................................................................. Manufacturing overhead ........................................................ Product costs .........................................................................

$137,600 69,100 170,350 $377,050

(c) Depreciation on delivery trucks............................................ Sales salaries ......................................................................... Repairs to office equipment .................................................. Advertising ............................................................................. Office supplies used .............................................................. Period costs ...........................................................................

3,800 46,400 1,300 15,000 2,640 $ 69,140

($3,800 + $46,400 + $1,300 + $15,000 + $2,640 = $69,140) (Depr. on del. trks. + Sales sal. + Repairs on off. equip. + Advert. + Off. sup. used = Period costs) LO2 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-13

EXERCISE 11.5 1. 2.

3. 4.

(a) (c)

5. 6.

7. 8.

(a) (b)

9. 10.

LO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

EXERCISE 11.6 1. (b) 2. (c) 3. (a) 4. (c) (Only for the portion that applies to the X-ray department) 5. (c) 6. (c) 7. (c) 8. (c) 9. (c) 10. (c) (Only for the portion that applies to the X-ray department) LO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

EXERCISE 11.7 (a)

Delivery service (product) costs: Indirect materials Depreciation on delivery equipment Dispatcher’s salary Gas and oil for delivery trucks Drivers’ salaries Delivery equipment repairs Total

$ 6,400 11,200 5,000 2,200 16,000 300 $41,100

($6,400 + $11,200 + $5,000 + $2,200 + $16,000 + $300 = $41,100) (Ind. mat. + Depr. on del. equip. + Dispatch. sal. + Gas & oil for del. trks. + Drivers’ sal. + Del. equip. repairs = Tot. product costs)

(b)

Period costs: Property taxes on office building CEO’s salary Advertising Office supplies Office utilities Repairs on office equipment Total

$ 870 12,000 4,600 650 990 180 $19,290

LO2 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management 11-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 11.8 Direct Materials Broom inspector’s salaries Copy machine maintenanceheadquarters Assembly worker hourly wages Research and development for new broom types Factory manager’s salary Depreciation-broom assembly equipment CEO administrative assistant’s salary Wood for handles Cleaning suppliesfactory Lubricants for factory broom assembly equipment Customer service agents' salaries Factory maintenance crew salaries Sales team golf outings with customers Raw materials receiving department salaries Advertising Depreciation-CFO company car Straw for brooms Salespersons’ salaries Shipping costs to customers

Manufacturing Direct Manufacturing Labor Overhead

Nonmanufacturing

Product or Period Product

X X

Period Product

Period

Product

Product X

Period Product

Product

Product X

Period Product

Period

Product X

Period

Product X

Period

LO2 BT: C Difficulty: Easy TOT: 10 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-15

EXERCISE 11.9 (a) Work in process, January 1 .................... Direct materials used .............................. $120,000 Direct labor .............................................. 110,000 Manufacturing overhead Depreciation on factory.................... $60,000 Factory supplies used ...................... 23,000 Property taxes on factory ................ 14,000 Total manufacturing overhead ............... 97,000 Total manufacturing costs ...................... Total cost of work in process ................. Less: Work in process, December 31 .... Cost of goods manufactured ..................

$ 12,000

327,000 339,000 15,500 $323,500

[$12,000 + (($120,000 + $110,000 + ($60,000 + $23,000 + $14,000)) - $15,500 = $323,500] [Beg. WIP + ((DM used + DL + (Depr. on factory + Fact. sup. used + Prop. tax on factory)) – End. WIP = COGM]

(b) Finished goods, Jan. 1 ............................ Cost of goods manufactured ................. Cost of goods available for sale ............. Less: Finished goods, inventory, Dec. 31 Cost of goods sold ..................................

$ 60,000 323,500 383,500 45,600 $337,900

(c) The costs not included in either the Schedule of Cost of Goods Manufactured or the Schedule of Cost of Goods sold are: Property taxes on store, Advertising expense, Delivery expense, Sales commissions, and Salaries paid to sales clerks. They would all be classified as period costs, and as such, would be reported on the income statement under operating expenses. LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

EXERCISE 11.10 Total raw materials available for use: Direct materials used ........................................................ Add: Raw materials inventory, Dec. 31 ......................... Total raw materials available for use ...............................

$180,000 22,500 $202,500

($180,000 + $22,500 = $202,500) (DM used + End. raw mat. = Tot. raw mat. avail. for use)

11-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 11.10 (Continued) Raw materials inventory (Jan. 1): Total raw materials available for use: Direct materials used ....................................................... Add: Raw materials inventory, Dec. 31 ......................... Total raw materials available for use .............................. Less: Raw materials purchases ...................................... Raw materials inventory, Jan. 1 ......................................

$180,000 22,500 202,500 158,000 $ 44,500

($180,000 + $22,500 - $158,000 = $44,500) (DM used + End. raw mat. – Raw mat. purch. = Beg. raw mat.)

Total cost of work in process: Cost of goods manufactured ........................................... Add: Work in process, Dec. 31 ........................................ Total cost of work in process ..........................................

$540,000 81,000 $621,000

Total manufacturing costs: Total cost of work in process ................................. Less: Work in process, Jan. 1................................. Total manufacturing costs ......................................

$621,000 210,000 $411,000

Direct labor: Total manufacturing costs ...................................... Less: Total manufacturing overhead ..................... Direct materials used .................................... Direct labor...............................................................

$411,000 $122,000 180,000

302,000 $109,000

[$411,000 – ($122,000 + $180,000) = $109,000] [Tot. mfg. costs – (Tot. MOH + DM used) = DL] LO3 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

EXERCISE 11.11 Case A a + $57,000 + $46,500 = $195,650 a = $92,150

$252,500 – $11,000 = f f = $241,500

$195,650 + b = $221,500 b = $25,850

Case C $130,000 + g + $102,000 = $253,700 g = $21,700

$221,500 – c = $185,275 c = $36,225

$253,700 + h = $337,000 h = $83,300

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-17

EXERCISE 11.11 (Continued) Case B $68,400 + $86,000 + $81,600 = d d = $236,000

$337,000 – $70,000 = i i = $267,000

$236,000 + $16,500 = e e = $252,500 Additional explanation to EXERCISE 11.11 solution: Case A (a) Total manufacturing costs ...................................... Less: Manufacturing overhead ............................... Direct labor .................................................... Direct materials used ...............................................

$195,650 $46,500 57,000

103,500 $ 92,150

[$195,650 – ($46,500 + $57,000) = $92,150] [Tot. mfg. costs – (MOH + DL) = DM used]

(b) Total cost of work in process ................................. Less: Total manufacturing costs ............................ Work in process (1/1/27) ..........................................

$221,500 195,650 $ 25,850

(c) Total cost of work in process ................................. Less: Cost of goods manufactured ........................ Work in process (12/31/27) ......................................

$221,500 185,275 $ 36,225

Case B (d) Direct materials used ............................................... Direct labor ............................................................... Manufacturing overhead ......................................... Total manufacturing costs ......................................

$ 68,400 86,000 81,600 $236,000

($68,400 + $86,000 + $81,600 = $236,000) (DM used + DL + MOH = Tot. mfg. costs)

(e) Total manufacturing costs ...................................... Work in process (1/1/27) .......................................... Total cost of work in process .................................

11-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

$236,000 16,500 $252,500

(For Instructor Use Only)

EXERCISE 11.11 (Continued) (f)

Total cost of work in process ................................. Less: Work in process (12/31/27) ........................... Cost of goods manufactured ..................................

$252,500 11,000 $241,500

Case C (g) Total manufacturing costs ...................................... Less: Manufacturing overhead .............................. Direct materials used ................................... Direct labor...............................................................

$253,700 $102,000 130,000

232,000 $ 21,700

[$253,700 – ($102,000 + $130,000) = $21,700] [Tot. mfg. costs – (MOH + DM used) = DL]

(h) Total cost of work in process ................................. Less: Total manufacturing costs ............................ Work in process (1/1/27)..........................................

$337,000 253,700 $ 83,300

(i)

$337,000 70,000 $267,000

Total cost of work in process ................................. Less: Work in process (12/31/27) ........................... Cost of goods manufactured ..................................

LO3 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

EXERCISE 11.12 (a) (a) $117,000 + $140,000 + $87,000 = $344,000 (b) $344,000 + $33,000 – $360,000 = $17,000 ($344,000 + $33,000 - $360,000 = $17,000) (Tot. mfg. costs + Beg. WIP – COGM = End. WIP)

(c) $450,000 – ($200,000 + $132,000) = $118,000 (d) $40,000 + $470,000 – $450,000 = $60,000 ($40,000 + $470,000 - $450,000 = $60,000) (End. WIP + COGM – Tot. mfg. costs = Beg. WIP)

(e) $265,000 – ($80,000 + $100,000) = $85,000 (f)

$265,000 + $60,000 – $80,000 = $245,000

($265,000 + $60,000 - $80,000 = $245,000) (Tot. mfg. costs + Beg. WIP – End. WIP = COGM)

Tot. mfg. Costs + Beg. WIP – COGM = End. WIP

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-19

EXERCISE 11.12 (Continued) (b)

HORIZON COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2027 Work in process, Jan. 1 ...................................... Direct materials used.......................................... Direct labor .......................................................... Manufacturing overhead .................................... Total manufacturing costs.......................... Total cost of work in process ............................ Less: Work in process inventory, Dec. 31 ...................................................... Cost of goods manufactured .............................

$ 33,000 $117,000 140,000 87,000 344,000 377,000 17,000 $360,000

[($33,000 + ($117,000 + $140,000 + $87,000)) - $17,000 = $360,000] [(Beg. WIP + (DM + DL + MOH)) – End. WIP = COGM] LO3 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

EXERCISE 11.13 (a)

CEPEDA CORPORATION Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027 Work in process, June 1 ............................. Direct materials used .................................. Direct labor .................................................. Manufacturing overhead Indirect factory labor ........................... Factory manager’s salary ................... Indirect materials used ....................... Maintenance, factory equipment ........ Depreciation, factory equipment ........ Factory utilities .................................... Total manufacturing overhead.... Total manufacturing costs ......................... Total cost of work in process .................... Less: Work in process, June 30................ Cost of goods manufactured .....................

$ 3,000 $20,000 40,000 $4,500 3,000 2,200 1,800 1,400 400 13,300 73,300 76,300 3,800 $72,500

[($3,000 + ($20,000 + $40,000 + ($4,500 + $3,000 + $2,200 + $1,800 + $1,400 + $400))) - $3,800 = $72,500] [(Beg. WIP + (DM used + DL + (Ind. labor + Fact. mgrs. sal. + Ind. mat. used + Maint. fact. equip. + Depr. fact. equip. + Fact. util.))) – End. WIP = COGM]

11-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 11.13 (Continued) (b)

CEPEDA CORPORATION Income Statement (Partial) For the Month Ended June 30, 2027 Sales revenue ......................................................... Cost of goods sold Finished goods inventory, June 1 ................. Cost of goods manufactured [from (a)] ......... Cost of goods available for sale .................... Less: Finished goods inventory, June 30 .... Cost of goods sold ......................... Gross profit .............................................................

$92,100 $ 5,000 72,500 77,500 7,500 70,000 $22,100

LO3 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

EXERCISE 11.14 (a) WASHINGTON CONSULTING Schedule of Cost of Contract Services Performed For the Month Ended August 31, 2027 Supplies used (direct materials) ................................. Salaries of professionals (direct labor) ...................... Service overhead: Utilities for contract operations.............................. Contract equipment depreciation........................... Insurance on contract operations .......................... Janitorial services for professional offices ........... Total overhead ................................................... Total cost of contract services provided ...............

$ 1,700 15,600 $1,400 900 800 700 3,800 $21,100

[$1,700 + $15,600 + ($1,400 + $900 + $800 + $700) = $21,100] [Supp. used + Sal. of profs. + (Util. on contract oper. + Contract equip. depr. + Ins. on contract oper. + Jan. srvs. for prof. off.) = $21,100]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-21

EXERCISE 11.14 (Continued) (b) The costs not included in the Schedule of Cost of Contract Services Performed are: Supplies used in administrative offices, Depreciation used on administrative office equipment, Salaries of administrative office personnel, Janitorial services for administrative offices, Insurance on administrative operations, and Utilities for administrative offices. They would all be classified as period costs, and as such, they would be reported on the income statement under administrative expenses. LO2, 3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

EXERCISE 11.15 (a) Work in process, Jan. 1 ........................ Direct materials Raw materials inventory, Jan. 1 ..... $ 21,000 Raw materials purchased ............... 150,000 Raw materials available for use ..... 171,000 Less: Raw materials inventory, Dec. 31 ............................................. 30,000 Direct materials used ............................. $141,000 Direct labor ............................................. 220,000 Manufacturing overhead ........................ 180,000 Total manufacturing costs ..................... Total cost of work in process ................ Less: Work in process, Dec. 31 ............. Cost of goods manufactured .................

$ 13,500

541,000 554,500 17,200 $537,300

[$13,500 + (($21,000 + $150,000 - $30,000) + $220,000 + $180,000) - $17,200 = $537,300] [Beg. WIP + ((Beg. RM + RM purch. – End. RM) + DL + MOH) – End. WIP = COGM]

11-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 11.15 (Continued) AIKMAN COMPANY Income Statement (Partial) For the Year Ended December 31, 2027 (b) Sales revenue ....................................... Cost of goods sold Finished goods inventory, Jan. 1 .... Cost of goods manufactured [From (a)] Cost of goods available for sale ...... Less: Finished goods inventory, Dec. 31 ............................. Cost of goods sold..................... Gross profit ............................................

$910,000 $ 27,000 537,300 564,300 21,000 543,300 $366,700

[$910,000 – ($27,000 + $537,300 - $21,000) = $366,700] [Sales rev. – (Beg. FG inv. + COGM – End. FG inv.) = GP]

AIKMAN COMPANY Balance Sheet (Partial) December 31, 2027 Assets (c) Current assets Inventories Finished goods .............................................. Work in process ............................................ Raw materials .................................................

$21,000 17,200 30,000

$68,200

(d) In a merchandising company’s income statement (using the periodic inventory system), the only difference would be in the computation of cost of goods sold. Beginning and ending finished goods inventory would be replaced by beginning and ending inventory, and cost of goods manufactured would be replaced by purchases. In a merchandising company’s balance sheet, there would be one inventory account (inventory) instead of three. LO3 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-23

EXERCISE 11.16 1. 2. 3. 4. 5. 6. 7. 8.

(a) (a) (a), (c) (b) (a) (a) (a) (b), (c)

9. 10. 11. 12. 13. 14. 15. 16.

(a) (a), (b) (b) (b) (a) (a) (a) (a)

LO3 BT: C Difficulty: Easy TOT: 8 min. AACSB: None AICPA FC: Reporting IMA: Reporting

EXERCISE 11.17 (a)

ROBERTS COMPANY Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027 Work in process inventory, June 1 ............... $ 5,000 Direct materials Raw materials inventory, June 1 ............ $ 9,000 Raw materials purchases........................ 54,000 Total raw materials available for use ..... 63,000 Less: Raw materials inventory, June 30 13,100 Direct materials used .............................. $49,900 Direct labor ..................................................... 47,000 Manufacturing overhead Indirect labor............................................ 5,500 Factory insurance.................................... 4,000 Machinery depreciation........................... 4,000 Factory utilities ........................................ 3,100 Machinery repairs .................................... 1,800 Miscellaneous factory costs ................... 1,500 Total manufacturing overhead ....... 19,900 Total manufacturing costs ............................ 116,800 Total cost of work in process ....................... 121,800 Less: Work in process inventory, June 30 .. 7,000 Cost of goods manufactured ........................ $114,800

[$5,000 + (($9,000 + $54,000 - $13,100) + $47,000 + ($5,500 + $4,000 + $4,000 + $3,100 + $1,800 + $1,500)) – $7,000 = $114,800] [Beg. WIP + ((Beg. raw mat. + Raw mat. purch. – End. raw mat.) + DL + (Ind. labor + Fact. ins. + Mach. depr. + Fact. util. + Mach. repairs + Misc. fact. costs)) – End. WIP = COGM]

11-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 11.17 (Continued) (b)

ROBERTS COMPANY Balance Sheet (Partial) June 30, 2027 ASSETS Current assets Inventories Finished goods ........................................... Work in process.......................................... Raw materials .............................................

$ 8,000 7,000 13,100

$28,100

LO3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

EXERCISE 11.18 (a) Raw Materials account: Work in Process account: Finished Goods account: Cost of Goods Sold account: Selling Expenses account:

(5,000 – 4,650) × $15 = $5,250 (4,600 × 10%) × $15 = $6,900 (4,600 × 90% × 30%) × $15 = $18,630 (4,600 × 90% × 70%) × $15 = $43,470 50 × $15 = $750

Proof of cost of head lamps allocated (5,000 × $15 = $75,000) Raw materials Work in process Finished goods Cost of goods sold Selling expenses Total

$ 5,250 6,900 18,630 43,470 750 $75,000

[(Raw mat.: (5,000 – 4,650) × $15 = $5,250); (WIP: 4,600 × 10% × $15 = $6,900); (Fin. gds.: (4,600 × 90% × 30%) × $15 = $18,630); (CGS: (4,600 × 90% × 70%) × $15 = $43,470); (Sell. exp.: 50 × $15 = $750)] [(Raw mat.: (Lamps purch. – Lamps withdrawn) × Unit cost = Acct. bal.); (WIP: (Lamps issued to production × % still in production) × Unit cost = Acct. bal.); (Fin. Gds.: (Lamps in production × % completed × % not sold) × Unit cost = Acct. bal.); (CGS: Lamps in production × % completed × % sold) × Unit cost = Acct. bal.); (Sell. exp.: Lamps in sales staff cars × Unit cost = Acct. bal.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

11-25

EXERCISE 11.18 (Continued) (b) To:

Chief Accountant

From:

Student

Subject:

Statement Presentation of Accounts

Two accounts will appear in the income statement. Cost of Goods Sold will be deducted from net sales in determining gross profit. Selling expenses will be shown under operating expenses and will be deducted from gross profit in determining net income. Sometimes, the calculation for Cost of Goods Sold is shown on the income statement. In these cases, the balance in Finished Goods inventory would also be reported on the income statement. The other accounts associated with the head lamps are inventory accounts which contain end-of-period balances. Thus, they would be reported under inventories in the current assets section of the balance sheet in the following order: finished goods, work in process, and raw materials. LO3 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting IMA: Cost Management, Reporting

EXERCISE 11.19 (a) (b) (c) (d)

3. 4. 2. 1.

Balanced scorecard Value chain Just-in-time inventory Activity-based costing

LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeiing IMA: Strategic Planning

11-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Cost Item

Period Costs

$11,000 1,500 $75,000 900 $

300

$58,000 800 1,100 5,700 400

000,000 $75,000

000,000 $58,000

1,500 $22,100

14,000 10,000 000,000 $25,100

(For Instructor Use Only)

[(MOH: $11,000 + $1,500 + $900 + $1,100 + $5,700 + $400 + $1,500 = $22,100); (Period costs: $300 + $800 + $14,000 + $10,000 = $25,100)] [(MOH: Rent, on fact. equip. + Ins., on fact. bldg. + Fact. util. + Misc. mat. + Fact. mgrs.. sal. + Prop. tax, fact. on bldg.. + Depr., fact. bldg. = Tot.); (Period costs: Gen. off. supp. + Depr., on off. equip. + Advert. for helmets + Sales comm. = Tot. period costs)]

(b) Total production costs Direct materials Direct labor Manufacturing overhead Total production cost

$ 75,000 58,000 22,100 $155,100

11-27

Production cost per helmet = $155,100/10,000 = $15.51. LO2 BT: AP Difficulty: Easy TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Reporting

PROBLEM 11.1

Kimmel, Survey of Accounting, 3e, Solutions Manual

Rent on factory equipment Insurance on factory building Raw materials used Utility costs for factory Supplies used for general office Wages for assembly-line workers Depreciation on office equipment Miscellaneous materials used Factory manager’s salary Property taxes on factory building Advertising for helmets Sales commissions Depreciation on factory building

Direct Materials

Product Costs Direct Manufacturing Labor Overhead

SOLUTIONS TO PROBLEMS

(a)

11-28

Period Costs

$90,000 $ 4,900 7,500 3,000 1,300 $9,500 00_0,000 $111,000

000,000 $90,000

650 750 $18,100

00,000 $9,500

(1)$74 x 1,500 = $111,000. (2)$12 x 5 x 1,500 = $90,000. (3)$5 x 1,500 = $7,500. (4)$7,800/12 = $650. (5)$9,000/12 = $750. [(MOH: $4,900 + ($5 x 1,500) + $3,000 + $1,300 + ($7,800/12) + ($9,000/12) = $18,100); (Period costs: $9,500)] [(MOH: Rent, on equip. + (Ind. mat. cost/system x No. systems) + Fact. super. sal. + Jan. costs + (Ann. depr./mos. in a yr.) + (Ann. prop.tax./Mos. in a yr,) = Tot.); (Period costs: Advert.)]

(For Instructor Use Only)

(b) Total production costs Direct materials $111,000 Direct labor 90,000 Manufacturing overhead 18,100 Total production cost $219,100 Production cost per system = $219,100/1,500 = $146.07. (rounded) LO2 BT: AP Difficulty: Easy TOT: 25 min. AACSB: Analytic AICPA AC: Measurement IMA: Reporting

PROBLEM 11.2

Kimmel, Survey of Accounting, 3e, Solutions Manual

Cost Item Direct materials (1) Wages for workers (2) Rent on equipment Indirect materials (3) Factory supervisor’s salary Janitorial costs Advertising Depreciation on factory building (4) Property taxes on factory building (5)

Direct Materials $111,000

Product Costs Direct Manufacturing Labor Overhead

PROBLEM 11.3

(a) Case 1 a = $9,600 + $5,000 + $8,000 = $22,600 Total manufacturing costs $22,600 + $1,000 – B = $17,000 b = $22,600 + $1,000 – $17,000 = $6,600 Ending WIP inventory $17,000 + C = $22,000 c = $22,000 – $17,000 = $5,000 Beginning F.G. inventory d = $22,000 – $3,400 = $18,600 Cost of goods sold e = ($24,500 – $2,500) – $18,600 = $3,400 Gross profit f = $3,400 – $2,500 = $900 Net income [(B: $22,600 + $1,000 - $17,000 = $6,600); (E: ($24,500 - $2,500) - $18,600 = $3,400)] [(B: Tot. mfg. costs + Beg. WIP – COGM = End. WIP); (E: (Sales rev. – sales disc.) – CGS = GP)]

Case 2 g + $8,000 + $4,000 = $16,000 g = $16,000 – $8,000 – $4,000 = $4,000 D.M. used $16,000 + h – $3,000 = $24,000 h = $24,000 + $3,000 – $16,000 = $11,000 Beginning WIP inventory (i – $1,400) – k = $7,000 (i– $1,400) – $24,800 = $7,000 i = $1,400 + $24,800 + $7,000 = $33,200 Sales revenue (Note: Item i can only be solved after item k is solved.) j = $24,000 + $3,300 = $27,300 Cost of goods available for sale k = $27,300 – $2,500 = $24,800 Cost of goods sold $7,000 – l = $5,000 l = $2,000 Operating expenses [(H: $24,000 + $3,000 - $16,000 = $11,000); (I: $1,400 + $24,800 + $7,000 = $33,200); (K: $27,300 - $2,500 = $24,800)] [(H: COGM + End. WIP – Tot. mfg. costs = Beg. WIP); (I: Sales disc. + CGS + GP = Sales rev.); (K: Gds. avail. for sale – End. fin. gds. = CGS)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

11-29

PROBLEM 11.3 (Continued) (b)

CASE 1 Cost of Goods Manufactured Schedule For the Year Ended December 31, 2027 Work in process, beginning ................................. Direct materials ..................................................... Direct labor ............................................................ Manufacturing overhead ...................................... Total manufacturing costs............................ Total cost of work in process .............................. Less: Work in process, ending ........................... Cost of goods manufactured ...............................

(c)

$ 1,000 $9,600 5,000 8,000 22,600 23,600 6,600 $17,000

CASE 1 Income Statement For the Year Ended December 31, 2027 Sales revenue........................................................ Less: Sales discounts ......................................... Net sales ................................................................ Cost of goods sold Finished goods inventory, beginning .......... Cost of goods manufactured ........................ Cost of goods available for sale................... Less: Finished goods inventory, ending .... Cost of goods sold ................................ Gross profit ........................................................... Operating expenses.............................................. Net income ............................................................

$24,500 2,500 $22,000 5,000 17,000 22,000 3,400 18,600 3,400 2,500 $ 900

[($24,500 - $2,500) – ($5,000 + $17,000 - $3,400) - $2,500 = $900] [(Sales rev. – Sales disc.) – (Beg. fin. gds. inv. + COGM – End. fin. gds. inv.) – Oper. exp. = Net inc.]

11-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 11.3 (Continued) CASE 1 Balance Sheet (Partial) December 31, 2027 Assets Current assets Cash ............................................................... Accounts receivables (net)........................... Inventories Finished goods ...................................... Work in process..................................... Raw materials ........................................ Prepaid expenses.......................................... Total current assets ..............................

$ 3,000 15,000 $3,400 6,600 600

10,600 400 $29,000

LO3 BT: AN Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

11-31

PROBLEM 11.4

(a)

CLARKSON COMPANY Cost of Goods Manufactured Schedule For the Year Ended June 30, 2027 Work in process, July 1, 2026 ............ Direct materials Raw materials inventory, July 1, 2026 .............................. $ 48,000 Raw materials purchases ........... 96,400 Total raw materials available for use ...................................... 144,400 Less: Raw materials inventory, June 30, 2027 ................... 39,600 Direct materials used .................. Direct labor .......................................... Manufacturing overhead Factory manager’s salary ........... 58,000 Factory utilities ............................ 27,600 Indirect labor ............................... 24,460 Factory machinery depreciation 16,000 Factory property taxes ................ 9,600 Factory insurance ....................... 4,600 Factory repairs ............................ 1,400 Total manufacturing overhead........................... Total manufacturing costs ................. Total cost of work in process ............ Less: Work in process, June 30, 2027 Cost of goods manufactured .............

$ 19,800

$104,800 139,250

141,660 385,710 405,510 18,600 $386,910

[$19,800 + (($48,000 + $96,400 - $39,600) + $139,250 + ($58,000 + $27,600 + $24,460 + $16,000 + $9,600 + $4,600 + $1,400)) - $18,600 = $386,910] [Beg. WIP + ((Beg. raw mat. + Raw mat. purch. – End. raw mat.) + DL + (Fact. mgrs. sal. + Fact. util. + Ind. labor + Fact. mach. depr. + Fact. prop. tax. + Fact. ins. + Fact. repairs)) – End. WIP = COGM]

11-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 11.4 (Continued) (b)

CLARKSON COMPANY Income Statement (Partial) For the Year Ended June 30, 2027 Sales revenues Sales revenue ............................................. Less: Sales discounts............................... Net sales ..................................................... Cost of goods sold Finished goods inventory, July 1, 2026 ............................................. Cost of goods manufactured [From (a)] ... Cost of goods available for sale ............... Less: Finished goods inventory, June 30, 2027 ................................. Cost of goods sold ............................. Gross profit ................................................

$534,000 4,200 $529,800 96,000 386,910 482,910 75,900 407,010 $122,790

[($534,000 - $4,200) – ($96,000 + $386,910 - $75,900) = $122,790] [(Sales rev. – Sales disc.) – (Beg. fin. gds. inv. + COGM – End. fin. gds. inv.) = GP]

(c)

CLARKSON COMPANY Balance Sheet (Partial) June 30, 2027 Assets Current assets Cash ............................................................ Accounts receivable .................................. Inventories Finished goods ................................... Work in process.................................. Raw materials ..................................... Total current assets ....................

$ 32,000 27,000 $75,900 18,600 39,600

134,100 $193,100

LO3 BT: AP Difficulty: Moderate TOT: 35 AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

11-33

PROBLEM 11.5

(a)

EMPIRE COMPANY Cost of Goods Manufactured Schedule For the Month Ended October 31, 2027 Work in process, October 1 .............. Direct materials Raw materials inventory, October 1 ................................ $ 18,000 Raw materials purchases ............................... 264,000 Total raw materials available for use ..................................... 282,000 Less: Raw materials inventory, October 31 ....................... 29,000 Direct materials used ................. Direct labor ......................................... Manufacturing overhead Factory facility rent .................... 60,000 Depreciation on factory equipment ............................... 31,000 Indirect labor .............................. 28,000 Factory utilities* ......................... 9,000 Factory insurance** .................... 4,800 Total manufacturing overhead.......................... Total manufacturing costs ................ Total cost of work in process ........... Less: Work in process, October 31 . Cost of goods manufactured ............

$ 20,000

$253,000 190,000

132,800 575,800 595,800 14,000 $581,800

**$12,000 × 75% = $9,000 **$ 8,000 × 60% = $4,800 [$20,000 + (($18,000 + $264,000 - $29,000) + $190,000 + ($60,000 + $31,000 + $28,000 + ($12,000 × 75%) + ($8,000 × 60%))) - $14,000 = $581,800] [Beg. WIP + ((Beg. raw mat. inv. + Raw mat. purch. – End. raw mat. inv.) + DL + (Fact. facil. rent + Depr. on fact. equip. + Ind. labor + Fact. util. + Fact. ins.)) – End. WIP = COGM]

11-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 11.5 (Continued) (b)

EMPIRE COMPANY Income Statement For the Month Ended October 31, 2027 Sales revenue ................................................... Cost of goods sold Finished goods inventory, October 1 ...... Cost of goods manufactured [From (a)] .. Cost of goods available for sale .............. Less: Finished goods inventory, October 31 ..................................... Cost of goods sold ............................ Gross profit ....................................................... Operating expenses Advertising expense ................................. Selling and administrative salaries .......... Depreciation expense—sales equipment .............................................. Insurance expense** ................................. Utilities expense* ...................................... Total operating expenses ................. Net income ........................................................

$780,000 $ 30,000 581,800 611,800 50,000 561,800 218,200 90,000 75,000 45,000 3,200 3,000 216,200 $ 2,000

**$12,000 × 25% **$ 8,000 × 40% LO3 BT: AN Difficulty: Moderate TOT: 35 AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

11-35

CD 11

CURRENT DESIGNS

The answers to parts (a) and (b) may vary from student to student. (a) What are the primary information needs of each manager? Mike Cichanowski, CEO, needs to know the overall financial picture of the company. He also needs to have a general picture of sales by territory and product line, and of cost per unit by product line. Diane Buswell, Controller, needs all accounting-related information. Deb Welch, Purchasing Manager, needs to know the costs of the components for each product. Bill Johnson, Sales Manager, needs to know sales by territory and product line. Dave Thill, Kayak Factory Manager, needs to know all the costs of producing each type of kayak. Rick Thrune, Production Manager for Composite Kayaks, needs to know the costs related to the composite kayak production.

11-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CD 11 (Continued) (b) Name one special-purpose management accounting report that could be designed for each manager. Include the name of the report, the information it would contain, and how frequently it should be issued.

Mike Cichanowski

Name of report Analysis of proposed new product line

Diane Buswell

Companywide budget analysis

Manager

Deb Welch

Purchasing History

Bill Johnson

Sales Summary

Dave Thill

Rick Thrune

Cost of Production Report Cost of Production Report for Composite Kayaks

Information report would contain Projected revenues and expenses for a possible new product line Revenues, expenses, and net income compared to the budgeted amounts for each List of items purchased and most recent cost for each item Sales by product line and by customer Direct materials, direct labor, and manufacturing overhead costs assigned to each product line Detailed direct material and direct labor costs for the composite kayaks

Kimmel, Survey of Accounting, 3e, Solutions Manual

How frequently should it be issued?

As needed and requested

Monthly Monthly or available online Monthly or weekly

Monthly or weekly

Weekly

(For Instructor Use Only)

11-37

CD 11 (Continued) (c) When Diane Buswell, controller for Current Designs, reviewed the accounting records for a recent period, she noted the following items. Classify each item as a product cost or a period cost. If a cost is a product cost, note if it is a direct materials, direct labor, or manufacturing overhead item.

Payee Winona Agency Bill Johnson (sales manager) Xcel Energy Winona Printing

Purpose

Product Costs Direct Direct Manufacturing Period Costs Materials Labor Overhead

Property insurance for the manufacturing factory Payroll–payment to sales manager Electricity for manufacturing factory Price lists for salespeople Sales commissions

Jim Kaiser (sales representative) Dave Thill (factory Payroll–payment to manager) factory manager Dana Schultz (kayak Payroll–payment to assembler) kayak assembler Bagging film used when kayaks are assembled; it Composite One is discarded after use. Shop supplies–brooms, Fastenal paper towels, etc. Polyethylene powder which is the main ingredient for the Ravago rotational molded kayaks Property taxes on Winona County manufacturing factory North American Kevlar fabric for Composites composite kayaks Trash disposal for the Waste Management company office building Record depreciation of manufacturing None equipment Totals

$3,200 $1,700 450 85 1,250 1,450 $760

260 890

$3,170 5,480 4,930 660

$8,100

$760

4,540 $16,270

$3,695

LO1, 2 BT: AN Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Measurement IMA: Strategic Planning, Performance Measurement

11-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

WC 11

WATERWAYS CORPORATION

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

11-39

WC 11 (Continued) WATERWAYS CORPORATION Cost of Goods Manufactured Schedule For the Month Ended November 30, 2027 Work in process 10/31 $ 52,700 Direct materials Raw materials inventory 10/31 $ 38,000 Raw material purchases 184,500 Total raw materials available for use 222,500 Less: Raw materials inventory 11/30 52,700 Direct materials used $169,800 Direct labor 42,000 Manufacturing overhead Depreciation— factory equipment 16,800 Factory utilities 27,000 Indirect labor 48,000 Rent—factory equipment 47,000 Repairs—factory equipment 4,500 Total factory overhead 143,300 Total manufacturing costs 355,100 Total cost of work in process 407,800 Less: Work in process 11/30 42,000 Cost of goods manufactured $365,800

11-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

WC 11 (Continued) WATERWAYS CORPORATION Income Statement For the Month Ended November 30, 2027 Sales Revenue $1,350,000 Cost of goods sold Finished goods inventory 10/31 $ 72,550 Cost of goods manufactured 365,800 Cost of goods available for sale 438,350 Less: Finished goods inventory 11/30 68,800 Cost of goods sold 369,550 Gross profit 980,450 Operating expenses Selling expenses Advertising expenses 54,000 Sales commissions 40,500 Total selling expenses 94,500 Administrative expenses Depreciation—office equipment $ 2,400 Office supplies expense 1,600 Other administrative expenses 72,000 Office salaries 325,000 Total administrative expenses 401,000 Total operating expenses 495,500 Net income $ 484,950 WATERWAYS CORPORATION Balance Sheet (partial) November 30, 2027 Assets Current assets Cash Accounts receivable Inventories Finished goods inventory $68,800 Work in process inventory 42,000 Raw materials inventory 52,700 Prepaid expenses Total current assets

$260,000 275,000

163,500 41,250 $739,750

LO3 BT: AN Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

11-41

SOLUTIONS TO DATA ANALYTICS IN ACTION The solutions for the Data Analytics in Action problems are available in Excel. See the file Solutions: Excel Templates in the Instructor Resources.

11-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 11.1

DECISION-MAKING ACROSS THE ORGANIZATION

Ending Raw Materials Inventory Beginning raw materials + Raw materials purchased = Raw materials available for use = $19,000 + $365,000 = $384,000 Raw materials available for use – Ending raw materials inventory = Direct materials used $384,000 – Ending raw materials inventory = $350,000 Ending raw materials inventory = $384,000 – $350,000 = $34,000 ($19,000 + $365,000 - $350,000 = $34,000) (Beg. raw mat. + Raw mat. purch. – DM used = End. raw mat.)

Ending Work in Process Inventory Direct materials used + Direct labor + Manufacturing overhead = Total manufacturing costs = $350,000 + $250,000 + ($250,000 x 60%) = $750,000 Beginning work in process inventory + Total manufacturing costs = Total cost of work in process = $25,000 + $750,000 = $775,000 Cost of goods manufactured + Beginning finished goods inventory = Cost of goods available for sale Cost of goods manufactured + $38,000 = $770,000 Cost of goods manufactured = $770,000 – $38,000 = $732,000 Total cost of work in process – Ending work in process inventory = Cost of goods manufactured $775,000 – Ending work in process inventory = $732,000 Ending work in process inventory = $775,000 – $732,000 = $43,000 [($25,000 + ($350,000 + $250,000 + ($250,000 x 60%)) = $775,000); ($770,000 - $38,000 = $732,000); ($775,000 - $732,000 = $43,000)] [(Beg. WIP + (DM + DL + (DL x MOH rate)) = Tot. cost in WIP); (Cost of gds. avail. for sale – Beg. fin. gds. = COGM); (Tot. cost in WIP – COGM = End. WIP)]

Ending Finished Goods Inventory Sales – Cost of goods sold = Gross profit $1,240,000 – Cost of goods sold = $1,240,000 x 40% Cost of goods sold = $1,240,000 – $496,000 = $744,000 Cost of goods available for sale – Ending finished goods inventory = Cost of goods sold $770,000 – Ending finished goods inventory = $744,000 Ending finished goods inventory = $770,000 – $744,000 = $26,000 LO3 BT: AN Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-43

CT 11.2

MANAGERIAL ANALYSIS

Since the questions were fairly open-ended, the following are only suggested results. The class may be able to think of others, or of more items for each one. (a) Jason Dennis

Needs information on sales, perhaps by salesperson and by territory.

Peggy Groneman

Needs cost information for her department.

Dave Marley

Needs all manufacturing accounting information.

Kevin Carson

Needs product cost information.

Sally Renner

Needs information on component costs and costs for her department. Income statement.

(b) Jason Dennis Peggy Groneman

None.

Dave Marley

All.

Kevin Carson

Income statement and cost of goods manufactured schedule.

Sally Renner (c) Jason Dennis

None. Sales by Territory—Detailed information, possibly by product line, issued daily or weekly.

Peggy Groneman

Cost of Computer Programs—Accumulated cost incurred for each major program used including maintenance and updates of program, issued monthly.

Dave Marley

Cost of Preparing Reports—Detailed analysis of all reports provided, their frequency, time, and estimated cost to prepare, issued monthly.

Kevin Carson

Cost of Product—Detailed cost by product line, including a comparison with estimated costs for that product. Issued as each batch of production is completed.

Sally Renner

Cost of Product Design—Accumulated total costs of each new product, issued at end of each project.

LO3 BT: AN Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting, Performance Measurement 11-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 11.3

REAL-WORLD FOCUS

(a) The IMA has more than 125,000 members. These members include business leaders, managers, and decision makers in accounting and finance. (b) Student and Associate members receive most of the benefits of Regular membership at a significant savings. • Unique access to the professional designation, the Certified Management Accountant (CMA) • Specialized learning opportunities • Educational assistance, grants, educational competitions • Around-the-Clock Networking • Career management resources (c) The answer to this question will vary by school. LO N/A BT: K Difficulty: Easy TOT: 20 min. AACSB: Technology AICPA PC: Communication IMA: None

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-45

CT 11.4

COMMUNICATION ACTIVITY

From: Business.Advisors@gmail.com To: SPhillips@PhillipsCo.com Subject: Income Statement Corrections Hi Shelly: As you requested, I corrected the income statement for October from the information you gave me. The corrected statement is enclosed and it shows that you actually earned net income of $2,000 for October. I also noticed that you did not have a cost of goods manufactured schedule, so I prepared one for you. The income statement your assistant accountant prepared was not correct for two primary reasons. First, product costs were not separated from selling and administrative expenses. Second, and more importantly, the reported net loss did not reflect changes in inventories. This had the effect of treating these costs as expenses rather than assets. A reconciliation of the reported net loss of $23,000 to net income of $2,000 is as follows: Net loss as reported .................................................... Increase (decrease) in inventories Raw materials ($29,000 – $18,000) ...................... Work in process ($14,000 – $20,000) .................. Finished goods ($50,000 – $30,000) ................... Total increase ............................................... Net income as corrected .............................................

$(23,000) $11,000 (6,000) 20,000 (25,000 $ (2,000

The changes in raw materials and work in process inventories are reported in the cost of goods manufactured schedule. You will see, for example, that the cost of direct materials used was $253,000, not $264,000 as reported by your accountant in the income statement. The difference is the change in raw materials inventories. Similarly, you will see that the $6,000 decrease in work in process inventories increases total manufacturing costs of $575,800 to produce cost of goods manufactured of $581,800. The change in finished goods inventories is reported in the income statement. Notice that the change of $20,000 is subtracted from cost of goods manufactured of $581,800 to produce cost of goods sold of $561,800.

11-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 11.4 (Continued) I have also modified the form of the income statement to recognize the distinction between product costs (cost of goods sold) and period costs (operating expenses) as required by generally accepted accounting principles. Thanks for letting me help. If I can be of further assistance, don’t hesitate to call. I hope you find a replacement for your controller soon. Student’s name LO3 BT: AN Difficulty: Moderate TOT: 15 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

11-47

CT 11.5

ETHICS CASE

(a) The stakeholders in this situation are: • • • •

The users of Newton Industries’ financial statements. Steve Morgan, controller. The vice-president of finance. The president of Newton Industries.

(b) The ethical issues in this situation pertain to the adherence to sound and acceptable accounting principles. Intentional violation of generally accepted accounting principles in order to satisfy a practical short-term personal or company need and thus create misleading financial statements would be unethical. Selecting one acceptable method of accounting and reporting among other acceptable methods is not necessarily unethical. (c) Ethically, the management of Newton Industries should be trying to report the financial condition and results of operations as fairly as possible; that is, in accordance with GAAP. Steve should inform management what is acceptable accounting and what is not. The basic concept to be supported in this advertising cost transaction is matching costs and revenues. Normally, advertising costs are expensed in the period in which they are incurred because it is very difficult to associate them with specific revenues. LO2, 3 BT: E Difficulty: Moderate TOT: 20 min. AACSB: Ethics AICPA FC: Reporting AICPA PC: Professional Demeanor, Communication IMA: Business Applications, Reporting

11-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 11.6

ALL ABOUT YOU

Student responses will vary. We have provided some basic examples that may represent common responses. (a) Individuals must often make purchase decisions which involve choosing between an item that has a more expensive initial purchase price, but is expected to either last longer, or provides some form of cost savings. The question that the individual faces is whether the cost savings or additional benefit justifies the additional initial cost. For example, more expensive dishwashers and refrigerators also tend to be more energy efficient. The labels on these appliances provide information regarding the energy savings which can be used to make a break-even evaluation. (Chapter 13) (b) In order to increase control over their financial situation and reduce the probability of financial hardship, all people should prepare personal budgets. Preparation of a personal budget requires the individual to plan for the future and to prioritize expenditures. (Chapter 15) (c) Companies employ the balanced scorecard as a mechanism to ensure that their financial goals are consistent with their efforts. Use of the balanced scorecard requires clear articulation of goals, priorities, and strategies. By employing these same techniques in their everyday life, individuals can be better assured that they will expend effort on those things that really matter to them, rather than wasting efforts on less important distractions. (Chapter 17) (d) Capital budgeting involves financial evaluation of long-term assets. Companies routinely make capital budgeting decisions, but so do individuals. The purchase of a home or car is a decision that has implications for your finances for many subsequent years. Buying a house or car is a very personal decision, influenced by many personal, nonfinancial, preferences. However, these decisions should also be subjected to a financial evaluation using capital budgeting techniques to ensure that the choice makes good economic sense. (Chapter 18) LO N/A BT: C Difficulty: Moderate TOT: 25 min. AACSB: Communication AICPA FC: Measurement IMA: Decision Analysis, Budget Preparation, Performance Measurement, and Investment Decisions

Kimmel, Survey of Accounting, 3e, Solutions Manual

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11-49

CT 11.7

CONSIDERING YOUR COSTS AND BENEFITS

Discussion guide: This is a difficult decision. While the direct costs of outsourced tax return preparation may in fact be lower, you must also consider other issues: Will the accuracy of the returns be as high? Will your relationships with your customers suffer due to the loss of direct contact? Will customers resent having their personal information shipped overseas? While you may not want to lay off six employees, you also don’t want to put your firm at risk by not remaining competitive. Perhaps one solution would be to outsource the most basic tasks, and then provide training to the six employees so they can perform higher-skilled services such as tax planning. Many of the techniques that you learn in the remaining chapters of this text will help you evaluate the merits of your various options. LO2 BT: E Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Measurement AICPA PC: Communication IMA: Reporting

11-50

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CHAPTER 12 Job Order Costing Learning Objectives 1. 2. 3. 4. 5.

Describe cost systems and the flow of costs in a job order system. Use a job cost sheet to assign costs to work in process. Demonstrate how to determine and use the predetermined overhead rate. Record manufacturing and service jobs completed and sold. Distinguish between under- and overapplied manufacturing overhead.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-1

ANSWERS TO QUESTIONS 1.

(a) Cost accounting involves the measuring, recording, and reporting of product costs. A cost accounting system consists of manufacturing cost accounts that are fully integrated into the accounting records of a company. (b) An important feature of a cost accounting system is the use of a perpetual inventory system that provides immediate, up-to-date information on the cost of a product.

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

(a) The two principal types of cost accounting systems are: (1) job order cost system and (2) process cost system. Under a job order cost system, costs are assigned to each job or batch of goods; at all times each job or batch of goods can be separately identified. A job order cost system measures costs for each completed job, rather than for set time periods. Under a process cost system, product-related costs are accumulated by or assigned to departments or processes for a set period of time. Job order costing lends itself to specific, special-order manufacturing or servicing while process costing is better suited to similar, large-volume products and continuous process manufacturing. (b) A company can use both types of systems. For example, General Motors uses process costing for standard model cars and job order costing for custom-made vehicles.

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

A job order cost system is most likely to be used by a company that receives special orders, or custom builds, or produces heterogeneous items or products; that is, the product manufactured or the service rendered is tailored to the customer or client’s requests, needs, or situation. Examples of industries that use job order systems are custom homebuilders, commercial printing companies, motion picture companies, construction contractors, repair shops, accounting and law firms, hospitals, shipbuilders, and architects.

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

A process cost system is most likely to be used by manufacturing firms with continuous production flows usually found in mass production, assembly line, large-volume, uniform, or relatively similar product industries. Companies producing appliances, chemicals, pharmaceuticals, rubber and tires, plastics, cement, petroleum, and automobiles utilize process cost systems.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

The major steps in the flow of costs in a job order cost system are: (1) accumulating the manufacturing costs incurred, (2) assigning the accumulated costs to Work in Process Inventory, (3) transferring the cost of completed jobs to Finished Goods Inventory, and (4) transferring the cost of jobs sold to Cost of Goods Sold.

LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

The three inventory control accounts and their subsidiary ledgers are: Raw materials inventory—materials inventory records. Work in process inventory—job cost sheets. Finished goods inventory—finished goods records.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

12-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 12 (Continued) 7.

The source documents used in accumulating direct labor costs are time tickets.

LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Disagree. Updates to Manufacturing Overhead are also made at the end of an accounting period. For example, there will be adjusting entries for factory depreciation, property taxes, and insurance.

LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement n IMA: Cost Management

The source document for materials is the materials requisition slip and the source document for labor is the time ticket. The entries are: Manufacturing Costs

Direct materials Indirect materials

Raw Materials Inventory –$XX –XX

Direct labor Indirect labor

Factory Labor

Manufacturing Overhead

Work in Process Inventory +$XX

+$XX –XX –XX

+XX +XX

LO2 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

10.

The purpose of a job cost sheet is to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

11.

The source documents for charging costs to specific jobs are materials requisition slips for direct materials, time tickets for direct labor, and the predetermined overhead rate for manufacturing overhead.

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

12.

The materials requisition slip is a business document used as an authorization to issue materials from inventory to production. It is approved and signed by authorized personnel so that materials may be removed from inventory and charged to production, to specific jobs, departments, or processes. The materials requisition slip is the basis for posting to the materials inventory records and to the job cost sheet.

LO2 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

13.

Disagree. Actual manufacturing overhead cannot be determined until the end of a period of time. Consequently, there could be a significant delay in assigning overhead and in determining the total cost of the completed job.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

14.

The elements for computing the predetermined overhead rate are the estimated annual overhead costs and an expected activity base such as direct labor hours. The rate is computed by dividing the estimated annual overhead costs by the expected annual operating activity.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-3

Questions Chapter 12 (Continued) 15.

At any point in time, the balance in Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs. Alternatively, posting to Work in Process Inventory may be compared with the sum of the postings to the job cost sheets for each of the manufacturing cost elements.

LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

16.

When Manufacturing Overhead has a positive balance, overhead is underapplied. Underapplied overhead means that the overhead applied to work in process is less than the overhead incurred. When Manufacturing Overhead has a negative balance, overhead is overapplied. Overapplied overhead means that the overhead applied to work in process is greater than the overhead incurred.

LO5 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

17.

Under- or overapplied overhead is not eliminated by adjusting the cost sheets. If the balance in Manufacturing Overhead is positive, it is decreased and Cost of Goods Sold is increased. If the balance in Manufacturing Overhead is negative, it is increased and Cost of Goods Sold is decreased.

LO5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

12-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12.1 Work in Process Inventory

Manufacturing Costs Raw Materials Inventory (1) Purchase raw materials (2) Incur factory labor (3) Factory utilities (3) Factory insurance (3) Factory repairs (3) Factory depreciation (3) Factory property taxes (4) Direct materials (4) Indirect materials (5) Direct labor (5) Indirect labor (6) Assign manufacturing overhead

Finished Goods Inventory

Cost of Goods Sold

+$XX –XX

+$XX

Factory Manufacturing Labor Overhead

+$XX +$XX +$XX +XX +XX +XX +XX –XX –XX

+$XX +XX –XX –XX

+XX +XX

–XX

+XX –XX

(7) Completed jobs (8) Sale of jobs (1) Purchase raw materials (2) Incur factory labor (3) Incur manufacturing overhead (4) Raw materials are used

(5) Factory labor is used (6) Overhead is applied (7) Completed goods are recognized (8) Cost of goods sold is recognized

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

12-5

BRIEF EXERCISE 12.2 Manufacturing Costs Raw Materials Inventory Purchased raw materials Incurred factory labor Factory utilities Balance

Manufacturing Overhead

Factory Labor

+$4,000 +$6,000 $4,000

$6,000

+$2,000 $2,000

LO1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE 12.3

Manufacturing Costs Raw Materials Factory Manufacturing Inventory Labor Overhead Balance from BE12.2 Direct materials Indirect materials Balance

$4,000

$6,000

$2,000

–2,800 –600 $600

Work in Process Inventory

+$2,800

$6,000

+600 $2,600

$2,800

LO2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

12-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 12.4 Work in Process Inventory

Manufacturing Costs Raw Materials Inventory Balance from BE12.3 Direct labor Indirect labor Balance

Factory Labor

$600

Manufacturing Overhead

$6,000 –5,200 –800

$2,600

$3,400

$2,800 +5,200

+800 $8,000

LO2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE 12.5

Date 1/31 1/31

Job 1 Direct Materials $900

Direct Labor $2,200

Date 1/31 1/31

Job 3 Direct Materials $700

Date 1/31 1/31

Job 2 Direct Materials $1,200

Direct Labor $1,600

Direct Labor $1,400

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE 12.6 Overhead rate per direct labor cost is 180%, or ($900,000 ÷ $500,000). Overhead rate per direct labor hour is $18, or ($900,000 ÷ 50,000 DLH). Overhead rate per machine hour is $9, or ($900,000 ÷ 100,000 MH). LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-7

BRIEF EXERCISE 12.7 January $40,000 × 70% = $28,000 February $30,000 × 70% = $21,000 March

$50,000 × 70% = $35,000

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE 12.8

Manufacturing Costs Raw Materials Inventory

Factory Labor

Balance Completion of Jobs: Job 10 Job 11 Job Sold: Job 10 Balance

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Manufacturing Overhead $50,000 –20,000 –30,000

+$20,000 +30,000 –20,000 30,000

+$20,000 20,000

LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

12-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 12.9

Service Contract Costs Service Salaries and Operating Supplies Wages Overhead Beginning balance $36,000 Assign personnel costs to projects –36,000 +$8,000 Assign operating overhead to –7,000 projects Ending balance $0 $1,000

Service Contract in Process

+$28,000 +7,000 $35,000

LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE 12.10 Shimeca Company The adjustment will increase Cost of Goods Sold and decrease Manufacturing Overhead. Garcia Company The adjustment will decrease Cost of Goods Sold and increase Manufacturing Overhead. LO5 BT: C Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-9

SOLUTIONS FOR DO IT! EXERCISES DO IT! 12.1 Manufacturing Costs Raw Materials Manufacturing Inventory Factory Labor Overhead (a) Purchased raw materials (b) Incurred factory labor (c) Factory utilities (c) Factory property taxes (c) Factory depreciation Balance

+$18,000 +$40,000 +$3,100 +2,700 +9,500 $18,000

$40,000

$15,300

LO1 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

DO IT! 12.2 The three summary entries are:

Manufacturing Costs Raw Materials Factory Manufacturing Inventory Labor Overhead –$16,200 –$12,000

Work in Process Inventory

+$16,200 +12,000

LO2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

12-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

DO IT! 12.3 The predetermined overhead for Washburn Company is: $200,000  2,500 hours = $80.00 The amount of overhead assigned to number 551 would be: 90 hours  $80.00 = $7,200 [($200,000 ÷ 2,500 hrs. = $80/hr.); (90 hrs. × $80/hr. = $7,200)] [(Expected MOH ÷ Expected MH = Predet. OH rate); (Act. MH × Predet. OH rate = Applied OH)] LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

DO IT! 12.4

Manufacturing Costs Raw Materials Factory Manufacturing Inventory Labor Overhead Balance Completion of Job No. 310 Completion of Job No. 312 Sale of Job No. 312 Balances

Work in Finished Process Goods Inventory Inventory

Cost of Goods Sold

$120,000 –70,000

+$70,000

–50,000

+50,000

–50,000 +$50,000 $70,000 $50,000

LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

DO IT! 12.5 Manufacturing overhead applied = 130% × $85,000 = $110,500 Underapplied manufacturing overhead = $115,000 – $110,500 = $4,500 [($85,000 × 130% = $110,500); ($115,000 - $110,500 = $4,500)] [(Actual DL cost × Predet. OH rate = Applied OH); (Actual OH – Applied OH = Underapp. MOH)] LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-11

SOLUTIONS TO EXERCISES EXERCISE 12.1 (a) & (b) Work in Process Inventory

Manufacturing Costs Raw Materials Inventory (a) Incurred factory labor (b) Direct labor (b) Indirect labor Balances

Factory Labor $90,000 –76,500 –13,500 $0

Manufacturing Overhead

+$76,500 +$13,500 $13,500

$76,500

LO1, 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

12-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 12.2 (a) – (c) Work in Finished Process Goods Inventory Inventory

Manufacturing Costs

(a) Balances (a) Incurred factory labor (b) Direct materials (b) Indirect materials (b) Direct labor (b) Indirect labor (b) Assign Manufacturing overhead (b) Completion of job No. 429 (c) Balance

Raw Materials Factory Manufacturing Inventory Labor Overhead $15,000

$3,500

+$13,700 –10,400 –800

+10,400 +$800 –12,500 –1,200

+12,500

+1,200

-7,500

+7,500 –7,540*

+$7,540

$26,360

*$2,000 + $2,500 + $1,900 + ($1,900 × 60%) = $7,540 (c) Job No. 430 431

Beginning Work in Process $1,500 0 $1,500

Job Cost Sheets Direct Direct Manufacturing* Material Labor Overhead $3,500 $ 3,000 $1,800 4,400 7,600 4,560 $7,900 $10,600 $6,360

Total $ 9,800 16,560 $26,360

*Direct labor × .60 LO1, 2, 3, 4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-13

EXERCISE 12.3 (a) $15,200, or ($5,000 + $6,000 + $4,200). (b) Last year 70%, or ($4,200 ÷ $6,000); this year 80% (either $6,400 ÷ $8,000 or $3,200 ÷ $4,000). [Last yr.: ($4,200 ÷ $6,000 = 70%); This yr.: ($3,200 ÷ $4,000 = 80%)] [Last yr.: (MOH cost ÷ DL cost = Predet. OH rate); This yr.: (MOH ÷ DL cost = Predet. OH rate)] LO1, 2, 3, 4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

EXERCISE 12.4 (a) $50,000 + $42,500 = $145,650 (a) = $53,150 $145,650 + (b) = $201,500 (b) = $55,850 $201,500 – (c) = $192,300 (c) = $9,200 [Note: The instructions indicate that manufacturing overhead is applied on the basis of direct labor cost, and the rate is the same in all cases. From Case A, a student should note the overhead rate to be 85%, or ($42,500 ÷ $50,000).] (d) = .85 × $140,000 (d) = $119,000 [($42,500 ÷ $50,000) x $140,000 = $119,000] [From Case A: (MOH applied ÷ DL cost) x Case B DL cost = Case B MOH app.]

$83,000 + $140,000 + $119,000 = (e) (e) = $342,000 $342,000 + $15,500 = (f) (f) = $357,500 $357,500 – $11,800 = (g) (g) = $345,700 [Note: (h) and (i) are solved together.] (i) = .85(h) 12-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 12.4 (Continued) $63,150 + (h) + .85(h) = $213,000 1.85(h) = $149,850 (h) = $81,000 (i) = $68,850 (j) = $213,000 + $18,000 (j) = $231,000 $231,000 – (k) = $222,000 (k) = $9,000 LO1, 5 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

EXERCISE 12.5 (a) $2.40 per machine hour ($300,000 ÷ 125,000 MH). (b) ($322,000) – ($2.40 × 130,000 Machine Hours) $322,000 – $312,000 = $10,000 underapplied [$322,000 – ($2.40 × 130,000) = $10,000 underapp.]

(c) The adjustment to assign the underapplied overhead to Cost of Goods Sold will decrease Manufacturing Overhead and increase Cost of Goods Sold. LO3, 5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

EXERCISE 12.6 (a) The source documents are: Direct materials—Materials requisition slips. Direct labor—Time tickets. Manufacturing overhead—Predetermined overhead rate. (b) The predetermined overhead rate is 125% of direct labor cost. For example, on July 15, the computation is $550 ÷ $440 = 125%. The same result is obtained on July 22 and 31. ($550 ÷ $440 = 125% of DL cost) (July 15: MOH cost ÷ DL cost = Predet. MOH rate)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-15

EXERCISE 12.6 (Continued) (c) The total cost is: Direct materials ............................................................ Direct labor ................................................................... Manufacturing overhead ..............................................

$4,690 1,360 1,700 $7,750

The unit cost is $3.10 ($7,750 ÷ 2,500). LO1, 2, 3, 4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

EXERCISE 12.7 Work in Finished Process Goods Inventory Inventory

Manufacturing Costs Raw Materials Inventory (1) Purchased raw materials (2) Direct materials (2) Indirect materials (3) Incurred factory labor (4) Direct labor (4) Indirect labor (5) Overhead costs incurred (6) Assigned overhead (7) Completed goods (8) Goods sold

Factory Labor

Cost of Goods Sold

Manufacturing Overhead

+$46,300 –29,200

+$29,200

–6,800

+$6,800 +$59,900 –54,000 –5,900

+54,000 +5,900

+80,500 –81,000

+81,000 –88,000 +$88,000 –75,000 +$75,000

LO1, 2, 3, 4 BT: AP Difficulty: Easy TOT: 18 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

12-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 12.8 Work in Process Inventory

Manufacturing Costs Raw Materials Inventory

Factory Labor

Finished Goods Inventory

Cost of Goods Sold

Manufacturing Overhead

(1) Purchased raw materials +$192,000 (1) Incurred factory labor +$87,300 (2) Direct materials –153,530 (2) Indirect materials –4,470 (2) Direct –80,000 labor (2) Indirect –7,300 labor (3) Incurred overhead costs (4) Factory depreciation (5) Assigned overhead (6) Completed jobs

+$153,530 +$4,470 +80,000 +7,300

+49,500 +14,550 –72,000

+72,000 –240,930

+$240,930

Computation of cost of jobs finished:

Job A20 A21 A23

Direct Materials $35,240 42,920 39,270

Direct Labor $18,000 22,000 25,000

Manufacturing Overhead $16,200 19,800 22,500

Total $ 69,440 84,720 86,770 $240,930

LO1, 2, 3, 4 BT: AP Difficulty: Easy TOT: 18 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-17

EXERCISE 12.9 (a)

LOPEZ COMPANY Cost of Goods Manufactured Schedule For the Month Ended May 31, 2027 Work in process, May 1 ........................................ Direct materials used ............................................ Direct labor ............................................................ Manufacturing overhead applied ......................... Total manufacturing costs............................ Total cost of work in process .............................. Less: Work in process, May 31 ........................... Cost of goods manufactured ...............................

$ 14,700 $62,400 50,000 40,000 152,400 167,100 15,900 $151,200

[($14,700 + ($62,400 + $50,000 + $40,000)) - $15,900 = $151,200] [(Beg. WIP + (DM + DL + MOH app.)) – End. WIP = COGM]

(b)

LOPEZ COMPANY (Partial) Income Statement For the Month Ended May 31, 2027 Sales revenue..................................................... Cost of goods sold Finished goods, May 1 ............................... Cost of goods manufactured ..................... Cost of goods available for sale................ Less: Finished goods, May 31 .................. Cost of goods sold ............................. Gross profit ........................................................

(c)

$215,000 $ 12,600 151,200 163,800 9,500 154,300 $ 60,700

LOPEZ COMPANY (Partial) Balance sheet May 31, 2027 Current assets: Finished goods inventory .......................... Work in process inventory ........................ Raw materials inventory ............................

$ 9,500 15,900 7,100

$32,500

LO1, 5 BT: AP Difficulty: Easy TOT: 18 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

12-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 12.10 (a) Work in Process Inventory April 30 $ 9,300 (#10, $5,200 + #11, $4,100) May 31 $18,600 (#11, $8,000 + #13, $4,700 + #14, $5,900) June 30 $ 9,500 (#14, $5,900 + $3,600) [(Apr. 30: $5,200 + $4,100 = $9,300); (May 31: $8,000 + $4,700 + $5,900 = $18,600); (June 30: $5,900 + $3,600 = $9,500)] [(Apr. 30: Job #10 + Job #11 = End. WIP); (May 31: (Job #11 + Job #13 + Job #14 = End. WIP); (June 30: Job #14 = End. WIP)]

(b) Finished Goods Inventory April 30 $ 1,200 (#12) May 31 $ 9,600 (#10) June 30 $19,200 (#11, $10,000 + #13, $9,200) (c) Gross Profit Month May June July

Job Number 12 10 11/13

Sales Revenue $ 1,500 12,000 24,000

Cost of Goods Sold $ 1,200 9,600 19,200

Gross Profit $ 300 2,400 4,800

[(May: ($1,200 × 125%) - $1,200 = $300); (June: ($9,600 × 125%) - $9,600 = $2,400); (July: ($19,200 × 125%) $19,200 = $4,800)] [(May: (CGS × (1 + Markup %)) – CGS = GP); (June: (CGS × (1 + Markup %)) – CGS = GP); (July: (CGS × (1 + Markup %)) – CGS = GP)] LO2, 4 BT: AP Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Measurement Reporting IMA: Cost management, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

12-19

EXERCISE 12.11

(a) (1) Purchased supplies (2) Direct supplies (2) Indirect supplies (3) Direct labor (3) Indirect labor (4) Incurred overhead costs (5) Assigned overhead (6) Completed work Balance

Service Contract Costs Service Salaries and Operating Supplies Wages Overhead

Service Contracts in Process

Cost of Completed Service Contracts

+$1,800 –720

+$720

–480

+$480 –$56,000 –14,000

+56,000 +14,000

+40,000 –50,400

+50,400 –75,000 32,120

+$75,000

(b) Service Contracts in Process (2) $ 720 (3) 56,000 (5) 50,400 (6) –75,000 Balance $ 32,120 LO1, 3, 4 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

12-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 12.12 (a) Direct materials Auditor labor costs Applied overhead Total cost

Waters Inc. $ 600 5,400 3,600 $9,600

Renolds Inc. $ 400 6,600 4,400 $11,400

Bayfield Inc. $ 200 3,375 2,250 $5,825

[(Waters app. OH: 72 × $50 = $3,600); (Renolds app. OH: 88 × $50 = $4,400); (Bayfield app. OH: 45 × $50 = $2,250)] [(Waters app. OH: (Auditor hrs. × Predet. OH rate = App. OH); (Renolds app. OH: (Auditor hrs. × Predet. OH rate = App. OH); (Bayfield app. OH: (Auditor hrs. × Predet. OH rate = App. OH)]

(b) The Waters Inc. job is the only incomplete job, therefore, $9,600. (c) Actual overhead Applied overhead Balance

$11,000 10,250 ($3,600 + $4,400 + $2,250) $ 750 (underapplied)

[$11,000 – ($3,600 + $4,400 + $2,250) = $750] [Act. OH – (Waters app. OH + Renolds app. OH + Bayfield app. OH) = Underapp. OH] LO2, 3, 4 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

EXERCISE 12.13 (a)

Predetermined overhead rate = Estimated overhead ÷ Estimated decorator hours = $960,000 ÷ 40,000 decorator hours = $24 per decorator hour

(b) 40,500 hrs. × $24 = $972,000 (c)

Actual overhead Applied overhead Balance

$982,800 972,000 $ 10,800 underapplied

[$982,800 – (40,500 × $24) = $10,800] [Act. OH – (Act. dec. hrs. × Predet. OH rate) = Underapp. OH] LO3, 5 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

12-21

SOLUTIONS TO PROBLEMS PROBLEM 12.1 (a) $840,000 ÷ $700,000 direct labor costs = 120% of direct labor costs ($840,000 ÷ $700,000 = 120% of DL cost) (Est. OH costs ÷ Est. DL cost = Predet. OH rate)

(b) See solution to part (e) for job cost sheets (c) - (f) Work in Process Inventory

Manufacturing Costs Raw Materials Inventory (c) Purchase raw materials (c) Incurred factory labor (c) Factory depreciation (c) Other overhead costs (c) Indirect materials (c) Indirect labor (d) Direct materials (d) Direct labor (d) Assigned overhead (e) Jobs completed (f) Jobs sold

Factory Labor

Finished Goods Inventory

Cost of Goods Sold

+$163,000 –159,000**

+$159,000

Manufacturing Overhead

+$90,000 +$70,000 +$12,000

+16,000 –17,000

+17,000 –20,000

+20,000

–79,000

+$79,000 +50,000

–50,000

–60,000

+60,000 –163,000*

*($69,000 + $94,000 = $163,000); (Job 50 costs + Job 51 costs = Cost of completed jobs) **($90,000 + $69,000 = $159,000); (Job 49 costs + Job 50 costs = Cost of jobs sold) 12-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 12.1 (Continued) See solution to part (e) for postings to job cost sheets. (b) & (e) Job Cost Sheets Job No. 50 Date Direct Materials Direct Labor Manufacturing Overhead Beg. $20,000 $12,000 *$16,000* Jan. 10,000 5,000 * 6,000* $30,000 $17,000 *$22,000* Cost of completed job Direct materials .............................................................. Direct labor ..................................................................... Manufacturing overhead ............................................... Total cost ...............................................................................

$30,000 17,000 22,000 $69,000

*$5,000 × 120% [Job #50: $5,000 × 120% = $6,000] [Job #50: DL cost × Predet. OH rate = App. OH]

Job No. 51 Date Direct Materials Jan. $39,000 $39,000

Direct Labor $25,000 $25,000

Manufacturing Overhead **$30,000** **$30,000**

Cost of completed job Direct materials .............................................................. Direct labor ..................................................................... Manufacturing overhead ............................................... Total cost ...............................................................................

$39,000 25,000 30,000 $94,000

**$25,000 × 120% [Job #51: $25,000 × 120% = $30,000] [Job #51: DL cost × Predet. OH rate = App. OH]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-23

PROBLEM 12.1 (Continued) Job No. 52 Date Direct Materials Jan. $30,000

Direct Labor $20,000

Manufacturing Overhead ***$24,000***

***$20,000 ×120% [Job #52: $20,000 × 120% = $24,000] [Job #52: DL cost ×Predet. OH rate = App. OH]

(g)

Finished Goods Inventory Beg. bal. Completed Jobs 50 & 51 Sold Jobs 49 & 50 End. bal.

$ 90,000 163,000 –159,000 $ 94,000

The balance in this account consists of the cost of completed Job No. 51 which has not yet been sold. [$90,000 + ($69,000 + $94,000) – ($90,000 + $69,000) = $94,000] [Beg. bal. + (Cost of compltd. jobs 50 & 51) – (Cost of jobs 49 & 50 sold) = End. bal.]

(h)

Manufacturing Overhead Actual Applied Underapplied

$65,000 –60,000 $ 5,000

The balance in the Manufacturing Overhead account is underapplied. [$65,000 – ($6,000 + $30,000 + $24,000) = $5,000] [Act. MOH – (MOH app. to jobs #50, #51, & #52) = MOH underapp.] LO1, 2, 3, 4, 5 BT: AP Difficulty: Easy TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

12-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 12.2 (a) - (c) Work in Process Inventory

Manufacturing Costs

(a) Beginning balance Purchased raw materials

Raw Materials Inventory

Cost of Goods Sold

Manufacturing Overhead

$ 15,000

(1) $128,400

$179,000

+140,000

Incurred factory labor Direct materials Indirect materials Direct labor Indirect labor Overhead costs incurred Factory equip. depreciation Assigned overhead

Factory Labor

Finished Goods Inventory

+157,000 –131,000

(2) +131,000

–14,000

+14,000 –139,000 –18,000

(3) +139,000 +18,000 +120,000 +8,000 –166,800

Completed jobs Sold jobs (b)

–386,200

WIP balance (c) Overapplied overhead

(4) +166,800 (5) +386,200 –378,200 +$378,200

$179,000

–6,800

+6,800

Numbered entries: Entries labeled (1) – (5) are cross-referenced to calculations shown in Part (b) below.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-25

PROBLEM 12.2 (Continued) (b) (1)

Job 7640 Job 7641

$ 77,800 50,600 $128,400

(3)

Job 7640 Job 7641 Job 7642

$ 36,000 48,000 55,000 $139,000

(2)

Job 7640 Job 7641 Job 7642

$ 30,000 43,000 58,000 $131,000

(4)

Job 7640 Job 7641 Job 7642

$ 43,200 57,600 66,000 $166,800

(5) (a) Job 7640 Beginning balance ................................................ Direct materials ..................................................... Direct labor............................................................ Manufacturing overhead ......................................

(b) Job 7641 Beginning balance ................................................ Direct materials ..................................................... Direct labor............................................................ Manufacturing overhead ...................................... (c) Total cost of completed work Job 7640 ................................................................ Job 7641 ................................................................ Work in process balance .................................................... Unfinished job No. 7642 .............................................. (*)

Current year’s cost Direct materials ................................ Direct labor....................................... Manufacturing overhead .................

$ 77,800 30,000 36,000 43,200 $187,000

$ 50,600 43,000 48,000 57,600 $199,200 $187,000 199,200 $386,200 $179,000 $179,000 (*)

$ 58,000 55,000 66,000 $179,000

[($77,800 + $50,600) + ($30,000 + $43,000 + $58,000) + ($36,000 + $48,000 + $55,000) + ($43,200 + $57,600 + $66,000) – ($187,000 + $199,200) = $179,000] [Beg. WIP bal. + DM + DL + App. OH – Cost of compltd. jobs 7640 & 7641 = End. WIP bal.]

12-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 12.2 (Continued) (c) Actual overhead costs Incurred on account .............................................. Indirect materials .................................................. Indirect labor ......................................................... Depreciation .......................................................... Applied overhead costs Job 7640................................................................. Job 7641................................................................. Job 7642.................................................................

Actual overhead ............................................................ Applied overhead.......................................................... Overapplied overhead ..................................................

$120,000 14,000 18,000 8,000 $160,000 $ 43,200 57,600 66,000 $166,800 $160,000 166,800 $ 6,800

[($120,000 + $14,000 + $18,000 + $8,000) – ($43,200 + $57,600 + $66,000) = $6,800] [(OH incurred on acct. + Ind. Mat. + Ind. Labor + Depr.) – (App. OH to jobs #7640 + #7641 + #7642) = Overapp. OH]

(d) Sales revenue (given) ........................................ Cost of goods sold Add: Job 7638 ................................................... Job 7639 ................................................... Job 7641 ................................................... Less: Overapplied overhead ............................ Gross profit ........................................................

$530,000 $ 87,000 92,000 199,200 378,200 6,800

371,400 $158,600

LO1, 2, 3, 4, 5 BT: AP Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement , Reporting IMA: Cost Management, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-27

PROBLEM 12.3 Work in Process Inventory

Manufacturing Costs Raw Materials Inventory Beginning balance (1) Purchased raw materials (1) Incurred factory labor (1) Misc. overhead costs (1) Factory equip. depr. (2) Direct materials (2) Indirect materials (2) Direct labor (2) Indirect labor (2) Assigned overhead* (6) Completion of jobs** (3) Sale of jobs Ending balance

Factory Labor

Finished Goods Inventory

Cost of Goods Sold

Manufacturing Overhead

$4,200 +4,900

-$990

$5,540

+4,800 +400 +900 –4,900

+4,900

–1,500

+1,500 –3,600 –1,200

+3,600 +1,200 –4,500

+4,500 –14,740

$2,700

-$1,490

+$14,740 –14,740

+$14,740

$14,740

$3,800

*($3,600 × 125% = $4,500); (DL × MOH rate = Assigned OH) **

Job Rodgers Stevens Linton

DM $1,700 1,300 2,200

DL $1,560 900 1,780

MOH*** $1,950 1,125 2,225

Tot. Costs $5,210 3,325 6,205 $14,740

***125% × DL

12-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 12.3 (Continued) (b)

Beginning balance Direct materials Direct labor Assigned overhead Completed jobs Ending balance

Work in Process Inventory $ 5,540 4,900 3,600 4,500 -14,740 $ 3,800

Job: Koss (Direct materials $2,000 + Direct labor $800 + Manufacturing overhead $1,000) ................................. (c)

$3,800

CASE INC. Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027 Work in process, June 1.......................................... Direct materials used .............................................. Direct labor............................................................... Manufacturing overhead applied ............................ Total manufacturing costs .............................. Total cost of work in process ................................. Less: Work in process, June 30 ............................ Cost of goods manufactured ..................................

$ 5,540 $4,900 3,600 4,500 13,000 18,540 3,800 $14,740

[($5,540 + ($4,900 + $3,600 + $4,500)) - $3,800 = $14,740] [(Beg. WIP + (DM used + DL + MOH app.)) – End. WIP = COGM] LO1, 2, 3, 4, 5 BT: AP Difficulty: Easy TOT: 40 min. AACSB: Analytic AICPA FC: Measurement , Reporting IMA: Cost Management, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-29

PROBLEM 12.4

(a) Department D: Department E: Department K:

$1,200,000 ÷ $1,500,000 = 80% of direct labor cost. $1,500,000 ÷ 125,000 = $12.00 per direct labor hour. $900,000 ÷ 120,000 = $7.50 per machine hour.

(b) Manufacturing Costs Direct materials Direct labor Overhead applied Total

D $140,000 120,000 96,000* $356,000

Department E $126,000 110,000 132,000** $368,000

K $ 78,000 37,500 78,000*** $193,500

D $99,000 96,000 $ 3,000

Department E $124,000 132,000 $ (8,000)

K $79,000 78,000 $ 1,000

*$120,000 × 80% **11,000 × $12.00 ***10,400 × $7.50 (c) Manufacturing Overhead Incurred Applied Under (over) applied

[(D: $99,000 – ($120,000 × 80%) = $3,000); (E: $124,000 – (11,000 × $12) = ($8,000)); (K: $79,000 – (10,400 × $7.50) = $1,000)] [(D: Act. MOH – (DL cost × Predet. MOH rate) = Underapp. MOH); (E: Act. MOH – (DL hrs. × Predet. MOH rate) = Overapp. MOH); (K: Act. MOH – (Act. MH × Predet. MOH rate) = Underapp. MOH)] LO3, 5 BT: AP Difficulty: Easy TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

12-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 12.5

(a) $7,600

($16,850 + $7,975 – $17,225).

($16,850 + $7,975 - $17,225 = $7,600) (RM used + RM end. bal. – RM purch. = RM beg. bal.)

(b) $36,000

[$9,750 + $15,000 + (75% × $15,000)]. (Given in other data).

($16,850 – $2,900).

($16,850 - $2,900 = $13,950) (RM used – Ind. Mat. = DM)

(d) $6,300

($8,400 × 75%).

(e) $12,200

[Given in other data—$3,800 + $4,800 + (75% × $4,800)].

[$3,800 + $4,800 + (75% × $4,800) = $12,200] [Job 158: DM + DL cost + (Predet. MOH rate x DL cost) = End. bal. WIP]

(f)

$52,450

($36,000 + $13,950 + $8,400 + $6,300 – $12,200).

($36,000 + $13,950 + $8,400 + $6,300 - $12,200 = $52,450) (Beg. bal. WIP + DM + DL + MOH app. – End. bal. WIP = Jobs completed]

(g) $5,000

(Given in other data).

(h) $52,450

(See (f) above).

(i)

($5,000 + $52,450 – $4,000).

$53,450

($5,000 + $52,450 - $4,000 = $53,450) (Beg. bal. fin. gds. inv. + Jobs completed – End. bal. fin. gds. inv. = CGS)

(j)

$4,000

(Given in other data).

(k) $12,025

(Equal to factory labor incurred).

(l)

($12,025 – $8,400).

$3,625

(m) $6,300 ($7,770* – $1,470) or (Same as (d)). *$2,900 + $3,625 + $1,245 (n) $1,470

(Given in other data).

(o) $53,450

(Same as (i) above).

(p) $53,450

(Same as (i) above).

LO1, 2, 3, 4, 5 BT: AN Difficulty: Complex TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-31

CD 12

CURRENT DESIGNS

Cost for one kayak: Direct Materials Polyethylene powder Finishing kit

54 pounds @ $1.50 per pound 1 kit @ $170

Direct Labor More skilled Less skilled

2 hours @ $15 per hour 3 hours @ $12 per hour

81 170 30 36

Manufacturing Overhead 150% of direct labor costs 150% × $66 Total cost for one kayak

99 $ 416

Cost for order of 20 kayaks $416 per kayak × 20 kayaks

$8,320

LO2, 1, 2, 3 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

12-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 12.1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) The manufacturing cost element that is responsible for the fluctuating unit costs is manufacturing overhead. Manufacturing overhead is being included as incurred rather than being applied on a predetermined basis. Direct materials and direct labor are not the cause as they have the same unit cost per batch in each quarter. (b) The solution is to apply overhead using a predetermined overhead rate based on a relevant basis of production activity. Based on actual overhead incurred and using batches of product TC-1 as the activity base, the overhead rate is $16,000 per batch [($105,000 + $153,000 + $97,000 + $125,000) ÷ 30]. Another approach would be to use direct labor cost as the relevant basis to apply overhead on a predetermined basis. For example, a rate of 133 1/3% of direct labor cost ($480,000 ÷ $360,000) could be used. Either approach will provide the same result. (c) The quarterly results using a predetermined overhead rate based on batches produced are as follows: Quarter Costs Direct materials Direct labor Manufacturing overhead Applied ($16,000 × batches) Total (a)

1 $100,000 60,000

2 $220,000 132,000

3 $ 80,000 48,000

4 $200,000 120,000

80,000 $240,000

176,000 $528,000

64,000 $192,000

160,000 $480,000

Production in batches (b)

$ 48,000

Unit cost (per batch) (a) ÷ (b)

(Note: The unit cost of a batch remains the same in each quarter. Both sales and production should be pleased with this solution to fluctuating unit costs.) LO2, 3 BT: E Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-33

CT 12.2

MANAGERIAL ANALYSIS

Increase Work in Process Inventory and decrease Raw Materials Inventory.

Increase Sales Bonus Expense and decrease Cash.

Increase Factory Labor and increase Factory Wages Payable.

Increase Manufacturing Overhead and decrease Raw Materials Inventory.

LO2, 3 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement, Reporting AICPA PC: Communication IMA: Cost Management, Reporting

12-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 12.3

REAL-WORLD FOCUS

(a) Candidates for the CMA or CFM Certificate must complete two continuous years of professional experience in management accounting or financial management. This requirement may be completed prior to or within seven years of passing the examination. (b) CMAs, CFMs, and candidates who have completed the CMA and/or the CFM examination but have not yet met the experience requirement, are required to maintain their proficiency in the fields of management accounting and financial management. This includes knowledge of new concepts and techniques as well as their application in the management accounting and financial management professions. The objective is to maintain the professional competence of the individual and to enhance one’s ability to perform job-related requirements. Persons who have retired need not meet continuing education requirements. The continuing requirement is 30 hours per year and at least 2 of those hours must be ethics-related. A broad range of subjects may be included in the programs for which hours of credit will be given. The subjects should be related to the topics covered on the CMA/CFM examination and/or to an individual’s job responsibilities. Illustrative of the subjects that may qualify are: all aspects of accounting, financial management, business applications of mathematics and statistics, computer science, economics, management, production, marketing, business law, and organizational behavior. LO N/A BT: C Difficulty: Easy TOT: 20 min AACSB: Technology, Communication AICPA FC: Reporting AICPA PC: Communication IMA: None

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-35

CT 12.4

COMMUNICATION ACTIVITY

From: Management Accountant’s email address To: Nancy Kopay’s email address Subject: Overead Costs Hello Ms. Kopay: Thank you for your prompt payment! I am very glad that you found the cost information helpful. Thank you also for your questions about our overhead costs. We do try to provide our customers with as much information as possible, but we cannot give detailed information on overhead costs. You asked why we do not use actual overhead costs when we bill our customers. We estimate overhead costs, rather than use actual costs, for several reasons. One of the most important reasons for you is that we could not prepare bills in a timely manner if we had to use actual overhead. We would have to wait until we were billed for such things as electricity and telephone service. A second reason is that some costs we include in overhead are only payable once or twice a year, such as insurance and taxes. When we use an estimated rate, we are able to allow for those costs. A third reason is that some costs are fixed, which means that they stay the same in dollar amount from month to month. This category includes items such as rent. If we billed you based on our actual costs, you would be billed a higher amount if your work was done during a slow time (because we would have fewer jobs to spread the costs over). An estimated overhead rate allows us to level out these costs.

12-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 12.4 (Continued) I hope this answers some of your questions. I’m glad you are interested in our company and that you took the time to write. I am sending a copy of our annual report under separate cover. It contains some details on the information you asked about. Thanks again for your letter and for having Williams make your new cabinets! Management Accountant’s name LO3 BT: C Difficulty: Easy TOT: 20 min. AACSB: Communication AICPA FC: Measurement, Reporting AICPA PC: Communication IMA: Cost Management, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-37

CT 12.5

ETHICS CASE

(a) The stakeholders in this situation are:  Alice Reiley, controller for LRF Printing.  The president of LRF Printing.  The customers of LRF Printing.  The competitors of LRF Printing. (b) Padding cost-plus contracts is both unethical and illegal. Alice is faced with an ethical dilemma. She will be in trouble with the president if she doesn’t follow his directive, and she will be committing an unethical act if she does follow his instructions. (c) Alice should continue to accurately account for cost-plus contracts and, if challenged by the president, she should say that she is doing her very best to charge each and every legitimate cost to the cost-plus contracts. Let the president perform the unethical act if he continues to persist in padding costs. LO N/A BT: E Difficulty: Easy TOT: 15 min. AACSB: Ethics AICPA FC: Reporting AICPA PC: Professional Demeanor, Communication IMA: Business Applications

12-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 12.6

ALL ABOUT YOU

The top 10 steps to starting a business are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Conduct market research. Write your business plan. Fund your business. Pick your business location. Choose a business structure. Choose your business name. Register your business. Get federal and state tax IDs. Apply for licenses and permits. Open a business bank account.

LO N/A BT: E Difficulty: Easy TOT: 15 min. AACSB: Technology AICPA FC: Reporting AICPA PC: Communication IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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12-39

CT 12.7

CONSIDERING YOUR COSTS AND BENEFITS

Discussion guide: The situation presented is a difficult one because you are presently receiving some help for free. It would seem that the best strategy is to price your services based on what it would cost you to do the landscape business without any free help. In the long run, it is going to be impossible to continue unless you can cover these costs. In addition, if you underprice your services today, your customers may expect your prices will remain as low in the future. That probably cannot happen, given that your costs will increase substantially after the first two years. However, we should note that it is not unusual to start a small business with some assets available to you. Then, as your business grows, you acquire additional assets to meet your needs. After all, you may need a low price to get started, and as you gain experience you will be able to charge more or become more efficient. So what to do? Let’s address your old truck first. You should treat the truck as an asset owned by your business. Put it on your books at its fair value, and depreciate it over a reasonable life. This will result in an overhead charge. You need to cover the cost of that truck, as you will have to buy another one some day. The land, barn, and your mother’s services are a little more difficult. If you rented the land and barn and if you paid an assistant, all of these costs would be charged to overhead. (The assistant would be indirect labor.) You are currently getting all these services for free. This is a good situation now, and you may need this situation early in your business to help you get started. But you should recognize that even if you run your business profitably for the first two years, you may have problems beginning in the third year. Thus, it would seem prudent to establish a budget based on both scenarios for the first two years. If you can charge based on your expected costs in the future, do so. If that is not realistic, because you need to establish yourself and get more experience, then charge less. But be sure from the start to cover a reasonable amount of your costs, or the business does not make sense for you financially. LO2, 3, 4 BT: E Difficulty: Moderate TOT: 25 min. AACSB: Analysis, Communication AICPA FC: Measurement, Reporting, AICPA PC: Communication IMA: Cost Management, Reporting

12-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CHAPTER 13 Cost-Volume-Profit Learning Objectives 1. 2. 3. 4. 5. *6.

Explain variable, fixed, and mixed costs and the relevant range. Apply the high-low method to determine the components of mixed costs. Prepare a CVP income statement to determine contribution margin. Compute the break-even point using three approaches. Determine the sales required to earn target net income and determine margin of safety. Apply regression analysis to determine the components of mixed costs.

Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-1

ANSWERS TO QUESTIONS 1.

(a) Cost behavior analysis is the study of how specific costs respond to changes in the level of activity within a company. (b) Cost behavior analysis is important to management in planning business operations and in deciding between alternative courses of action.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

(a) The activity index is the activity that causes changes in the behavior of costs. Once the index is determined, it is possible to classify the behavior of costs in response to changes in activity levels into three categories: variable, fixed, or mixed. (b) Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Unit variable costs remain the same at every level of activity.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

Fixed costs remain the same in total regardless of changes in the activity level. In contrast, fixed costs per unit vary inversely with changes in activity. As volume increases, fixed costs per unit decline and vice versa.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

(a) The relevant range is the range of activity over which a company expects to operate during the year. (b) J.P.’s claim is incorrect. The behavior of both fixed and variable costs is linear only over a certain range of activity. CVP analysis is based on the assumption that both fixed and variable costs remain linear within the relevant range.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

This is true. Most companies operate within the relevant range. Within this range, it is possible to establish a linear (straight-line) relationship for both variable and fixed costs. If a relevant range cannot be established, segregation of costs into fixed and variable becomes extremely difficult.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

Apartment rent is fixed because the cost per month remains the same regardless of how much Adam uses the apartment. Rent on a Hertz rental truck is a mixed cost because the cost usually includes a per day charge (a fixed cost) plus an activity charge based on miles driven (a variable cost).

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

For CVP analysis, mixed costs must be classified into their fixed cost and variable cost components. One approach to the classification of mixed costs is the high-low method. Another is regression analysis.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

Unit variable cost is $1.30, or [($165,000 – $100,000) ÷ (90,000 – 40,000)]. At any level of activity, fixed costs are $48,000 per month [$165,000 – (90,000 × $1.30)].

LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(($165,000 - $100,000) ÷ (90,000 – 40,000) = $1.30); ($165,000 – (90,000 × $1.30) = $48,000)] [((Hi. cost – Low cost) ÷ (Hi. act. – Low act.) = Unit VC ); (Hi. cost – (Hi. act. × Unit VC ) = FC)]

13-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 13 (Continued) 9.

No, not true. Only two of the basic components of cost-volume-profit (CVP) analysis, unit selling prices and unit variable cost, relate to unit data. The other components, volume, total fixed costs, and sales mix, are not based on per-unit amounts.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

10.

There is no truth in Faye’s statement. Contribution margin is sales less variable costs. It is the revenue that remains to cover fixed costs and to produce net income (profit) for the company.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

11.

Unit contribution margin is $14 ($40 – $26). The contribution margin ratio is 35% ($14 ÷ $40).

[(($40 - $26) = $14); ($14 ÷ $40 = 35%)] [((USP – UVC = UCM); (UCM ÷ USP = CM ratio)] LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

12.

False. Knowledge of the break-even point is useful to management in deciding whether to introduce new product lines, change sales prices on established products, reduce variable and/or fixed costs, and enter new market areas.

LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

13.

$26,000 ÷ 25% = $104,000

($26,000 ÷ 25% = $104,000) (FC ÷ CM ratio = BEP in sales $) LO4 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

14.

(a) The break-even point involves the plotting of three lines over the full range of activity: the total revenue line, the total fixed cost line, and the total cost line. The break-even point is determined at the intersection of the total revenue and total cost lines. (b) The break-even point in units is obtained by drawing a vertical line from the break-even point to the horizontal axis. The break-even point in sales dollars is obtained by drawing a horizontal line from the break-even point to the vertical axis.

LO4 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

15.

Margin of safety is the difference between actual or expected sales and sales at the break-even point. Expected sales = 1,250 × $12 = $15,000; Margin of safety = $15,000 – $13,200 = $1,800; Margin of safety ratio = $1,800 ÷ $15,000 = 12%.

[(1,250 × $12 = $15,000); ($15,000 - $13,200 = $1,800); ($1,800 ÷ $15,000 = 12%)] [(Expect. unit sales × USP = Expect. sales $); (Expect. sales $ - BEP sales $ = MOS); (MOS ÷ Expect. sales $ = MOS ratio)] LO5 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

16.

At the break-even point, the contribution margin is equal to the fixed costs. The contribution margin ratio is: $180,000 $500,000

= 36%

The sales revenue required to achieve net income of $90,000 is as follows:

$180,000 + $90,000 .36

= $750,000

[($180,000 ÷ $500,000 = 36%); (($180,000 + $90,000) ÷ 36% = $750,000)] [(FC ÷ BEP sales $ = CM ratio); ((FC + Target NI) ÷ CM ratio = Sales $)] LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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13-3

Questions Chapter 18 (Continued) 17.

PACE COMPANY CVP Income Statement Sales ................................................................................................. Variable costs Cost of goods sold ($600,000 × 0.70) ........................................ Operating expenses ($200,000 × 0.70) ...................................... Total variable expenses...................................................... Contribution margin ...........................................................................

$900,000 $420,000 140,000 560,000 $340,000

[$900,000 – ($600,000 × 0.70) – ($200,000 × 0.70) = $340,000] [Sales – (CGS × VC ratio) – (Oper. exp. × VC ratio) = CM] LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

*18.

The inherent weakness of the high-low method is that the cost equation created by using this method is based on just two of the sample data points (high point and low point). A more representative cost equation can be derived from using regression analysis. Its primary advantages are that the resulting cost equation is based on all of the sample data points, thereby creating a more accurate cost equation and better decision-making.

LO2, 6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Knowledge AICPA AC: Measurement IMA: Quantitative Methods

*19.

The cost equation line will minimize the sum of the squared differences between the line and the individual sample data points.

LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Quantitative Methods

*20.

If the mixed cost being analyzed is not a linear function, regression analysis can provide misleading results. Regression analysis can also be influenced by “outliers”, i.e., data points that differ significantly from the rest of the observations. These must be adjusted for or eliminated. Finally, regression analysis is most accurate when there are a large number of data points. However, collecting data points is time consuming and expensive. So, in some cases there are just not enough data points to make a reliable estimate.

LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Quantitative Methods

13-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13.1 Indirect labor is a variable cost because it increases in total directly and proportionately with the change in the activity level, and the cost unit remains constant. Supervisory salaries is a fixed cost because it remains the same in total regardless of changes in the activity level. Maintenance is a mixed cost because it increases in total but not proportionately with changes in the activity level, and the cost per unit decreases with increases in activity. LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

BRIEF EXERCISE 13.2 VARIABLE COST Relevant Range

FIXED COST Relevant Range

$10,000

8,000 C O S T

6,000 4,000 2,000

80 100

Activity Level (%)

80 100

Activity Level (%)

LO1 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Business Economics

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13-5

BRIEF EXERCISE 13.3

$60,000 Total Cost Line

COST

45,000 Variable Cost Component 30,000

15,000 Fixed Cost Component 0

500

1,000

1,500

2,000

2,500

Direct Labor Hours LO1 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement Business Economics IMA: Business Economics

BRIEF EXERCISE 13.4 High Low Difference $15,000 – $13,500 = $1,500 8,500 – 7,500 = 1,000 $1,500 ÷ 1,000 = $1.50 Variable cost per mile. High Low Total cost $15,000 $13,500 Less: Variable costs 8,500 × $1.50 12,750 7,500 × $1.50 11,250 Total fixed costs $ 2,250 $ 2,250 The mixed cost is equal to $2,250 plus $1.50 per mile. [(($15,000 - $13,500) ÷ (8,500 – 7,500) = $1.50 per mi.); ($15,000 - (8,500 × $1.50) = $2,250)] [((Hi. cost – Low cost) ÷ (Hi. act. – Low act.) = VC per mi.); (Hi. cost – (Hi. act. × VC per mi.) = FC)] LO2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-6

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BRIEF EXERCISE 13.5 High Low Difference $74,500 – $36,000 = $38,500 40,000 – 18,000 = 22,000 $38,500 ÷ 22,000

= $1.75 per unit. Activity Level High Low $74,500 $36,000

Total cost Less: Variable costs 40,000 × $1.75 18,000 × $1.75 Total fixed costs

70,000 000,000 $ 4,500

31,500 $ 4,500

[(($74,500 - $36,000) ÷ (40,000 – 18,000) = $1.75 per unit): ($74,500 – (40,000 × $1.75) = $4,500)] [((Hi. cost – Low cost) ÷ (Hi. act. – Low act.) = VC per unit); (Hi. cost – (Hi. act. × VC per unit) = FC)] LO2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

BRIEF EXERCISE 13.6 1.

(a)

$288 = ($640 – $352)

($640 - $352 = $288) (USP – UVC = UCM)

(b)

45% ($288 ÷ $640)

($288 ÷ $640 = 45%) (UCM ÷ USP = CM ratio)

(c)

$207 = ($300 – $93)

($300 - $93 = $207) (USP – UCM = UVC)

(d)

31% ($93 ÷ $300)

($93 ÷ $300 = 31%) (UCM ÷ USP = CM ratio)

(e)

$1,300 = ($325 ÷ 25%)

($325 ÷ 25% = $1,300) (UCM ÷ CM ratio = USP)

(f)

$975 ($1,300 – $325)

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13-7

BRIEF EXERCISE 13.7 RUSSELL INC. CVP Income Statement For the Quarter Ended March 31, 2027 Per Percent Total Unit of Sales Sales $2,200,000 $10.00 100% Variable costs ($920,000 + $70,000 + $88,000) 1,078,000 4.90 49% Contribution margin 1,122,000 $ 5.10 51% Fixed costs ($440,000 + $45,000 + $98,000) 583,000 Net income $ 539,000 [$2,200,000 – ($920,000 + $70,000 + $88,000) – ($440,000 + $45,000 + $98,000) = $539,000; ($10 – $4.90 – $5.10); (100% – 49% – 51%)] [Sales – (Var. CGS + Var. sell. exp. + Var. admin. exp.) – (Fix. CGS + Fix. sell. exp. + Fix. admin. exp.) = Net inc.; USP – UVC = UCM; (USP as a % USP) – (UVC as a % USP) = cm ratio] LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Decision analysis

BRIEF EXERCISE 13.8 (a) $520Q – $286Q – $163,800 = $0 $234Q = $163,800 Q = 700 units [($520Q - $286Q - $163,800 = $0); ($234Q = $163,800); (Q = 700 units)] [((USP × Qty.) – (UVC × Qty.) – FC = Net inc.); (UCM × Qty. = FC); (Qty. = BEP in units)]

(b) Unit contribution margin $234, or ($520 – $286) Q = $163,800 ÷ $234 Q = 700 units [Q = $163,800 ÷ ($520 - $286) = 700 units] [Qty. = FC ÷ (USP – UVC) = BEP in units] LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA:: Decision Analysis

BRIEF EXERCISE 13.9 Contribution margin ratio = [($300,000 – $180,000) ÷ $300,000] = 40% Break-even point in sales dollars = $110,000 ÷ 40% = $275,000 [(($300,000 - $180,000) ÷ $300,000 = 40%); ($110,000 ÷ 40% = $275,000)] [((Tot. rev. – Tot. VC) ÷ Tot. rev. = CM ratio); (FC ÷ CM ratio = BEP in sales dollars)] LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 13.10 If variable costs are 70% of sales, the contribution margin ratio is 100% – 70% = 30% Required sales in dollars = ($195,000 + $75,000) ÷ .30 = $900,000 [((100% – 70% = 30%); (($195,000 + $75,000) ÷ 30% = $900,000)] [(Sales as a % of sales – VC as a % of sales = CM ratio); ((FC + Target Net inc.) ÷ CM ratio = Req. sales dollars)] LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

BRIEF EXERCISE 13.11 (a) Margin of safety in dollars = $1,000,000 – $800,000 = $200,000 (b) Margin of safety ratio = $200,000 ÷ $1,000,000 = 20% (a) [($1,000,000 - $800,000 = $200,000); (b) ($200,000 ÷ $1,000,000 = 20%)] [(a) (Act. sales – BEP sales = MOS); ((b) MOS ÷ Act. sales = MOS ratio)] LO5 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

BRIEF EXERCISE 13.12 Unit contribution margin = $1.60 = $6.00 – $4.40 Required sales in units = ($480,000 + $1,500,000) ÷ $1.60 = 1,237,500. [($6.00 - $4.40 = $1.60); (($480,000 + $1,500,000) ÷ $1.60 = 1,237,500 units)] [(USP – UVC = UCM); ((FC + Target net inc.) ÷ UCM = Req. sales units)] LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

*BRIEF EXERCISE 13.13 Using regression analysis in Excel, the intercept and slope are: Intercept: 4836.29 (fixed cost) Slope: 1.46281 (unit variable cost) The cost equation is: $4,836.29 + $1.46281 per unit produced = Total cost LO6 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Quantitative Methods

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13-9

SOLUTIONS FOR DO IT! EXERCISES DO IT! 13.1 Variable costs: Indirect labor, direct labor, and direct materials. Fixed costs: Property taxes and depreciation. Mixed costs: Utilities and maintenance. LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

DO IT! 13.2 (a)

Variable cost: Fixed cost:

($18,580 – $16,200) ÷ (10,500 – 8,800) = $1.40 per unit $18,580 – ($1.40 x 10,500 units) = $3,880 or $16,200 – ($1.40 × 8,800) = $3,880

[(($18,580 - $16,200) ÷ (10,500 – 8,800) = $1.40 per unit); ($18,580 – ($1.40 × 10,500) = $3,880)] [((Hi. cost – Low cost) ÷ (Hi. act. – Low act.) = VC per unit); (Hi. cost – (VC per unit × Hi. act.) = FC)]

(b)

$3,880 + $1.40 per unit produced = Total cost

(c)

Estimated total cost to produce 9,200 units: $3,880 + ($1.40 × 9,200) = $16,760

[$3,880 + ($1.40 × 9,200) = $16,760] [FC + (VC × Units produced) = Est. tot. cost] LO2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

DO IT! 13.3 Cedar Grove Industries CVP Income Statement For the Month Ended May 31, 2027 Total Sales (8,000 × $45) $360,000 Variable costs (8,000 × $21.60) 172,800 Contribution margin 187,200 Fixed costs 120,000 Net income $ 67,200

Per Unit $45.00 21.60 $23.40

Percent of Sales 100% 48% 52%

[(($45 × 8,000) – ($21.60 × 8,000) - $120,000 = $67,200); ($45 - $21.60 = $23.40; ($45 ÷ $45) – ($21.60 ÷ $45) = ($23.40 ÷ $45)] [((USP × Units sold) – (UVC × Units sold) – FC = Net inc.); (USP – UVC = UCM; (USP as a % of USP) – (UVC as a % of USP) = CM ratio] LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Decision Analysis 13-10

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DO IT! 13.4 (a)

The equation is $250Q – $170Q – $160,000 = $0. Therefore, $80Q = $160,000, and the breakeven point in units is 2,000 ($160,000 ÷ $80).

[($250Q - $170Q - $160,000 = $0); ($80Q = $160,000); (Q = 2,000 units)] [(USP × Qty.) – (UVC × Qty.) – FC = Net inc.); (UCM × Qty. = FC); Qty. = BEP units)]

(b)

The unit contribution margin is $80 ($250 – $170). The equation therefore is $160,000 ÷ $80, and the breakeven point in units is 2,000.

[($250 - $170 = $80); ($160,000 ÷ $80 = 2,000 units)] [(USP – UVC = UCM); (FC ÷ UCM = BEP units)] LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

DO IT! 13.5 (a)

Unit CM = Unit selling price – Unit variable costs $12 = $30 – $18 CM ratio = Unit CM /Unit selling price 40% = $12/$30 Break-even point = Fixed costs ÷ Contribution margin ratio in sales dollars = $220,000 ÷ 40% = $550,000

[($30 - $18 = $12); ($12 ÷ $30 = 40%); ($220,000 ÷ 40% = $550,000)] [(USP – UVC = UCM); (UCM ÷ USP = CM ratio); (FC ÷ CM ratio = BEP in $)]

(b)

Margin of safety ratio

Actual sales – Break-even sales Actual sales $800,000 – $550,000 = $800,000 =

= 31.25% [($800,000 - $550,000) ÷ $800,000 = 31.25%] [(Act. sales – BEP sales) ÷ Act. sales = MOS ratio]

(c)

Sales dollars required = (Fixed costs + Desired net income) ÷ CM ratio = ($220,000 + $140,000) ÷ 40% = $900,000

[($220,000 + $140,000) ÷ 40% = $900,000] [(FC + Desired net inc.) ÷ CM ratio = Req. sales $] LO4, 5 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-11

SOLUTIONS TO EXERCISES EXERCISE 13.1 (a) The determination as to whether a cost is variable, fixed, or mixed can be made by comparing the cost in total or on a per-unit basis at two different levels of production. Variable Costs Fixed Costs Mixed Costs

Vary in total but remain constant on a per-unit basis. Remain constant in total but vary on a per-unit basis. Contain both a fixed element and a variable element. Vary both in total and on a per-unit basis.

(b) Using these criteria as a guideline, the classification is as follows: Direct materials Direct labor Utilities

Variable Variable Mixed

Rent Maintenance Supervisory salaries

Fixed Mixed Fixed

LO1 BT: C Difficulty: Easy TOT: 8 min. AACSB: Knowledge AICPA FC: Measurement IMA: Business Economics

EXERCISE 13.2 (a)

13-12

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EXERCISE 13.2 (Continued) (b) The relevant range is 3,000 – 8,000 units of output since a straight-line relationship exists for both direct materials and rent within this range. (c)

Unit variable cost for direct materials Within the relevant range (3,000 – 8,000 units)

Cost Units $15,000* = 5,000* =

$3 per unit

*Any costs and units within the relevant range could have been used to calculate the same unit variable cost of $3. (d) Fixed cost within the relevant range = $8,000 (3,000 – 8,000 units) LO1 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Business Economics

EXERCISE 13.3 (a) Maintenance Costs:

$2,800 $5,500 – $2,700 = = $7 variable cost per machine hour 700 – 300 400

Total costs Less: Variable costs 700 × $7 300 × $7 Total fixed costs

700 Machine Hours $5,500

300 Machine Hours $2,700

4,900 $ 600

2,100 $ 600

Thus, maintenance costs are $600 per month plus $7 per machine hour. [(($5,500 - $2,700) ÷ (700 – 300) = $7 per MH); ($5,500 – (700 × $7) = $600); (Tot. maint. costs = $600 per mo. + $7 per MH)] [((Hi. cost – Low cost) ÷ (Hi. act. – Low act.) = VC per MH); (Hi. cost – (Hi. act. x VC per MH) = FC); (Tot. maint. cost = FC + (VC per MH × MH))]

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13-13

EXERCISE 13.3 (Continued) $6,000

(b)

Total Cost Line

$5,500

$5,000

$4,000

Costs

$3,000

Variable Cost Component

$2,000

$1,000 Fixed Cost Line

$ 600

Fixed Cost Component 0 100 200 300 400 500 600 700 Machine Hours LO1, 2 BT: AN Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 13.4 1. Wood used in the production of furniture. 2. Fuel used in delivery trucks. 3. Straight-line depreciation on factory building. 4. Screws used in the production of furniture. 5. Sales staff salaries. 6. Sales commissions. 7. Property taxes. 8. Insurance on buildings. 9. Hourly wages of furniture craftsmen. 10. Salaries of factory supervisors. 11. Utilities expense. 12. Telephone bill.

Variable. Variable. Fixed. Variable. Fixed. Variable. Fixed. Fixed. Variable. Fixed. Mixed. Mixed or Fixed.

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Business Economics 13-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 13.5 (a) Maintenance Costs: $4,620 – $2,640 $1,980 = = $0.44 variable cost per machine hour 8,000 – 3,500 4,500 Activity Level High Low Total cost $4,620 $2,640 Less: Variable costs 8,000 × $0.44 3,520 3,500 × $0.44 00,000 1,540 Total fixed costs $1,100 $1,100 Thus, maintenance costs are $1,100 per month plus $.44 per machine hour. [(($4,620 - $2,640) ÷ (8,000 – 3,500) = $0.44 per MH); ($4,620 – (8,000 × $0.44) = $1,100); (Maint. Costs = $1,100 + $0.44 per MH)] [((Hi. cost – Low cost) ÷ (Hi. act. – Low act.) = VC per MH); (Hi. cost – (Hi. act. × VC per MH) = FC); (Maint. costs = FC + (VC per MH × MH))]

(b)

$5,000 $4,620 Total Cost Line

$4,000

$3,000

Costs

Variable Cost Component

$2,000 Fixed Cost Line

$1,100 $1,000

Fixed Cost Component 0

2,000

4,000

6,000

8,000

Machine Hours LO1, 2 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Business Economics

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-15

EXERCISE 13.6 (a)

(b)

Cost Direct materials Direct labor Utilities Property taxes Indirect labor Supervisory salaries Maintenance Depreciation (Straight-Line)

Fixed

Fixed costs

Variable X X

Mixed X

X X X X X = $1,000 + $1,900 + $2,400 + $300 + $200 = $5,800

Variable costs to produce 3,000 units = $7,500 + $18,000 + $4,500 = $30,000 Unit variable cost

= $30,000/3,000 units = $10 per unit

[($7,500 + $18,000 + $4,500) ÷ 3,000 = $10]; [(Var. DM + Var. DL + Ind. DL) ÷ No. units = VC per unit]

Variable cost portion of mixed cost

= Total cost – Fixed portion

Utilities: Variable cost to produce 3,000 units = $2,100 – $300 = $1,800 Unit variable cost

= $1,800/3,000 units = $0.60 per unit

[Utilities: ($2,100 - $300 = $1,800); ($1,800 ÷ 3,000 = $0.60 per unit)] [(Tot. cost – FC = VC); (VC ÷ No. units = VC per unit)]

Maintenance: Variable cost to produce 3,000 units = $1,100 – $200 = $900 Unit variable cost

= $900/3,000 units = $0.30 per unit

[Maint.: ($1,100 - $200 = $900); ($900 ÷ 3,000 = $0.30 per unit)] [(Tot. cost – FC = VC); (VC ÷ No. units = Unit VC )]

Cost to produce 5,000 units = (Unit variable costs × Units produced) + Fixed costs = ($10 + $0.60 + $0.30) x 5,000) + $5,800 = $54,500 + $5,800 = $60,300 13-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 13.6 (Continued) [Production costs: (($10 + $.60 + $.30) x 5,000) + ($1,000 + $1,900 + $2,400 + $300 + $200) = $60,300] + ((DM per unit + DL per unit + Ind. labor per unit) + Util. per unit + Maint. per unit) × No. units) + (Prop. tax. + Super. sal. + Depr. + Fix. util. + Fix. maint.) = Tot. production costs] LO1 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Business Economics

EXERCISE 13.7 From: Student’s email address To: Marty Moser’s email address Subject: Assumptions underlying CVP analysis Mr. Moser: CVP analysis is a useful tool in analyzing the effects of changes in costs and volume on a company’s profits. However, there are some assumptions that underlie CVP analysis. When these assumptions are not valid, the results of CVP analysis may be inaccurate. The five assumptions are: 1. The behavior of both costs and revenues is linear throughout the relevant range of the activity index. 2. Costs can be classified accurately as either fixed or variable. 3. Changes in activity are the only factors that affect costs. 4. All units produced are sold. 5. When more than one type of product is sold, the sales mix will remain constant. If you want further explanation of any of these assumptions, please contact me. Student’s name LO3 BT: K Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-17

EXERCISE 13.8 (a)

ALL THAT BLOOMS CVP Income Statement For the Month Ended July 31, 2027

Sales Variable costs (120* x ($12 + $10 + $2)) Contribution margin Fixed costs ($1,400 + $200 + $2,000) Net income

Total $7,200 2,880 4,320 3,600 $ 720

Per Unit $60 24 $36

Percent of Sales 100% 40% 60%

*$7,200  $60 = 120 treatments [(120 × $60) – (120 × $24) – ($1,400 + $200 + $2,000) = $720; $60 – $24 = $36; 100% – 40% = 60%] [(Units sold × USP) – (Units sold × UVC) – FC = Net inc.; USP – UVC = UCM; (USP as a % USP) – (UVC as a % USP) = CM ratio

(b)(1) Contribution margin per lawn

$60 – ($12 + $10 + $2)

Contribution margin per lawn

$36

Fixed costs = $1,400 + $200 + $2,000 = $3,600 Break-even point in lawns = $3,600 ÷ $36 = 100 [($60 – ($12 + $10 + $2) = $36); (($1,400 + $200 + $2,000) ÷ $36 = 100)] [(USP – (Weed & feed mat. per lawn + DL per lawn + Fuel per lawn) = CM per lawn); ((Depr. + Advert. + Ins.) ÷ CM per lawn = BEP in lawns)]

(2) Break-even point in dollars = 100 lawns × $60 per lawn = $6,000 per month OR Contribution margin ratio = $36 ÷ $60 = 60% Fixed costs ÷ Contribution margin ratio = $3,600 ÷ 60% = $6,000 per month [($1,400 + $200 + $2,000) ÷ 60% = $6,000] [(Depr. + Advert. + Ins.) ÷ CM ratio = BEP in sales $] LO3, 4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 13.9 (a)

Contribution margin per room

$60 – ($14 + $28)

Contribution margin per room

$18

Fixed costs = $5,900 + $1,100 + $1,000 + $100 = $8,100 Break-even point in rooms = $8,100 ÷ $18 = 450 [($60 – ($14 + $28) = $18); (($5,900 + $1,100 + $1,000 + $100) ÷ $18 = 450)] [(USP – (Maid serv. per room + Other costs per room) = CM per room); ((Sal. + Util. + Depr. + Maint.) ÷ CM per room = BEP in rooms)]

(b) Break-even point in dollars

= 450 rooms × $60 per room = $27,000 per month

OR Contribution margin ratio = $18 ÷ $60 = 30% Fixed costs ÷ Contribution margin ratio = $8,100 ÷ 30% = $27,000 per month [(($5,900 + $1,100 + $1,000 + $100) ÷ 30% = $27,000)] [((Sal. + Prop.. tax. + Depr. + Maint.) ÷ CM ratio = BEP in $)] LO3, 4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 13.10 (a) Contribution margin in dollars: Sales = 560 × $120 =

$67,200 Variable costs = $67,200 × .60 = 40,320 Contribution margin $26,880

Unit contribution margin:

$120 – $72 ($120 × 60%) = $48.

Contribution margin ratio:

$48 ÷ $120 = 40%.

[((560 × $120) – ($67,200 × 60%) = $26,880); ($120 – ($120 × 60%) = $48); ($48 ÷ $120 = 40%)] [((No. of clients × USP) – (Sales × VC %) = CM); (USP – (USP × VC %) = UCM); (UCM ÷ USP = CM ratio)]

(b) Break-even sales in dollars:

$21,024 = $52,560. 40%

Break-even sales in units:

$21,024 = 438. $48

[($21,024 ÷ 40% = $52,560); ($21,024 ÷ $48 = 438)] [(FC ÷ CM ratio = BEP in sales $); (FC ÷ UCM = BEP in units)] LO3, 4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-19

EXERCISE 13.11 (a) (1) Contribution margin ratio =

$27,000 $36,000

= 75%

Break-even point in dollars =

$18,000 75%

= $24,000

(2) Revenue per passenger

Break-even point in number of passengers =

$36,000 = $24 1,500 pass.

$24,000 $24

= 1,000

[1: ($27,000 ÷ $36,000 = 75%); ($18,000 ÷ 75% = $24,000); 2: ($36,000 ÷ 1,500 = $24); ($24,000 ÷ $24 = 1,000)] [1: (CM ÷ Sales = CM ratio); (FC ÷ CM ratio = BEP in $): 2: (Sales ÷ No. of pass. = Rev. per pass.); (Rev. per pass. × CM ratio = CM per pass.); (Tot. FC ÷ CM per pass. = No. of pass. at BEP)]

(b) At the break-even point, fixed costs and contribution margin are equal to $18,000. LO3, 4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA:: Decision Analysis

13-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 13.12 (a) Unit contribution margin =

Fixed costs Break-even sales in units $112,000 ($350,000 ÷ $5)

= $1.60 Unit variable cost

= Unit selling price – Unit contribution margin = $5.00 – $1.60 = $3.40

OR = 70,000 × $5.00 = 70,000X + $112,000 = where X = Unit variable cost = Unit variable cost = $3.40 Contribution margin ratio = $1.60 ÷ $5.00 = 32% [($112,000 ÷ ($350,000 ÷ $5) = $1.60); ($5.00 - $1.60 = $3.40); ($1.60 ÷ $5.00 = 32%)] [(FC ÷ (BEP in $ ÷ USP) = UCM); (USP – UCM = UVC); (UCM ÷ USP = CM ratio)]

(b) Fixed costs ÷ Contribution margin ratio = Break-even sales in dollars Fixed costs ÷ 0.32 = $420,000 = $134,400 ($420,000 × 0.32) Since fixed costs were $112,000 in 2026, the increase in 2027 is $22,400 ($134,400 – $112,000). [($420,000 × 32% = $134,400); ($134,400 - $112,000 = $22,400)] [(BEP in $ × CM ratio = 2027 FC); (2027 FC – 2026 FC = Incr. in FC)] LO3, 4 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-21

EXERCISE 13.13 (a) and (b)

BILLINGS COMPANY CVP Income Statement For the Month Ended September 30, 2027

Total Sales (600 × $400) $240,000 Variable costs (600 × $280) 168,000 Contribution margin 72,000 Fixed costs 54,000 Net income $ 18,000

Per Unit $400 280 $120

Percent of Sales 100% 70% 30%

[(($400 × 600) – ($280 × 600) - $54,000 = $18,000); ($400 - $280 = $120) (100% – 70% = 30%)] [((USP × Units sold) – (UVC × Units sold) – FC = Net inc.); (USP – UVC = UCM); USP as a % of USP – UVC as a % of USP = cm ratio)]

(c) Break-even point in sales units = Fixed costs ÷ Unit contribution margin = $54,000 ÷ $120 = 450 units ($54,000 ÷ $120) (FC ÷ Unit CM)

(d)

BILLINGS COMPANY CVP Income Statement For the Month Ended September 30, 2027

Sales (450 × $400) Variable costs (450 × $280) Contribution margin Fixed costs Net income

Total $180,000 126,000 54,000 54,000 $ –0–

Per Unit $400 280 $120

Percent of Sales 100% 70% 30%

[(($400 × 450) – ($280 x 450) - $54,000 = 0); ($400 - $280 = $120); (100% – 70% = 30%)] [((USP × Units sold) – (UVC × Units sold) – FC = Net inc.); (USP – UVC = UCM); (USP as a % of USP – UVC as a % % USP = cm ratio)] LO3, 4 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Reporting IMA: Decision Analysis

13-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 13.14 (a) RISKY CORPORATION GAAP Income Statement For the Year Ended December 31, 2027 Sales Cost of goods sold ($600,000 + $800,000) Gross profit Operating expenses: Selling expenses ($120,000 + 60,000) Administrative expenses ($240,000 + $80,000) Net income

$3,000,000 1,400,000 1,600,000 $180,000 320,000

500,000 $1,100,000

[$3,000,000 – ($600,000 + $800,000) – ($120,000 + $60,000) – ($240,000 + $80,000) = $1,100,000] [Sales – CGS – (Sell. exp. + Admin. exp.) = Net inc.]

(b) RISKY CORPORATION CVP Income Statement For the Year Ended December 31, 2027 Per Percent Total Unit of Sales Sales (200,000* × $15) $3,000,000 $15.00 100% Variable costs: Cost of goods sold $ 600,000 Selling expenses 120,000 Administrative expenses 240,000 960,000 4.80** 32% Contribution margin 2,040,000 $10.20 68% Fixed costs: Cost of goods sold 800,000 Selling expenses 60,000 Administrative expenses 80,000 940,000 Net income $1,100,000 *$3,000,000  $15 = 200,000 **$960,000  200,000 = $4.80 [(200,000 × $15) − ($600,000 + $120,000 + $240,000) − ($800,000 + $60,000 + $80,000) = $1,100,000; $15.00 − $4.80 = $10.40; 100% − 32% = 68%]] [Units sold × USP) − (VCGS + Var. Sell. exp. x Var. admin. exp.) − (Fix. CGS + Fix sell. exp. + Fix. admin. exp.) = Net inc.; USP − UVC = UCM: USP as a % of USP − UVC as a % of USP = CM ratio] LO3 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-23

EXERCISE 13.15 (a) Units sold in 2026 =

$570,000 + $210,000 = 15,600 units $140 – $90

[($570,000 + $210,000) ÷ ($140 - $90) = 15,600 units] [(FC + Net inc.) ÷ (USP – UVC) = No. units sold]

(b) Units needed in 2027 =

$570,000 + $272,400 * = 16,848 units $140 – $90

*$210,000 + $62,400 = $272,400 [($570,000 + ($210,000 + $62,400)) ÷ ($140 - $90) = 16,848 units] [(FC + (2026 Net inc. + Desired incr. in net inc.)) ÷ (USP – UVC) = Units to be sold]

(c)

$570,000 + $272,400 = 15,600 units, where X = new selling price X – $90 $842,400 = 15,600X – $1,404,000 $2,246,400 = 15,600X X = $144

[($570,000 + $272,400) ÷ (X - $90) = 15,600 units); (X = $144)] [(FC + Desired net inc.) ÷ (USP – UVC) = No. units sold in 2026); (USP = $144)] LO4, 5 BT: AN Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 13.16 1.

Unit sales price = $400,000 ÷ 5,000 units = $80 Increase selling price to $88, or ($80 × 110%). Net income = $440,000 – $240,000 – $90,000 = $110,000.

[($400,000 ÷ 5,000 units = $80); ($80 × 110% = $88); (($88 x 5,000) - $240,000 - $90,000 = $110,000)] [(Sales ÷ No. units sold = USP); (USP × Incr. in sales price = New USP); ((New USP × No. units sold) – VC – FC = Net inc.)]

Reduce variable costs to 55% of sales. Net income = $400,000 – $220,000 – $90,000 = $90,000.

Alternative 1, increasing selling price, will produce the higher net income. [$400,000 – ($400,000 × 55%) - $90,000 = $90,000] [Sales – (Sales × VC ratio) – FC = Net inc.] LO5 BT: AN Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 13.17 (a) 1.

Break-even sales in units: $4.00Q - ($4.00 × .625)Q - $600,000 = $0 $1.50Q = $600,000 Q = 400,000 units

[($4Q - ($4.00 × .625)Q - $600,000 = $0); ($1.50Q = $600,000); (Q = 400,000 units)] [((USP × Qty.) – (UVC × Qty.) – FC = Net inc.); (UCM × Qty. = FC); (Qty. = BEP in units)]

Break-even sales in dollars: X = .625X + $600,000 .375X = $600,000 X = $1,600,000 or $600,000 ÷ 37.5%

[(1.00X - .625X - $600,000 = $0); (.375X = $600,000); (X = $1,600,000)] [(Sales as % of sales – VC as % of sales – FC = Net inc.); (CM as % of sales = FC); (Sales = Sales at BEP)]

(b)

$3,200

Sales Line

2,800

Dollars (000)

2,400

Break-even Point

Total Cost Line

2,000 1,600 1,200 800 Fixed Cost Line 400 100 200 300 400 500 600 700 800 Number of Units (in thousands)

Margin of safety in dollars: $2,000,000 – $1,600,000 = $400,000

($2,000,000 - $1,600,000 = $400,000) (Act. sales – BEP sales = MOS)

Margin of safety ratio: $400,000 ÷ $2,000,000 = 20%

($400,000 ÷ $2,000,000 = 20%) (MOS ÷ Act. sales = MOS %) LO4, 5 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-25

EXERCISE 13.18 (a) Contribution ratio = Contribution margin ÷ Sales ($40 – $24) ÷ $40 = 40% [($40 - $24) ÷ $40 = 40%] [(USP – UVC) ÷ USP = CM ratio)

(b) Break-even in sales dollars: $19,500 ÷ 40% = $48,750 ($19,500 ÷ 40% = $48,750) (FC ÷ CM ratio = BEP in $)

(c) Margin of safety = (2,500 × $40) – $48,750 = $51,250 Margin of safety ratio = $51,250 ÷ (2,500 × $40) = 51.25% [((2,500 × $40) - $48,750 = $51,250); ($51,250 ÷ (2,500 × $40) = 51.25%)] [((No. units sold × USP) – BEP sales $ = MOS); (MOS ÷ (No. units sold × USP) = MOS %)]

(d) Current contribution margin $40 – $24 = $16 Total contribution margin is $16 × 2,500 = $40,000 30% increase in contribution margin is $40,000 × 30% = $12,000 Total increase in sales required: $12,000 ÷ 40% = $30,000 [($40 - $24 = $16); ($16 × 2,500 = $40,000); ($40,000 × 30% = $12,000); ($12,000 ÷ 40% = $30,000)] [(USP – UVC = UCM); (UCM × No. units sold = Tot. CM); (Tot. CM × % incr. req. = Incr. in CM); (Incr. in CM ÷ CM ratio = Incr. in sales req.)] LO3, 4, 5 BT: AP Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

*EXERCISE 13.19 (a)

Using Excel regression analysis the intercept and slope are: Intercept (fixed costs): $850.468 Slope (unit variable costs): $5.86971/machine hour

(b) $7,000

Total Electricity Costs

$6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 0

200

400

600

800

Total Machine Hours

13-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 13.19 (Continued) (c)

Electricity costs = $850.47 + (500 × $5.87) = $3,785.47 $3,785.47 - $3,600 = $185.47 over the cost observed for March.

[($850.47 + (500 × $5.87) = $3,785.47); ($3,785.47 - $3,600 = $185.47] [(FC + (est. hrs. × UVC) = Est. elec. costs);(Est. elec. costs – Observed costs = Amt. over observed)] LO6 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Quantitative Methods

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-27

SOLUTIONS TO PROBLEMS PROBLEM 13.1 (a) Electricity Costs: $5,860 - $2,500 = $3,360 = $8 Variable cost per machine hour 720 – 300 420

Total costs Less: Variable costs 720 × $8 300 × $8 Total fixed costs

720 Machine Hours $5,860

300 Machine Hours $2,500

5,760 $ 100

2,400 $ 100

Thus, electricity costs are $100 per month plus $8 per machine hour. (b) Estimated cost at 500 MH: $100 + (500 × $8) = $4,100 This estimate exceeds the observed cost at 500 MH by $500 ($4,100 $3,600). (c) Estimated cost at 700 MH: $100 + (700 × $8) = $5,700 This estimate exceeds the observed cost at 700 MH by $800 ($5,700 $4,900). LO1,2 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 13.2 (a) Variable costs (per haircut) Barbers’ commission Barber supplies Utilities Total variable cost per haircut

$4.50 0.30 0.20 $5.00

(b) $10.00Q - $5.00Q - $7,000 = $0 $ 5.00Q = $7,000 Q = 1,400 haircuts

Fixed costs (per month) Barbers’ salaries(4 x $1,250) $5,000 Manager’s extra salary 500 Advertising 200 Rent 1,100 Utilities 175 Magazines 25 Total fixed costs $7,000 1,400 haircuts × $10 = $14,000

[($10Q - $5Q - $7,000 = $0); (Q = 1,400 haircuts) (1,400 haircuts × $10 = $14,000) [((USP × No. haircuts) – (UVC × No. haircuts) – FC = Net inc.); (BEP in haircuts x USP = BEP in $) (No. haircuts = BEP)]

(c)

Sales Line Break-even Point

DOLLARS (000)

Total Cost Line

12 9 Fixed Cost Line

6 3

300

600

900

1,200 1,500 1,800

Number of Haircuts

(d) Net income = (1,600 × $10) – [($5.00 × 1,600) + $7,000] = $1,000 [(1,600 × $10) – (1,600 × $5) - $7,000 = $1,000] [(No. haircuts × USP) – (No. haircuts × UVC) – FC = Net inc.] LO1, 2, 3, 4 BT: AN Difficulty: Easy TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-29

PROBLEM 13.3 (a)

JORGE COMPANY CVP Income Statement (Estimated) For the Year Ending December 31, 2027

Sales Variable expenses Cost of goods sold Selling expenses Administrative expenses Total variable expenses Contribution margin Fixed expenses Manufacturing overhead Selling expenses Administrative expenses Total fixed expenses Net income

$1,800,000

Per unit $0.50

Percent of Sales 100%

1,260,000 540,000

0.35 0.15

70% 30%

$1,170,000* 70,000 20,000

280,000 65,000 60,000 405,000 $ 135,000

*Direct materials $430,000 + direct labor $360,000 + variable manufacturing overhead $380,000. [$1,800,000 – (($430,000 + $360,000 + $380,000) + $70,000 + $20,000) – ($280,000 + $65,000 + $60,000) = $135,000); $0.50 − ($1,260,000  3,600,000) = $0.15; ($0.50  $0.50) − ($0.35  $0.50) = 30%]] [Sales – ((DM + DL + VOH) + Var. sell. exp. + Var. admin. exp.) – (Fix. CGS + Fix. sell. exp. + Fix. admin. exp.) = Net inc.); USP − UVC = UCM; (USP as a % of USP) − (UVC as a % of USP) = CM ratio]

(b) Variable costs = 70% of sales ($1,260,000 ÷ $1,800,000) or $0.35 per bottle ($0.50 × 70%). Total fixed costs = $405,000. (1) $0.50Q - $0.35Q - $405,000 = $0 $0.15Q = $405,000 Q = 2,700,000 units (2) 2,700,000 × $0.50 = $1,350,000 [($1,260,000 ÷ $1,800,000 = 70%); (70% × $0.50 = $0.35); ($280,000 + $65,000 + $60,000 = $405,000); ($0.50Q - $0.35Q - $405,000 = $0); (Q = 2,700,000); (2,700,000 x $0.50 = $1,350,000)] [(Tot. VC ÷ Sales = VC %); (VC % × USP = UVC); (Fix. CGS + Fix. sell. exp. + Fix. admin. exp. = Tot. FC); ((USP × No. units sold) – (UVC × No. units sold) – FC = Net inc.); (No. units sold = BEP in units); (BEP in units × USP = BEP in $)]

13-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 13.3 (Continued) (c) Contribution margin ratio = ($0.50 – $0.35) ÷ $0.50 = 30% (or 1 – .70) Margin of safety ratio

= ($1,800,000 – $1,350,000) ÷ $1,800,000 = 25%

[(($0.50 - $0.35) ÷ $0.50 = 30%); (($1,800,000 - $1,350,000) ÷ $1,800,000 = 25%)] [((USP – UVC) ÷ USP = CM ratio); ((Est. sales $ – BEP sales $) ÷ Est. sales $ = MOS %)]

(d) Required sales =

$405,000 + $180,000 = $1,950,000 .30

[($405,000 + $180,000) ÷ 30% = $1,950,000] [(FC + Desired net inc.) ÷ CM ratio = Req. sales $] LO3, 4, 5 BT: AP Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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13-31

PROBLEM 13.4

(a) Sales were $2,500,000, variable expenses were $1,750,000 (70% of sales), and fixed expenses were $840,000. Therefore, the break-even point in dollars is:

$840,000 = $2,800,000 .30 [(($2,500,000 - $1,750,000) ÷ $2,500,000 = 30%); ($840,000 ÷ 30% = $2,800,000)] [((Sales – VC) ÷ Sales = CM ratio); (FC ÷ CM ratio = BEP in $)]

(b) 1.

The effect of this alternative is to increase the selling price per unit to $6 ($5* × 120%). Total sales become $3,000,000 (500,000 × $6). Thus, the contribution margin ratio changes to 42% [($3,000,000 – $1,750,000) ÷ $3,000,000]. The new break-even point is:

$840,000 = $2,000,000 .42 *$2,500,000 ÷ 500,000) [(($5 × 120% = $6); (500,000 × $6 = $3,000,000); (($3,000,000 - $1,750,000) ÷ $3,000,000 = 42%); ($840,000 ÷ 42% = $2,000,000)] [((old USP × % incr. = New USP); (No. units sold × New USP = New sales); ((New sales – VC) ÷ New sales = New CM ratio); (FC ÷ New CM ratio = New BEP in sales $)]

The effects of this alternative are to change total fixed costs to $760,000 ($840,000 – $80,000) and to change the contribution margin to 25% [($2,500,000 – $1,750,000 – $125,000) ÷ $2,500,000]. The new break-even point is:

$760,000 = $3,040,000 .25

[($840,000 – ($140,000 - $60,000) = $760,000); (($2,500,000 - $1,750,000 – ($2,500,000 × 5%)) ÷ $2,500,000 = 25%); ($760,000 ÷ 25% = $3,040,000)] [(Old FC – (Old sales sal. – New sales sal.) = New FC); ((Sales – VC – (Sales × Comm. %)) ÷ Sales = New CM ratio); (New FC ÷ New CM ratio = New BEP in sales $)]

Alternative 1 is the recommended course of action because it has a lower break-even point. LO4 BT: E Difficulty: Easy TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 13.5 (a)

BARGAIN SHOE STORE CVP Income Statement

Sales (20,000 × $40) Variable expenses (20,000 × $25) Contribution margin Fixed expenses Net income

Current

New

$800,000 500,000 300,000 270,000 $ 30,000

$950,000 625,000 325,000 299,000 $ 26,000

(25,000 × $38) (25,000 × $25)

(b) Current break-even point: $40Q − $25Q − $270,000 = $0 $15Q = $270,000 Q = 18,000 pairs of shoes New break-even point:

$38Q − $25Q − ($270,000 + $29,000) = $0 $13Q = $299,000 Q = 23,000 pairs of shoes

[($40Q - $25Q - $270,000 = $0); (Q = 18,000 pairs); ($38Q - $25Q – ($270,000 + $29,000) = $0); (Q = 23,000 pairs)] [((USP × No. pairs sold) – (UVC × No. pairs sold) – FC = Net inc.): No. pairs sold = BEP in pairs); ((New USP × No. pairs sold) – (UVC × No. pairs sold) – (Old FC + Incr. in FC) = Net inc.); No. of pairs sold = New BEP in pairs)]

(20,000  $40) – (18,000  $40) (20,000  $40)

= 10% New margin of safety ratio

(25,000  $38) – (23,000  $38) (25,000  $38) = 8%

[(((20,000 × $40) – (18,000 × $40)) ÷ (20,000 × $40) = 10%); (((25,000 × $38) – (23,000 × $38) ÷ (25,000 × 38) = 8%)] [(((Current pairs sold × Current USP) – (Current BEP in pairs × Current USP)) ÷ (Current pairs sold × Current USP) = Current MOS %); (((New pairs sold × New USP) – (New BEP pairs × New USP)) ÷ (New pairs sold × New USP) = New MOS %)]

The proposed changes will raise the break-even point 5,000 units (23,000 – 18,000). This is a significant increase. Margin of safety is 2% (10% - 8%) lower and net income is $4,000 lower. The recommendation is to not accept the proposed changes. LO3, 4, 5 BT: E Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis Copyright © 2023 John Wiley & Sons, Inc.

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13-33

PROBLEM 13.6

(a) (1) Current Year $1,600,000

Sales Variable costs Direct materials Direct labor Manufacturing overhead ($380,000 × 0.70) Selling expenses ($250,000 × 0.40) Administrative expenses ($270,000 × 0.20) Total variable costs Contribution margin Sales

Current Year $1,600,000 × 1.1

Variable costs Direct materials Direct labor Manufacturing overhead Selling expenses Administrative expenses Total variable costs Contribution margin

490,000 290,000 266,000 100,000 54,000 1,200,000 $ 400,000

× 1.1 × 1.1 × 1.1 × 1.1 × 1.1 × 1.1 × 1.1

490,000 290,000 266,000 100,000 54,000 1,200,000 $ 400,000 Projected Year $1,760,000 539,000 319,000 292,600 110,000 59,400 1,320,000 $ 440,000

[Current: $1,600,000 – ($490,000 + $290,000 + ($380,000 × 70%) + ($250,000 × 40%) + ($270,000 × 20%)) = $400,000] [Current: Sales – (DM + DL + (MOH × VC %) + (Sell. exp. ×VC %) + (Admin. exp. × VC %) = CM] [Projected: ($1,600,000 × 1.1) – (($490,000 × 1.1) + ($290,000 × 1.1) + ($266,000 × 1.1) + ($100,000 ×1.1) + ($54,000 × 1.1)) = ($400,000 × 1.1)] [Projected: (Current sales × incr.) – ((DM × incr.) + (DL × incr.) + (MOH × incr.) + (Sell. exp. × incr.) + (Admin. exp. × incr.)) = (CM x incr.)]

(2) Fixed Costs Current Year Manufacturing overhead ($380,000 × 0.30) $114,000 Selling expenses ($250,000 × 0.60) 150,000 Administrative expenses ($270,000 × 0.80) 216,000 Total fixed costs $480,000

Projected year $114,000 150,000 216,000 $480,000

[Current & projected: ($380,000 × 30%) + ($250,000 × 60%) + ($270,000 × 80%) = $480,000] [Current & projected: (MOH x FC %) + (Sell. exp. × FC %) + (Admin. exp. × FC %) = Tot. FC]

13-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 13.6 (Continued) (b) Unit selling price = $1,600,000 ÷ 100,000 = $16 Unit variable cost = $1,200,000 ÷ 100,000 = $12 Unit contribution margin = $16 – $12 = $4 Contribution margin ratio = $4 ÷ $16 = 25% Break-even point in units = Fixed costs ÷ Unit contribution margin 120,000 units = $480,000 ÷ $4 Break-even point in dollars = Fixed costs ÷ Contribution margin ratio $1,920,000 = $480,000 ÷ .25 [($1,600,000 ÷ 100,000 = $16); ($1,200,000 ÷ 100,000 = $12); ($16 - $12 = $4); ($4 ÷ $16 = 25%); ($480,000 ÷ $4 = 120,000); ($480,000 ÷ 25% = $1,920,000)] [(Sales ÷ No. units sold = USP); (VC ÷ No. units sold = UVC); (USP – UVC = UCM); (UCM ÷ USP = CM ratio); (FC ÷ UCM = BEP in units); (FC ÷ CM ratio = BEP in sales $)]

(c) Sales dollars required for = (Fixed costs + Target net income) ÷ Contribution margin ratio target net income $2,500,000

($480,000

$145,000)

.25

[($480,000 + $145,000) ÷ 25% = $2,500,000] [(FC + Desired net inc.) ÷ CM ratio = Req. sales $]

(d) Margin of safety = (Expected sales – Break-even sales) ÷ Expected sales ratio 23.2%

($2,500,000

–

$1,920,000)

$2,500,000

[($2,500,000 - $1,920,000) ÷ $2,500,000 = 23.2%] [(Req. sales $ - BEP in sales $) ÷ Req. sales $ = MOS %] LO3, 4, 5 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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13-35

PROBLEM 13.7

(a) 1.

Let variable selling and administrative expenses = VSA Sales – Variable cost of goods sold – VSA = Contribution Margin $1,500,000 – ($500,000 + $625,000 + $62,500 + VSA) = $180,000 VSA = $132,500

[$1,500,000 – ($500,000 + $625,000 + $62,500) - $180,000 = $132,500] [Sales – (DM + DL + Var. MOH) – CM = VSA]

Let fixed manufacturing overhead = FMO Sales – Variable cost of goods sold – FMO = Gross profit $1,500,000 – ($500,000 + $625,000 + $62,500 + FMO) = $242,500 FMO = $70,000

[$1,500,000 - ($500,000 + $625,000 + $62,500) - $242,500 = $70,000] [Sales – (DM + DL + Var. MOH) – GP = FMO]

Let fixed selling and administrative expenses = FSA Contribution margin ratio = $180,000 ÷ $1,500,000 = 12% Contribution margin at break-even = $1,500,000 × 12% = $180,000 At break-even, Contribution margin = Fixed costs (FSA + FMO) $180,000 = FSA + $70,000 FSA = $110,000

[($180,000 ÷ $1,500,000 = 12%); ($1,500,000 × 12% = $180,000); ($180,000 - $70,000 = $110,000)] [(CM ÷ Sales = CM ratio); (BEP in sales $ × CM ratio = CM at BEP); (CM at BEP – FMO = FSA)]

(b) Incremental sales = $1,500,000 × 20% = $300,000 Incremental contribution margin = $300,000 × 12% = $36,000 [($1,500,000 × 20% = $300,000); ($300,000 × 12% = $36,000)] [(Sales × % incr. = Incremental sales); (Incremental sales × CM ratio = Incremental CM)

The maximum increased advertising expenditure would be equal to the incremental contribution margin earned on the increased sales, which is $36,000. The other fixed costs are irrelevant to this decision, because they would be incurred whether or not the advertising expenditure is increased. LO1, 3, 5 BT: E Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

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*PROBLEM 13.8

a. Using Excel regression analysis, the intercept and slope are: Intercept (fixed costs): $1,083 Slope (unit variable costs): $5.7343/machine hour b.

c. Estimated cost for 500 machine hours: $1,083 + ($5.7343 × 500) = $3,950.15 Difference between actual and estimated costs for 500 machine hours: $4,000.00 − $3,950.15 = $49.85 d. Estimated cost for 700 machine hours: (5.7343 × 700) + $1,083 = $5,097.01. Difference between actual and estimated costs for 700 machine hours: $5,300 − $5,097.01 = $202.99 [($1,083.00 + (700 × $5.73.43) = $5,097.01); ($5,300.00 - $5,097.01 = $202.99] [(FC + (est. MH x UVC) = Est. util. costs);(Act. util. costs – Est. util. costs = Amt. under observed)] LO6 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Quantitative Methods

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13-37

CD 13

CURRENT DESIGNS

(a) $250 + $100 + $170 + $420 + $400 = $1,340 total variable costs (b) Contribution margin per unit = $2,000 – $1,340 = $660 ($2,000 - $1,340 = $660) (USP – UVC = UCM)

(c) $359,700* ÷ $660 = 545 units *$119,700 + $240,000 [($119,700 + $240,000) ÷ $660 = 545] [(S&A fix. exp. + MOH fix.) ÷ UCM = BEP in units]

(d) ($359,700 + $270,600) ÷ $660 = 955 units [($359,700 + $270,600) ÷ $660 = 955] [(FC + Desired net inc.) ÷ UCM = Req. units]

(e) Actual (expected) sales = $2,000 × 1,000 = $2,000,000 Break-even sales = $2,000 × 545 = $1,090,000 Margin of safety in dollars = $2,000,000 – $1,090,000 = $910,000 Margin of safety ratio = $910,000 ÷ $2,000,000 = 45.5% [($2,000 × 1,000 = $2,000,000); ($2,000 × 545 = $1,090,000); ($2,000,000 - $1,090,000 = $910,000); ($910,000 ÷ $2,000,000 = 45.5%)] [(USP × No. units sold = Act. sales); (USP × BEP in units = BEP in sales $); (Act. sales – BEP in sales $ - MOS$); (MOS$ ÷ Act. sales = MOS %)] LO3, 4, 5 BT: AP Difficulty: Easy TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

WC 13

WATERWAYS CORPORATION

(Note: Some figures are rounded.) (a) (1) The contribution margin ratio is 35% ($1,023,120  $2,923,200): WATERWAYS CORPORATION Contribution Margin Income Statement for Water Control and Timer Per Total Unit Sales (696,000 units) $2,923,200 $4.20 Variable expenses 1,900,080 2.73 Contribution margin 1,023,120 $1.47 Fixed Expenses 683,256 Net income from product $339,864

Percent of Sales 100% 65% 35%

(2) Break-even point in sales units = 464,800 units Fixed expenses Unit CM

$683,256 $1.47

= 464,800 units

Break-even point in sales dollars = $1,952,160 Fixed expenses CM ratio

$683,256 0.35

= $1,952,160

(3) Margin of safety in dollars = $ 971,040 Sales Less: Break-even in dollars

$2,923,200 1,952,160 $ 971,040

Margin of safety ratio = 33% Margin of safety in dollars Sales

$971,040 $2,923,200 = 33% (rounded)

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13-39

WC 13 (Continued) (4) Waterways would have to sell an additional 23,120 units. 10% increase in income Current income Total projected income Fixed expense Total CM

= $ 33,986.40 +339,864.00 373,850.40 +683,256.00 $1,057,106.40

$1,057,106.40 $1.47 = 719,120 units

719,120 units (696,000) units 23,120 additional units (5) Income will increase by $74,970 ($414,834 − $339,864): WATERWAYS CORPORATION Contribution Margin Income Statement for Water Control and Timer Per Percent Total Unit of Sales Sales (747,000 units) $3,137,400 $4.20 100% Variable expenses 2,039,310 2.73 65% Contribution margin 1,098,090 $1.47 35% Fixed expenses 683,256 Net income from product $ 414,834 (b) (1)

If the average unit sales price and unit variable cost both increased, the contribution margin ratio would drop by 2% (from 27% to 25%). Net income, however, would increase by $81,137.10 ($751,988.10 − $670,851). We would give strong consideration to mass-producing the sprinklers. An increase in variable costs is less risky than an increase in fixed costs and such a decision can be reversed if it does not result in the projected increase in sales.

13-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

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WC 13 (Continued) Waterways Corporation Sprinkler Units (current sales) Per Total Unit Sales (491,740) $13,031,110 $26.50 Variable expenses: Manufacturing $6,863,512 Variable expenses: Selling and administrative 2,651,657 9,515,169 19.35 Contribution margin 3,515,941 $ 7.15 Fixed expenses: Manufacturing $2,050,140 Fixed expenses: Selling and administrative 794,950 2,845,090 Net income from sprinkler units $ 670,851

Percent of Sales 100%

73% 27%

Waterways Corporation Sprinkler Units (increase price) Per Percent Total Unit of Sales Sales (540,914) $14,442,403.80 $26.70 100% Variable expenses 10,845,325.70 20.05 75% Contribution margin 3,597,078.10 $ 6.65 25% Fixed expenses 2,845,090.00 Net income from sprinkler units $ 751,988.10

(2) If the average sales price did not increase but unit variable costs increased, the contribution margin ratio would drop 3% (from 27% to 24%). Profit would decrease by $27,045.70 ($670,851 − $643,805.30). This definitely would not be in the best interest of the company.

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13-41

WC 13 (Continued) Waterways Corporation Sprinkler Units (no price change) Per Percent Total Unit of Sales Sales (540,914) $14,334,221.00 $26.50 100% Variable expenses 10,845,325.70 20.05 76% Contribution margin 3,488,895.30 $ 6.45 24% Fixed expenses 2,845,090.00 Net income from sprinkler units $ 643,805.30 LO 3,4,5 BT: AN Difficulty: Moderate TOT: 75 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DATA ANALYTICS IN ACTION The solutions for the Data Analytics in Action problems are available in Excel. See the file Solutions: Excel Templates in the Instructor Resources.

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13-43

CT 13.1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) (1)

Capital-Intensive

Fixed manufacturing costs Incremental selling expenses Total fixed costs Selling price Variable costs Direct materials Direct labor Variable overhead Selling expenses Contribution margin

(2) $2,524,000 502,000 $3,026,000 $32.00

$5.00 6.00 3.00 2.00

Total fixed costs (1)

16.00 $16.00 $3,026,000

Labor-Intensive

Fixed manufacturing costs Incremental selling expenses Total fixed costs Selling price Variable costs Direct materials Direct labor Variable overhead Selling expenses Contribution margin

$1,550,000 502,000 $2,052,000 $32.00

$5.50 8.00 4.50 2.00

Total fixed costs (1)

20.00 $12.00 $2,052,000

Contribution margin per unit (2)

$16.00

Contribution margin per unit (2)

$12.00

Break-even in units (1) ÷ (2)

189,125

Break-even in units (1) ÷ (2)

171,000

[Capital: ($2,524,000 + $502,000) ÷ ($32 - $5 - $6 - $3 - $2) = 189,125] [Capital: (Fix. mfg. costs + Incr. sell. exp.) ÷ (USP – DM/unit – DL/unit – VOH/unit – VSA) = BEP in units] [Labor: ($1,550,000 + $502,000) ÷ ($32 - $5.50 - $8 - $4.50 - $2) = 171,000] [Labor: (Fix. mfg. costs + Incr. sell. exp.) ÷ (USP – DM/unit – DL/unit – VOH/unit – VSA) = BEP in units]

(b) Creative Ideas Company would be indifferent between the two manufacturing methods at the volume (Q) where total costs are equal. $16Q + $3,026,000 = $20Q + $2,052,000 $4Q = $974,000 Q = 243,500 units [($16Q + $3,026,000 = $20Q + $2,052,000); (Q = 243,500)] [((Capital UVC × No. units) + Capital FC = (Labor UVC × No. units) + Labor FC)); (No. of units = Indiff. Point in units)]

(c) Creative Ideas should employ the capital-intensive manufacturing method if annual sales are expected to exceed 243,500 units and the laborintensive manufacturing method if annual sales are not expected to exceed 243,500 units. The labor-intensive method is more profitable for sales up to 243,500 units because the fixed costs are lower. The capitalintensive method is more profitable for sales above 243,500 units because its unit contribution margin is higher. LO3, 4 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

13-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 13.2

MANAGERIAL ANALYSIS

(a) The unit variable costs are: Cost of goods sold (($800,000 × 75%) ÷ 240,000) ....... Selling expenses (($300,000 × 40%) ÷ 240,000) ........... Administrative expenses (($152,500 - $92,500 ÷ 240,000) Total........................................................................

$2.50 0.50 0.25 $3.25

[(($800,000 × 75%) ÷ 240,000 = $2.50); (($300,000 × 40%) ÷ 240,000 = $.50); (($152,500 - $92,500) ÷ 240,000 = $.25): ($2.50 + $.50 + $.25 = $3.25)] [((CGS × VC %) ÷ No. units sold = Var. CGS); ((Sell. exp. × VC%) ÷ No. units sold = Var. sell. exp.); ((Admin. exp. - Fixed admin. exp.) ÷ No. units sold = Var. admin. exp.); (Var. CGS + Var. sell. exp. + Var. admin. exp. = Tot. VC per unit)]

Fixed costs are: Cost of goods sold ($800,000 × 0.25) ........................... Selling expenses ($300,000 × 0.60) .............................. Administrative expenses (Given) ................................. Total…………………………………………………….

$200,000 180,000 92,500 $472,500

[($800,000 × 25% = $200,000); ($300,000 × 60% = $180,000); $92,500); ($200,000 + $180,000 + $92,500 = $472,500)] [(CGS × (1 – VC %) = Fix. CGS); (Sell. exp. × (1 – VC %) = Fix. sell. exp.); (Provided) = Fix. admin. exp.); (Fix, CGS + Fix. sell. exp. + Fix. admin. exp. = Tot. FC)]

The break-even points are: Q = ($3.25 ÷ $5.00)Q + $472,500 Q = 0.65Q + $472,500 0.35Q = $472,500 Q = $1,350,000 $5.00Q - $3.25Q - $472,500 = $0 $1.75Q = $472,500 Q = 270,000 units [(1.00Q – ($3.25 ÷ $5.00)Q – $472,500 = $0); (Q = $1,350,000); (($5.00Q - $3.25Q) - $472,500 = $0); (Q = 270,000)] [(Sales as % of sales – VC as % of sales – FC = Net inc.); (Sales = BEP in $); ((USP × No. units) – (UVC × No. units) – FC = Net inc.); (No. units = BEP in units)]

(b) Unit variable cost of goods sold = $2.82 (($800,000 × 75%) ÷ 240,000 = $2.50; $2.50 + $0.32) Sales volume = 300,000 units (240,000 × 125%) Total sales = 300,000 × (($1,200,000 ÷ 240,000) + $0.25) = $1,575,000 [(($600,000 ÷ 240,000) + $0.32 = $2.82); (240,000 × 125% = 300,000); (300,000 × $5.25 = $1,575,000)] [((Var. CGS ÷ No. units sold) + Incr. in DM/unit = New Var. CGS); (No. units sold × % incr. = New no. units sold); (New no. units sold × New USP = New tot. sales)]

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13-45

CT 13.2 (Continued) Net income computation: Sales....................................................... Variable expenses Cost of goods sold (300,000 × $2.82) ........................ Selling expenses (300,000 × $0.50) ........................ Administrative expenses (300,000 × $0.25) ........................ Total variable expenses ......... Contribution margin .............................. Fixed expenses Cost of goods sold ........................ Selling expenses............................ Administrative expenses............... Total fixed expenses .............. Net income .............................................

$1,575,000 $846,000 150,000 75,000 1,071,000 504,000 200,000 180,000 92,500 472,500 $ 31,500

[$1,575,000 – ((300,000 × $2.82) + (300,000 × $0.50) + (300,000 × $0.25)) – ($200,000 + $180,000 + $92,500) = $31,500] [New tot. sales – ((No. units sold × VCGS/unit) + (No. units sold × Var. sell. exp./unit) + (No. units sold × Var. admin. exp./unit)) – (Fix. CGS + Fix. sell. exp. + Fix. admin. exp.) = Net inc.]

X = ($1,071,000 ÷ $1,575,000)X + $472,500 X = 0.68X + $472,500 0.32X = $472,500 X = $1,476,562.50 [(1.00X – ($1,071,000 ÷ $1,575,000) - $472,500 = $0); (X = $1,476,562.50)] [(Sales as % of sales – VC as % of sales – FC = Net inc.); (Sales = BEP in $)]

Profits and the break-even point would both increase.

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 13.2 (Continued) (c) Sales [384,000 (1) × ($5.00 – $0.25)].............. Variable expenses Cost of goods sold (384,000 × $2.50) ................................. Selling expenses (384,000 × $0.575) ..... Administrative expenses (384,000 × $0.25) ................................ Total variable expenses ................. Contribution margin ...................................... Fixed expenses Cost of goods sold ................................. Selling expenses ($180,000 + $51,000) ........................... Administrative expenses ....................... Total fixed expenses ...................... Net income .....................................................

$1,824,000 $960,000 220,800 96,000 1,276,800 547,200 200,000 231,000 92,500 523,500 $ 23,700

(1) Sales volume = 240,000 × 160% = 384,000 [((240,000 × 160%) × ($5.00 - $0.25)) – ((384,000 × $2.50) + (384,000 × $0.575) + (384,000 × $0.25)) – ($200,000 + ($180,000 + $51,000) + $92,500) = $23,700] [((Current units × % incr.) × (Current USP – Decr. in USP)) – ((No. units sold × Unit var. CGS) + (No. units sold × Unit var. sell. exp.) + (No. Units sold × Unit var. admin exp.)) – (Fix. CGS + (Fix. sell. exp. + Incr.) + Fix. admin. exp.) = Net inc.]

X = ($1,276,800 ÷ $1,824,000)X + $523,500 X = 0.70X + $523,500 0.30X = $523,500 X = $1,745,000 [(1.00X – ($1,276,800 ÷ $1,824,000)X - $523,500 = $0); (X = $1,745,000)] [(Sales as % of sales – VC as % of sales – FC = Net inc.); (Sales = BEP in $)]

Profits would increase and the break-even point would increase. (d) Peri’s plan should be accepted. It produces a higher net income and a lower break-even point than Paul’s plan. LO3, 4, 5 BT: E Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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13-47

CT 13.3

REAL-WORLD FOCUS

(a) Sweeteners and packaging are a variable cost to Coca-Cola because their use is directly proportional to the amount of product produced. If the unit cost of a variable cost item increases, the contribution margin will decline. This will lead to a decline in net income unless the company can increase its selling price, increase the number of units it sells, or reduce other costs. (b) This description makes the marketing expenditures sound like they are a variable cost, since it suggests that they vary with the amount of units sold. However, unlike variable costs, the relationship of marketing costs is not directly proportional to sales, since other factors also influence units sold. Thus, it is not a pure variable cost. However, it is also not a fixed cost, in that there usually is a relationship between marketing expenditures and sales. For CVP purposes, it might best be handled as a mixed cost, having both a fixed and variable component. (c) The first measure, gallon shipments of concentrates and syrups, is the activity index, since it best reflects the company’s production and sales activity at the wholesale level, its primary line of business. The second measure, unit cases of finished product, indicates the amount of activity by Coke’s primary customers, the bottlers. Coke also keeps track of this since it provides information about what is happening at the retail level. LO1 BT: C Difficulty: Moderate TOT: 15 min. AACSB: None AICPA FC: Measurement IMA: Business Economics

13-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 13.4

COMMUNICATION ACTIVITY

From:

Student’s email address

To:

Roommate’s email address

Subject:

Cost-Volume-Profit Questions

Hi Roommate: In response to your request for help, I provide you the following: (a) The mathematical equation for break-even sales is: Break-even Sales = Variable Costs + Fixed Costs Break-even sales in dollars is found by expressing variable costs as a percentage of unit selling price. For example, if the percentage is 70%, the break-even equation becomes X = 0.70X + Fixed Costs. The answer will be in sales dollars. Break-even sales in units is found by using unit selling price and unit variable costs in the equation. For example, if the selling price is $300 and variable costs are $210, the break-even equation becomes $300X $210X - Fixed Costs = $0. The answer will be in sales units. (b) The equations for unit contribution margin and contribution margin ratio differ as shown below: Unit Selling Price – Unit Variable Costs = Unit Contribution Margin Unit Contribution Margin ÷ Unit Selling Price = Contribution Margin Ratio You can see that Unit CM is used in computing the CM ratio. (c) When the contribution margin techniques are used to determine breakeven sales, total fixed costs are divided by either the contribution margin ratio or unit contribution margin. Using the CM ratio results in determining the break-even point in dollars. Using unit CM results in determining the break-even point in units. Copyright © 2023 John Wiley & Sons, Inc.

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13-49

CT 13.4 (Continued) The equation for determining break-even sales in dollars is: Fixed Costs ÷ Contribution Margin Ratio = Break-even Sales in Dollars The equation for determining break-even sales in units is: Fixed Costs ÷ Unit Contribution Margin = Break-even Sales in Units I hope this memo answers your questions, if not, read the chapter. Student’s name LO4 BT: C Difficulty: Easy TOT: 15 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication IMA: Decision Analysis

13-50

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 13.5

ETHICS CASE

(a) The stakeholders in this situation are:  Scott Bestor, accountant for Westfield Company.  The dislocated personnel of Westfield.  The senior management who made the decision.  Shareholders and creditors (b) Scott is hiding an error and is knowingly deceiving the company’s management and its shareholders and creditors with inaccurate data. (c) Scott’s alternatives are:  Keep quiet.  Confess his mistake to management. The students’ recommendations should recognize the practical aspects of the situation but they should be idealistic and ethical. If the students can’t be totally ethical when really nothing is at stake, how can they expect to be ethical under real-world pressures? LO N/A BT: E Difficulty: Easy TOT: 10 min. AACSB: Ethics AICPA FC: Measurement AICPA PC: Professional Demeanor, Communication IMA: Business Applications

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13-51

CT 13.6

ALL ABOUT YOU

(a)

The variable gasoline cost of going one mile in the hybrid car would be $0.05 ($2.50/50). The variable gasoline cost of going one mile in the traditional car would be $0.08 ($2.50/30).

(b)

The savings per mile of driving the hybrid vehicle would be $0.03 ($0.08 – $0.05).

(c)

In order to break even on your investment, you would need to drive 150,000 miles. This is determined by dividing the additional fixed cost of $4,500 by the cost savings per mile of $0.03.

(d)

There are many other factors that you would want to consider in your analysis. For example, do the vehicles differ in their expected repair bills, insurance costs, licensing fees, or ultimate resale value. Also, some states and some employers offer rebates for the purchase of hybrid vehicles. In addition, your decision might be influenced by non-financial factors, such as a desire to reduce emissions.

LO1, 2, 3 BT: E Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement, IMA: Decision Analysis

13-52

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CHAPTER 14 Incremental Analysis Learning Objectives 1. 2. 3. 4. 5. 6.

Describe management’s decision-making process and incremental analysis. Analyze the relevant costs in accepting an order at a special price. Analyze the relevant costs in a make-or-buy decision. Analyze the relevant costs and revenues in determining whether to sell or process materials further. Analyze the relevant costs to be considered in repairing, retaining, or replacing equipment. Analyze the relevant costs in deciding whether to eliminate an unprofitable segment or product.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-1

ANSWERS TO QUESTIONS 1.

The following steps are frequently involved in management’s decision-making process: (1) Identify the problem and assign responsibility. (2) Determine and evaluate possible courses of action. (3) Make a decision. (4) Review results of the decision.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

My roommate is incorrect. Accounting contributes to the decision-making process at Steps 2 and 4. Prior to the decision, accounting provides relevant revenue and cost data for each course of action. Following the decision, internal reports are prepared to show the actual impact of the decision.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

Not true. Incremental analysis involves the identification of financial data that change under alternative courses of action.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

In incremental analysis, the important point to consider is whether costs will differ (change) between the two alternatives. As a result, sometimes (1) variable costs do not change under the alternative courses of action and (2) fixed costs do change.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

The relevant data in deciding whether to accept an order at a special price are the incremental revenues to be obtained compared to the incremental costs of filling the special order.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

The manufacturing costs that are relevant in the make-or-buy decision are those that will change if the parts are purchased.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

Opportunity cost is the potential benefit that is lost when one course of action is chosen rather than an alternative course of action. Opportunity cost is relevant in a make-or-buy decision when the facilities used to make the part can be used to generate additional income.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

The decision rule in a decision to sell a product or to process it further is: Process further as long as the incremental revenue from the additional processing exceeds the incremental processing costs.

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

Joint products are products that are produced from a single raw material and a common production process. An accounting issue related to joint products is how to allocate the joint costs incurred during the production process that creates the joint products.

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

14-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 14 (Continued) 10.

Joint costs are irrelevant to a sell-or-process-further decision because they are sunk costs and will not change whether the decision is to sell the existing product or process it further. Therefore, joint costs are ignored in this decision.

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

11.

A sunk cost is a cost that cannot be changed by any present or future decision. Sunk costs, such as the book value of an old piece of equipment, therefore, are not relevant in a decision to retain or replace equipment.

LO5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement n IMA: Decision Analysis

12.

Net income will be lower if an unprofitable product line is eliminated when the product line is producing a positive contribution margin and its fixed costs cannot be avoided or reduced.

LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-3

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14.1 The correct order is: 1. Identify the problem and assign responsibility. 2. Determine and evaluate possible courses of action. 3. Make a decision. 4. Review results of the decision. LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

IMA: Decision Analysis

BRIEF EXERCISE 14.2

Revenues Costs Net income

Alternative A $160,000 100,000 $ 60,000

Alternative B $180,000 125,000 $ 55,000

Net Income Increase (Decrease) ($ 20,000) (25,000) ($ 5,000)

Alternative A is better than Alternative B because its net income is $5,000 greater. LO1 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [$20,000 – $25,000 = ($5,000)] [Incr. in net inc. – Decr. in net incr. = Decr. in net inc.]

BRIEF EXERCISE 14.3

Revenues Costs—Variable manufacturing Shipping Net income

Reject Order $0 0 0 $0

Accept Order $75,000* 60,000** 9,000*** $ 6,000

Net Income Increase (Decrease) ($ 75,000) ( (60,000) ( (9,000) ($ 6,000)

The special order should be accepted because net income will increase by $6,000. *3,000 × $25 **3,000 × $20 ***3,000 × $ 3 14-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 14.3 (Continued) LO2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [Accept order: (3,000 × $25) – ((3,000 × $20) + (3,000 × $3)) = $6,000] [Accept order: (Units sold × USP) – ((Units sold × UVC) + (Units sold × Unit shipping cost)) = Net inc.]

BRIEF EXERCISE 14.4

Variable manufacturing costs Fixed manufacturing costs Purchase price Total annual cost

Make $50,000 30,000 –0– $80,000

Buy $ –0– 30,000 60,000 $90,000

Net Income Increase (Decrease) $ 50,000 0 (60,000) ($(10,000)

The decision should be to make the part as it is $10,000 less costly. LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(Make: $50,000 + $30,000 = $80,000); (Buy: $30,000 + $60,000 = $90,000)] [(Make: Var. mfg. costs + Fixed mfg. costs = Tot. ann. cost); (Buy: Fixed mfg. costs + Purch. price = Tot. ann. cost)]

BRIEF EXERCISE 14.5

Sales price per unit Cost per unit Variable Fixed Total Net income per unit

Sell $62.00

Process Further $70.00

Net Income Increase (Decrease) $8.00

36.00 10.00 46.00 $16.00

42.00 10.00 52.00 $18.00

( (6.00) 0 ( (6.00) $2.00

The bookcases should be processed further because the incremental revenues exceed incremental costs by $2.00 per unit. LO4 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(Sell: $62 – ($36 + $10) = $16); (Process further: $70 – ($42 + $10) = $18)] [(Sell: USP – (UVC + UFC) = Net inc./unit); (Process further: USP – (UVC + UFC) = Net inc./unit)]

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14-5

BRIEF EXERCISE 14.6 The allocated joint costs are irrelevant to the sell or process further decisions. If AB1 is processed further, the company will earn incremental revenue of $50,000 ($150,000 – $100,000) and only incur incremental costs of $45,000. Therefore, the company should process AB1 further and sell AB2. If XY1 is processed further, the company will earn incremental revenue of $35,000 ($130,000 – $95,000) but will incur incremental costs of $50,000. Therefore, the company should sell XY1 rather than process it further. LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

BRIEF EXERCISE 14.7

Variable manufacturing costs for 5 years New machine cost Sell old machine Total

Retain Equipment

Replace Equipment

Net 5-Year Income Increase (Decrease)

$3,000,000 0 0 $3,000,000

$2,500,000 400,000 (30,000) $2,870,000

($ 500,000 ((400,000) 30,000 $ 130,000

The old factory machine should be replaced as it will result in $130,000 less cost. LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis ($500,000 – $400,000 + $30,000 = $130,000) (Var. mfg. cost savings for 5 yrs. – New machine cost + Sale of old machine = Tot. incr. in net inc.)

BRIEF EXERCISE 14.8

Sales Variable costs Contribution margin Fixed costs Net income

14-6

Continue $200,000 180,000 20,000 30,000 ($ (10,000)

Eliminate $ –0– –0– ( –0– 20,000) $(20,000)

Net Income Increase (Decrease) $(200,000) (180,000) (20,000) ( 10,000) $ (10,000)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 14.8 (Continued) The Big Bart product line should be continued because $20,000 of contribution margin will not be realized if the line is eliminated. This amount is greater than the $10,000 savings of fixed costs. LO6 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis (-$200,000 + $180,000 + $10,000 = -$10,000) (Lost sales + VC savings + FC savings = Decr. in net inc.)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-7

SOLUTIONS FOR DO IT! EXERCISES DO IT! 14.1

Revenues Maintenance expense Operating expenses Equipment upgrade Opportunity cost

Option 1 $65,000 5,000 26,000 17,000 4,000

Option 2 $60,000 5,000 22,000 0 0

Net Income Increase (Decrease) $(5,000) 0 4,000 0 4,000 $3,000

Sunk (s)

LO1 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [Net inc. effect: ($5,000) + $0 + $4,000 + $0 +$4,000 = $3,000] [Net inc. effect: Decr. rev. + Maint. exp. change + Oper. exp. savings + Equip. upgrade (S) + Opp. cost = Net inc. incr.]

DO IT! 14.2

Revenues Costs Net income

Reject $ –0– $ –0– $ –0–

Accept $180,000 144,000* $ 36,000

Net Income Increase (Decrease) $180,000 (144,000) $ 36,000

*(6,000 × $20) + (6,000 × $4) Given the results of the above analysis, Maize Company should accept the special order as net income will increase by $36,000. LO2 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [Net inc. effect: $180,000 – ((6,000 × $20) + (6,000 × $4)) = $36,000] [Net inc. effect: Incr. rev. – ((units sold × Var. mfg. costs/unit) + (Units sold × Add’l. costs/unit)) = Net inc. incr.]

14-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 14.3 (a)

Direct materials Direct labor Variable overhead Fixed overhead Purchase price Net income

Make $ 30,000 42,000 45,000 60,000 –0– $177,000

Buy $ –0– –0– –0– 45,000 162,000* $207,000

Net Income Increase (Decrease) $ 30,000 42,000 45,000 15,000 (162,000) $ (30,000)

*60,000  $2.70 Given the results of the above analysis, Wilma Company will incur $30,000 of additional costs if it buys the switches, therefore, Wilma should continue to make the switches. [Net inc. effect: $30,000 + $42,000 + $45,000 + $15,000 – (60,000 × $2.70) = ($30,000)] [Net inc. effect: DM cost savings + DL cost savings + VOH cost savings + FOH cost savings – (Units sold × New USP) = Decr. in net inc.]

(b)

Total cost Opportunity cost Total cost

Make $177,000 34,000 $211,000

Buy $207,000 –0– $207,000

Net Income Increase (Decrease) $(30,000) 34,000 $ 4,000

Yes, the answer is different: The analysis shows that net income is expected to increase by $4,000 if Wilma Company purchases the switches. LO3 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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14-9

DO IT! 14.4

Sales price per unit Cost per unit Variable Fixed Total Net income per unit

Sell $75

Process Further $100

Net Income Increase (Decrease) $25

$40 10 $50

$ 59 13 $ 72

($19) (3) ($22)

$25

$ 28

$ 3

The tables should be processed further and Mesa Verde should finish the tables because the incremental revenues are expected to exceed incremental costs by $3 per unit. LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [Net inc. effect: $25 – ($19 + $3) = $3] [Net inc. effect: Incr. in USP – (Incr. in UVC + Incr. in UFC) = Inc. in net inc./unit]

DO IT! 14.5 Retain Equipment Operating expenses $450,000 Repair costs 50,000 Rental revenue New machine cost Sale of old machine Total $500,000

Replace Equipment $ 300,000 (50,000) 170,000 (15,000) $ 405,000

Net Income Increase (Decrease) $150,000 50,000 50,000 (170,000) 15,000 $ 95,000

The equipment should be replaced because it is expected to increase net income by $95,000 over retaining and repairing it. LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [Net inc. effect: $150,000 + $50,000 + $50,000 - $170,000 + $15,000 = $95,000] [Net inc. effect: Oper. exp. savings + Repair cost savings + Rental rev. – New machine cost + Sale of old machine = Incr. in net inc.]

14-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 14.6

Sales Variable costs Contribution margin Fixed costs Net income

Continue $500,000 370,000 130,000 150,000 $ (20,000)

Eliminate $ 0 0 0 38,000 $(38,000)

Net Income Increase (Decrease) $(500,000) 370,000 (130,000) 112,000 $ (18,000)

The analysis indicates that Gator should not eliminate the gloves and mittens line because net income is expected to decrease $18,000. LO6 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [Net inc. effect: ($500,000) + $370,000 + $112,000 = ($18,000) [Net inc. effect: Lost sales + VC savings + FC savings = Decr. in net inc.]

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14-11

SOLUTIONS TO EXERCISES EXERCISE 14.1 1. 2. 3. 4. 5. 6. 7. 8. 9.

False. The first step in management’s decision-making process is “identify the problem and assign responsibility”. False. The final step in management’s decision-making process is to review the results of the decision. True. False. In making business decisions, management ordinarily considers both financial and nonfinancial information. True. True. False. Costs that are the same under all alternative courses of action do not affect the decision. False. When using incremental analysis, either costs or revenues or both will change under alternative courses of action. False. Sometimes variable costs will not change under alternative courses of action, but fixed costs sometimes will.

LO1 BT: C Difficulty: Easy TOT: 15 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.2 (a) Reject Order $ –0– –0– –0–

Accept Order $24,000 (2,500) (7,500)

Net Income Increase (Decrease) $24,000 (2,500) (7,500)

Revenues ($4.80 × 5,000) Materials ($0.50* × 5,000) Labor ($1.50** × 5,000) Variable overhead ($1.00*** × 5,000) –0– (5,000) Cost of equipment rental (6,000) Net income $ –0– $ 3,000 *($10,000 ÷ 20,000) **($30,000 ÷ 20,000) ***($20,000 ÷ 20,000)

(5,000) (6,000) $ 3,000

[Net inc. effect: $24,000 - $2,500 - $7,500 - $5,000 - $6,000 = $3,000] [Net inc. effect: Incr. rev. – Incr. mat. – Incr. labor – Incr. VOH – Cost of equip. rent. = Net inc. incr.]

(b) As shown in the incremental analysis, Gruden should accept the special order because incremental revenue exceeds incremental expenses by $3,000. 14-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 14.2 (Continued) (c) It is assumed that sales of the golf discs in other markets would not be affected by this special order. If other sales were affected, Gruden would have to consider the lost sales in making the decision. Second, if Gruden is operating at full capacity, it is likely that the special order would be rejected. LO2 BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.3 (a)

Revenues (15,000 × $7.60) Cost of goods sold Operating expenses Net income

Reject Order $0 0 0 $0

Accept Order $114,000 78,000 (1) 31,800 (2) $ 4,200

Net Income Increase (Decrease) ($114,000) ( (78,000) ( (31,800) ($ 4,200)

(1) Variable cost of goods sold = $2,600,000 × 70% = $1,820,000. Variable cost of goods sold per unit = $1,820,000 ÷ 350,000 = $5.20 Variable cost of goods sold for the special order = $5.20 × 15,000 = $78,000. [($2,600,000 × 70% = $1,820,000); ($1,820,000 ÷ 350,000 = $5.20); (15,000 × $5.20 = $78,000)] [(CGS × Var. cost % = Var. CGS); (Var. CGS ÷ No. units sold = Var. CGS/unit); (Spec. order units × Var. CGS/unit = Var. CGS for spec. order)]

(2) Variable operating expenses = $840,000 × 80% = $672,000 $672,000 ÷ 350,000 = $1.92 per unit 15,000 × $1.92 = $28,800 $28,800 + $3,000 = $31,800 [($840,000 × 80% = $672,000); ($672,000 ÷ 350,000 = $1.92); ((15,000 × $1.92) + $3,000 = $31,800)] [(Oper. exp. × Var. cost % = Var. oper. exp.); (Var. oper. exp. ÷ No. units sold = Var. oper. exp./unit); ((Spec. order units ×Var. oper. exp./unit) + Add’l. ship. costs = Var. oper. exp. for spec. order)]

(b) As shown in the incremental analysis, Moonbeam Company should accept the special order because incremental revenues exceed incremental expenses by $4,200. LO2 BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-13

EXERCISE 14.4

Revenues Variable costs: Direct materials Direct labor Variable overhead Total variable costs Net income

Reject Order $0

Accept Order $1,187,500 (1)

Net Income Increase (Decrease) $1,187,500

0 0 0 0 $0

500,000 187,500 250,000 937,500 $ 250,000

(500,000) (187,500) (250,000) (937,500) $ 250,000

(1) [($2.00 + $0.75 + $1.00 + $1.00) × 250,000] Klean Fiber should accept the Army’s offer since it is expected to increase net income by $250,000. LO2 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(($2.00 + $0.75 + $1.00 + $1.00) × 250,000) - $500,000 - $187,500 - $250,000 = $250,000] (Incr. rev. – Incr. DM – Incr. DL – Incr. VOH = Incr. net inc.)

EXERCISE 14.5 (a)

Direct materials (30,000 × $4.00) Direct labor (30,000 × $5.00) Variable overhead costs ($150,000 × 70%) Fixed manufacturing costs Purchase price (30,000 × $12.95) Total annual cost

Make $120,000 150,000

0 0

Net Income Increase (Decrease) $ 120,000 150,000

105,000 45,000 0 $420,000

0 45,000 388,500 $433,500

105,000 0 ( (388,500) ($ (13,500)

Buy

[(30,000 × $4) + (30,000 × $5) + ($150,000 × 70%) – (30,000 × $12.95) = ($13,500)] (DM to make + DL to make + VOH to make – Purch. price = Net inc. decr. if buy)

(b) No, Pottery Ranch should not purchase the finials. As indicated by the incremental analysis, it would cost the company $13,500 more to purchase the finials.

14-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 14.5 (Continued) (c) Yes, by purchasing the finials, a total cost saving of $6,500 is expected to result as shown below.

Total annual cost (above) Opportunity cost Total cost

Make $420,000 20,000 $440,000

Buy $433,500 0 $433,500

Net Income Increase (Decrease) $(13,500) (20,000) $( 6,500)

LO3 BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.6 (a) 1.

Direct materials Direct labor Variable overhead Fixed overhead Purchase price Total annual cost

Make Buy $1,000,000 $ –0– 800,000 –0– 120,000 –0– 600,000 195,000 –0– 2,300,000 $2,520,000 $2,495,000

Net Income Increase (Decrease) $ 1,000,000 800,000 120,000 405,000 (2,300,000) $ 25,000

Yes. The offer should be accepted as net income is expected to increase by $25,000. ($1,000,000 + $800,000 + $120,000 + $405,000 –$2,300,000 = $25,000) (Incr. DM to make + Incr. DL to make + Incr. VOH to make + Incr. FOH to make – Purch. price = Incr. in net inc. if buy)

0 0 0 600,000 0 2,300,000 $2,900,000

Net Income Increase (Decrease) $ 1,000,000 800,000 120,000 0 375,000 (2,300,000) $ (5,000)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Direct materials Direct labor Variable overhead Fixed overhead Opportunity cost Purchase price Totals

Make $1,000,000 800,000 120,000 600,000 375,000 0 $2,895,000

Buy $

14-15

EXERCISE 14.6 (Continued) No. The offer should not be accepted as net income is expected to be $5,000 less. ($1,000,000 + $800,000 + $120,000 + $375,000 - $2,300,000 = ($5,000)) (Incr. DM to make + Incr. DL to make + Incr. VOH to make + Opp. Cost – Purch. price = Net inc. decr. if buy)

(b) Qualitative factors include the possibility of laying off those employees that produced the robot and the resulting poor morale of the remaining employees, maintaining quality standards, timeliness of delivery, and controlling the purchase price in the future. LO3 BT: E Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.7 (a) Direct materials Direct labor Variable overhead Purchase price Total unit cost

Make Sails $100 80 25 0 $205

Buy Sails $ 0 0 0 250 $250

Net Income Increase (Decrease) $ 100 80 25 (250) $ (45)

Riggs should be making the sails, because it could save $45 per unit or $54,000. The president was including the fixed overhead cost in the calculation. Variable overhead = Total overhead ($90) – Fixed overhead ($78,000 ÷ 1,200) = $25. This amount has been allocated, so Riggs will incur the cost whether or not it makes the sails. This is an example of an irrelevant cost, because it does not differ between the two alternatives. ($100 + $80 + $25 - $250 = ($45)) (Incr. DM to make + Incr. DL to make + Incr. VOH to make – Purch. price = Net inc. decr. if buy)

14-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 14.7 (Continued) (b)

The best decision would be to rent out the space as shown below. The differential savings would be $77,000 – $54,000 = $23,000.

(Based on 1,200 units) Manufacturing cost Purchase price Opportunity cost Total annual cost (c)

Per Unit $205 $250

Make Sails $246,000 0 77,000 $323,000

Buy Sails $ 0 300,000 0 $300,000

Net Income Increase (Decrease) $ 246,000 (300,000) 77,000 $ 23,000

Qualitative factors to consider would be (1) whether Riggs will be able to exercise control over the future price of the product (2) whether Riggs will be able to exercise control over the quality of the product (3) whether delivery will be timely and (4) the potential for interruptions in the supply of the product.

LO3 BT: E Difficulty: Easy TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.8 (a) Direct materials Direct labor Material handling Variable overhead Fixed overhead Purchase price Total unit cost

Make IMC2 $ 65.00 45.00 6.50 72.00* 48.00** 0 $236.50

Buy IMC2 $ 0 0 0 0 48.00 200.00 $248.00

Net Income Increase (Decrease) $ 65.00 45.00 6.50 72.00 0.00 (200.00) $ (11.50)

*Variable overhead = 60% × ($126.50 – $6.50) **Fixed overhead = 40% × (126.50 – $6.50) The component should not be purchased from the outside vendor, as the per unit cost would be $11.50 greater than if the company made it. [$65.00 + $45.00 + $6.50 + (60% × ($126.50 - $6.50)) + (40% × ($126.50 - $6.50)) – ($200.00 + $48.00) = ($11.50) (Incr. DM/unit to make + Incr. DL/unit to make + Mat. handling/unit to make + Incr. VOH/unit to make + FOH/unit – (Purch. price/unit + FOH/unit) = Net loss/unit if buy)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

14-17

EXERCISE 14.8 (Continued) (b)

In order for Innova to make an accurate decision, it would have to know the opportunity cost of manufacturing the other product. As determined in (a), purchasing the product from outside would cost $11,500 more (1,000 × $11.50). Innova would have to increase their contribution margin by more than $11,500 through the manufacture of the other product, before it would be economical for it to purchase the IMC2 from the outside vendor.

(c)

Qualitative factors to consider would be (1) quality of the component (2) on-time delivery, (3) timeliness of delivery, and (4) reliability of the vendor.

LO3 BT: E Difficulty: Easy TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.9

Sales per unit Costs per unit Direct materials Direct labor Total Net income per unit

Sell (Basic Kit) $30

Process Further (Stage 2 Kit) ( )$36( )

Net Income Increase (Decrease) $(6)

$16 0 $16

( ) $ 8 (1) ( ) 9 (2) ( ) $17 ( )

$(8) (9) $(1)

$14

( ) $19 ( )

$(5)

(1) The cost of materials decreases because Anna can make two Stage 2 Kits from the materials for a basic kit. (2) The total time to make the two kits is one hour at $18 per hour or $9 per unit. Anna should carry the Stage 2 Kits. The incremental revenue, $6, exceeds the incremental processing costs, $1. Thus, net income is expected to increase by processing the kits further. LO4 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [Net inc. effect: $6 + ($8 – $9) = $5] [Net inc. effect: Incr. in USP + (DM cost savings/unit – DL incr./unit) = Net inc. incr./unit]

14-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 14.10 (a)

Sales ($60,000 + $15,000 + $55,000) Joint costs Net income

$ 130,000 (100,000) $ 30,000

(b) Sales ($190,000 + $35,000 + $215,000) Joint costs Additional costs ($100,000 + $30,000 + $150,000) Net income

$ 440,000 (100,000) (280,000) $ 60,000

Incremental revenue Incremental costs Incremental profit (loss) (1)

Product 10 $ 130,000 (100,000) $ 30,000

Product 12 Product 14 $ 20,000 $ 160,000 (30,000) (150,000) $(10,000) $ 10,000

Sales value after further processing – Sales value @ split-off point

Products 10 and 14 should be processed further and Product 12 should be sold at the split-off point. [(Product 10: $130,000 - $100,000 = $30,000); (Product 12: $20,000 - $30,000 = ($10,000)); (Product 14: $160,000 - $150,000 = $10,000)] [(Product 10: Incr. rev – Incr. costs = Incr. profit); (Product 12: Incr. rev. – Incr. costs = Incr. loss); (Product 14: Incr. rev. – Incr. costs = Incr. profit)]

(d) Sales ($190,000 + $15,000 + $215,000) Joint costs Additional costs ($100,000 + $150,000) Net income

$ 420,000 (100,000) (250,000) $ 70,000

Net income is estimated to be $10,000 ($70,000 – $60,000) higher in (d) than in (b) because Product 12 is not processed further, thereby increasing overall profit $10,000. LO4 BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

14-19

EXERCISE 14.11 To determine whether each of the three joint products should be sold as is, or processed further, we must determine the incremental profit or loss that would be earned by each. The allocated joint costs are irrelevant to the decision since these costs will not change whether or not the products are sold as is or processed further.

Incremental revenue Incremental cost Incremental profit (loss)

Spock $ 90,000* (110,000) $ (20,000)

Uhura $100,000** (85,000) $ 15,000

Sulu $345,000*** (250,000) $ 95,000

From this analysis we see that Uhura and Sulu should be processed further because the incremental revenue is expected to exceed the incremental costs, but Spock should be sold as is. *$300,000 – $210,000 **$400,000 – $300,000 ***$800,000 – $455,000 LO4 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(Spock: ($300,000 - $210,000) - $110,000 = ($20,000)); (Uhura: ($400,000 - $300,000) - $85,000 = $15,000); (Sulu: ($800,000 - $455,000) - $250,000 = $95,000)] [(Spock: Incr. rev. – Incr. cost = Incr. loss); (Uhura: Incr. rev. – Incr. cost = Incr. profit); (Sulu: Incr. rev. – Incr. cost = Incr. profit)]

EXERCISE 14.12 (a)

The costs that are relevant in this decision are the incremental revenues and the incremental costs associated with processing the material past the split-off point. Any costs incurred up to the split-off point are sunk costs, and therefore, irrelevant to this decision.

(b)

Revenue after further processing: Product D—$60,000 (4,000 units × $15.00 per unit) Product E—$97,200 (6,000 units × $16.20 per unit) Product F—$45,200 (2,000 units × $22.60 per unit) Revenue at split-off: Product D—$40,000 (4,000 units × $10.00 per unit) Product E—$69,600 (6,000 units × $11.60 per unit) Product F—$38,800 (2,000 units × $19.40 per unit) D E Incremental revenue $20,000 $27,600 Incremental cost (14,000) (20,000) Increase (decrease) in profit $ 6,000 $ 7,600 Products D and E should be processed further.

14-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

F $ 6,400 (9,000) $(2,600)

(For Instructor Use Only)

EXERCISE 14.12 (Continued) [(D: ($60,000 - $40,000) - $14,000 = $6,000); (E: ($97,200 - $69,600) - $20,000 = $7,600); (F: ($45,200 $38,800) - $9,000 = ($2,600))] [(D: Incr. rev. – Incr. cost = Incr. profit); (E: Incr. rev. – Incr. cost = Incr. profit); (F: Incr. rev. – Incr. cost = Incr. loss)]

(c)

The decision would remain the same. It does not matter how the joint costs are allocated because joint costs are irrelevant to this decision.

LO4 BT: E Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.13 (a)

Cost Accumulated depreciation Book value Sales proceeds Loss on sale

$100,000 (25,000*) 75,000 50,000 $ 25,000

*One year’s depreciation: ($100,000 – $0) ÷ 4 years (b)

Annual operating costs New scanner cost Old scanner salvage Total

Retain Scanner $315,000* $315,000

Replace Scanner $240,000** 110,000 (50,000) $300,000

Net Income Increase (Decrease) $ 75,000 (110,000) 50,000 $ 15,000

*(3 years × $105,000) **[3 years × ($105,000 – $25,000)] Yes. Twilight Hospital should replace the old scanner because it is expected to result in a savings of $15,000 over the next three years. [(Retain: (3 × $105,000) = $315,000); (Replace: (3 × ($105,000 - $25,000)) + $110,000 - $50,000 = $300,000); ($315,000 - $300,000 = $15,000)] [(Retain: (No. of yrs. × Ann. oper. costs) = Tot. costs); (Replace: (No. of yrs. × Reduced ann. oper. costs) + Cost of new scanner – SV of old scanner = Tot. costs); (Retain tot. costs – Replace tot. costs = Incr. diff. in favor of replace)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

14-21

EXERCISE 14.13 (Continued) (c)

As shown in (a) above, replacing the old scanner will result in reporting a loss of $25,000. Reluctance to report losses of this nature is the usual reason for not recognizing that a poor decision was made in the past. The remaining book value of the old scanner ($75,000) is a sunk cost. It will be deducted in the future, if the scanner is retained, or written off now if it is replaced. However, if it is replaced now, that cost will be partially offset by the salvage value that Dyno is willing to pay ($50,000).

LO5 BT: E Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.14

Operating costs New machine cost Salvage value (old) Total (1) $25,000 × 5. (2) $20,000 × 5.

Retain Machine $125,000 (1) 0 0 $125,000

Replace Machine ($100,000) (2) ( 25,000) ( (6,000) ($119,000)

Net Income Increase (Decrease) ($ 25,000 ( (25,000) ( 6,000 ($ 6,000

The current machine should be replaced. The incremental analysis shows that net income for the five-year period is expected to be $6,000 higher by replacing the current machine. LO5 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(Retain: ($25,000 × 5) = $125,000); (Replace: ($20,000 × 5) + $25,000 - $6,000 = $119,000); ($125,000 $119,000 = $6,000)] [(Retain: (Ann. oper. costs × No. of yrs) = Tot. costs); (Replace: (Reduced ann. oper. costs × No. of yrs.) + New machine cost – SV of old machine = Tot. cost); (Retain tot. costs – Replace tot. costs = Diff. in favor of replace)]

14-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 14.15

Sales Variable costs Cost of goods sold Operating expenses Total variable Contribution margin Fixed costs Cost of goods sold Operating expenses Total fixed Net income (loss)

Net Income Increase (Decrease) $(100,000)

Continue $100,000)

Eliminate $( 0)

( 61,000) (30,000) (91,000) ( 9,000)

( ( ( (

0) 0) 0) 0)

(61,000) (30,000) (91,000) (9,000)

(15,000) (20,000) (35,000) $(26,000)

15,000) (20,000) (35,000) $(35,000)

0) ( 0) ( 0) $ (9,000)

Veronica is incorrect. The incremental analysis shows that net income is expected to be $9,000 less if the Percy Division is eliminated. This amount equals the contribution margin that would be lost through discontinuing the division. (Note: None of the fixed costs can be avoided.) LO6 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [($100,000) + $61,000 + $30,000 = ($9,000)] [Lost sales if eliminate + CGS saved if eliminate + Oper. exp. saved if eliminate = Lost CM and Net loss if eliminate]

EXERCISE 14.16 (a)

$30,000 + $70,000 – $40,000 = $60,000

(b) Sales Variable expenses Contribution margin Fixed expenses Net income

Tingler $300,000 150,000 150,000 142,500* $ 7,500

Shocker $500,000 200,000 300,000 267,500** $ 32,500

Total $800,000 350,000 450,000 410,000 $ 40,000

*$30,000 + [($300,000 ÷ $800,000) × $300,000] **$80,000 + [($500,000 ÷ $800,000) × $300,000]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-23

EXERCISE 14.16 (Continued) [(Tingler: $300,000 - $150,000 – ($30,000 + (($300,000 ÷ $800,000) × $300,000)) = $7,500); (Shocker: $500,000 - $200,000 – ($80,000 + (($500,000 ÷ $800,000) × $300,000)) = $32,500); ($7,500 + $32,500 = $40,000)] [(Tingler: Sales – VE – FE = Net inc.); (Shocker: Sales – VE – FE = Net inc.); (Tingler net inc. + Shocker net inc. = Tot. net inc.)]

(c)

As shown in the analysis above, Cawley should not eliminate the Stunner product line. Elimination of the line is expected to cause net income to drop from $60,000 to $40,000. The reason for this decrease in net income is that elimination of the product line would result in the loss of $55,000 of contribution margin while saving only $35,000 of fixed expenses.

LO6 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.17 Calculation of contribution margin per unit: Selling price per unit Less: variable costs/unit Contribution margin/unit

C $95 50 $45

D $75 40 $35

E $115 45 $ 70

Fixed costs = $24 × (9,000 + 20,000) = $696,000 Company profit with Products C and D: Units sold Sales revenue Less: Variable costs Contribution margin Less: Fixed costs Net income

C 9,000 $855,000 450,000 $405,000

D 20,000 $1,500,000 800,000 $ 700,000

Total $2,355,000 1,250,000 1,105,000 696,000 $ 409,000

[(C: (9,000 × $95) – (9,000 × $50) = $405,000); (D: (20,000 × $75) – (20,000 × $40) = $700,000); ($405,000 + $700,000 - $696,000 = $409,000)] [(C: (No. units sold × USP) – (No. units sold × UVC) = CM); (D: (No. units sold × USP) – (No. units sold × UVC) = CM); (Product C CM + Product D CM – FC = Net inc.)]

14-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 14.17 (Continued) Company profit with Products C and E: Units sold Sales revenue Less: Variable costs Contribution margin Less: Fixed costs Net income

C 9,900*

E 10,000

Total

$940,500 495,000 $445,500

$1,150,000 450,000 $ 700,000

$2,090,500 945,000 1,145,500 696,000 $ 449,500

*Product C sales increase by 10%, (9,000 × 110%) [(C: (9,000 × 110% × $95) – (9,000 × 110% × $50) = $445,500); (E: (10,000 × $115) – (10,000 × $45) = $700,000); ($445,500 + $700,000 - $696,000 = $449,500)] [(C: (Orig. no. units sold × % incr. × USP) – (No. units sold × UVC) = CM); (E: (No. units sold × USP) – (No. units sold × UVC) = CM); (Product C CM + Product E CM – FC = Net inc.)]

Yes it should introduce Product E since net profit is expected to increase by $40,500 ($449,500 – $409,000). LO6 BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE 14.18 1. Irrelevant. Unavoidable costs will be incurred regardless of the decision made. 2. Relevant. 3. Irrelevant. This is a sunk cost and all sunk costs are irrelevant. 4. Irrelevant. These are sunk costs. 5. Relevant. 6. Relevant. 7. Relevant. 8. Relevant. 9. Irrelevant. If there is no change in the direct materials charge regardless of the decision made, the cost is irrelevant. 10. Relevant. LO1, 2, 3, 4, 5, 6 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-25

SOLUTIONS TO PROBLEMS PROBLEM 14.1

(a)

Revenues (10,000 × $28) Var. Cost of goods sold Var. Selling and administrative expenses Net income

Reject Order $0 0

Accept Order $280,000 220,000 (1)

Net Income Increase (Decrease) $ 280,000 ( (220,000)

0 $0

22,500 (2) $ 37,500

( (22,500) $ 37,500

(1) Variable CGS = $3,600,000 – $960,000 = $2,640,000; $2,640,000 ÷ 120,000 units = $22.00 per unit; 10,000 × $22.00 = $220,000. [($3,600,000 - $960,000 = $2,640,000); ($2,640,000 ÷ 120,000 = $22); ($22 × 10,000 = $220,000)] [(Tot. CGS – Fixed CGS = Var. CGS); (Var. CGS ÷ No. units produced = Var. CGS/unit); (Var. CGS/unit × No. units in spec. order = Spec. order Var. CGS)]

(2) Variable S&A expenses = $405,000 – $225,000 = $180,000; $180,000 ÷ 120,000 units = $1.50 per unit; 10,000 × ($1.50 + $0.75) = $22,500. [($405,000 - $225,000 = $180,000); ($180,000 ÷ 120,000 = $1.50); (10,000 × ($1.50 + $0.75) = $22,500)] [(Tot. S&A exp. – Fixed S&A = Var. S&A exp.); (Var. S&A exp. ÷ No. units produced = Var. S&A exp./unit); (No. units in spec. order × (Var. S&A exp./unit + Ship. exp./unit) = Spec. order var. S&A exp.)]

(b) Yes, the special order should be accepted because net income is expected to increase by $37,500. (c) Unit selling price = $22.00 (variable manufacturing costs) + $2.25 ($1.50 + $0.75) variable selling and administrative expenses + $5.00 net income = $29.25. (d) Nonfinancial factors to be considered are: (1) possible effect on domestic sales, (2) possible alternative uses of the unused factory capacity, and (3) ability to meet customer’s schedule for delivery without increasing costs. LO2 BT: E Difficulty: Simple TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis 14-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 14.2

(a) Make CISCO Direct materials (8,000 × $4.80) Direct labor (8,000 × $4.30) Indirect labor (8,000 × $0.43) Utilities (8,000 × $0.40) Depreciation Property taxes Insurance Purchase price Freight and inspection (8,000 × $0.35) Receiving costs Net income

$38,400

Buy CISCO $

Net Income Increase (Decrease)

($38,400)

34,400

( 34,400)

3,440 3,200 3,000 700 1,500 0

0 0 900 200 600 80,000

(

0 0 $84,640

2,800 1,300 $85,800

( (2,800) ( (1,300) ($ (1,160)

3,440) 3,200) ( 2,100) ( 500) ( 900) ( (80,000)

[Net inc. effect: (8,000 × $4.80) + (8,000 × $4.30) + (8,000 × $0.43) + (8,000 × $0.40) + $2,100 + $500 + $900 – $80,000 – (8,000 × $0.35) - $1,300 = ($1,160)] [Net inc. effect: (Units made × DM/unit saved) + (Units made × DL/unit saved) + (Units made × Ind. labor/unit saved) + (Units made × Util./unit saved) + Depr. savings + Prop. tax savings + Ins. savings – Purch. price – (Units purch. × Frt. & inspect./unit) – Rec. costs = Net inc. decr.]

(b) The company should continue to make CISCO because net income is expected to be $1,160 less if CISCO were purchased from the supplier. (c) The decision would be different. Because of the opportunity cost of $3,000, net income is expected to be $1,840 higher if CISCO is purchased as shown below: Net Income Increase Make CISCO Buy CISCO (Decrease) Total annual cost $84,640 $85,800 $(1,160) Opportunity cost 3,000 0 (3,000) Net income $87,640 $85,800 $(1,840)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-27

PROBLEM 14.2 (Continued) (d) Nonfinancial factors include: (1) the adverse effect on employees if CISCO is purchased, (2) how long the supplier will be able to satisfy the Shatner Manufacturing Company’s quality control standards at the quoted price per unit, and (3) whether the supplier will deliver the units when they are needed by Shatner. LO3 BT: E Difficulty: Moderate TOT: 35 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

14-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 14.3

(a) (1)

Table Cleaner Not Processed Further Sales: FloorShine (600,000 ÷ 30) × $20 Table Cleaner (300,000 ÷ 25) × $17 Total revenue Costs: CDG Additional costs of FloorShine Total costs Gross profit

$400,000 204,000 $604,000 210,000 240,000 450,000 $154,000

[(FoorShine: (600,000 ÷ 30) × $20) + (Table Cleaner (300,000 ÷ 25) × $17) – ($210,000 + $240,000) = $154,000] [(FloorShine sales rev.) + (Table Cleaner sales rev.) – (CDG + Add’l. costs of Floor Shine) = GP]

(2)

Table Cleaner Processed Further Sales: FloorShine Table Stain Remover (300,000 ÷ 25) × $14 Table Polish (300,000 ÷ 25) × $14 Total revenue Costs: CDG Additional costs of FloorShine TCP Total costs Gross profit

$400,000 168,000 168,000 $736,000 210,000 240,000 100,000 550,000 $186,000

[(FloorShine: $400,000 + (Table Stain Remover: ((300,000 ÷ 25) × $14)) + (Table Polish: ((300,000 ÷ 25) × $14)) – ($210,000 + $240,000 + $100,000) = $186,000] [(FloorShine sales rev. + (Table Stain Remover sales rev.) + (Table Polish sales rev.) – (CDG + Add’l. costs of FloorShine + TCP) = GP]

(3) If the table cleaner is processed further overall company profit is expected to be $32,000 higher. Therefore, management made the wrong decision by choosing to not process table cleaner further.

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14-29

PROBLEM 14.3 (Continued) (b) Incremental revenue Incremental costs Totals

Don’t Process Table Cleaner Further $204,000 0 $204,000

Process Table Cleaner Further $336,000 100,000 $236,000

Net Income Increase (Decrease) $132,000 (100,000) $ 32,000

When trying to decide if the table cleaner should be processed further into TSR and TP, only the relevant data need be considered. All of the costs that occurred prior to the creation of the table cleaner are sunk costs and can be ignored. The decision should be made by comparing the incremental revenue from further processing to the incremental costs. LO4 BT: AN Difficulty: Moderate TOT: 35 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

14-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 14.4

(a)

Cost Accumulated depreciation Book value Sales proceeds Loss on sale

$120,000 (24,000*) 96,000 (25,000) $ 71,000

*$120,000 ÷ 5 years = $24,000 [$120,000 – ($120,000 ÷ 5) - $25,000 = $71,000] [Cost – Accum. depr. – Sales proceeds = Loss on sale]

(b) (1) Revenues ($240,000 × 4 yrs.) Less costs: Variable costs ($35,000 × 4) Fixed costs ($23,000 × 4) Selling & administrative Depreciation Net income

Retain Old Elevator $960,000 $140,000 92,000 116,000* 96,000

444,000 $516,000

*($29,000 × 4) (2) Revenues Less costs: Variable costs ($10,000 × 4) Fixed costs ($8,500 × 4) Selling and administrative Depreciation Operating income Less: Loss on old elevator Net income

Replace Old Elevator $960,000 $ 40,000 34,000 116,000 160,000

350,000 610,000 71,000 $539,000

[$960,000 – (($10,000 × 4) + ($8,500 × 4) + ($29,000 × 4) + ($40,000 × 4)) - $71,000 = $539,000] [Rev. – ((VC × No. of yrs.) + (FC × No. of yrs.) + (S&A exp. × No. of yrs.) + (Ann. depr. × No. of yrs.) – Loss on old elevator = Net inc.]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-31

PROBLEM 14.4 (Continued) (c) Retain Replace Old Elevator Old Elevator Variable operating costs $140,000 $ 40,000 Fixed operating costs 92,000 34,000 New elevator cost 160,000 Salvage on old elevator (25,000) Totals $232,000 $209,000 .

Net Income Increase (Decrease) $ 100,000 58,000 (160,000) 25,000 $ 23,000

(d) From: Student’s email address To: Richter’s email address SUBJECT: Relevant Data for Decision to Replace Old Elevator Hi Ron: When deciding whether or not to replace any old equipment, the analysis should only include cost data relevant to the replacement decision. The $71,000 loss that would be experienced if we replace the old elevator with the newer model is related to a sunk cost, namely the cost of the old elevator. Sunk costs are irrelevant in decision making. The loss occurs when comparing the book value of the old elevator to the cash proceeds that would be received. The book value of $96,000 would be deducted as depreciation expense over the next four years if the elevator were retained. If the elevator is replaced with the newer model, the book value will be expensed in the current year, less the cash proceeds received on disposal. Therefore, the $96,000 book value will be expensed under either alternative, making it irrelevant. Student’s name LO5 BT: S Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

14-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 14.5

(a) Sales Variable costs Cost of goods sold Selling and administrative Total variable expenses Contribution margin

Division I $250,000

Division II $200,000

140,000 30,000 170,000 ($ 80,000)

172,800 36,000 208,800 $ (8,800)

[(Div. I: $250,000 – ($140,000 + $30,000) = $80,000); (Div. II: $200,000 – ($172,800 + $36,000) = ($8,800)] [(Div. I: Sales – (Var. CGS + Var. S&A) = CM); (Div. II: Sales – (Var. CGS + Var. S&A) = CM)]

(b) (1) Division I

Continue

Eliminate

Net Income Increase (Decrease)

Contribution margin (Part a) Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

$(80,000)

(60,000) (45,000) (105,000) $(25,000)

(30,000) (22,500) (52,500) $(52,500)

30,000 22,500 52,500 $(27,500)

[Net inc. effect: -$80,000 + $30,000 + $22,500 = ($27,500)] [Net inc. effect: CM decr. + CGS FC saved + S&A FC saved = Net inc. decr.]

(2) Division II

Continue

Eliminate

Net Income Increase (Decrease)

Contribution margin (Part a) Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

$ (8,800)

$ 8,800

(19,200 ( 24,000 ( 43,200 $(52,000)

( 9,600) (12,000) (21,600) $(21,600)

( 9,600 12,000 21,600 $30,400

[Net inc. effect: $8,800 + $9,600 + $12,000 = $30,400] [Net inc. effect: CM incr. + CGS FC saved + S&A FC saved = Net inc. incr.]

Division II should be eliminated as its negative contribution margin is $8,800. Income from operations would increase $30,400 if Division II is eliminated. Division I should be continued because it is producing positive contribution margin of $80,000. Income from operations will decrease $27,500 by discontinuing this division. Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-33

PROBLEM 14.5 (Continued) (c)

BRISLIN COMPANY CVP Income Statement For the Quarter Ended March 31, 2027 Divisions Sales Variable costs Cost of goods sold Selling and administrative Total variable costs Contribution margin Fixed costs Cost of goods sold (1) Selling and administrative (2) Total fixed costs Income (loss) from operations

III

Total

$250,000

$500,000

$450,000

$1,200,000

140,000

240,000

187,500

567,500

30,000

90,000

170,000 80,000

270,000 230,000

217,500 232,500

657,500 542,500

63,200

65,700

192,100

49,000

34,000

24,000

107,000

112,200

97,200

89,700

299,100

$(32,200) $132,800

$142,800

$ 243,400

(1) Division’s fixed cost of goods sold plus 1/3 of Division II’s unavoidable fixed cost of goods sold [$192,000 × (100% – 90%) × 50% = $9,600]. Each division’s share is $3,200. (2)

Division’s fixed selling and administrative expense plus 1/3 of Division II’s unavoidable fixed selling and administrative expenses [$60,000 × (100% – 60%) × 50% = $12,000]. Each division’s share is $4,000.

(d) Income from operations with Division II of $213,000 (given) plus incremental income of $30,400 from eliminating Division II = $243,400 income from operations without Division II. ($213,000 + $30,400 = $243,400) (Inc. from oper. with Div. II + Incremental inc. from eliminating Div. II = Combined inc. from Div. I, III & IV) LO6 BT: AN Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

14-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CD 14

CURRENT DESIGNS

Situation #1 (a) Current Designs should accept the special order based on the following calculations:

Revenues Costs Net Income

Reject Order $0 0 $0

Accept Order $25,000* (19,000)** $ 6,000

Net Income Increase (Decrease) $25,000 (19,000) $ 6,000

*(100 × $250) **(($80 + $60 + $20) × 100) + ($3,000) [(100 × $250) – ((($80 + $60 + $20) × 100) + ($1,000 + $2,000)) = $6,000] [Accept order rev. – Accept order costs = Incr. in net inc. if accept order]

(b) If Current Designs is currently operating at full capacity, it would have to weigh its options. If it displaced production of regular kayaks in order to fill this order, it would have to consider the opportunity costs associated with this decision. The opportunity cost, when operating at full capacity, would be the lost contribution margin from regular sales given up in order to fulfill the special order. Alternatively, rather than reject the special order, it might consider temporarily expanding the factory’s capacity by adding an additional production shift to handle the special order. If this option were considered, it would have to identify all additional incremental costs (for example, overtime pay) that would be incurred.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-35

CD 14 (Continued) Situation #2 (a) Current Designs should not replace the Rotomold oven based on the following calculations:

Variable manufacturing costs New oven cost Proceeds from scrapping old oven Total

Retain Oven $110,500* 0 0 $110,500

Replace Oven $ 97,500** 250,000 (10,000) $337,500

Net Income Increase (Decrease) $ 13,000 (250,000) 10,000 ($ 227,000)

*(17,000 therms/year × $0.65/therm × 10 years) **(15,000 therms/year × $0.65/therm × 10 years) [(Retain: 17,000 × $0.65 × 10 = $110,500); (Replace: (15,000 × $0.65 × 10) + $250,000 - $10,000 = $337,500); ($110,500 - $337,500 = ($227,000))] [(Retain: No. therms/yr. × Cost/therm × No. of yrs. = Tot. cost); (Replace: (No. therms/yr. × Cost/therm × No. of yrs.) + New oven cost – SV of old oven = Tot. cost); (Retain tot. cost – Replace tot. cost = Decr. in net inc. if replace)]

(b) Even with the cost of natural gas increasing at a faster than expected rate, Current Designs still should not replace the Rotomold oven as the rate increase does not cover the cost of the new oven based on the following calculations:

Variable manufacturing costs New oven cost Proceeds from scrapping old oven Total

Retain Oven $144,500* 0 0 $144,500

Replace Oven $127,500** 250,000 (10,000) $367,500

Net Income Increase (Decrease) $ 17,000 (250,000) 10,000 ($ 223,000)

*(17,000 therms/year × $0.85/therm × 10 years) **(15,000 therms/year × $0.85/therm × 10 years)

14-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CD 14 (Continued) Situation #3 (a) Current Designs should make the seats based on the following calculations:

Direct materials Direct labor Variable manufacturing costs Fixed manufacturing costs Purchase price ($50 × 3,000) Total annual cost

Make $ 60,000 45,000 36,000 20,000 0 $161,000

0 0 0

Net Income Increase (Decrease) $ 60,000 45,000 36,000

15,000 150,000 $165,000

5,000 (150,000) ($ 4,000)

Buy $

[(Make: $60,000 + $45,000 + $36,000 + $20,000 = $161,000); (Buy: $15,000 + $150,000 = $165,000); ($161,000 – $165,000 = ($4,000))] [(Make: DM + DL + Var. mfg. costs + Fix. mfg. costs = Tot. ann. cost); (Buy: Fix. mfg. costs + Purch. price = Tot. ann. cost); (Make tot. cost – Buy tot. cost = Decr. in net inc. if buy)]

(b) When the opportunity cost of $20,000 is considered, Current Designs should buy the seats based on the following calculations:

Total annual cost Opportunity cost Total cost

Make $161,000 20,000 $181,000

Buy $165,000 0 $165,000

Net Income Increase (Decrease) ($ 4,000) 20,000 $16,000

LO2, 3, 5 BT: AN Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-37

WC 14

WATERWAYS CORPORATION

Part 1 (a) Even though the unit contribution margin would be cut to $0.20 ($2.60 – $2.40) on the additional units, Waterways would increase its profits by $3,000 to $59,000 (compared to $56,000). It can handle the special order, but only by adding a shift. Profit with no special order 35,000 × $1.60

Unit profit $1.60 $56,000 a year

Added profit with Canadian Co. 15,000 × $0.20

Unit profit $0.20 $3,000

Revenues Costs Net income

Reject Order $0 0 $0

Accept Order $39,000 36,000** $ 3,000

Net Income Increase (Decrease) $39,000* (36,000) $ 3,000

*15,000 × $2.60 **15,000 × ($2.30 + $0.30 – $0.20) Incremental analysis indicates that Waterways should accept the special order because net income increases by $3,000. (b) The unit contribution margin would be $0.80 and would increase profits by $1,600. This special order would not bring on a need for an added shift and should, therefore, be accepted. Added profit with irrigation co. Unit profit $0.80 2,000 × $0.80 $1,600

Revenues Costs Net income

Reject Order $0 0 $0

Accept Order $6,200* 4,600** $1,600

Net Income Increase (Decrease) $6,200 (4,600) $1,600

*2,000 × $3.10 **2,000 × $2.30 14-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

WC 14 (Continued) Incremental analysis indicates that Waterways should accept the special order because net income increases by $1,600. (c) Accepting both special orders would increase net income by $4,600. Currently, Waterways is earning a contribution margin of $56,000 (35,000 units × $1.60) on the connectors. If it accepts both special orders, contribution margin would increase by $4,600 or 8.2%. Acceptance would depend on management’s opinion regarding the added shift. Part 2 (a) The cost to make the units is $460,000 ($1.00 × 460,000 units). The cost to purchase the units is $377,200 ($0.82 × 460,000). However, the fixed manufacturing cost that cannot be eliminated by buying the units amounts to $92,000 ($0.20 × 460,000). The total cost of purchasing exceeds the total cost of making by $9,200. The company should continue to make the fitting. Variable and fixed manufacturing costs Fixed manufacturing cost not eliminated Total annual cost

Variable manufacturing costs ($1.00 – $0.20) Fixed manufacturing costs ($0.20) Purchase price ($0.82) Total cost

Make

Buy

Income Change

$460,000

$377,200

$82,800

$ 92,000

(92,000) ($9,200) Net Income Increase (Decrease)

Make Part

Buy Part

$368,000* 92,000**

0 92,000

$ 368,000 0

0 $460,000

377,200*** $469,200

(377,200) $ (9,200)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-39

WC 14 (Continued) (b) (1) The opportunity cost is $1,380. Cost of buying timer Cost of making timer Opportunity cost

$ 6,330 (4,950) $ 1,380

(500 × $12.66) (500 × $9.90)

(2) If Waterways adds that amount to the cost of making the small fitting, it still does not bring the cost up to the total cost of buying the unit. Therefore, the company would still be better off to make the small fittings and buy the timing units.

Variable costs ($1.00 – $0.20) Fixed costs ($0.20) Purchase price ($0.82) Total annual cost Opportunity cost Total cost

Make Part $368,000 92,000 0 $460,000 1,380 $461,380

Buy Part $ 0 92,000 377,200 $469,200 0 $469,200

Net Income Increase (Decrease) $ 368,000 0 (377,200) $ (9,200) 1,380 $ (7,820)

Part 3 Replacing the machine will result in a net loss of $3,000. Waterways should keep the old machine for the 2 years remaining.

Revenues Production costs New machine cost Total

Retain Machine $221,000* 169,000** 0 $ 52,000

Replace Machine $442,000*** 338,000**** 55,000 $ 49,000

Net Income Increase (Decrease) $ 221,000 (169,000) (55,000) $ (3,000)

*$8.50 × 50 units per day × 260 days × 2 years **$6.50 × 50 units per day × 260 days × 2 years ***$8.50 × 100 units per day × 260 days × 2 years ****$6.50 × 100 units per day × 260 days × 2 years

14-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

WC 14 (Continued)

Profits from machine for 2 years Cost of new machine Total

Retain Machine $52,000* 0 $52,000

Replace Machine $104,000 (55,000) $ 49,000

Income Change $ 52,000 (55,000) $ (3,000)

*($8.50 – $6.50) × 50 units per day × 260 days × 2 years LO2, 3, 5 BT: AN Difficulty: Moderate TOT: 90 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

14-41

CT 14.1

DECISION-MAKING ACROSS THE ORGANIZATION

Sales Costs and expenses Cost of goods sold Selling expenses Administrative expenses Purchase price Total costs and expenses Net income (1) (2) (3) (4) (5)

Retain Purchase Old Machine New Machine $6,000,000 (1) $6,600,000 (2)

Net Income Increase (Decrease) ($ 600,000

4,500,000 (3) 900,000 500,000 — 5,900,000 $ 100,000

( (120,000) ( (90,000) ( (65,000) ( (150,000) ( (425,000) ($ 175,000

4,620,000 (4) 990,000 565,000 150,000 (5) 6,325,000 $ 275,000

12,000 ×$100 × 5 years = $6,000,000. $6,000,000 × 110% = $6,600,000. $6,000,000 × (100% – 25%) = $4,500,000. $6,600,000 × (100% – 30%) = $4,620,000. $140,000 + $4,000 + $6,000 = $150,000.

The new machine should be purchased. The incremental analysis shows that net income is expected to increase from $100,000 to $275,000 over the five years with the new machine. LO5 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [Net inc. effect: $600,000 – ($120,000 + $90,000 + $65,000 + $150,000) = $175,000] [Net inc. effect: Sales incr. – (CGS incr. + Sell. exp. incr. + Admin. exp. incr. + Purch. price) = Net inc. incr.]

14-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 14.2

MANAGERIAL ANALYSIS

(a)

Sales Revenue Variable Manufacturing Cost: Circuit Board Plastic Case Alarms (4 @ $0.15 each) Labor Overhead Purchase Cost Fixed Manufacturing Cost Total Manufacturing Cost Profit per Unit Total Profit

Make $ 14.50

Buy— TransTech $ 14.50

Buy— Omega $ 14.50

2.00 0.80 0.60 3.00 0.50 0 0 6.90 $ 7.60 $38,000

0 0 0 0 0 10.00 0.20* 10.20 $ 4.30 $21,500

0 0 0 0 0 5.00 0.20 5.20 $ 9.30 $46,500

*The $1,000 cost that will continue to be incurred, even if the product is not manufactured, divided by the 5,000 units. The company is expected to generate the most profit if the clocks are purchased from Omega Company. The company will make $8,500 less if the clocks are manufactured by MiniTek. The company will make $25,000 less if the clocks are purchased from Trans-Tech compared to purchasing from Omega. [(Make: $14.50 – ($2.00 + $0.80 + $0.60 + $3.00 + $0.50) = $7.60); (Buy Trans-Tech: $14.50 – ($10.00 + ($1,000 ÷ 5,000)) = $4.30); (Buy Omega: $14.50 – ($5.00 + $0.20) = $9.30)] [(Make: USP – (Cir. Bd./unit + Plas. Case/unit + Alarms/unit + Labor/unit + OH/unit) = Profit/unit); (Buy TransTech: USP – (Purch. cost + (FOH ÷ No. units)) = Profit/unit); (Buy Omega: USP – (Purch. price + FOH) = Profit/unit)]

(b) There are several important nonfinancial factors described in the case. Other factors might be identified as well. The factors described are: The company is having serious difficulty manufacturing the clocks. Therefore, it would probably be willing to have someone else manufacture the clocks, even if it cost more to do so. The most promising company appears to be Omega; however, there is a serious question about Omega’s ability to remain in business. However, the company could purchase just this one order from Omega, and then continue to search for another manufacturer, or stop manufacturing the clocks. Trans-Tech’s stringent requirements for preferred customer status, in the form of large sales requirements, appear to limit the possibilities Copyright © 2023 John Wiley & Sons, Inc.

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14-43

CT 14.2 (Continued) for MiniTek to use it as a supplier. However, if MiniTek does desire to continue to offer the clocks because of their popularity, then perhaps Trans-Tech could be used in the future. (c) Many answers are possible, depending upon each student’s assessment of the seriousness of the issues mentioned in (b). One answer would be: The company should use Omega to manufacture the BigMart order. After that, the company should not offer the clocks any longer. Especially since the clocks are no longer very profitable, it does not seem like a good idea to keep spending money to modify the process. LO3 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

14-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 14.3

REAL-WORLD FOCUS

(a) Before building the special-order new ceiling fans, company management must consider the effect of the new lines on current production capacity, existing and available channels of distribution, the effect on manufacturing efficiency, the effect on sales of current lines of product, and the supply of materials and labor. (b) Incremental analysis would provide a financial comparison of income with the special-order ceiling fans to income without the special orders. LO2 BT: E Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

14-45

CT 14.4

COMMUNICATION ACTIVITY

From:

Hank’s email address

From:

Preston’s email address

Subject: Relevant Costs When Purchasing New Machinery Hi Preston: I have spent considerable time thinking about the dilemma created by the new PDD1130 machine. Clearly, it is far superior to our existing machine. There is no question that it would save us tremendous amounts of money. I hope I am not overstepping my bounds here, but I think we need to prepare an incremental analysis to reevaluate this decision. The key to incremental analysis is identifying relevant costs. Relevant costs are those costs that vary depending on the course of action taken. In our situation, a relevant cost would be the savings that we would experience were we to purchase the new machine. The book value of the existing machine is not a relevant cost since it would not be changed by purchasing or not purchasing the new machine. Costs incurred in the past that do not change are referred to as sunk costs. Sunk costs are irrelevant to incremental analysis. I would really like to lay out an analysis of our options to decide the proper course of action. I am concerned that by using the old machine for a couple of years the profitability of the factory could be impacted negatively. Hank LO5 BT: C Difficulty: Moderate TOT: 12 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

14-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 14.5

ETHICS CASE

(a) Many factors need to be considered when determining whether to close a division. The loss of jobs can have a devastating impact on a community and on the morale of remaining employees. From a financial perspective, closing a division that is reporting losses will not necessarily increase the reported net income of the company. The reason: if fixed costs that have been allocated to a division that is closed are reallocated to the remaining divisions, the company’s net income might actually decrease. This sounds like it would most likely be the case at Peters. (b) It is not unusual to reevaluate fixed cost allocations periodically. However, the allocation should be based on the underlying economics of the situation rather than the motives of individuals. (c) Blake should explain to the board of directors that the change in income is due to a reallocation and that closing the plumbing division is not advisable. In this case, being honest is not only the ethical thing to do, but it will also maximize the company’s net income. LO6 BT: E Difficulty: Easy TOT: 10 min. AACSB: Ethics, Analytic AICPA FC: Measurement AICPA PC: Professional Demeanor IMA: Decision Analysis, Ethical Conduct

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-47

CT 14.6

ALL ABOUT YOU

(a) Chronic homelessness is defined as being on the streets for a year or more. (b) Homelessness costs cities money because the chronic homeless have frequent jail time, shelter costs, emergency room visits and hospital stays. Some costs per city per homeless person are: New York $40,000; Dallas $50,000; San Diego $150,000. (c) The first step is to try to identify the size of the problem by doing street counts. From this count, benchmarks can be set, enabling a reward system for meeting goals. Next is to identify what the homeless people want. What do they think they need to help them address their problem? They typically want adequate housing with some privacy. (d) It has been estimated that in New York this approach costs about $22,000 per year. New York has documented an 88% success rate (defined as not returning to the streets for five years). (e) In terms of incremental analysis, two alternatives are to either continue with the current situation, with the costs presented in part (b) or to implement the approach outlined in part (d). From a purely financial perspective the approach in (d) appears to have significant merit. Also (d) does not even take into account the intangible benefits of improving the quality of life for this segment of the population. LO N/A BT: E Difficulty: Moderate TOT: 20 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication IMA: Decision Analysis

14-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 14.7

CONSIDERING YOUR COSTS AND BENEFITS

Discussion guide: This is a very difficult decision. All of the evidence suggests that your short-term and long-term prospects will be far greater with some form of post–high-school degree. Because of this, we feel strongly that you should make every effort to continue your education. Many of the discussions provided in this text present ideas on how to get control of your individual financial situation. We would encourage you to use these tools to identify ways to reduce your financial burden in order to continue your education. We also want to repeat that even taking only one course a semester is better than dropping out. Your instructors and advisors frequently provide advice to students who are faced with the decision about whether to continue with their education. If you are in this situation, we would encourage you to seek their advice since the implications of this decision can be long-lasting. LO N/A BT: S Difficulty: Moderate TOT: 30 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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14-49

CHAPTER 15 Budgetary Planning Learning Objectives 1. 2. 3. 4. 5.

State the essentials of effective budgeting and the components of the master budget. Prepare budgets for sales, production, and direct materials. Prepare budgets for direct labor, manufacturing overhead, and selling and administrative expenses, and a budgeted income statement. Prepare a cash budget and a budgeted balance sheet. Apply budgeting principles to nonmanufacturing companies.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

15-1

ANSWERS TO QUESTIONS 1.

(a) A budget is a formal written statement of management’s plans for a specified future time period, expressed in financial terms. (b) A budget aids management in planning because it represents the primary method of communicating agreed-upon objectives throughout the organization. Once adopted, a budget becomes an important basis for evaluating performance.

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement, IMA: Budget Preparation

The primary benefits of budgeting are: (1) It requires all levels of management to plan ahead and to formalize goals on a recurring basis. (2) It provides definite objectives for evaluating performance at each level of responsibility. (3) It creates an early warning system for potential problems, so that management can make changes before things get out of hand. (4) It facilitates the coordination of activities within the business by correlating the goals of each segment with overall company objectives. (5) It results in greater management awareness of the entity’s overall operations and the impact on operations of external factors such as economic trends. (6) It motivates personnel throughout the organization to meet planned objectives.

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

The essentials of effective budgeting are: (1) a sound organizational structure, (2) research and analysis, and (3) acceptance by all levels of management.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

(a) False. Accounting information makes major contributions to the budgeting process. Accounting provides the starting point of budgeting by providing historical data on revenues, costs, and expenses. An accountant becomes the translator of the budget and communicates the budget to all areas of responsibility. Accountants also prepare periodic budget reports that compare actual results with planned objectives and provide a basis for evaluating performance. (b) The budget itself, and the administration of the budget, are the responsibility of management.

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

The budget period should be long enough to provide an attainable goal under normal business conditions. The budget period should minimize the impact of seasonal and cyclical business fluctuations, but it should not be so long that reliable estimates are impossible. The most common budget period is one year.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

Not true. Long-range planning usually encompasses a period of at least five years. It involves the selection of strategies to achieve long-term goals and the development of policies and plans to implement the strategies. In addition, long-range planning reports contain considerably less detail than budget reports.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

15-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 15 (Continued) 7.

Participative budgeting involves the use of a “bottom-to-top” approach, which requires input from lower-level management during the budgeting process so as to involve employees from various levels and areas within the company. The potential benefits of this approach are lower-level managers have more detailed knowledge of the specifics of their job, and thus should be able to provide better budgetary estimates. In addition, by involving lower-level managers in the process, it is more likely that they will perceive the budget as being fair and reasonable. One disadvantage of participative budgeting is that it takes more time, and thus costs more. Another disadvantage of participative budgeting is that it may enable managers to game the system through such practices as budgetary slack.

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

Budgetary slack is the amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals. Managers may have an incentive to create budgetary slack in order to increase the likelihood of receiving their bonuses, or decrease the likelihood of losing their jobs.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

A master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period. The master budget is developed within the framework of a sales forecast.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

10.

The sales budget is the starting point in preparing the master budget. An inaccurate sales budget may adversely affect net income. An overly optimistic sales budget may result in excessive inventories and a very conservative sales budget may lead to inventory shortages.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA AC: Measurement IMA: Budget Preparation

11.

The statement is false. The production budget only shows the units that must be produced to meet anticipated sales and ending inventory requirements.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

12.

The required units of production are 155,000 (160,000 + 15,000 = 175,000 – 20,000 = 155,000).

LO2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation (160,000 + 15,000 – 20,000 = 155,000) (Bud. sales + Desired end. inv. – Beg. inv. = Req. units of production)

13.

The desired ending direct materials units are 21,000 (64,000 + 9,000 = 73,000 – 52,000 = 21,000).

LO2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation (64,000 + 9,000 – 52,000 = 21,000) (Req. purch. + Beg. inv. – Req. for production = Desired end. inv.)

14.

Total budgeted direct labor cost is $960,000 (80,000 × 45/60 × $16 = $960,000).

LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation (80,000 × .75 × $16 = $960,000) (Fin. units to be produced × DLH/unit × DL rate/hr. = Tot. bud. DL cost)

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

15-3

Questions Chapter 15 (Continued) 15.

(a) Manufacturing overhead rate based on direct labor cost is 48% [$198,000 + $162,000 = $360,000; $360,000 ÷ (150,000 × 1/3 hr. × $15/hr.) = 48%].

[($198,000 + $162,000) ÷ (150,000 × 1/3hr. × $15/hr.) = 48%] [(Tot. VOH costs + Tot. FOH casts) ÷ (Units to be produced × DLH/unit × DL rate/hr.) = Predet. OH rate]

(b) Manufacturing overhead rate per direct labor hour is $7.20 [$360,000 ÷ (150,000 × 1/3hr.)]. LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

16.

The first quarter budgeted selling and administrative expenses are $74,000 [(12% × $200,000) + $50,000]. The second quarter total is $78,800 [(12% × $240,000) + $50,000].

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [1st Qtr.: (12% × $200,000) + $50,000 = $74,000] [1st Qtr.:(Var. S&A % of sales × Bud. sales) + Fix. S&A = Tot. bud. S&A exp.]

17.

The budgeted cost per unit of product is $46 [DM$10 + DL$20 + MOH$16 ($20 × 80%)]. Gross profit per unit is $19 ($65 – $46). Total budgeted gross profit is $475,000 (25,000 x $19).

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [($10 + $20 + ($20 × 80%) = $46); ($65 - $46 = $19); (25,000 × $19 = $475,000)] [(DM/unit + DL/unit + (DL/unit × Mfg. OH as % of DL/unit) = Bud. cost /unit); (USP – Unit cost = GP/ unit); (Units sold × GP/unit = Tot. bud. GP)]

18.

The supporting schedules are the budgets for sales, direct materials, direct labor, and manufacturing overhead.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

19.

The three sections of a cash budget are: (1) cash receipts, (2) cash disbursements, and (3) financing. The cash budget also shows the beginning and ending cash balances.

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

20.

Cash collections from January sales are: January—$600,000 × 40% = $240,000. February—$600,000 × 50% = $300,000. March—$600,000 × 10% = $60,000.

LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

21.

The equation is: Budgeted cost of goods sold plus desired ending merchandise inventory minus beginning merchandise inventory equals required merchandise purchases.

LO5 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

22.

In a service company, expected revenues can be obtained from expected output or expected input. The former is based on anticipated billings of clients for services provided. The latter is based on expected billable time of the professional staff.

LO5 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

15-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 15.1 Sales Budget

Production Budget

Direct Materials Budget

Direct Labor Budget

Manufacturing Overhead Budget

Operating Budgets

Budgeted Balance Sheet

Financial Budgets

Selling and Administrative Expense Budget

Budgeted Income Statement

Capital Expenditure Budget

Cash Budget

LO1 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

15-5

BRIEF EXERCISE 15.2 PAIGE COMPANY Sales Budget For the Year Ending December 31, 2027 Quarter Expected unit sales Unit selling price Total sales

Year

10,000

14,000

15,000

18,000

57,000

× $70 $700,000

× $70 $980,000

× $70 $1,050,000

× $70 $1,260,000

× $70 $3,990,000

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

BRIEF EXERCISE 15.3 PAIGE COMPANY Production Budget For the Six Months Ending June 30, 2027 Quarter Expected unit sales Add: Desired ending finished goods Total required units Less: Beginning finished goods inventory Required production units a

14,000 × 0.25

10,000 × 0.25

1 2 10,000 14,000 3,500 a 3,750 c 13,500 17,750 2,500 b 3,500 11,000 14,250

Six Months

25,250

15,000 × 0.25

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(Qtr. 1: 10,000 + (14,000 × 0.25) – (10,000 × 0.25) = 11,000); (Qtr. 2: 14,000 + (15,000 × 0.25) – 3,500 = 14,250)] [(Qtr. 1: Exp. unit sales + (Qtr. 2 exp. unit sales × Desired % on hand) – (Qtr. 1 exp. unit sales × Desired % on hand) = Req. production units); (Qtr. 2: Exp. unit sales + (Qtr. 3 exp. unit sales × Desired % on hand) – Qtr. 1 desired end. inv. = Req. production units)]

15-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 15.4 PERINE COMPANY Direct Materials Budget For the Month Ending January 31, 2027 Units to be produced ....................................................... Direct materials pounds per unit..................................... Total pounds required for production ............................ Add: Desired ending inventory pounds (5,000 × 2 × 25%) Total materials required ................................................... Less: Beginning materials inventory (4,000 × 2 × 25%) ...... Direct materials units to be purchased........................... Cost per pound ................................................................. Total cost of direct materials purchases ........................

4,000 × 2 8,000 2,500 10,500 2,000 8,500 × $6 $51,000

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(4,000 × 2) + (5,000 × 2 × 25%) – (4,000 × 2 × 25%) = 8,500] [(Jan. units to be produced × DM/unit) + (Feb. units to be produced × DM/unit × Desired end. inv. %) - (Jan. units to be produced × DM/unit × Desired end. inv. %) = DM purch.]

BRIEF EXERCISE 15.5 GUNDY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2027 Quarter Units to be produced Direct labor time (hours) per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost

1 5,000 × 1.6 8,000 × $15 $120,000

2 7,000 × 1.6 11,200 × $15 $168,000

Six Months

$288,000

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

15-7

BRIEF EXERCISE 15.6 ROCHE INC. Manufacturing Overhead Budget For the Year Ending December 31, 2027 Quarter 1 Variable costs Fixed costs Total manufacturing overhead

$20,000 $25,000 $30,000 40,000 40,000 40,000 $60,000 $65,000 $70,000

Year

$35,000 40,000 $75,000

$110,000 160,000 $270,000

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

BRIEF EXERCISE 15.7 ELBERT COMPANY Selling and Administrative Expense Budget For the Year Ending December 31, 2027 1 Variable expenses $24,000 Fixed expenses 40,000 Total selling and administrative expenses $64,000

Quarter 2 3

Year

$28,000 $32,000 $36,000 $120,000 40,000 40,000 40,000 160,000 $68,000 $72,000 $76,000 $280,000

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

BRIEF EXERCISE 15.8 NORTH COMPANY Budgeted Income Statement For the Year Ending December 31, 2027 Sales .................................................................................. Cost of goods sold (50,000 × $25) ................................... Gross profit ....................................................................... Selling and administrative expenses .............................. Income from operations ................................................... Interest expense ............................................................... Income before income taxes ........................................... Income tax expense ......................................................... Net income ........................................................................

$2,250,000 1,250,000 1,000,000 300,000 700,000 10,000 690,000 200,000 $ 490,000

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

15-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 15.9

Credit Sales January, $220,000 February, $260,000 March, $300,000

Collections from Customers January February March $165,000 $ 55,000 195,000 $ 65,000 225,000 $165,000 $250,000 $290,000

LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(Jan.: $220,000 × 75% = $165,000); (Feb.: ($220,000 × 25%) + ($260,000 × 75%) = $250,000); (Mar.: ($260,000 × 25%) + ($300,000 × 75%) = $290,000)] [(Jan.: Jan. credit sales × % collect. in Jan. = Cash collect.); (Feb.: (Jan. credit sales × % collect. in Feb.) + (Feb. credit sales × % collect. in Feb.) = Cash collect.); (Mar.: (Feb. credit sales × % collect. in Mar.) + (Mar. credit sales × % collect. in Mar.) = Cash collect.)]

BRIEF EXERCISE 15.10 Budgeted cost of goods sold ($400,000 × 65%) ........................ Add: Desired ending inventory ($480,000 × 65% × 20%) ........ Total inventory required ............................................................. Less: Beginning inventory ($400,000 × 65% × 20%) ................ Required merchandise purchases for April ..............................

$260,000 62,400 322,400 52,000 $270,400

LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [($400,000 × 65%) + ($480,000 × 65% × 20%) – ($400,000 × 65% × 20%) = $270,400] [(Apr. sales × CGS %) + (May sales × CGS % × Desired end. inv. %) – (Apr. sales × CGS % × Desired end. inv. %) = Req. merch. purch. for Apr.]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

15-9

SOLUTIONS FOR DO IT! EXERCISES DO IT! 15.1 1. 2. 3.

Operating budgets Master budget Participative budgeting

4. 5. 6.

Financial budgets Sales forecast Long-range plans

LO1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

DO IT! 15.2 PARGO COMPANY Sales Budget For the Year Ending December 31, 2027 Quarter 1 Expected unit sales Unit selling price Total sales a 1,000,000 × 20%

Year

200,000a 250,000b 250,000b 300,000c 1,000,000 × $40 × $40 × $40 × $45 — $8,000,000 $10,000,000 $10,000,000 $13,500,000 $41,500,000

b 1,000,000 × 25% c 1,000,000 × 30%

PARGO COMPANY Production Budget For the Year Ending December 31, 2027 Quarter 1 2 Expected unit sales 200,000 250,000 Add: Desired ending finished goods units 62,500 62,500 Total required units 262,500 312,500 Less: Beginning finished goods units 50,000** 62,500 Required production units 212,500 250,000

3 250,000

4 300,000

75,000 325,000

60,000* 360,000

62,500 262,500

75,000 285,000

Year

1,010,000

*Estimated first-quarter 2028 sales volume 200,000 + (200,000 × 20%) = 240,000: 240,000 × 25%. **25% of estimated first-quarter 2027 sales units (200,000 × 25%). [(Qtr. 1: (1,000,000 × 20%) + (250,000 × 25%) – (200,000 × 25%) = 212,500); (Qtr. 4: (1,000,000 × 30%) + (200,000 × 120% × 25%) – (300,000 × 25%) = 285,000)] [(Qtr. 1: Exp. unit sales + (Qtr. 2 exp. unit sales × desired end. inv. %) – (Qtr. 1 exp. unit sales × desired end. inv. %) = Req. production units); (Qtr. 4: Exp. unit sales + ((Qtr. 1 exp. unit sales × Exp. % incr.) × Desired end. inv. %) – (Qtr. 4 exp. unit sales × Desired end. inv. %) = Req. production units)]

15-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

DO IT! 15.2 (Continued) PARGO COMPANY Direct Materials Budget For the Year Ending December 31, 2027 Quarter 1 212,500 × 2

2 250,000 × 2

3 262,500 × 2

4 285,000 × 2

Year

Units to be produced Direct materials per unit Total pounds needed for production 425,000 500,000 525,000 570,000 Add: Desired ending direct materials (pounds) 50,000 52,500 57,000 *45,000 Total materials required 475,000 552,500 582,000 615,000 Less: Beginning direct materials (pounds) **42,500 50,000 52,500 57,000 Direct materials purchases 432,500 502,500 529,500 558,000 Cost per pound × $12 × $12 × $12 × $12 Total cost of direct materials purchases $5,190,000 $6,030,000 $6,354,000 $6,696,000 $24,270,000 *Estimated first-quarter 2028 production requirements 450,000 × 10% = 45,000 **10% of estimated first-quarter pounds needed for production (425,000 × 10%). LO2 BT: AP Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(Qtr. 1: (212,500 × 2) + (250,000 × 2 × 10%) – (212,500 × 2 × 10%) = 432,500); (Qtr. 4: (285,000 × 2) + (450,000 ×10%) – (570,000 × 10%) = 558,000)] [(Qtr. 1: (Qtr. 1 fin. units to be produced × No. DM units/fin. unit) + (Qtr. 2 fin. units to be produced × No. DM units/fin. unit × End. inv. %) - (Qtr. 1 fin. units to be produced × No. DM units/fin. unit × End. inv. %) = DM purch.); (Qtr. 4: (Qtr. 4 fin. units to be produced × No. DM units/fin. unit) + (2028 Qtr. 1 DM needed for production × End. inv. %) - (Qtr. 4 fin. units to be produced × No. DM units/fin. unit × End. inv. %) = DM purch.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

15-11

DO IT! 15.3 (a)

Total unit cost: Cost Element Direct materials ............................. Direct labor .................................... Manufacturing overhead............... Total unit cost.......................

(b)

Quantity 2 pounds 0.3 hours 0.3 hours

Unit Cost $12.00 $15.00 $20.00

Total $24.00 4.50 6.00 $34.50

PARGO COMPANY Budgeted Income Statement For the Year Ending December 31, 2027 Sales (1,000,000) units from sales budget, DO IT! 15.2 .. Cost of goods sold (1,000,000 × $34.50/unit) .................. Gross profit ....................................................................... Selling and administrative expenses ............................... Net income.........................................................................

$41,500,000 34,500,000 7,000,000 6,000,000 $ 1,000,000

LO3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [$41,500,000 – (1,000,000 × ($24 + $4.50 + $6)) - $6,000,000 = $1,000,000] [Sales from sales bud. in DO IT! 15.2 – (Units sold × (DM/unit + DL/unit + Mfg. OH/unit)) – S&A exp. = Net inc.]

DO IT! 15.4 BATISTA COMPANY Cash Budget April Beginning cash balance.............................................................. Add: Cash receipts for April ...................................................... Total available cash..................................................................... Less: Cash disbursements in April ........................................... Excess of available cash over cash disbursements ................. Add: Financing ($25,000 – $15,000) .......................................... Ending cash balance ...................................................................

$ 25,000 245,000 270,000 255,000 15,000 10,000 $ 25,000

To maintain the desired minimum cash balance of $25,000, Batista Company must borrow $10,000. LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

15-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

DO IT! 15.5 Zeller COMPANY Merchandise Purchases Budget For the Six Months Ending June 30, 2027 Quarter Budgeted cost of goods sold (Sales × 50%) Add: Desired ending merchandise inventory (10% of next quarter’s cost of goods sold) Total Less: Beginning merchandise inventory (10% this quarter’s cost of goods sold) Required merchandise purchases

$20,000

$24,000

2,400 22,400

2,900 26,900

2,000 $20,400

2,400 $24,500

Six Months

$44,900

LO5 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(Qtr. 1: ($40,000 × 50%) + ($48,000 × 50% × 10%) – ($40,000 × 50% × 10%) = $20,400); (Qtr. 2: ($48,000 × 50%) + ($58,000 × 50% × 10%) – ($48,000 × 50% × 10%) = $24,500)] [(Qtr. 1: (Qtr. 1 sales × CGS %) + (Qtr. 2 sales ×CGS % × End. inv. %) – (Qtr. 1 sales × CGS % × End. inv. %) = Req. merch. purch.); (Qtr. 2 sales × CGS %) + (Qtr. 3 sales × CGS % × End. inv. %) – (Qtr. 2 sales × CGS % × End. inv. %) = Req. merch. purch.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

15-13

SOLUTIONS TO EXERCISES EXERCISE 15.1 From: Student’s email address To:

Dixon’s email address

Subject: Budgeting Mr. Dixon: I am glad Trusler Company is considering preparing a formal budget. There are many benefits derived from budgeting, as I will discuss later in this memo. A budget is a formal written statement of management’s plans for a specified future time period, expressed in financial terms. The master budget generally consists of operating budgets such as the sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, selling and administrative expense budget, and budgeted income statement; and financial budgets such as the capital expenditure budget, cash budget, and budgeted balance sheet. The primary benefits of budgeting are: 1. It requires all levels of management to plan ahead and to formalize goals on a recurring basis. 2. It provides definite objectives for evaluating performance at each level of responsibility. 3. It creates an early warning system for potential problems, so that management can make changes before things get out of hand. 4. It facilitates the coordination of activities within the business by correlating the goals of each segment with overall company objectives. 5. It results in greater management awareness of the entity’s overall operations and the impact on operations of external factors such as economic trends. 6. It motivates personnel throughout the organization to meet planned objectives. In order to maximize these benefits, it is essential that budgeting take place within a sound organizational structure, so authority and responsibility for all phases of operations are clearly defined. Also, the budget should be based on research and analysis that results in realistic goals. Finally, the effectiveness of a budget program is directly related to its acceptance by all levels of management. If you want further explanation of any of these topics, please contact me. 15-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 15.1 (Continued) Student’s name LO1 BT: C Difficulty: Easy TOT: 15 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

15-15

Product

Units

XQ-103 XQ-104 Totals

20,000 12,000 32,000

Quarter 1 Selling Total Price Sales $15 25

Units

$300,000 22,000 300,000 15,000 $600,000 37,000

Quarter 2 Selling Total Price Sales $15 25

$330,000 375,000 $705,000

Units 42,000 27,000 69,000

Six Months Selling Total Price Sales $15 25

LO2 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

$ 630,000 675,000 $1,305,000

EXERCISE 15.2

Kimmel, Survey of Accounting, 3e, Solutions Manual

EDINGTON ELECTRONICS INC. Sales Budget For the Six Months Ending June 30, 2027

(For Instructor Use Only)

22-15

THOME AND CREDE, CPAs Service Revenue Budget For the Year Ending December 31, 2027

Dept. Auditing Tax Consulting Totals

Billable Hours 8,300a 9,700b 6,000c

Quarter 1 Billable Total Rate Rev. $ 80 $184,000 90 270,000 110 165,000 $619,000

Year Billable Rate $ 80 90 110

Billable Hours 1,600 2,200 1,500

Quarter 2 Billable Rate $ 80 90 110

Total Rev. 128,000 198,000 165,000 $491,000

Billable Hours 2,000 2,000 1,500

Quarter 3 Billable Total Rate Rev. $ 80 $160,000 90 180,000 110 165,000 $505,000

Billable Hours 2,400 2,500 1,500

Total Rev. $ 664,000 873,000 660,000 $2,197,000

a2,300 + 1,600 + 2,000 + 2,400 b3,000 + 2,200 + 2,000 + 2,500 c1,500 × 4

(For Instructor Use Only)

LO5 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

Quarter 4 Billable Total Rate Rev. $ 80 $192,000 90 225,000 110 165,000 $582,000

EXERCISE 15.3

Kimmel, Survey of Accounting, 3e, Solutions Manual

Dept. Auditing Tax Consulting Totals

Billable Hours 2,300 3,000 1,500

EXERCISE 15.4 TURNEY COMPANY Production Budget For the Year Ending December 31, 2027 Product HD-240 Quarter Expected unit sales Add: Desired ending finished goods units(1) Total required units Less: Beginning finished goods units Required production units (1) (2)

Year

5,000

7,000

8,000

10,000

2,800 7,800

3,200 10,200

4,000 12,000

2,500 (2) 12,500

2,000 5,800

2,800 7,400

3,200 8,800

4,000 8,500

30,500

40% of next quarter’s sales 40% × (5,000 × 125%)

LO2 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(Qtr. 1: 5,000 + (7,000 × 40%) – (5,000 × 40%) = 5,800); (Qtr. 4: 10,000 + (5,000 × 125% × 40%) – (10,000 × 40%) = 8,500)] [(Qtr. 1: Qtr. 1 exp. unit sales + (Qtr. 2 exp. unit sales × end. inv. %) – (Qtr. 1 exp. unit sales × end. inv. %) = Req. production units); (Qtr. 4: Qtr. 4 exp. unit sales + (2028 Qtr. 1 exp. unit sales × end. inv. %) – (Qtr. 4 exp. unit sales × end. inv. %) = Req. production units)]

22-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 15.5 DEWITT INDUSTRIES Direct Materials Purchases Budget For the Quarter Ending March 31, 2027

Units to be produced Direct materials per unit Total pounds needed for production Add: Desired ending direct materials (pounds)* Total materials required Less: Beginning direct materials (pounds) Direct materials purchases Cost per pound Total cost of direct materials purchases

January

February

March

10,000 × 2 20,000

8,000 × 2 16,000

5,000 × 2 10,000

3,200 23,200

2,000 18,000

1,600 11,600

4,000 19,200 × $3

3,200 14,800 × $3

2,000 9,600 × $3

Quarter

$130,800 $57,600

$44,400

$28,800

*20% of next month’s production needs. LO2 BT: AP Difficulty: Easy TOT: 9 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [March: (5,000 × 2) + (4,000 × 2 × 20%) – (5,000 × 2 × 20%) = 9,600] [March: (March units to be produced × DM/unit) + (Apr. units to be produced × DM/unit × End. inv. %) – (March units to be produced × DM/unit × End. inv. %) = DM purch.]

EXERCISE 15.6 (a)

HARDIN COMPANY Production Budget For the Six Months Ending June 30, 2027 Quarter Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units (1)

25% × 6,000 (2)25% × 7,000

(3)

Six Months

1 5,000

2 6,000

1,500(1) 6,500 1,250(3) 5,250

1,750 (2) 7,750 1,500 6,250 11,500

25% × 5,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-19

EXERCISE 15.6 (Continued) (b)

HARDIN COMPANY Direct Materials Budget For the Six Months Ending June 30, 2027 Quarter Units to be produced Direct materials per unit Total pounds needed for production Add: Desired ending direct materials (pounds) Total materials required Less: Beginning direct materials (pounds) Direct materials purchases Cost per pound Total cost of direct materials Purchases (1) 40% × 18,750 (2) (7,200 × 3) × 40% (3) 40% × 15,750

1 5,250 × 3 15,750

2 6,250 × 3 18,750

7,500 (1) 23,250

8,640 (2) 27,390

Six Months

6,300 (3) 7,500 16,950 19,890 × $4 × $4

0000,000

$67,800

$147,360

$79,560

LO2 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(Qtr. 1: (5,250 × 3) + (6,250 × 3 × 40%) – (5,250 ×3 × 40%) = 16,950); (Qtr. 2: (6,250 × 3) + (7,200 × 3 × 40%) – (6,250 × 3 × 40%) = 19,890)] [(Qtr. 1: (Qtr. 1 units to be produced × DM/unit) + (Qtr. 2 units to be produced × DM/unit × End. inv. %) - (Qtr. 1 units to be produced × DM/unit) × End. inv. % = DM purch.): (Qtr. 2: (Qtr. 2 units to be produced × DM/unit) + (Qtr. 3 units to be produced × DM/unit × End. inv. %) - (Qtr. 2 units to be produced × DM/unit × End. inv. %) = DM purch.)]

22-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 15.7 Finished goods: Estimated May Sales .............................................. Plus: Target ending inventory, May 31.................. Total required finished units ...................................... Less: Beginning inventory, May 1 ........................ Required finished units production .......................... Direct materials per finished unit ............................... Units of direct material required for production ....... Plus: Target ending direct materials inventory ......... Total direct materials required ................................... Less: Beginning DM inventory ............................. Purchases of direct material required ....................... Cost per unit ................................................................ Total cost of direct materials purchases ...................

2,675 2,200 4,875 2,230 2,645 ×

2 5,290 2,500(a) 7,790 2,645(b) 5,145 × $4 $20,580

The May raw material purchases would be $20,580. (a)

2,390 + 2,310 – 2,200 = 2,500; 2,500 × 2 × 50% = 2,500 2,675 + 2,200 – 2,230 = 2,645; 2,645 × 2 × 50% = 2,645

(b)

LO2 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [((2,675 + 2,200 – 2,230) × 2) + ((2,390 + 2,310 – 2,200) × 2 × 50%) – ((2,675 + 2,200 – 2,230) × 2 × 50%) = 5,145] [((Sales + End. inv. – Beg. inv.) × DM/unit) + ((June sales + June end. inv. – May end. inv.) × DM/unit × DM end. inv. %) – ((May sales + May end. inv. – Apr. end. inv.) × DM/unit × DM end. inv. %) = Req. DM purch.]

EXERCISE 15.8 (a)

FUQUA COMPANY Production Budget For the Two Months Ending February 28, 2027 _____________________________________________________________ January February Expected unit sales ........................................... 10,000 12,000 Add: Desired ending finished goods inventory ................................................. 2,400* 2,600*** Total required units............................................ 12,400 14,600 Less: Beginning finished goods inventory ..... 2,000** 2,400 Required production units ................................ 10,400 12,200 *20% × next month’s expected sales or 12,000 x 20% **20% × 10,000 ***20% × 13,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-21

EXERCISE 15.8 (Continued) (b)

FUQUA COMPANY Direct Materials Budget For the Month Ending January 31, 2027 _____________________________________________________________ January Units to be produced ........................................................... 10,400 Direct material pounds per unit .......................................... × 4 Total pounds needed for production ................................. 41,600 Add: desired pounds in ending materials inventory ........ 19,520* Total materials required ...................................................... 61,120 Less: beginning direct materials (pounds) ........................ 16,640** Direct materials purchases ................................................. 44,480 Cost per pound .................................................................... × $2 Total cost of direct materials purchases ........................... $88,960 *(12,200 × 4) × 40%

**(10,400 × 4) × 40%

LO2 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(10,400 ×4) + (12,200 × 4 × 40%) – (10,400 × 4 × 40%) = 44,480] [(Units to be produced × DM/unit) + (Feb. units to be produced × DM/unit × DM end. inv. %) – (Jan. units to be produced × DM/unit ×DM end. inv. %) = DM purch.]

EXERCISE 15.9 RODRIGUEZ, INC. Direct Labor Budget For the Year Ending December 31, 2027 Quarter Units to be produced Direct labor time (hours) per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost

20,000

25,000

35,000

30,000

1.5

Year

1.5

30,000

37,500

52,500

45,000

× $16 $480,000

× $16 $600,000

× $18 $945,000

× $18 $810,000

110,000 .2

$2,835,000

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

22-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 15.10 LOWELL COMPANY Production Budget For the Quarter Ending March 31, 2027 Sales in units Plus: Desired ending inventory Total needs Less: Beginning inventory Required production units

Jan 12,000 19,200(1) 31,200 17,600 13,600

Feb 14,000 17,400(2) 31,400 19,200 12,200

Mar 13,000 15,400(3) 28,400 17,400 11,000

Total 39,000 15,400 54,400 17,600 36,800

(1)

(14,000 × 100%) + (13,000 × 40%) (13,000 × 100%) + (11,000 × 40%) (3) (11,000 × 100%) + (11,000 × 40%) (2)

[(Jan.: 12,000 + ((14,000 × 100%) + (13,000 × 40%)) – 17,600 = 13,600); (Feb: 14,000 + ((13,000 × 100%) + (11,000 × 40%)) – 19,200 = 12,200); (Mar.: 13,000 + ((11,000 × 100%) + (11,000 × 40%)) – 17,400 = 11,000)] [(Jan.: Jan. unit sales + ((Feb. unit sales × End. inv. %) + (Mar. unit sales × End. inv. %)) – Jan. beg. inv. = Req. production units); (Feb.: Feb. unit sales + ((Mar. unit sales × End. inv. %) + (Apr. unit sales × End. inv. %)) – Feb. beg. inv. = Req. production units); (Mar.: Mar. unit sales + ((Apr. unit sales × End. inv. %) + (May unit sales × End. inv. %)) – Mar. beg. inv. = Req. production units)]

LOWELL COMPANY Direct Labor Budget For the Quarter Ending March 31, 2027 Production in units Direct labor hours per unit Total hours needed Direct labor cost per hour Total direct labor

Jan Feb Mar Total 13,600 12,200 11,000 x 2.00 x 2.00 x 1.50 27,200 24,400 16,500 x $16.00 x $16.00 x $16.00 $435,200 $390,400 $264,000 $1,089,600

LO2, 3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-23

EXERCISE 15.11 ATLANTA COMPANY Manufacturing Overhead Budget For the Year Ending December 31, 2027 Quarter Variable costs Indirect materials ($0.80/hour) Indirect labor ($1.20/hour) Maintenance ($0.50/hour) Total variable Fixed costs Supervisory salaries Depreciation Maintenance Total fixed Total manufacturing overhead

Year

$12,000 18,000 7,500 37,500

$ 14,400 21,600 9,000 45,000

$ 16,800 25,200 10,500 52,500

$ 19,200 28,800 12,000 60,000

$ 62,400 93,600 39,000 195,000

41,250 15,000 12,000 68,250 $105,750

41,250 15,000 12,000 68,250 $113,250

41,250 15,000 12,000 68,250 $120,750

41,250 15,000 12,000 68,250 $128,250

165,000 60,000 48,000 273,000 $468,000

15,000

18,000

21,000

24,000

78,000

Direct labor hours* Manufacturing overhead rate per direct labor hour ($468,000 ÷ 78,000)

$6.00

*(Units × 1.5DLH/unit) LO3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [Qtr. 1: (10,000 × 1.5 = 15,000); ((15,000 × $0.80) + (15,000 × $1.20) + (15,000 × $0.50) = $37,500); ($41,250 + $15,000 + $12,000 = $68,250)] [Qtr. 1: (Units produced × DLH/unit = DLHs); ((DLHs × Ind. Mat/hr.) + (DLHs × Ind. Labor/hr.) + (DLHs × Maint./hr.) = Tot. VC); (Super. sal. + Depr. + Maint. = Tot. FC)]

22-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 15.12 KIRKLAND COMPANY Selling and Administrative Expense Budget For the Six Months Ending June 30, 2027 Quarter

Six Months

Budgeted sales in units

1 20,000

2 22,000

Variable expenses (1) Sales commissions Delivery expense Advertising Total variable

$20,000* 8,000 12,000 40,000

$22,000 8,800 13,200 44,000

$ 42,000 16,800 25,200 84,000

12,000 8,000 4,200 1,500 800 500 27,000

24,000 16,000 8,400 3,000 1,600 1,000 54,000

$67,000

$71,000

$138,000

Fixed expenses Sales salaries Office salaries Depreciation Insurance Utilities Repairs expense Total fixed Total selling and administrative expenses

(1) Variable costs per dollar of sales are: Sales commissions (5%), Delivery expense (2%), and Advertising (3%). *(20,000 × $20 × 5%) LO3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [Qtr. 1: ((20,000 × $20 × 5%) + (20,000 × $20 × 2%) + (20,000 × $20 × 3%) = $40,000); ($12,000 + $8,000 + $4,200 + $1,500 + $800 + $500 = $27,000)] [Qtr. 1: ((Units sold × USP × Sales comm. %) + (Units sold × USP × Del. exp. %) + (Units sold × USP × Advert. %) = Tot. VC); (Sales sal. + Off. sal. + Depr. + Ins. + Util. + Repairs exp. = Tot. FC)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-25

EXERCISE 15.13 (a) FULTZ COMPANY Computation of Cost of Goods Sold For the Year Ending December 31, 2027 Cost of one unit of finished goods: Direct materials (1 × $5) ............................................................... Direct labor (3 × $15) .................................................................... Manufacturing overhead (3 × $5) ................................................. Total ......................................................................................

$ 5 45 15 $65

Cost of goods sold = 30,000 units × $65 = $1,950,000. (b) FULTZ COMPANY Budgeted Income Statement For the Year Ending December 31, 2027 Sales (30,000 × $85) ............................................................ Cost of goods sold (see part (a)) ....................................... Gross profit ......................................................................... Selling and administrative expenses ................................ Income from operations ..................................................... Interest expense ................................................................. Income before income taxes .............................................. Income tax expense ($400,000 × 20%)............................... Net income ..........................................................................

$2,550,000 1,950,000 600,000 170,000 430,000 30,000 400,000 80,000 $ 320,000

LO3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(30,000 × $85) – (30,000 × ($5 + $45 + $15)) - $170,000 - $30,000 – ($400,000 × 20%) = $320,000] [(Units sold × USP) – (Units sold × (DM/unit + DL/unit + Mfg. OH/unit)) – Sell. & admin. exp. – Int. exp. – (Inc. before inc. tax. × tax rate) = Net inc.]

22-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 15.14 DANNER COMPANY Cash Budget For the Two Months Ending February 28, 2027

Beginning cash balance ....................................... Add: Receipts Collections from customers .................... Sale of marketable securities .................. Total receipts ............................................ Total available cash .............................................. Less: Disbursements Direct materials ........................................ Direct labor ............................................... Manufacturing overhead* ........................ Selling and administrative expenses ...... Total disbursements ................................ Excess (deficiency) of available cash over cash disbursements .................................................. Financing Add: Borrowings ................................................. Less: Repayments ................................................ Ending cash balance ............................................ *Jan: $21,000 - $1,500 depreciation

January $ 45,000

February $ 27,500

85,000 12,000 97,000 142,000

150,000 0 150,000 177,500

50,000 30,000 19,500 15,000 114,500

75,000 45,000 23,500 20,000 163,500

27,500

14,000

0 0 $ 27,500

6,000 0 $ 20,000

Feb: $25,000 - $1,500 depreciation

LO4 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [Feb.: ($27,500 + $150,000 = $177,500) – ($75,000 + $45,000 + ($25,000 - $1,500) + $20,000 = $163,500); ($177,500 - $163,500 = $14,000); ($14,000 + $6,000 = $20,000)] [Feb.: (Beg. cash bal. + Collect. from cust. = Tot. avail. cash); (DM + DL + (Mfg. OH – Depr.) + Sell. & admin. exp. = Tot. disb.); (Tot. avail. cash – Tot. disb. = Excess of avail. cash over cash disb.); (Excess of avail. cash over cash disb. + Borrow. = End. cash bal.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-27

EXERCISE 15.15 DEITZ CORPORATION Cash Budget For the Quarter Ended March 31, 2027 Beginning cash balance .......................................................... Add: Receipts Collections from customers ....................................... Sale of equipment ....................................................... Total receipts......................................................... Total available cash ................................................................. Less: Disbursements Direct materials ........................................................... Direct labor .................................................................. Manufacturing overhead ............................................. Selling and administrative expenses ......................... Purchase of securities ................................................ Total disbursements ............................................. Excess of available cash over disbursements ...................... Financing Add: Borrowings ($25,000 - $11,000) .................................... Less: Repayments .................................................................. Ending cash balance ...............................................................

$ 30,000 185,000 3,000 188,000 218,000 43,000 70,000 35,000 45,000 14,000 207,000 11,000 14,000 –0– $ 25,000

LO4 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [($30,000 + ($185,000 + $3,000) = $218,000); ($43,000 + $70,000 + $35,000 + $45,000 + $14,000 = $207,000); ($218,000 - $207,000 = $11,000); ($11,000 + $14,000 = $25,000)] [(Beg. cash bal. + (Collect. from cust. + Sale of equip.) = Tot. avail. cash); (DM + DL + Mfg. OH + Sell. & admin. exp. + Purch. of sec. = Tot. disb.); (Tot. avail. cash – Tot. disb. = Excess of avail. cash over disb.); (Excess of avail. cash over disb. + Borrow. = End. cash bal.)]

22-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 15.16 (a)

TRENSHAW COMPANY Cash Budget For the Month Ended July 31, 2027 Beginning cash balance ............................ Add: Cash collections .............................. Total cash available ................................... Less: Cash disbursements Merchandise purchases ......... Operating expenses................ Equipment purchase .............. Total cash disbursements ......................... Excess of available cash over disbursements ................................ Add: Borrowings ($25,000 - $18,000) ....... Ending cash balance .................................

$45,000 90,000 $135,000 $56,200 40,800 20,000 117,000 18,000 7,000 $ 25,000

Cash disbursements of $117,000 plus the desired ending cash balance of $25,000 exceeds the $135,000 total cash available by $7,000. Therefore, Trenshaw Company will have to borrow $7,000. [($45,000 + $90,000 = $135,000); ($56,200 + $40,800 + $20,000 = $117,000); ($135,000 - $117,000 = $18,000); ($18,000 + $7,000 = $25,000)] [(Beg. cash bal. + Cash collect. = Tot. cash avail.); (Merch purch. + Oper. exp. + Equip. purch. = Tot. cash disb.); (Tot. cash avail. – Tot. cash disb. = Excess of avail. cash over disb.); (Excess of avail. cash over disb. + Borrow. = End. cash bal.)]

(b)

An advantage of cash budgeting is that it allows cash shortfalls to be predicted. If the timing of future cash shortfalls is known, arrangements to borrow funds can be made well in advance, which often means that interest rates may be more favorable than if the funds are needed on short notice.

LO4 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-29

EXERCISE 15.17 (a)

NIETO COMPANY Schedule of Expected Collections from Customers - March March cash sales (30% × $250,000) .................................... Collection of March credit sales [(70% × $250,000) × 10%] ................................................. Collection of February credit sales [(70% × $220,000) × 50%] ................................................. Collection of January credit sales [(70% × $200,000) × 36%] ................................................. Total collections ......................................................

March $ 75,000 17,500 77,000 50,400 $219,900

[($250,000 × 30%) + ($250,000 × 70% × 10%) + ($220,000 × 70% × 50%) + ($200,000 × 70% × 36%) = $219,900] [(Mar. sales × Cash %) + (Mar. sales × Credit sales % × Collect. % in mo. of sale) + (Feb. sales × Credit sales % × Collect. % in mo. after sale) + (Jan. sales × Credit sales % × Collect. % in 2nd mo. after sale) = Tot. collect.]

(b)

NIETO COMPANY Schedule of Expected Payments for Direct Materials - March March cash purchases (50% × $38,000) ............................. Payment of March credit purchases [(50% × $38,000) × 40%] ................................................... Payment of February credit purchases [(50% × $36,000) × 60%] ................................................... Total payments ........................................................

March $19,000 7,600 10,800 $37,400

LO4 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

22-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 15.18 (a)

(1) GREEN LANDSCAPING INC. Schedule of Expected Collections From Clients For the Quarter Ending March 31, 2027 January November ($80,000) .... December ($90,000) .... January ($100,000) ...... February ($120,000) .... March ($140,000) ......... Total collections ...

February

$ 8,000 27,000 60,000

______

_______

$95,000

$111,000

March

Quarter $

9,000 30,000 72,000

$ 10,000 36,000 84,000 $130,000

8,000 36,000 100,000 108,000 84,000 $336,000

(2) GREEN LANDSCAPING INC. Schedule of Expected Payments for Landscaping Supplies For the Quarter Ending March 31, 2027 ________________________________________________________ January December ($14,000) .... January ($12,000) ........ February ($15,000) ...... March ($18,000) ........... Total payments .....

$ 5,600 7,200

$12,800

February $ 4,800 9,000 $13,800

March

Quarter

$ 6,000 10,800 $16,800

$ 5,600 12,000 15,000 10,800 $43,400

(b) (1) Accounts receivable at March 31, 2027: ($120,000 × 10%) + ($140,000 × 40%) = $68,000 [($120,000 × 10%) + ($140,000 × 40%) = $68,000] [(Feb serv. rev. × Uncollect. %) + (Mar. serv. rev. × Uncollect. %) = Mar. end. accts. rec. bal.]

(2) Accounts payable at March 31, 2027: ($18,000 × 40%) = $7,200 LO4, 5 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-31

EXERCISE 15.19 PLETCHER DENTAL CLINIC Cash Budget For the Two Quarters Ending June 30, 2027

Beginning cash balance ..................................... Add: Receipts Collections from patients .................... Sale of equipment ................................ Investment interest .............................. Total receipts.................................. Total cash available ............................................ Less: Disbursements Professional salaries ........................... Overhead costs .................................... Selling and administrative costs ........ Equipment purchase ........................... Payment of income taxes .................... Total disbursements ...................... Excess (deficiency) of cash available over cash disbursements ............................... Financing Add: Borrowings ($25,000 - $12,000) .............. Less: Repayments ............................................. Ending cash balance .......................................... $50,000 – $2,000 b $70,000 – $2,000 a

1st Quarter $ 30,000

2nd Quarter $ 25,000

235,000 12,000 0 247,000 277,000

380,000 0 7,000 387,000 412,000

140,000 77,000 48,000a 0 0 265,000

140,000 100,000 68,000b 50,000 4,000 362,000

12,000

50,000

13,000 0 $ 25,000

0 13,200c $ 36,800

$13,000 principal + $200 interest

LO4, 5 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [Qtr. 2: ($25,000 + ($380,000 + $7,000) = $412,000); ($140,000 + $100,000 + ($70,000 - $2,000) + $50,000 + $4,000 = $362,000); ($412,000 - $362,000 = $50,000); ($50,000 – ($13,000 + $200) = $36,800)] [Qtr. 2: (Beg. cash bal. + (Collect. from patients + Invest. int.) = Tot. cash avail.); (Prof. sal. + OH costs + (Sell. & admin. costs – Depr.) + Equip. purch. + Pmt. of inc. tax. = Tot. disb.); (Tot. cash avail. – Tot. disb. = Excess of cash avail. over cash disb.); (Excess of cash avail. over cash disb. – (Loan repmt. + Int. pmt.) = End. cash bal.)]

22-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 15.20 (a)

GRAND STORES Merchandise Purchases Budget For the Month Ending June 30, 2027 Budgeted cost of goods sold ($500,000 × 75%) .................. Add: Desired ending merchandise inventory ($600,000 × 75% × 30%) ..................................................... Total ........................................................................................ Less: Beginning merchandise inventory ($375,000 × 30%) ......................................................... Required merchandise purchases .......................................

$375,000 135,000 510,000 112,500 $397,500

[($500,000 × 75%) + ($600,000 × 75% × 30%) – ($375,000 × 30%) = $397,500] [(June sales × CGS %) + (Jul. sales x CGS % × End. merch. Inv. %) – (June CGS × End. merch. Inv. %) = Req. merch purch.]

(b)

GRAND STORES Budgeted Income Statement (Partial) For the Month Ending June 30, 2027 Sales ...................................................................................... Cost of goods sold (75% × $500,000) .................................. Gross profit ...........................................................................

$500,000 375,000 $125,000

LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

EXERCISE 15.21 EMERIC AND ELLIE’S PAINTING SERVICE Direct Labor Budget For the Month Ending June 30, 2027 Small 10

Home to be painted Direct labor time (hours) per house × 40 Total required direct labor hours 400 Direct labor cost per hour × $18 Total direct labor cost $7,200

Medium 5

Large 2

× 70

× 120

350 × $18 $6,300

240 × $18 $4,320

Total

$17,820

LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-33

SOLUTIONS TO PROBLEMS PROBLEM 15.1

COOK FARM SUPPLY COMPANY Sales Budget For the Six Months Ending June 30, 2027 Quarter Expected unit sales ..................... Unit selling price ......................... Total sales ...................................

1 40,000 × $60 $2,400,000

Six Months 96,000 × $60 $5,760,000

2 56,000 × $60 $3,360,000

COOK FARM SUPPLY COMPANY Production Budget For the Six Months Ending June 30, 2027 Quarter Expected unit sales ..................................... Add: Desired ending finished goods units................................................... Total required units ..................................... Less: Beginning finished goods units ...... Required production units ..........................

22-34

1 40,000

2 56,000

15,000 55,000 8,000 47,000

18,000 74,000 15,000 59,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

Six Months

106,000

(For Instructor Use Only)

PROBLEM 15.1 (Continued) COOK FARM SUPPLY COMPANY Direct Materials Budget—Gumm For the Six Months Ending June 30, 2027 Quarter Units to be produced .................................. Direct materials per unit............................. Total pounds needed for production ........ Add: Desired ending direct materials (pounds) ........................................... Total materials required ............................. Less: Beginning direct materials (pounds) ......................................... Direct materials purchases ........................ Cost per pound ........................................... Total cost of direct materials purchases ................................................

47,000 x4 188,000

59,000 x 4 236,000

10,000 198,000

13,000 249,000

9,000 189,000 x $3.80

10,000 239,000 x $3.80

$718,200

$908,200

Six Months

$1,626,400

[Qtr. 1: ((47,000 x 4) + 10,000 – 9,000) x $3.80 = $718,200] [Qtr. 1: ((Units to be produced × DM/unit) + DM end. inv. – DM beg. inv.) × Cost/DM lb. = Tot. cost of DM purch.]

COOK FARM SUPPLY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2027 Quarter Units to be produced .......................... Direct labor time (hours) per unit* ..... Total required direct labor hours ....... Direct labor cost per hour .................. Total direct labor cost ........................

1 47,000 × 1/4 11,750 × $16 $188,000

2 59,000 × 1/4 14,750 × $16 $236,000

Six Months

$424,000

*15/60 = 1/4

Kimmel, Survey of Accounting, 3e, Solutions Manual

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22-35

PROBLEM 15.1 (Continued) COOK FARM SUPPLY COMPANY Selling and Administrative Expense Budget For the Six Months Ending June 30, 2027 Quarter Budgeted sales in units ...................

1 40,000

2 56,000

Six Months 96,000

Variable (15% × sales dollarsa) ........ Fixed ................................................. Total ..................................................

$360,000 175,000 $535,000

$504,000 175,000 $679,000

$ 864,000 350,000 $1,214,000

40,000 x $60 x 15% = $360,000

56,000 x $60 x 15% = $504,000

COOK FARM SUPPLY COMPANY Budgeted Income Statement For the Six Months Ending June 30, 2027 Sales ............................................................................................. Cost of goods sold (96,000 × $33.20)*........................................ Gross profit .................................................................................. Selling and administrative expenses ......................................... Income from operations .............................................................. Interest expense .......................................................................... Income before income tax .......................................................... Income tax expense (20% × $1,258,800) .................................... Net income ...................................................................................

$5,760,000 3,187,200 2,572,800 1,214,000 1,358,800 100,000 1,258,800 251,760 $1,007,040

*Cost Per Bag Cost Element Direct materials Gumm ......................................... Tarr ............................................. Direct labor..................................... Manufacturing overhead (125% of direct labor cost) ........ Total .......................................

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Quantity

Unit Cost

Total

4 pounds 6 pounds 1/4 hour

$ 3.80 1.50 16.00

$15.20 9.00 4.00

Kimmel, Survey of Accounting, 3e, Solutions Manual

5.00 $33.20

(For Instructor Use Only)

PROBLEM 15.1 (Continued) LO2, 3 BT: AP Difficulty: Easy TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(4 × $3.80) + (6 × $1.50) + (1/4hr. × $16) + (1/4 hr. × $16 × 125%) = $33.20] [(Gumm lbs./unit × Cost/lb.) + (Tarr lbs./unit × Cost/lb.) + (Hrs./unit × Hrly. rate) + (Hrs./unit × Hrly. rate × MOH rate) = Tot. cost/unit]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-37

PROBLEM 15.2

(a)

DELEON INC. Sales Budget For the Year Ending December 31, 2027

Expected unit sales......... Unit selling price ............. Total sales .......................

(b)

JB 50 400,000 × $20 $8,000,000

Total 000,000,0 $13,000,000

DELEON INC. Production Budget For the Year Ending December 31, 2027

Expected unit sales ........................... Add: Desired ending finished goods units ............................. Total required units ........................... Less: Beginning finished goods units ........................................ Required production units ................

22-38

JB 60 200,000 × $25 $5,000,000

JB 50 400,000

JB 60 200,000

30,000 430,000

15,000 215,000

25,000 405,000

10,000 205,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 15.2 (Continued) (c)

DELEON INC. Direct Materials Budget For the Year Ending December 31, 2027

Units to be produced ................... Direct materials per unit.............. Total pounds needed for production ................................ Add: Desired ending direct materials (pounds) ........... Total materials required .............. Less: Beginning direct materials (pounds) ........... Direct materials purchases ......... Cost per pound ............................ Total cost of direct materials purchases ...............................

JB 50

JB 60

405,000 × 2

205,000 × 3

810,000

615,000

30,000 840,000

10,000 625,000

40,000 800,000 × $3

15,000 610,000 × $4

$2,400,000

$2,440,000

Total

$4,840,000

[(JB 50: ((405,000 × 2) + 30,000 – 40,000) × $3 = $2,400,000); (JB 60: ((205,000 × 3) + 10,000 – 15,000) × $4 = $2,440,000)] [(JB 50: ((Units to be produced × DM/unit) + DM end. inv. – DM beg. inv.) × Cost/lb. = Tot. cost of DM purch.); (JB 60: ((Units to be produced × DM/unit) + DM end. inv. – DM beg. inv.) × Cost/lb. = Tot. cost of DM purch.)]

(d)

DELEON INC. Direct Labor Budget For the Year Ending December 31, 2027

Units to be produced ................... Direct labor time (hours) per unit ............................................ Total required direct labor hours ......................................... Direct labor cost per hour ........... Total direct labor cost .................

JB 50

JB 60

Total

405,000

205,000

650,000

× 0.4

× 0.6

—

162,000 × $12 $1,944,000

123,000 × $12 $1,476,000

301,000 X $10 $3,420,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-39

PROBLEM 15.2 (Continued) (e)

DELEON INC. Budgeted Income Statement For the Year Ending December 31, 2027

Sales ................................... Cost of goods sold ............ Gross profit ........................ Operating expenses Selling expenses............ Administrative expenses .................... Total operating expenses ............ Income from operations .... Interest expense ................ Income before income taxes ............................... Income tax expense (20% × $1,850,000) ......... Net income ......................... (1) (2)

JB 50 JB 60 Total $8,000,000 $5,000,000 $13,000,000 (1) 5,200,000 4,000,000 (2) 9,200,000 2,800,000 1,000,000 3,800,000 560,000

360,000

920,000

540,000

340,000

880,000

1,100,000 $1,700,000

700,000 $ 300,000

1,800,000 2,000,000 150,000 1,850,000 370,000 $ 1,480,000

400,000 × $13 200,000 × $20

LO2, 3 BT: AP Difficulty: Easy TOT: 50 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation [(JB 50: $8,000,000 – (400,000 × $13) – ($560,000 + $540,000) = $1,700,000); (JB 60: $5,000,000 – (200,000 × $20) – ($360,000 + $340,000) = $300,000)] [(JB 50: Sales – (Units sold × Unit cost) – (Sell. exp. + Admin. exp.) = Inc. from oper.); (JB 60: Sales – (Units sold × Unit cost) – (Sell. exp. + Admin. exp.) = Inc. from oper.)]

22-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 15.3

(a)

HILL INDUSTRIES Sales Budget For the Year Ending December 31, 2027

Expected unit sales .................................... Unit selling price ......................................... Total sales ...................................................

Plan A Plan B 725,000 (1) 980,000 (2) × $8.40 × $7.50 (3) $6,090,000 $7,350,000

$6,800,000 ÷ $8 = 850,000; 850,000 – 125,000 = 725,000. 850,000 + 130,000 = 980,000. (3) $8.00 – $0.50 (1) (2)

[(Plan A: (($6,800,000 ÷ $8) - 125,000 × $8.40 = $6,090,000); (Plan B: ((850,000 + 130,000) × ($8.00 - $.50)) = $7,350,000)] [(Plan A: ((Tot. sales ÷ USP) - Expected decr. in unit sales) × 2027 USP = Tot. sales); (Plan B: ((2026 sales units + exp. incr. in unit sales) × (2026 USP – USP decr.)) = $7,350,000)]

(b)

HILL INDUSTRIES Production Budget For the Year Ending December 31, 2027

Expected unit sales............................................. Add: Desired ending finished goods units ..... Total required units ............................................. Less: Beginning finished goods units .............. Required production units .................................

Plan A

Plan B

725,000 35,000 760,000 40,000 720,000

980,000 60,000 1,040,000 40,000 1,000,000

Total variable costs Total fixed costs Total costs (a) Total units (b) Unit cost (a) ÷ (b)

Plan A

Plan B

$2,880,000 (720,000 × $4.00) 1,895,000 $4,775,000

$4,000,000 (1,000,000 × $4.00) 1,895,000 $5,895,000

720,000

1,000,000

$6.63

$5.90

Kimmel, Survey of Accounting, 3e, Solutions Manual

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22-41

PROBLEM 15.3 (Continued) The difference in unit cost is due to fixed costs being spread over a larger number of units (280,000 more units) in Plan B. [(Plan A: ((720,000 × ($1.50 + $1.30 + $1.20)) + $1,895,000 = $4,775,000); ($4,775,000 ÷ 720,000 = $6.63)); (Plan B: ((1,000,000 × ($1.50 + $1. 30 + $1.20)) + $1,895,000 = $5,895,000); ($5,895,000 ÷ 1,000,000 = $5.90)] [(Plan A: ((Units to be produced × (DL/unit + DM/unit + VOH/unit)) + FC = Tot. costs); (Tot. costs ÷ Units to be produced = Unit cost)); (Plan B: ((Units to be produced × (DL/unit + DM/unit + VOH/unit)) + FC = Tot. costs); (Tot. costs ÷ Units to be produced = Unit cost)]

(d)

Gross Profit Plan A Sales Cost of goods sold Gross profit

$6,090,000 4,806,750 (725,000 × $6.63) $1,283,250

Plan B $7,350,000 5,782,000 (980,000 × $5.90) $1,568,000

Plan B should be accepted because it produces a higher gross profit than Plan A. LO2 BT: E Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

22-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 15.4

(a) (1)

COLTER COMPANY Schedule of Expected Collections from Customers For the Two Months Ending February 28, 2027 November ($250,000) .............................. December ($320,000) .............................. January ($360,000) .................................. February ($400,000) ................................ Total collections.............................

January $ 50,000 96,000 180,000 .

$326,000

February $ 0 64,000 108,000 200,000 $372,000

[(Jan.: ($250,000 × 20%) + ($320,000 × 30%) + ($360,000 × 50%) = $326,000); (Feb.: ($320,000 × 20%) + ($360,000 × 30%) + ($400,000 × 50%) = $372,000)] [(Jan.: (Nov. sales × 2nd mo. after sale %) + (Dec. sales × 1st mo. after sale %) + (Jan. sales × Mo. of sale %) = Tot. collect.); (Feb.: Dec. sales × 2nd mo. after sale %) + (Jan. sales ×1st mo. after sale %) + (Feb. sales × Mo. of sale %) = Tot. collect.)]

(2)

COLTER COMPANY Schedule of Expected Payments for Direct Materials For the Two Months Ending February 28, 2027 December ($100,000) .............................. January ($120,000) .................................. February ($125,000) ................................ Total payments...............................

January $ 40,000 72,000 .

$112,000

February $ 0 48,000 75,000 $123,000

[(Jan.: ($100,000 × 40%) + ($120,000 × 60%) = $112,000); (Feb.: ($120,000 × 40%) + ($125,000 × 60%) = $123,000)] [(Jan.: (Dec. DM purch. × Mo. after purch. %) + (Jan. DM purch. × Mo. of purch. %) = Tot. pmts.); (Feb.: Jan. DM purch. × Mo. after purch. %) + (Feb. DM purch. × Mo. of purch. %) = Tot. pmts.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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22-43

PROBLEM 15.4 (Continued) (b)

COLTER COMPANY Cash Budget For the Two Months Ending February 28, 2027

Beginning cash balance ................................. Add: Receipts Collections from customers ........... [See Schedule 1] Notes receivable .............................. Sale of securities ............................. Total receipts ........................... Total available cash ........................................ Less: Disbursements Direct materials .............................. [See Schedule 2] Direct labor ..................................... Manufacturing overhead ................ Selling and administrative expenses* ................................... Cash dividend................................. Total disbursements .............. Excess (deficiency) of available cash over cash disbursements ........................... Financing Add: Borrowings ($50,000 - $41,000)........... Less: Repayments ......................................... Ending cash balance ......................................

January $ 60,000

February $ 51,000

326,000

372,000

15,000 341,000 401,000

6,000 378,000 429,000

112,000

123,000

90,000 70,000

100,000 75,000

78,000 350,000

84,000 6,000 388,000

51,000

41,000

0 0 $ 51,000

9,000 0 $ 50,000

*Selling and administrative expenses less $1,000 depreciation. LO4 BT: AP Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation

22-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 15.5

(a)

SUPPAR COMPANY San Miguel Store Merchandise Purchases Budget For the Months of May and June, 2027

Budgeted cost of goods sold ........................... Add: Desired ending merchandise inventory Total ................................................................... Less: Beginning merchandise inventory ........ Required merchandise purchases...................

May June $600,000 $630,000 (1) 63,000(2) 66,150 (3) 663,000 696,150 (4) 60,000 63,000 $603,000 $633,150

(1)

$800,000 × 105% = $840,000; $840,000 × 75% = $630,000 $630,000 × 10% = $63,000 (3) $840,000 × 105% = $882,000; $882,000 × 75% = $661,500; $661,500 × 10% = $66,150 (4) $600,000 × 10% = $60,000 (2)

[(May: ($800,000 × 75%) + ($800,000 × 105% × 75% × 10%) – ($800,000 × 75% × 10%) = $603,000); (Jun.: ($800,000 × 105% × 75%) + ($800,000 × 105% × 105% × 75% × 10%) – ($800,000 × 105% × 75% × 10%) = $633,150)] [(May: (May sales × CGS %) + (May sales × monthly % incr. × CGS % × End. inv. %) – (May sales × CGS % × End. inv. %) = Req. merch. purch.); (Jun.: (May sales × Monthly % incr. × CGS %) + (May sales × Monthly % incr. × Monthly % incr. × CGS % × End. inv. %) – (May sales × Monthly % incr. × CGS % × End. inv. %) = Req. merch. purch.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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22-45

PROBLEM 15.5 (Continued) (b)

SUPPAR COMPANY San Miguel Store Budgeted Income Statement For the Months of May and June, 2027

Sales .................................................................. Cost of goods sold Beginning inventory .................................. Purchases .................................................. Cost of goods available for sale ............... Less: Ending inventory ............................ Cost of goods sold ............................ Gross profit ....................................................... Operating expenses Sales salaries............................................. Advertising* ............................................... Delivery** ................................................... Sales commissions*** ............................... Rent ............................................................ Depreciation .............................................. Utilities ....................................................... Insurance ................................................... Total .................................................... Income from operations ................................... Interest expense................................................ Income before income taxes ............................ Income tax expense (20%) ............................... Net income ........................................................

May $800,000

June $840,000

60,000 603,000 663,000 63,000 600,000 200,000

63,000 633,150 696,150 66,150 630,000 210,000

35,000 48,000 16,000 40,000 5,000 800 600 500 145,900 54,100 2,000 52,100 10,420 $ 41,680

35,000 50,400 16,800 42,000 5,000 800 600 500 151,100 58,900 2,000 56,900 11,380 $ 45,520

*6% of sales. **2% of sales. ***5% of sales. LO5 BT: AP Difficulty: Easy TOT: 40 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation

22-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 15.6 KRAUSE INDUSTRIES Budgeted Cost of Goods Sold For the Year Ending December 31, 2027 Finished goods inventory, 1/1/27 ............................ Cost of goods manufactured Direct materials used ....................................... Direct labor........................................................ Manufacturing overhead applied ..................... Cost of goods available for sale.............................. Finished goods inventory 12/31/27 (2,500 × $18) ... Cost of goods sold ...................................................

$ 24,000 $62,500 50,900 48,600

162,000 186,000 45,000 $141,000

[(($62,500 + $50,900 + $48,600) ÷ 9,000 units = $18/unit); ($24,000 + ($62,500 + $50,900 + $48,600) – (2,500 × $18) = $141,000)] [((DM used + DL + MOH app.) ÷ No. units produced = Cost/unit); (Beg. fin. gds. inv. + (DM used + DL + MOH app.) – (Units in end. fin. gds. inv. × Cost/unit) = CGS)]

KRAUSE INDUSTRIES Budgeted Income Statement For the Year Ending December 31, 2027 Sales revenue (8,000 × $32) ..................................... Cost of goods sold ................................................... Gross profit............................................................... Selling and administrative expenses ...................... Income from operations........................................... Interest expense ....................................................... Income before income taxes ................................... Income tax expense (20% × $36,500) ...................... Net income ................................................................

$256,000 141,000 115,000 75,000 40,000 3,500 36,500 7,300 $ 29,200

KRAUSE INDUSTRIES Budgeted Retained Earnings Statement For the Year Ending December 31, 2027 Retained earnings, 1/1/27 ........................................ Add: Net income ....................................................... Deduct: Dividends .................................................... Retained earnings 12/31/27 ..................................... Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

$25,000 29,200 54,200 8,000 $46,200 (For Instructor Use Only)

22-47

PROBLEM 15.6 (Continued) KRAUSE INDUSTRIES Budgeted Balance Sheet December 31, 2027 Assets Current assets Cash ...................................................................... $ 13,180 Accounts receivable ($76,800 × 40%) ................. 30,720 Finished goods inventory (2,500 × $18) ..................................................... 45,000 Total current assets .....................................

$88,900

Property, plant, and equipment Equipment ($40,000 + $9,000) ............................. Less: Accumulated depreciation ($10,000 + $4,000) ..................................... Total assets ..................................................

35,000 $123,900

49,000 14,000

Liabilities and Stockholders’ Equity Liabilities Notes payable ($25,000 – $8,000)........................ Accounts payable ($8,500* + $7,200) .................. Income taxes payable .......................................... Total liabilities .............................................. Stockholders’ equity Common stock ..................................................... Retained earnings ................................................ Total stockholders’ equity ........................... Total liabilities and stockholders’ equity ........................................................

$17,000 15,700 5,000 $ 37,700 40,000 46,200 86,200 $123,900

*$17,000 × 50%

22-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 15.6 (Continued) Proof of budgeted cash balance December 31, 2025 (Optional) Beginning Cash ........................................................ Collections Beginning accounts receivable ............................... 2027 sales less ending accounts receivable ($256,000 – $30,720) .........................................

7,500

$ 73,500 225,280

Payments Beginning accounts payable ................................... 45,000 Note payment ........................................................... 8,000 Equipment purchase ................................................ 9,000 Dividends .................................................................. 8,000 Direct materials purchases ($62,500 – $8,500) .................................................... 54,000 Direct labor .................................................................. 50,900 Manufacturing overhead and selling and admin exp. less depreciation and ending other accts. payable $48,600 + $75,000 – $4,000 – $7,200 ................... 112,400 Interest expense .......................................................... 3,500 Income taxes ($7,300 – $5,000) .................................. 2,300 Ending cash .................................................................

298,780 306,280

293,100 $ 13,180

LO3, 4 BT: AP Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation [$7,500 + ($73,500 + ($256,000 - $30,720)) – ($45,000 + $8,000 + $9,000 + $8,000 + ($62,500 - $8,500) + $50,900 + ($48,600 + $75,000 - $4,000 - $7,200) + $3,500 + ($7,300 - $5,000) = $13,180] [Beg. cash bal. + (Beg. accts. rec. + (2027 sales – end. accts rec.)) – (Beg. accts. pay. + Note pmt. + Equip. purch. + Div. + (DM purch. – Unpd. bal.) + DL + (MOH + Sell. & admin. exp. – Depr. – End. accts. pay.) + Int. exp. + (Inc. tax exp. – Unpd. bal.) = End. cash bal.]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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22-49

CD 15

CURRENT DESIGNS

CURRENT DESIGNS Production Budget For the Year Ending December 31, 2027 Expected unit sales Add: desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total 1,000 1,500 750 750 4,000 300* 1,300

150* 1,650

150* 900

220** 970

220 4,220

200*** 1,100

300 1,350

150 750

150 820

200 4,020

*(20% of next quarter’s sales) **20% × 1,100 ***given in problem [Qtr. 1: 1,000 + (1,500 × 20%) – (1,000 × 20%) = 1,100] [Qtr. 1: Exp. unit sales + (Qtr. 2 exp. unit sales × End. inv. %) – (Qtr. 1 unit sales × End. inv. %) = Req. production units]

22-50

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CD 15 (Continued) CURRENT DESIGNS Direct Materials Budget For the Year Ending December 31, 2027 Units to be produced Pounds of polyethylene powder per unit

Quarter 1

Quarter 2

Quarter 3

Quarter 4

1,100

1,350

750

820

Total pounds needed for production 59,400 Add: desired ending inventory of powder 18,225* Total pounds of powder required 77,625 Less: Beginning inventory of powder 19,400*** Pounds of Polyethylene powder to be purchased 58,225 Cost per pound × $1.50 Cost of polyethylene powder to be purchased $ 87,337.50 Cost of required finishing kits (one kit per kayak manufactured) @$170 each 187,000.00 Total costs for direct materials $274,337.50

Total 4,020 ×

72,900

40,500

44,280

217,080

10,125*

11,070*

15,930**

15,930

83,025

51,570

60,210

233,010

18,225

10,125

11,070

19,400

64,800 $1.50

41,445 $1.50

49,140 $1.50

213,610 $1.50

$ 97,200.00

$ 62,167.50

$ 73,710.00

$ 320,415.00

229,500.00 $326,700.00

127,500.00 $189,667.50

139,400.00 $213,110.00

683,400.00 $1,003,815.00

*25% of needs for next quarter **Desired ending inventory for Quarter 4 = 25% of amount needed for first quarter of 2028 production. Production for first quarter of 2028 = 1,100 + (1,500 × 20%) – (1,100 × 20%) = 1,180 units (1,180 units × 54 pounds per unit × 25%) = 15,930 pounds ***given in problem [Qtr. 1: ((1,100 × 54) + (1,350 × 54 × 25%) – 19,400 = 58,225); ((58,225 × $1.50) + (1,100 × $170) = $274,337.50)] [Qtr. 1: ((Qtr. 1 units to be produced × Lbs. of powder/unit) + (Qtr. 2 units to be produced × Lbs. of powder/unit × End. inv. %) – Beg. inv. of powder = Lbs. of powder to be purch.); ((Lbs. of powder to be purch. × Cost/Lb.) + (No. of finishing kits needed × Cost/kit) = Tot. cost of DM purch.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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22-51

CD 15 (Continued) CURRENT DESIGNS Direct Labor Budget For the Year Ending December 31, 2027 Units to be produced Number of hours of more skilled labor/unit Total number of hours of more skilled labor Hourly rate for more skilled labor Total cost of more skilled labor Units to be produced Number of hours of less skilled labor/unit Total number of hours of less skilled labor Hourly rate for less skilled labor Total cost of less skilled labor Total cost for direct labor

Quarter 1

Quarter 2

Quarter 3

Quarter 4

1,100

1,350

750

820

Total 4,020 ×

2,200 × $15 $33,000

2,700 × $15 $40,500

1,500 × $15 $22,500

1,640 × $15 $24,600

8,040 × $15 $120,600

1,100

1,350

750

820

4,020

3,300 × $12 39,600 $72,600

4,050 × $12 48,600 $89,100

2,250 × $12 27,000 $49,500

2,460 × $12 29,520 $54,120

12,060 × $12 144,720 $265,320

CURRENT DESIGNS Manufacturing Overhead Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total costs for direct labor $72,600 $89,100 Manufacturing overhead rate per direct labor dollar × 150% × 150% Manufacturing overhead costs $108,900 $133,650

22-52

Total

$49,500

$54,120

$265,320

× 150%

$74,250

$81,180

$397,980

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CD 15 (Continued) CURRENT DESIGNS Selling and Administrative Expense Budget For the Year Ending December 31, 2027 Expected unit sales Variable selling and administrative costs at $45 per unit sold Fixed selling and administrative costs Total selling and administrative costs

Quarter 1 Quarter 2 Quarter 3 Quarter 4 1,000 1,500 750 750

Total 4,000

$45,000

$67,500

$33,750

$180,000

7,500

30,000

$52,500

$75,000

$41,250

$210,000

LO2, 3 BT: AP Difficulty: Moderate TOT: 50 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-53

WC 15

WATERWAYS CORPORATION

(a) Sales budget WATERWAYS CORPORATION Sales Budget For the First Quarter of 2027 First Quarter January

February

March

Quarter

Expected unit sales 113,000 Unit selling price × $ 12 Total sales $1,356,000

112,500 × $ 12 $1,350,000

116,000 × $ 12 $1,392,000

341,500 × $ 12 $4,098,000

(b) Production budget WATERWAYS CORPORATION Production Budget For the First Quarter of 2027 First Quarter Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

January February March 113,000 112,500 116,000 11,250 124,250

11,600 124,100

11,300** 11,250 112,950 112,850

Quarter 341,500

12,500* 12,500 128,500 354,000 11,600 116,900

11,300 342,700

*12,500 is 10% of April’s budgeted sales units **11,300 is 10% of January’s sales units

22-54

Kimmel, Survey of Accounting, 3e, Solutions Manual

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WC 15 (Continued) (c) Direct materials budget WATERWAYS CORPORATION Direct Materials Budget For the First Quarter of 2027 First Quarter

Units to be produced (from part b) Direct materials per unit Total pounds needed for production Add: Desired ending direct materials (lbs.) Total materials required Less: Beginning direct materials (lbs.) Direct materials purchases Cost per pound Total cost of direct materials purchases

January 112,950 ×2 225,900 11,285 237,185 11,295** 225,890 × $0.75 $169,418

February 112,850 × 2 225,700 11,690 237,390 11,285 226,105 × $0.75 $ 169,579

March 116,900 × 2 233,800 12,625* 246,425 11,690 234,735 × $0.75 $176,051

Quarter 342,700 × 2 685,400 12,625 698,025 11,295 686,730 × $0.75 $515,048

*12,625 is 5% of April’s budgeted materials needed = (April unit sales + 10% of May unit sales – March’s ending unit inventory) × 2 × 5% = (125,000 units + 13,750 units – 12,500 units) × 2 × 5% = 126,250 units × 2 pounds per unit × 5% **Actual inventory (d) Direct labor budget WATERWAYS CORPORATION Direct Labor Budget For the First Quarter of 2027 First Quarter

Units to be produced (from part b) Direct labor time (hours per unit) Total required direct labor-hours Direct labor cost per hour Total direct labor cost

January 112,950 × 0.2 22,590 × $8 $180,720

February 112,850 × 0.2 22,570 × $8 $180,560

Kimmel, Survey of Accounting, 3e, Solutions Manual

March 116,900 × 0.2 23,380 × $8 $187,040

Quarter 342,700 × 0.2 68,540 × $8 $548,320

(For Instructor Use Only)

22-55

WC 15 (Continued) (e) Manufacturing overhead budget WATERWAYS CORPORATION Manufacturing Overhead Budget For the First Quarter of 2027 First Quarter Variable costs Indirect materials (30¢ per hour) Indirect labor (50¢ per hour) Utilities (45¢ per hour) Maintenance (25¢ per hour) Total variable costs Fixed costs Salaries Depreciation Property taxes Insurance Maintenance Fixed manufacturing overhead Total manufacturing overhead

January

February

March

Quarter

$ 6,777 11,295 10,165 5,647 33,884

$ 6,771 11,285 10,157 5,643 33,856

$ 7,014 11,690 10,521 5,845 35,070

$ 20,562 34,270 30,843 17,135 102,810

42,000 16,800 2,675 1,200 1,300 63,975 $97,859

42,000 16,800 2,675 1,200 1,300 63,975 $97,831

42,000 16,800 2,675 1,200 1,300 63,975 $99,045

126,000 50,400 8,025 3,600 3,900 191,925 $294,735

23,380

$294,735 68,540 $4.30

Total manufacturing overhead Direct labor hours (from part d) 22,590 22,570 Predetermined overhead rate for the quarter $294,735 ÷ 68,540 hours =

(f)

Selling and administrative expense budget WATERWAYS CORPORATION Selling and Administrative Expense Budget For the First Quarter of 2027 First Quarter Budget sales in units (from part a) Variable expenses per unit Total variable S & A expense Fixed expenses: Advertising Insurance Salaries Depreciation Other Total fixed expenses Total S & A expenses

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January 113,000 × $1.60 $180,800

February 112,500 × $1.60 $180,000

March 116,000 × $1.60 $185,600

× $1.60 $546,400

15,000 1,400 72,000 2,500 3,000 93,900 $274,700

15,000 1,400 72,000 2,500 3,000 93,900 $273,900

15,000 1,400 72,000 2,500 3,000 93,900 $279,500

45,000 4,200 216,000 7,500 9,000 281,700 $828,100

Kimmel, Survey of Accounting, 3e, Solutions Manual

Quarter 341,500

(For Instructor Use Only)

WC 15 (Continued) (g) Collections from customers Schedule of Expected Collections from Customers January Accounts receivable, 12/31/26 $ 183,780 January ($1,356,000) 1,152,600* February ($1,350,000) March ($1,392,000) Total cash collections $1,336,380

February

March

$ 203,400** 1,147,500 $ 202,500 1,183,200 $1,350,900 $1,385,700

*85% of sales collected in month of sale (85% × $1,356,000) **15% of sales collected in month after sale (15% × $1,356,000)

(h) Payments for direct materials Schedule of Expected Payments for Direct Materials January Accounts payable, 12/31/26 $120,595 January ($169,418) 84,709 February ($169,579) March ($176,051) Total payments $205,304

February

$ 84,709 84,790 $169,499

March

Quarter

$ 84,789 88,026 $172,815

$120,595 169,418 169,579 88,026 $547,618

*Purchase payments 50% in month of purchase and 50% in month after purchase

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WC 15 (Continued) (i)

Cash budget

Beginning cash balance Add: Receipts

WATERWAYS CORPORATION Cash Budget For the first Quarter of 2027 First Quarter January February $ 100,500 $ 800,097

Collections from customers Total available cash Less: Disbursements Direct materials Direct labor Manufacturing overhead* Selling and administrative* Equipment purchase Dividends Total disbursements Excess (deficiency) of available cash over cash disbursements Financing: Borrowings Repayments Interest** Ending cash balance

March $ 819,474

Quarter $ 100,500

1,336,380 1,436,880

1,350,900 2,150,997

1,385,700 2,205,174

4,072,980 4,173,480

205,304 180,720 81,059 272,200 0 12,500 751,783

169,499 180,560 81,031 271,400 500,000 12,500 1,214,990

172,815 187,040 82,245 277,000 0 12,500 731,600

547,618 548,320 244,335 820,600 500,000 37,500 2,698,373

685,097

936,007

1,473,574

1,475,107

115,000 —

— (115,000)

— —

115,000 (115,000)

(1,533)

—

(1,533)

— $ 800,097

819,474

$1,473,574

*Adjusted for depreciation ** Interest calculated as $115,000 × 0.08 × 2/12 = $1,533 LO2, 3, 4 BT: AP Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation

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CC 15.1 1.

AUBURN CIRCULAR CLUB

Yes. All organizations should set goals. A large-scale project such as a professional rodeo may not make a profit in the first year. Based on ticket sales, the Auburn Circular Club Pro Rodeo Roundup appears to be a popular attraction. Therefore, if the club uses management accounting techniques successfully to plan, control, and monitor activities, the project should produce a profit in the future. Civic organizations often give back to the community in a variety of ways, such as providing scholarships, making donations to worthy causes, and volunteering. Auburn Circular Club wants to give back to the community by providing entertainment to the public through an enjoyable three-day family event. Funds raised by the rodeo will then be filtered back into the community via traditional channels. By sponsoring the rodeo, Auburn Circular Club gains exposure through public radio announcements, fliers, and advertising posters throughout the community. Patrons will look forward to next year’s entertainment, will tell others, and ticket sales will increase. Patrons may also seek to join such a civic-minded organization and support future fund-raising efforts sponsored by the club.

Like profit-seeking organizations, nonprofit organizations should make sure an activity is worth the required investment of time, effort, and monetary resources. Jonathan’s comment implies that the rodeo is expected to fulfill the organization’s goals and objectives.

Yes. Jonathan views this project as a capital investment for the organization—not the purchase of tangible, long-term assets—but a project that will have a positive impact on the organization over a long term. In other words, even though the rodeo reported a loss in its first year, Jonathan appears to believe the rodeo will be profitable in the future and that the community is well served by the club providing a high-quality, family-oriented event.

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CC 15.1 (Continued) 4.

Within a relevant range, most of these costs are fixed costs. In other words, variable costs would be a very small percentage of the costs in any of these categories.

The high and low levels of activity are 96 contestants Saturday night and 68 contestants on Friday. The catering costs at these two levels are $1,243 and $998 respectively. The difference in catering cost is $245 or ($1,243 – $998). The difference in contestants is 28 or (96 – 68). Therefore, the variable cost for catering is $8.75 per contestant ($245 ÷ 28). The fixed cost is determined by subtracting the variable cost at either level from the total cost at the corresponding level as follows:

Total cost Less: Variable costs 96 contestants × $8.75 68 contestants × $8.75 Total fixed costs 6.

Activity Level High Low $1,243 $ 998 840 $ 403

595 $ 403

Some suggestions include: • Promote ticket sales for the Friday and Sunday shows. • Consider renting additional bleachers. • Include additional entertainment such as a rock or country music star to attract individuals who did not attend the first annual event. • Increase revenue by having members of Auburn Circular Club provide concessions to the public instead of outsourcing concessions to a local youth organization. • Increase revenue by raising ticket prices. • Include group rates to businesses and organizations. • Decrease costs by bartering with a local hotel for free accommodations for stock contractors in exchange for a free sponsorship. • Decrease costs by exchanging free tickets with a local farmer for hay. • Negotiate with a local insurance agent for a lower rate.

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CC 15.1 (Continued) 7.

To determine the break-even point in dollars, we need to determine fixed costs and the contribution margin ratio. Fixed costs are estimated to be $51,000 and variable costs at 4% (100% - 96%) of total revenue. The contribution margin ratio is therefore 96%. The formula to compute the break-even point in dollars is therefore as follows: Fixed costs Break-even point = = $51,000 = $53,125 in dollars Contribution margin ratio 0.96 We then subtract from the break-even point in dollars the contribution from sponsors to determine a break-even point in dollars from ticket sales. Break-even point in dollars ...................................................... Less: Contributions from sponsors ....................................... Amount needed from ticket sales to break even ....................

$53,125 25,600 $27,525

(a) To determine the dollar volume of ticket sales needed in order to earn a target profit of $6,000, we use the following formula: Fixed costs + Target profit = $51,000 + $6,000 = $59,375 Contribution margin ratio 0.96 We then subtract contributions from sponsors to arrive at the required ticket sales in dollars. Amount needed to earn $6,000 ....................................... Less: Contributions from sponsors............................... Amount needed from ticket sales ...................................

$59,375 25,600 $33,775

(b) We follow the same procedure as in (a), using the same formula: Fixed costs + Target profit = $51,000 + $12,000 = $65,625 Contribution margin ratio 0.96 We then subtract contributions from sponsors to arrive at the required ticket sales in dollars. Amount needed to earn $12,000 .................................... Less: Contributions from sponsors.............................. Amount needed from ticket sales .................................. Copyright © 2023 John Wiley & Sons, Inc.

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$65,625 25,600 $40,025

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CC 15.1 (Continued) 9.

At a target profit of $6,000, the rodeo will need to generate $59,375 in total receipts. Of these total receipts, $25,600 are expected to be contributions from sponsors. The receipts from ticket sales are computed as follows: Amount needed to earn $6,000 ........................................... Less: Contributions from sponsors .................................. Ticket revenues ....................................................................

$59,375 25,600 $33,775

We then compute the average cost per ticket using first-year data as follows: Average cost per ticket =

Ticket revenue = $28,971 = $8.70 Number in attendance 3,330*

*1,663 + 898 + 769 Given an average price of $8.70, it will take 3,882 tickets over the three days or 1,294 tickets per day as shown below. Ticket revenues = $33,775 = 3,882 for three days or 1,294 per day Average cost per ticket $8.70 Since the stands were able to hold the Saturday night audience of 1,663, the facilities appear adequate.

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CC 15.1 (Continued) 10.

Receipts Contributions from sponsors ....................... Receipts from ticket sales (from 8)............... Total cash receipts ........................................ Expenses Livestock contractor...................................... Prize money ................................................... Sponsor signs for arena (1,900 × $1.164*) ... Insurance........................................................ Ticket printing ($1,050 × .50) ......................... Sanctioning fees ............................................ Entertainment................................................. Judging fees .................................................. Rent ................................................................ Utilities............................................................ Sand for arena................................................ Miscellaneous fixed costs ............................. Total expenses ............................................... Net income .....................................................

$25,600 40,025 $65,625 $26,000 21,000 2,212 600 525 925 859 750 600 300 300 100 54,171 $11,454

*$25,600 ÷ 22,000 11.

The costs associated with Shelley’s rodeo apparel are not relevant costs. First, even if these were costs incurred by the rodeo, they would be considered sunk costs, which are never relevant. Second, they are personal costs of Shelley and not relevant to the rodeo.

12.

You should encourage the committee to accept the offer of the tent and Shady’s Bar-B-Q catering. Because there is room for additional banners in the arena, the only relevant costs to consider here are the potential savings of $3,341 for contestant hospitality and the cost of the two banners totaling $96. Even if there was no space in the arena for additional banners, the Committee should consider accepting the tent and the Bar-B-Q meal offered by Shady’s and consider eliminating other sponsors. A better alternative, however, would be to extend the arena in order to add more signs or provide another way to advertise sponsors. For example, include them in radio and television advertising. The cost is an opportunity cost; i.e., the foregone benefit ($3,341 cost savings) that would be lost from not accepting Shady’s and the Fun Shop’s offers.

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CC 15.2

SWEATS GALORE

Yes, it is important for Michael to stipulate certain criteria during planning for his new business. Michael is wise to set criteria other than simply making a profit. First, Michael wants to do something he enjoys. Because he has prior experience in a related industry and he has envisioned having his own business he will be better prepared to handle the responsibilities of this new business. Michael’s positive attitude will be reflected in the way he handles employees and customers. Michael’s business will probably come from customers such as university groups, church groups, civic organizations, youth athletic clubs, and secondary school groups. Because Michael is offering quality shirts at a modest price, he will, in effect, be contributing to the community. In addition, as Michael’s company becomes more profitable he will give back to the community through cash donations to some of these groups. Michael’s foresight (wanting to grow and be more successful every year) will encourage him to make decisions that will profit the business not just in the short run, but also in the long run.

The difference in the high and low levels of activity is 6,000 units (8,000 units in September less 2,000 units in January). The difference in utility costs is $300 ($1,400 – $1,100). Therefore, estimated variable cost per unit is $0.05 and total fixed costs are $1,000 computed as follows: $300 ÷ 6,000 = $0.05 $1,400 – ($0.05 × 8,000) = $1,000 The difference in maintenance costs is $198 ($1,914 – $1,716). Therefore, estimated variable cost per unit is $0.033 and total fixed costs are $1,650 computed as follows: $198 ÷ 6,000 = $0.033 $1,914 – ($0.033 × 8,000) = $1,650 If the company has sales of $12,000, the units sold total 750 ($12,000 ÷ $16). Therefore, total variable costs relating to utilities and maintenance for 750 shirts total $62.25 computed as follows: 750 shirts × $0.05 = $37.50 750 shirts × $0.033 = $24.75 If the company has sales of $12,000, the total fixed costs would be $2,650 ($1,000 + $1,650).

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CC 15.2 (Continued) 3. SWEATS GALORE, INC. Sales Budget For the Year Ending December 31, 20257 Quarter Expected unit sales Unit selling price Budgeted sales revenue

1 8,000 × $16 $128,000

2 10,000 × $16 $160,000

3 20,000 × $16 $320,000

4 12,000 × $16 $192,000

Year 50,000 × $16 $800,000

4. SWEATS GALORE, INC. Schedule of Expected Collections from Customers For the Year Ending December 31, 2027 Quarter 1

–0– $89,600

Accounts receivable 1/1/27 First quarter ($128,000) Second quarter ($160,000) Third quarter ($320,000) Fourth quarter ($192,000) Total collections

$89,600

$ 38,400 112,000

$150,400

$ 48,000 224,000 $272,000

$ 96,000 134,400 $230,400

5. SWEATS GALORE, INC. Shirt Purchases Budget For the Year Ending December 31, 2027 Quarter Shirts to be silk-screened Plus: Desired ending inventory Total shirts required Less: Beginning inventory Total shirts needed Cost per shirt* Total cost of shirt purchases

1 8,000 2,500

2 10,000 5,000

3 20,000 3,000

4 12,000 4,500

Year 50,000 4,500

10,500 –0– 10,500 × $10 $105,000

15,000 2,500 12,500 × $10 $125,000

23,000 5,000 18,000 × $10 $180,000

16,500 3,000 13,500 × $10 $135,000

54,500 –0– 54,500 × $10 $545,000

*$1,440 ÷144 (144 is a gross)

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CC 15.2 (Continued) 6. SWEATS GALORE, INC. Schedule of Expected Payments for Purchases For the Year Ending December 31, 2027

Account payable 1/1/27 First quarter ($105,000) Second quarter ($125,000) Third quarter ($180,000) Fourth quarter ($135,000) Total payments

1 –0– $42,000

$42,000

Quarter 3

2 $ 63,000 50,000

$ 75,000 72,000

$113,000

$108,000 54,000 $162,000

$147,000

7. SWEATS GALORE, INC. Silk-Screen Labor Budget For the Year Ending December 31, 2027 Quarter Units to be produced Silk-screen labor hours per unit* Total required silk-screen labor hours Silk-screen labor cost per hour** Total silk-screen labor cost

8,000 x .12 hrs.

10,000 x .12 hrs.

20,000 x .12 hrs.

12,000 x .12 hrs.

Year 50,000 x .12 hrs.

960 x $12 $11,520

1,200 x $12 $14,400

2,400 x $12 $28,800

1,440 x $12 $17,280

6,000 x $12 $72,000

*(6 workers × 20 hrs. × 50 weeks) ÷ 50,000 shirts **$72,000 ÷ (6 × 20 hrs. × 50)

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CC 15.2 (Continued) 8.

SWEATS GALORE, INC. Selling and Administrative Expenses Budget For the Year Ending December 31, 2027 Quarter Variable expenses Sales commissions Total variable expenses Fixed expenses Advertising [($25 + $75) × 13] Rent ($1,000 × 0.25 × 3) Sales salaries ($1,200 × 0.50 × 3) Office salaries Depreciation* Property taxes and Insurance ($380 ÷ 4) Total fixed expenses Total selling and administrative expenses

Year

$12,800 12,800

$16,000 16,000

$32,000 32,000

$19,200 19,200

$ 80,000 80,000

$ 1,300 750

1,800 1,800 75

7,200 7,200 300

95 5,820

380 23,280

$18,620

$21,820

$37,820

$25,020

$103,280

5,200 3,000

*[($2,000 ÷ 10) + ($500 ÷ 5)] ÷ 4

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CC 15.2 (Continued) 9. SWEATS GALORE, INC. Silk-screen Overhead Expenses Budget For the Year Ending December 31, 2027 Quarter 1

Year

Variable expenses Ink ($.75/unit) $ 6,000 $ 7,500 $15,000 $ 9,000 $37,500 Maintenance ($0.033/unit) 264 330 660 396 1,650 Utilities ($0.05/unit) 400 500 1,000 600 2,500 Graphics design 800 1,000 2,000 1,200 5,000 ($0.10/unit) Total variable expenses 7,464 9,330 18,660 11,196 46,650 Fixed expenses Rent ($1,000 × 0.75 × 3) 2,250 2,250 2,250 2,250 9,000 Maintenance ($1,650 × 3) 4,950 4,950 4,950 4,950 19,800 Utilities ($1,000 × 3) 3,000 3,000 3,000 3,000 12,000 Graphics design ($500 × 3) 1,500 1,500 1,500 1,500 6,000 Property taxes and insurance ($2,240 ÷ 4) 560 560 560 560 2,240 Depreciation* 690 690 690 690 2,760 Total fixed expenses 12,950 12,950 12,950 12,950 51,800 Total silk-screen overhead $20,414 $22,280 $31,610 $24,146 $98,450 Direct silk-screen hours 960 1,200 2,400 1,440 6,000 Overhead rate per silk-screen hour $16.41 *($7,500 ÷ 5) + [($1,350 + $2,500) ÷ 10] + ($3,500 ÷ 4)] = $2,760; $2,760 ÷ 4 = $690

10. SWEATS GALORE, INC. Budgeted Income Statement For the Year Ending December 31, 2027 Sales ............................................................................ Cost of goods sold .................................................... Gross profit ................................................................ Selling and administrative expenses ....................... Income from operations ............................................ Interest expense ($20,000 × 0.08) ............................. Income before income taxes..................................... Income tax expense ($24,670 × 0.20)........................ Net income ................................................................. *Purchase of shirts *Labor *Overhead

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$800,000 *670,450 129,550 103,280 26,270 1,600 24,670 4,934 $ 19,736

$500,000 (50,000 × $10) 72,000 98,450 $670,450 Kimmel, Survey of Accounting, 3e, Solutions Manual

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CC 15.2 (Continued) 11. SWEATS GALORE, INC. Cash Budget For the Year Ending December 31, 2027

Quarter Beginning cash balance .................. Add: Receipts Collections from customers............ Total available cash .........................

1 $ 10,000

2 $ 19,136

3 ($ 9,874)

4 $ 17,661

89,600 99,600

150,400 169,536

272,000 262,126

230,400 248,061

Less: Disbursements Payments for shirt purchases......... Silk-screen labor .............................. Silk-screen overhead ....................... Selling and administrative expenses ...................................... Payment for equipment purchase .. Total disbursements ........................

42,000 11,520 19,724*

113,000 14,400 21,590

147,000 28,800 30,920

162,000 17,280 23,456

18,545** 8,675*** 100,464

21,745 8,675 179,410

37,745 0 244,465

24,945 0 227,681

Excess (deficiency) of available cash over disbursements ............

(864)

(9,874)

17,661

20,380

Financing Borrowings ....................................... Ending cash balance .......................

20,000 $ 19,136

0 ($ 9,874)

0 17,661

0 $ 20,380

*$20,414 – $690 depreciation **$18,620 – $75 depreciation ***($7,500 + $1,350 + $2,500 + $3,500 + $2,000 + $500) x 0.50

12. SWEATS GALORE, INC. Budgeted Balance Sheet December 31, 2027 Assets Cash .............................................................................................. Accounts receivable ($192,000 × 0.30) ....................................... Sweatshirt inventory (4,500 × $10) ............................................. Equipment ($7,500 + $1,350 + $2,500 + $3,500 + $2,000 + $500) Less: Accumulated depreciation ($300 + $2,760) ...................... Total assets ..................................................................................

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$ 20,380 57,600 45,000 17,350 (3,060) $137,270

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CC 15.2 (Continued) SWEATS GALORE, INC. Budgeted Balance Sheet (Continued) December 31, 2027 Liabilities and Stockholders’ Equity Liabilities: Accounts payable ($135,000 × 0.60) ................................ Notes payable.................................................................... Interest payable ($20,000 × 0.08)...................................... Taxes payable ................................................................... Total liabilities ................................................................. Stockholders’ Equity: Common stock .................................................................. Retained earnings ............................................................. Total stockholders’ equity .............................................. Total liabilities and owner’s equity ....................................

$ 81,000 20,000 1,600 4,934 107,534 10,000 19,736 29,736 $137,270

13. (a) Unit Selling Price – Unit Variable Costs = Contribution Margin $16 – [$10 + ($80,000 ÷ 50,000) + ($46,650 ÷ 50,000)] = Contribution Margin $16 – $12.533 = $3.467 (b) Estimated fixed costs: Selling and administrative ...... Overhead .................................. Salaries..................................... Interest ..................................... Taxes ........................................ Total estimated fixed costs .........

$ 23,280 51,800 72,000 1,600 4,934 $153,614

(c) Fixed costs ÷ CM = Break-even point in units $153,614 ÷ $3.467 = 44,308 Break-even point in units (rounded) 44,308 × $16 = $708,928 Break-even point in dollars

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CC 15.2 (Continued) 14. (a) Required Sales = VC + FC + Target Net Income $16X = $12.533X + $153,614 + $25,000 $3.467X = $178,614 X = 51,519 shirts (rounded) (b) The company’s net income differs from the cash balance because the accrual basis accounting was used to compute net income. Consequently, net income includes revenue that has not been received in cash and expenses that have not been paid. For example, revenue of $57,600 was included in the Budgeted Income Statement that was not in the Cash Budget because it was earned but not received. Likewise items such as accounts payable, notes payable, interest payable, and taxes payable affect the Income Statement in one period and the Cash Budget in another period. 15. Answers will vary. Some students will argue that the 10 percent commission is too high and Michael should try to find someone with similar qualifications who is willing to work for a smaller commission. Other students will argue that with Cary Sue’s contacts, sales would be much lower without Cary Sue. In addition, they may argue that if sales are low, Cary Sue’s commission will also be low. LO2, 3, 4 BT: AP Difficulty: Moderate TOT: 90 min. AACSB: Analytic AICPA FC: Measurement, Reporting IMA: Decision Analysis, Budget Preparation

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SOLUTIONS TO DATA ANALYTICS IN ACTION The solutions for the Data Analytics in Action problems are available in Excel. See the file Solutions: Excel Templates in the Instructor Resources.

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CT 15.1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) The budget at Palmer Corporation is an imposed “top-down” budget which fails to consider both the need for realistic data and the human interaction essential to an effective budgeting/control process. The president has not given any basis for his goals, so one cannot know whether they are realistic for the company. True participation of company employees in preparation of the budget is minimal and limited to mechanical gathering and manipulation of data. This suggests there will be little enthusiasm for implementing the budget. The budget process is the merging of the requirements of all facets of the company on a basis of sound judgment and equity. Specific instances of poor procedures other than the approach and goals include the following: 1.

The sales by product line should be based upon an accurate sales forecast of potential market. Therefore, the sales by product line should have been developed first to derive the sales target rather than the reverse. Production costs probably would be the easiest and most certain costs to estimate. Given variable and fixed production costs, one could estimate the sales volume needed to cover manufacturing costs plus the costs of other aspects of the operation. This would be helpful before budgets for marketing costs and corporate office expenses are set. The initial meeting between the vice president of finance, executive vice president, marketing manager, and production manager should be held earlier. This meeting is held too late in the budgeting process.

(b) Palmer Corporation should consider the adoption of a “bottom to top” (participative) budget process. This means that the people responsible for performance under the budget would participate in the decisions by which the budget is established. In addition, this approach requires initial and continuing involvement of sales, financial, and production personnel to define sales and profit goals which are realistic within the constraints under which management operates. Although timeconsuming, the approach should produce a more acceptable, honest, and workable goal-control mechanism. It also provides for goal congruence possibilities for both individuals and departments within the firm. Copyright © 2023 John Wiley & Sons, Inc.

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CT 15.1 (Continued) The sales forecast should be developed considering internal sales forecasts as well as external factors. Costs within departments should be divided into fixed and variable, discretionary and nondiscretionary. (c) The functional areas should not necessarily be expected to cut costs when sales volume falls below budget. The time frame of the budget (one year) is short enough so that many costs are relatively fixed in amount. For those costs which are fixed, there is little hope for a reduction as a consequence of short-run changes in volume. However, the functional areas should be expected to cut costs should sales volume fall below target when: 1.

Control is exercised over the costs within their function.

Budgeted costs were more than adequate for the originally targeted sales; i.e., slack was present.

Budgeted costs vary to some extent with changes in sales.

There are discretionary costs which can be delayed or omitted with no serious effect on the department. (CMA adapted)

LO1, 2 BT: S Difficulty: Moderate TOT: 30 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication IMA: Budget Preparation

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CT 15.2

MANAGERIAL ANALYSIS

(a) Direct materials

Either lower quality materials resulting in an inferior product and possible lost sales, or fewer units produced resulting in lost sales.

Direct labor

Reduced production resulting in lost sales, or reduction in quality of product resulting in lost sales.

Insurance

Less coverage; may acceptable levels.

Depreciation

To reduce depreciation, fixed assets would have to be disposed of. Could result in less production and lost sales.

Machine repairs

Less efficient operations, or lost production and sales.

Sales salaries

Lost sales.

Office salaries

Less effective administrative functions.

Factory salaries

Lost production due to inefficiency, and therefore lost sales.

increase

risk

beyond

(b) Given the nature of their product, a decline in quality should be avoided, since this could result in lower future sales. Direct materials represent the largest single cost, and thus perhaps the greatest potential savings. Perhaps substitute materials of similar quality can be found, or less expensive materials can be used for aspects of the product where quality is not as critical. Additionally, it may be possible to renegotiate prices with the supplier. Elliot & Hesse should be very reluctant to reduce repair costs, since in the long run this can be very expensive. Perhaps salaried and hourly employees can be encouraged to take pay cuts if a profit-sharing mechanism is introduced. LO N/A BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication IMA: Budget Preparation

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CT 15.3

REAL-WORLD FOCUS

(a) According to Mr. LaFaive, zero-based budgeting requires that the existence of a government program or programs be justified in each fiscal year, as opposed to simply basing budgeting decisions on a previous year’s funding level. Zero-based budgeting is often encouraged by fiscal watchdog groups as a way to ensure against unnecessary spending. (b) In addition to saving money and improving services, zero-based budgeting may: • • •

Increase restraint in developing budgets; Reduce the entitlement mentality with respect to cost increases; and Make budget discussions more meaningful during review sessions.

May increase the time and expense of preparing a budget; May be too radical a solution for the task at hand. You don’t need a sledgehammer to pound in a nail; Can make matters worse if not done in the right way. A substantial commitment must be made by all involved to ensure that this doesn’t happen.

(d) In Oklahoma, which has recently adopted zero-based budgeting, officials are applying the method to two departments and several agencies each year. Once those reviews are complete, the same departments and agencies will not see another zero-based review for eight years. LO N/A BT: AN Difficulty: Easy TOT: 25 min. AACSB: Technology, Communication AICPA FC: Reporting AICPA PC: Communication IMA: Budget Preparation

22-76

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 15.4

COMMUNICATION ACTIVITY

From: Student’s email address To: Megan’s email address Subject: Critique of Cash Fow Problems Megan: Allow me to congratulate you on the success of your new venture! The growth in sales you have experienced is phenomenal. You have managed the business side of the venture very well also. At the same time, I understand your concern about cash flow. You are selling these kits as fast as you can make them, and yet you are running out of cash. There is a solution to your problem. Before describing that, it may be helpful for you to understand why this situation occurred. The primary reason is that you are purchasing kit supplies at least two months in advance of sales. As your business expands, these materials costs continue to increase. Sales do not “catch up” until the Drs. Parcells have a seminar. You did not describe in detail how often these seminars are, but I would guess that they tend to run in cycles rather than being regularly spaced. Eventually, as sales stabilize, you will find that cash inflows exceed cash outflows, and your need for additional cash will subside. Presently, I think it would be a good idea to try to borrow additional funds. I have not seen all your financial data, but judging only from the cash budget you showed me, it appears that you have the basis of a very successful company. If so, your banker will be able to see the potential in your business and should be happy to provide the cash you need. You will need to prepare a full set of financial statements. I will be happy to assist you, if you desire. There is also a possibility that you have underpriced your product. You are providing a valuable service in assembling this information and these materials. The fact that every seminar results in a sellout of the materials may mean that you have priced your product too low. I know that your husband wishes to have these materials available to every family, but increasing the price a little may not make the price too high, and would better compensate you for your efforts.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-77

CT 15.4 (Continued) However, even if you raised prices, you will find that you need additional cash as long as the business continues to expand. It certainly does not mean that you and Sue are doing anything wrong. It just means that you will be investing additional funds as long as you continue to grow. In my opinion, the best way to make sure these kits are available to as many families as possible is for you and Sue to have a consultant evaluate and determine the size of the market for you. Then you can decide whether to expand to meet the need, or whether to keep your own business small and allow competitors to imitate your product. Congratulations again on a very successful product. Call or email this office if we may be of further assistance preparing financial statements or providing additional advice. Student’s name LO4 BT: AN Difficulty: Moderate TOT: 35 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication IMA: Budget Preparation

22-78

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 15.5

ETHICS CASE

(a) At best, if you disclose the errors in your calculations, you will be embarrassed. At worst, you will be dismissed without a recommendation for another job. (b) The president will continue making presentations using data that are grossly overstated. In time, your error may be detected when the events you projected do not materialize. (c) The most ethical scenario would be to admit your error, let the president know about the error, provide the president with corrected projections, and allow the president to decide how to alter his presentations during the second week of his speech-making. LO N/A BT: E Difficulty: Easy TOT: 20 min. AACSB: Ethics AICPA PC: Professional Demeanor, Communication IMA: Business Applications

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-79

CT 15.6

ALL ABOUT YOU

Personal Budget Typical Month Income: Wages earned .................................................. Interest income ................................................ Income subtotal .......................................................... Income tax withheld ................................................... Spendable income........................................... Expenses: Rent ............................................................................. Utilities Electricity ......................................................... Telephone and Internet ................................... Food: Groceries ......................................................... Eating out......................................................... Insurance .................................................................... Transportation ............................................................ Student loan payments .............................................. Entertainment ............................................................. Savings ....................................................................... Miscellaneous ............................................................. Total investments and expenses .............. Surplus/Shortage........................................................

$2,500 50 2,550 300 $2,250 500 85 125 100 150 100 150 375 250 50 210 2,095 $ 155

LO N/A BT: AP Difficulty: Easy TOT: 20 min. AACSB: Technology, Analytic AICPA FC: Reporting IMA: Budget Preparation

22-80

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 15.7

CONSIDERING YOUR COSTS AND BENEFITS

We are concerned that the personal budgets presented on websites and in financial planning textbooks often list student loans among the sources of income. This type of thinking can lead to an overreliance on debt during college, and will result in accumulation of large amounts of debt that must be repaid. We would prefer a format that lists nondebt sources of income, then subtracts expenses, then shows debt borrowed. This format emphasizes an important point: Just like a business, in the short run you can borrow money when your cash inflows are not sufficient to meet your outflows, but in the long run you need to learn to live within your income, and your budget. LO N/A BT: E Difficulty: Easy TOT: 15 min. AACSB: Technology, Communication AICPA PC: Communication IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

22-81

CHAPTER 16 Budgetary Control and Responsibility Accounting Learning Objectives 1. 2. 3. 4.

Describe budgetary control and static budget reports. Prepare flexible budget reports. Apply responsibility accounting to cost and profit centers. Evaluate performance in investment centers. *5.Explain the difference between ROI and residual income.

*Note: All asterisked Questions, Brief Exercises, Exercises, and Problems relate to material contained in the appendix to the chapter.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

16-1

ANSWERS TO QUESTIONS 1.

(a) Budgetary control is the use of budgets in controlling operations. (b) The steps in budgetary control are: (1) Develop the planned objectives (budget). (2) Analyze differences between actual and budgeted results. (3) Take corrective action. (4) Modify future plans, if necessary.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA AC: Measurement IMA: Budget Preparation

Purpose

Name of Report

Frequency

(a) (b) (c)

Scrap Departmental overhead costs Income statement

Daily Monthly Monthly and Quarterly

Primary Recipient(s) Production manager Department manager Top management

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement, Analysis and Interpretation IMA: Budget Preparation

The budget report for the second quarter can include year-to-date information as well as data for the second quarter.

LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

There is no justification for Ken’s concern. The sales budget is derived from the sales forecast and it represents management’s best estimate of sales. Thus, it is a useful basis for evaluating sales performance.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

A static budget is an appropriate basis for evaluating a manager’s effectiveness in controlling costs when: (1) The actual level of activity closely approximates the master budget activity level and/or (2) The behavior of the costs in response to changes in activity is fixed.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

Yes, this is true. A flexible budget is a series of static budgets at different levels of activity.

LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

The performance is unfavorable. The budgeted indirect labor cost in the static budget is $1.35 per direct labor hour ($54,000 ÷ 40,000). At 45,000 direct labor hours, budgeted costs are $60,750 (45,000 × $1.35). Thus, indirect labor is $3,250 over budget ($64,000 – $60,750).

LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

The performance is favorable. At 50,000 direct labor hours, the budgeted cost is still $6,500. Thus, factory insurance is $200 under budget ($6,500 – $6,300).

LO2 BT: AN Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

The steps in preparing a flexible budget are: (1) Identify the activity index and the relevant range of activity. (2) Identify the variable costs and determine the budgeted variable cost per unit of activity for each cost. (3) Identify the fixed costs, and determine the budgeted amount for each cost. (4) Prepare the budget for selected increments of activity within the relevant range.

LO2 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Budget Preparation

16-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 16 (Continued) 10.

Cali Company can say that total budgeted costs are $20,000 fixed plus $6.50 per direct labor hour [($85,000 – $20,000) ÷ 10,000].

LO2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Strategy, Planning & Performance: Budgeting and forecasting

11.

(a) At 9,000 hours, total budgeted costs are $86,000, or [$50,000 + ($4 × 9,000)]. (b) At 12,345 hours, total budgeted costs are $99,380, or [$50,000 + ($4 × 12,345)].

LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

12.

Management by exception means that top management’s review of a budget report is focused either entirely or primarily on significant differences between actual results and planned objectives. The criteria for identifying exceptions are materiality and controllability of the item.

LO3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

13.

Responsibility accounting is a method of controlling operations that involves identifying, accumulating, and reporting costs (and revenues, where relevant) on the basis of the manager who has the authority to make the day-to-day decisions about the items. The purpose of responsibility accounting is to evaluate a manager’s performance on the basis of matters directly under that manager’s control.

LO3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

14.

Eve should know that the following conditions contribute to the effective use of responsibility accounting: (1) Costs and revenues can be directly associated with the specific level of management responsibility. (2) The costs and revenues are controllable at the level of responsibility with which they are associated. (3) Budget data can be developed for evaluating the manager’s effectiveness in controlling the costs and revenues.

LO3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

15.

A cost is controllable at a given level of managerial responsibility if the manager has the power to incur the cost within a given period of time. Most costs incurred directly are controllable, whereas costs incurred indirectly and allocated to a responsibility level are noncontrollable at that level.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

16.

Responsibility reports differ from budget reports in two respects: (1) a distinction is made between controllable and noncontrollable items and (2) responsibility reports either emphasize, or only include, items controllable by the individual manager.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

17.

Usually there is a relationship between a responsibility reporting system and a company’s organization chart. In a responsibility reporting system, reports are prepared for each level of responsibility in the organization chart.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

18.

There are three types of responsibility centers: (a) A cost center incurs costs (and expenses) but does not directly generate revenues. (b) A profit center incurs costs (and expenses) and also generates revenues. (c) An investment center incurs costs (and expenses), generates revenues, and has control over decisions regarding the assets available for use.

LO3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

16-3

Questions Chapter 16 (Continued) 19.

(a) Only controllable costs are included in a performance report for a cost center. (b) No distinction is made between variable and fixed costs.

LO3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

20.

Direct fixed costs relate specifically to one responsibility center and are incurred for the sole benefit of that center. An indirect fixed cost relates to the company’s overall activities and is incurred for the benefit of more than one profit center. Both types of fixed costs are controllable. A direct fixed cost is controllable by a specific center manager and an indirect fixed cost is controllable by a manager higher up in the organization.

LO3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

21.

Controllable margin is contribution margin less controllable fixed costs in a profit center. The purpose of controllable margin is to provide a basis for evaluating the manager’s effectiveness in controlling revenues and costs.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

22. The primary basis for evaluating the performance of the manager of an investment center is return on investment (ROI). The equation is: Controllable Margin divided by Average Operating Assets. LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

23. ROI can be improved by: (1) increasing controllable margin and (2) reducing average operating assets. Controllable margin can be increased by increasing sales or by reducing variable and controllable fixed costs. LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

24. (a) The manager being evaluated should have direct input into the process of establishing budget goals and have the opportunity to respond to the evaluation. (b) Top management should make the evaluation entirely on matters controllable by the manager, and should fully support the evaluation process. LO3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

*25. ROI fails to indicate the dollar amount of change in residual income. That is, a positive increase in residual income may result from a project that is rejected because of its negative effect on ROI, even though the project’s ROI is greater than the company’s minimum rate of return. LO5 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

*26. Residual income is the income that remains after subtracting from the controllable margin the minimum rate of return on a company’s average operating assets. Residual income as a performance measure ignores the amount of difference in investments (average operating assets) by concentrating only on the amount of additional residual income. LO5 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

16-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 16.1 CROIX COMPANY Sales Budget Report For the Quarter Ended March 31, 2027 Product Line

Budget $315,000

Guitar: The Edge

Actual $305,000

Difference $10,000 U

LO1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

BRIEF EXERCISE 16.2 CROIX COMPANY Sales Budget Report For the Quarter Ended June 30, 2027 Product Line Guitar: The Edge

Second Quarter Budget Actual Difference

Year to Date Budget Actual Difference

$380,000 $384,000

$695,000 $689,000

$4,000 F

$6,000 U

LO1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

BRIEF EXERCISE 16.3 (a)

Direct Labor (b)

Direct Labor

ROONEY COMPANY Static Direct Labor Budget Report For the Month Ended January 31, 2027 Budget $200,000

(10,000 × $20)

Actual $206,000

Difference $6,000 U

ROONEY COMPANY Flexible Direct Labor Budget Report For the Month Ended January 31, 2027 Budget $208,000

(10,400 × $20)

Actual $206,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

Difference $2,000 F

(For Instructor Use Only)

16-5

BRIEF EXERCISE 16.3 (Continued) The static budget does not provide a proper basis for evaluating performance because the budget is not based on the hours actually worked. In contrast, the flexible budget provides the proper basis for evaluating performance because the budget is based on the hours actually worked. LO2 BT: E Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

BRIEF EXERCISE 16.4 GUNDY COMPANY Monthly Flexible Manufacturing Budget For the Year 2027 Activity level Finished units Variable costs Direct materials ($5) Direct labor ($6) Overhead ($8) Total variable costs ($19) Fixed costs Depreciation (1) Supervision (2) Total fixed costs Total costs (1) (2)

80,000

100,000

120,000

$ 400,000 480,000 640,000 1,520,000

$ 500,000 600,000 800,000 1,900,000

$ 600,000 720,000 960,000 2,280,000

200,000 100,000 300,000 $1,820,000

200,000 100,000 300,000 $2,200,000

200,000 100,000 300,000 $2,580,000

($2 × 1,200,000) ÷ 12 ($1 × 1,200,000) ÷ 12

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation [80,000 fin. units: ((80,000 × $5) + (80,000 × $6) + (80,000 × $8)) + (($2 × 1,200,000) ÷ 12) + (($1 × 1,200,000) ÷ 12)) = $1,820,000] [80,000 fin. units: ((Fin. units × DM/unit) + (Fin. units × DL/unit) + (Fin. units × VOH/unit)) + ((Tot. ann. units × Depr./unit) ÷ No. mos. in a yr.) + ((Tot. ann. units × Super./unit) ÷ No. mos. in a yr.)) = Tot. costs]

16-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 16.5 GUNDY COMPANY Manufacturing Flexible Budget Report For the Month Ended March 31, 2027

Units produced Variable costs Direct materials Direct labor Overhead Total variable costs Fixed costs Depreciation Supervision Total fixed costs Total costs

Budget

Actual

100,000

Difference Favorable F Unfavorable U

$ 500,000 600,000 800,000 1,900,000

$ 520,000 596,000 805,000 1,921,000

$20,000 U 4,000 F 5,000 U 21,000 U

200,000 100,000 300,000 $2,200,000

200,000 100,000 300,000 $2,221,000

–0– –0– –0– $21,000 U

Costs were not entirely controlled as evidenced by the difference between budgeted and actual for the variable costs. However, the largest variance from budget was direct materials which was only 4% ($20,000 ÷ $500,000) over budget and may be within management’s guidelines for materiality. LO2 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement [($500,000 - $520,000 = $20,000U); ($600,000 - $596,000 = $4,000F); ($800,000 - $805,000 = $5,000U); ($200,000 - $200,000 = $0); ($100,000 - $100,000 = $0); ($2,200,000 - $2,221,000 = $21,000U)] [(DM bud. – DM act. = Unfav. diff.); (DL bud. – DL act. = Fav. diff.); (OH bud. – OH act. = Unfav. diff.); (Depr. bud. – Depr. act. = No diff.); (Super. bud. – Super. act. = No diff.); (Tot. cost bud. – Tot. cost act. = Tot. unfav. diff.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

16-7

BRIEF EXERCISE 16.6 HANNON COMPANY Assembly Department Manufacturing Overhead Cost Responsibility Report For the Month Ended April 30, 2027 Controllable Cost

Budget

Actual

Indirect materials Indirect labor Utilities Supervision

$16,000 20,000 10,000 5,000 $51,000

$14,300 20,600 10,850 5,000 $50,750

Difference Favorable F Unfavorable U $1,700 F 600 U 850 U 0U $ 250 F

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement ($51,000 - $50,750 = $250F) (Bud. tot. cost – Act. tot. cost = Tot. fav. diff.)

BRIEF EXERCISE 16.7 TORRES COMPANY Water Division Responsibility Report For the Year Ended December 31, 2027

Sales Variable costs Contribution margin Controllable fixed costs Controllable margin

Budget

Actual

$2,000,000 1,000,000 1,000,000 300,000 $ 700,000

$2,080,000 1,050,000 1,030,000 305,000 $ 725,000

Difference Favorable F Unfavorable U $80,000 F 50,000 U 30,000 F 5,000 U $25,000 F

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 16.8 COBB COMPANY Plastics Division Responsibility Report For the Year Ended December 31, 2027 Budget

Actual

Contribution margin Controllable fixed costs Controllable margin

$700,000 300,000 $400,000

$710,000 302,000 $408,000

Difference Favorable F Unfavorable U $10,000 F 2,000 U $ 8,000 F

Return on investment

20%

20.4%

0.4% F

($400,000 ÷ $2,000,000)

($408,000 ÷ $2,000,000)

($8,000 ÷ $2,000,000)

LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement [Bud.: (($700,000 - $300,000) ÷ $2,000,000 = 20%); Act.: (($710,000 - $302,000) ÷ $2,000,000 = 20.4%); (20% 20.4% = 0.4%F)] [Bud.: ((CM – Control. FC) ÷ Ave. oper. assets = ROI); (Act.: ((CM – Control. FC) ÷ Ave. oper. assets = ROI); (Bud. ROI – Act. ROI = Fav. diff)]

BRIEF EXERCISE 16.9 III III III

28% ($1,400,000 ÷ $5,000,000) 25% ($2,000,000 ÷ $8,000,000) 36% ($3,600,000 ÷ $10,000,000)

LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

16-9

BRIEF EXERCISE 16.10 III

A $300,000 ($2,000,000 × 15%) increase in sales will increase contribution margin and controllable margin $210,000 ($300,000 × 70%). The new ROI is 32.2% ($1,610,000 ÷ $5,000,000).

III

A decrease in controllable fixed costs results in a corresponding increase in controllable margin. The new ROI is 30% ($2,400,000 ÷ $8,000,000).

III

A decrease in average operating assets reduces the denominator. The new ROI is 37.5% ($3,600,000 ÷ $9,600,000).

LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement [(I: ($1,400,000 × 115%) ÷ $5,000,000 = 32.2%); (II: ($2,000,000 + $400,000) ÷ $8,000,000 = 30%); (III: $3,600,000 ÷ ($10,000,000 - $400,000) = 37.5%)] [(I: (Control. margin × % incr.) ÷ Ave. oper. assets = ROI); (II: (Controll. margin + $ incr.) ÷ Ave. oper. assets = ROI); (III: Controll. margin ÷ (Ave. oper. assets - $ decr.) = ROI)]

*BRIEF EXERCISE 16.11 Controllable Margin $630,000

÷ ÷

Average Operating Assets $3,000,000

= ROI = 21%

Controllable Margin $630,000 $630,000

– – –

(Minimum Rate of Return × Average Operating Assets) (10% × $3,000,000) $300,000

= = =

Residual Income Residual Income $330,000

LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

*BRIEF EXERCISE 16.12 Controllable Margin $800,000

÷ ÷

Average Operating Assets $4,000,000

= ROI = 20%

Controllable Margin $800,000 $800,000

– – –

(Minimum Rate of Return × Average Operating Assets) (15% × $4,000,000) $600,000

= = =

Residual Income Residual Income $200,000

LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Analysis and Interpretation IMA: Performance Measurement

16-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS FOR DO IT! EXERCISES DO IT! 16.1 Difference Favorable F Unfavorable U

Production in units

Budget 6,000

Actual 6,500

Variable costs Direct materials ($7) Direct labor ($13) Overhead ($18) Total variable costs

$ 42,000 78,000 108,000 228,000

$ 38,850 76,440 116,640 231,930

$3,150 F 1,560 F 8,640 U 3,930 U

Fixed costs Depreciation Supervision Total fixed costs Total costs

8,000 3,800 11,800 $239,800

8,000 4,000 12,000 $243,930

0 200 U 200 U $4,130 U

The static budget indicates that actual variable costs exceeded budgeted amounts by $3,930. Fixed costs were unfavorable by $200. The static budget gives the impression that the company did not control its variable costs. However, the static budget does not give consideration to the fact that the company produced 500 more units than planned. As a consequence, the static budget is not an effective tool to evaluate variable costs. It is, however, a good tool to evaluate fixed costs, since those should not vary with changes in production volume. LO1 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

DO IT! 16.2 Using the graph data, fixed costs are $90,000, and variable costs are $5.20 per direct labor hour [($350,000 – $90,000) ÷ 50,000]. Thus, at 65,000 direct labor hours, total budgeted costs are $428,000 [$90,000 + (65,000 × $5.20)]. LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management [(($350,000 - $90,000) ÷ 50,000 = $5.20); ($90,000 + (65,000 × $5.20) = $428,000)] [((Tot. cost – FC) ÷ DLH activity = VC/DLH); (FC + (DLH activity × VC/DLH) = Tot. bud. costs)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

16-11

DO IT! 16.3 ROCKIES DIVISION Responsibility Report For the Year Ended December 31, 2027

Sales Variable costs Contribution margin Controllable fixed costs Controllable margin

Budget $2,000,000 800,000 1,200,000 550,000 $ 650,000

Actual $1,890,000 760,000 1,130,000 550,000 $ 580,000

Difference Favorable F Unfavorable U $110,000 U 40,000 F 70,000 U –0– $ 70,000 U

LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement (Control. margin: $650,000 - $580,000 = $70,000U) (Control. margin: Bud. – Act. = Unfav. diff.)

DO IT! 16.4 (a)

Controllable margin for 2027: Sales .................................................... Variable costs ..................................... Contribution margin ........................... Controllable fixed costs ..................... Controllable margin ............................ Return on investment for 2027:

(b)

$500,000 300,000 200,000 75,000 $125,000 $125,000 $625,000

20%

Expected return on investment for alternative 1: $125,000* = 25% $500,000 *Controllable margin remains unchanged from (a)

($125,000 ÷ ($625,000 - $125,000) = 25%) (Control. margin ÷ (Ave. oper. assets – Reduction) = ROI)

16-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

DO IT! 16.4 (Continued) Controllable margin for alternative 2: Sales ($500,000 + $100,000).................... Variable costs ($300,000/$500,000 × $600,000) ........... Contribution margin ................................ Controllable fixed costs……………………. Controllable margin ................................ Expected return on investment for alternative 2:

$600,000 360,000 240,000 75,000 $165,000 $165,000 $625,000

26.4%

[(($500,000 + $100,000) – (($300,000 ÷ $500,000) × ($500,000 + $100,000)) - $75,000 = $165,000); ($165,000 ÷ $625,000 = 26.4%)] [((Old sales + Incr.) – ((Old VC ÷ Old sales) × (Old sales + Incr.)) – Control. FC = Control. margin); (Control. margin ÷ Ave. oper. assets = ROI)] LO4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

16-13

SOLUTIONS TO EXERCISES EXERCISE 16.1 1. True. 2. False. Budget reports are prepared as frequently as needed. 3. True. 4. True. 5. False. Budgetary control works best when a company has a formalized reporting system. 6. False. The primary recipients of the sales report are the sales manager and top management. 7. True. 8. True. 9. False. Top management’s reaction to unfavorable differences is often influenced by the materiality of the difference. 10. True. LO1, 2 BT: K Difficulty: Easy TOT: 5 min. AACSB: Knowledge AICPA FC: Measurement IMA: Budget Preparation, Performance Measurement

EXERCISE 16.2 (a)

CREDE COMPANY Selling Expense Report For the Quarter Ending March 31

Month

Budget

By Month Actual Difference

January February March

$30,000 $35,000 $40,000

$31,200 $34,525 $46,000

$1,200 U $ 475 F $6,000 U

Budget

Year-to-Date Actual Difference

$ 30,000 $ 65,000 $105,000

$ 31,200 $ 65,725 $111,725

$1,200 U $ 725 U $6,725 U

(b)

The purpose of the Selling Expense Report is to help management control selling expenses. The primary recipient is the sales manager.

(c)

Most likely, when management scrutinized the results for January and February, they would determine that the difference was insignificant (4% in January and 1.4% in February), and require no action. When the March results are examined, however, the fact that the difference is 15% of budget would probably cause management to investigate further. As a result of their investigation, management would either take corrective action or modify the amounts of budgeted selling expense for future months to reflect changing conditions.

LO1 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 16.3 MYERS COMPANY Monthly Manufacturing Overhead Flexible Budget For the Year 2027 Activity level Direct labor hours Variable costs Indirect labor ($1.00) Indirect materials ($0.70) Utilities ($0.40) Total variable costs ($2.10) Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

7,000

8,000

9,000

10,000

$ 7,000 4,900 2,800 14,700

$ 8,000 5,600 3,200 16,800

$ 9,000 6,300 3,600 18,900

$10,000 7,000 4,000 21,000

4,000 1,200 800 6,000 $20,700

4,000 1,200 800 6,000 $22,800

4,000 1,200 800 6,000 $24,900

4,000 1,200 800 6,000 $27,000

LO2 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

EXERCISE 16.4 (a)

MYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2027

Direct labor hours (DLH) Variable costs Indirect labor($1.00) Indirect materials($0.70) Utilities($0.40) Total variable costs($2.10) Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

Budget at 9,000 DLH

Actual Costs 9,000 DLH

Difference Favorable F Unfavorable U

$ 9,000 6,300 3,600

$ 8,800 5,800 3,200

$200 F 500 F 400 F

18,900

17,800

1,100 F

4,000 1,200 800 6,000 $24,900

4,000 1,200 800 6,000 $23,800

— — — — $1,100 F

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

16-15

EXERCISE 16.4 (Continued) (b)

MYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2027

Direct labor hours (DLH) Variable costs Indirect labor ($1.00) Indirect materials ($0.70) Utilities ($0.40) Total variable costs ($2.10) Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

Budget at 8,500 DLH

Actual Costs 8,500 DLH

Difference Favorable F Unfavorable U

$ 8,500 5,950 3,400

$ 8,800 5,800 3,200

$300 U 150 F 200 F

17,850

17,800

50 F

4,000 1,200 800 6,000 $23,850

4,000 1,200 800 6,000 $23,800

— — — — $50 F

[(Ind. Labor: (8,500 × $1.00) - $8,800 = $300U); (Ind. Mat.: (8,500 × $0.70) - $5,800 = $150F); (Util.: (8,500 × $0.40) - $3,200 = $200F); (Super.: ($4,000 - $4,000 = $0); (Depr.: ($1,200 - $1,200 = $0); (Prop. tax.: ($800 $800) = $0); ($23,850 - $23,800 = $50F)] [(Ind. Labor: (Act. DLH × Ind. labor rate/hr.) – Act. ind. labor = Unfav. diff.) + (Ind. Mat.: (Act. DLH × Ind. mat. rate/hr.) – Act. ind. mat. = Fav. diff.) + (Util.: (Act. DLH × Util. rate/hr.) – Act. util. = Fav. diff.); (Super.: (Bud. super. – Act. super) = No diff.); (Depr.: (Bud. depr. – Act. depr.) = No diff.); (Prop. tax.: (Bud. prop. tax. – Act. prop. tax) = No diff.); (Bud. tot. costs – Act. tot. costs = Fav. diff.)]

(c) To be able to evaluate the findings for case (a) and case (b), a quantitative guideline or materiality threshold is needed to determine if any variances (favorable or unfavorable) merit investigation. In case (a) the overall performance for the month looks satisfactory because all line items have favorable variances. However, indirect materials at 7.9% ($500 ÷ $6,300) of budgeted costs and utilities at 11.1% ($400 ÷ $3,600) may warrant investigation if management’s materiality guidelines were to investigate variances greater than 5% from budget. If management applied the same materiality guideline in case (b) management may need to determine the causes of the differences for utilities favorable variance of 5.9% ($200 ÷ $3,400) favorable, or since the differences are small, management might consider them immaterial if they applied both a percent and a dollar guideline, such as 5% of budget or more than $1,000. Note that even though the indirect labor had an unfavorable variance of 3.5% ($300 ÷ $8,500) it may not warrant investigation if it does not meet management’s materiality guidelines. LO2 BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement 16-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 16.5 FALLON COMPANY Monthly Selling Expense Flexible Budget For the Year 2027 Activity level Sales Variable expenses Sales commissions (6%) Advertising (4%) Travel (3%) Delivery (2%) Total variable expenses (15%) Fixed expenses Sales salaries Depreciation Insurance Total fixed expenses Total expenses

$170,000

$180,000

$190,000

$200,000

$ 10,200 6,800 5,100 3,400

$ 10,800 7,200 5,400 3,600

$ 11,400 7,600 5,700 3,800

$ 12,000 8,000 6,000 4,000

25,500

27,000

28,500

30,000

35,000 7,000 1,000 43,000 $ 68,500

35,000 7,000 1,000 43,000 $ 70,000

35,000 7,000 1,000 43,000 $ 71,500

35,000 7,000 1,000 43,000 $ 73,000

LO2 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA AC: Reporting IMA: Performance Measurement

EXERCISE 16.6 (a)

FALLON COMPANY Selling Expense Flexible Budget Report For the Month Ended March 31, 2027

Sales Variable expenses Sales commissions Advertising Travel Delivery Total variable expenses Fixed expenses Sales salaries Depreciation Insurance Total fixed expenses Total expenses

Budget $170,000

Actual $170,000

Difference Favorable F Unfavorable U

$ 10,200 6,800 5,100 3,400 25,500

$ 11,000 6,900 5,100 3,450 26,450

$800 U 100 U 0U 50 U 950 U

35,000 7,000 1,000 43,000 $ 68,500

35,000 7,000 1,000 43,000 $ 69,450

0U 0U 0U 0U $950 U

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-17

EXERCISE 16.6 (Continued) (b)

FALLON COMPANY Selling Expense Flexible Budget Report For the Month Ended March 31, 2027

Sales Variable expenses Sales commissions Advertising Travel Delivery Total variable expenses Fixed expenses Sales salaries Depreciation Insurance Total fixed expenses Total expenses

Budget $180,000

Actual $180,000

Difference Favorable F Unfavorable U

$ 10,800 7,200 5,400 3,600

$ 11,000 6,900 5,100 3,450

$200 U 300 F 300 F 150 F

27,000

26,450

550 F

35,000 7,000 1,000 43,000 $ 70,000

35,000 7,000 1,000 43,000 $ 69,450

0U 0U 0U 0U $550 F

[(Sales comm.: ($180,000 × 6%) - $11,000 = $200U); (Advert.: ($180,000 × 4%) - $6,900 = $300F); (Travel: ($180,000 × 3%) - $5,100 = $300F); (Del.: ($180,000 × 2%) - $3,450 = $150F); (Tot. var. exp.: $27,000 - $26,450 = $550F);(Sales sal.: ($35,000 - $35,000 = $0); (Depr.: ($7,000 - $7,000) = $0); (Ins.: ($1,000 - $1,000) = $0); (Tot. fix. exp.: $43,000 - $43,000 = $0); (Tot. exp.: $70,000 - $69,450 = $550F)] [(Sales comm.: (Act. Sales × Sales comm. %) – Act. sales comm. = Unfav. diff.); (Advert.: (Act. sales × Advert. %) – Act. advert. = Fav. diff.); (Travel: (Act. sales × Travel %) – Act. travel = Fav. diff.); ( Del.: (Act. sales × Del. %) – Act. del. = Fav. diff.);(Bud. tot. var. exp. – Act. var. exp. = Fav. diff.); (Sales sal.: (Bud. sales sal. – Act. sales sal.) = No diff.); (Depr.: (Bud. depr. – Act. depr.) = No diff.); (Ins.: (Bud. ins. – Act. ins.) = No diff.); (Bud. tot. fix. exp. – Act. tot. fix. exp. = No diff.);(Bud. tot. exp. – Act. tot. exp. = Fav. diff.)]

(c) Flexible budgets are essential in evaluating a manager’s performance in controlling variable expenses because the budget allowance varies directly with changes in the activity index. At $170,000 of sales, the manager was over budget (unfavorable) by $950 but at $180,000 of sales, the manager was under budget (favorable) by $550. LO2 BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 16.7 (a)

APPLIANCE POSSIBLE INC. Flexible Production Cost Budget Activity level Production levels Variable costs: Manufacturing ($6) Administrative ($4) Selling ($3) Total variable costs ($13) Fixed costs: Manufacturing Administrative Total fixed costs Total costs

90,000

100,000

110,000

$ 540,000 360,000 270,000 1,170,000

$ 600,000 400,000 300,000 1,300,000

$ 660,000 440,000 330,000 1,430,000

160,000 80,000 240,000 $1,410,000

160,000 80,000 240,000 $1,540,000

160,000 80,000 240,000 $1,670,000

(b) Let (X) represent number of units Sales price(X) = Variable costs(X) + Fixed costs + Profit Sales price(X) = Variable costs(X) + $240,000 + $60,000 (Sales price – Variable costs)(X) = $300,000 ($16 – $13)(X) = $300,000 $3(X) = $300,000 X = 100,000 units to be sold [($240,000 + $60,000) ÷ ($16 - $13) = 100,000] [(FC + Target net inc.) ÷ (USP – UVC) = Targeted units] LO2 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-19

EXERCISE 16.8 (a)

RENSING GROOMERS Flexible Budget Activity level Direct labor hours Variable costs: Grooming supplies ($5) Direct labor ($14) Overhead ($1) Total variable costs ($20) Fixed costs: Overhead Total fixed costs Total costs

550

600

700

$ 2,750 7,700 550 11,000

$ 3,000 8,400 600 12,000

$ 3,500 9,800 700 14,000

10,000 10,000 $21,000

10,000 10,000 $22,000

10,000 10,000 $24,000

(b) A flexible budget presents expected costs at various levels of production volume, not just one, so that comparisons can be made between actual costs and budgeted costs at the same volume. This allows the manager to determine whether a difference between the actual results and budget is due to better or worse cost control than expected or due to achieving a different volume than that upon which the static budget was predicated. (c) $21,000 ÷ 550 = $38.18 $22,000 ÷ 600 = $36.67 $24,000 ÷ 700 = $34.29 (d) Cost formula is $10,000 + $20(X), where (X) = direct labor hours Total cost = $10,000 + ($20 × 650) = $23,000. Number of clients = 650 hrs ÷ 1.30 hrs/client = 500 Cost per client = $23,000 ÷ 500 = $46.00 Charge per client = $46.00 × 1.40 = $64.40 [($10,000 + ($20 × 650) = $23,000); (650 ÷ 1.30 = 500); ($23,000 ÷ 500 = $46.00); ($46.00 × 140% = $64.40)] [(FC + (UVC/DLH × No. DLH) = Tot. cost); (No. DLH ÷ DLH/client = No. of clients); (Tot. cost ÷ No. of clients = Cost/client); (Cost/client × Sales markup % = Chrg./client)] LO1, 2 BT: E Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation

16-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 16.9 (a)

SORIA COMPANY Selling Expense Flexible Budget Report Clothing Department For the Month Ended October 31, 2027

Sales in units Variable expenses Sales commissions ($0.30) Advertising expense ($0.09) Travel expense ($0.45) Free samples ($0.20) Total variable expenses ($1.04) Fixed expenses Rent Sales salaries Office salaries Depreciation—sale staff autos Total fixed expenses Total expenses

Budget 10,000

Actual 10,000

Difference Favorable F Unfavorable U

$ 3,000 900 4,500 2,000

$ 2,600 850 4,100 1,400

$ 400 F 50 F 400 F 600 F

10,400

8,950

1,450 F

1,500 1,200 800 500 4,000 $14,400

1,500 1,200 800 500 4,000 $12,950

0U 0U 0U 0 0U $1,450 F

[(Sales comm.: (($2,400 ÷ 8,000) × 10,000) - $2,600 = $400F); (Advert.: (($720 ÷ 8,000) × 10,000) - $850 = $50F); (Travel: (($3,600 ÷ 8,000) × 10,000) - $4,100 = $400F); (Free samples: (($1,600 ÷ 8,000) × 10,000) $1,400 = $600F); (Rent: ($1,500 – $1,500) = $0); (Sales sal.: ($1,200 - $1,200) = $0); (Off. sal.: ($800 - $800) = $0); (Depr.: ($500 - $500) = $0)] [(Sales comm.: ((Static bud. amt. ÷ Static bud. units) × Act. units) – Act. sales comm. = Fav. diff.); (Advert.: ((Static bud. amt. ÷ Static bud. units) × Act. units) – Act. advert. =Fav. diff.); (Travel: ((Static bud. amt. ÷ Static bud. units) × Act. units) – Act. travel = Fav. diff.); (Free samples: ((Static bud. amt. ÷ Static bud. units) × Act. units) – Act. free samples = Fav. diff.); (Rent: (Bud. rent – Act. rent) = No diff.); (Sales sal.: (Bud. sales sal. – Act. sales sal.) = No diff.); (Off. sal.: (Bud. off. sal. – Act. off. sal.) = No diff.); (Depr. : (Bud. depr. – Act. depr.) = No diff.)]

(b) No, Joe should not have been reprimanded. As shown in the flexible budget report, variable costs were $1,450 below budget. LO1, 2 BT: E Difficulty: Easy TOT: 7 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-21

EXERCISE 16.10 (a)

CHUBBS INC. Manufacturing Overhead Flexible Budget Report For the Quarter Ended March 31, 2027

Variable costs Indirect materials Indirect labor Utilities Maintenance Total variable costs Fixed costs Supervisory salaries Depreciation Property taxes and insurance Maintenance Total fixed costs Total costs (b)

Budget

Actual

Difference Favorable F Unfavorable U

$12,000 10,000 8,000 6,000 36,000

$13,500 9,500 8,700 5,000 36,700

$1,500 U 500 F 700 U 1,000 F 700 U

36,000 7,000

0U 0U

8,000 5,000 56,000 $92,000

8,300 5,000 56,300 $93,000

300 U 0U 300 U $1,000 U

CHUBBS INC. Manufacturing Overhead Responsibility Report For the Quarter Ended March 31, 2027

Controllable Costs Indirect materials Indirect labor Utilities Maintenance* Supervisory salaries

Budget $12,000 10,000 8,000 11,000 36,000 $77,000

Actual $13,500 9,500 8,700 10,000 36,000 $77,700

Difference Favorable F Unfavorable U $1,500 U 500 F 700 U 1,000 F 0U $ 700 U

*Includes variable and fixed costs [(Ind. mat.: $12,000 - $13,500 = $1,500U); (Ind. labor: $10,000 - $9,500 = $500F); (Util.: $8,000 - $8,700 = $700U); (Maint.: ($6,000 + $5,000) – ($5,000 + $5,000) = $1,000F); (Super. sal.: $36,000 - $36,000 = $0)]

16-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 16.10 (Continued) [(Ind. mat.: Bud. amt. – Act. amt. = Unfav. diff.); (Ind. labor: Bud. amt. – Act. amt. = Fav. diff.);(Util.: Bud. amt. – Act. amt. = Unfav. diff.); (Maint.: (Bud. VC + Bud. FC) – (Act. VC + Act. FC) = Fav. diff.);(Super. sal.: Bud. amt. Act. amt. = No diff.)] LO2, 3 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

EXERCISE 16.11 (a) URLINK COMPANY Home Internet Service Segment Responsibility Report For the Quarter Ended March 31, 2027

Service revenue Variable costs: Material and supplies Wages Gas and oil Total variable costs Contribution margin Controllable fixed costs: Supervisory salaries Insurance Equipment depreciation Total controllable fixed costs Controllable margin

Budget

Actual

Difference Favorable F Unfavorable U

$25,000

$26,200

$1,200 F

1,600 3,000 2,800 7,400 17,600

1,200 3,250 3,400 7,850 18,350

400 F 250 U 600 U 450 U 750 F

9,000 4,000 1,500 14,500 $ 3,100

9,500 3,900 1,300 14,700 $ 3,650

500 U 100 F 200 F 200 U $ 550 F

[($1,200F + ($400F - $250U - $600U) = $750F); ($750F + (-$500U + $100F + $200F) = $550F)] [(Serv. rev. fav. diff. + (Mat. & supp. fav. diff. – Wages unfav. diff. – Gas & oil unfav. diff.) = CM fav. diff.); (CM fav. diff. + (-Super. sal. unfav. diff. + Ins. fav. diff. + Equip. depr. fav. diff.) = Control. margin fav. diff.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-23

EXERCISE 16.11 (Continued) (b) FROM:

Student’s email address

TO:

Kirkland’s email address

SUBJECT:

The Reporting Principles of Performance Reports

Mr. Kirkland: When evaluating the performance of a company’s segments, the performance reports should: 1. Contain only data that are controllable by the segment’s manager. 2. Provide accurate and reliable budget data to measure performance. 3. Highlight significant differences between actual results and budget goals. 4. Be tailor-made for the intended evaluation. 5. Be prepared at reasonable intervals. I hope these suggested guidelines will be helpful in establishing the performance reporting system to be used by UrLink Company. Student’s name LO2, 3 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

EXERCISE 16.12 (a) Fabricating Department = $50,000 fixed costs plus total variable costs of $2.00 per direct labor hour [($150,000 – $50,000) ÷ 50,000]. Assembling Department = $40,000 fixed costs plus total variable costs of $1.60 per direct labor hour [($120,000 – $40,000) ÷ 50,000]. [(Fab.: $50,000 + (($150,000 - $50,000) ÷ 50,000)); (Assem: $40,000 + (($120,000 - $40,000) ÷ 50,000))] [(Fab.: FC + ((Tot. costs – FC) ÷ Normal DLH)); ((Assem.: FC + ((Tot. costs – FC) ÷ Normal DLH))]

(b) Fabricating Department = $50,000 + ($2.00 × 53,000) = $156,000. Assembling Department = $40,000 + ($1.60 × 47,000) = $115,200. [(Fab.: $50,000 + ($2.00 × 53,000) = $156,000); (Assem.: $40,000 + ($1.60 × 47,000) = $115,200)] [(Fab.: FC + (UVC × Act. DLH) = Tot. costs); (Assem.: FC + (UVC × Act. DLH) = Tot. costs)]

16-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 16.12 (Continued)

(c)

$300

Total Budgeted Cost Line

250

Costs in (000)

200 Budgeted Variable Costs

150

100

50 Budgeted Fixed Costs

90 100

Direct Labor Hours in (000) LO2 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-25

EXERCISE 16.13 (a) To Dallas Department Manager—Finishing Controllable Costs: Direct Materials Direct Labor Manufacturing Overhead Total

Budget $ 44,000 82,000 49,200 $175,200

Month: July Actual $ 42,500 83,400 51,000 $176,900

(b) To Assembly Factory Manager—Dallas Controllable Costs: Dallas Office Departments: Machining Finishing Total

Fav/Unfav $1,500 F 1,400 U 1,800 U $1,700 U Month: July

Budget $ 92,000

Actual $ 95,000

Fav/Unfav $3,000 U

219,000 175,200 $486,200

220,000 176,900 $491,900

1,000 U 1,700 U $5,700 U

[(Off.: $92,000 - $95,000 = $3,000U); (Mach.: $219,000 - $220,000 = $1,000U); (Fin.: ($44,000 + $82,000 + $49,200) – ($42,500 + $83,400 + $51,000) = $1,700U)] [(Off.: Off. bud. – Act. bud. = Unfav. diff.); (Mach.: Mach. bud. – Mach. act. = Unfav. diff.); (Fin.: Bud. DM + Bud. DL + Bud. VOH) – (Act. DM + Act. DL + Act. VOH) = Unfav. diff.)]

Month: July

Budget $ 130,000

Actual $ 132,000

Fav/Unfav $2,000 U

420,000 486,200 496,500 $1,532,700

424,000 491,900 494,200 $1,542,100

4,000 U 5,700 U 2,300 F $9,400 U

LO3 BT: AP Difficulty: Easy TOT: 12 AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 16.14 (a)

MALONE COMPANY Mixing Department Responsibility Report For the Month Ended January 31, 2027 Controllable Cost Indirect labor Indirect materials Lubricants Maintenance Utilities

(b)

Budget $12,000 7,700 1,675 3,500 5,000 $29,875

Actual $12,250 10,200 1,650 3,500 6,400 $34,000

Difference $ 250 UU 2,500 U 25 F -01,400 U $4,125 U

Most likely, when management examined the responsibility report for January, they would determine that the differences were insignificant for indirect labor 2.1% of budget ($250 ÷ $12,000), lubricants 1.5% ($25 ÷ $1,675), and maintenance 0% and require no action. However, the differences for indirect materials 32.5% ($2,500 ÷ $7,700) and utilities 28% ($1,400 ÷ $5,000) would cause management to investigate further. As a result of their investigation, management would either take corrective action or modify the budgeted amounts for future months to reflect changing conditions.

LO3 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

EXERCISE 16.15 (a) 1. 2. 3. 4. 5. 6.

Controllable margin ($270,000 – $100,000) Variable costs ($600,000 – $270,000) Contribution margin ($450,000 – $320,000) Controllable fixed costs ($130,000 – $90,000) Controllable fixed costs ($180,000 – $95,000) Sales ($250,000 + $180,000)

$170,000 330,000 130,000 40,000 85,000 430,000

[(Women’s: ($270,000 - $100,000 = $170,000); ($600,000 - $270,000 = $330,000)); (Men’s: ($450,000 - $320,000 = $130,000); ($130,000 - $90,000 = $40,000)); (Children’s: ($180,000 - $95,000 = $85,000); ($250,000 + $180,000 = $430,000))] [(Women’s: (CM – Control. FC = Control. margin); (Sales – CM = VC)); (Men’s: (Sales – VC = CM); (CM – Control. Margin = Control. FC)); (Children’s: (CM – Control. margin = Control. FC); (VC + CM = Sales))]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-27

EXERCISE 16.15 (Continued) (b)

HORATIO INC. Women’s Shoe Division Responsibility Report For the Month Ended June 30, 2027

Sales Variable costs Contribution margin Controllable fixed costs Controllable margin

Budget $600,000 325,000 275,000 100,000 $175,000

Actual $600,000 330,000 270,000 100,000 $170,000

Difference Favorable F Unfavorable U $ 0U 5,000 U 5,000 U 0U $5,000 U

LO3 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

EXERCISE 16.16 (a)

HARRINGTON COMPANY Sports Equipment Division Responsibility Report For the Year Ended December 31, 2027

Sales Variable costs Cost of goods sold Selling and administrative Total Contribution margin Controllable fixed costs Cost of goods sold Selling and administrative Total Controllable margin

Budget

Actual

Difference

$900,000

$880,000

$20,000 U

440,000 60,000 500,000 400,000

408,000 61,000 469,000 411,000

32,000 F 1,000 U 31,000 F 11,000 F

100,000 90,000 190,000 $210,000

105,000 66,000 171,000 $240,000

5,000 U 24,000 F 19,000 F $30,000 F

(b) ($240,000 – $90,000)/$1,000,000 = 15% [($240,000 - $90,000) ÷ $1,000,000 = 15%] [(Act. control. margin – Noncontrol. FC) ÷ Ave. oper. assets = ROI] LO3, 4 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement 16-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 16.17 (a) Controllable margin = ($3,000,000 – $1,950,000 – $600,000) = $450,000 ROI = $450,000 ÷ $5,000,000 = 9% (b) 1.

Contribution margin percentage is 35%, or ($1,050,000 ÷ $3,000,000) Increase in controllable margin = $300,000 × 35% = $105,000 ROI = ($450,000 + $105,000) ÷ $5,000,000 = 11.1%

[($1,050,000 ÷ $3,000,000 = 35%); ($300,000 × 35% = $105,000); (($405,000 + $105,000) ÷ $5,000,000 = 11.1%)] [((Sales - VC) ÷ Sales = CM %); (Sales incr. × CM % = Incr. in control. margin); (Control. margin + Incr. in control. margin) ÷ Ave. oper. assets = ROI)]

($450,000 + $150,000) ÷ $5,000,000 = 12%

[($450,000 + $150,000) ÷ $5,000,000 = 12%] [(Control. margin + Decr. in VC) ÷ Ave. oper. assets = ROI]

$450,000 ÷ ($5,000,000 – ($5,000,000 x 6.25%)) = 9.6%

[$450,000 ÷ ($5,000,000 – ($5,000,000 × 6.25%)) = 9.6%] [Control. margin ÷ (Ave. oper. assets – Decr.)] LO4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-29

EXERCISE 16.18 (a) DINKLE AND FRIZELL DENTAL CLINIC Preventive Services Responsibility Report For the Month Ended May 31, 2027

Service revenue Variable costs Filling materials Novocain Dental assistant wages Supplies Utilities Total variable costs Contribution margin Controllable fixed costs Dentist salary Equipment depreciation Total controllable fixed costs Controllable margin Return on investment*

Budget $39,000

Actual $40,000

Difference Favorable F Unfavorable U $1,000 F

4,900 3,800 2,500 2,250 390 13,840 25,160

5,000 3,900 2,500 1,900 500 13,800 26,200

100 U 100 U 0 350 F 110 U 40 F 1,040 F

9,400 6,000 15,400 $ 9,760

9,800 6,000 15,800 $10,400

400 U 0 400 U $ 640 F

12.2%

13.0%

0.8% F

*Average investment = ($82,400 + $77,600) ÷ 2 = $80,000 Budget ROI = $9,760 ÷ $80,000 Actual ROI = $10,400 ÷ $80,000 ROI Difference = $640 ÷ $80,000 [(Bud.: $9,760 ÷ (($82,400 + $77,600) ÷ 2) = 12.2%); (Act.: $10,400 ÷ (($82,400 + $77,600) ÷ 2) = 13.0%); (Diff.: 12.2% - 13.0% = 0.8%F)] [(Bud.: Control. margin ÷ ((Beg. oper. assets + End. oper. assets) ÷ 2) = ROI); (Act.: Control. margin ÷ ((Beg. oper. assets + End. oper. assets) ÷ 2) = ROI); (Bud. ROI – Act. ROI = Fav. diff.)]

16-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 16.18 (Continued) (b) FROM: Student’s email address TO: Drs. Dinkle and Frizell email addresses SUBJECT: Deficiencies in the Current Responsibility Reporting System The current reporting system has the following deficiencies: 1. 2. 3. 4.

It does not clearly show both budgeted goals and actual performance. It does not indicate the contribution margin generated by the center, which shows the amount available to go towards covering controllable fixed costs. It does not report only those costs controllable by the manager of the center. Instead, it includes both controllable and common fixed costs. This results in the center appearing to be unprofitable. It does not indicate the return on investment earned by the center.

All of these deficiencies have been corrected in the recommended responsibility report attached. As can be seen from that report, the Preventive Services center is profitable. The service revenues generated in this center are adequate to cover all of its costs, both variable and controllable fixed costs, and contribute toward the covering of the clinic’s common fixed costs. In addition, the report indicates the return on investment earned by the center and that it exceeds the budget goal. Student’s name LO4 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

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16-31

EXERCISE 16.19 Planes: ROI = Controllable margin ÷ Average operating assets 12% = Controllable margin ÷ $25,000,000 Controllable margin = $25,000,000 × 12% = $3,000,000 Contribution margin = Controllable margin + Controllable fixed costs = $3,000,000 + $1,500,000 = $4,500,000 Service revenue = Contribution margin + Variable costs = $4,500,000 + $5,500,000 = $10,000,000 [($25,000,000 × 12% = $3,000,000); ($3,000,000 + $1,500,000 = $4,500,000); ($4,500,000 + $5,500,000 = $10,000,000)] [(Ave. oper. assets × ROI = Control. margin); (Control. margin + Control. FC = CM); (CM + VC = Serv. rev.)]

Taxis: ROI = Controllable margin ÷ Average operating assets 10% = $80,000 ÷ Average operating assets Average operating assets = $80,000 ÷ 10% = $800,000 Controllable margin = Contribution margin – Controllable fixed costs $80,000 = $250,000 – Controllable fixed costs Controllable fixed costs = $250,000 – $80,000 = $170,000 Contribution margin = Service revenue – Variable costs $250,000 = $500,000 – Variable costs Variable costs = $500,000 – $250,000 = $250,000 [($80,000 ÷ 10% = $800,000); ($250,000 - $80,000 = $170,000); ($500,000 - $250,000 = $250,000)] [(Control. margin ÷ ROI = Ave. oper. assets); (CM – Control. margin = Control. FC); (Serv. rev. – CM = VC)]

16-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 16.19 (Continued) Limos: ROI = Controllable margin ÷ Average operating assets = $210,000 ÷ $1,500,000 = 14% Controllable margin = Contribution margin – Controllable fixed costs $210,000 = $480,000 – Controllable fixed costs Controllable fixed costs = $480,000 – $210,000 = $270,000 Contribution margin = Service revenue – Variable costs $480,000 = Service revenue – $300,000 Service revenue = $480,000 + $300,000 = $780,000 [($210,000 ÷ $1,500,000 = 14%); ($480,000 - $210,000 = $270,000); ($480,000 + $300,000 = $780,000)] [(Control. margin ÷ Ave. oper. assets = ROI); (CM – Control. margin = Control. FC); (CM + VC = Serv. Rev.)] LO4 BT: AN Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

*EXERCISE 16.20 (a)

North Division: ROI = $140,000 ÷ $1,000,000 = 14% West Division: ROI = $360,000 ÷ $2,000,000 = 18% South Division: ROI = $210,000 ÷ $1,500,000 = 14%

(b)

North Division: Residual Income = $140,000 – (0.13 × $1,000,000) = $10,000 West Division: Residual Income = $360,000 – (0.16 × $2,000,000) = $40,000 South Division: Residual Income = $210,000 – (0.10 × $1,500,000) = $60,000

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16-33

*EXERCISE 16.20 (Continued) (c)

If ROI is used to measure performance, only the North Division (with a 14% ROI) and the South Division (with a 14% ROI) would make the additional investment that provides a 16% ROI. The West Division presently earns an 18% return ($360,000 ÷ $2,000,000), and therefore would decline the investment. If residual income is used to measure performance, all three divisions would probably make the additional investment because each would realize an increase in residual income.

LO5 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

*EXERCISE 16.21 (a) ROI

= Controllable margin 16% = $200,000 Average operating assets =

÷ ÷

Average operating assets Average operating assets $1,250,000

(b)

Controllable margin – (Minimum rate of return × Average operating assets) = Residual income $200,000 – (Minimum rate of return × $1,250,000) = $100,000 $100,000 = Minimum rate of return × $1,250,000 Minimum rate of return = 8%

(c)

Controllable margin Controllable margin Controllable margin

(d)

ROI = 24% =

– (Minimum rate of return x Average operating assets) = Residual income – (11% × $1,200,000) = $156,000 = $288,000

Controllable margin $288,000

÷ ÷

Average operating assets $1,200,000

LO5 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

16-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO PROBLEMS PROBLEM 16.1

(a)

BUMBLEBEE COMPANY Packaging Department Monthly Manufacturing Overhead Flexible Budget For the Year 2027

Activity level Direct labor hours Variable costs Indirect labor ($0.42)* Indirect materials ($0.30) Repairs ($0.23) Utilities ($0.24) Lubricants ($0.06) Total variable costs ($1.25)

27,000

30,000

33,000

36,000

$11,340 8,100 6,210 6,480 1,620 33,750

$12,600 9,000 6,900 7,200 1,800 37,500

$13,860 9,900 7,590 7,920 1,980 41,250

$15,120 10,800 8,280 8,640 2,160 45,000

Fixed costs Supervision** Depreciation Insurance Rent Property taxes Total fixed costs Total costs

8,000 6,000 2,500 2,000 1,500 20,000 $53,750

8,000 6,000 2,500 2,000 1,500 20,000 $57,500

8,000 6,000 2,500 2,000 1,500 20,000 $61,250

8,000 6,000 2,500 2,000 1,500 20,000 $65,000

*$126,000/300,000 **$96,000/12 [($375,000 ÷ 300,000 = $1.25); ($240,000 ÷ 12 = $20,000)] [(Bud. ann. VC ÷ Bud. DLH = VC/DLH); (Bud. ann. FC ÷ No. mos. in a yr. = FC/mo.)]

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16-35

PROBLEM 16.1 (Continued) (b)

BUMBLEBEE COMPANY Packaging Department Manufacturing Overhead Flexible Budget Report For the Month Ended October 31, 2027

Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Repairs Utilities Lubricants Total variable costs Fixed costs Supervision Depreciation Insurance Rent Property taxes Total fixed costs Total costs

Budget at 27,000 DLH

Actual Costs 27,000 DLH

Difference Favorable F Unfavorable U

$11,340 8,100 6,210 6,480 1,620 33,750

$12,432 7,680 6,100 6,840 1,920 34,972

$1,092 U 420 F 110 F 360 U 300 U 1,222 U

8,000 6,000 2,500 2,000 1,500 20,000 $53,750

8,000 6,000 2,460 2,000 1,500 19,960 $54,932

0U 0U 40 F 0U 0U 40 F $1,182 U

[(Ind. Labor: $11,340 - $12,432 = $1,092U); (Ind. Mat.: $8,100 - $7,680 = $420F); (Repairs: $6,210 - $6,100 = $110F); (Util.: $6,480 - $6,840 = $360U); (Lub.: $1,620 - $1,920 = $300U); (Ins.: $2,500 - $2,460 = $40F)] [(Ind. labor: (Bud. amt. – Act. amt. = Unfav. diff.); (Ind. mat.: Bud. amt. – Act. amt. = Fav. diff.); (Repairs: Bud. amt. – Act. amt. = Fav. diff.); (Util.: Bud. amt. – Act. amt. = Unfav. diff.); (Lub.: Bud. amt. – Act. amt. = Unfav. diff.); (Ins.: Bud. amt. – Act. amt. = Fav. diff.)]

(c) The overall performance of management was slightly unfavorable. However, none of the unfavorable differences exceeded 10% of budget except for lubricants 18.5% ($300 ÷ $1,620). LO2 BT: AN Difficulty: Easy TOT: 30 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation, Performance Measurement

16-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 16.2

(a)

ZELMER COMPANY Monthly Manufacturing Overhead Flexible Budget Ironing Department For the Year 2027

Activity level Direct labor hours 35,000 Variable costs Indirect labor ($0.40) $14,000 Indirect materials ($0.50) 17,500 Factory utilities ($0.30) 10,500 Factory repairs ($0.20) 7,000 Total variable costs ($1.40) 49,000 Fixed costs* Supervision 4,000 Depreciation 1,500 Insurance 1,000 Rent 2,500 Total fixed costs 9,000 Total costs $58,000

40,000

45,000

50,000

$16,000 20,000 12,000 8,000 56,000

$18,000 22,500 13,500 9,000 63,000

$20,000 25,000 15,000 10,000 70,000

4,000 1,500 1,000 2,500 9,000 $65,000

4,000 1,500 1,000 2,500 9,000 $72,000

4,000 1,500 1,000 2,500 9,000 $79,000

*Annual amount ÷ 12

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16-37

PROBLEM 16.2 (Continued) (b)

ZELMER COMPANY Ironing Department Manufacturing Overhead Flexible Budget Report For the Month Ended June 30, 2027

Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Factory utilities Factory repairs Total variable costs Fixed costs Supervision* Depreciation Insurance Rent Total fixed costs Total costs (1) 41,000 × $0.40 (5) 41,000 × $0.44

Budget at 41,000 DLH

Actual Costs 41,000 DLH

Difference Favorable F Unfavorable U

$16,400 (1) 20,500 (2) 12,300 (3) 8,200 (4) 57,400

$18,040 (5) 19,680 (6) 13,120 (7) 10,250 (8) 61,090

$1,640 U 820 F 820 U 2,050 U 3,690 U

4,000 1,500 1,000 2,500 9,000 $66,400

4,000 1,500 1,000 2,500 9,000 $70,090

0U 0U 0U 0U 0U $3,690 U

(2) 41,000 × $0.50 (6) 41,000 × $0.48

(3) 41,000 × $0.30 (7) 41,000 × $0.32

(4) 41,000 × $0.20 (8) 41,000 × $0.25

[(Ind. labor: $16,400 - $18,040 = $1,640U); (Ind. mat.: $20,500 - $19,680 = $820F); (Fact. util.: ($12,300 $13,120 = $820U); (Fact. repairs: $8,200 - $10,250 = $2,050U); (Tot. costs: $66,400 - $70,090 = $3,690U)] [(Ind. labor: Bud. amt. – Act. amt. = Unfav. diff.); (Ind. mat.: Bud. amt. – Act. amt. = Fav. diff.); (Fact. util.: Bud. amt. – Act. mat. = Unfav. diff.); (Fact. repairs: Bud. amt. – Act. amt. = Unfav. diff.); (Tot. costs: Bud. amt. – Act. amt. = Unfav. diff.)]

(c) The manager was ineffective in controlling variable costs ($3,690 U). Indirect labor was over budget by 10% ($1,640 ÷ $16,400) and Factory repairs by 25% ($2,050 ÷ $8,200). Both should be investigated. Fixed costs were effectively controlled. (d) The equation is fixed costs of $9,000 plus total variable costs of $1.40 per direct labor hour. *Both amounts come from Flexible Budget in Part (a)

16-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 16.2 (Continued) (e)

Total Budgeted Cost Line

$80 70

Costs in (000)

60 50 Budgeted Variable Costs

40 30 20 10

Budgeted Fixed Costs

Direct Labor Hours in (000) LO2 BT: E Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation, Performance Measurement

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16-39

PROBLEM 16.3

(a) The equation is fixed costs $35,000 plus variable costs of $2.85 per unit ($171,000 ÷ 60,000 units). (b)

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended August 31, 2027 Difference Units Variable costs* Direct materials ($0.80 × 58,000) Direct labor ($0.90 × 58,000) Indirect materials ($0.40 × 58,000) Indirect labor ($0.30 × 58,000) Utilities ($0.25 × 58,000) Maintenance ($0.20 × 58,000) Total variable ($2.85 × 58,000) Fixed costs Rent Supervision Depreciation Total fixed Total costs

Budget at 58,000 Units

Actual Costs 58,000 Units

Favorable F Unfavorable U

$ 46,400 52,200 23,200 17,400 14,500 11,600 165,300

$ 47,000 51,200 24,200 17,500 14,900 12,400 167,200

$ 600 U 1,000 F 1,000 U 100 U 400 U 800 U 1,900 U

12,000 17,000 6,000 35,000 $200,300

12,000 17,000 6,000 35,000 $202,200

0U 0U 0U 0U $1,900 U

*The per unit variable costs are computed by taking the budget amount at 60,000 units and dividing it by 60,000. For example, direct $48,000 materials per unit is therefore $0.80 or . 60,000 This report provides a better basis for evaluating performance because the budget is based on the level of activity actually achieved. [(DM: $48,000 ÷ 60,000 = $.80); (DL: $54,000 ÷ 60,000 = $.90); (Ind. mat.: $24,000 ÷ 60,000 = $.40); (Ind. labor: $18,000 ÷ 60,000 = $.30); (Util.: $15,000 ÷ 60,000 = $.25); (Maint.: ($12,000 ÷ 60,000 = $.20)] [(DM: Static bud. amt. ÷ Bud. units = DM/unit); (DL: Static bud. amt. ÷ Bud. units = DL/unit); (Ind. mat.: Static bud. amt. ÷ Bud. units = Ind. mat./unit); (Ind. labor: Static bud. amt. ÷ Bud. units = Ind. labor/unit); (Util.: Static bud. amt. ÷ Bud. units = Util./unit); (Maint.: Static bud. amt. ÷ Bud. units = Maint./unit)]

16-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 16.3 (Continued) (c)

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended September 30, 2027 Difference Units Variable costs Direct materials ($0.80 × 64,000) Direct labor ($0.90 × 64,000) Indirect materials ($0.40 × 64,000) Indirect labor ($0.30 × 64,000) Utilities ($0.25 × 64,000) Maintenance ($0.20 × 64,000) Total variable costs Fixed costs Rent Supervision Depreciation Total fixed costs Total costs

Budget at 64,000 Units

Actual Costs 64,000 Units

Favorable F Unfavorable U

$ 51,200 57,600 25,600 19,200 16,000 12,800 182,400

$ 51,700 56,320 26,620 19,250 16,390 13,640 183,920

$ 500 U 1,280 F 1,020 U 50 U 390 U 840 U 1,520 U

12,000 17,000 6,000 35,000 $217,400

12,000 17,000 6,000 35,000 $218,920

0U 0U 0U 0U $1,520 U

Note that actual variable costs in September were 10% higher than the actual variable costs in August. Therefore, to find the actual variable costs in September, the actual variable costs in August must be increased 10% as follows:

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16-41

PROBLEM 16.3 (Continued)

Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance

August (actual) $ 47,000 × 110% 51,200 × 110% 24,200 × 110% 17,500 × 110% 14,900 × 110% 12,400 × 110% $167,200 X 80%

September (actual) = $ 51,700 56,320 26,620 19,250 16,390 13,640 $183,920

[(DM: ($.80 × 64,000) – ($47,000 × 110%) = $500U); (DL: ($.90 × 64,000) – ($51,200 × 110%) = $1,280F); (Ind. mat.: ($.40 × 64,000) – ($24,200 × 110%) = $1,020U); (Ind. labor: ($.30 × 64,000) – ($17,500 × 110%) = $50U); (Util.: ($.25 × 64,000) – ($14,900 × 110%) = $390U); (Maint.: ($.20 × 64,000) – ($12,400 × 110%) = $840U)] [(DM: (DM/unit × Act. units) – (Aug. act. costs × Incr. %) = Unfav. diff.); (DL: (DL/unit × Act. units) – (Aug. act. costs × Incr. %) = Fav. diff.); (Ind. mat.: (Ind. mat./unit × Act. units) – (Aug. act. costs × Incr. %) = Unfav. diff.); (Ind. labor: (Ind. labor/unit) – (Aug. act. costs × Incr. %) = Unfav. diff.); (Util.: (Util./unit × Act. units) – (Aug. act. costs × Incr. %) = Unfav. diff.); (Maint.: Maint./unit × Act. units) – (Aug. act. costs × Incr. %) = Unfav. diff.)] LO1, 2 BT: AN Difficulty: Easy TOT: 30 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 16.4

(a)

CLARKE INC. Patio Furniture Division Responsibility Report For the Year Ended December 31, 2027 Difference Budget

Actual

Favorable F Unfavorable U

Sales

$2,500,000

$2,550,000

$50,000 F

Variable costs Cost of goods sold Selling and administrative Total

1,300,000 220,000 1,520,000

1,259,000 226,000 1,485,000

41,000 F 6,000 U 35,000 F

Contribution margin

980,000

1,065,000

85,000 F

Controllable fixed costs Cost of goods sold Selling and administrative Total

200,000 50,000 250,000

203,000 52,000 255,000

3,000 U 2,000 U 5,000 U

$ 730,000

$ 810,000

$80,000 F

Controllable margin

[(Sales: $2,500,000 + $50,000 = $2,550,000); (Var. CGS: $1,300,000 - $41,000 = $1,259,000); (Var. S&A: $220,000 + $6,000 = $226,000); (CM: $980,000 + $85,000 = $1,065,000); (Control. FC CGS: $200,000 + $3,000 = $203,000); (Control. FC S&A: $50,000 + $2,000 = $52,000); (Control. margin: $730,000 + $80,000 = $810,000)] [(Sales: Bud. amt. + Fav. diff. = Act. amt.); (Var. CGS: Bud. amt. – Fav. diff. = Act. amt.); (Var. S&A: Bud. amt. + Unfav. diff. = Act. amt.); (CM: Bud. amt. + Fav. diff. = Act. amt.); (Control FC CGS: Bud. amt. + Unfav. diff. = Act. amt.); (Control FC S&A: Bud. amt. + Unfav. diff. = Act. amt.); (Control. margin: Bud. amt. + Fav. diff. = Act. amt.)]

(b) The manager effectively controlled revenues and costs. Contribution margin was $85,000 favorable and controllable margin was $80,000 favorable. Contribution margin was favorable primarily because sales were $50,000 over budget and variable cost of goods sold was $41,000 under budget. Apparently, the manager was able to control variable cost of goods sold when sales exceeded budget expectations. The manager was ineffective in controlling fixed costs. However, the unfavorable difference of $5,000 was approximately 6% of the favorable difference in controllable margin.

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16-43

PROBLEM 16.4 (Continued) (c) Two costs are excluded from the report: (1) noncontrollable fixed costs and (2) indirect fixed costs. The reason is that neither cost is controllable by the Patio Furniture Division Manager. LO3 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 16.5

(a)

OPTIMUS COMPANY Home Division Responsibility Report For the Year Ended December 31, 2027 (in thousands of dollars)

Sales Variable costs Cost of goods sold Selling and administrative Total Contribution margin Controllable direct fixed costs Cost of goods sold Selling and administrative Total Controllable margin ROI

 $330  (1)    $2,000 

$360  (2)    $2,000 

Budget $1,300

Actual $1,400

Difference Favorable F Unfavorable U $100 F

620 100 720 580

665 125 790 610

45 U 25 U 70 U 30 F

170 80 250 $ 330

170 80 250 $ 360

0U 0U 0U $ 30 F

16.5% (1)

18.0% (2)

1.5% F (3)

 $30  (3)    $2,000 

[(Sales: $1,400 - $100 = $1,300); (VC CGS: $665 - $45 = $620); (VC S&A: $125 - $25 = $100); (CM: $610 - $30 = $580); (Control. margin: $360 - $30 = $330); (Bud. ROI: $330 ÷ $2,000 = 16.5%); (Act. ROI: $360 ÷ $2,000 = 18.0%); (Diff.: $30 ÷ $2,000 = 1.5%)] [(Sales: Act. amt. – Fav. diff. = Bud. amt.); (VC CGS: Act. amt. – Unfav. diff. = Bud. amt.); (VC S&A: Act. amt – Unfav. diff. = Bud. amt.); (CM: Act. amt. – Fav. diff. = Bud. amt.); (Control. margin: Act. amt. – Fav. amt. = Bud. amt.); (Bud.: Control. margin ÷ Ave. oper. assets = ROI); (Act.: Control. margin ÷ Ave. oper. assets = ROI); (Diff.: Diff. in control. margin ÷ Ave. oper. assets = ROI diff.)]

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16-45

PROBLEM 16.5 (Continued) (b) The controllable margin of the manager of the Home Division was above budget expectations for the year by 9.1% ($30,000 ÷ $330,000). However, top management would likely recognize the limitations of using a static budget to evaluate the manager’s performance in controlling variable costs and therefore would adjust the budgeted amounts for variable costs based on the increased sales as follows: Cost of goods sold: $1,400,000 x ($620 ÷ $1,300) = $667,692 and Selling and administrative $1,400,000 x ($100 ÷ $1,300) = $107,692. When the adjusted budget amounts for the variable costs are evaluated, the cost of goods sold variance changes to a favorable variance of approximately $3,000 which is only .4% of the adjusted budget and would most likely not require further investigation. The selling and administrative variance is still unfavorable. The variance decreases to $17,308 which is 16.1% of the adjusted budget and most likely would still require further investigation to discover the cause(s) of this variance. (c) 1.

$360,000 + ($125,000 x 4%) = 18.25%. $2,000,000

[($360,000 + ($125,000 × 4%)) ÷ $2,000,000 = 18.25%] [(Act. control. margin + (Act. var. CGS × % decr.)) ÷ Ave. oper. assets = ROI]

$360,000 = 20%. $2,000,000 – ($2,000,000 x 10%)

[$360,000 ÷ ($2,000,000 – ($2,000,000 × 10%)) = 20% [Act. control. margin ÷ (Ave. oper. assets – (Ave. oper. assets × % decr.)) = ROI]

$360,000 + $80,000 = 22%. $2,000,000

[($360,000 + $80,000) ÷ $2,000,000 = 22%] [(Act. control. margin + CM incr.) ÷ Ave. oper. assets = ROI] LO4 BT: E Difficulty: Moderate TOT: 50 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 16.6

(a) To Cutting Department Manager—Seattle Division Controllable Costs: Budget Actual Indirect labor $ 70,000 $ 73,000 Indirect materials 46,000 47,900 Maintenance 18,000 20,500 Utilities 17,000 20,100 Supervision 20,000 22,000 Total $171,000 $183,500

(b) To Division Production Manager—Seattle Controllable Costs: Budget Seattle Division $ 51,000 Departments: Cutting 171,000 Shaping 148,000 Finishing 205,000 Total $575,000

No. 1 Month: January Fav/Unfav $ 3,000 U 1,900 U 2,500 U 3,100 U 2,000 U $12,500 U

No. 2 Month: January Actual Fav/Unfav $ 52,500 $ 1,500 U 183,500 158,000 210,000 $604,000

12,500 U 10,000 U 5,000 U $29,000 U

[(Seattle div.: $51,000 - $52,500 = $1,500U); (Cut.: $171,000 - $183,500 = $12,500U); (Shape.: $148,000 $158,000 = $10,000U); (Fin.: $205,000 - $210,000 = $5,000U)] [(Seattle div.: (Bud. amt. – Act. amt. = Unfav. diff.); (Cut.: (Bud. amt. – Act. div. = Unfav. diff.); (Shape: Bud. amt. – Act. amt. = Unfav. diff.); (Fin.: Bud. amt. – Act. amt. = Unfav. diff.)]

(c) To Vice President—Production Controllable Costs: Budget V-P Production $ 64,000 Divisions: Seattle 575,000 Denver 673,000 San Diego 715,000 Total $2,027,000

No. 3 Month: January Actual Fav/Unfav $ 65,000 $ 1,000 U 604,000 678,000 722,000 $2,069,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

29,000 U 5,000 U 7,000 U $42,000 U

(For Instructor Use Only)

16-47

PROBLEM 16.6 (Continued) (d) To President Controllable Costs: President Vice-Presidents: Production Marketing Finance Total

Budget $ 74,200

No. 4 Month: January Actual Fav/Unfav $ 76,400 $ 2,200 U

2,027,000 130,000 104,000 $2,335,200

2,069,000 133,600 109,000 $2,388,000

42,000 U 3,600 U 5,000 U $52,800 U

LO3 BT: AN Difficulty: Moderate TOT: 50 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 16.7

(a)

ROI = Controllable Margin ÷ Average Operating Assets ROI = $2,460,000 ÷ $12,300,000 ROI = 20%

($2,460,000 ÷ $12,300,000 = 20%) (Control. margin ÷ Ave. oper. assets = ROI

Residual Income = Controllable Margin – (Minimum Rate of Return x Average Operating Assets) Residual Income = $2,460,000 – (0.18 × $12,300,000) Residual Income = $2,460,000 – $2,214,000 = $246,000

[$2,460,000 – (18% × $12,300,000) = $246,000] [Control. margin – (Min. ROR × Ave. oper. assets) = Residual inc.]

(b)

The management of Jensen Division would clearly have accepted the investment opportunity it had in 2027 if residual income had been used as the performance measure because an increase in residual income results from a project whose ROI is greater than the minimum rate of return. If management of the Jensen Division had used ROI as the performance measure, the decision would be to reject the project because the ROI of 19% is less than Jensen’s ROI experience range of 20.1% to 23.5%. With bonuses based in part on ROI, the 19% project would have a negative effect on bonuses.

LO5 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

16-49

CD 16

(a)

CURRENT DESIGNS

Current Designs Rotomolded Line Manufacturing Budget For the Year Ended December 31, 2027 Units to be produced Budgeted Costs Costs: Variable costs Polyethylene powder Finishing kits Labor—type I Labor—type II Indirect materials Manufacturing supplies Maintenance and utilities Total variable costs Fixed costs Supervision Insurance Depreciation Total fixed costs Total costs

Calculation

4,000 × 54 × $1.50 4,000 × $170 4,000 × 2 × $15 4,000 × 3 × $12

4,000 kayaks Amount budgeted

$ 324,000 680,000 120,000 144,000 40,000 53,800 88,000 1,449,800 90,000 14,400 109,800 214,200 $1,664,000

[(Poly. powder: 4,000 × 54 × $1.50 = $324,000); (Fin. kits: 4,000 × $170 = $680,000); (Labor-Type I: 4,000 × 2 × $15 = $120,000); (Labor-Type II: 4,000 × 3 × $12 = $144,000)] [(Poly. powder: No. kayaks x× Lbs./kayak × Cost/lb. = Cost); (Fin. kits: No. kayaks × Cost/kit = Cost); (Labor-type I: No. kayaks × Hrs./kayak × Hrly. rate = Cost); (Labor-type II: No. kayaks × Hrs./kayak × Hrly. rate = Cost)]

16-50

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CD 16 (Continued) (b)

Current Designs Rotomolded Line Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2027 Units to be produced 900 kayaks 1,000 kayaks Costs: Variable costs Polyethylene powder (54 × $1.50 per unit) $ 72,900 $ 81,000 Finishing kits ($170 per unit) 153,000 170,000 Labor—type I (2 hours per unit × $15 per hour) 27,000 30,000 Labor—type II (3 hours per unit × $12 per hour) 32,400 36,000 Indirect materials ($10* per unit) 9,000 10,000 Manufacturing supplies ($13.45** per unit) 12,105 13,450 Maintenance and utilities ($22*** per unit) 19,800 22,000 Total variable costs ($362.45 per unit) 326,205 362,450 Fixed costs Supervision (a.) 22,500 22,500 Insurance (b.) 3,600 3,600 Depreciation (c.) 27,450 27,450 Total fixed costs 53,550 53,550 Total costs $379,755 $416,000 *$40,000 ÷ 4,000 **$53,800 ÷ 4,000 ***$88,000 ÷ 4,000

1,050 kayaks

$ 85,050 178,500 31,500 37,800 10,500 14,123 23,100 380,573 22,500 3,600 27,450 53,550 $434,123

a. $ 90,000 ÷ 4 b. $ 14,400 ÷ 4 c. $109,800 ÷ 4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

16-51

CD 16 (Continued) (c)

Current Designs Rotomolded Line Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2027

Difference Budget for Actual costs for F = favorable Units to be produced 1,050 kayaks 1,050 kayaks U = unfavorable Costs: Variable costs Polyethylene powder $ 85,050 $ 87,000 $1,950 Finishing kits 178,500 178,840 340 Labor—type I 31,500 31,500 0 Labor—type II 37,800 39,060 1,260 Indirect materials 10,500 10,500 0 Manufacturing supplies 14,123 14,150 27 Maintenance and utilities 23,100 26,000 2,900 Total variable costs 380,573 387,050 6,477 Fixed costs Supervision 22,500 20,000 2,500 Insurance 3,600 3,600 0 Depreciation 27,450 27,450 0 Total fixed costs 53,550 51,050 2,500 Total costs $434,123 $438,100 $3,977

U U U U U U F F U

[(Poly. powder: 1,050 × 54 × $1.50 = $85,050); (Fin. kits: 1,050 × $170 = $178,500); (Labor-type I: 1,050 × 2 × $15 = $31,500); (Labor-type II: 1,050 × 3 × $12 = $37,800); (Ind. mat.: 1,050 × ($40,000 ÷ 4,000) = $10,500); (Mfg. sup.: 1,050 × ($53,800 ÷ 4,000) = $14,123); (Maint. & util.: 1,050 × ($88,000 ÷ 4,000) = $23,100); (Super.: $90,000 ÷ 4 = $22,500); (Ins.: $14,400 ÷ 4 = $3,600); (Depr.: $109,800 ÷ 4 = $27,450)] [(Poly. powder: Kayaks made × Lbs./kayak × Cost/lb. = Bud. cost); (Fin. kits: Kayaks made × Cost/kit = Bud. cost); (Labor-type I: Kayaks made × Hrs./kayak × Hrly.rate = Bud. cost); (Labor-type II: Kayaks made × Hrs./kayak × Hrly. rate = Bud. cost); (Ind. mat.: Kayaks made × Ind. mat./kayak = Bud. cost); (Mfg. supp.: Kayaks made × Mfg. sup./kayak = Bud. cost); (Maint. & util.: Kayaks made × Maint. & util./kayak = Bud. cost); (Super.: Ann. bud. amt. ÷ No. qtrs./yr. = Qtrly. bud. cost); (Ins.: Ann. bud. amt. ÷ No. qtrs./yr. = Qtrly. bud. cost); (Depr.: Ann. bud. amt. ÷ No. qtrs../yr. = Qtrly. bud. cost)] LO2, 3 BT: AP Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation, Performance Measurement

16-52

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

WC 16

WATERWAYS CORPORATION

(a) WATERWAYS CORPORATION Manufacturing Overhead Flexible Budget For the Month of March Production in units Variable costs Indirect materials ($.05/unit)a Indirect labor ($.12/unit)b Utilities ($.10/unit)c Maintenance ($.07/unit)d Total variable costs ($.34/unit) Fixed Costs Salaries Depreciation Property taxes Insurance Janitorial Total fixed costs Total budgeted costs

115,500

116,500

117,500

118,500

119,500

5,925 14,220 11,850

$ 5,975 14,340 11,950

5,775 13,860 11,550

5,825 13,980 11,650

5,875 14,100 11,750

8,085

8,155

8,225

8,295

8,365

39,270

39,610

39,950

40,290

40,630

42,000 16,800 3,000 1,200

1,500 64,500 $103,770

1,500 64,500 $104,110

1,500 64,500 $104,450

1,500 64,500 $104,790

1,500 64,500 $105,130

Unit costs are based on the static budget costs. a. $ 5,875/117,500 units = $0.05/unit b. $14,100/117,500 units = $0.12/unit c. $11,750/117,500 units = $0.10/unit d. $ 8,225/117,500 units = $0.07/unit (b) WATERWAYS CORPORATION Manufacturing Overhead Flexible Budget Report For the Month of March

Production in units Variable costs Indirect materials Indirect labor Utilities Maintenance Total variable costs Fixed Costs Salaries Depreciation Property taxes Insurance Janitorial Total fixed costs Total budgeted costs

Actual 118,500

Difference Favorable Unfavorable

5,910 14,195 11,880 8,275 40,260

$15 F 25 F 30 U 20 F 30 F

42,000 16,800 3,000 1,200 1,500 64,500 $ 104,760

0 0 0 0 0 0 $30 F

Budget 118,500 $

5,925 14,220 11,850 8,295 40,290

42,000 16,800 3,000 1,200 1,500 64,500 $104,790

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16-53

WC 16 (Continued) (c) WATERWAYS CORPORATION Responsibility Report Manufacturing Overhead For the Month of March

Controllable Costs Indirect materials Indirect labor Utilities

Budget $ 5,925 14,220 11,850

Actual $ 5,910 14,195 11,880

Difference Favorable Unfavorable $15 F $25 F $30 U

Maintenance

8,295 $40,290

8,275 $40,260

$20 F $30 F

LO2, 3 BT: AN Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

16-54

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DATA ANALYTICS IN ACTION The solutions for the Data Analytics in Action problems are available in Excel. See the file Solutions: Excel Templates in the Instructor Resources.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-55

CT 16.1

(a) 1.

DECISION-MAKING ACROSS THE ORGANIZATION

The primary causes of the loss in net income were the decrease in the number of boarding days and the decrease in the boarding fee. The number of boarding days decreased by 2,900 or approximately 13% (2,900 days ÷ 21,900 days), and the boarding fee decreased from $25(a) per day to $20(b) per day, a decrease of 20% ($5 ÷ $25). Together these resulted in a $167,500 decrease in sales revenue, a decrease of approximately 31% ($167,500 ÷ $547,500). (a)

$547,500 ÷ 21,900 days = $25 per day $380,000 ÷ 19,000 days = $20 per day

(b)

Management did a poor job in controlling variable expenses. Given that boarding days declined by about 13%, variable expenses should decline by about 13%, or more precisely, variable expenses



should decline by $25,520  $192,720 



2,900  . However, variable 21,900 

expenses only declined by $14,330 or about 7.4% ($14,330 ÷ $192,720). Thus, management did a poor job in controlling variable expenses. Management did a better job in controlling fixed expenses. Fixed expenses were under budget by $4,000 and this includes the additional expenses incurred in advertising and entertainment. 3.

16-56

Management’s decisions to stay competitive probably were sound. Given the decline in boarding days, the decision not to replace the worker was sound. The decision to reduce rates was probably forced by the competition. Without the additional advertising and entertainment expenses, the loss in net income might have been even greater.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 16.1 (Continued) (b)

GREEN PASTURES Income Statement Flexible Budget Report For the Year Ended December 31, 2027 Difference Boarding days (BD) Service revenue ($25) Less variable expenses Feed ($5) Veterinary fees ($3) Blacksmith fees ($0.25) Supplies ($0.55) Total variable expenses ($8.80) Contribution margin Less fixed expenses Depreciation Insurance Utilities Repairs and maintenance Labor Advertising Entertainment Total fixed expenses Net income

Budget at 19,000 BD $475,000

Actual at 19,000 BD $380,000

Favorable F Unfavorable U $ 95,000 U

95,000 57,000 4,750 10,450

104,390 58,838 4,984 10,178

9,390 U 1,838 U 234 U 272 F

167,200 307,800

178,390 201,610

11,190 U 106,190 U

40,000 11,000 14,000 11,000 95,000 8,000 5,000 184,000 $123,800

40,000 11,000 12,000 10,000 88,000 12,000 7,000 180,000 $ 21,610

0U 0U 2,000 F 1,000 F 7,000 F 4,000 U 2,000 U 4,000 F $102,190 U

[(Serv. rev.: (19,000 × $25) - $380,000 = $95,000U); (Feed: (19,000 × $5) - $104,390 = $9,390U); (Vet. fees: (19,000 × $3) - $58,838 = $1,838U); (Black. fees: (19,000 × $.25) - $4,984 = $234U); (Supp.: (19,000 × $.55) $10,178 = $272F); (CM: $307,800 - $201,610 = $106,190U); (Net inc.: $123,800 - $21,610 = $102,190U)] [(Serv. rev.: (Act. BD ×x USP) – Act. sales = Unfav. diff.); (Feed: (Act. BD × UVC) – Act. feed = Unfav. diff.); (Vet. fees: (Act. BD × UVC) – Act. vet. fees = Unfav. diff.); (Black. fees: (Act. BD × UVC) – Act. black. fees = Unfav. diff.); (Supp.: (Act. BD × UVC) – Act. sup. = Fav. diff.); (CM: Bud. amt. – Act. amt. = Unfav. diff.); (Net inc.: Bud. amt. – Act. amt. = Unfav. diff.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-57

CT 16.1 (Continued) (c) 1.

The primary causes of the decrease in net income are the decreases in boarding rates and volume. The average daily rate charged was $20 = ($380,000 ÷ 19,000). This rate resulted in a decrease in sales revenue of $95,000 or 20% = ($95,000 ÷ $475,000). Given that it is “an extremely competitive business,” if Green Pastures had not reduced rates, boarding days almost certainly would have declined even more.

Management did a poor job of controlling variable expenses. These expenses in total were $11,190 over budget or 6.7%, or ($11,190 ÷ $167,200). Moreover, each individual variable expense was over budget, except for supplies. Management did a good job of controlling fixed expenses as noted in part (a).

As noted in part (a), management’s decisions to stay competitive probably were sound.

(d) Given that the industry is “extremely competitive,” management should consider two options. One, become the lowest cost operator. If Green Pastures is the company with the lowest operating costs, it can under price its competitors and take customers away from them (increasing its sales). Eventually, some of its competitors (those with the highest operating costs) will go out of business, and Green Pastures will acquire their customers, or at least some of them. (Walmart is an example of this strategy.) Option two is to offer its customers a superior product or service. If customers perceive that Green Pastures is the “best” boarding stable in Kentucky, the company will take customers away from its competitors. Also, if Green Pastures is perceived as the “best,” many customers will be willing to pay a premium for its boarding service, and Green Pastures will be able to raise its rates. (Gillette is an example of this strategy.) LO1, 2 BT: S Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-58

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 16.2

MANAGERIAL ANALYSIS

(a) Mary Gammel—Profit Center: Responsible for sales, inventory cost, advertising, sales personnel, printing, and travel. She is not responsible for the assets invested in her division and probably does not control the rent or depreciation costs either. As a profit center manager she may have control of the insurance, but she probably does not. Stephen Flott—Cost Center: Responsible for inventory cost, advertising, sales personnel, printing, and travel. As a cost center manager, he may or may not have control of rent and insurance costs, but he probably does not. He does not have control of the assets invested in his department; thus, he does not have control of the depreciation. Jose Gomez—Investment Center: Responsible for all items shown. (b) Mary Gammel Budget differences: The cost of goods sold is 28% ($42,000 ÷ $150,000) above budget and so should definitely be brought to her attention. Travel is 30% ($6,000 ÷ $20,000) below budget. Students may differ as to whether they believe that this should be brought to her attention, however, it is a material difference and should be investigated. The differences in rent and depreciation should not be brought to her attention because she does not control those costs. Stephen Flott Budget differences: The cost of goods sold, which is 22% ($22,000 ÷ $100,000) above budget, should definitely be brought to his attention. Travel costs are 30% ($9,000 ÷ $30,000) below budget. This should probably be brought to his attention, so that he can verify that the goal of travel is being adequately accomplished by other means. The 67% ($20,000 ÷ $30,000) increase in rent and 10% ($10,000 ÷ $100,000) decrease in depreciation are not under his control and so should not be brought to his attention. It should probably be pointed out to students that all budget differences are monitored by someone within the company. These differences that are not the responsibility of the various managers are still within the scope of top management’s responsibility.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-59

CT 16.2 (Continued) Jose Gomez Budget differences: As manager of an investment center, Mr. Gomez is responsible for all categories of the budget. The selection in this case would be which differences merit his attention. Any decrease in a company’s gross profit rate (gross profit ÷ sales) is a cause for concern. (Remember the gross profit is sales minus cost of goods sold.) Thus, the 6% [($26,500 – $25,000) ÷ $25,000] increase in cost of goods sold should be brought to his attention. Travel is below budget 25% ($500 ÷ $2,000), which is $500. This is not a large percentage of total costs, nor is it a large dollar amount, so there could be an argument that this should be left out. The 23% ($2,300 ÷ $10,000) increase in rent is only a $2,300 increase, so it could be included, though it might be left out as immaterial. The 40% ($16,000 ÷ $40,000) increase in depreciation should definitely be included. LO3, 4 BT: AN Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 16.3

REAL-WORLD FOCUS

(a) The company’s costs do not increase proportionately with the revenues increase in the third and fourth quarter because the behavior of the costs is primarily fixed. (b) Static budgeting seems to be most appropriate for CA Technologies because costs do not respond proportionately with changes in the activity level (revenues). LO1 BT: AN Difficulty: Easy TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Budget Preparation

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16-61

CT 16.4

COMMUNICATION ACTIVITY

(a) Fred Bedner should be able to control all the variable costs and the fixed costs of supervision (but not his portion) and inspection. Insurance and depreciation ordinarily are not the responsibility of the department manager. (b) The total variable cost per unit is $25 ($50,000 ÷ 2,000). The total cost during the month to manufacture 1,500 units is variable costs $37,500 (1,500 x $25) plus fixed costs ($35,000) or $72,500 ($37,500 + $35,000). (c)

FLEMING COMPANY Production Department Manufacturing Overhead Flexible Budget Report For the Month Ended Difference Budget at 1,500 units

Actual at 1,500 units

Favorable F Unfavorable U

$16,500 9,000 7,500

$22,500 13,500 8,200

$ 6,000 U 4,500 U 700 U

4,500 37,500

5,000 49,200

500 U 11,700 U

Fixed costs Supervision Inspection costs Insurance expense Depreciation Total fixed

17,000 1,000 2,000 15,000 35,000

18,400 1,200 2,200 14,700 36,500

1,400 U 200 U 200 U 300 F 1,500 U

Total costs

$72,500

$85,700

$13,200 U

Variable costs* Indirect materials ($11) Indirect labor ($6) Maintenance expense ($5) Manufacturing supplies ($3) Total variable ($25)

*Unit variable costs = Budgeted amount ÷ Estimated units to be produced [(Ind. mat.: 1,500 × ($22,000 ÷ 2,000) = $16,500); (Ind. labor: 1,500 × ($12,000 ÷ 2,000) = $9,000); (Maint. exp.: 1,500 × ($10,000 ÷ 2,000) = $7,500); (Mfg. sup.: 1,500 × ($6,000 ÷ 2,000) = $4,500); (Tot. costs: $37,500 + $35,000 = $72,500)] [(Ind. mat.: Act. units × (Static bud. amt ÷ Bud. units) = Flex. bud. amt.); (Ind. labor: Act. units × (Static bud. amt ÷ Bud. units) = Flex. bud. amt.); (Maint. exp.: Act. units × (Static bud. amt ÷ Bud. units) = Flex. bud. amt.); (Mfg. sup.: Act. units × (Static bud. amt ÷ Bud. units) = Flex. bud. amt.); (Tot. costs: Flex. bud. VC + Flex. bud. FC = Flex. bud. tot. costs)]

16-62

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 16.4 (Continued) (d) A production department is a cost center. Thus, the report should include only the costs that are controllable by the production manager. In this type of report, no distinction is made between variable and fixed costs. FLEMING COMPANY Production Department Manufacturing Overhead Responsibility Report For the Month Ended

Controllable Cost Indirect materials Indirect labor Maintenance expense Manufacturing supplies Supervision* Inspection costs Total

Budget $16,500 9,000 7,500 4,500 7,000 1,000

Actual $22,500 13,500 8,200 5,000 8,400 1,200

Difference Favorable F Unfavorable U $ 6,000 U 4,500 U 700 U 500 U 1,400 U 200 U

$45,500

$58,800

$13,300 U

*$10,000 is deducted from both budget and actual for Mr. Bedner’s cost.

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16-63

CT 16.4 (Continued) From:

VPProduction@FlemingCo.com

To:

FBender@FlemingCo.com

Subject:

Performance Evaluation for the Month of XXXXX

Hi Fred: Your performance in controlling costs that are your responsibility was very disappointing in the month of XXXXX. As indicated in the accompanying responsibility report, total costs were $13,300 over budget. On a percentage basis, costs were 29% over budget. As you can see, actual costs were over budget for every cost item. In two instances, costs were more significantly over budget (indirect materials 36% and indirect labor 50%). Fred, it is imperative that you get costs under control in your department as soon as possible. I think we need to talk about ways to implement more effective cost control measures. I would like to meet with you in my office at 9 a.m. on Wednesday to discuss possible alternatives. VP Production’s name LO1, 2, 3 BT: AN Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

16-64

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 16.5

ETHICS CASE

(a) The stakeholders in this ethical situation are:  The employees and managers of each investment center.  The central management and chief executive officer.  The customers who buy the product.  The owners or stockholders. (b) Pressure to perform is a frequently identified cause for unethical conduct. Employees are more prone to engage in unethical conduct when unreasonable demands are made upon them. Rather than lose their jobs or be demoted, if given no alternatives, employees may seek to cut corners, reduce quality control, use questionable sales tactics, and bend the rules. (c) The company might maintain open lines of communication with its employees to better know the pressures of its managers. By “keeping in touch,” the company may avoid making unreasonable demands on its managers and employees. The company might also develop a company code of ethical conduct and enforce it. However, if dismissal or demotion continues to be the probable consequence of failure to meet objectives, some managers are likely to engage in unethical behavior in an attempt to meet the objectives. LO4 BT: E Difficulty: Easy TOT: 15 min. AACSB: Ethics, Communication AICPA PC: Professional Demeanor, Communication IMA: Performance Measurement, Business Applications

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16-65

CT 16.6

ALL ABOUT YOU

(a)

The basic idea is to set up individual envelopes each labeled with for a different expense category. Once you have used up the money in a particular envelope, you can’t use more for that purpose. Begin by preparing a monthly budget. Identify those items that you will pay in cash. These would include things like groceries, eating out at restaurants, clothing, gasoline, car repairs, gifts, and entertainment. These are the categories for which you will have envelopes. Next, decide how often to fill the envelopes and determine the amount to put in each envelope. If you continually run out of money in a particular envelope you many need to re-evaluate your allocation. If you don’t use up all the money in an envelope in one month, you can carry it over to the next month.

(b)

Answers will vary by student.

LO N/A BT: E Difficulty: Easy TOT: 20 min. AACSB: Technology, Communication AICPA PC: Communication IMA: Budget Preparation

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 16.7

CONSIDERING YOUR COSTS AND BENEFITS

In general, in past years it has usually been considered prudent to purchase a home rather than to rent. As noted, over time, home prices have usually appreciated in most parts of the country. Mortgage interest provides some tax relief, and by purchasing a home you get some control over your housing costs. However, recent turbulence in the housing market has made the decision more complicated. In some parts of the country home prices have fallen considerably, and there is no indication how soon they will recover. In some areas renting appears to be an attractive alternative to purchasing. In the scenario described, there is considerable uncertainty surrounding this individual’s life. Purchasing a home is a huge decision, with very high transaction costs. It is often suggested that, because of the high transaction costs, you should not purchase a home unless you intend on living in it for a number of years. The person in the case is starting a new job in a new community. Until he or she is more certain that they will like their job, that the job is stable, and that they like the community, they should delay the purchase of a home. LO N/A BT: E Difficulty: Easy TOT: 20 min. AACSB: Communication AICPA PC: Communication IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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16-67

CHAPTER 17 Standard Costs and Balanced Scorecard Learning Objectives 1. Describe standard costs. 2. Determine direct materials variances. 3. Determine direct labor and total manufacturing overhead variances. 4. Prepare variance reports and balanced scorecards. *5. Compute overhead controllable and volume variances.

*Note: All asterisked Questions, Brief Exercises, Exercises and Problems relate to material contained in the appendix to the chapter.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

17-1

ANSWERS TO QUESTIONS 1.

(a) This is incorrect. Standard costs are predetermined unit costs. (b) Correct. Examples of governmental regulations that establish standards for a business are the Fair Labor Standards Act, the Equal Employment Opportunity Act, and a multitude of environmental laws.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

(a) Standards and budgets are similar in that both are predetermined costs and both contribute significantly to management planning and control. The two terms differ in that a standard is a budgeted unit amount and a budget is a total amount. (b) There are important accounting differences between budgets and standards. Except in the application of manufacturing overhead to jobs and processes, budget data are not journalized in cost accounting systems. In contrast, standard costs may be incorporated into cost accounting systems. It is possible for a company to report inventories at standard costs in its financial statements, but it is not possible to report inventories at budgeted costs.

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

IMA: Performance Measurement

In addition to facilitating management planning, standard costs offer the following advantages to an organization: (1) They promote a greater economy by making employees more “cost-conscious.” (2) They may be useful in setting selling prices. (3) They contribute to management control by providing a basis for evaluating cost control. (4) They are useful in highlighting variances in “management by exception.” (5) They simplify the costing of inventories and reduce clerical costs.

LO1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

The management accountant provides input to the setting of standards through the accumulation of historical cost data and knowledge of the behavior of costs in response to changes in activity levels. Management has the responsibility for setting the standards.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

Ideal standards represent optimum levels of performance under perfect operating conditions. Normal standards represent efficient levels of performance that are attainable under expected operating conditions.

LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA:: Performance Measurement

(a) The direct materials price standard should be based on the purchasing department’s best estimate of the cost of raw materials and an amount for related costs such as receiving, storing, and handling. (b) The direct materials quantity standard should be based on both quality and quantity requirements plus allowances for unavoidable waste and normal spoilage.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

Agree. The direct labor quantity standard should include allowances for rest periods, cleanup, machine setup, and machine downtime.

LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

With standard costs, the predetermined overhead rate is determined by dividing budgeted overhead costs by an expected standard activity index.

LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 17 (Continued) 9.

A favorable cost variance has a positive connotation. It suggests efficiencies in incurring manufacturing costs and in using direct materials, direct labor, and manufacturing overhead. An unfavorable cost variance has a negative connotation. It suggests that too much was paid for one or more of the manufacturing cost elements or that the elements were used inefficiently.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

10.

(a) (1) actual price. (b) (3) actual quantity. (c) (5) standard price.

(2) standard price. (4) standard price. (6) standard quantity.

LO2 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

11.

(1) – (3) = total labor variance; (1) – (2) = labor price variance; and (2) – (3) = labor quantity variance.

LO3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

12.

Overhead applied = $18 × 13,500 = $243,000.

LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

13.

Variances should be reported to appropriate levels of management as soon as possible. The principle of “management by exception” may be used with variance reports.

LO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

14.

The purchasing department would be responsible for an unfavorable materials price variance when it paid more than the standard price for the materials. The purchasing department would also be responsible for an unfavorable materials quantity variance if it purchased materials of inferior quality which caused an excess use of materials.

LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

15.

The four perspectives of the balanced scorecard are: financial, customer, internal process, and learning and growth. The financial perspective employs financial measures of performance used by most firms. The customer perspective evaluates the company from the viewpoint of those people who buy its product in terms of price, quality, product innovation, customer service, and other dimensions. The internal process perspective evaluates the value chain—product development, production, delivery and after-sale service—to ensure that the company is operating effectively and efficiently. The learning and growth perspective evaluates how well the company develops and retains its employees. The four perspectives are linked in that the results in one perspective influence the results in the next.

LO4 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

16.

Kerry James is not correct. The balanced scorecard does not replace financial measures, it instead integrates both financial and nonfinancial measures. In fact, financial measures are very critical to the balanced scorecard, since they represent the final “destination” of all the company’s efforts.

LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

17.

The possibilities for nonfinancial measures are limitless. Some that were mentioned in the chapter were: capacity utilization of factories, average age of key assets, impact of strikes, brand-loyalty statistics, market profile of customer-end products, number of new products, employee stock ownership percentages, number of scientists and technicians used in R&D, customer satisfaction data, factors affecting customer product selection, number of patents and trademarks held, customer brand awareness, number of ATMs by state, number of products used by average customer, percentage of customer service calls handled by interactive voice response units, personnel cost per employee, credit card retention rates.

LO4 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

17-3

Questions Chapter 17 (Continued) 18.

(a) Variances are reported in income statements for management below gross profit which is reported at standard costs. Each variance is identified and the total variance is shown. (b) Standard costs may be used in costing inventories when there is no significant difference between actual costs and standard costs. When there are significant differences, actual costs must be reported.

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

*19. Overhead controllable variance = actual overhead costs ($248,000) – overhead budgeted. Overhead budgeted is based on standard hours allowed as follows: variable costs (135,000 × $10 = $135,000) + fixed costs (14,000 × $8 = $112,000) = total overhead budgeted ($247,000). Thus, the controllable variance is $1,000 unfavorable. LO6 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement [$248,000 – ((13,500 × $10) + (14,000 × $8)) = $1,000 U] [Act. OH costs – (Bud. VOH costs + Bud. FOH costs) = Unfav. control. var.]

*20. The purpose of computing the overhead volume variance is to determine whether factory facilities were efficiently used during the period. The basic equation is fixed overhead rate × (normal capacity – standard hours allowed). LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

*21. Fixed costs remain the same at every level of activity within the relevant range. Since the predetermined overhead rate is based on normal capacity, it follows that if standard hours allowed are less than standard hours at normal capacity, fixed overhead costs will be underapplied. The reverse is true when production exceeds normal capacity. LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

*22. John should include the following points about overhead variances: (1) Standard hours allowed are used in each of the variances. (2) Budgeted costs for the controllable variance are derived from the flexible budget. (3) The controllable variance generally pertains to variable costs. (4) The volume variance pertains solely to fixed costs. LO6 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA:: Performance Measurement

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 17.1 (a) Standards are stated as a per unit amount. Thus, the standards are materials, $2.80 ($1,400,000 ÷ 500,000) and labor, $3.40 ($1,700,000 ÷ 500,000). [(Mat.: $1,400,000 ÷ 500,000 = $2.80); (Labor: $1,700,000 ÷ 500,000 = $3.40)] [(Mat.: Est. cost ÷ Est. units = Std. cost/unit); (Labor: Est. cost ÷ Est. units = Std. cost/unit)]

(b) Budgets are stated as a total amount. Thus, the budgeted costs for the year are materials $1,400,000 and labor $1,700,000. LO1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

BRIEF EXERCISE 17.2 (a) Standard direct materials price per gallon = $2.60 ($2.30 + $0.20 + $0.10). (b) Standard direct materials quantity per gallon = 4 pounds (3.6 +0 .4). (c) Standard materials cost per gallon = $10.40 ($2.60 × 4). ($2.60 × 4 = $10.40) (Std. cost/lb. × Std. lbs./ga. = Std. DM cost/ga.) LO1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

BRIEF EXERCISE 17.3 (a) Standard direct labor rate per hour = $16.00 ($14.00 + $0.80 + $1.20). (b) Standard direct labor hours per gallon = 1.5 hours (1.1 + 0.25 +0 .15). (c) Standard labor cost per gallon = $24.00 ($16.00 × 1.5). ($16 × 1.5 = $24) (Std. DL rate/hr. × Std. DLH/ga. = Std. DL cost/ga.) LO1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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17-5

BRIEF EXERCISE 17.4 Total materials variance = $1,192 U (3,200 × $5.06*) – (3,000** × $5.00). Materials price variance = $192 U (3,200 × $5.06) – (3,200 × $5.00). Materials quantity variance = $1,000 U (3,200 × $5.00) – (3,000 × $5.00). *$16,192 ÷ 3,200 **1,500 × 2 LO2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement [(3,200 × ($16,192 ÷ 3,200)) – ((1,500 × 2) × $5.00) = $1,192U] [(lbs.DM used x (Cost of DM purch. ÷ lbs. purch) – ((Units made x std. lbs./unit) x Std. Cost/lb.) = Unfav. tot. DM var.]

BRIEF EXERCISE 17.5 Total labor variance Labor price variance Labor quantity variance

= $1,220 U (2,150 × $10.80) – (2,000* × $11.00). = $430 F (2,150 × $10.80) – (2,150 × $11.00). = $1,650 U (2,150 × $11.00) – (2,000* × $11.00).

*1,000 × 2 LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

[(2,150 × $10.80) – ((1,000 × 2) × $11) = $1,220U] [(Act. DLH × Act. rate/DLH) – ((Units made × Std.DLH/unit) × Std. rate/DLH) = Unfav. tot. DL var.]

BRIEF EXERCISE 17.6 The equation is:

Actual Overhead Overhead – Applied = $118,000 – *$123,600*

Total Overhead Variance $5,600 F

*20,600 × $6 = $123,600 LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement [$118,000 – (20,600 × $6) = $5,600F] [(Act. OH – (Std. DLH allowed × Std. rate/DLH) = Fav. tot. OH var.]

BRIEF EXERCISE 17.7 1. 2. 3. 4.

financial ............................ (c) return on assets customer .......................... (d) brand recognition internal process ............... (a) factory capacity utilization learning and growth......... (b) employee work days missed due to injury

LO4 BT: AP Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

17-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

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*BRIEF EXERCISE 17.8 The equation is:

Overhead Overhead Actual Overhead – Budgeted = Controllable Variance $118,000 – *$132,400* $14,400 F

*(20,600 × $4) + $50,000 = $132,400 LO6 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement [$118,000 – ((20,600 × $4) + $50,000) = $14,400F] [Act. OH – ((Std. DLH allowed × Std. VOH rate/DLH) + Bud. FOH) = Fav. OH control. var.]

*BRIEF EXERCISE 17.9 The equation is: Fixed Overhead × (Normal Capacity Hrs. – Standard Hrs. Rate Allowed) $2.00*/hr. × (25,000 – 20,600)

Overhead Volume Variance

$8,800 U

*($50,000 ÷ 25,000 hrs.) LO6 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement [($50,000 ÷ 25,000) × (25,000 – 20,600) = $8,800U] [(Bud. FOH ÷ Normal DLH) × (Normal DLH – Std. DLH allowed) – Unfav. OH vol. var.]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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17-7

SOLUTIONS FOR DO IT! EXERCISES DO IT! 17.1 Manufacturing Cost Element Direct materials Direct labor Manufacturing overhead Total

Standard Quantity 2 pounds 0.2 hours 0.2 hours

Standard = Price $ 5.00 16.00 20.00

Standard Cost $10.00 3.20 4.00 $17.20

LO1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Accounting ($10.00 + $3.20 + $4.00 = $17.20) (Std. DM cost/unit + Std. DL cost/ unit + Std. MOH cost/unit = Tot. std. cost/unit)

DO IT! 17.2 The variances are: Total materials variance = (29,000 × $6.30) – (32,000* × $6.00) = $9,300 favorable Materials price variance = (29,000 × $6.30) – (29,000 × $6.00) = $8,700 unfavorable Materials quantity variance = (29,000 × $6.00) – (32,000* × $6.00) = $18,000 favorable

*(16,000 X 2) LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement [(29,000 × $6.30) – ((16,000 × 2) × $6.00) = $9,300F] [Act. qty. purch. × Act. price) – ((Units made × std. DM/unit) × Std. price) = Fav. tot. DM var.]

DO IT! 17.3 (a) The labor variances are: Total labor variance = (4,000 × $14.30) – (3,800* × $14.00) = $4,000 unfavorable Labor price variance = (4,000 × $14.30) – (4,000 × $14.00) = $1,200 unfavorable Labor quantity variance = (4,000 × $14.00) – (3,800* × $14.00) = $2,800 unfavorable (b) The total overhead variance is: Total overhead variance = $81,300 – $83,600** = $2,300 favorable *2,000 × 1.9 **3,800 hours × $22.00 LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement [(Labor: (4,000 × $14.30) – ((2,000 × 1.9) × $14.00) = $4,000U); (OH: $81,300 – (3,800 × $22) = $2,300F)] [(Labor: (Act. DLH × Act. DLH rate) – ((No. units made × Std. DLH/unit) × Std. DLH rate) = Unfav. tot. DL var.); (OH: Act. OH – (Std. DLH allowed × Std. OH rate/DLH) = Fav. tot. OH var.)]

17-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 17.4 Sales revenue Cost of goods sold (at standard) Standard gross profit Variances Materials price $350 U Materials quantity 1,700 F Labor price 800 F Labor quantity 500 F Overhead 1,200 U Total variance favorable Gross profit (actual)

$92,100 51,600 40,500

1,450 $41,950

LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting [($92,100 - $51,600) + (-$350 + $1,700 + $800 + $500 - $1,200) = $41,950] [(Sales rev. – CGS @ std.) + (Unfav. DM price var. + Fav. DM qty. var. + Fav. DL price var. + Fav. DL qty. var. – Unfav. OH var.) = GP @ act.]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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17-9

SOLUTIONS TO EXERCISES EXERCISE 17.1 (a) Direct materials: (2,000 × 3) × $5 = $30,000 Direct labor: (2,000 × 1/2) × $16 = $16,000 Overhead: $16,000 × 70% = $11,200 (b) Direct materials: 3 × $5 = $15.00 Direct labor: 1/2 × $16 = 8.00 Overhead: $8.00 × 70% = 5.60 Standard cost: $28.60 [(3 × $5) + (1/2 × $16) + ($8.00 × 70%) = $28.60] [(Std. lbs./unit × Std. price/lb.) + (Std. DLH/unit × Std. DLH rate) + (Std. DL cost/unit × Std. OH rate/DLH) = Std. cost/unit]

(c) The advantages of standard costs which are carefully established and prudently used are: 1. Management planning is facilitated. 2. Greater economy is promoted by making employees more costconscious. 3. Setting selling prices is facilitated. 4. Management control is enhanced by having a basis for evaluation of cost control. 5. Variances are highlighted in management by exception. 6. Costing of inventories is simplified and clerical costs are reduced. LO1 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Accounting

EXERCISE 17.2 Ingredient Grape concentrate Sugar (54 ÷ 50) Lemons (60 ÷ 50) Yeast Nutrient Water (2,600 ÷ 50)

Amount Per Gallon 60* oz. 1.08 lb. 1.2 1 tablet 1 tablet 52 oz.

Standard Standard Waste Usage 4% (a) 62.5 oz. 10% (b) 1.20 lb. 25% (c) 1.6 0% 1 tablet 0% 1 tablet 0% 52 oz.

Standard Price $0.06 0.30 0.60 0.25 0.20 0.005

Standard Cost Per Gallon $3.75 0.36 0.96 0.25 0.20 0.26 $5.78

*3,000 ÷ 50 (a) .96X = 60 ounces; or X = (60 ounces)/.96. (b) .90X = 1.08 pounds; or X = (1.08 pounds)/.90. (c) .75X = 1.2 lemons; or X = (1.2 lemons)/.75. 17-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 17.2 (Continued) LO1 BT: AP Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Accounting [Std. usage: (Grape:((3,000 ÷ 50) ÷ (1.00 - .04)) = 62.5 oz.); (Sugar: ((54 ÷ 50) ÷ (1.00 - .10)) = 1.20 lb.); (Lemons: ((60 ÷ 50) ÷ (1.00 - .25)) = 1.6 lemons); (Yeast: 1 tablet); (Nutrient: 1 tablet); (Water: 2,600 ÷ 50 = 52 oz.)] [Std. usage: (Grape: ((Tot. oz. ÷ No. gallons) ÷ % used) = Std. oz./ga.); (Sugar: ((Tot. lbs. ÷ No, gallons) ÷ % used) = Std. lbs./ga.); (Lemons: ((Tot. lemons ÷ No. ga.) ÷ % used) = Std. no. lemons/ga.); (Yeast: Std. no. tablets/ga.); (Nutrient: Std. no. tablets/ga.); (Water: (Tot. oz. ÷ No. ga.= Std. oz./ga.)]

EXERCISE 17.3 Direct materials Cost per pound [($5 – (2% × $5)) + $0.25] Pounds per unit (4.5 + 0.5)

$5.15 × 5

$25.75

Direct labor Cost per hour ($12 + $3) Hours per unit (2 + .4)

$ 15 × 2.4

36.00

Manufacturing overhead 2.4 hours × $7 Total standard cost per unit

16.80 $78.55

LO1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Accounting [DM: ($5 – (2% × $5) + $.25) × (4.5 + 0.5) = $25.75] [DM: (Cost/lb – Cash disc. + Frt.) × (lbs. in fin. unit + Normal spoilage) = Std. DM cost/unit]

EXERCISE 17.4 (a) Actual service time Setup and downtime (20% × 1.0) Cleanup and rest periods (30% × 1.0) Standard direct labor hours per oil change

1.0 hours 0.2 hours 0.3 hours 1.5 hours

(b) Hourly wage rate Payroll taxes ($12 × 10%) Fringe benefits ($12 × 25%) Standard direct labor hourly rate

$12.00 1.20 3.00 $16.20

[$12.00 + ($12 × 10%) + ($12 × 25%) = $16.20] [Hrly. wage rate + (Hrly. wage rate × Payroll tax rate) + (Hrly. wage rate × Fringe benefit rate) = Std. DLH rate]

= =

1.50 hours × $16.20 per hour $24.30

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 17.4 (Continued) (d) Direct labor quantity variance

= (1.60 hours × $16.20) – (1.50 hours × = $16.20) = $25.92 – $24.30 $1.62 U

[(1.6 × $16.20) – (1.5 × $16.20) = $1.62U] [(Act. DLH × Std. DLH rate) – (Std. DLH × Std. DLH rate) = Unfav. DL qty. var.] LO1, 3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Accounting

EXERCISE 17.5 (a) Total materials variance: (AQ × AP) – (SQ × SP) (29,000 × $4.70) (28,200* × $5.00) $136,300 – $141,000 = $4,700 F *9,400 × 3 [(29,000 × $4.70) – ((9,400 × 3) × $5.00) = $4,700F] [(Act. qty. purch. × Act. price/unit) – ((Units made × Std. DM/unit) × Std. price/unit) = Fav. Tot. DM var.]

Materials price variance: (AQ × AP) – (AQ × SP) (29,000 × $4.70) (29,000 × $5.00) $136,300 – $145,000 = $8,700 F Materials quantity variance: (AQ × SP) – (SQ × SP) (29,000 × $5.00) (28,200 × $5.00) $145,000 – $141,000 = $4,000 U (b) Total materials variance: (AQ × AP) – (SQ × SP) (28,000 × $5.15) (28,200 × $5.00) $144,200 – $141,000 = $3,200 U Materials price variance: (AQ × AP) – (AQ × SP) (28,000 × $5.15) (28,000 × $5.00) $144,200 – $140,000 = $4,200 U

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 17.5 (Continued) Materials quantity variance: (AQ × SP) – (SQ × SP) (28,000 × $5.00) (28,200 × $5.00) $140,000 – $141,000 = $1,000 F [(28,000 × $5) – (28,200 × $5) = $1,000F] [(Act. qty. used × Std. price/unit) – (Std. qty. allowed x Std. price/unit) = Fav. DM qty. var.] LO2 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

EXERCISE 17.6 (a) Total labor variance: (AH × AR) – (SH × SR) (40,600 × $12.15) (40,000* × $12.00) $493,290 – $480,000 = $13,290 U *10,000 × 4 [(40,600 × $12.15) – ((10,000 × 4) × $12.00) = $13,290U] [(Act. DLH × Act. DLH rate) – ((No. units made × Std. DLH/unit) × Std. DLH rate) = Unfav. tot. DL var.]

(b) Labor price variance: (AH × AR) – (AH × SR) (40,600 × $12.15) (40,600 × $12.00) $493,290 – $487,200 = $6,090 U Labor quantity variance: (AH × SR) – (SH × SR) (40,600 × $12.00) (40,000 × $12.00) $487,200 – $480,000 = $7,200 U (c) Labor price variance: (AH × AR) – (AH × SR) (40,600 × $12.15) (40,600 × $12.25) $493,290 – $497,350 = $4,060 F Labor quantity variance: (AH × SR) – (SH × SR) (40,600 × $12.25) (41,000* × $12.25) $497,350 – $502,250 = $4,900 F *4.1 x 10,000 [(40,600 × $12.25) – ((10,000 × 4.1) x $12.25) = $4,900F] [(Act. DLH × Std. DLH rate) – ((Units made × Std. DLH/unit) × Std. DLH rate) = F DL qty. var.] LO3 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

17-13

EXERCISE 17.7 Total materials variance: (AQ × AP) – (SQ × SP) (1,900 × $2.65*) (1,840** × $2.50) $5,035 – $4,600 = $435 U [(1,900 × ($5,035 ÷ 1,900)) – ((230 × 8) × $2.50) = $435U] [(Act. qty. purch. × (Act. tot. cost ÷ Act. qty. purch)) – ((Units made × Std. DM/unit) ×x Std. DM price = Unfav. tot. DM var.]

Materials price variance: (AQ × AP) – (1,900 × $2.65) $5,035 –

(AQ × SP) (1,900 × $2.50) $4,750

*$5,035 ÷ 1,900

= $285 U

**230 × 8

Materials quantity variance: (AQ × SP) – (SQ × SP) (1,900 × $2.50) (1,840 × $2.50) $4,750 – $4,600 = $150 U Total labor variance: (AH × AR) – (SH × SR) (700 × $11.60*) (690** × $12.00) $8,120 – $8,280 = $160 F *$8,120 ÷ 700

**230 x 3

[(700 × ($8,120 ÷ 700)) – ((230 × 3) x $12.00) = $160F] [(Act. DLH × (Act. DL cost ÷ Act. DLH)) – ((Units made × Std. DLH/unit) × Std. DLH rate) = Fav. tot. DL var.]

Labor price variance: (AH × AR) – (AH × SR) (700 × $11.60) (700 × $12.00) $8,120 – $8,400 = $280 F Labor quantity variance: (AH × SR) – (SH × SR) (700 × $12.00) (690 × $12.00) $8,400 – $8,280 = $120 U

17-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 17.7 (Continued) (Not Required) Materials Variance Matrix (1)

(2)

(3)

Actual Quantity × Actual Price 1,900 × $2.65 = $5,035

Actual Quantity × Standard Price 1,900 × $2.50 = $4,750

Standard Quantity × Standard Price (8 × 230) × $2.50 = $4,600

Price Variance (1) – (2) $5,035 – $4,750 = $285 U

Quantity Variance (2) – (3) $4,750 – $4,600 = $150 U

Total Variance (1) – (3) $5,035 – $4,600 = $435 U

Labor Variance Matrix (1)

(2)

(3)

Actual Hours × Actual Rate 700 × $11.60 = $8,120

Actual Hours × Standard Rate 700 × $12.00 = $8,400

Standard Hours × Standard Rate (3 × 230) ×x $12.00 = $8,280

Price Variance (1) – (2) $8,120 – $8,400 = $280 F

Quantity Variance (2) – (3) $8,400 – $8,280 = $120 U

Total Variance (1) – (3) $8,120 – $8,280 = $160 F

LO2, 3 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA:: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

17-15

EXERCISE 17.8 (a) Total materials variance: (AQ × AP) – (SQ × SP) (1,220 × $128) (1,200 × $130) $156,160 – $156,000 = $160 U [(1,220 × $128) – (1,200 × $130) = $160U] [(Act. qty. purch. × Act. price) – (Std. qty. allowed × Std. price) = Unfav. tot. DM var.]

Materials price variance: (AQ × AP) – (AQ × SP) (1,220 × $128) (1,220 ×x $130) $156,160 – $158,600 = $2,440 F Materials quantity variance: (AQ × SP) – (SQ × SP) (1,220 × $130) (1,200 × $130) $158,600 – $156,000 = $2,600 U Total labor variance: (AH × AR) – (SH × SR) (4,150 × $13) (4,300 × $12.50) $53,950 – $53,750 = $200 U [(4,150 × $13) – (4,300 × $12.50) = $200U] [(Act. DLH × Act. DLH rate) – (Std. DLH allowed × Std. DLH rate) = Unfav. tot. DL var.]

Labor price variance: (AH × AR) – (AH × SR) (4,150 × $13) (4,150 × $12.50) $53,950 – $51,875 = $2,075 U Labor quantity variance: (AH × SR) – (SH × SR) (4,150 × $12.50) (4,300 × $12.50) $51,875 – $53,750 = $1,875 F (b) The unfavorable materials quantity variance may be caused by the carelessness or inefficiency of production workers. Alternatively, the excess quantities may be caused by inferior quality materials acquired by the purchasing department.

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 17.8 (Continued) The unfavorable labor price variance may be caused by misallocation of the work force by the production department. In this case, more experienced workers may have been assigned to tasks normally done by inexperienced workers. An unfavorable labor variance may also occur when workers are paid higher wages than expected. The manager who authorized the wage increase is responsible for this variance. LO2, 3 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

EXERCISE 17.9 (a)

Number of units = Total direct materials standard cost ÷ Direct materials standard cost per unit Number of units = $410,000 ÷ $20.00 (5 lb × $4 per lb) = 20,500 OR Number of units = Total direct labor standard cost ÷ Direct labor standard cost per unit Number of units = $164,000 ÷ $8 (0.8 hr. × $10 per hr.) = 20,500

[$410,000 ÷ (5 × $4) = 20,500] [Tot. DM std. cost ÷ (Std. lbs./unit × Std. DM cost/lb.) = No. units produced] [$164,000 ÷ (0.8 × $10) = 20,500 [Tot. DL std. cost ÷ (Std. hrs./unit × Std. DL cost/hr.) = No. units produced

(b) AQ = [(SQ × SP) ± Quantity variance] ÷ SP AQ = ($410,000 + $9,000) ÷ $4.00 per lb = 104,750 pounds (c)

AP = [(AQ × SP) ± Price variance] ÷ AQ AP = [(104,750 x $4) – $2,095] = $416,905; $416,905 ÷ 104,750 lb = $3.98/lb

[((104,750 × $4) -$2,095) ÷ 104,750 = $3.98] [((Act. qty. used × Std. DM price) – DM fav. price var.) ÷ Act. qty. used = Act. DM price]

(d) AH = [(SH ×x SR) ± Quantity variance] ÷ SR AH = ($164,000 + $22,000) ÷ $10.00/hr = 18,600 hours (e)

AR = [(AH × SR) ± Price variance] ÷ AH AP = [(18,600 × $10) + $3,906] = $189,906 ÷ 18,600 hr = $10.21/hr

[((18,600 × $10) + $3,906) ÷ 18,600 = $10.21] [((Act. DLH × Std. DLH rate) + DL unfav. price var.) ÷ Act. DLH = Act. DLH rate] LO2, 3 BT: AN Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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17-17

EXERCISE 17.10 TOBY TOOL & DIE COMPANY Direct Labor Variance Report For the Month Ended March 31, 2027 Job No.

Actual Hours

Standard Hours

Quantity Actual Standard Price (a) (1) (2) Variance Rate Rate Variance (b) Explanation

A257 A258 A259

221 450 300

225 430 300

$ 80.00 F $20.00 400.00 U $21.00 ( 0 $20.60

$20.00 $20.00 $20.00

A260

116 110 Totals

120.00 U $18.00 $ 440.00 U

$20.00

LQV = SR × (AH – SH) (b) LPV = AH × (AR – SR) (a)

$ 0 Repeat job 450.00 U Rush job 180.00 U Replacement worker 232.00 F New trainee $398.00 U

(1)

Actual costs ÷ actual hours Standard costs ÷ standard hours

(2)

LO3, 4 BT: AP Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA AC: Reporting IMA: Performance Measurement [(A258 qty. var.: $20 × (450 – 430) = $400U); (A259 price var.: 300 × ($20.60 - $20.00) = $180U)] [(A258 qty. var.: Std. DLH rate × (Act. DLH – Std. DLH) = Unfav. DL qty. var.); (A259 price var.: Act. DLH × (Act. DLH rate – Std. DLH rate) = Unfav. DL price var.)]

EXERCISE 17.11 Total overhead variance: Actual Overhead – Overhead Applied $263,000 – $260,000 (52,000 × $5)

= $3,000 U

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement [$263,000 – (52,000 × $5) = $3,000U] [Act. OH – (Std. DLH allowed × Std. OH rate/DLH) = Unfav. tot. OH var.]

17-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 17.12 (a)

Overhead Budget ÷ (at normal capacity) Variable $250,000 Fixed 600,000 (b)

Standard Hours Allowed 95,000

Direct Labor Hours (at normal capacity) 100,000 100,000 Predetermined Overhead Rate $8.50

Predetermined Overhead Rate $2.50 6.00 $8.50

Overhead Applied $807,500 (95,000 × $8.50)

Overhead Applied $807,500

Total Overhead = Variance = $48,500 U

[($256,000 + $600,000) – (95,000 × $8.50) = $48,500U] [(Act. VOH + Act. FOH) – (Std. DLH allowed × Std. OH rate/DLH) = Unfav. tot. OH var.] LO3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

EXERCISE 17.13 (a)

(AQ × AP) – (SQ × SP) = Total Materials Variance ($10,200) – (2,100* × $5) = $300 F (AQ × AP) – (AQ × SP) = Materials Price Variance ($10,200) – (2,400 × $5) = $1,800 F (AQ × SP) – (SQ × SP) = Materials Quantity Variance (2,400 × $5) – (2,100* × $5) = $1,500 U *1,050 × 2

[($10,200) – ((1,050 × 2) × $5) = $300F] [(Act. qty. used × Act. price) – ((Units made × Std. DM/unit) × Std. DM price) = Fav. tot. DM var.]

(b) One possible cause of an unfavorable materials quantity variance is the purchase of substandard materials. Such materials would normally be purchased at a lower price than normal, which means there would also be favorable materials price variance. Substandard materials could also cause work slowdowns and delays, causing an unfavorable labor quantity variance. Therefore, the purchase of substandard materials could cause all three variances mentioned. LO2, 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

17-19

EXERCISE 17.14 (a) PICARD LANDSCAPING Variance Report – Purchasing Department For the Current Month (1) Actual Actual Price Pounds Per Project Purchased Pound Remington 500 $2.40 Chang 400 2.30 Wyco 550 2.60

(2) Standard Price Per Pound $2.50 2.50 2.50

Total price variance

Price Variance (a) Explanation $50 F Purchased poor-quality seeds 80 F Seeds on sale 55 U Price/lb. increased $75 F

(a)

MPV = AQ × (AP – SP) Actual costs ÷ actual quantity (2) Standard costs ÷ standard quantity (1)

[($1,200 ÷ 500 = $2.40); ($1,150 ÷ 460 = $2.50); (500 × ($2.40 - $2.50) = $50F)] [(Act. cost of DM purch. ÷ Act. qty. purch. = Act. price/lb.); (Std. cost of DM used ÷ Std. qty. allowed = Std. price/lb.); (Act. DM lbs. purch. × (Act. price/lb. – Std. price/lb.) = Fav. DM price var.)]

(b) PICARD LANDSCAPING Variance Report – Production Department For the Current Month

Project Remington Chang Wyco

Actual Pounds 500 400 550

Standard Standard Price Per Pounds Pound 460 $2.50 410 2.50 480 2.50

Total quantity variance

Quantity (b) Variance Explanation $100 U Purchased poor-quality seeds 25 F Purchased higher-quality seeds 175 U New employee $250 U

(b)MQV = SP × (AQ – SQ)

LO2, 4 BT: AP Difficulty: Moderate TOT: 14 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement

17-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 17.15 URBAN CORPORATION Variance Report – Purchasing Department For Week Ended January 9, 2027 Type of Materials Rogue 11 Storm 17 Beast 29

Quantity Purchased 27,500 lbs.a 7,000 oz. 22,000 units.

Actual Price $5.20 $3.45c $0.40

Standard Price $5.00 $3.30 $0.43d

Price Variance $5,500 Ub $1,050 U $ 660 F

Explanation Price increase Rush order Bought larger quantity

a27,500 = $5,500/($5.20 – $5.00). b$5,500 U because the actual price ($5.20) exceeds the standard price ($5.00). c$1,050/7,000 = $0.15; $3.30 + $0.15 = $3.45 d$660/22,000 = $0.03; $0.40 + $0.03 = $0.43

LO4 BT: AP Difficulty: Moderate TOT: 14 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance Measurement [($5,500 ÷ ($5.20 - $5.00) = 27,500); (27,500 × ($5.20 - $5.00) = $5,500U); ($3.30 + ($1,050 ÷ 7,000) = $3.45); ($.40 + ($660 ÷ 22,000) = $.43)] [(Price var. ÷ (Act. price – Std. price) = Qty. purch.); (Qty. purch. x (Act. price – Std. price) = Unfav. price var.); (Std. price + (Price var. ÷ Qty. purch.) = Act. price); (Act. price + (Price var. ÷ Qty. purch.) = Std. price)]

EXERCISE 17.16 FISK COMPANY Income Statement For the Month Ended January 31, 2027 Sales revenue (8,000 × $8) ............................................. Cost of goods sold (8,000 × $5)..................................... Gross profit (at standard) .............................................. Variances Materials price ........................................................ $1,200 U Materials quantity ................................................... 800 F Labor price .............................................................. 550 U Labor quantity ......................................................... 750 U Overhead ................................................................. 800 U Total variance—unfavorable .......................... Gross profit (actual) ....................................................... Selling and administrative expenses ............................ Net income ......................................................................

$64,000 40,000 24,000

2,500 21,500 8,000 $13,500

LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting [((8,000 x $8) – (8,000 x $5)) + (-$1,200 + $800 - $550 - $750 - $800) = $21,500 - $8,000 = $13,500] [((Units sold × USP) – (Units sold × Unit std. cost)) + (- Unfav. DM price var. + Fav. DM qty. var. – Unfav. DL price var. – Unfav. DL qty. var. – Unfav. OH var.) = GP @ actual – S&A exp. = Net inc.]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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17-21

EXERCISE 17.17 1.

Balanced scorecard—(c) An approach that incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company’s strategic goals.

Variance—(a) The difference between total actual costs and total standard costs.

Learning and growth perspective—(d) A viewpoint employed in the balanced scorecard to evaluate how well a company develops and retains its employees.

Nonfinancial measures —(e) An evaluation tool that is not based on dollars.

Customer perspective—(f) A viewpoint employed in the balanced scorecard to evaluate the company from the perspective of those people who buy its products or services.

Internal process perspective—(h) A viewpoint employed in the balanced scorecard to evaluate the efficiency and effectiveness of the company’s value chain.

Ideal standards—(g) An optimum level of performance under perfect operating conditions.

Normal standards—(b) An efficient level of performance that is attainable under expected operating conditions.

LO4 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA ACFC: Measurement IMA: Performance Measurement

EXERCISE 17.18 1. 2. 3. 4. 5. 6.

Customer perspective. Learning and growth perspective. Financial perspective. Customer perspective. Learning and growth perspective. Internal process perspective.

LO4 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

17-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 17.19 1. 2. 3. 4. 5. 6.

Learning and growth perspective. Financial perspective. Customer perspective. Internal process perspective. Learning and growth perspective. Customer perspective.

LO4 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Performance Measurement

*EXERCISE 17.20 (a) Item Variable overhead ................................. Fixed overhead ...................................... Total overhead....................................... (b) Total overhead variance: Actual Overhead – Overhead Applied $55,500 – $53,460 (16,200* × $3.30)

Amount $34,650 19,800 $54,450

Hours 16,500 16,500 16,500

Rate $2.10 1.20 $3.30

= $2,040 U

*4,050 × 4 hrs. = 16,200 hrs. Overhead controllable variance: Actual Overhead – Overhead Budgeted $55,500 – $53,820 = $1,680 U [((16,200 × $2.10) + $19,800] Overhead volume variance: Fixed Overhead × Normal Capacity Standard Hours Rate × Hours – Allowed $1.20 [16,500 – (4,050 × 4)] = $360 U [(Tot. OH var.: $55,500 – ((4,050 × 4) x $3.30) = $2,040U); (OH control. var.: $55,500 – ((16,200 × $2.10) + $19,800) = $1,680U); (OH vol. var.: $1.20 × (16,500 – (4,050 × 4)) = $360U)] [(Tot. OH var.: Act. mfg. OH – ((Units made × Std. DLH/unit) × Tot. OH rate) = Unfav. tot. OH var.); (OH control. var.: Act. mfg. OH – ((Std. DLH allowed × VOH rate) + Bud. FOH) = Unfav. OH control. var.); (OH vol. var.: FOH rate × (Normal DLH – Std. DLH allowed) = Unfav. OH vol. var.)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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17-23

*EXERCISE 17.20 (Continued) (c) The overhead controllable variance is generally associated with variable overhead costs. Thus, this variance indicates the production manager’s inefficiency in controlling variable overhead costs. The overhead volume variance relates to fixed overhead costs. This variance indicates whether factory facilities were efficiently used. In this case 300 (16,500 – 16,200) hours of factory capacity were not utilized. LO6 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

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*EXERCISE 17.21 (a) 1. Total actual overhead cost

Overhead Budgeted

= ($18,000 + $12,600) +

Overhead Controllable Variance $1,200

= $31,800 [($18,000 + $12,600) + $1,200 = $31,800] [(Bud. VOH + Bud. FOH) + OH control. var. = Tot. act. OH)

Actual variable overhead cost = Actual Overhead – Fixed Overhead –

= $31,800

$12,600

= $19,200 3.

Variable overhead cost applied = 2,000 hours × $9 = $18,000

Fixed overhead cost applied

= 2,000 hours × $6 = $12,000

Overhead volume variance

= Overhead ×

(Capacity – Hours)

= $6

(2,100*

–

2,000)

= $600 U *$12,600 ÷ $6 per hour = 2,100 hours [$6 × (($12,600 ÷ $6) – 2,000) = $600U] [Std. FOH rate × ((Bud. FOH ÷ Std. FOH rate) – Std. hrs. allowed) = Unfav. OH vol. var.]

(b)

Number of loans processed

= Standard hours allowed ÷ Standard hours per application = 2,000 ÷ 2 = 1,000 loans processed

(2,000 ÷ 2 = 1,000) (Std. hrs. allowed ÷ Std. hrs./application = No. loans processed) LO6 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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17-25

EXERCISE 17.22 (a) (Actual) – (Applied) = Total Overhead Variance ($19,500) – (1,800 × $10*) = $1,500 U (Actual) – ($19,500) – Fixed OH Rate $3**

(Budgeted) ($18,600)

= Overhead Controllable Variance = $900 U

Normal Capacity

–

(2,000***

–

*$240,000/24,000

Standard Hours Overhead Allowed = Volume = Variance 1,800) = $600 U

**($6,000 × 12)/24,000

***24,000/12

[(Tot. OH var.: $19,500 – (1,800 × ($200,000 ÷ 20,000)) = $1,500U); (OH control. var.: $19,500 - $18,600 = $900U); (OH vol. var.: (($6,000 × 12) ÷ 24,000) × ((24,000 ÷ 12) – 1,800) = $600U)] [(Tot. OH var.: Act. OH – (Std. DLH × (Est. ann. OH ÷ Est. ann. DLH)) = Unfav. tot. OH var.); (OH control. var.: May act. OH – May bud. OH = Unfav. OH control. var.); (OH vol. var.: ((May bud. FOH × Mos. in a yr.) ÷ Est. ann DLH) × ((Est. ann. DLH ÷ Mos. in a yr.) – Std. hrs. allowed) = Unfav. OH vol. var.)]

(b) The cause of an unfavorable controllable variance could be higher than expected use of indirect materials, indirect labor, and factory supplies, or increases in indirect manufacturing costs, such as fuel and maintenance costs. An unfavorable volume variance would be caused by production of fewer units than what is considered normal capacity. LO6 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

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Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO PROBLEMS PROBLEM 17.1

(a) Total materials variance: (AQ × AP) – (SQ × SP) (5,100 × $7.20*) (4,800 × $7.00) $36,720 – $33,600 = $3,120 U *($36,720 ÷ 5,100) [(5,100 × ($36,720 ÷ 5,100)) – (4,800 × $7.00) = $3,120U] [(Act. lbs. purch. × Act. price/lb.) – (Std. lbs. allowed × Std. price/lb.) = Unfav. tot. mat. var.]

Materials price variance: (AQ × AP) – (AQ × SP) (5,100 × $7.20) (5,100 × $7.00) $36,720 – $35,700 = $1,020 U Materials quantity variance: (AQ × SP) – (SQ × SP) (5,100 × $7.00) (4,800 × $7.00) $35,700 – $33,600 = $2,100 U Total labor variance: (AH × AR) – (SH × SR) (7,400 × $12.50*) (7,680** × $12.00) $92,500 – $92,160 = $340 U *($92,500 ÷ 4,800)

**(4,800 x 1.6)

[(7,400 × ($92,500 ÷ 7,400)) – ((4,800 × 1.6) × $12.00) = $340U] [(Act. DLH × Act. DLH rate) – ((Units made × Std. DLH/unit) × Std. DLH rate) = Unfav. tot. labor var.]

Labor price variance: (AH × AR) – (AH × SR) (7,400 × $12.50) (7,400 × $12.00) $92,500 – $88,800 = $3,700 U Labor quantity variance: (AH × SR) – (SH × SR) (7,400 × $12.00) (7,680 × $12.00) $88,800 – $92,160 = $3,360 F

Kimmel, Survey of Accounting, 3e, Solutions Manual

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17-27

PROBLEM 17.1 (Continued) (b) Total overhead variance: Actual Overhead Overhead – Applied ($59,700 + $21,000) – (7,680 × $10.00) $80,700 $76,800 = $3,900 U [($59,700 + $21,000) – ((4,800 × 1.6) × $10) = $3,900U] [(Act. VOH + Act. FOH) – ((Units made × Std. DLH/unit) × Std. OH rate) = Unfav. tot. OH var.] LO2, 3 BT: AP Difficulty: Simple TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 17.2

(a) 1. Total materials variance: (AQ × AP) – (SQ × SP) (10,600 × $2.25) (10,000 × $2.10) $23,850 – $21,000 = $2,850 U [(10,600 × $2.25) – (10,000 × $2.10) = $2,850U] [(Act. units purch. × Act. cost/unit) – (Standard units used × Std. cost/unit) = Unfav. tot. mat. var.]

Materials price variance: (AQ × AP) – (AQ × SP) (10,600 × $2.25) (10,600 × $2.10) $23,850 – $22,260 = $1,590 U Materials quantity variance: (AQ × SP) – (SQ × SP) (10,600 × $2.10) (10,000 × $2.10) $22,260 – $21,000 = $1,260 U 2. Total labor variance: (AH × AR) – (SH × SR) (14,400 × $8.40*) (15,000 × $8.00**) $120,960 – $120,000 = $960 U *($120,960 ÷ 14,400)

**($120,000 ÷ 15,000)

[(14,400 × ($120,960 ÷ 14,400)) – (15,000 × ($120,000 ÷ 15,000)) = $960U] [(Act. DLH × (DL payroll ÷ Act. DLH)) – (Std. DLH × (Std. DL payroll ÷ Std. DLH)) = Unfav. tot. labor var.]

Labor price variance: (AH × AR) – (AH × SR) (14,400 × $8.40) (14,400 × $8.00) $120,960 – $115,200 = $5,760 U Labor quantity variance: (AH × SR) – (SH × SR) (14,400 × $8.00) (15,000 × $8.00) $115,200 – $120,000 = $4,800 F

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

17-29

PROBLEM 17.2 (Continued) (b)

Total overhead variance: Actual Overhead Overhead – Applied $189,500 – $193,500 = $4,000 F (45,000* × $4.30**) *(15,000 × 3)

**($3.00 + $1.30)

[$189,500 – ((15,000 × 3) × ($3.00 + $1.30)) = $4,000F] [Act. OH – ((Std. DLHs × Std. MH/DLH) × (VOH rate/MH + FOH rate/MH)) = Fav. tot. OH var.]

(c)

AYALA CORPORATION Income Statement For the Month Ended June 30, 2027

Sales revenue..................................................... Cost of goods sold (at standard) ...................... Gross profit (at standard) .................................. Variances Materials price ............................................ Materials quantity ....................................... Labor price.................................................. Labor quantity ............................................ Overhead..................................................... Total variance—favorable .................. Gross profit (actual)........................................... Selling and administrative expenses ............... Net income .........................................................

$400,000 334,500* 65,500 $ 1,590 U 1,260 U 5,760 U 4,800 F 4,000 F 190 65,690 40,000 $ 25,690

*Materials $21,000a + labor $120,000 + overhead applied $193,500 a

(10,000 x $2.10)

[($400,000 – ($21,000 + $120,000 + $193,500)) = $65,500); ($65,500 + (-$1,590 - $1,260 - $5,760 + $4,800 + $4,000) = $65,690); ($65,690 - $40,000 = $25,690)] [(Sales rev. – (Std. mat. used + Std. labor used + Std. OH applied) = GP @ std.); (GP @ std. + (Unfav. mat. price var. + Unfav. mat. qty. var. + Unfav. labor price var. + Fav. labor qty. var. + Fav. OH var.) = GP @ act.); (GP @ act. – S&A exp. = Net inc.)] LO2, 3, 4 BT: AP Difficulty: Simple TOT: 40 min. AACSB: Analytic AICPA FC: Measurement , Reporting IMA: Performance Measurement, Reporting

17-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 17.3

(a) 1.

Total materials variance: (AQ × AP) – (SQ × SP) (90,500 × $4.15) (90,000* × $4.40) $375,575 – $396,000 = $20,425 F *(11,250 X 8)

[(90,500 × $4.15) – ((11,250 × 8) × $4.40) = $20,425F] [Act. yds. purch × Act. price/yd.) – (Units made × Std. yds./unit) × Std. price/yd.) = Fav. tot. mat. var.]

Materials price variance: (AQ × AP) – (AQ × SP) (90,500 × $4.15) (90,500 × $4.40) $375,575 – $398,200 = $22,625 F Materials quantity variance: (AQ × SP) – (SQ × SP) (90,500 × $4.40) (90,000 × $4.40) $398,200 – $396,000 = $2,200 U 2.

Total labor variance: (AH × AR) – (SH × SR) (14,250 × $14.10) (13,500* × $13.40) $200,925 – $180,900 = $20,025 U *(11,250 × 1.2)

[(14,250 × $14.10) – ((11,250 × 1.2) x $13.40) = $20,025U] [(Act. DLH × Act. rate/DLH) – ((Units made × Std. DLH/unit) × Std. rate/DLH) = Unfav. tot. labor var.]

Labor price variance: (AH × AR) – (AH × SR) (14,250 × $14.10) (14,250 × $13.40) $200,925 – $190,950 = $9,975 U Labor quantity variance: (AH × SR) – (SH × SR) (14,250 × $13.40) (13,500 × $13.40) $190,950 – $180,900 = $10,050 U

Kimmel, Survey of Accounting, 3e, Solutions Manual

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17-31

PROBLEM 17.3 (Continued) (b)

Total overhead variance: Actual Overhead Overhead – Applied $86,000 – $82,350 ($49,000 + $37,000) (13,500* × $6.10**) = $3,650 U *(11,250 × 1.2) **($3.50 + $2.60)

[($49,000 + $37,000) – ((11,250 × 1.2) × ($3.50 + $2.60)) = $3,650U] [(Act. VOH + Act. FOH) - ((Units made × Std. DLH/unit) × (Std. VOH/DLH + Std. FOH rate/DLH)) = Unfav. tot. OH var.]

(c) The materials price variance is more than 4% from standard. The actual price for materials of $4.15 is $0.25 below the standard price of $4.40 or 5.7% ($0.25 ÷ $4.40). The same result can be obtained by dividing the total price variance by the total standard price for the quantities purchased ($22,625 ÷ $398,200). The labor price variance is 5.2% from standard ($0.70 ÷ $13.40). The same result can be obtained by dividing the total price variance by the total standard price for the direct labor hours used ($9,975 ÷ $190,950). The labor quantity variance is 5.6% (750 ÷ 13,500) from standard. The same result can be obtained by dividing the total quantity variance by the total standard price for the standard hours allowed ($10,050 ÷ $180,900). LO2, 3, 4 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 17.4

(a) $3,510 ÷ 117,000 = $0.03; $0.92 + $0.03 = $0.95 standard materials price per pound. OR 117,000 × $0.92 = $107,640; $107,640 + $3,510 = $111,150; $111,150 ÷ 117,000 = $0.95 per pound. [(117,000 × $.92 = $107,640); ($107,640 + $3,510 = $111,150); ($111,150 + 117,000 = $.95)] [(Act. lbs. purch. ×x Act. price/lb. = Act. DM cost); (Act. DM cost + Fav. DM price var. = Std. DM cost); (Std. DM cost ÷ Act. lbs. purch. = Std. price/lb.)]

(b) $4,750 ÷ $0.95(from a) = 5,000 pounds; 117,000 – 5,000 = 112,000 standard quantity for 28,000 units or 4.0 pounds (112,000 ÷ 28,000) per unit. OR $111,150 (from a) – $4,750 = $106,400; $106,400 ÷ $0.95 = 112,000; 112,000 ÷ 28,000 = 4.0 pounds per unit. (c) Standard hours allowed are 44,800 (28,000 × 1.6). (28,000 × 1.6 = 44,800) (Units made × Std. DLH/unit = Std. DLH allowed)

(d) $7,200 ÷ $12.00 = 600 hours over standard; 44,800 standard hours (from c) + 600 hours = 45,400 actual hours worked. OR 44,800 × $12 = $537,600; $537,600 + $7,200 = $544,800; $544,800 ÷ $12 = 45,400 actual hours worked. [($7,200 ÷ $12 = 600); (44,800 + 600 = 45,400)] [(Unfav. DL qty. var. ÷ Std. DLH rate = DLHs over std.); (Std. DLH allowed + DLHs over std. = Act. DLHs)]

(e) $9,080 ÷ 45,400 (from d) = $0.20; $12.00 – $0.20 = $11.80 actual rate per hour. OR $544,800 (from d) – $9,080 = $535,720; $535,720 ÷ 45,400 = $11.80 actual rate per hour. (f)

$360,000 ÷ 50,000 = $7.20 predetermined overhead rate per direct labor hour.

($360,000 ÷ 50,000 = $7.20) (MOH @ normal cap. ÷ Normal cap. in DLHs = Predet. OH rate/DLH)

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17-33

PROBLEM 17.4 (Continued) (g) Direct materials 4.0 pounds (from b) × $0.95 (from a) = $3.80; direct labor 1.6 × $12.00 = $19.20; manufacturing overhead 1.6 × $7.20 (from f) = $11.52. $3.80 + $19.20 + $11.52 = $34.52 standard cost per unit. [(DM: 4 × $.95 = $3.80); (DL: 1.6 × $12 = $19.20); (MOH: 1.6 × $7.20 = $11.52); ($3.80 + $19.20 + $11.52 = $34.52)] [(DM: Std. lbs./unit × Std. price/lb. = Std. DM cost/unit); (DL: std. DLH/unit × Std. rate/DLH = Std. DL cost/unit); (MOH: Std. DLH/unit × Std. OH rate/unit = Std. OH cost/unit); (Std. DM cost/unit + Std. DL cost/unit + Std. OH cost/unit = Std. cost/unit)]

(h) 44,800 (from c) × $7.20 = $322,560 overhead applied. (44,800 × $7.20 = $322,560) (Std. DLH allowed × Predet. OH rate/DLH = OH applied)

(i)

$34.52 [see (g) above] × 28,000 = $966,560 or direct materials $106,400 (from b) + direct labor $537,600 (from d) + overhead applied $322,560 (from h) = $966,560.

LO2, 3 BT: AN Difficulty: Complex TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 17.5

(a) Materials price variance: (AQ × AP) – (AQ × SP) (3,050 × $1.40*) (3,050 × $1.46) $4,270 – $4,453

= $183 F

*($4,270 ÷ 3,050) Materials quantity variance: (AQ × SP) – (SQ × SP) (3,050 × $1.46) (2,950* × $1.46) $4,453 – $4,307 *(1,475 × 2) Labor price variance: (AH × AR) – (1,550 × $23*) $35,650 – *($35,650 ÷ 1,550)

= $146 U

(AH × SR) (1,550 × $24) $37,200

= $1,550 F

Labor quantity variance: (AH × SR) – (SH × SR) (1,550 × $24) (1,475* × $24) $37,200 – $35,400

= $1,800 U

*(1,475 × 1 hr.) (b) Total Overhead variance: Actual Overhead Overhead – Applied $22,400 – $23,600 ($7,400 + $15,000) (1,475 × $16*)

= $1,200 F

*($10 + $6) [($7,400 + $15,000) – ((1,475 × 1) × ($10 + $6)) = $1,200F] [(Act. VOH + Act. FOH) – ((Units made × Std. DLH/unit) × (Std. VOH rate + Std. FOH rate)) = Fav. tot. OH var.]

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17-35

PROBLEM 17.5 (Continued) (c) HART LABS, INC. Income Statement For the Month Ended November 30, 2027

Service revenue ..................................................... Cost of service provided (at standard) (1,475 × $42.92) .................................................. Gross profit (at standard) ...................................... Variances Materials price ................................................ Materials quantity ........................................... Labor price...................................................... Labor quantity ................................................ Overhead......................................................... Total variance—favorable ...................... Gross profit (actual)............................................... Selling and administrative expenses ................... Net income .............................................................

$75,000 63,307 11,693 $ 183 F 146 U 1,550 F 1,800 U 1,200 F 987 12,680 5,000 $ 7,680

[($75,000 – (1,475 × $42.92) = $11,693); ($11,693 + ($183 - $146 + $1,550 - $1,800 + $1,200) = $12,680); ($12,680 - $5,000 = $7,680)] [(Serv. rev. – (Units sold × Std. cost/unit) = GP @ std.); (GP @ std. + (Fav. mat. price var. – Unfav. mat. qty. var. + Fav. labor price var. – Unfav. labor qty. var. + Fav. OH var.) = GP @ act.); (GP @ act. – S&A exp. = Net inc.)]

(d) The unfavorable materials quantity variance could be caused by poor quality materials or inexperienced workers or faulty test procedures. The unfavorable labor quantity variance could be caused by inexperienced workers, poor quality materials, or faulty test procedures. LO2, 3, 4 BT: AP Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement , Reporting IMA: Performance Measurement, Reporting

17-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

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*PROBLEM 17.6

Overhead controllable variance: Actual Overhead Overhead – Budgeted $80,700 – $77,600 = $3,100 U [(7,680* × $7.50) + $20,000] *(4,800 × 1.6 hours) [$80,700 – (((4,800 × 1.6) × $7.50) + $20,000) = $3,100U] [Act. OH – (((Units made × Std. DLH/unit) × Std. VOH rate) + Bud. FOH) = Unfav. OH control. var.]

Overhead volume variance: Fixed Normal Standard Overhead × Capacity – Hours Rate Hours Allowed $2.50/hr. × (8,000 – 7,680)

= $800 U

LO 6 BT: AP Difficulty: Simple TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

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17-37

*PROBLEM 17.7

Overhead controllable variance: Actual Overhead Overhead – Budgeted $189,500 – $190,250 [(45,000* × $3.00) + (42,500 × $1.30)]

= $750 F

*(15,000 x 3 hours) [$189,500 – (((15,000 × 3) × $3) + (42,500 × $1.30)) = $750F] [Act. OH – ((Units made × Std. MH/unit) × Std. VOH rate) + (Normal cap. in MH × Std. FOH rate)) = Fav. OH control. var.]

Overhead volume variance: Fixed Normal Standard Overhead × Capacity – Hours Rate Hours Allowed $1.30/hr. × (42,500 – 45,000) = $3,250 F LO 6 BT: AP Difficulty: Simple TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 17.8

Overhead controllable variance: Actual Overhead Overhead – Budgeted $86,000 – $84,100 = $1,900 U ($49,000 + $37,000) [(13,500* × $2.60) + $49,000] *(11,250 × 1.2 hours) [($49,000 + $37,000) – (((11,250 × 1.2) × $2.60) + $49,000) = $1,900U] [(Act. VOH + Act. FOH) – (((Units made × Std. DLH/unit) × Std. VOH rate) + Bud. FOH) = Unfav. OH control. var.]

Overhead volume variance: Fixed Normal Standard Overhead × Capacity – Hours Rate Hours Allowed $3.50/hr. × (14,000 – 13,500)

= $1,750 U

LO 6 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

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17-39

*PROBLEM 17.9

Overhead controllable variance: Actual Overhead Overhead – Budgeted $22,400 – $22,850 = $450 F ($7,400 + $15,000) [(1,475 × $6) + $14,000] [($7,400 + $15,000) – ((1,475 × $6) + $14,000) = $450F] [(Act. VOH + Act. FOH) – (Tests conducted × Std. VOH rate) + Bud. FOH) = Fav. OH control. var.]

Overhead volume variance: Fixed Normal Standard Overhead × Capacity – Hours Rate Hours Allowed $10 × (1,400* – 1,475) = $750 F *($14,000 ÷ $10) LO 6 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CD 17

CURRENT DESIGNS

(a) Quantity variance for polyethylene powder Price variance for polyethylene powder Quantity variance for finishing kits Price variance for finishing kits Quantity variance for type I workers Price variance for type I workers Quantity variance for type II workers Price variance for type II workers

Unfavorable Unfavorable NEI = Not enough information Favorable Favorable NEI = Not enough information Unfavorable NEI = Not enough information

(b) Quantity variance for polyethylene powder (AQ × SP) – (SQ × SP) (1,200 × $1.50) (1,080* × $1.50) $1,800 – $1,620 = $180 U *(54 × 20) [(1,200 × $1.50) – ((54 × 20) × $1.50) = $180U] [(Act. lbs. used ×Std. cost/lb.) – ((Lbs./kayak × Kayaks made) × Std. cost/lb.) = Unfav. qty. var.]

Price variance for polyethylene powder (AQ × AP) – (AQ × SP) (1,200 × $1.70*) (1,200 × $1.50) $2,040 – $1,800

= $240 U

*($2,040 ÷ 1,200) Quantity variance for finishing kits (AQ × SP) – (SQ × SP) (20 × $170) (20 × $170) $3,400 – $3,400

=$ 0

Price variance for finishing kits (AQ × AP) – (AQ × SP) (20 × $162*) (20 × $170) $3,240 – $3,400

= $160 F

*($3,240 ÷ 20) [(20 × ($3,240 ÷ 20)) – (20 × $170) = $160F] [(Kits made × (Tot. cost of kits ÷ Kits made) – (Kits made × Std. cost/kit) = Fav. price var.]

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17-41

CD 17 (Continued) Quantity variance for type I workers (AH × SR) – (SH × SR) (38 × $15*) (40** × $15) $570 – $600 *($570 ÷ 38)

= $30 F

**(20 × 2)

[(38 × $15) – ((20 × 2) × $15) = $30F] [(Act. DLH × Std. DLH rate) – ((Kayaks made × Std. DLH/kayak) × Std. DLH rate) = Fav. qty var.]

Price variance for type I workers (AH × AR) – (AH × SR) (38 × $15*) (38 × $15) $570 – $570

=$ 0

*($570 ÷ 38) Quantity variance for type II workers (AH × SR) – (SH × SR) (65 × $12) (60* × $12) $780 – $720

= $60 U

*(20 × 3) Price variance for type II workers (AH × AR) – (AH × SR) (65 × $12.25*) (65 × $12.00) $796.25 – $780

= $16.25 U

*($796.25 ÷ 65) [(65 × ($796.25 ÷ 65)) – (65 × $12) = $16.25U] [(Act. DLH × (Tot. act. DL cost ÷ Act. DLH)) – (Act. DLH × Std. DLH rate) = Unfav. price var.] LO2, 3 BT: AP Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

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WC 17

WATERWAYS CORPORATION

(a) Materials Price Variance Actual Quantity × Actual Price 229,000 lbs. × $0.78 = $178,620

less

Actual Quantity × Standard Price 229,000 lbs. × $0.80* = $183,200

less

= $4,580 F

*Standard price per pound: Material lbs. per unit × Price per lb. Metal 1.00 × $0.63 Plastic 0.75 × 1.00 Rubber 0.25 × 0.88 Total 2.00 lbs

= = = = =

Std. price per lb. $0.63 0.75 0.22 $1.60

$1.60 ÷ 2.00 lbs. = $0.80/lb. (b) Materials Quantity Variance Actual Quantity × Standard Price 229,000 lbs. × $0.80 = $183,200

less

Standard Quantity × Standard Price

less

231,000 lbs.* × $0.80 = $184,800

= $1,600 F F

*115,500 units × 2 lbs. = 231,000 lbs.

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17-43

WC 17 (Continued) (c) Total Materials Variance Actual Quantity × Actual Price 229,000 lbs. × $0.78 = $178,620

less

Standard Quantity × Standard Price 231,000 lbs.* × $0.80 = $184,800

= $6,180 F

*115,500 units × 2 lbs. = 231,000 lbs. (d) Labor Price Variance Actual Hours × Actual Rate 34,650 hrs.* × $7.80 = $270,270

less

Actual Hours × Standard Rate 34,650 hours × $8.00 = $277,200

= $6,930 F

*115,500 units × 0.30 hrs./unit = 34,650 hrs. (e) Labor Quantity Variance Actual Hours × Standard Rate 34,650 hours × $8.00 = $277,200

less

Standard Hours × Standard Rate 28,875 hours* × $8.00 = $231,000

= $46,200 U

*115,500 units × 0.25 hrs./unit = 28,875 hrs. 17-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

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WC 17 (Continued) (f) Total Labor Variance Actual Hours × Actual Rate 34,650 hrs. × $7.80 = $270,270

less

Standard Hours × Standard Rate 28,875 hrs. × $8.00 = $231,000

= $39,270 U

(g) Total Overhead Variance Actual Overhead Overhead Applied* $128,473 less $123,585 ($54,673 + $73,800) ($4.28 × 28,875 hours)

= $4,888 U

*Based on standard hours allowed for 115,500 units, 115,500 × .25 hrs. = 28,875 hours)

(h) The labor quantity variance is a concern. Perhaps the labor is not as skilled as it should be. The actual price paid for labor suggests less skill, so it could take workers longer to complete each unit. Or the materials may not meet the proper standard, causing the workers to take longer to complete a unit. It could also mean the machinery being used is not working efficiently. Yet another possibility is that the workers are not being properly supervised and are wasting time doing unproductive activities. The materials quantity variance could suggest that insufficient material is being used in the product (not in keeping with specs) making the product less durable. The unfavorable overhead variance may be related to the unfavorable labor quantity variance. Extra direct labor hours and inefficient use of machines may result in higher indirect labor costs, more repairs, or higher use of utilities. LO2, 3 BT: AP Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: erformance Measurement Copyright © 2023 John Wiley & Sons, Inc.

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17-45

SOLUTIONS TO DATA ANALYTICS IN ACTION The solutions for the Data Analytics in Action problems are available in Excel. See the file Solutions: Excel Templates in the Instructor Resources.

17-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 17.1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) When setting a standard for computer/labor hours usage, Milton Professionals should consider the following factors: 1.

A standard set conservatively high may discourage clients from purchasing the model.

A standard set too low may encourage sales of the model, but if customers use more hours than the standard suggests, they may be upset at having been misled.

Clients are likely to use the standard as an evaluation tool for their own employees operating the model. Standards set inappropriately may adversely affect productivity and/or morale of client employees.

(b) Logical alternatives for the standard include: 1.

34 hours:

The average number of hours used for one application by all five financial institutions.

45 hours:

The conservatively high number experienced by one financial institution.

25 hours:

The optimistic low number experienced by one financial institution.

30 hours:

The number of hours required most frequently in the sample of five institutions.

(c) In light of earlier factors listed, the second and third choices for the standard should be eliminated (i.e., 45 and 25 hours). The average 34 hours is probably the most representative. However, Milton Professionals may select 30 hours, given that the company has a high incentive to sell the new model. Consequently, it may make the most sense to pick the lower of the two remaining choices (30 hours).

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17-47

CT 17.1 (Continued) (d) Standard material cost for one model application: User Manuals:

$320 ÷ 20 manuals = $16/application.

Computer Forms:

$60 ÷ 250 forms = $0.24/form $0.24/form x 50 forms = $12/application.

[($60 ÷ 250 = $0.24); ($0.24 × 50 = $12)] [(Cost/package ÷ No. forms/package = Cost/form); (Cost/form × No. forms/package) = Cost/application] LO1 BT: E Difficulty: Easy TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17-48

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*CT 17.2

MANAGERIAL ANALYSIS

(a) The overhead application rate is $144,000 divided by 5,000 hours (1,000 units × 5 hours), or $28.80 per direct labor hour. (b) The standard direct labor hours are used to apply overhead to production, so the calculation is $28.80 × 4,500, or $129,600. (c)

Actual Overhead – Overhead Applied = Total Overhead Variance $150,000 $129,600 = $20,400 U The overhead budgeted for 4,500 direct labor hours is computed below. Fixed:

$22,500 + $13,000 + $27,000 + $8,000 + $3,000 + $1,500 + $500 + $300 = $75,800

Variable: ($12,000 + $43,000 + $10,000 + $2,500 + $700) ÷ 5,000 = $13.64 Fixed Variable (4,500 × $13.64)

$ 75,800 61,380 $137,180

The variances are: Controllable: Actual ($150,000) – Budgeted ($137,180) = $12,820 U Volume: $15.16*/hr. × (5,000 – 4,500) = $7,580 U *$75,800 ÷ 5,000 hrs. [($150,000 – ($28.80 × 4,500) = $20,400U); (Act. OH – (Std. OH/DLH × DLH allowed) = Unfav. tot. OH var.)] [($150,000 – ($75,800 + (4,500 × $13.64)) = $12,820U); (Act. OH – (Bud. FOH + (DLH allowed × Std. VOH rate)) = Unfav. OH control. var.)] [(($75,800 ÷ 5,000) × (5,000 – 4,500) = $7,580U); ((Bud. FOH ÷ Std. DLH allowed) × (Normal cap. in DLH – Std. DLH allowed)) = Unfav. OH vol. var.)]

(d) Both variances appear significant. The controllable variance is 9.3% of budgeted overhead ($12,820 ÷ $137,180), and the volume variance is 5.8% of applied overhead ($7,580 ÷ $129,600).

Kimmel, Survey of Accounting, 3e, Solutions Manual

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*CT 17.2 (Continued) (e) The controllable variance is caused by either spending more than expected on overhead items, or using more than expected of overhead items (for example, more indirect labor hours). The volume variance is caused by underutilizing factory time. To improve performance, management must spend less on overhead items, use them more efficiently, and increase production to 1,000 units. LO3, 6 BT: AP Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17-50

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 17.3

REAL-WORLD FOCUS

(a) Glassmaster is using standard costs because management states that a factor that contributed to improved margins (profit) was a favorable materials price variance. (b) The materials price variance experienced should not lead to changes in the standard for the next fiscal year. Management indicates that the favorable variance is temporary and will begin to reverse itself as stronger worldwide demand for commodity products improves in tandem with the economy. LO1, 2 BT: E Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Management

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CT 17.4

REAL-WORLD FOCUS

(a) The objectives for each perspective are: Financial: Increase profitability, lower costs, increase revenue Customer: Flight is on-time, lowest prices, more customers Internal: Improve turnaround time. Learning: Ground crew alignment. (b) To measure achievement of the customer perspective objectives of on-time flights, lowest prices and more customers, the company will use FAA on time arrival ratings, customer ranking, and number of customers. (c) To achieve the learning perspective objective of ground crew alignment, the company plans to implement an employee stock ownership plan and ground crew training. LO4 BT: C Difficulty: Easy TOT: 20 min. AACSB: Technology, Communication AICPA FC: Measurement IMA: Performance Measurement

17-52

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 17.5

COMMUNICATION ACTIVITY

From:

Student’s email address

To:

Professor’s email address

Subject:

Setting Standard Costs

Hi Professor ___________: This email covers two points as follows: (a) The comparative advantages and disadvantages of ideal versus normal standards. Ideal standards represent optimum levels of performance under perfect operating conditions. In contrast, normal standards represent efficient levels of performance that are attainable under expected operating conditions. An advantage of ideal standards is that they stimulate the conscientious worker to ever-increasing improvement. The disadvantage of ideal standards is that because they are so difficult to meet, they lower the morale of the entire work force. Normal standards are rigorous but attainable. Such standards should stimulate the worker to self-improvement without discouraging him or her or lowering the morale of the work force. (b) Factors to be considered in setting standards for direct materials, direct labor, and manufacturing overhead. 1.

Direct materials. The direct materials price standard is the cost per unit of direct materials that should be incurred. This standard should be based on the purchasing department’s best estimate of the cost of raw materials. The price standard should include allowances for related costs such as receiving, storing and handling.

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CT 17.5 (Continued) The direct materials quantity standard is the quantity of direct materials that should be used per unit of finished goods. This standard is a physical measure and it should include allowances for unavoidable waste and normal spoilage. 2.

Direct labor. The direct labor price standard is the rate per hour that should be incurred for direct labor. This standard should be based on current wage rates adjusted for expected cost of living adjustments and employer payroll taxes and fringe benefits. The direct labor quantity standard is the time that should be required to make one unit of product. In setting this standard, allowances should be made for rest periods, cleanup, and machine setup and downtime.

Manufacturing overhead. For this standard, a standard predetermined overhead rate is used. This rate is determined by dividing budgeted overhead costs by an expected standard activity index. The budgeted overhead costs should be based on a realistic estimate of overhead costs at normal capacity.

Student’s name LO1 BT: C Difficulty: Easy TOT: 20 min. AACSB: Communication AICPA FC: Measurement IMA: Performance Measurement

17-54

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 17.6

ETHICS CASE

(a) Bill and his fellow painters in the painting department will benefit from Bill’s slow action. The company and its customers are harmed. The company will incur higher costs on the product and therefore, will have to set a higher selling price or suffer a smaller gross profit. Customers will have to pay a greater price for the product or stockholders will obtain less benefit from their investment. (b) Deliberately falsifying and distorting the time study was unethical. If every employee in every phase of producing this new product distorted the time study, the company would not be competitive. If the company is not competitive and profitable, it will eventually go out of business and Bill will be out of a job. It is in Bill’s best interest to support the development of reasonable standards and improved efficiency. (c) The company might conduct several time study tests using different employees. Or the company might conduct unannounced time studies. The standard might be changed more often than every six months by conducting monthly time studies to effect continuous improvements in efficiency. Incentives might be offered to employees who produce the most efficient effort in the time studies, thereby discouraging distorted, inefficient performance. LO1 BT: E Difficulty: Moderate TOT: 25 min. AACSB: Ethics, Communication AICPA FC: Measurement AICPA PC: Professional Demeanor IMA: Performance Measurement, Business Applications

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CT 17.7

ALL ABOUT YOU

(a) As discussed in the chapter, standards provide a mechanism for evaluating performance and, if used properly, can be used as a motivational tool. The results of standardized tests might help to evaluate the effectiveness of various approaches to education. They might also be used to “weed out” schools that are not meeting minimum expectations. (b) Potential disadvantages of standards are that they might reduce the willingness of instructors or institutions to experiment with new teaching approaches. In addition, in order to obtain high scores, instructors might feel compelled to “teach to the exam,” thus narrowing the breadth of exposure obtained by the student. Also, by their very nature, standardized tests have a difficult time addressing differences across various instructional settings that can cause differences in results. (c) Answers will vary depending on student response. LO1 BT: E Difficulty: Easy TOT: 20 min. AACSB: Technology, Communication AICPA FC: Measurement IMA: Performance Measurement

17-56

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 17.8

CONSIDERING YOUR COSTS AND BENEFITS

Discussion Guide: The practice of medicine holds an unusual place in society. On the one hand, it provides a critical, life-sustaining service. We expect and demand the highest-quality service. We measure its success in terms of health improvement and lives saved. On the other hand, it is a business, and like other businesses, it must operate profitably. Some healthcare providers characterize this delicate balance as “The Business of Caring.” How should we balance providing quality health care and reducing costs? In recent years, managerial accounting has played an important, although not always successful, role in this issue. In the 1990s, health-care providers made extensive use of managerial accounting techniques to reduce costs. By the end of that decade, a number of important studies suggested that the quality of health care had suffered as a result of concentrating too much on cost-controlling efforts and not enough on maintaining quality. Today, many health-care organizations are implementing balanced scorecards in an effort to balance the dual (and in some ways competing) goals of quality health care and reduced costs. For example, by providing incentives for preventive medicine, health-care providers can reduce costs and at the same time improve patient health. It is likely that, in order to provide health care to more Americans, we will have to reduce costs. It is hoped that successful implementation of balanced scorecard programs will result in reduced costs through increased efficiency, while increasing the quality of health care. LO1 BT: E Difficulty: Moderate TOT: 25 min. AACSB: Communication AICPA FC: Measurement IMA: Performance Measurement

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CHAPTER 18 Planning for Capital Investments Learning Objectives 1. 2. 3. 4. 5.

Describe capital budgeting inputs and apply the cash payback technique. Use the net present value method. Identify capital budgeting challenges and refinements. Use the internal rate of return method. Use the annual rate of return method.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-1

ANSWERS TO QUESTIONS 1.

The screening of proposed capital expenditures may be done by a capital budgeting committee that submits its findings to the officers of the company. The officers, in turn, select the projects they believe to be the most worthy of funding and submit them to the board of directors. The directors ultimately approve the capital expenditure budget for the year.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

The cash payback technique is relatively easy to compute and understand. However, it should not ordinarily be the only basis for the capital budgeting decision because it ignores the expected profitability of the investment and the time value of money.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

Tom is not correct. The equation for the cash payback technique is: Cost of the capital investment ÷ Estimated net annual cash flow. The equation for the annual rate of return is: Expected annual net income ÷ average investment.

LO1, 5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

The two tables are: (1) The Present Value of 1 (Table 3 in Appendix A). This table is used when a project has uneven cash payments over its useful life and to compute the present value of the salvage value of the project and single period cash flow. (2) The Present Value of an Annuity of 1 (Table 4 in Appendix A). This table is used when a project has equal cash payments occurring at equal intervals of time over its useful life.

LO2 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

The decision rule is: Accept the project when net present value is zero or positive; reject the project when net present value is negative.

LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

The discount rate has two elements, a cost of capital element and a risk element. Many times companies set the risk element equal to zero; thus, they are setting the discount rate equal to the cost of capital. However, if a project is considered to be riskier than the firm’s other projects, the discount rate should include a risk element.

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

The following simplifying assumptions were made: • All cash flows come at the end of the year. • All cash flows are immediately reinvested in another project that has a similar return. • All cash flows can be predicted with certainty.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

Examples of intangible benefits of investment projects would be increased product quality, improved safety, and enhanced employee loyalty. Intangible benefits often complicate the capital budgeting process because their value can be difficult to quantify. Ignoring intangible benefits may result in rejecting projects that would be financially beneficial to the company.

LO3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

Two approaches can be taken. Under the first approach, management should ask whether the value of the intangible benefits exceeds the amount by which the net present value of the project is negative. If so, the project should be accepted. Under the second approach, management should make conservative dollar estimates of the value of the intangible benefits and the net present value should be recalculated.

LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

18-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 18 (Continued) 10.

When trying to choose between competing proposals, simply comparing the net present value of the competing proposals ignores the fact that one proposal may require a considerably larger investment. The profitability index is useful because it incorporates the required initial investment into the evaluation.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

11.

A post-audit is a thorough evaluation of how well a project’s actual performance matches the original projections. Performing post-audits can be valuable because: (1) managers are more likely to submit reasonable and accurate data if they know that their estimates will be evaluated subsequently, (2) they provide a process for determining whether projects should be continued, and (3) they improve the development of future investment proposals because, by evaluating their past successes and failures, managers improve their estimation techniques.

LO3 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

12.

When the net annual cash flows are equal each year, the steps are: (1) Compute the internal rate of return factor by dividing Capital Investment by Net Annual Cash Flows. (2) Use the factor and the Present Value of an Annuity of 1 table to find the internal rate of return.

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

13.

Under the internal rate of return method, the objective is to find the rate that will make the present value of the expected net annual cash flows equal the present value of the proposed capital expenditure. The decision rule under the internal rate of return method is: Accept the project when the internal rate of return is equal to or greater than the required rate of return, and reject the project when the internal rate of return is less than the required rate.

LO4 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

14.

The advantages of this method are the simplicity of its calculation and management’s familiarity with the accounting terms used in the computation. A limitation is that it does not consider the time value of money. Also, by employing accrual accounting numbers rather than cash flows, it ignores the fact that the value of an investment proposal is based on the cash flows that it generates.

LO5 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

15.

The equation for the annual rate of return technique is: Expected annual net income ÷ Average investment.

LO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

16.

Cost of capital is the average rate of return that the company must pay to obtain borrowed and equity funds. The decision rule is: Accept the project when the internal rate of return is equal to or greater than the required rate of return (which often is its cost of capital). Reject the project when the internal rate of return is less than the required rate of return.

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Investment Decisions

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18-3

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 18.1 $450,000 ÷ $60,000 = 7.5 years LO1 BT: AP Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions ($450,000 ÷ $60,000) (Cost of equip. ÷ Net ann. cash flow)

BRIEF EXERCISE 18.2 Present Value $226,000 215,000 $ 11,000

Net annual cash flows – $40,000 × 5.65 Less: Capital investment Net present value

The investment should be made because the net present value is positive. LO2 BT: AN Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [($40,000 × 5.65) - $215,000 = $11,000] (PV of net ann. cash flows – Cap. invest. = Pos. NPV)

BRIEF EXERCISE 18.3

Event/(Time Period) Present value of net annual cash flows/(1 – 5) Present value of salvage Value/(5) Less: Capital investment/(0) Net present value

Cash Flows ×

10% Discount Factor

Present Value

$25,000

3.79079

$ 94,770

60,000

.62092

37,255 132,025 136,000 $(3,975)

Since the net present value is negative, the project is unacceptable. LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [($25,000 × 3.79079) + ($60,000 × .62092) - $136,000 = ($3,975)] (PV of net ann. cash flows + PV of SV – Cap. invest. = Neg. NPV)

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 18.4

Event/(Time Period) Present value of net annual cash flows/(1-8) Less: Capital investment/(0) Net present value

Cash 9% Discount Flows × Factor =

Present Value

$34,000

$188,184 200,000 $ (11,816)

5.53482

The reduction in downtime would have to have a present value of at least $11,816 in order for the project to be acceptable. LO2, 3 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [($34,000 × 5.53482) - $200,000 = ($11,816)] (PV of net ann. cash flows – Cap. invest. = Neg. NPV)

BRIEF EXERCISE 18.5 Project A Event/(Time Period) Present value of net annual cash Flows/(1 – 10) Less: Capital investment/(0) Net present value

Cash Flows

9% Discount Present × Factor = Value

$70,000

6.41766

$449,236 400,000 $ 49,236

Profitability index = $449,236/$400,000 = 1.12 [($70,000 × 6.41766) - $400,000 = $49,236]; ($449,236 ÷ $400,000 = 1.12) (PV of net ann. cash flows – Cap. invest. = Pos. NPV); (PV of net cash flows ÷ Cap. invest. = Profit. Index)

Project B Present value of net annual cash Flows/(1 – 10) Less: Capital investment/(0) Net present value

Cash Flows

9% Discount Present × Factor = Value

$55,000

6.41766

$352,971 310,000 $ 42,971

Profitability index = $352,971/$310,000 = 1.14 Project B has a lower net present value than Project A, but because of its lower capital investment, it has a higher profitability index. Based on its profitability index, Project B should be accepted. LO2, 3 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-5

BRIEF EXERCISE 18.6 Original estimate Cash 10% Discount Present Flows × Factor = Value

Event/(Time Period) Present value of net annual cash Flows(1 – 9) Less: Capital investment (0) Net present value

$46,000

5.75902

$264,915 250,000 $ 14,915

Revised estimate Event (Time Period) Present value of net annual cash Flows (1 – 11) Less: Capital investment (0) Net present value

Cash 10% Discount Flows × Factor =

Present Value

$39,000

$253,307 260,000 $ (6,693)

6.49506

[($39,000 × 6.49506) - $260,000 = ($6,693)] (PV of net ann. cash flows – Cap. invest. = Neg. NPV)

The original net present value was projected to be a positive $14,915; however, the revised estimate is a negative $6,693. The project is not a success. LO3 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

BRIEF EXERCISE 18.7 When net annual cash flows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash flows to determine the discount factor and then locating this discount factor on the present value of an annuity table. $176,000/$35,000 = 5.02857 By tracing across on the 7-year row we see that the discount factor for 9% is 5.03295. Thus, the internal rate of return on this project is approximately 9%. LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions ($176,000 ÷ $35,000 = 5.02857) (Cap. invest. ÷ Net ann. cash flows = Disc. factor from PV of annuity table)

18-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 18.8 When net annual cash flows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash flows to determine the discount factor and then locating this discount factor on the present value of an annuity table. Since this exercise has a salvage value, not all cash flows are equal. In this case, the internal rate of return can be approximated by identifying the discount rate that will result in a net present value of zero. By experimenting with various rates, we determined that the net present value is approximately zero when a discount rate of approximately 9% is used. Net annual cash flows = $400,000 – $150,000 = $250,000 Event/(Time Period) Present value of net annual cash flows/(1 – 12) Present value of salvage Value/(12)

Cash 9% Discount Flows × Factor = $250,000 716,000

7.16073 .35554

Less: Capital investment/(0) Net present value

Present Value $1,790,183 254,567 2,044,750 2,045,000 $ (250)

The 9% internal rate of return exceeds the company’s 7% required rate of return; thus, the project should be accepted. LO4 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [($250,000 × 7.16073) + ($716,000 × .35554) - $2,045,000 = ($250)] (PV of net ann. cash flows at 9% + PV of SV at 9% - Cap. invest. = Neg. NPV]

BRIEF EXERCISE 18.9 The annual rate of return is calculated by dividing expected annual income by the average investment. The company’s expected annual income is: $130,000 – $70,000 = $60,000 Its average investment is: $490,000 + $10,000 = $250,000 2 Therefore, its annual rate of return is: $60,000/$250,000 = 24% LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [($130,000 - $70,000) ÷ (($490,000 + $10,000) ÷ 2) = 24%] (Exp. ann. net inc. ÷ Ave. invest. = Ann. ROR) Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-7

SOLUTIONS FOR DO IT! EXERCISES DO IT! 18.1 Estimated annual cash inflows................................. Less: Estimated annual cash outflows .................... Net annual cash flow .................................................

$80,000 40,000 $40,000

Cash payback period = $140,000/$40,000 = 3.5 years. LO1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [$140,000 ÷ ($80,000 - $40,000) = 3.5] (Cap. invest. ÷ Net ann. cash flow = Cash payback period in yrs.)

DO IT! 18.2 Estimated annual cash inflows................................. Less: Estimated annual cash outflows .................... Net annual cash flow ................................................. Event/(Time Period) Present value of net annual cash flows/(1 – 4) Less: Capital investment/(0) Net present value a Table 4, Appendix A.

$80,000 40,000 $40,000

Cash Flow

12% Discount × Factor =

Present Value

$40,000

3.03735 a

$121,494 120,000 $ 1,494

Since the net present value is positive, the project should be accepted. LO2 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [(($80,000 - $40,000) × 3.03735) - $120,000 = $1,494] (PV of net ann. cash flows – Cap. invest. = Pos. NPV)

DO IT! 18.3 Present value of net annual cash flows Less: Capital investment Net present value Profitability index

Solar $52,580 39,500 $13,080 1.33*

Wind $128,450 105,300 $ 23,150 1.22**

*$52,580  $39,500 = 1.33 (Rounded) **$128,450  $105,300 = 1.22 (Rounded) [(Solar: ($52,580 - $39,500 = $13,080; $52,580 ÷ $39,500 = 1.33); (Wind: $128,450 - $105,300 = $23,150; $128,450 ÷ $105,300 = 1.22)]

18-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 18.3 (Continued) [(Solar: (PV of net ann. cash flows – Cap. invest. = Pos. NPV; PV of net ann. cash flows ÷ Cap. invest. = Profit. Index); (Wind: (PV of net ann. cash flows – Cap. invest. = Pos. NPV; PV of net ann. cash flows ÷ Cap. invest. = Profit. Index)]

While the investment in wind power generates the higher net present value, it also requires a substantially higher initial investment. The profitability index is higher for solar, which suggests that the additional net present value of wind is outweighed by the cost of the initial investment. The company should choose solar. LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

DO IT! 18.4 Estimated annual cash inflows ................................ Less: Estimated annual cash outflows .................... Net annual cash flow .................................................

$80,000 40,000 $40,000

$120,000/$40,000 = 3.00. Using Table 4 of Appendix A and the factors that correspond with the four-period row, 3.00 is between the factors for 12% and 15%. Since the project has an internal rate that is more than 12%, the company’s required rate of return, the project should be accepted. LO4 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [$120,000 ÷ ($80,000 - $40,000) = 3.00] (Cap. invest. ÷ Net ann. cash flow = Disc. factor for PV of an annuity table)

DO IT! 18.5 Revenues .................................................................... Less: Expenses (excluding depreciation) .................... Depreciation ($120,000/4 years) .......................... Annual net income .....................................................

$80,000 $41,000 30,000

71,000 $ 9,000

Average investment = ($120,000 + $0)/2 = $60,000. Annual rate of return = $9,000/$60,000 = 15%. Since the annual rate of return, 15%, is greater than Wayne’s required rate of return, 12%, the proposed project is acceptable. LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [($80,000 – ($41,000 + ($120,000 ÷ 4)) = $9,000; (($120,000 + $0) ÷ 2 = $60,000); ($9,000 ÷ $60,000 = 15%)] [(Rev. – (Exp. excluding depr. + Depr.) = Ann. net inc.); ((Cap. invest. + SV) ÷ 2 = Ave. invest.); (Ann. net inc. ÷ Ave. invest. = Ann. ROR)] Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-9

SOLUTIONS TO EXERCISES EXERCISE 18.1 (a) The cash payback period is: $56,000 ÷ $8,000 = 7 years The net present value is: Event/(Time Period) Present value of net annual cash Flows/(1 – 8) Present value of salvage value/(8)

8% Cash Discount Present Flows × Factor = Value $ 8,000 27,000

5.74664 .54027

Less: Capital investment/(0) Net present value

$45,973 14,587 60,560 56,000 $ 4,560

[($56,000 ÷ $8,000 = 7); (($8,000 × 5.74664) + ($27,000 × .54027) - $56,000 = $4,560)] [(Cap. invest. ÷ net ann. cash flows = Cash payback period); (PV of net ann. cash flows + PV of SV – Cap. invest. = Pos. NPV)]

(b) In order to meet the cash payback criteria, the project would have to have a cash payback period of less than 4 years (8 ÷ 2). It does not meet this criterion. The net present value is positive, however, suggesting the project should be accepted. The reason for the difference is that the project’s high estimated salvage value increases the present value of the project. The net present value is a better indicator of the project’s worth because it takes into account the time value of money. LO1, 2 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

EXERCISE 18.2 (a) AA Year Net Annual Cash Flow 1 $ 7,000 2 9,000 3 12,000 Cash payback period 2.50 years $22,000 – $16,000 = $6,000 $6,000 ÷ $12,000 = .50 18-10

Cumulative Net Cash Flow $ 7,000 16,000 28,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 18.2 (Continued) BB $22,000 ÷ $10,000 = 2.2 years Year 1 2 3

CC Net Annual Cash Flow $13,000 12,000 11,000

Cumulative Net Cash Flow $13,000 25,000 36,000

Cash payback period 1.75 years $22,000 – 13,000 = $9,000 $9,000 ÷ $12,000 = .75 The most desirable project is CC because it has the shortest payback period. The least desirable project is AA because it has the longest payback period. As indicated, only CC is acceptable because its cash payback is 1.75 years. (b) Year

12% Discount Factor

AA Cash Present Flow Value

1 .89286 $ 7,000 2 .79719 9,000 3 .71178 12,000 Total present value Less: Investment Net present value

BB Cash Present Flow Value

$ 6,250 $10,000 7,175 10,000 8,541 10,000 21,966 (22,000) $ (34)

CC Cash Present Flow Value

$ 8,929 $13,000 7,972 12,000 7,118 11,000 24,019(1) (22,000) $ 2,019

$11,607 9,566 7,830 29,003 (22,000) $ 7,003

(1) This total may also be obtained from Table 4: $10,000 × 2.40183 = $24,018. (The difference of $1 is due to rounding) [(AA: (.89286 × $7,000) + (.79719 × $9,000) + (.71178 × $12,000) - $22,000 = ($34)); (BB: (.89286 × $10,000) + (.79719 × $10,000) + (.71178 × $10,000) - $22,000 = $2,019); (CC: (.89286 × $13,000) + (.79719 × $12,000) + (.71178 × $11,000) - $22,000 = $7,003)] [(AA: (Yr. 1 cash flow × 12% disc. factor) + (Yr. 2 cash flow × 12% disc. factor) + (Yr. 3 cash flow × 12% disc. factor) – Cap. invest. = Neg. NPV); (BB: (Yr. 1 cash flow × 12% disc. factor) + (Yr. 2 cash flow ×12% disc. factor) + (Yr. 3 cash flow × 12% disc. factor) – Cap. invest. = Pos. NPV); (CC: (Yr. 1 cash flow × 12% disc. factor) + (Yr. 2 cash flow × 12% disc. factor) + (Yr. 3 cash flow × 12% disc. factor) – Cap. invest. = Pos. NPV)]

Project CC is still the most desirable project. Also, on the basis of net present values, project BB is also acceptable. Project AA is not acceptable. LO1, 2 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions Copyright © 2023 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-11

EXERCISE 18.3 Investment in new equipment ............. Disposal of old equipment ................... Additional training required ................. Net capital investment required ..........

$2,450,000 (250,000) 85,000 $2,285,000

Calculation of net present value:

Cash flows

Year 1 2 3 4 5 6 7

Maintenance Net cash flows from operations: Terminal salvage Present value of cash inflows Less: Capital investment Net present value

5 7

Discount Present Factor, 9% × Amount = Value 0.91743 $ 390,000 $ 357,798 0.84168 400,000 336,672 0.77218 411,000 317,366 0.70843 426,000 301,791 0.64993 434,000 282,070 0.59627 435,000 259,377 0.54703 436,000 238,505 0.64993 0.54703

(100,000)

(64,993)

400,000

2,028,586 218,812

2,247,398 2,285,000 $ (37,602)

Based on the net present calculation alone, the sewing machine should not be purchased. However, the internal rate of return would be only slightly lower than the 9% minimum required, so the company may want to look at some of the non-quantitative factors involved. LO2 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [($2,450,000 - $250,000 + $85,000 = $2,285,000); ($357,798 + $336,672 + $317,366 + $301,791 + $282,070 + $259,377 + $238,505 - $64,993 + $218,812 - $2,285,000 = ($37,602))] [(Invest. in new equip. – Disp. of old equip. + Add’l. training req. = Cap. invest.); (PV of cash flow from yr. 1 + PV of cash flow from yr. 2 + PV of cash flow from yr. 3 + PV of cash flow from yr. 4 + PV of cash flow from yr. 5 + PV of cash flow from yr. 6 + PV of cash flow from yr. 7 - PV of cash flow from maint. yr. 5 + PV of cash flow from terminal salvage yr. 7 – Cap. invest. = Neg. NPV))]

18-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 18.4 Machine A Event/(Time Period) Present value of net annual cash Flows/(1 – 8) Less: Capital investment/(0) Net present value

Cash Flows

9% Discount Present × Factor = Value

$15,000

5.53482

$83,022 75,500 $ 7,522

Profitability index = $83,022/$75,500 = 1.10 (Rounded) [(Machine A: ($15,000 × 5.53482) - $75,500 = $7,522); ($83,022 ÷ $75,500 = 1.10)] [(Machine A: PV of net ann. cash flows – Cap. invest. = Pos. NPV); (PV of net cash flows ÷ Cap. invest. = Profit. Index)]

Machine B Event/(Time Period) Present value of net annual cash Flows/(1 – 8) Less: Capital investment/(0) Net present value

Cash 9% Discount Flows × Factor = $30,000

5.53482

Present Value ( $166,045) )( 180,000) ($ (13,955)

Profitability index = $166,045/$180,000 = .92 (Rounded) Machine B has a negative net present value, and also a lower profitability index. Machine B should be rejected and Machine A should be purchased. LO2, 3 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

EXERCISE 18.5 When net annual cash flows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash flows to determine the discount factor, and then locating this discount factor on the present value of an annuity table. $430,000/$101,000 = 4.25743 By tracing across on the 6-year row, we see that the discount factor for 11% is 4.23054. Thus, the internal rate of return on this project is approximately 11%. Since this is above the company’s required rate of return, the project should be accepted. LO4 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-13

EXERCISE 18.6 (a)

Total net investment = $29,300 + $1,500 – $2,000 = $28,800 Annual net cash flow = $7,000 Payback period = $28,800 ÷ $7,000 = 4.1 years (Rounded)

[($29,300 + $1,500 - $2,000) ÷ $7,000 = 4.1 yrs.] (Tot. net invest. ÷ Ann. net cash flows = Payback period)

(b)

Net present value approximates zero when discount rate is 12%. Item Amount Net annual cash flows $7,000 Less: Capital investment Net present value

(c)

Time Period 1–6 0

12% PV Factor 4.11141

Present Value $28,780 28,800 $ (20)

Because the approximate internal rate of return of 12% exceeds the required rate of return of 10%, the investment should be accepted.

LO1, 4 BT: AN Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

EXERCISE 18.7 (a)

Project

Capital Investment ÷

Net Annual Cash Flows*

Internal Rate of Return = Factor

22A 23A 24A

$240,000 $270,000 $280,000

($15,500 + $40,000) ($20,600 + $30,000) ($15,700 + $40,000)

= = =

÷ ÷ ÷

4.324 5.336 5.027

Closest Discount Factor

Internal Rate of Return

4.35526 5.32825 5.03295

10% 12% 9%

*(Annual net income + Depreciation expense) [(22A: $240,000 ÷ ($15,500 + $40,000) = 4.324 = 10%); (23A: $270,000 ÷ ($20,600 + $30,000) = 5.336 = 12%); (24A: $280,000 ÷ ($15,700 + $40,000) = 5.027 = 9%)] [(22A: Cap. invest. ÷ (Ann. net inc. + Depr. exp.) = IRR factor = IRR); (23A: Cap. invest. ÷ (Ann. net inc. + Depr. exp.) = IRR factor = IRR); (24A: Cap. invest. ÷ (Ann. net inc. + Depr. exp.) = IRR factor = IRR)]

(b)

The acceptable projects are 22A and 23A because their rates of return are equal to or greater than the 10% required rate of return.

LO4 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

18-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 18.8 The annual rate of return is calculated by dividing expected annual income by the average investment. The company’s expected annual income is: $70,000 (annual revenues) – $41,500 (annual expenses) = $28,500 Its average investment is: $300,000 + $80,000 = $190,000 2 Therefore, its annual rate of return is: $28,500 ÷ $190,000 = 15% LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions [($70,000 - $41,500) ÷ (($300,000 + $80,000) ÷ 2) = 15%] (Exp. ann. inc. ÷ Ave. invest. = Ann. ROR)

EXERCISE 18.9 (a) Cost of hoist: $32,400 + $3,300 + $700 = $36,400. Net annual cash flows: Number of extra mufflers 5 × 52 weeks Contribution margin per muffler ($72 – $36 – $16) Total net annual cash flows (a) x (b) Cash payback period = $36,400 ÷ $5,200 = 7 years.

(a) 260 (b) × $20 $5,200

[($32,400 + $3,300 + $700 = $36,400); ((5 × 52 wks.) x ($72 - $36 - $16) = $5,200); ($36,400 ÷ $5,200 = 7 yrs.)] [(Purch. price + Install. costs + Frt. = Cost of hoist); ((No. extra mufflers per wk. × No. wks. per yr.) x (USP – Cost per muffler – Install. labor per muffler) = Tot. ann. cash flows); (Cost of hoist ÷ Tot. ann. cash flows = Cash payback period)]

(b) Average investment: ($36,400 + $3,000) ÷ 2 = $19,700. Annual depreciation: ($36,400 – $3,000) ÷ 8 = $4,175. Annual net income: $5,200 – $4,175 = $1,025. Annual rate of return = $1,025 ÷ $19,700 = 5.2% (Rounded). LO1, 5 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-15

EXERCISE 18.10 (a) 1. Cash payback period: $190,000 ÷ $50,000 = 3.8 years. 2. Annual rate of return: $12,000 ÷ [($190,000 + $0) ÷ 2] = 12.63%. (Rounded) [($190,000 ÷ $50,000 = 3.8 yrs.); ($12,000 ÷ (($190,000 + $0) ÷ 2) = 12.63%)] [(Cap. invest. ÷ Net ann. cash flows = Cash payback period); (Ann. net inc. ÷ Ave. invest. = Ann. ROR)]

Time (b)

Item

Amount

Perio d

PV Factor

Present Value

Net annual cash flows Less: Capital investment Net present value

$ 50,000

1–5 0

3.60478

$180,239 190,000 $ (9,761)

LO1, 2, 5 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

EXERCISE 18.11 (a) Year Net Annual Cash Flow Cumulative Net Cash Flow 1 $45,000 $ 45,000 2 40,000 85,000 3 35,000 120,000 Cash payback period 2.57 years (Rounded) (2 + [($105,000 – $85,000) ÷ $35,000]) (b) Average annual net income = ($10,000 + $12,000 + $14,000 + $16,000 + $18,000) ÷ 5 = $14,000 Average investment = ($105,000 + $0) ÷ 2 = $52,500 Annual rate of return = $14,000 ÷ $52,500 = 26.67% (Rounded) (c) Discount Present Year Factor, 11% × Amount = Value Net cash flows 1 0.90090 $45,000 $ 40,541 2 0.81162 40,000 32,465 3 0.73119 35,000 25,592 4 0.65873 30,000 19,762 5 0.59345 25,000 14,836 Present value of cash inflows 133,196 Less: Capital investment 0 105,000 Net present value $ 28,196 [($40,541 + $32,465 + $25,592 + $19,762 + $14,836) - $105,000 = $28,196] [(PV of cash flow for yr. 1 + PV of cash flow for yr. 2 + PV of cash flow for yr. 3 + PV of cash flow for yr. 4 + PV of cash flow for yr. 5) – Cap. invest. = Pos. NPV] LO1, 2, 5 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

18-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO PROBLEMS PROBLEM 18.1

(a) Project Bono $160,000 ÷ ($14,000 + $32,000) = 3.48 years (Rounded)

Year 1 2 3 4 5

Project Edge Cash Flow $53,000 ($18,000 + $35,000) $52,000 ($17,000 + $35,000) $51,000 ($16,000 + $35,000) $47,000 ($12,000 + $35,000) $44,000 ($ 9,000 + $35,000)

Cumulative Cash Flow $ 53,000 $105,000 $156,000 $203,000 $247,000

Cash payback period 3.40 years (Rounded) $175,000 – $156,000 = $19,000 $19,000 ÷ $47,000 = .40 (Rounded)

Year 1 2 3 4 5

Project Clayton Cash Flow $67,000 ($27,000 + $40,000) $63,000 ($23,000 + $40,000) $61,000 ($21,000 + $40,000) $53,000 ($13,000 + $40,000) $52,000 ($12,000 + $40,000)

Cumulative Cash Flow $ 67,000 $130,000 $191,000 $244,000 $296,000

Cash payback period 3.17 years (Rounded) $200,000 – $191,000 = $9,000 $9,000 ÷ $53,000 = .17 (Rounded)

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18-17

PROBLEM 18.1 (Continued) (b) Item Net annual cash flows Less: Capital investment Negative net present value

Project Bono Time Amount Period PV Factor $46,000 1–5 3.35216 0

Present Value $154,199 160,000 $ (5,801)

[Bono: ($46,000 × 3.35216) - $160,000 = ($5,801)] [Bono: (Net ann. cash flows × 15% disc. factor) – Cap. invest. = NPV]

15% Discount Factor .86957 .75614 .65752 .57175 .49718

Project Edge Cash Year Flow PV 1 $ 53,000 $ 46,087 2 52,000 39,319 3 51,000 33,534 4 47,000 26,872 5 44,000 21,876 Total $247,000 167,688 175,000 Less: Capital investment Positive (negative) $ (7,312) net present value

Project Clayton Cash Flow PV $ 67,000 $ 58,261 63,000 47,637 40,109 61,000 30,303 53,000 25,853 52,000 202,163 $296,000 200,000 $

2,163

[(Edge: (($53,000 × .86957) + ($52,000 × .75614) + ($51,000 × .65752) + ($47,000 × .57175) + ($44,000 × .49718)) - $175,000 = ($7,312); (Clayton: (($67,000 × .86957) + ($63,000 × .75614) + ($61,000 × .65752) + ($53,000 × .57175) + ($52,000 × .49718)) - $200,000 = $2,163)] [(Edge: ((Yr. 1 cash flow × 15% disc. factor) + (Yr. 2 cash flow × 15% disc. factor) + (Yr. 3 cash flow × 15% disc. factor) + (Yr. 4 cash flow × 15% disc. factor) + (Yr. 5 cash flow × 15% disc. factor)) – Cap. invest. = NPV); (Clayton: ((Yr. 1 cash flow × 15% disc. factor) + (Yr. 2 cash flow × 15% disc. factor) + (Yr. 3 cash flow × 15% disc. factor) + (Yr. 4 cash flow × 15% disc. factor) + (Yr. 5 cash flow x× 15% disc. factor)) – Cap. invest. = NPV)]

(c) Project Bono = $14,000 ÷ [($160,000 + $0) ÷ 2] = 17.50%. (Rounded) Project Edge = $14,400 ÷ [($175,000 + $0) ÷ 2] = 16.46%. (Rounded) Project Clayton = $19,200 ÷ [($200,000 + $0) ÷ 2] = 19.20%.(Rounded) [(Bono: $14,000 ÷ (($160,000 + $0) ÷ 2) = 17.5%); (Edge: ($72,000 ÷ 5) ÷ (($175,000 + $0) ÷ 2) = 16.5%); (Clayton: ($96,000 ÷ 5) ÷ (($200,000 + $0) ÷ 2) = 19.2%)] [(Bono: Net inc. ÷ ((Cap. invest. + SV) ÷ 2) = Ann. ROR); (Edge: Net inc. ÷ ((Cap. invest. + SV) ÷ 2) = Ann. ROR); (Clayton: Net inc. ÷ ((Cap. invest. + SV) ÷ 2) = Ann. ROR)]

(d) Project Bono Edge Clayton

Cash Payback 3 2 1

Net Present Value 2 3 1

Annual Rate of Return 2 3 1

The best project is Clayton. LO1, 2, 5 BT: AN Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions 18-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 18.2 (a)

Sales Expenses Drivers’ salaries Out-of-pocket expenses Depreciation Total expenses Net income Cash inflow

(1) Annual Net Income *$108,000*

(2) Annual Cash Inflow $108,000

* 48,000* * 30,000* * 25,000* * 103,000* *$ 5,000*

48,000 30,000 0 78,000 $ 30,000

*5 vans × 10 trips × 6 students × 30 weeks × $12.00 = $108,000. [(Ann. net inc.: (5 × 10 × 6 × 30 × $12) – ($48,000 + $30,000 + $25,000) = $5,000); (Ann. cash inflow: $108,000 – ($48,000 + $30,000) = $30,000)] [(Ann. net inc.: (No. vans × No. trips × No. students × No. wks. × Ticket price) – (Drivers’ sal. + Out-of-pocket exp. + Depr.) = Net inc.); (Ann. cash inflow: (No. vans × No. trips × No. students × No. wks. × Ticket price) – (Drivers’ sal. + Out-of-pocket exp.) = Cash flow)]

(b) 1.

Cash payback period = $75,000 ÷ $30,000 = 2.50 years.

($75,000 ÷ $30,000 = 2.50 yrs.) (Cap. invest. ÷ Ann. cash flow = Cash payback period)

Annual rate of return = $5,000 ÷ ($75,000 +$0) = 13.33%. 2

[$5,000 ÷ (($75,000 + $0) ÷ 2) = 13.33%] [Net inc. ÷ ((Cap. invest. + SV) ÷ 2) = Ann. ROR]

(c) Present value of annual cash inflows ($30,000 × 2.28323*) = $68,497 Less: Capital investment = 75,000 Net present value = $ (6,503) *3 years at 15%, PV of annuity of 1. (d) The computations show that the commuter service is not a wise investment for these reasons: (1) annual net income will only be $5,000, (2) the annual rate of return (13.33%) is less than the cost of capital (15%), (3) the cash payback period is 83% (2.5 ÷ 3) of the useful life of the vans, and (4) net present value is negative, indicating the investment earns a return less than the cost of capital. LO1, 2, 5 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-19

PROBLEM 18.3 (a) (1) Option A Event/(Time Period) Present value of net annual cash Flows/(1 – 7) Present value of cost to rebuild/(4)

Cash Flows

8% Discount × Factor =

Present Value

a$41,000a

5.20637 .73503

$213,461 (36,752) 176,709 160,000 $ 16,709)

(50,000)

Less: Capital investment/(0) Net present value aNet annual cash flows = $71,000 – $30,000 = $41,000

[(($71,000 - $30,000) × 5.20637) – ($50,000 × .73503) - $160,000 = $16,709] [((Ann. cash inflows – Ann. cash outflows) × 8% disc. factor) – (Cost to rebuild × 8% disc. factor) – Cap. invest. = NPV]

(2) Profitability index = $176,709/$160,000 = 1.10 (Rounded) (3) The internal rate of return can be approximated by finding, through trial and error, the discount rate that results in a net present value of approximately zero. This is accomplished with a 11% discount rate. Event/(Tie Period) Present value of net annual cash Flows/(1 – 7) Present value of cost to rebuild/(7)

Cash Flows

11% Discount × Factor =

Present Value

$41,000a (50,000)

4.71220 .65873

$193,200 (32,937) 160,263 160,000 $ 263

Less: Capital investment/(0) Net present value aNet annual cash flows = $71,000 – $30,000 = $41,000

[($41,000 × 4.71220) – ($50,000 × .65873) - $160,000 = $263] [(Net ann. cash flows × 11% disc. factor) – (Cost to rebuild × 11% disc. factor) – Cap. invest. = NPV)]

(1) Option B Event/(Time Period) Present value of net annual cash Flows/(1 – 7) Present value of salvage value/(7)

Cash Flows $49,000b 8,000

8% Discount Factor = 5.20637 .58349

Less: Capital investment/(0) Net present value

18-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

Present Value $255,112 4,668 259,780 227,000 $ 32,780

(For Instructor Use Only)

PROBLEM 18.3 (Continued) bNet annual cash flows = $80,000 – $31,000 = $49,000

[(($80,000 - $31,000) × 5.20637) + ($8,000 × .58349) - $227,000 = $32,780] [((Ann. cash inflows – Acc. cash outflows) × 8% disc. factor) + (SV × 8% disc. factor) – Cap. invest. = NPV]

(2) Profitability index = $259,780/$227,000 = 1.14 (Rounded) (3) Internal rate of return on Option B is 12%, as calculated below: Event/(Time Period) Present value of net annual cash Flows/(1 – 7) Present value of salvage value/(7)

Cash Flows

12% Discount Present Factor = Value

$49,000b 8,000

4.56376 .45235

Less: Capital investment/(0) Net present value

$223,624 3,619 227,243 227,000 $ 243

bNet annual cash flows = $80,000 – $31,000 = $49,000

[($49,000 × 4.56376) + ($8,000 × .45235) - $227,000 = $243] [(Net ann. cash flows × 12% disc. factor) + (SV × 12% disc. factor) – Cap. invest. = NPV]

(b) Option A has a lower net present value than Option B, and also a lower profitability index and internal rate of return. Therefore, Option B is the preferred project. LO2, 3, 4 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-21

PROBLEM 18.4 (a) The net present value based on the original estimates is as follows: Event/(Time Period) Present value of net annual cash Flows/(1 – 8) Present value of cost of overhaul/(4) Present value of salvage value/(8)

Cash Flows $ 8,000 (6,000) 12,000

9% Discount Factor =

Present Value

5.53482 .70843 .50187

$ 44,279 (4,251) 6,022 46,050 Less: Capital investment/(0) 60,000 Net present value $(13,950) Based on its negative net present value, the tow truck should not be purchased. [($8,000 × 5.53482) – ($6,000 × .70843) + ($12,000 × .50187) - $60,000 = ($13,950)] (PV of net ann. cash flows – PV of overhaul cost + PV of SV – Cap. invest. = Neg. NPV)

(b) The net present value based on the revised estimates is as follows: Event/(Time Period) Present value of net annual cash flows/(1-8) Present value of cost of overhaul/(4) Present value of salvage value/(8) Less: Capital investment/(0) Net present value *$8,000 + ($3,000 + $750 + $1,000 + $750)

Cash 9% Discount Present Flows × Factor = Value $13,500* ×× 5.53482 = $74,720 (6,000)* × .70843 = (4,251) 12,000 * .50187 = 6,022 76,491 60,000 $16,491

[(($8,000 + $3,000 + $750 + $1,000 + $750) × 5.53482) – ($6,000 ×.70843) + ($12,000 × .50187) - $60,000 = $16,491] [((Net ann. cash flow from towing + Add’l ann. cash flow from repair work + Ann. savings from plowing + Add’l. ann. cash flow from cust. goodwill + Add’l. ann. net cash flow from advert.) × 9% disc. factor) – (Overhaul cost × 9% disc. factor) + (SV × 9% disc. factor) – Cap. invest. = Pos. NPV]

Based on the revised figures, the tow truck has a positive net present value and therefore should be purchased. (c) The present value of the intangible benefits was $30,441 (the increase in the net present value from a negative $13,950 to a positive $16,491). Rick’s estimates of the value of these intangible benefits may be overly optimistic. In order for the project to be acceptable, the present value of the intangible benefits would only have to be $13,950. That is the amount by which the original estimate fell short of having a positive net present value. LO2, 3 BT: E Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions 18-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM 18.5 (a) Using the original estimates, the net present value is calculated as follows: Event/(Time Period) Present value of net annual cash Flows/(1 – 20) Present value of salvage value/(20)

Cash Flows

$ 80,000a 1,500,000

8% Discount Factor =

Present Value

9.81815 .21455

$ 785,452 321,825 1,107,277

Less: Capital investment ($300,000 + $600,000)/(0) Net present value

900,000 $ 207,277

aNet annual cash flows = $920,000 – $840,000

[(($920,000 - $840,000) × 9.81815) + ($1,500,000 ×x .21455) – ($300,000 + $600,000) = $207,277] (PV of net ann. cash flows + PV of SV – Cap. invest. = Pos. NPV)

The positive net present value of the project suggests that it should be accepted. (b) Using the revised estimates, the net present value is calculated as follows: Event/(Time Period) Present value of net annual cash Flows/(1 – 20) Present value of salvage value/(20)

Cash Flows

$ 55,000b 1,500,000

8% Discount Factor =

Present Value

9.81815 .21455

$ 539,998 321,825 861,823 900,000 $ (38,177)

Less: Capital investment/(0) Net present value bNet annual cash flows = $805,000 – $750,000

[(($805,000 - $750,000) × 9.81815) + ($1,500,000 × .21455) - $900,000 = ($38,177)] (PV of revised ann. net cash flows + PV of SV – Cap. invest. = Neg. NPV)

Under these revised estimates, the project should be rejected. It appears that many of the camp’s costs are fixed; thus, when the number of players declines, cash inflows decline, but cash outflows don’t decline proportionately.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

18-23

PROBLEM 18.5 (Continued) (c) Using the original estimates, but an 10% discount rate, the net present value is calculated as follows: Event/(Time Period) Present value of net annual cash Flows/(1 – 20) Present value of salvage value/(20)

Cash Flows

10% Discount × Factor =

Present Value

$ 80,000c 1,500,000

8.51356 .14864

$ 681,085 222,960 904,045 900,000 $ 4,045

Less: Capital investment/(0) Net present value cNet annual cash flows = $920,000 – $840,000

[(($920,000 - $840,000) × 8.51356) + ($1,500,000 × .14864) - $900,000 = $4,045] (PV of ann. net cash flows at higher disc. rate + PV of SV at higher disc. rate – Cap. invest. = Pos. NPV]

The positive net present value of the project suggests that it should be accepted; however, it is not nearly as profitable using an 8% discount rate. (d) The internal rate of return can be determined by calculating the discount rate that results in a net present value of approximately zero. In this case the internal rate of return was approximately 12%. Event/(Time Period) Present value of net annual cash Flows/(1 – 5) Present value of salvage value/(5)

Cash Flows $

40,000 1,332,000

12% Discount Present Factor = Value 3.60478 .56743

Less: Capital investment/(0) Net present value

$144,191 755,817 900,008 900,000 $ 8

The project had a high internal rate of return, even though the business itself was not generating much cash flow, because the property increased significantly in value during the 5-year period. LO2, 3, 4 BT: E Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

18-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CD 18

CURRENT DESIGNS

(a) Average investment = ($256,000 + 0) ÷ 2 = $128,000 Annual rate of return = $15,200 ÷ $128,000 = 11.88% (Rounded) [((($256,000 + $0) ÷ 2) = $128,000); ($15,200 ÷ $128,000 = 11.88%)] [(((Cap. invest. + SV) ÷ 2) = Ave. invest.); (Net inc. ÷ Ave. invest. = Ann. ROR)]

(b) Net annual cash flow = $15,200 + $32,000 = $47,200 Payback period = $256,000 ÷ $47,200 = 5.42 years (Rounded) (c) Event Net annual cash flow Less: Oven purchase Net present value

Time Period 1-8 0

Cash Flows × $ 47,200 256,000

9% Discount Present Factor = Value 5.53482 $ 261,244 1.00000 256,000 $ 5,244

Accept the proposal [($47,200 × 5.53482) - $256,000 = $5,244] [(Net ann. cash flow × 9% disc. factor) – Oven purch. = NPV]

(d) Event Net annual cash flow Less: Oven purchase

Time Period 1-8 0

Cash 15% Discount Present Flows × Factor = Value $ 47,200 4.48732 $ 211,802 256,000 1.00000 256,000

Net present value

$ (44,198)

Do not accept the proposal LO1, 2, 5 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

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18-25

WC 18 (a)

WATERWAYS CORPORATION

(1)

NET PRESENT VALUE Buy New Backhoes

Equipment purchase Salvage value of old equip Net cash flow

Time Period 0 0 1-8

Cash Flow × $(200,000) 42,000 43,900

8% Discount Rate = 1 1 5.74664

90,000

0.54027

Salvage value of new equip Net present value

Present Value $ (200,000) 42,000 252,277 48,624 $ 142,901

NET PRESENT VALUE Keep Old Backhoes

Overhaul cost Net cash flow

Time Period 1 1-8

Cash Flow × $(55,000) 30,425

8% Discount Present Rate = Value 0.92593 $ (50,926) 5.74664 174,842

15,000

0.54027

Salvage value Net present value

8,104 $ 132,020

(2)

PAYBACK METHOD Cost of Capital Investment  Net Annual Cash Flow = Cash Payback Period

New

Old

Cost of Capital Investment

$158,000

$55,000

Net annual cash flow

$ 43,900

$30,425

Payback time

3.60 years

1.81 years

(3)

PROFITABILITY INDEX Present Value of Net Cash Flows  Initial Investment = Profitability Index

18-26

New

Old

Present Value of Net Cash Flows

$300,901

$182,946

Initial investment

$158,000

$ 55,000

Profitability index

1.90

3.33

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

WC 18 (Continued) (4)

INTERNAL RATE OF RETURN Investment Required  Net Annual Cash Flows = Internal Rate of Return Factor

New $158,000 $43,900

= 3.59909

Old $55,000 = 1.80772 = a much higher return than buying a new one $30,425 Both of these values are above the factors presented in the text table, so they are above 15% and well over the required 8% discount rate.

(b)

Intangible benefits include faster completion of jobs due to the increased speed of the backhoes. The depth and width of the trenches will be more accurate. Also, the new backhoes have considerably more comforts for the operator than the old backhoes. However, there would be time involved in training the operators to use the new backhoes. There may also be some resistance from the operators to change from the machines in which they now feel competent in handling. Because of the increased speed, these operators who are paid on an hourly basis may find their incomes decreased if the increased speed does not also result in increased jobs requiring the use of the backhoes.

(c)

The decision would be a difficult one to make. There is little difference in the net present value, although buying new backhoes is slightly higher. All the other indicators suggest that keeping the old backhoes for another 8 years may be the best decision at this time. However, buying new backhoes would decrease maintenance costs and the time spent on maintenance. This may allow for additional jobs to be added to the schedule. Depreciation would also increase, which would lower income—and therefore income taxes—without affecting actual cash flow. Both decisions would yield a much higher than 8% return on the money invested. Either decision could actually be defended.

LO1, 2, 3, 4 BT: AN Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

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18-27

CC 18.1 1.

GREETINGS INC.

Present value of future cash flows: Cost of equipment (zero residual value) ........................................................... Cost of ink and paper supplies (purchased immediately) .................................................... Annual cash flow savings for Wall Décor ($175,000 × 3.60478)* .......................................................... Annual additional store cash flow from increased sales ($100,000 × 3.60478) ........................................................... Sale of ink and paper supplies at end of 5 years ($50,000 × 0.56743)**........................................................... Net present value ....................................................................

($800,000) (100,000) ( 630,837) ( 360,478) ( 28,372) ($119,687)

**Present value of an annuity for 5 years at 12% **Present value of 1 for 5 years at 12% The analysis shows that if Mr. Burns approves the purchase of equipment, the net present value of the project is $119,687. This suggests that the project should be undertaken. 2.

Computation of revised amounts:

Cost of equipment (zero residual value) Cost of ink and paper supplies Annual cash flow savings from Wall Décor Annual additional store cash inflow from increased sales Sale of ink and paper supplies at end of 5 years

18-28

Original Amounts ($800,000) (100,000) ( 175,000)

Revised Amounts ($880,000) (110,000) ( 157,500)

( 100,000)

(

90,000)

(

45,000)

50,000)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CC 18.1 (Continued) Present value of future cash flows, revised amounts: Cost of equipment Cost of ink and paper supplies (purchased immediately) ... Annual cash flow savings for Wall Décor ($157,500 × 3.60478) ........................................................... Annual additional store cash flow from sales ($90,000 × 3.60478) ............................................................. Sale of ink and paper supplies at end of 5 years ($45,000 × 0.56743) ............................................................. Net present value....................................................................

($880,000) (110,000) ( 567,753) ( 324,430) ( 25,534) ($ 72,283)

The analysis shows that if Mr. Burns approves the purchase of equipment, the net present value of the project is a negative $72,283. This suggests that under these assumptions the project should not be undertaken. 3.

Analysis of flaws and risks (a) The analysis and decision framework may be flawed in its time period assumption. The analysis is based on a five-year time period. Notice the projected cost savings and additional profits are based on five-year projections. Implicit is that it will require five years for the competition to match the cost advantage of printing on demand. It might be naïve to think that it will take five years for the competition to match and generate whatever advantage is created by this new approach. Competition will likely be able to purchase the same equipment and licensing rights. If it becomes clear that this strategy is working well for Greetings, the competitors will be quick to follow suit. (b) Quality must be assured. The analysis assumed that the “in-store” printing process could match the supply and quality of traditional prints. Selling a poor quality product to valued customers could result in lost business. (c) What about new prints that become popular? Can reasonably priced license agreements be secured, on a timely basis, for new popular prints? (d) Will acquiring a license right become a bidding war?

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18-29

CC 18.1 (Continued) (e) The analysis assumes that the expanded market will turn additional profits with the purchase of related products. Although this may be reasonable, it is only an educated guess. Students will likely develop additional issues. 4.

Memo: The one-page memo should be divided into two sections: (a) Conclusion and support (b) Suggestions Conclusion Our initial analysis points to a decision to purchase the printing-ondemand equipment. This option enables the Greetings stores to maintain and build customer relationships. The projections provided point to a net present value of $119,687. By not purchasing the equipment, profits will decline during this period. Any capital budgeting decision must rely on estimates and assumptions. To test the sensitivity of the assumptions used, I redid the analysis assuming costs would be 10% higher than projected, and cash inflows would be 10% lower. Under these more conservative assumptions the project’s net present value is a negative $72,283. While every effort was made to arrive at the most accurate estimates possible, it is not unusual for estimates to differ from actual results by as much as 10%. Other concerns merit further investigation before a decision is made. First, this analysis was based on an assumption that the project will provide a competitive advantage for a five-year period. This may prove to be too optimistic. If the project is successful, the competition will certainly adopt these same techniques as quickly as possible. It may be that a competitive advantage is provided for only a three-year period. In addition, a market test should be performed to ensure that the quality of these prints is acceptable to the target customers. Also, licensing arrangements need to be pursued further to ensure that popular prints can be obtained at a reasonable price, and that contract terms can be negotiated to ensure that licensing fees stay relatively constant during this period.

18-30

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CC 18.1 Suggestions Purchasing equipment should be only one component of the decision process. I suggest you challenge the stores and Wall Décor to shorten the time frame to achieve a positive net present value. The target level of success would be to generate enough additional business to generate a positive net present value in a time frame of approximately three years. Furthermore, the stores and Wall Décor should try to find additional applications for the new equipment purchased. I also suggest that the decision to purchase the equipment be used as a pilot study. Lessons learned from this project can likely be extended to additional products and services. The key is for management to build a compensation structure that encourages innovation in expanding product-mix offerings within the same store space. For example, the computer used to link the stores to Wall Décor may also be used to help sell a specialty line of reading material for senior citizens. Be assured that the cost advantage created by producing prints on demand will be matched by the competition. The only question is how quickly it will act. LO 2 BT: AN Difficulty: Difficult TOT: 120 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

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18-31

CC 18.2

ARMSTRONG HELMET COMPANY

Item Administrative salaries Advertising for helmets Depreciation on factory building Depreciation on office equipment Insurance on factory building Miscellaneous expenses— factory Office supplies expense Professional fees Property taxes on factory building Raw materials used Rent on production equipment Research and development Sales commissions Utility costs—factory Wages—factory Totals

18-32

Direct Materials

Product Costs Direct Manufacturing Labor Overhead

Period Costs $15,500 11,000

$ 1,500 800 1,500 1,000 300 500 400 $70,000 6,000 10,000 40,000 900 $70,000 $70,000

$70,000

$11,300

Kimmel, Survey of Accounting, 3e, Solutions Manual

$78,100

(For Instructor Use Only)

CC 18.2 (Continued) 2. Item Administrative salaries ....................... Advertising for helmets ...................... Depreciation on factory building ....... Depreciation on office equipment ..... Insurance on factory building ............ Miscellaneous expenses—factory ..... Office supplies expense ..................... Professional fees................................. Property taxes on factory building .... Raw materials used ............................. Rent on production equipment .......... Research and development................ Sales commissions ............................. Utility costs—factory .......................... Wages—factory ................................... Totals ....................................................

Variable Costs

Fixed Costs $15,500 11,000 1,500 800 1,500

1,000 300 500 400 70,000 6,000 10,000 40,000 900

70,000 $181,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

$48,400

Total Costs $15,500 11,000 1,500 800 1,500 1,000 300 500 400 70,000 6,000 10,000 40,000 900 70,000 $229,400

(For Instructor Use Only)

18-33

CC 18.2 (Continued) 3. ARMSTRONG HELMET COMPANY Cost of Goods Manufactured Schedule For the Month Ended December 31, 2027 Work in process, December 1 ......... Direct materials Raw materials inventory, (December $ 0 1) Raw materials purchased .......... 70,000 Less: Raw materials inventory (December 31) .................. 0 Direct materials used ....................... Direct labor ....................................... Manufacturing overhead Rent on production equipment... 6,000 Insurance on factory building ... 1,500 Depreciation on factory building .................................. 1,500 Utility costs—factory ................. 900 Property taxes on factory building .................................. 400 Miscellaneous expenses— factory .................................... 1,000

–0–

$70,000 70,000

11,300

Total manufacturing costs .............. Total cost of work in process .......... Less: Work in process (December 31) ........................ Cost of goods manufactured ..........

$151,300 151,300 –0– $151,300

Production cost per helmet = $151,300 [from 3.] ÷ 10,000 = $15.13.

The Armstrong Helmet Company likely uses a process cost system. Process costing is used when large volumes of a homogenous product are produced on a continuous basis. Armstrong Helmet Company would find it useful, using a process costing system, to identify the cost of each production batch of bicycle helmets.

If Armstrong Helmet Company decides to produce additional helmets (e.g., baseball, hockey, football, etc., or different models of bicycle helmets), it may find it useful to move to a job order costing system.

18-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CC 18.2 (Continued) 7. Unit variable cost 8.

= $181,000 (from 2.) ÷ 10,000 helmets = $18.10 per helmet

Contribution margin per unit = Unit selling price – Unit variable costs = $40.00 – $18.10 = $21.90 Contribution margin ratio

= Contribution margin per unit ÷ Unit selling price = $21.90 ÷ $40.00 = 54.75%

9. Break-even point in dollars: Sales dollars at the break-even point = Fixed costs ÷ Contribution margin ratio X = $48,400 (from 2.) ÷ 54.75% X = $88,402 Break-even point in units = Fixed costs ÷ Contribution margin per unit X = $48,400 ÷ $21.90 X = 2,210 helmets 10. (a) ARMSTRONG HELMET COMPANY Sales Budget For the Month Ended December 31, 2027 Expected unit sales .......................................................... Unit selling price ............................................................... Total sales .........................................................................

8,000 × $40 $320,000

(b) ARMSTRONG HELMET COMPANY Production Budget For the Month Ended December 31, 2027 Expected unit sales .......................................................... Add: Desired ending finished goods units (10,000 × 20%) ......................................................... Total required units .......................................................... Less: Beginning finished goods units ........................... Required production units ...............................................

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8,000 2,000 10,000 0 10,000

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18-35

CC 18.2 (Continued) (c) ARMSTRONG HELMET COMPANY Direct Materials Budget For the Month Ended December 31, 2027 Units to be produced ........................................................ Direct materials per unit ................................................... Total kilograms needed for production ........................... Add: Desired ending direct materials (kilograms) ......... Total materials required ................................................... Less: Beginning direct materials (kilograms) ................ Direct materials purchases .............................................. Cost per kilogram ............................................................. Total cost of direct materials purchases.........................

10,000 × 1kg 10,000 0 10,000 0 10,000 × $7 $70,000

(d) ARMSTRONG HELMET COMPANY Direct Labor Budget For the Month Ended December 31, 2027 Units to be produced ........................................................ Direct labor time (hours) per unit .................................... Total required direct labor hours ..................................... Direct labor cost per hour ................................................ Total direct labor cost ......................................................

10,000 × 0.35 3,500 × $20 $70,000

(e) ARMSTRONG HELMET COMPANY Selling and Administrative Expenses Budget For the Month Ended December 31, 2027 Variable expenses Sales commissions....................................................... Total variable..................................................................... Fixed expenses Administrative salaries ................................................. Advertising for helmets ................................................ Depreciation on office equipment ............................... Office supplies expense ............................................... Research and development ......................................... Professional fees .......................................................... Total fixed .......................................................................... Total selling and administrative expenses ..................... 18-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

$40,000 $40,000 $15,500 11,000 800 300 10,000 500 38,100 $78,100

(For Instructor Use Only)

CC 18.2 (Continued) (f) ARMSTRONG HELMET COMPANY Cash Budget For the Month Ended December 31, 2027 Beginning cash balance ................................................... Add: Receipts Collections from customers (75% of sales, $320,000) ................................... Total receipts ................................................ Total available cash .......................................................... Less: Disbursements Direct materials .............................................. (75% of direct materials purchases, $70,000) Direct labor ..................................................... Manufacturing overhead ($11,300 from part (1) – $1,500 depreciation) ........................................... Selling and administrative expenses ($78,100 from part (e) – $800 depreciation) ........................................... Total disbursements ............................. Excess (deficiency) of available cash over disbursements ......................................................... Financing: Borrowing ................................................... Ending cash balance ......................................................

–0–

240,000 240,000 240,000 52,500 70,000 9,800 77,300 209,600 30,400 –0– $ 30,400

(g) ARMSTRONG HELMET COMPANY Budgeted Income Statement For the Month Ended December 31, 2027 Sales (8,000 × $40) ............................................................ Cost of goods sold [8,000 × $15.13 (from part (4.)]......... Gross profit ....................................................................... Selling and administrative expenses .............................. Income from operations ................................................... Income tax expense (45%) ............................................... Net income....................................................................

Kimmel, Survey of Accounting, 3e, Solutions Manual

$320,000 121,040 198,960 78,100 120,860 54,387 $ 66,473

(For Instructor Use Only)

18-37

CC 18.2 (Continued) 11. ARMSTRONG HELMET COMPANY Monthly Flexible Manufacturing Costs Budget For the Month Ended December 31, 2027 Activity level Production in units ............ Variable costs Raw materials ($7) ............. Wages ($7).......................... Miscellaneous ($0.10*)....... Total variable costs .. Fixed costs .................................. Total fixed costs ................. Total costs ...................................

8,000

9,000

10,000

$ 56,000 56,000 800 112,800

$ 63,000 63,000 900 126,900

$ 70,000 70,000 1,000 141,000

10,300** $123,100

10,300 $137,200

10,300 $151,300

*$1,000 ÷ 10,000 **$11,300 [from (1)] – $1,000 miscellaneous (variable cost). 12. Potential causes of a materials variance: price paid for plastics or any other raw materials included in helmet; employees; faulty equipment Potential causes of a direct labor variance: change in pay rates; inexperienced employees; faulty equipment Potential causes of a manufacturing overhead variance: change in use of supplies; increase in indirect costs such as fuel, heat, etc. 13. Cash payback period: Cost of capital investment ÷ Net cash flow $720,000 ÷ [$30,400 (from part (10f)] = 23.68 months or approximately 2 years. LO N/A & 1 BT: AN Difficulty: Difficult TOT: 120 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

18-38

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SOLUTIONS TO DATA ANALYTICS IN ACTION The solutions for the Data Analytics in Action problems are available in Excel. See the file Solutions: Excel Templates in the Instructor Resources.

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18-39

CT 18.1

DECISION-MAKING ACROSS THE ORGANIZATION

Sales Costs and expenses Cost of goods sold Selling expenses Administrative expenses Depreciation Loss on disposal of machine Total costs and expenses Net income (1) (2) (3) (4) (5) (6)

Purchase New Machine $5,000,000 (1) $3,500,000 704,000 448,000 130,000 40,000

(2) (3) (4) (5) (6) 4,822,000 $ 178,000

10,000 x $100 × 4 years = $4,000,000 × 125% = $5,000,000 $5,000,000 × (100% – 30%) = $3,500,000 $160,000 × 110% × 4 years = $704,000 $112,000 × 4 years = $448,000 $122,000 + $3,000 + $5,000 = $130,000 Assuming old machine has zero scrap value

[(10,000 × $100 × 4 yrs. × 125%) – (($5,000,000 × 70%) + ($160,000 × 110% × 4 yrs.) + ($112,000 × 4yrs.) + ($122,000 + $3,000 + $5,000) + $40,000) = $178,000] [Sales – (CGS + Sell. exp. + Admin. exp. + Depr. + Loss on disp. of machine) = Net inc.]

(a) Annual rate of return = 68.46%; ($178,000 ÷ 4) ÷ [($130,000 + $0) ÷ 2] (b) Cash payback period = 1.49 yrs.; $130,000 ÷ [($178,000 + $130,000 + $40,000) ÷ 4] [$130,000 ÷ (($178,000 + $130,000 + $40,000) ÷ 4) = 1.49 yrs.]

(Cap. invest. ÷ Ave. ann. cash flows = Cash payback period)

Discount Amount × Factor 15% = Present Value $ 87,000 * 2.85498 $248,383 130,000 1.00000 130,000 $118,383

*($178,000 + $130,000 + $40,000) ÷ 4 (d) The new machine should be purchased. The analysis shows that net income will be $178,000 over the four years with the new machine, which results in a 68.5% annual rate of return. The cash payback period of 1.49 years meets management’s minimum requirement of three years. In addition, net present value is $118,383 positive, which indicates that the investment meets the required minimum rate of return of 15%. LO1, 2, 5 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

18-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

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CT 18.2

MANAGERIAL ANALYSIS

(a) Using the original estimates, the present value is calculated as follows: Event/(Time Period) Present value of net annual cash Flows/(1 – 15) Present value of salvage value/(15)

Cash Flows

11% Discount × Factor =

Present Value

$ 460,000a 2,000,000

7.19087 .20900

$3,307,800 418,000 3,725,800 4,000,000 $ (274,200)

Less: Capital investment/(0) Net present value aNet annual cash flows = $4,000,000 – $3,540,000

The negative net present value of the project suggests that it should be rejected. [(($4,000,000 - $3,540,000) × 7.19087) + ($2,000,000 × .20900) - $4,000,000 = ($274,200)] (PV of net ann. cash flows + PV of SV – Cap. invest. = Neg. NPV)

(b) Using the revised estimates, the net present value is calculated as follows: Event/(Time Period) Present value of net annual cash Flows/(1 – 15) Present value of salvage value/(15)

Cash Flows

11% Discount Factor =

Present Value

7.19087 .20900

$5,177,426 418,000 5,595,426 4,000,000 $1,595,426

$ 720,000b 2,000,000

Less: Capital investment/(0) Net present value

bNet annual cash flows = [($4,000,000 + $200,000) - $3,540,000 + $60,000]

Under these revised estimates, the project should be accepted. [(($4,200,000 - $3,480,000) × 7.19087) + ($2,000,000 × .20900) - $4,000,000 = $1,595,426] (PV of revised net ann. cash flows + PV of SV – Cap. invest. = Pos. NPV)

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18-41

CT 18.2 (Continued) (c) Using the original estimates, but a 9% discount rate, the net present value is calculated as follows: Event/(Time Period) Present value of net annual cash Flows/(1 – 15) Present value of salvage value/(15)

Cash Flows

9% Discount × Factor =

Present Value

$ 460,000c 2,000,000

8.06069 .27454

$3,707,917 549,080 $4,256,997 4,000,000 $ 256,997

Less: Capital investment/(0) Net present value Net annual cash flows = $4,000,000 – $3,540,000

Using the original estimates, but the lower discount rate, the net present value is positive, suggesting the project should be accepted. (d) If Bob is correct in either his belief that the estimated net annual cash flows are too conservative, or that the discount rate being used is too high, then the project is acceptable. At a minimum, this analysis suggests that further investigation is warranted. LO2, 3 BT: E Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

18-42

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CT 18.3

REAL-WORLD FOCUS

This disclosure, provided by the company’s management in its annual report, suggests that the scroll compressor project has not achieved the goals originally hoped for. In deciding whether to continue with this project, management should undertake a post-audit. This would involve collecting data on results obtained thus far and comparing those results with original projections. Those people responsible for the original projections should then be asked to provide explanations for differences between the results and projections. Careful consideration of the nature of these differences and their implications for future performance should provide valuable information regarding the decision to continue or terminate the project. LO3 BT: C Difficulty: Moderate TOT: 15 min. AACSB: Communication AICPA FC: Measurement AICPA PC: Communication IMA: Investment Decisions

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18-43

CT 18.4

REAL-WORLD FOCUS

Answers to this problem will vary depending on the year chosen by the student. The following solution is provided for the year ended August 2, 2020. (a) The statement of cash flows indicates that capital expenditures (purchase of plant assets) were $299 million in 2020, an decrease of $85 million from the prior year. (b) The statement of cash flows indicates $1,000 million of long-term borrowings were made in 2020. Note 14 indicates that interest rates on existing long-term borrowing ranged from 2.10% to 8.875% during the year. (c) The internal rate of return on these capital expenditures is approximately 8%, computed as follows: $299 million ÷ $45 million = 6.64 Note that the factor for n = 10, i = 8% is 6.71008 (Table A-4 (Appendix A), n = 10, i = 8%), so the IRR is estimated to be approximately 8%. LO4 BT: AP Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

18-44

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CT 18.5

COMMUNICATION ACTIVITY

From:

Sender’s email address

To:

Maria’s email address

Subject:

Recommendation for New Hoist

Hi Maria: The quantitative analysis pertaining to this management decision is as follows: Cost of hoist: $32,400 + $3,300 + $700 = $36,400. Net annual cash flows: Number of extra mufflers 5 × 52 weeks Contribution margin per muffler ($72 – $36 – $16) Total net annual cash flows (a) × (b) Cash payback period = $36,400 ÷ $5,200 = 7 years.

(a) 260 (b) x $20 $5,200

Average investment: ($36,400 + $3,000) ÷ 2 = $19,700. Annual depreciation: ($36,400 – $3,000) ÷ 8 = $4,175. Annual net income: $5,200 – $4,175 = $1,025. Annual rate of return = $1,025 ÷ $19,700 = 5.2% (Rounded). These data indicate that the cash payback period is 88% of the new asset’s useful life. This would generally be considered fairly high, indicating a less desirable project. The data also show a 5.2% annual rate of return. This is a low return and it is below what management would consider an acceptable return. The quantitative data do not include any technique that considers the time value of money. However, I believe there is a strong probability that the discounted cash flow technique would show a negative net present value for the new hoist. I believe that the information I have presented wenould indicate that, based on the current data, the investment should not be made. Sender’s name LO5 BT: E Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement AICPA PC: Communication IMA: Investment Decisions

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-45

CT 18.6

ETHICS CASE

(a) The stakeholders are: • • • • •

Yourself. Your spouse and children. Employees of NuComp Company. Citizens of the town where the company is presently located. The stockholders of NuComp Company.

(b) The ethical issue is: • An employee’s personal interests and those of his co-workers and the town versus the best interests of the company and its stockholders. (c) The student should recognize a conflict of interest. The company should hire an outside consultant to study and evaluate such a move rather than place one of its employees in this dilemma. You should rise above the conflict of interest and perform an objective economic evaluation, but also be prepared to remind management, should they be so oblivious, of the consequences to the employees and the town. Knowingly preparing a biased or false report is unethical. LO2 BT: E Difficulty: Moderate TOT: 20 min. AACSB: Ethics AICPA FC: Measurement AICPA PC: Professional Demeanor IMA: Investment Decisions, Business Applications

18-46

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT 18.7

ALL ABOUT YOU

Results will vary depending on article selected by the student. Some common signals identified in articles are: bills more than two months in arrears; must make decisions about who to pay; you have a debt judgment filed against you; spending exceeds income; all credit cards are at their maximum. LO N/A BT: S Difficulty: Easy TOT: 40 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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18-47

CT 18.8

CONSIDERING YOUR COSTS AND BENEFITS

(a) The total cost of the installed solar panels was $80,000. The “out-ofpocket” cost to the couple was $27,200. (b) Using the total annual electricity bill of $5,000 mentioned in the story, the cash payback of the project using the total costs of $80,000 is 16 years ($80,000 ÷ $5,000). The cash payback based on the “out-of-pocket” cost of $27,200 is 5.4 years ($27,200 ÷ $5,000). [(Tot. cost: $80,000 ÷ $5,000 = 16 yrs.); (Out-of-pocket: $27,200 ÷ $5,000 = 5.4 yrs.)] [(Tot. cost: Cap. invest. ÷ Ann. elec. bill = Cash payback period); (Out-of-pocket: Cap. invest. ÷ Ann. elec. bill = Cash payback period)]

(c) The net present value of the project using the total cost is: Event/(Time Period) Present value of net annual cash flows/(1 – 20) Less: Capital investment/(0) Net present value

Cash 6% Discount Flows × Factor =

Present Value

$5,000

$ 57,350 80,000 $(22,650)

11.46992

[$57,350 - $80,000 = ($22,650)] (PV of net ann. cash flows – Tot. cost cap. invest. = Neg. NPV)

The net present value of the project using the out-of-pocket cost is: Event/(Time Period) Present value of net annual cash flows/(1 – 20) Less: Capital investment/(0) Net present value

Cash 6% Discount Flows × Factor =

Present Value

$5,000

$57,350 27,200 $30,150

11.46992

($57,350 - $27,200 = $30,150) (PV of net ann. cash flows – Out-of-pocket cost cap. invest. = Pos. NPV)

(d) The wholesale price of panels per watt at the time the article was written was $1.70 per watt. The price per watt the article says that subsidies no longer would be needed is $1.00. One solar panel provider said that it would be providing panels that cost $1.00 per watt within three years of the time the article was written. LO1, 2 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

18-48

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CHAPTER 19 Statement of Cash Flows Learning Objectives 1. Discuss the usefulness and format of the statement of cash flows. 2. Prepare a statement of cash flows using the indirect method. 3. Analyze the statement of cash flows.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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19-1

ANSWERS TO QUESTIONS 1.

(a) The statement of cash flows reports the cash receipts and cash payments from operating, investing, and financing activities during a period in a format that reconciles the beginning and ending cash balances. (b) Disagree. The statement of cash flows is required. It is the fourth basic financial statement.

LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 2.

The statement of cash flows answers the following questions about cash: (a) Where did the cash come from during the period? (b) What was the cash used for during the period? and (c) What was the change in the cash balance during the period?

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 3.

The three activities are: Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) purchasing and disposing of investments and productive longlived assets and (b) lending money and collecting loans. Financing activities include: (a) obtaining cash from issuing debt and repaying amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying stockholders dividends.

LO 1 BT: K Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 4.

(a) The sources of cash (inflows) in the statement of cash flows come from: (1)

Operating activities i. Sale of goods or services ii. Interest and dividends received

(2)

Investing activities i. Sale of property, plant, and equipment ii. Sale of investments in other entities’ securities iii. Collection of principal on loans to other entities

(3)

Financing activities i. Sale of common stock ii. Issuance of debt (bonds and notes)

(b) The uses of cash (outflows) in the statement of cash flows come from: (1)

19-2

Operating activities i. Payments to suppliers for inventory ii. Payments to employees for services iii. Payments to government for taxes iv. Payments to lenders for interest v. Payments to others for expenses

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 19 (Continued) (2)

Investing activities i. Purchase of property, plant, and equipment ii. Purchase of investments in other entities’ securities iii. Making loans to other entities

(3)

Financing activities i. Payment of cash dividends to stockholders ii. Redeeming principal of long-term debt iii. Payment to reacquire capital stock (treasury stock)

LO 1 BT: K Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 5.

The statement of cash flows presents investing and financing activities so that even noncash transactions of an investing and financing nature are disclosed in the financial statements. If they affect financial conditions significantly, the FASB requires that they be disclosed in either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements.

LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 6.

Examples of significant noncash activities are: (1) issuance of stock for assets, (2) conversion of bonds into common stock, (3) issuance of bonds or notes for assets, and (4) noncash exchanges of property, plant, and equipment.

LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 7.

Comparative balance sheets, a current income statement, and certain transaction data all provide information necessary for preparation of the statement of cash flows. Comparative balance sheets indicate how assets, liabilities, and equities have changed during the period. A current income statement provides information about the amount of cash provided or used by operations. Certain transactions provide additional detailed information needed to determine how cash was provided or used during the period.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 8.

The two methods differ in how they arrive at “Net cash provided by operating activities.” The indirect method adjusts net income for items that do not affect cash. Most companies use this method because (1) it is easier to use and less costly to prepare; and (2) it focuses on the difference between net income and net cash flow from operating activities. The direct method shows operating cash receipts and payments. It is prepared by adjusting each item in the income statement from the accrual basis to the cash basis. Both methods are acceptable but the FASB expressed a preference for the direct method. However, the indirect method is the overwhelming favorite of companies.

LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 9.

When total cash inflows exceed total cash outflows, the excess is identified as a “net increase in cash” near the bottom of the statement of cash flows.

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19-3

Questions Chapter 19 (Continued) 10.

The indirect method involves converting accrual net income to net cash provided (used) by operating activities. This is done by starting with accrual net income and adjusting for items that do not affect cash. Examples of adjustments include depreciation and other noncash expenses, gains and losses on the sale of noncurrent assets, and changes in the balances of non-cash current asset and non-cash current liability accounts from one period to the next.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 11.

It is necessary to convert accrual basis net income to cash basis income because the unadjusted net income includes items that do not provide or use cash. An example would be an increase in accounts receivable. If accounts receivable increased during the period, revenues reported on the accrual basis would be higher than the actual cash revenues received. Thus, accrual basis net income must be adjusted to reflect the net cash provided by operating activities.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 12.

A number of factors could have caused an increase in cash despite the net loss. These are (1) high cash revenues relative to low cash expenses; (2) sales of property, plant, and equipment; (3) sales of investments; (4) issuance of debt or capital stock, and (5) differences between cash and accrual accounting, e.g. depreciation.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 13.

Student answers will vary, however the five items selected should come from the following list: Depreciation/amortization/depletion expense. Gain or loss on disposal of a noncurrent asset. Increase/decrease in specific current assets. Increase/decrease in specific current liabilities.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 14.

Under the indirect method, depreciation is added back to net income to reconcile net income to net cash provided (used) by operating activities because depreciation is an expense but not a cash payment.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 15.

The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company’s ability to generate future cash flows, (2) the company’s ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided (used) by operating activities, and (4) the cash and noncash financing and investing transactions during the period.

LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 16.

This transaction is reported in a note or schedule entitled “Noncash investing and financing activities” as follows: “Acquired land through issuance of common stock, $1,700,000.”

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

19-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Chapter 19 (Continued) 17.

(a) The phases of the corporate life cycle are the introductory phase, growth phase, maturity phase, and decline phase. (b) During the introductory phase, net cash provided by operating and investing activities would be expected to be negative, and cash from financing would be positive. During the growth phase, a company would be expected to show some small amounts of cash from operations while continuing to show negative cash from investing and positive cash from financing. During the maturity phase, net cash provided by operating, investing, and financing activities would all be expected to be positive while in the decline phase, net cash provided by operating and investing activities would continue to be positive while cash from financing would be negative.

LO 3 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 18.

Apple has positive net cash provided by operating activities that exceeds its net income. Net cash provided by operating activities exceeded its investing needs and it bought back shares of stock and paid dividends. Apple appears to be in the middle to late maturity phase.

LO 3 BT: AN Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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19-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 19.1 (a) (b) (c) (d)

Cash inflow from financing activity, $200,000. Cash outflow from investing activity, $180,000. Cash inflow from investing activity, $20,000. Cash outflow from financing activity, $50,000.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 19.2 (a) Investing activity. (b) Investing activity. (c) Financing activity.

(d) Operating activity. (e) Financing activity. (f) Financing activity.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 19.3 Cash flows from financing activities Proceeds from issuance of bonds payable ....................... Payment of dividends .......................................................... Net cash provided by financing activities ..................

$300,000) (40,000) $260,000)

(Financing activity cash flows = Issuance of L-T debt (+); and payment of cash dividends (-)) ($260,000 = $300,000 − $40,000) LO 1 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

19-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 19.4 Net cash provided by operating activities is $2,730,000. Using the indirect approach, the solution is: Net income ................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................... Decrease in accounts receivable ........ Decrease in accounts payable ............ Net cash provided by operating activities............................................

$2,500,000

$160,000) 350,000) (280,000)

230,000 $2,730,000

(Adjustments to net income include depreciation (+); decrease in noncash current assets (+); and decrease in noncash current liabilities (−)) ($230,000 = $160,000 + $350,000 − $280,000) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 19.5 Cash flows from operating activities Net income ................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................... Loss on disposal of plant assets ........ Net cash provided by operating activities............................................

$280,000

$70,000 28,000

98,000 $378,000

(Adjustments to net income include depreciation (+); loss (+)) ($98,000 = $70,000 + $28,000) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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19-7

BRIEF EXERCISE 19.6 Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accounts receivable ................ Increase in prepaid expenses ..................... Increase in inventories ................................ Net cash provided by operating activities ...................................................

$186,000 $80,000) (28,000) (40,000)

12,000 $198,000

(Adjustments to net income include decrease in noncash current assets (+); and increase in noncash current assets (−)) ($12,000 = $80,000 − $28,000 − $40,000) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 19.7 Original cost of equipment sold ................................................. Less: Accumulated depreciation............................................... Book value of equipment sold .................................................... Less: Loss on disposal of equipment ....................................... Cash flow from sale of equipment .............................................

$21,000 5,100 15,900 3,500 $12,400

(Loss on disposal = book value of disposal equipment – cash proceeds) [$3,500 = ($21,000 − $5,100) − $12,400] LO 2 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 19.8 (a) Net cash provided by operating activities would be lower than net income during the growth phase because inventory must be purchased for future projected sales. Since sales during the growth phase are projected to be increasing, inventory purchases must increase and inventory expensed on an accrual basis would be less than inventory purchased on a cash basis. Also, collections on accounts receivable would lag behind sales; thus, accrual sales would exceed cash collections during the period. (b) Cash from investing is often positive during the late maturity phase and the decline phase because the firm may sell off excess long-term assets that are no longer needed for productive purposes. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Measurement, Reporting

19-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE 19.9 Free cash flow = $89,303,000 – $25,823,000 – $0 = $63,480,000 LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 19.10 Free cash flow = $412,000 – $200,000 – $0 = $212,000 LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 19.11 Free cash flow = ($104,539,000) – $79,330,000 – $0 = ($183,869,000) LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 19.12 Free cash flow is net cash provided by operating activities less capital expenditures and cash dividends paid. For Uhuru Inc. this would be $332,000 ($734,000 – $310,000 – $92,000). Since it has positive free cash flow that far exceeds its dividend, an increase in the dividend might be possible. However, other factors should be considered. For example, it must have adequate retained earnings, and it should be convinced that a larger dividend can be sustained over future years. It should also use the free cash flow to expand its operations or pay down its debt. LO 3 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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19-9

SOLUTIONS TO DO IT! EXERCISES DO IT! 19.1 (1) (2) (3) (4) (5)

Financing activity Operating activity Financing activity Investing activity Investing activity

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement, Reporting

DO IT! 19.2a Cash flows from operating activities Net income ................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................................... Patent amortization expense ............................... Gain on disposal of plant assets......................... Decrease in accounts receivable ........................ Increase in accounts payable .............................. Net cash provided by operating activities ....

$100,000 $6,300 4,000 (3,600) 6,000 3,200

15,900 $115,900

LO 2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

19-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! 19.2b ALEX COMPANY Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2027 Cash flows from operating activities Net income .................................................................. $156,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ........................................... 40,000 Loss on disposal of equipment............................ 2,000 Increase in accounts receivable .......................... (40,000) Increase in inventory ............................................ (44,000) Increase in prepaid expenses .............................. (2,000) Increase in accounts payable............................... 3,000 Decrease in accrued expenses payable .............. (10,000) (51,000) Net cash provided by operating activities ..... 105,000 Cash flows from investing activities Sale of land ................................................................. 15,000 Sale of equipment ...................................................... 34,000 Purchase of equipment .............................................. (166,000) Net cash used by investing activities ............ (117,000) Cash flows from financing activities Redemption of bonds................................................. (50,000) Sale of common stock ............................................... 170,000 Payment of dividends ................................................ (85,000) Net cash provided by financing activities ..... 35,000 Net increase in cash.......................................................... 23,000 Cash at beginning of period ............................................. 36,000 Cash at end of period ........................................................ $59,000 LO 2 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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19-11

DO IT! 19.3 (a) Free cash flow = $73,700 – $24,200 – $13,000 = $36,500 (b) Net cash provided by operating activities fails to take into account that a company must invest in new plant assets just to maintain the current level of operations. Companies must also maintain dividends at current levels to satisfy investors. The measurement of free cash flow provides additional insight regarding a company’s cash-generating ability. LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

19-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO EXERCISES EXERCISE 19.1 (a) (b) (c) (d) (e) (f) (g)

Noncash investing and financing activities. Financing activities. Noncash investing and financing activities. Financing activities. Investing activities. Operating activities. Operating activities.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement, Reporting

EXERCISE 19.2 (a) (b) (c) (d) (e)

Noncash investing and financing activity. Investing activity. Financing activity. Operating activity. Noncash investing and financing activity Financing activity.

(g) Operating activity. (h) Noncash investing and financing activity. (i) Investing activity. (j) Operating activity (loss); investing activity (cash proceeds from sale). (k) Financing activity.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement, Reporting

EXERCISE 19.3 1.

The cash receipt ($15,000) is reported in the investing section. The gain ($3,000) is deducted from net income in the operating section.

The cash receipt ($20,000) is reported in the financing section.

Depreciation expense ($17,000) is added to net income in the operating section.

Salaries and wages expense is not reported separately on the statement of cash flows. It is part of the computation of net income in the income statement, and is included in the net income amount on the statement of cash flows.

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19-13

EXERCISE 19.3 (Continued) 5.

The issuance of common stock for equipment ($8,000) is reported as a noncash investing and financing activity at the bottom of the statement of cash flows.

The cash receipt ($1,200) is reported in the investing section. The loss ($1,800) is added to net income in the operating activities section.

LO 1 BT: AP Difficulty: Moderate TOT: 14 min. AACSB: Analytic AICPA FC: Reporting

19-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 19.4 SOSA COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income ........................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................... Loss on disposal of plant assets ............. Increase in accounts receivable .............. Increase in prepaid expenses .................. Increase in accounts payable................... Net cash provided by operating activities.................................................

$190,000 $35,000 5,000 (15,000) (4,000) 17,000

38,000 $228,000

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 19.5 SUNN INC. Partial Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income ........................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................... Decrease in accounts receivable ............. Decrease in inventory ............................... Increase in prepaid expenses .................. Increase in accrued expenses payable ... Decrease in accounts payable ................. Net cash provided by operating activities.................................................

$153,000 $27,000) 9,000 4,000 (5,000) 10,000) (7,000)

38,000 $191,000

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

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19-15

EXERCISE 19.6 RAY INC. Partial Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ................................... Increase in accounts receivable................... Increase in inventory .................................... Decrease in prepaid expenses ..................... Decrease in accrued expenses payable ...... Increase in accounts payable ....................... Net cash provided by operating activities ...

$254,000 $42,000 (15,000) (17,000) 2,000 (10,000) 16,000

18,000 $272,000

[Net cash provided by oper. act. = Net inc. + (Depr. exp. – Incr. In accts. rec. – Incr. in inv. + Decr. in prepd. exp. - Decr. in accrued exp. pay. + Incr. in accts. pay.)] [$254,000 + ($42,000 – $15,000 – $17,000 + $2,000 – $10,000 + $16,000)] LO 2 BT: AP Difficulty: Easy TOT: 7 min. AACSB: Analytic AICPA FC: Reporting

19-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE 19.7 STAMOS CORPORATION Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2027 Cash flows from operating activities Net income .................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ......................................... Increase in accounts receivable ........................ Increase in inventory .......................................... Increase in income taxes payable ..................... Decrease in accounts payable ........................... Net cash provided by operating activities ...

$284,100 $162,000 (8,200) (11,000) 4,700 (3,700)

Cash flows from investing activities Sale of land .......................................................... Purchase of building........................................... Net cash used by investing activities ..........

35,000 (289,000)

Cash flows from financing activities Issuance of bonds .............................................. Payment of dividend ........................................... Purchase of treasury stock ................................ Net cash provided by financing activities ...

200,000 (12,000) (26,000)

143,800 427,900

(254,000)

162,000

Net increase in cash................................................... Cash at beginning of period ...................................... Cash at end of period .................................................

335,900 45,000 $380,900

LO 2 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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19-17

EXERCISE 19.8 MOAB CORPORATION Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2027 Cash flows from operating activities Net income ............................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ...................................... Decrease in accounts receivable .................... Decrease in inventory ...................................... Decrease in income taxes payable ................. Increase in accounts payable ......................... Net cash provided by operating activities ...............................................

$57,200) $41,000) 4,800) 3,100) (3,900) ) 5,700)

50,700) 107,900)

Cash flows from investing activities Sale of land....................................................... Purchase of land .............................................. Net cash provided by investing activities

104,000 (81,000)

Cash flows from financing activities Issuance of stock ............................................. Payment of dividend ........................................ Redemption of bonds ...................................... Net cash provided by financing activities ..

160,000) (38,000)) (66,000)

23,000

Net increase in cash ................................................ Cash at beginning of period ................................... Cash at end of period ..............................................

) 56,000 186,900) 24,000) $210,900)

[Net cash provided by oper. act. = Net inc. + (Depr. exp. + Decr. in accts. rec. + Decr. in inv. – Decr. in inc. tax. pay. + Incr. in accts. pay.)]; [$57,200 + ($41,000 + $4,800 + $3,100 – $3,900 + $5,700)] LO 2 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

19-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 19.9 BEIBER CORP. Partial Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income ........................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................... Loss on disposal of plant assets ............. Net cash provided by operating activities................................................. Cash flows from investing activities Sale of equipment ............................................. Purchase of equipment .................................... Construction of equipment .............................. Net cash used by investing activities ......

$ 72,000)

$28,000) 8,000)

108,000) 25,000* (70,000) (53,000) (98,000)

Cash flows from financing activities Payment of cash dividends.............................. *Cost of equipment sold................................... *Accumulated depreciation .............................. *Book value ....................................................... *Loss on sale of equipment ............................. *Cash proceeds ................................................

36,000)

(14,000) $49,000) (16,000)) 33,000) (8,000) $25,000)

)

(cash proceeds = book value – loss on sale of equipment) [$25,000 = ($49,000 – $16,000) - $8,000] LO 2 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

19-19

EXERCISE 19.10 MITCH COMPANY Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income ................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ....................... Increase in accounts receivable ...... Decrease in inventory....................... Decrease in accounts payable ......... Net cash provided by operating activities ........................................ Cash flows from investing activities Sale of land ............................................... Purchase of equipment ............................ Net cash used by investing activities ........................................ Cash flows from financing activities Issuance of common stock ..................... Payment of cash dividends ..................... Redemption of bonds .............................. Net cash used by financing activities ........................................

$ 93,000)

$34,000) (12,000) 22,000) (4,000)

40,000) 133,000)

20,000) (60,000) (40,000) 42,000) (39,000) (50,000)

Net increase in cash ........................................ Cash at beginning of period ............................ Cash at end of period ......................................

(47,000) 46,000) 22,000) $ 68,000)

LO 2 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

19-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE 19.11 Point in Time M N O P

Phase Introductory phase Decline phase Maturity phase Growth phase

During the introductory phase (point M), net cash provided by operating and investing activities are expected to be negative while cash from financing would be positive. In the growth phase (point P), a company would continue to show negative net cash provided by operating and investing and positive cash from financing. During the maturity phase (point O), net cash provided by operating activities and net income would be approximately the same. Net cash provided by operating activities would exceed investing needs. In the decline phase (point N), net cash provided by operating activities would diminish while cash from financing would be negative. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 19.12

Free cash flow

PepsiCo

Coca-Cola

$6,796 – $2,128 – $2,732 = $1,936

$8,186 – $1,993 – $3,800 = $2,393

Coca-Cola’s free cash flow is greater than Pepsi's. LO 3 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 19.13

Free cash flow

Merrill Corporation

Wingate Corporation

$80,000 – $40,000 – $5,000 = $35,000

$100,000 – $70,000 – $10,000 = $20,000

Merrill's free cash flow is better than Wingate's. LO 3 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

19-21

SOLUTIONS TO PROBLEMS PROBLEM 19.1

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Depreciation expense was $80,000 Interest Payable account increased $5,000 Received $26,000 from sale of plant assets Acquired land by issuing common stock to seller Paid $17,000 cash dividend to preferred stockholders Paid $4,000 cash dividend to common stockholders Accounts Receivable account decreased $10,000 Inventory increased $2,000 Received $100,000 from issuing bonds payable Acquired equipment for $16,000 cash

SCF Section Affected O

If Operating, did it increase/decrease Reported cash from Operating activities A

–

O F

S –

–

LO 1, 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

19-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 19.2

(a) Net income can be determined by analyzing the retained earnings account. Retained earnings beginning of year .......................... Add: Net income (plug) ................................................ Less: Cash dividends .................................................. Stock dividends ................................................. Retained earnings, end of year ....................................

$270,000 58,800* 328,800 20,000 8,800 $300,000

*($300,000 + $8,800 + $20,000 – $270,000) [Net inc. = (End ret. earn. + stk.div. + cash div.) – Beg. ret. earn.] [$58,800 = ($300,000 + $8,800 + $20,000) – $270,000]

(b) Cash inflow from the issue of stock was $12,000 ($160,800 – $140,000 – $8,800). Common Stock 140,000 8,800 12,000 160,800

20216 balance Stock Dividend Shares Issued for Cash 2027 balance

Cash outflow for dividends was $20,000. The stock dividend does not use cash. (c) Both of the above activities (issue of common stock and payment of cash dividends) would be classified as financing activities on the statement of cash flows. LO 2 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

19-23

PROBLEM 19.3

MUNSUN COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2027 Cash flows from operating activities Net income ........................................................... $1,750,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................. $ 110,000 Decrease in accounts receivable ............... 380,000 Decrease in inventory ............................. 300,000 Increase in prepaid expenses ................ (150,000) Decrease in accounts payable ............... (350,000) Decrease in accrued expenses payable ... (100,000) 190,000 Net cash provided by operating activities .......................................... $1,940,000 LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

19-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 19.4

REWE COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income ........................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................... Loss on disposal of plant assets ............. Increase in accounts receivable .............. Increase in accounts payable................... Increase in income taxes payable ............ Net cash provided by operating activities.................................................

$229,000

$55,000 16,000 (10,000) 9,000 6,000

76,000 $305,000

LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

19-25

PROBLEM 19.5

(a)

WARNER COMPANY Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income ................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................... Increase in accounts receivable ......... Increase in inventory ........................... Increase in accounts payable.............. Decrease in income taxes payable ..... Net cash provided by operating activities............................................

$32,000

$17,500 (6,000) (8,000) 4,000 (1,000)

38,500

Cash flows from investing activities Sale of equipment ...................................... Cash flows from financing activities Issuance of common stock ....................... Redemption of bonds ................................ Payment of dividends ................................ Net cash used by financing activities.............................................

6,500

8,500 4,000 (16,000) (20,000)

Net increase in cash ......................................... Cash at beginning of period ............................. Cash at end of period .......................................

(32,000) 15,000 20,000 $35,000

(b) $38,500 – $0 – $20,000 = $18,500 LO 2, 3 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

19-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 19.6 GRANGER INC. Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income ........................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................... Loss on disposal of plant assets ............. Increase in accounts receivable .............. Increase in inventory ................................ Increase in prepaid expenses .................. Increase in accounts payable................... Decrease in accrued expenses payable .... Net cash provided by operating activities................................................. Cash flows from investing activities Sale of plant assets .......................................... Purchase of investments ................................. Purchase of plant assets.................................. Net cash used by investing activities................................................. Cash flows from financing activities Sale of common stock ...................................... Payment of cash dividends.............................. Redemption of bonds ....................................... Net cash used by financing activities.................................................

$154,580

$46,500 7,500 (49,800) (9,650) (2,400) 34,700 (4,500)

22,350 176,930

1,500 (29,000) (100,000) (127,500) 45,000 (26,030) (36,000) (17,030)

Net increase in cash................................................. Cash at beginning of period .................................... Cash at end of period ...............................................

32,400 48,400 $ 80,800

LO 2 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

19-27

PROBLEM 19.7

SPICER COMPANY Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................. Loss on disposal of plant assets ................ Decrease in accounts receivable ................ Increase in inventory ................................... Decrease in prepaid expenses .................... Increase in accounts payable ...................... Net cash provided by operating activities .................................................... Cash flows from investing activities Sale of land ($130,000 + $40,000 – $145,000) ..... Sale of equipment ................................................ Purchase of equipment ....................................... Net cash used by investing activities .........

$ 37,000

$42,000 2,000 8,000 (9,450) 5,720 8,730

57,000 94,000

25,000 8,000 (92,000) (59,000)

Cash flows from financing activities Payment of cash dividends .................................

(12,000)

Net increase in cash .................................................... Cash at beginning of period ....................................... Cash at end of period ..................................................

23,000 45,000 $68,000

Noncash investing and financing activities Acquired land by issuance of common stock..........................................

$40,000

LO 2 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

19-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM 19.8

(a) (b) (c) (d) (e) (f)

Free Cash Flow ($125,000) NE I D

Transaction Recorded credit sales $2,500. Collected $1,900 owed by customers. Paid amount owed to suppliers, $2,750. Recorded sales returns of $500 and credited the customer’s account. Purchased new equipment $5,000. Purchased a patent and paid $65,000 cash for the asset.

NE D D

LO 3 BT: C Difficulty: Medium TOT: 15 min. AACSB: None AICPA FC: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

19-29

CT19.1

FINANCIAL REPORTING PROBLEM

(a) Net cash provided by operating activities (in millions): September 26, 2020 September 28, 2019

$80,674 $69,391

(b) The decrease in cash and cash equivalents for the year ended September 26, 2020 was $10,828 million. (c) Apple uses the indirect method of computing and presenting the net cash provided by operating activities. (d) According to the statement of cash flows, accounts receivable decreased $6,917 million in the year ended September 26, 2020. Inventories increased $127 million. Accounts payable decreased $4,062 million in fiscal year ending September 26, 2020. (e) The net cash generated (used) by investing activities in fiscal year ending September 26, 2020 was ($4,289) million. (f)

The supplemental disclosure of cash flow information disclosed interest paid of $3,002 million and income taxes paid of $9,501 million in fiscal year ending September 26, 2020.

LO 1, 2 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

19-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT19.2

(a)

COMPARATIVE ANALYSIS PROBLEM

(in thousands)

Columbia Sportswear

$276,077 − $28,758 − $17,195 = $212,864 - $92,291 - $0 =

$230,124

Under Armour, Inc. $120,573

(b) Columbia Sportswear generated almost 2 times as much free cash flow as Under Armour. However, both had a significant amount of "free cash" available after covering capital expenditures and cash dividends. However, it should be noted that Columbia Sportswear paid a cash dividend whereas, Under Armour, Inc. did not pay a cash dividend. LO 3 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

19-31

CT19.3

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by the student. LO - BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic, Technology, and Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

19-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT19.4

DECISION MAKING ACROSS THE ORGANIZATION

(a) Computation of net income (loss) Sales of merchandise ............................... Interest revenue ........................................ Gain on sale of investment ($80,000 – $75,000) ................................ Total revenues and gains .................. Merchandise purchased ........................... Operating expenses .................................. Depreciation .............................................. Interest expense ........................................ Total expenses................................... Net loss ......................................................

Kimmel, Survey of Accounting, 3e, Solutions Manual

$385,000 6,000 5,000 396,000 $258,000 170,000 55,000 3,000 486,000 $ (90,000)

(For Instructor Use Only)

19-33

CT19.4 (Continued) (b)

SULLIVAN COMPANY Statement of Cash Flows For the Year Ended January 31, 2027 Cash flows from operating activities Net loss [From part (a)] ......................... Adjustments to reconcile net income to net cash used by operating activities: Depreciation expense .................... Gain from disposal of investment Net cash used by operating activities ..................................... Cash flows from investing activities Sale of investment................................. Purchase of investment ........................ Purchase of fixtures and equipment .... Net cash used by investing activities ..................................... Cash flows from financing activities Sale of capital stock .............................. Purchase of treasury stock .................. Net cash provided by financing activities ..................................... Net increase in cash ..................................... Cash at beginning of period ......................... Cash at end of period ...................................

$(90,000)

$ 55,000 (5,000)

50,000 (40,000)

80,000 (75,000) (320,000) (315,000)* 405,000 (10,000)

Noncash investing and financing activities Issuance of note for truck .....................

395,000 40,000 140,000 $180,000 $ 20,000

(c) From the information given, it appears that Maria is correct from an operating standpoint, Sullivan Company did not have a superb first year, having suffered a $90,000 net loss. However, Maria is wrong about the actual increase in cash not being $40,000; $40,000 is the correct increase in cash. LO 2 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Collaboration, Leadership, and Communication

19-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT19.5

From:

COMMUNICATION ACTIVITY

Accountant’s email address

To: President’s email address Subject: Statement of cash flows Hi Walt: The statement of cash flows provides information about the cash receipts and cash payments of a firm, classified as operating, investing, and financing activities. The operating activities section of the company’s statement of cash flows shows that cash increased by $172,000 as a result of transactions which affected net income. This amount is computed by adjusting net income for those items which affect net income, but do not affect cash, such as sales on account which remain uncollected at year-end. The investing activities section of the statement reports cash flows resulting from changes in investments and other long-term assets. The company had a cash outflow from investing activities due to purchases of buildings and equipment. The financing activities section of the statement reports cash flows resulting from changes in long-term liabilities and stockholders’ equity. The company had a cash inflow from financing activities due to the issuance of common stock and an outflow due to the payment of cash dividends. If you have any further questions, please do not hesitate to contact me. Accountant’s name LO 1, 2 BT: C Difficulty: Medium TOT: 30 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

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19-35

CT19.6

ETHICS CASE

(a) The stakeholders in this situation are: Hans Pfizer, president of Pendleton Automotive Corporation. Kurt Nolte, controller. The Board of Directors. The stockholders of Pendleton Automotive Corporation. (b) The president’s statement, “We must get that amount above $1 million,” puts undue pressure on the controller. This statement along with his statement, “I know you won’t let me down Kurt,” encourages Kurt to do something unethical. Controller Kurt Nolte's reclassification (intentional misclassification) of a cash inflow from a long-term note (financing activity) issuance to an “increase in payables” (operating activity) is inappropriate and unethical. (c) It is unlikely that any board members (other than board members who are also officers of the company) would discover the misclassification. Board members generally do not have detailed enough knowledge of their company’s transactions to detect this misstatement. It is possible that an officer of the bank that made the loan would detect the misclassification upon close reading of Pendleton Automotive Corporation’s statement of cash flows. It is also possible that close scrutiny of the balance sheet showing an increase in notes payable (long-term debt) would reveal that there is no comparable financing activity item (proceeds from note payable) in the statement of cash flows. LO 2 BT: E Difficulty: Hard TOT: 40 min. AACSB: Communication, Ethics AICPA FC: Reporting

19-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

CT19.7

ALL ABOUT YOU

(a) The article describes three factors that determine how much money you should set aside. (1) Your willingness to take risk. You need to evaluate how willing you are to experience wide swings in your financial position. (2) Your needs. You need to carefully evaluate your situation and evaluate the possibility of various events and what the financial implications would be. This is also impacted by the number of dependents you have. (3) Your upcoming expenses. Here you need to look further out into the horizon and consider the implications of larger events such as a big trip, a wedding, or education costs. (b) They recommend having at least three months of living expenses set aside, and up to six months. (c) Responses to this question will vary. What is most important is that students begin the process of considering their cash needs and developing a plan to set aside enough money to provide a cushion in the event of a financial “hiccup.” LO - BT: S Difficulty: Medium TOT: 30 min. AACSB: Analytic, Technology, Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

19-37

E1.24 Classify items as assets, liabilities, and stockholders' equity and prepare accounting Suppose the following items were taken from the balance sheet of Nike, Inc. (All dollars are in millions.) 1. 2. 3. 4. 5. 6.

Cash Accounts receivable Common stock Notes payable Buildings Mortgage payable

2,291.1 2,883.9 2,874.2 342.9 3,759.9 1,311.5

7. 8. 9. 10. 11.

Inventory Income taxes payable Equipment Retained earnings Accounts payable

Instructions Classify each of these items as an asset, liability, or stockholders' equity and determine the total dollar amount for e a.

Determine Nike's accounting equation by calculating the value of total assets, total liabilities, and total stockholder b. c. To what extent does Nike rely on debt versus equity financing? NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

(b)

Assets (in millions) Cash Accounts receivable Inventory Equipment Buildings Total Assets

VALUE VALUE VALUE VALUE VALUE ?

Liabilities Notes payable Accounts payable Mortgage payable Income taxes payable Total liabilities

VALUE VALUE VALUE VALUE ?

Stockholders' equity Common stock Retained earnings Total stockholders' equity

VALUE VALUE ?

Assets ?

Liabilities ?

+ Stockholders' Equity ?

(c)

Total liabilities Total assets Assets financed by debt

VALUE VALUE ?

Total equity Total assets Assets financed by equity

VALUE VALUE ?

After you have completed E1.24, consider the additional question. Assume that building increased to $4,600 and common stock increased to $3,714.3 What impact do these changes have to the percentage of assets financed by debt and equity?

Assets (in millions) Cash Accounts receivable Inventory Equipment Buildings Total Assets

VALUE VALUE VALUE VALUE VALUE ?

Stockholders' equity Common stock Retained earnings Total stockholders' equity

VALUE VALUE ?

Assets ?

Liabilities ?

+ Stockholders' Equity ?

Total liabilities Total assets Assets financed by debt

VALUE VALUE ?

Total equity Total assets Assets financed by equity

VALUE VALUE ?

d prepare accounting equation.

2,357.0 86.3 1,957.7 5,818.9 2,815.8

e the total dollar amount for each classification.

abilities, and total stockholders' equity.

cells with a "?" .

E1.24 Classify items as assets, liabilities, and stockholders' equity and prepare accounting equation. Suppose the following items were taken from the balance sheet of Nike, Inc. (All dollars are in millions.) 1. 2. 3. 4. 5. 6.

Cash Accounts receivable Common stock Notes payable Buildings Mortgage payable

2,291.1 2,883.9 2,874.2 342.9 3,759.9 1,311.5

7. 8. 9. 10. 11.

Inventory Income taxes payable Equipment Retained earnings Accounts payable

2,357.0 86.3 1,957.7 5,818.9 2,815.8

Instructions Classify each of these items as an asset, liability, or stockholders' equity and determine the total dollar amount for each classification. a. Determine Nike's accounting equation by calculating the value of total assets, total liabilities, and total stockholders' equity. b. c. To what extent does Nike rely on debt versus equity financing? NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

(b)

Assets (in millions) Cash Accounts receivable Inventory Equipment Buildings Total Assets

$2,291.1 $2,883.9 $2,357.0 $1,957.7 $3,759.9 $13,249.6

Liabilities Notes payable Accounts payable Mortgage payable Income taxes payable Total liabilities

$342.9 $2,815.8 $1,311.5 $86.3 $4,556.5

Stockholders' equity Common stock Retained earnings Total stockholders' equity

$2,874.2 $5,818.9 $8,693.1

Assets $13,249.60

Liabilities $4,556.50

+ Stockholders' Equity $8,693.10

(c)

Total liabilities Total assets Assets financed by debt

$4,556.50 $13,249.60 34%

Total equity Total assets Assets financed by equity

$8,693.10 $13,249.60 66%

Assets (in millions) Cash Accounts receivable Inventory Equipment Buildings Total Assets

$2,291.1 $2,883.9 $2,357.0 $1,957.7 $4,600.0 $14,089.7

Stockholders' equity Common stock Retained earnings Total stockholders' equity

$3,714.3 $5,818.9 $9,533.2

Assets $14,089.70

Liabilities $4,556.50

Total liabilities Total assets Assets financed by debt

$4,556.50 $14,089.70 32%

Total equity Total assets Assets financed by equity

$9,533.20 $14,089.70 68%

+ Stockholders' Equity $9,533.20

accounting equation.

ollar amount for each classification.

total stockholders' equity.

"?" .

P1.3 Prepare an income statement, retained earnings statement and balance sheet; discuss results. On June 1, 2027, Elite Service Co. was started with an initial investment in the company of $22,100 cash. Here are the assets, liabilities, and common stock of the company at June 30, 2022, and the revenues and expenses for the month of June, its first month of operations:

Cash Accounts receivable Service revenue Supplies Advertising expense Equipment Common Stock

4,600 4,000 7,500 2,400 400 26,000 22,100

Notes payable Accounts payable Supplies expense Maintenance and repairs expense Utilities expense Salaries and wages expense

During June, the company issued no additional stock but paid dividends of $1,400. Instructions a. Prepare an income statement and retained earnings statement for the month of June and a balance sheet at June 30, 2027. b. Briefly discuss whether the company's first month of operations was a success. c. Discuss the company's decision to distribute a dividend. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

ELITE SERVICE CO. Income Statement For the Month Ended June 30, 2027 Revenues Service revenue Expenses Salaries and wages expense Supplies expense Maintenance and repairs expense Advertising expense Utilities expense Total expenses Net income

VALUE VALUE VALUE VALUE VALUE VALUE

ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2027 Retained earnings, June 1 Add: Net income Less: Dividends Retained earnings, June 30

? ?

VALUE VALUE ? VALUE ?

12,000 500 1,000 600 300 1,400

ELITE SERVICE CO. Balance Sheet June 30, 2027 Assets Cash Accounts receivable Supplies Equipment Total assets

VALUE VALUE VALUE VALUE ? Liabilities and Stockholders' Equity

Liabilities Notes payable Accounts payable Total liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity b.

VALUE VALUE ? VALUE ?

? ?

Cash Accounts receivable Service revenue Supplies Advertising expense Equipment Common Stock

4,600 4,000 7,500 2,400 400 26,000 22,100

Notes payable Accounts payable Supplies expense Maintenance and repairs expense Utilities expense Salaries and wages expense

7,500

3,700 3,800

1,400 1,000 600 400 300

ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2027 Retained earnings, June 1 Add: Net income Less: Dividends Retained earnings, June 30

3,800 3,800 1,400 2,400

12,000 500 1,000 600 300 1,400

ELITE SERVICE CO. Balance Sheet June 30, 2027 Assets Cash Accounts receivable Supplies Equipment Total assets

Liabilities and Stockholders' Equity Liabilities Notes payable $ 12,000 Accounts payable 500 Total liabilities Stockholders' equity Common stock 22,100 Retained earnings 2,400 Total liabilities and stockholders' equity $

4,600 4,000 2,400 26,000 37,000

12,500

24,500 37,000

Elite had a very successful first month, earning $3,800 or 51% of service revenues ($3,800 ÷ $7,500). Its net income represents a 17% return on the initial investment ($3,800 ÷ $22,100). Distributing a dividend after only one month of operations is probably unusual. Most new businesses choose to build up a cash balance to provide for future operating and investing activities or pay down debt. Elite distributed 37% ($1,400 ÷ $3,800) of its first month’s income but it had adequate cash to do so and still showed a significant increase in retained earnings.

After you have completed P1.3 consider the following additional question. Assume that service revenue and salaries and wages changed to $9,000 and $1,800 respectively. The additional revenue earned were all on account. Revise the financial statements to reflect these changes.

(a)

ELITE SERVICE CO. Income Statement For the Month Ended June 30, 2022 Revenues Service revenue Expenses Salaries and wages expense Supplies expense Maintenance and repairs expense Advertising expense Utilities expense Total expenses Net income

$9,000 $1,800 1,000 600 400 300 4,100 $4,900

ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2022 Retained earnings, June 1 Add: Net income Less: Dividends Retained earnings, June 30

$0 4,900 4,900 1,400 $3,500

ELITE SERVICE CO. Balance Sheet June 30, 2022 Assets Cash Accounts receivable Supplies Equipment Total assets

$4,200 5,500 2,400 26,000 $38,100 Liabilities and Stockholders' Equity

Liabilities Notes payable Accounts payable Total liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity

$12,000 500 12,500 22,100 3,500

25,600 $38,100

es, and common stock of

E2.4 Prepare assets section of a classified balance sheet. Suppose the following information (in thousands of dollars) is available for H. J. Heinz Company - famous for ketchup and other fine food products - at April 30, 2027. Prepaid insurance Land Goodwill Trademarks Inventory

125,765 76,193 3,982,954 757,907 1,237,613

Buildings Cash Accounts receivable Accumulated depreciation buildings

4,033,369 373,145 1,171,797 2,131,260

Instructions Prepare the assets section of a classified balance sheet, listing the items in proper sequence and including a statement heading. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

H. J. HEINZ COMPANY Partial Balance Sheet April 30, 2027 (in thousands) Assets Current assets Cash Accounts receivable Inventory Prepaid insurance

VALUE VALUE VALUE VALUE

Total current assets Property, plant and equipment Land Buildings Less: Accumulated depreciation

VALUE VALUE VALUE

- buildings Intangible assets Goodwill Trademarks Total assets

VALUE VALUE

When you have completed E2.4, consider the following additional question. Assume that accounts receivable and trademarks changed to $1,200,000 and $786,110, respectively. How do these changes impact the assets section of the classified balance sheet?

? ?

E2.4 Prepare assets section of a classified balance sheet. Suppose the following information (in thousands of dollars) is available for H. J. Heinz Company - famous for ketchup and other fine food products at April 30, 2027. Prepaid insurance Land Goodwill Trademarks Inventory

125,765 76,193 3,982,954 757,907 1,237,613

Buildings Cash Accounts receivable Accumulated depreciation - buildings

4,033,369 373,145 1,171,797 2,131,260

H. J. HEINZ COMPANY Partial Balance Sheet April 30, 2027 (in thousands) Assets Current assets Cash Accounts receivable Inventory Prepaid insurance Total current assets Property, plant and equipment Land Buildings Less: Accumulated depreciation - buildings Intangible assets Goodwill Trademarks Total assets

373,145 1,171,797 1,237,613 125,765 $

2,908,320

76,193 $

4,033,369 -2,131,260

1,902,109

1,978,302

3,982,954 757,907 $

4,740,861 9,627,483

H. J. HEINZ COMPANY Partial Balance Sheet April 30, 2022 (in thousands) Assets Current assets Cash Accounts receivable Inventory Prepaid insurance Total current assets Property, plant and equipment Land Buildings Less: Accumulated depreciation - buildings Intangible assets Goodwill Trademarks Total assets

$373,145 1,200,000 1,237,613 125,765

$2,936,523

76,193 $4,033,369 -2,131,260

1,902,109

3,982,954 786,110

1,978,302

4,769,064 $9,683,889

P3.2 Analyze transactions and compute net income. On April 1, Wonder Travel Agency Inc. was established. These transactions were completed during the month. 1. Stockholders invested $30,000 cash in the company in exchange for common stock. 2. Paid $900 cash for April office rent. 3. Purchased office equipment for $3,400 cash. Purchased $200 of advertising in the Chicago Tribune , on account. 4. 5. Paid $500 cash for office supplies. 6. Performed services worth $12,000. Cash of $3,000 is received from customers, and the balance of $9,000 is billed to customers on account. 7. Paid $400 cash dividends. Paid Chicago Tribune amount due in transaction (4). 8. 9. Paid employees' salaries $1,800. 10. Received $9,000 in cash from customers billed previously in transaction (6). Instructions a. Prepare a tabular analysis of the transactions using these column headings: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock, and Retained Earnings (with separate columns Earnings for Revenues, Expenses, andthe Dividends). Include explanations for any changes in Retained Earnings. b. From an analysis of the Retained columns, compute net income or netmargin loss for April. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

WONDER TRAVEL AGENCY INC. Assets Cash

VALUE

Accounts Receivable

+ Supplies

Equipment

Liabilities Accounts Payable

Stockholders' Equity Common Stock VALUE

+ Revenue

- Expenses

VALUE

10.

VALUE ?

Dividends

Account

VALUE

Rent Expense

VALUE

Advertising Expense

VALUE

(b)

VALUE VALUE

VALUE

Service Revenue VALUE Dividends

VALUE VALUE

Salaries and Wages Expense

VALUE +

? +

Service Revenue Expenses Salaries and Wages Expense Rent Expense Advertising Expense Net Income

? +

Dividends

VALUE VALUE VALUE VALUE

? ?

OR Revenues Less: Expenses Net Income

VALUE VALUE ?

OR Revenues Less: Expenses Net Income

VALUE VALUE ?

After you have completed P3.2, consider the following additional question. Assume that in transaction (6) services performed changed to $15,000 with $5,000 received in cash. Also assume that the amount was paid in full (transaction 10). Show the impact of this change on the analysis and on net income. WONDER TRAVEL AGENCY INC. Assets Cash

Value

Accounts Receivable

+ Supplies

Equipment

Liabilities Accounts Payable

+ +

Stockholders' Equity Common Stock Value

+ Revenue

Value Value

Value

- Expenses

Value

Value Value

Value Value Value

Account

Value

10.

Value ?

(b)

Value Value +

Service Revenue Expenses Salaries and Wages Expense Rent Expense Advertising Expense Net Income

Value Value Value Value

OR Revenues Less: Expenses Net Income

Value Value ?

? ?

P3.2A Analyze transactions and compute net income. On April 1, Wonder Travel Agency Inc. was established. These transactions were completed during the month. 1. Stockholders invested $30,000 cash in the company in exchange for common stock. 2. Paid $900 cash for April office rent. 3. Purchased office equipment for $3,400 cash. Purchased $200 of advertising in the Chicago Tribune , on account. 4. 5. Paid $500 cash for office supplies. 6. Performed services worth $12,000. Cash of $3,000 is received from customers, and the balance of $9,000 is billed to customers on account. 7. Paid $400 cash dividends. Paid Chicago Tribune amount due in transaction (4). 8. 9. Paid employees' salaries $1,800. 10. Received $9,000 in cash from customers billed previously in transaction (6). Instructions a. Prepare a tabular analysis of the transactions using these column headings: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock, and Retained Earnings (with separate columns for Revenues, Expenses, and Dividends). Include margin explanations for any changes in Retained Earnings. b. From an analysis of the Retained Earnings columns, compute the net income or net loss for April. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

WONDER TRAVEL AGENCY INC. Assets

Cash $

Accounts Receivable

+ Supplies

Equipment

Liabilities Accounts Payable

+ +

30,000

(900)

(3,400)

Stockholders' Equity Common Stock $ 30,000

+ Revenue

Expenses

200 (500)

3,000

(400)

(200)

(1,800)

10.

9,000 $34,800

Dividends

Account

(900)

Rent Expense

(200)

Advertising Expense

3,400

4. 5.

500 9,000

12,000

Service Revenue (400) Dividends

(200) (1,800)

Salaries and Wages Expense

(9,000) +

$0 +

500

3,400

$0 +

$30,000 +

12,000

(2,900)

(400)

(b)

Service Revenue Expenses Salaries and Wages Expense Rent Expense Advertising Expense Net Income

12,000

(2,900) 9,100

1,800 (900) (200)

OR Revenues Less: Expenses Net Income

$ $

12,000 (2,900) 9,100

WONDER TRAVEL AGENCY INC. Assets Cash

$30,000

(900)

(3,400)

Accounts Receivable

+ Supplies

Equipment

+ +

Stockholders' Equity Common Stock + Revenue - Expenses $30,000

200

(500)

5,000

(400)

(200)

(1,800)

10.

10,000 $37,800

Dividends

Account

(900)

Rent Expense

(200)

Advertising Expense

500 10,000

15,000

Service Revenue (400) Dividends

(200) (1,800)

Salaries and Wages Expense

(10,000) +

Service Revenue Expenses Salaries and Wages Expense Rent Expense Advertising Expense Net Income

$0 +

$500 +

$3,400

$15,000 $

(1,800) (900) (200)

OR Revenues Less: Expenses Net Income

3,400

(b)

Liabilities Accounts Payable

$15,000 -2,900 $12,100

(2,900) $12,100

$0 +

$30,000 +

$15,000 -

(2,900)

(400)

P3.4 Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet. Bindy Crawford created a corporation providing legal services, Bindy Crawford Inc., on July 1, 2027. On July 31, the balance sheet showed Cash $4,000; Accounts Receivable $2,500; Supplies $500; Equipment $5,000; Accounts Payable $4,200; Common Stock $6,200; and Retained Earnings $1,600. During August, the following transactions occurred. Aug

1 4 9 15 19 23 26 31

Instructions a.

Collected $1,100 of accounts receivable due from customers. Paid $2,700 cash for accounts payable due. Performed services worth $5,400 of which $3,600 is collected in cash and the balance is due in September. Purchased additional office equipment for $4,000, paying $700 in cash and the balance on account. Paid salaries $1,400, rent for August $700, and advertising expenses $350. Paid a cash dividend of $700. Borrowed $5,000 from American Federal Bank; the money was borrowed on a 4-month note payable. Incurred utility expenses for the month on account $380.

Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column headings should be Cash + Accounts Receivable + Supplies + Equipment = Notes Payable + Accounts Payable + Common Stock + Retained Earnings + Revenue - Expenses - Dividends. Include margin explanations for any changes in Retained Earnings. Prepare an income statement for August, a retained earnings statement for August, and a classified balance sheet at August 31.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Assets Cash July 31 Bal. $ 4,000 Aug 1

VALUE

Accounts Receivable + $ 2,500 +

+ +

BINDY CRAWFORD INC. Liabilities Notes Accounts Payable + Payable $ 4,200

= Supplies $ 500

+ +

Equipment $ 5,000

Stockholders' Equity Common Stock $ 6,200

+ +

Retained Earnings $ 1,600

+ +

Revenue

Expenses

Dividends

Account

VALUE VALUE VALUE

VALUE VALUE

Service Revenue

VALUE VALUE

Salaries and Wages Expense

VALUE

Rent Expense

VALUE

Advertising Expense VALUE Dividends

VALUE

31 $4,000

$2,500

$500

$5,000

VALUE $4,200

$6,200

$1,600

- $

VALUE -

Utilities Expense - $

(b)

BINDY CRAWFORD INC. Income Statement For the Month Ended August 31, 2027 Revenues Service revenue Expenses Salaries and wages expense Rent expense Utilities expense Advertising expense Total expenses Net income

VALUE VALUE VALUE VALUE VALUE ? ?

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2027 Retained earnings, August 1 Add: Net income Less: Dividends Retained earnings, August 31

VALUE VALUE ? VALUE ?

BINDY CRAWFORD INC. Balance Sheet August 31, 2027 Assets Current assets Cash Accounts receivable Supplies Total current assets Equipment Total assets

VALUE VALUE VALUE ? VALUE ?

Liabilities and Stockholders' Equity Current liabilities Notes payable Account payable Total current liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity

Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity

VALUE VALUE ? VALUE ?

? ?

Value Value

? ?

After you have completed P3.4, consider the following additional question Assume that salaries and wages expense and the amount borrowed from the bank changed to $1,600 and $7,500 respectively.

(a)

Assets Cash July 31 Bal. $4,000 Aug 1

Value

Accounts + Receivable + + $2,500 +

= Supplies $500

+ +

Equipment $5,000

BINDY CRAWFORD INC. Liabilities + Notes Accounts Common Payable + Payable + Stock $4,200 + $6,200

Stockholders' Equity + +

Retained Earnings $1,600

Revenue

Expenses

- Dividends

Value Value Value

Value Value

Value Value Value Value

Value

Value Value

31 ?

(b)

BINDY CRAWFORD INC. Income Statement For the Month Ended August 31, 2022 Revenues Service revenue Expenses Salaries and wages expense Rent expense Utilities expense Advertising expense Total expenses Net income

Value Value Value Value Value

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2022

? ?

Value ?

Account

Retained earnings, August 1 Add: Net income

Value Value Value Value ?

Less: Dividends Retained earnings, August 31

BINDY CRAWFORD INC. Balance Sheet August 31, 2022 Assets Current assets Cash Accounts receivable Supplies Total current assets Equipment Total assets

Value Value Value ? Value ?

Value Value ? Value Value

? ?

1 4 9 15 19 23 26 31

Instructions a.

Prepare an income statement for August, a retained earnings statement for August, and a classified balance sheet at August 31.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Assets

July 31 Bal.

Cash $

4,000

Aug 1

1100

(2,700)

3,600

(700)

(2,450)

Accounts Receivable + $ 2,500 +

+ +

BINDY CRAWFORD INC. Liabilities Notes Accounts Payable + Payable $ 4,200

= Supplies $ 500

+ +

Equipment $ 5,000

Stockholders' Equity Common Stock $ 6,200

+ +

Retained Earnings $ 1,600

+ +

Revenue

Expenses

Dividends

(1,100) (2,700) 1,800

5,400 4,000

3,300 (1,400) (700) (350)

(700)

5,000

(700) 5,000

31 $7,150

$3,200

$500

$9,000

$5,000

380 $5,180

$6,200

$1,600

$5,400

- $

(380) (2,830)

- $

(700)

(b)

5,400

-$1,400 -700 -380 -350 -2,830 $2,570

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2027 Retained earnings, August 1 Add: Net income

1,600 2,570 4,170 -700 $3,470

10,850 9,000 $19,850

Less: Dividends Retained earnings, August 31

BINDY CRAWFORD INC. Balance Sheet August 31, 2027 Assets Current assets Cash Accounts receivable Supplies Total current assets Equipment Total assets

7,150 3,200 500

$5,000 5,180 $10,180 6,200 3,470

9,670 $19,850

After you have completed P3.4, consider the following additional question Assume that salaries and wages expense and the amount borrowed from the bank changed to $1,600 and $7,500 respectively.

Assets Cash July 31 Bal.

Accounts Receivable + $2,500 +

+ +

$4,000

Aug 1

1,100

(2,700)

3,600

(700)

(2,650)

BINDY CRAWFORD INC. Liabilities Notes Accounts Payable + Payable $4,200

= Supplies $500

+ +

Equipment $5,000

Stockholders' Equity Common Stock $6,200

+ +

Retained Earnings $1,600

+ +

Revenue

Expenses

Dividends

(1,100) (2,700) 1,800

5,400 4,000

3,300 (1,600) (700) (350)

(700)

7,500

(700) 7,500

31 $9,450

(b)

$3,200

$500

$9,000

$5,400 -$1,600 -700 -380 -350 -3,030 $2,370

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2022 Retained earnings, August 1 Add: Net income Less: Dividends Retained earnings, August 31

$1,600 2,370 3,970 -700 $3,270

$7,500

380 $5,180

$6,200

$1,600

$5,400

- $

(380) (3,030)

- $

(700)

BINDY CRAWFORD INC. Balance Sheet August 31, 2022 Assets Current assets Cash Accounts receivable Supplies Total current assets Equipment Total assets

$9,450 3,200 500 $13,150 9,000 $22,150 Liabilities and Stockholders' Equity

Current liabilities Notes payable Account payable Total current liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity

$7,500 5,180 $12,680 6,200 3,270

9,470 $22,150

Account

Service Revenue

Salaries and Wages Expense Rent Expense Advertising Expense Dividends

Utilities Expense

Account

Service Revenue

Salaries and Wages Expense Rent Expense Advertising Expense Dividends

Utilities Expense

P3.5 Analyze transactions and compute net income. Fredonia Repair Inc. was started on May 1. A summary of May transactions is presented below. 1 Stockholders invested $10,000 cash in the business in exchange for common stock. 2 Purchased equipment for $5,000 cash. 3 Paid $400 cash for May office rent. 4 Paid $300 cash for supplies. Incurred $250 of advertising costs in the Beacon News on account. 5 6 Received $4,700 in cash from customers for repair service. 7 Declared and paid a $700 cash dividend. 8 Paid part-time employee salaries $1,000. 9 Paid utility bills $140. 10 Performed repair services worth $1,100 on account. 11 Collected cash of $120 for services billed in transaction (10). Instructions a.

Prepare a tabular analysis using the following column headings: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock, and Retained Earnings (with separate columns for Revenues, Expenses, and Dividends). Include margin explanations for any changes in retained earnings. Revenue is called Service Revenue.

b. From an analysis of the Retained Earnings columns, compute the net income or net loss for May. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Assets

Cash VALUE

VALUE

Accounts Receivable

FREDONIA REPAIR INC. Liabilities + Accounts Common Payable + Stock VALUE

= Supplies

Equipment

Revenue

Stockholders' Equity Retained Earnings Expenses

Dividends

Key to Retained Earnings Column

= +

VALUE = VALUE

(a) Rent Expense

VALUE

(b) Advertising Expense

= 4

VALUE

VALUE =

VALUE

= 7

VALUE

(d) Dividends

= 8

VALUE

(e) Salaries and Wages Expense

VALUE

(f) Utilities Expense

= 9

VALUE =

VALUE

(g) Service Revenue

= 11

VALUE ?

(b)

FREDONIA REPAIR INC. Income Statement For the Month Ended May 31, 2027 Revenues Service revenue Expenses Salaries and wages expense Rent expense Advertising expense Utilities expense Total expenses Net income

? VALUE VALUE VALUE VALUE ? ?

(a)

Assets

Cash $ 10,000

(5,000)

(400)

Accounts Receivable

FREDONIA REPAIR INC. Liabilities + Accounts Common Payable + Stock $ 10,000

= Supplies

Equipment

Revenue

Stockholders' Equity Retained Earnings Expenses

Dividends

Key to Retained Earnings Column

= +

5,000 = (400)

(a) Rent Expense

(250)

(b) Advertising Expense

= 4

(300)

300 =

250 =

4,700

= 7

(700)

(d) Dividends

= 8

(1,000)

(e) Salaries and Wages Expense

= 9

(140)

(f) Utilities Expense

= 10

1,100

(g) Service Revenue

= 11

120 $7,280

(120) $980

$13,560

$300

$5,000

$250

$10,000

$5,800

$13,560

- $

(1,790)

- $

(700)

(b)

5,800

(1,000) (400) (250) (140) (1,790) $4,010

E4.15 Prepare a correct income statement. The income statement of Norski Co. for the month of July shows net income of $2,000 based on Service Revenue $5,500; Salaries and Wages $2,100; Supplies Expense $900; and Utilities Expense $500. In reviewing the statement, you discover the following: 1. 2. 3. 4. 5.

Insurance expired during July of $350 was omitted. Supplies expense includes $200 of supplies that are still on hand at July 31. Depreciation on equipment of $150 was omitted. Accrued but unpaid wages at July 31 of $360 were not included. Services performed but unrecorded totaled $700.

Instructions Prepare a correct income statement for July 2027. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

NORSKI Co. Income Statement For the Month Ended July 31, 2027 Revenues Service revenue Expenses Salaries and wages expense Supplies expense Utilities expense Insurance expense Depreciation expense Total expenses Net income

VALUE VALUE VALUE VALUE VALUE VALUE ? ?

After you have completed E4.15, consider the following additional question Assume that services performed but unrecorded was $950; supplies expense included $285 of supplies still on hand; and, insurance expense of $450 was omitted. What impact do these changes have on the income statement?

VALUE VALUE VALUE VALUE VALUE VALUE ? ?

Instructions Prepare a correct income statement for July 2027. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

$ $

6,200

2,460 700 500 350 150 4,160 $2,040

$ $

6,450

2,460 615 500 450 150 4,175 $2,275

E4.16 Analyze adjusted data. The following lists selected accounts and their adjusted balances for Ramon Company on January 31, 2027. Insurance Expense Prepaid Insurance Salaries and Wages Expense Salaries and Wages Payable

$520 1,560 1,800 1,060

Service Revenue Supplies Supplies Expense Unearned Service Revenue

$4,000 700 950 750

Instructions Answer these questions, assuming the year begins January 1. (a) If the amount in Supplies Expense is the January 31 adjusting entry, and $300 of supplies was purchased in January, what was the balance in Supplies on January 1? (b)

If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for 1 year, what was the total premium and when was the policy purchased?

(c )

If $2,500 of salaries was paid in January, what was the balance in Salaries and Wages Payable at December 31, 2026?

(d)

If $1,800 was received in January for services performed in January, what was the balance in Unearned Service Revenue at December 31, 2026? (Assume that Accounts Receivable had a zero balance on January 1.) NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

Value Value Value ?

(b)

Monthly premium Number of months Total premium

Value X 12 ?

Prepaid Insurance, 1/31 Monthly premium Number of months remaining,1/31 Date of Purchase

Value Value ? Date

Cash Paid Salaries and wages payable, 1/31/27

Value Value ? Value ?

(c)

Less: Salaries and wages expense Salaries and wages payable, 12/31/26

(d)

Service revenue Unearned revenue, 1/31/27 Cash received in January Unearned revenue, 12/31/26

Value Value Value Value ?

After you have completed E4.16, consider the following additional question. Assume that amounts for purchase of supplies, salaries paid and cash received in services performed in January changed to $500, $1,800 and $2,800 respectively. How do these changes impact your responses?

$520 1,560 1,800 1,060

Service Revenue Supplies Supplies Expense Unearned Service Revenue

$4,000 700 950 750

If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for 1 year, what was the total premium and when was the policy purchased?

(c )

If $2,500 of salaries was paid in January, what was the balance in Salaries and Wages Payable at December 31, 2026?

(d)

(a)

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

$950 700 -300 $1,350

(b)

Monthly premium Number of months Total premium

$520 X 12 $6,240

(c)

Prepaid Insurance, 1/31 Monthly premium Number of months remaining,1/31 Date of Purchase

$1,560 520 3 05/01/26

Cash Paid Salaries and wages payable, 1/31/27

$2,500 1,060 3,560 1,800 $1,760

Less: Salaries and wages expense Salaries and wages payable, 12/31/26

(d)

Service revenue Unearned revenue, 1/31/27 Cash received in January Unearned revenue, 12/31/26

$4,000 750 4,750 1,800 $2,950

(a)

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

$950 700 -500 $1,150

(c)

Cash Paid Salaries and wages payable, 1/31/27

$1,800 1,060 2,860 1,800 $4,660

Less: Salaries and wages expense Salaries and wages payable, 12/31/26 (d)

Service revenue Unearned revenue, 1/31/27 Cash received in January Unearned revenue, 12/31/26

$4,000 750 4,750 -2,800 $1,950

P4.1 Record transactions on accrual basis; convert revenue to cash receipts. The following selected data are taken from the comparative financial statements of Yankee Curling Club. The club prepares its financial statements using the accrual basis of accounting. September 30 Accounts receivable for member dues Unearned sales revenue Service revenue (from member dues)

2027 15,000 20,000 151,000

2026 19,000 23,000 135,000

Dues are billed to members based upon their use of the club's facilities. Unearned sales revenues arise from the sale of tickets to events, such as the Skins Game.

Instructions (Hint: You must analyze these data sequentially, as missing information must first be deduced before moving on.) (a) Use the tabular summary that includes selected accounts and balances to record the following events that took place during 2027. 1. Dues receivable from members from 2026 were all collected during 2027. 2. During 2027, goods were provided for all of the unearned sales revenue at the end of 2026. 3. Additional tickets were sold for $44,000 cash during 2027, a portion of these were used by the purchasers during the year. The entire balance remaining in Unearned Sales Revenue relates to the upcoming Skins Game in 2027. 4. Dues of $151,000 for the 2026-2027 fiscal year were billed to members. 5. Dues receivable for 2027 (i.e., those billed in item (4) above) were partially collected. (b) Determine the amount of cash received by Yankee from the above transactions during the year ended September 30, 2027. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

YANKEE CURLING CLUB Assets Cash 9/30/2026 Balance 1.

= Accounts Receivable

19,000 Value

Value

+ +

Stockholders' Equity Common Stock

Value

Value Value

Value

(b)

Value

Cash received with respect to fees and dues 1. Collection of 2026 dues 3. Sales of tickets 5. Collection of 2027 dues

Cash 1. 3. 5. 2027

Value Value Value ? Service Revenue 4.

Value Value Value ?

2027

Value ?

Bal.

2026 Bal. 4.

Accounts Receivable Value 1. 5. Value

Value Value

Sales Revenue 2. 3. 2027

2026

Bal.

2. 3.

Unearned Sales Revenue Value 2026 Value Bal. 3. 2027

Revenue

Expenses

Dividends

Account

23,000

(b)

Liabilities Unearned Sales Rev.

Value Value ?

Bal.

After you have completed P4.1, consider the following additional question. Assume that the 2027 balances for Unearned sales revenue and that additional ticket sold during the year changed to $18,000 and $48,000 respectively. Recalculate the amount of cash collected for the year ended September 30, 2027.

Value Value ?

Value

Sales Revenue

Value Value

Sales Revenue Service Revenue

2027 15,000 20,000 151,000

2026 19,000 23,000 135,000

Dues are billed to members based upon their use of the club's facilities. Unearned sales revenues arise from the sale of tickets to events, such as the Skins Game.

YANKEE CURLING CLUB Assets Cash

= Accounts Receivable

Liabilities Unearned Sales Rev.

Stockholders' Equity Common Stock

Revenue

Expenses

Dividends

Account

9/30/2026 Balance 1.

19,000

19,000 19,000

23,000

2. 3.

23,000

44,000 24,000

44,000

151,000

136,000

(b)

$199,000

(b)

2027

Sales Revenue

24,000 151,000

Sales Revenue Service Revenue

136,000

Cash received with respect to fees and dues 1. Collection of 2026 dues 3. Sales of tickets 5. Collection of 2027 dues

1. 3. 5.

23,000

19,000 44,000 136,000 199,000

Cash 19,000 44,000 136,000 199,000

Service Revenue 4.

151,000

2027

151,000

Bal.

2026 Bal. 4.

Accounts Receivable 19,000 1. 5. 151,000

Sales Revenue 19,000 136,000

2. 3.

23,000 24,000 2027

2027

15,000

47,000

Bal.

2. 3.

Unearned Sales Revenue 23,000 2026 24,000 Bal. 3. 2027

23,000 44,000 20,000

Bal.

September 30 Accounts receivable for member dues Unearned sales revenue Service revenue (from member dues)

2027 $

15,000 18,000 151,000

YANKEE CURLING CLUB Assets Cash 9/30/2026

= Accounts Receivable

Liabilities Unearned Sales Rev.

+ +

Stockholders' Equity Common Stock

Revenue

Expenses

Dividends

Account

Balance 1.

19,000 -$19,000

$19,000

23,000

-$23,000

48000

48000 -30000

151000

136000

(b)

$203,000

(b)

-136000

Cash received with respect to fees and dues 1. Collection of 2026 dues 3. Sales of tickets 5. Collection of 2027 dues

1. 3. 5. 2027

$19,000 48,000 136,000 $203,000

Cash 19,000 48,000 136,000 203,000

Service Revenue 4.

151,000

2027

151,000

Bal.

2026 Bal. 4.

Accounts Receivable 19,000 1. 5. 151,000

Sales Revenue 19,000 136,000

2. 3.

23,000 30,000 2027

2027

15,000

Bal.

2. 3.

Unearned Sales Revenue 23,000 2026 30,000 Bal. 3. 2027 Bal.

23,000 48,000 18,000

53,000

23000

Sales Revenue

30000 151000

Sales Revenue Service Revenue

E5.8 Prepare bank reconciliation and adjustments. The following information pertains to Lance Company. 1. Cash balance per bank, July 31, $7,328. 2. July bank service charge not recorded by the depositor $38. 3. Cash balance per books, July 31, $7,364. 4. Deposits in transit, July 31, $2,700. 5. $2,016 collected for Lance Company in July by the bank through electronic funds transfer. The collection has not been recorded by Lance Company. 6. Outstanding checks, July 31, $686. Instructions a. Prepare a bank reconciliation at July 31, 2027. b. Prepare a tabular analysis for the adjustments at July 31 on the books of Lance Company. Use the following column headings: Cash, Accounts Receivable, Revenues, and Expenses. Include margin explanations for the changes in revenues and expenses. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

LANCE COMPANY Bank Reconciliation July 31, 2027 Cash balance per bank statement Add: Deposits in transit

Value Value ? Value ?

Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of note receivable

Value Value ? Value ?

Less: Bank service charge Adjusted cash balance per books

b. Cash + July 31 Value 31 Value

Assets Accts. Rec. Value

= =

Liabilities

Stockholders' Equity + Revenues - Expenses

Value

Account

Text

After you have completed E5.8, consider the following additonal question: Assume that deposit in transit, outstanding checks and cash balance per books changed to $3,600, $886 and $8,064 respectively. Show the impact of these changes on the bank reconciliation.

(a)

LANCE COMPANY Bank Reconciliation July 31, 2027 Cash balance per bank statement Add: Deposits in transit

Value Value ? Value ?

Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of note receivable

Value Value ? Value ?

Less: Bank service charge Adjusted cash balance per books

(b) Cash + July 31 Value 31 Value

Assets Accts. Rec. Value

= =

Liabilities

Stockholders' Equity + Revenues - Expenses

Value

Account

Text

LANCE COMPANY Bank Reconciliation July 31, 2027 Cash balance per bank statement Add: Deposits in transit

Less: Outstanding checks Adjusted cash balance per bank

Cash balance per books Add: Collection of note receivable

Less: Bank service charge Adjusted cash balance per books

Assets Cash + Accts. Rec. July 31 2016 -2016 31

-38

= =

Liabilities

7,328 2,700 10,028 686 9,342 7,364 2,016 9,380 38 9,342

Stockholders' Equity + Revenues - Expenses

Account

Bank Charges Expense

(a)

LANCE COMPANY Bank Reconciliation July 31, 2027 Cash balance per bank statement Add: Deposits in transit

Less: Outstanding checks Adjusted cash balance per bank

Cash balance per books Add: Collection of note receivable

Less: Bank service charge Adjusted cash balance per books

(b)

Assets Cash + Accts. Rec. July 31 2016 -2016 31

-38

= =

Liabilities

7,328 3,600 10,928 886 10,042 8,064 2,016 10,080 38 10,042

Stockholders' Equity + Revenues - Expenses

Account

Bank Charges Expense

E5.9 Prepare bank reconciliation and adjustments. This information relates to the Cash account in the ledger of Howard Company. Balance September 1 - $16,500; Cash deposited - $64,000 Balance September 30 - $17,600; Checks written - $62,800 The September bank statement shows a balance of $16,500 at September 30 and the following memoranda. Credits Collection of electronic funds transfer Interest earned on checking account

Debits $1,830 NSF checks: H. Kane 45 Safety deposit box rent

560 60

At September 30, deposits in transit were $4,738 and outstanding checks totaled $2,383. Instructions a. Prepare the bank reconciliation at September 30, 2027. b. Prepare a tabular analysis for the adjustments at September 30, assuming the NSF check was from a customer on account. Use the following column headings: Cash, Accounts Receivable, Revenues, and Expenses. Include margin explanations for the changes in revenues and expenses. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

HOWARD COMPANY Bank Reconciliation September 30, 2027 Cash balance per bank statement Add: Deposits in transit

Value Value ? Value ?

Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of note receivable Interest earned

Value Value Value

Less: NSF check Safety deposit box rent Adjusted cash balance per books

b. Cash + Value

Sep 30 30

Value

Assets Accts. Rec. Value

= =

? ?

Value Value

Liabilities +

? ?

Stockholders' Equity + Revenues - Expenses

Value

Account

Text

Value Value

Text

After you have completed E5.9, consider the following additional question: Assume that the note, interest on the note and the NSF check changed to $2,000, $50 and $800 respectively. Outstanding checks also changed to $2,448. Show the impact of these changes on the bank reconciliation and on the tabular adjustments. a.

HOWARD COMPANY Bank Reconciliation September 30, 2027 Cash balance per bank statement Add: Deposits in transit

Value Value ? Value ?

Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of note receivable Interest earned

Value Value Value

Less: NSF check Safety deposit box rent Adjusted cash balance per books

b. Cash + Value

Sep 30 30

Value

Assets Accts. Rec. Value

= =

? ?

Value Value

Liabilities +

? ?

Stockholders' Equity + Revenues - Expenses

Value

Account

Text

Value Value

Text

Debits

Collection of electronic funds transfer Interest earned on checking account

$1,830 45

NSF checks: H. Kane Safety deposit box rent

560 60

At September 30, deposits in transit were $4,738 and outstanding checks totaled $2,383. Instructions a. b.

Prepare the bank reconciliation at September 30, 2027. Prepare a tabular analysis for the adjustments at September 30, assuming the NSF check was from a customer on account. Use the following column headings: Cash, Accounts Receivable, Revenues, and Expenses. Include margin explanations for the changes in revenues and expenses.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

HOWARD COMPANY Bank Reconciliation September 30, 2027 Cash balance per bank statement Add: Deposits in transit

Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of note receivable Interest earned

Cash + 1830

Sep 30 30

-560

Assets Accts. Rec. -1830

17,600

1,830 45

Less: NSF check Safety deposit box rent Adjusted cash balance per books

16,500 4,738 21,238 2,383 18,855

1,875 19,475

560 60 $

= =

Liabilities +

620 18,855

Stockholders' Equity + Revenues + Revenues - Expenses

Account

Interest Revenue

560 -60

Bank charges expense

HOWARD COMPANY Bank Reconciliation September 30, 2027 Cash balance per bank statement Add: Deposits in transit

Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of note receivable Interest earned

Cash + 2000

Sep 30 30

-800

Assets Accts. Rec. -2000

17,600

2,000 50

Less: NSF check Safety deposit box rent Adjusted cash balance per books

16,500 4,738 21,238 2,448 18,790

2,050 19,650

800 60 $

= =

Liabilities +

860 18,790

Stockholders' Equity + Revenues + Revenues - Expenses

Account

Interest Revenue

800 -60

Bank charges expense

E5.15 Prepare a cash budget for two months. Rigley Company expects to have a cash balance of $46,000 on January 1, 2027. These are the relevant monthly budget data for the first two months of 2027. 1. Collection from customers: January $71,000 and February $146,000. 2. Payments to suppliers: January $40,000, February $75,000. 3. Wages: January $30,000 and February $40,000. Wages are paid in the month they are incurred. 4. Administrative expenses: January $21,000 and February $24,000. These costs include depreciation of $1,000 per month. All other costs are paid as incurred. 5. Selling expenses: January $15,000 and February $20,000. These costs are exclusive of depreciation. They are paid as incurred. 6. Sales of short-term investments in January are expected to realize $12,000 in cash. Rigley has a line of credit at a local bank that enables it to borrow up to $25,000. The company want to maintain a minimum monthly cash balance of $20,000. Instructions Prepare a cash budget for January and February. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

RIGLEY COMPANY Cash Budget For the Two Months Ending February 28, 2027 January Value

Beginning cash balance Add: Cash receipts Collections from customers Sale of short-term investments Total receipts Total available cash Less: Cash disbursements Payments to suppliers Wages Administrative expenses Selling expenses Total disbursements Excess (deficiency) of available cash over disbursements Financing Add: Borrowings Less: Repayments Ending cash balance

February Value

Value Value ? ?

Value Value Value Value ? ?

Value Value ?

After you have completed E5.15, consider the following additional question: Assume that collection from customers and payment to suppliers in January changed to $80,000 and $55,000 respectively. Show the impact of these changes on the Cash Budget. RIGLEY COMPANY Cash Budget For the Two Months Ending February 28, 2027 January Value

February Value

Value Value ? ?

Value Value Value Value ? ?

Value Value ?

RIGLEY COMPANY Cash Budget For the Two Months Ending February 28, 2027 January $46,000

February $24,000

71,000 12,000 83,000 129,000

146,000 0 146,000 170,000

40,000 30,000 20,000 15,000 105,000 24,000

75,000 40,000 23,000 20,000 158,000 12,000

0 0 $24,000

8,000 0 $20,000

February $20,000

80,000 12,000 92,000 138,000

146,000 0 146,000 166,000

55,000 30,000 20,000 15,000 120,000 18,000

75,000 40,000 23,000 20,000 158,000 8,000

2,000 0 $20,000

12,000 0 $20,000

E6.7 Prepare multi-step income statement In its income statement for the year ended December 31, 2027, Darren Company reported the following condensed data. Salaries and wages expense Cost of goods sold Interest expense Interest revenue Depreciation expense

465,000 987,000 71,000 65,000 310,000

Loss on disposal of plant assets Sales revenue Income tax expense Sales discounts Utilities expense

Instructions Prepare a multi-step income statement. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

DARREN COMPANY Income Statement For the Year Ended December 31, 2027 Sales Sales revenue Less: Sales discounts Net Sales Cost of goods sold Gross profit Operating expenses Salaries and wages expense Depreciation expense Utilities expense Total operating expenses Income from operations Other revenues and gains Interest revenue Other expenses and losses Loss on disposal of plant assets Interest expense Income before income taxes Income tax expense Net income

VALUE VALUE ? VALUE ? VALUE VALUE VALUE ? ? VALUE VALUE VALUE

? ? VALUE ?

83,500 2,210,000 25,000 160,000 110,000

465,000 987,000 71,000 65,000 310,000

Loss on disposal of plant assets Sales revenue Income tax expense Sales discounts Utilities expense

Instructions Prepare a multi-step income statement. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

2,210,000 160,000 $

2,050,000 987,000 1,063,000

465,000 310,000 110,000 885,000 178,000 65,000 83,500 71,000

154,500 88,500 25,000 63,500

83,500 2,210,000 25,000 160,000 110,000

Using Data Visualization to Understand Data DA6.1 Data Visualization can be used to understand profitability trends. Example Recall the Feature Story “Buy Now, Vote Later” presented in the chapter. Even with the arrival of the pandemic in 2020, REI (Recreational Equipment, Inc.) continued to be a strong competitor in the outdoor gear industry. The pandemic, however, added to the shift in what, where, and when consumers buy, both positively and negatively. The pandemic brought temporary store closures causing customers to increase online purchases and a loss of jobs that resulted in a decline in the amount of merchandise sold and profitability. In addition, the pandemic promoted a stronger interest in outdoor activities where social distancing could be practiced, prompting an increase in hiking and camping equipment sales. However, the downside of the pandemic more than offsets any increase in sales and profitability for 2020.

How is REI doing? We can use the column chart to visualize the company’s performance. The chart illustrates REI's profitability from 2016 to 2020. We can see that REI's sales increased steadily for the first four years with the largest dollar increase from 2018 to 2019. The pandemic caused a decline in sales as expected during 2020. Because gross profit is tied to sales, the company's gross profit resulted in a gradual increase in sales through 2019, with an expected drop in 2020. The slope of the trend lines shows that the sales increased at a greater rate than gross profit for the first four years, implying that cost of goods sold was increasing faster than sales. Despite the promising increase in gross profit through 2019, REI’s net profit margin remained flat through 2019 indicating operating expenses must have been increasing

Data source: https://www.rei.com/about-rei/financial-information

REI's Income Statements for 2016 to 2020

2016

Amounts in thousands

Net sales Cost of goods sold Gross profit Operating and other expenses Income (loss) before taxes and dividends Income tax provision (benefit) Income before members' dividends Members' dividends Net income

2017

2,557,543 $ 1,460,433 1,097,110 920,182 176,928 21,716 155,212 116,937 38,275 $

2,622,776 1,482,580 1,140,196 954,016 186,180 33,696 152,484 121,959 30,525

REI Profitability from 2016 to 2020 3500000

Dollar Amounts (in thousands)

3000000 2500000 2000000 1500000 1000000 500000 0 -500000 2016 Net sales Linear (Net sales)

2017 Gross profit Linear (Gross profit)

2018 Net income Linear (Net income)

2018 $

2,781,909 $ 1,567,202 1,214,707 1,027,272 187,435 11,046 176,389 129,636 46,753 $

2019 3,122,994 $ 1,715,246 1,407,748 1,245,659 162,089 5,799 156,290 134,153 22,137 $

to 2020

2019 Linear (Net income)

2020

2020 2,754,714 1,638,934 1,115,780 1,169,656 (53,876) (15,211) (38,665) (4,630) (34,035)

Using Data Visualization to Understand Data

DA6.1 Data Visualization can be used to understand profitability trends. REI's Income statements for REI for 2016 through 2020 are presented here. As indicated in the feature story “Buy N Later”, REI is a co-op in which members share in the company's profits. However, co-ops do not have common stoc though the members of the co-op receive distributions. The amounts distributed are not really dividends. Instead, R these distributions as expenses on its income statement. REI's Income Statements for 2016 to 2020 2016 2017 2018 2019 Net sales $ 2,557.5 $ 2,622.8 $ 2,781.9 $ 3,123.0 Cost of goods sold 1,460.4 1,482.6 1,567.2 1,715.2 Gross profit 1,097.1 1,140.2 1,214.7 1,407.7 Operating and other expenses 920.2 954.0 1,027.3 1,245.7 Income before taxes and dividends 176.9 186.2 187.4 162.1 Income taxes 21.7 33.7 11.0 5.8 Income before members' dividends 155.2 152.5 176.4 156.3 Members' dividends 116.9 122.0 129.6 134.2 Net income $ 38.3 $ 30.5 $ 46.8 $ 22.1

Amounts in millions

Instructions There are four parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to pe following: a. Complete the table in the Student Work Area by inputting formulas to compute the percentage of net sale item on the income statements for each of the five years. b. Prepare a clustered column chart by year to visualize each of the four subtotal percentages computed in a descriptive chart title, axes labels, properly formatted axes, and a legend. Add a trend line for each exp percentage. c. What does the chart tell you about the gross profit percentage? What trends do you see in operating and expenses and in members' dividends? What do you think may be the cause? What costs seem to have c most to the decline in net income? d. If REI shifts its work model to allow non-retail employees to work up to five days a week from home, what think this model will have on each of the expenses? How will the effects on expenses affect the company

Data source: https://www.rei.com/about-rei/financial-information

ted in the feature story “Buy Now, Vote ops do not have common stock so even ot really dividends. Instead, REI recognizes Student Work Area

2020 $ 2,754.7 1,638.9 1,115.8 1,169.6 (53.8) (15.2) (38.6) (4.6) $ (34.0)

your instructor’s choice to perform the

a. REI's Income Statement' Percentages for 2016 to 2020 2016 Income statement components Net sales Cost of goods sold Gross profit Operating and other expenses Income (loss) before taxes and dividends Income tax provision (benefit) Income before members' dividends Members' dividends Net income

b. Chart for part b

ute the percentage of net sales for each

tal percentages computed in part a. Include Add a trend line for each expense

s do you see in operating and other ? What costs seem to have contributed

days a week from home, what effects do you expenses affect the company’s net income?

c. Response to part c

d. Response to part d

2016 to 2020 2017

2018

2019

2020

Using Data Visualization to Understand Data

DA6.1 Data Visualization can be used to understand profitability trends. REI's Income statements for REI for 2016 through 2020 are presented here. As indicated in the feature story “Buy N Vote Later”, REI is a co-op in which members share in the company's profits. However, co-ops do not have commo so even though the members of the co-op receive distributions. The amounts distributed are not really dividends. In REI recognizes these distributions as expenses on its income statement. REI's Income Statements for 2016 to 2020 2016 2017 2018 2019 Net sales $ 2,557.5 $ 2,622.8 $ 2,781.9 $ 3,123.0 Cost of goods sold 1,460.4 1,482.6 1,567.2 1,715.2 Gross profit 1,097.1 1,140.2 1,214.7 1,407.7 Operating and other expenses 920.2 954.0 1,027.3 1,245.7 Income before taxes and176.9 dividends 186.2 187.4 162.1 Income taxes 21.7 33.7 11.0 5.8 Income before members' dividends 155.2 152.5 176.4 156.3 Members' dividends 116.9 122.0 129.6 134.2 Net income $ 38.3 $ 30.5 $ 46.8 $ 22.1

Amounts in millions

Instructions There are four parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to pe the following: a. Complete the table in the Student Work Area by inputting formulas to compute the percentage of ne for each item on the income statements for each of the five years. b. Prepare a clustered column chart by year to visualize each of the four subtotal percentages comput part a. Include a descriptive chart title, axes labels, properly formatted axes, and a legend. Add a tre for each expense percentage. c. What does the chart tell you about the gross profit percentage? What trends do you see in operatin other expenses and in members' dividends? What do you think may be the cause? What costs seem have contributed most to the decline in net income? d. If REI shifts its work model to allow non-retail employees to work up to five days a week from home, effects do you think this model will have on each of the expenses? How will the effects on expenses the company’s net income?

Data source: https://www.rei.com/about-rei/financial-information

dicated in the feature story “Buy Now, ever, co-ops do not have common stock ibuted are not really dividends. Instead, Student Work Area

20 $

2020 2,754.7 1,638.9 1,115.8 1,169.6 (53.8) (15.2) (38.6) (4.6) (34.0)

r or your instructor’s choice to perform

a. REI's Income Statement' Percentages for 2016 to 2020 Income statement components Net sales Cost of goods sold Gross profit Operating and other expenses Income (loss) before taxes and dividends Income tax provision (benefit) Income before members' dividends Members' dividends Net income

b. Chart for part b

REI's Income Percentages fo

to compute the percentage of net sales 0.5

our subtotal percentages computed in ted axes, and a legend. Add a trend line

p to five days a week from home, what How will the effects on expenses affect

Percentage of Total Sales

hat trends do you see in operating and y be the cause? What costs seem to

0.4 0.3 0.2 0.1 0 2016

2017

-0.1 Gross profit

Income (loss) before taxes and dividends

c. Response to part c There appears to be a gradual increase in the gross profit percentage thro prices or decreased costs. This change could also be due to a shift from lo Income before taxes and members' dividends seems to be decreasing ove expenses. Net income was relatively stable for the first three years, with a other expenses. The extreme drop in profitability in 2020 is explained by th chapter, member's dividends are based on the company's profit, so it is lo member's dividends declines.

prices or decreased costs. This change could also be due to a shift from lo Income before taxes and members' dividends seems to be decreasing ove expenses. Net income was relatively stable for the first three years, with a other expenses. The extreme drop in profitability in 2020 is explained by th chapter, member's dividends are based on the company's profit, so it is lo member's dividends declines.

d. Response to part d The shift in workforce for the non-retail segment of the workforce likely wil commercial real estate costs for rents and leases can be reduced along w costs for operating expenses may go up due to remote support of employ net effect will likely be accretive to earnings.

tages for 2016 to 2020 2016 100.0% 57.1% 42.9% 36.0% 6.9% 0.8% 6.1% 4.6% 1.5%

2017 100.0% 56.5% 43.5% 36.4% 7.1% 1.3% 5.8% 4.6% 1.2%

2018 100.0% 56.3% 43.7% 36.9% 6.7% 0.4% 6.3% 4.7% 1.7%

2019 100.0% 54.9% 45.1% 39.9% 5.2% 0.2% 5.0% 4.3% 0.7%

2020 100.0% 59.5% 40.5% 42.5% -2.0% -0.6% -1.4% -0.2% -1.2%

REI's Income Percentages for 2016 to 2020

e (loss) before taxes and dividends

2018

2019

Income before members' dividends

2020

Net income

ase in the gross profit percentage through 2019 most likely due to increases in selling ge could also be due to a shift from low margin products to higher margin products. dividends seems to be decreasing over time due to the increase in operating and other stable for the first three years, with a decline in 2019 due to the increase in operating and profitability in 2020 is explained by the pandemic. As indicated in the feature story in the ed on the company's profit, so it is logical that these dividends decline when income before

ge could also be due to a shift from low margin products to higher margin products. dividends seems to be decreasing over time due to the increase in operating and other stable for the first three years, with a decline in 2019 due to the increase in operating and profitability in 2020 is explained by the pandemic. As indicated in the feature story in the ed on the company's profit, so it is logical that these dividends decline when income before

ail segment of the workforce likely will have an overall positive net income effect since s and leases can be reduced along with maintenance for these facilities. Some incremental up due to remote support of employees for networking and other technology costs. The arnings.

Using Data Analytics to Compare Companies’ Profitability DA6.2 Data Visualization can be used to compare the profitability of different companies. Caterpillar is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Cummins is a company that designs, manufactures, sells, and services diesel and natural gas engines and powertrain-related component products. CNH Industrial operates in the capital goods sector and designs, produces, and sells agricultural and construction equipment, trucks, commercial vehicles, buses, and specialty vehicles. Financial information from these three companies is presented here. Think about the implications for financial ratios for these three companies if they each reuse existing materials. This action can reduce its cost of goods sold which should cause its gross margin to increase.

In Billions USD Caterpillar Revenue (est.) $ 39.0 Cost of goods 29.1 Gross profit 9.9 Net income 3.0

Cummins 19.8 14.9 4.9 1.8

CNH $

26.0 22.4 3.6 (0.5)

Instructions There are four parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Complete the table in the Student Work Area by inputting formulas to compute the gross profit ratio, and percentages of cost of goods sold, other expenses, and net income as compared to revenue for Caterpillar, Cummins, and CNH Industrial. b. Prepare a clustered column chart by company showing cost of goods sold, other expenses, and net operating Income as a percent of sales revenue to compare the three companies. Include a descriptive chart title, axes labels, properly formatted axes, and a legend. c. Research: Looking at their sustainability reports, in what ways do Caterpillar, Cummins, and CNH Industrial promote rebuilding and recycling? d. What impact do you think recycling has on the companies' profitability? Compare your chart in part b with your findings in part c. Is the financial performance in line with your research? If so, how?

Links to Sustainability Reports https://www.cnhindustrial.com/enus/sustainability/our_approach_to_sustainability/brochures/cnh%20industrial%20a%20sustainable%20year%202019.pdf?REDIRECT=0

https://www.cummins.com/news/2019/06/18/cummins-achieves-two-environmental-goals-early-faces-challenges-ahead https://reports.caterpillar.com/sr/materials/

Student Work Area

a. Table of percentages for part a of gross margin, cost of goods sold, other expenses, and net in Income Statement Items Caterpillar Cummins Gross margin % Cost of goods sold % Other expenses % Net income % Total expenses and net income %

b. Chart for part b

c. Response to part c

d. Response to part d

other expenses, and net income CNH

Using Data Analytics to Compare Companies’ Profitability DA6.2 Data Visualization can be used to compare the profitability of different companies.

Caterpillar is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Cummins is a company that designs, manufactures, sells, and services d and natural gas engines and powertrain-related component products. CNH Industrial operates in the capital goods and designs, produces, and sells agricultural and construction equipment, trucks, commercial vehicles, buses, and specialty vehicles. Financial information from these three companies is presented here. Think about the implication financial ratios for these three companies if they each reuse existing materials. This action can reduce its cost of go sold which should cause its gross margin to increase.

In Billions USD Revenue (est.) Cost of goods Gross profit Net income

Caterpillar 39.0 $ 29.1 9.9 3.0

Cummins 19.8 $ 14.9 4.9 1.8

CNH 26.0 22.4 3.6 (0.5)

Instructions There are four parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to pe the following: a. Complete the table in the Student Work Area by inputting formulas to compute the gross profit and percentages of cost of goods sold, other expenses, and net income as compared to reven Caterpillar, Cummins, and CNH Industrial.

b. Prepare a clustered column chart by company showing cost of goods sold, other expenses, an operating Income as a percent of sales revenue to compare the three companies. Include a descriptive chart title, axes labels, properly formatted axes, and a legend. c.

Research: Looking at their sustainability reports, in what ways do Caterpillar, Cummins, and CN Industrial promote rebuilding and recycling?

d. What impact do you think recycling has on the companies' profitability? Compare your chart in with your findings in part c. Is the financial performance in line with your research? If so, how?

Links to Sustainability Reports https://www.cnhindustrial.com/enus/sustainability/our_approach_to_sustainability/brochures/cnh%20industrial%20a%20sustainable%20year%202019.pdf?REDIRECT=0

https://www.cummins.com/news/2019/06/18/cummins-achieves-two-environmental-goals-early-faces-challenges-ahead https://reports.caterpillar.com/sr/materials/

engines, industrial gas es, sells, and services diesel tes in the capital goods sector al vehicles, buses, and nk about the implications for an reduce its cost of goods Student Work Area a. Table of percentages for part a of gross margin, cost of goods sold, other expenses, and net income Income Statement Items CaterpillarCummins CNH Gross margin % 25.4% 24.7% 13.8% 74.6% 75.3% 86.2% Cost of goods sold % 17.7% 15.7% 15.8% Other expenses % 7.7% 9.1% -1.9% Net income % 100.0% 100.0% 100.0% Total expenses and net income %

nstructor’s choice to perform b. Chart for part b

ompute the gross profit ratio, e as compared to revenue for

Income Statement Items as a % of Revenue 100.0% 90.0%

pillar, Cummins, and CNH

80.0%

% of Revenue

old, other expenses, and net ompanies. Include a d.

70.0% 60.0% 50.0%

40.0% 30.0% 20.0%

Compare your chart in part b research? If so, how?

REDIRECT=0

10.0% 0.0% Caterpillar Gross margin %

Cummins Cost of goods sold %

Other expenses %

c. Response to part c Caterpillar's sustainability report indicates that it responsibly sources the raw materia used to build their products, and it keeps those materials in circulation for as long as possible through remanufacturing and rebuilding programs that reduce waste, exten equipment life and save customers money. CNH Industrial claims that 100 percent of its new products include sustainability/ recyclability design criteria. In addition to recycling water and waste recovered, it recycles 8.3% of spare parts from remanufactured components. While Cummins indicates it puts efforts towards a cleaner, healthier and safer environment, it does n directly mention the reuse of materials in its manufacturing projects.

used to build their products, and it keeps those materials in circulation for as long as possible through remanufacturing and rebuilding programs that reduce waste, exten equipment life and save customers money. CNH Industrial claims that 100 percent of its new products include sustainability/ recyclability design criteria. In addition to recycling water and waste recovered, it recycles 8.3% of spare parts from remanufactured components. While Cummins indicates it puts efforts towards a cleaner, healthier and safer environment, it does n directly mention the reuse of materials in its manufacturing projects.

d. Response to part d The financial performance is somewhat in line with Caterpillar's claim on recycling based upon its larger gross profit percentage of 25%. It appears that Caterpillar recycles a larger portion of its materials, though its sustainability report does not indicate what portion by not cycling materials in its products, Cummins cost of goods sold percentage is larger than Caterpillar's, indicating that it either did not disclose its recycling efforts or its efforts are less than those of Caterpillar. The 8.3% that CNH indicates that it recycles appears to be less than that of Caterpillar, given that CNH h the lowest gross profit of the three companies if the assumption is made that the companies use the same quality and quantities in production.

of Revenue

CNH

Other expenses %

bly sources the raw materials in circulation for as long as ms that reduce waste, extend

s include sustainability/ and waste recovered, it onents. While Cummins afer environment, it does not g projects.

in circulation for as long as ms that reduce waste, extend

s include sustainability/ and waste recovered, it onents. While Cummins afer environment, it does not g projects.

pillar's claim on recycling ppears that Caterpillar nability report does not cts, Cummins cost of goods t it either did not disclose its pillar. The 8.3% that CNH Caterpillar, given that CNH has mption is made that the tion.

P7.2 Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis

Mullins Distribution markets CDs of numerous performing artists. At the beginning of March, Mullins had in beginning inventory 2,500 CDs with a unit cost of $6. During M made the following purchases of CDs. March 5 3,000 @ $7 March 21 5,000 @ $9 March 13 3,500 @ $8 March 26 2,000 @ $10 During March 12,000 units were sold. Mullins uses a periodic inventory system.

Instructions a. Determine the cost of goods available of sale. b. Determine (1) the ending inventory and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average-cost). Prove the accu of goods sold under the FIFO and LIFO methods. (Note: For average-cost, carry cost per unit to two decimal places.) c.

Which cost flow methods results in (1) the highest inventory amount for the balance sheet and (2) the highest cost of goods sold for the income statement?

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?". Enter a textual answer in the cells with "TEXT."

COST OF GOODS AVAILABLE FOR SALE Date Explanation March 1 Beginning inventory 5 Purchase 13 Purchase 21 Purchase 26 Purchase Total

Units 2,500 3,000 3,500 5,000 2,000 ?

Unit Cost $6 7 8 9 10

Unit Cost $10 9

Total Cost Value Value ?

FIFO b.(1)

b.(2)

Ending Inventory Date March 26 21

Units 2,000 2,000 ?

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold Proof of Cost of Goods Sold Date March 1 5 13 21

Units 2,500 3,000 3,500 3,000 ?

Value Value ?

Unit Cost $6 7 8 9

Total Cost Value Value Value Value ?

Total Cost Value Value Value Value Value ?

LIFO b.(1)

b.(2)

Ending Inventory Date March 1 5

Units 2,500 1,500 ?

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold Proof of Cost of Goods Sold Date March 26 21 13 5

b.(1)

b.(2)

c.(1) c.(2)

Ending Inventory Units 4,000

As shown in (b), As shown in (b),

TEXT TEXT

Unit Cost $10 9 8 7

Total Cost Value Value Value Value ?

AVERAGE COST Value Value ?

Unit Cost Value

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

Total Cost Value Value ?

Value Value ?

Units 2,000 5,000 3,500 1,500 ?

Cost of goods available for sale Units available for sale Average cost per unit

Unit Cost $6 7

Total Cost ?

Value Value ? produces the highest inventory amount. produces the highest highest cost cost ofof goods goods sold. sold.

Value Value

ost with analysis

ventory 2,500 CDs with a unit cost of $6. During March, Mullins

ds (FIFO, LIFO, and average-cost). Prove the accuracy of the cost aces.)

cost of goods sold for the income statement?

extual answer in the cells with "TEXT."

P7.2 Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis

Mullins Distribution markets CDs of numerous performing artists. At the beginning of March, Mullins had in beginning inventory 2,500 CDs with a unit cost of $6. During Ma purchases of CDs. March 5 3,000 @ $7 March 21 5,000 @ $9 March 13 3,500 @ $8 March 26 2,000 @ $10 During March 12,000 units were sold. Mullins uses a periodic inventory system.

Instructions a. Determine the cost of goods available of sale. b. Determine (1) the ending inventory and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average-cost). Prove the accurac FIFO and LIFO methods. (Note: For average-cost, carry cost per unit to two decimal places.) c.

Which cost flow methods results in (1) the highest inventory amount for the balance sheet and (2) the highest cost of goods sold for the income statement?

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?". Enter a textual answer in the cells with "TEXT."

COST OF GOODS AVAILABLE FOR SALE Date Explanation March 1 Beginning inventory 5 Purchase 13 Purchase 21 Purchase 26 Purchase Total

Units 2,500 3,000 3,500 5,000 2,000 16,000

Unit Cost $6 7 8 9 10

Unit Cost $10 9

Total Cost $20,000 18,000 $38,000

FIFO b.(1)

b.(2)

Ending Inventory Date March 26 21

Units 2,000 2,000 4,000

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$129,000 38,000 $91,000

Proof of Cost of Goods Sold Date March 1 5 13 21

Unit Cost $6 7 8 9

Total Cost $15,000 21,000 28,000 27,000 $91,000

Unit Cost $6 7

Total Cost $15,000 10,500 $25,500

Units 2,500 3,000 3,500 3,000 12,000

LIFO b.(1)

b.(2)

Ending Inventory Date March 1 5

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

Units 2,500 1,500 4,000

$129,000 25,500 $103,500

Total Cost $15,000 21,000 28,000 45,000 20,000 $129,000

Proof of Cost of Goods Sold Date March 26 21 13 5

Units 2,000 5,000 3,500 1,500 12,000

b.(2)

c.(1) c.(2)

Ending Inventory Units 4,000

Unit Cost $8.0625

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold As shown in (b), As shown in (b),

Total Cost $20,000 45,000 28,000 10,500 $103,500

AVERAGE COST $129,000 16,000 $8.0625

Cost of goods available for sale Units available for sale Average cost per unit b.(1)

Unit Cost $10 9 8 7

Total Cost $32,250

$129,000 32,250 $96,750 FIFO LIFO

produces the highest inventory amount. produces the highest highest cost cost of of goods goods sold. sold.

$38,000 $103,500

ost with analysis

entory 2,500 CDs with a unit cost of $6. During March, Mullins made the following

(FIFO, LIFO, and average-cost). Prove the accuracy of the cost of goods sold under the

ost of goods sold for the income statement?

l answer in the cells with "TEXT."

P7.3 Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost in a periodic inventory system and assess financial statement effects. Vista Company Inc. had a beginning inventory of 100 units of Product RST at a cost of $7 per unit. During the year, purchases were: Feb 20 600 units @ $8 Aug 12 400 units @ $10 May 5 500 units @ $9 Dec 8 200 units @ $11 Vista Company uses a periodic inventory system. Sales totaled 1,500 units. Instructions a. Determine the cost of goods available of sale. b. Determine the ending inventory and the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average-cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods. c.

Which cost flow methods results in the lowest inventory amount for the balance sheet? The lowest cost of goods sold for the income statement? NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?". Enter a textual answer in the cells with "TEXT."

COST OF GOODS AVAILABLE FOR SALE Date Explanation Jan 1 Beginning inventory Feb 20 Purchase May 5 Purchase Aug 12 Purchase Dec 8 Purchase Total

Units 100 600 500 400 200 ?

Unit Cost $7 8 9 10 11

Unit Cost $11 10

Total Cost ? ? ?

FIFO b.(1)

b.(2)

Ending Inventory Date Dec 8 Aug 12

Units 200 100 ?

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold Proof of Cost of Goods Sold Date Jan 1 Feb 20 May 5 Aug 12

Units 100 600 500 300 ?

? ? ?

Unit Cost $7 8 9 10

Total Cost ? ? ? ? ?

Total Cost ? ? ? ? ? ?

LIFO b.(1)

b.(2)

Ending Inventory Date Jan 1 Feb 20

Units 100 200 ?

Unit Cost $7 8

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold Proof of Cost of Goods Sold Date Dec 8 Aug 12 May 5 Feb 20

Total Cost ? ? ?

? ? ?

Units 200 400 500 400 ?

Unit Cost $11 10 9 8

Total Cost ? ? ? ? ?

AVERAGE COST Cost of goods available for sale Units available for sale Average cost per unit b.(1)

b.(2)

c.(1) c.(2)

Ending Inventory Units 300

Unit Cost Value

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold As shown in (b), As shown in (b),

TEXT TEXT

? ? ?

Total Cost ?

? ? ? produces the lowest inventory amount. produces the lowest highest cost cost of goods of goods sold. sold.

Value Value

COST OF GOODS AVAILABLE FOR SALE Date Explanation Jan 1 Beginning inventory Feb 20 Purchase May 5 Purchase Aug 12 Purchase Dec 8 Purchase Total

Units 100 600 500 400 200 1,800

Unit Cost $7 8 9 10 11

Unit Cost $11 10

Total Cost $2,200 1,000 $3,200

FIFO b.(1)

b.(2)

Ending Inventory Date Dec 8 Aug 12

Units 200 100 300

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$16,200 3,200 $13,000

Proof of Cost of Goods Sold Date Jan 1 Feb 20 May 5 Aug 12

Unit Cost $7 8 9 10

Units 100 600 500 300 1,500

Total Cost $700 4,800 4,500 3,000 $13,000

Total Cost $700 4,800 4,500 4,000 2,200 $16,200

LIFO b.(1)

b.(2)

Ending Inventory Date Jan 1 Feb 20

Units 100 200 300

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$16,200 2,300 $13,900

Proof of Cost of Goods Sold Date Dec 8 Aug 12 May 5 Feb 20

Unit Cost $11 10 9 8

Units 200 400 500 400 1,500

b.(2)

c.(1) c.(2)

Ending Inventory Units 300

Unit Cost $9.00

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold As shown in (b), As shown in (b),

Total Cost $700 1,600 $2,300

Total Cost $2,200 4,000 4,500 3,200 $13,900

AVERAGE COST $16,200 1,800 $9.00

Cost of goods available for sale Units available for sale Average cost per unit b.(1)

Unit Cost $7 8

Total Cost $2,700

$16,200 2,700 $13,500 LIFO FIFO

produces the lowest inventory amount. produces the lowest highest cost cost of goods of goods sold. sold.

$2,300 $13,000

P7.7 Journalize transactions related to bad debts Presented below is an aging schedule for Bryan Company.

Customer Accounts Receivable Estimated percentage uncollectible Total estimated bad debts

Total $262,000

$42,400

Not Yet Due $107,000

1-30 $49,000

12%

24%

60%

$3,210

$3,430

$3,360

$9,600

$22,800

Number of Days Past Due 31-60 61-90 $28,000 $40,000

Over 90 $38,000

At December 31, 2026, the unadjusted balance in Allowance for Doubtful Accounts is $8,000. Instructions a. Indicate the amount of bad debt expense for the year ending December 31, 2026, and the cash realizable value of Accounts Receivable.

On January 5, 2027, a $600 customer balance originating in 2021 is judged uncollectible. Indicate the cash realizable value of Accounts Receivable after recognizing the January 5 write-off. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Bad debt expense at December 31, 2026 is:

Value

Cash realizable value of accounts receivable at December 31, 2026: Accounts receivable Less: Allowance for doubtful accounts

Value Value ?

Cash realizable value of accounts receivable after $600 write-off (January 5, 2027): Accounts receivable Less: Allowance for doubtful accounts

Value Value ?

P7.7 Journalize transactions related to bad debts Presented below is an aging schedule for Bryan Company.

Customer Accounts Receivable Estimated percentage uncollectible Total estimated bad debts

Total $262,000

$42,400

Not Yet Due $107,000

1-30 $49,000

12%

24%

60%

$3,210

$3,430

$3,360

$9,600

$22,800

Number of Days Past Due 31-60 61-90 $28,000 $40,000

Over 90

Bad debt expense at December 31, 2026 is:

$42,400

Cash realizable value of accounts receivable at December 31, 2026: Accounts receivable Less: Allowance for doubtful accounts

$262,000 $42,400 $219,600

Cash realizable value of accounts receivable after $600 write-off (January 5, 2027): Accounts receivable Less: Allowance for doubtful accounts

$261,400 $41,800 $219,600

$38,000

Using Data Visualization to Understand Data DA 7.1 Data Visualization can be used to understand financial reports. Example Recall the Feature Story “Where Is That Spare Bulldozer Blade?” presented in the chapter. Caterpillar has continued to improve its inventory management by improving its product sustainability in two ways. First, it is by rebuilding used parts to like-new condition. Second, the company is remanufacturing usable inventory parts when customers trade-in or dispose of their used equipment. These actions not only reduce inventory costs but also enable Caterpillar to participate in the circular economy, where manufacturers take responsibility for their products at the end of the product lives. As noted in its 2019 sustainability report, Caterpillar has a goal of 20% growth in both rebuilding and remanufacturing from 2013 to 2020. Caterpillar's sustainability goals and excerpts from its sustainability policy are presented here.

Area Growth in remanufacturing and rework Growth in remanufacturing business Growth in rebuild business

Measure Goal 20% Remanufacturing % change from 2013 Rebuild % change from 2013

Caterpillar provides the following in its sustainability report for 2019. Our remanufacturing and rebuild businesses provide customers with immediate cost savings, help extend product life cycles and use materials more efficiently. We seek to continue to grow these businesses. Remanufacturing and rebuild options deliver multiple sustainability benefits and help Caterpillar contribute to the circular economy. Through these businesses, we recycle millions of pounds of end-of-life iron annually. Because we are in the business of returning end-of-life components to same-as-when-new condition, we reduce waste and minimize the need for raw material, energy and water to produce new parts. Through remanufacturing, we make a significant contribution to sustainable development—extending the value of the energy and water consumed in a component’s original manufacture and keeping high-value nonrenewable resources in circulation for multiple lifetimes. Source: https://reports.caterpillar.com/sr/esg-data-center/

How is Caterpillar doing so far? A line chart can help you visualize the company’s progress toward this goal. What information can you obtain by examining the chart? As indicated by the chart, while its goal has remained at 20% for the past four years as a change from 2013, Caterpillar's remanufacturing and rebuilding businesses are growing. The biggest increase in the growth of the latter occurred from 2016 to 2017. There was a decline from 2018 to 2019 in these initiatives, though it may be that Caterpillar has reached a peak that is leveling off due to new production that is more sustainable.

n the chapter. t sustainability in y is d equipment. n the circular roduct lives. As lding and its sustainability

ess toward this t, while its goal nufacturing and rred from 2016 at Caterpillar has

2019 20% 3% 14%

Caterpillar Remanufacturing and Rebuilding Changes 0.25 0.2

Percentage Changes

m 2013

Caterpillar's Percentage Changes in Growth by Year from 2013 2016 2017 2018 Growth in remanufacturing business 20% 20% 20% Growth in remanufacturing business -13% 2% 7% Growth in rebuild business -10% 14% 17%

0.15 0.1

0.05 0 2016

2017

2018

-0.05 -0.1 -0.15 Goal 20%

Remanufacturing % change from 2013

Rebuild % change from 2013

2019

d % change from 2013

Using Data Visualization to Analyze Financial Information DA 7.1 Data visualization can be used to compare changes over time. The millions of pounds of products reacquired at end-of life received from customers, and the percentage of actual end-of-life returns and materials that were usable as recycling materials by Caterpillar during 2016 through 2019 are presented here.

Measure Weight in millions of pounds of end-of-life returned materials received Percentage of actual end-of-life returns usable for recycling

2016

2017

2018

2019

125

130

155

153

91%

92%

91%

Instructions There are three parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Create a combination column and line chart that graphs the pounds of product materials received from 2016 to 2019 as bars on the primary vertical axis, and the percentage of the materials received that are usable as a line on the secondary vertical axis. Include a descriptive chart title, axes labels, properly formatted axes, and a legend. b, What information does the chart provide? Explain. c. What do you think that management can do to increase its gross profit as it relates to the end-of-life materials received from customers?

Student Work Area a. Chart for part a

b. Response for part b

c. Response for part c

Student Work Area a. Chart for part a

2016

2017 2018

2019

125

130

155

153

91%

92%

91%

1.2

Millions of Pounds of Materials Received

Measure Weight in millions of pounds of end-of-life returned materials received Percentage of actual end-of-life returns usable for recycling

0.8

0.6

0.4

0.2

b. Response for part The amount of materia each year with a slight are usable for recyclin While there is only a s compared to prior yea

c. Response for part Management can enco a price reduction on n percentage of returned materials.

Student Work Area a. Chart for part a

Pounds of Material Received and Percentage Usable for New Products 120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0% 1

2 Weight of End-of-life Returned Materials Processed

4 % of End-of-life Returns Usable

b. Response for part b The amount of material in pounds that Caterpillar is receiving from customers as returned materials is increasing each year with a slight decline in 2019. The small percentage differences for the 4-year period of actual returns that are usable for recycling purposes appear to be significant on the chart if the scale is not taken into consideration. While there is only a small percentage change between periods, less recyclable returns are indicated in 2019 compared to prior years.

c. Response for part c Management can encourage customers to recycle their used equipment as a trade-in on new equipment by offering a price reduction on new purchases as an incentive. Management can also research methods to recycle a larger percentage of returned items including possibly melting down unusable materials for conversion into other materials.

100.0%

80.0%

60.0%

40.0%

20.0%

Percentage of Recyclable Returns

120.0%

0.0%

erials is increasing of actual returns that nto consideration. cated in 2019

quipment by offering o recycle a larger n into other

Using Data Analytics to Compare Companies’ Inventory Turnover DA 7.2 Data visualization can be used to compare inventory management.

Inventory turnover shows the number of times during the period a firm sells the entire dollar amount of its inventory. It is advantageous to 'turnover' inventory more quickly to reduce the risk of obsolescence and spoilage. As such, companies often have a goal of increasing inventory turnover. Inventory turnover data for Costco, Walmart, Target, and Amazon are presented here for 2005 through 2019.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Costco Walmart COST WMT 11.56 7.84 11.57 8.08 12.60 8.81 11.53 9.30 12.06 8.64 11.71 8.23 12.24 8.04 11.65 7.98 11.64 8.09 11.35 8.12 11.47 8.39 11.38 8.53 11.16 8.70 11.66 8.88

Target Amazon TGT AMZN 6.57 9.41 6.46 9.57 6.83 10.65 6.35 8.74 6.13 8.30 6.10 7.47 6.46 7.62 6.04 7.31 6.19 7.56 6.07 7.00 5.91 7.70 5.95 6.98 5.61 8.10 6.10 8.08

Data for Costco and Amazon are not available for 2005. Source: https://www.alphaquery.com/ Instructions There are four parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Create a scatter plot with lines and markers for the data. Include a descriptive chart title, axes labels, properly formatted axes, and a legend. b. What trends can you identify in the inventory turnover of the four companies during the period? c. Calculate “Days' Sales in Inventory” for each year and each company. d. Which company is managing its inventory levels most effectively? What disadvantages can you identify that may result to high inventory turnover? Explain.

2012 2013 2014 2015 2016 2017 2018 2019

d. Response to pa

Student Work Area

a. Chart for part a

b. Response to part b

c. Table in which to calculate days' sales in inventory for part c Days' Sales in Inventory for 2019 through 2005 Costco Walmart Target Amazon 2006 2007 2008 2009 2010 2011

2012 2013 2014 2015 2016 2017 2018 2019

d. Response to part d

Using Data Analytics to Compare Companies’ Inventory Turnover DA 7.2 Data visualization can be used to compare inventory management.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Costco Walmart COST WMT 11.56 7.84 11.57 8.08 12.60 8.81 11.53 9.30 12.06 8.64 11.71 8.23 12.24 8.04 11.65 7.98 11.64 8.09 11.35 8.12 11.47 8.39 11.38 8.53 11.16 8.70 11.66 8.88

Target Amazon TGT AMZN 6.57 9.41 6.46 9.57 6.83 10.65 6.35 8.74 6.13 8.30 6.10 7.47 6.46 7.62 6.04 7.31 6.19 7.56 6.07 7.00 5.91 7.70 5.95 6.98 5.61 8.10 6.10 8.08

Student Work Area a. Chart for part a

Annual Rate of Turnover

12 10 8 6 4 2 0 2004

b. Response to part b Each firm has a relatively small fluctuations, but gen consistently turns over its shows the lowest turnover others are steady.

c. Table in which to calc Days' Sales in Inventory 2006 2007 2008 2009 2010 2011 2012 2013

2014 2015 2016 2017 2018 2019

d. Response to part d Of the four retailers, Costc inventory turnover, and th about a month to sell the e their inventories about one months. Generally, high tu result in running out of sto are factors management m

Student Work Area a. Chart for part a

Inventory Turnover - Major Retailers

2004

2006

2008

2010

2012

2014

2016

2018

2020

Year Costco

Walmart

Target

Amazon

b. Response to part b Each firm has a relatively stable level of inventory turnover over the period. There are small fluctuations, but generally the turnover is consistent for the period. Costco consistently turns over its inventory more quickly than the other companies, while Target shows the lowest turnover. Amazon's turnover has been declining over the years, while the others are steady.

c. Table in which to calculate days' sales in inventory for part c Days' Sales in Inventory for 2019 through 2005 Costco Walmart Target Amazon 31.6 46.6 55.6 38.8 31.5 45.2 56.5 38.1 29.0 41.4 53.4 34.3 31.7 39.2 57.5 41.8 30.3 42.2 59.5 44.0 31.2 44.3 59.8 48.9 29.8 45.4 56.5 47.9 31.3 45.7 60.4 49.9

31.4 32.2 31.8 32.1 32.7 31.3

45.1 45.0 43.5 42.8 42.0 41.1

59.0 60.1 61.8 61.3 65.1 59.8

48.3 52.1 47.4 52.3 45.1 45.2

d. Response to part d Of the four retailers, Costco manages its inventory the most efficiently. It has the highest inventory turnover, and the lowest days sales in inventory. On average, Costco takes about a month to sell the entire dollar amount of its inventory. Walmart and Amazon hold their inventories about one month and a half, and Target holds its inventory at close to two months. Generally, high turnover is beneficial for the firm, however, high turnover may result in running out of stock that could cause customers to buy from competitors. These are factors management must determine in establishing their inventory turnover goals.”

E8.5 Determine straight line depreciation for partial period Gotham Company purchased a new machine on October 1, 2027, at a cost of $90,000. The company estimated that the machine has a salvage value of $8,000. The machine is expected to be used for 70,000 working hours during its 8-year life. Instructions Compute the depreciation expense under the straight-line method for 2027 and 2028, assuming a December 31 year-end. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Cost Salvage value Depreciable cost Useful life Annual depreciation

Value Value ? Value ?

2027 Depreciation 2028 Depreciation

Value Value

3/12 =

After you have completed E8.5, consider the additional question: Assume that the cost of the new machine changed to $85,000. Determine the impact of this change on 2027 and 2028 depreciation.

Cost Salvage value Depreciable cost Useful life Annual depreciation

Value Value ? Value ?

2027 Depreciation 2028 Depreciation

Value Value

3/12 =

Cost Salvage value Depreciable cost Useful life Annual depreciation

$90,000 8,000 82,000 8 years $10,250

2022 Depreciation 2023 Depreciation

$10,250 $10,250

3/12 =

$2,562.50

E8.5 Solution to additional question Assume that the cost of the new machine changed to $85,000. Determine the impact of this change on 2027 and 2028 depreciation.

Cost Salvage value Depreciable cost Useful life Annual depreciation

$85,000 8,000 77,000 8 years $9,625

2027 Depreciation 2028 Depreciation

$9,625 $9,625

3/12 =

$2,406.25

E8.7 Journalize transactions related to disposals of plant assets Thieu Co. has delivery equipment that cost $50,000 and has been depreciated $24,000. Instructions Prepare a tabular summary to record the disposal under the following assumptions: a. It was scrapped as having no value. b. It was sold for $37,000. c. It was sold for $20,000 NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Assets

Cash

Bal.

Equip.

Value Value

Accum. Deprec.Equipment

Bal.

Equip.

Accum. Deprec.Equipment

Bal. Value

Equip. Value Value

Stockholders' Equity Retained Earnings

Com. Stk.

Rev.

Exp.

Liabilities

Value Value

Div.

Text

Stockholders' Equity Retained Earnings

Com. Stk.

Rev.

Exp.

Account

Div.

= Accum. Deprec.Equipment

Account

Value Value

Assets

Cash

Value Value

Value

Value Value

Assets

Cash

Liabilities

Text

Stockholders' Equity Retained Earnings

Com. Stk.

Rev.

Exp.

Account

Div.

Text

After you have completed E8.7, consider the following additional question: Assume that the accumulated depreciation up to the time of disposal changed to $30,000. Show the impact of this change on each of the scenario given.

(a)

Assets

Cash

Bal.

Equip.

Value Value

(b)

Accum. Deprec.Equipment

Bal.

Equip.

(c)

Accum. Deprec.Equipment

Bal. Value

Equip. Value Value

Stockholders' Equity Retained Earnings

Com. Stk.

Rev.

Exp.

Liabilities

Value Value

Div.

Text

Stockholders' Equity Retained Earnings

Com. Stk.

Rev.

Exp.

Account

Div.

= Accum. Deprec.Equipment

Account

Value Value

Assets

Cash

Value Value

Value

Value Value

Assets

Cash

Liabilities

Text

Stockholders' Equity Retained Earnings

Com. Stk.

Rev.

Exp.

Account

Div.

Text

Assets Cash

Bal.

Equip.

50,000 -50,000

= Accum. Deprec.-Equipment

Bal.

Equip.

50,000 -50,000

37,000

Bal. 20,000

Equip. 50,000 -50,000

Com. Stk.

Stockholders' Equity Retained Earnings Rev. - Exp. Div.

-26,000

= Accum. Deprec.-Equipment

Liabilities

Com. Stk.

-24,000 24,000

Assets Cash

-24,000 24,000

Assets Cash

Liabilities

11,000

= Accum. Deprec.-Equipment -24,000 24,000

Stockholders' Equity Retained Earnings Rev. - Exp. Div.

Liabilities

+ Com. Stk.

Account

Loss on Disposal

Account

Gain on Disposal

Stockholders' Equity Retained Earnings Rev. - Exp. Div.

-6000

Account

Loss on Disposal

E8.7 Journalize transactions related to disposals of plant assets After you have completed E8.7, consider the following additional question: Assume that the accumulated depreciation up to the time of disposal changed to $30,000. Show the impact of this change on each of the scenario given.

(a)

Assets Cash

Bal.

(b)

Equip.

Accum. Deprec.-Equipment=

50,000 -50,000

-30,000 30,000

Assets Cash

Bal. 37,000

+ Com. Stk.

Stockholders' Equity Retained Earnings Rev. Exp. -

Account Div.

-20,000

Equip.

Accum. Deprec.-Equipment=

50,000 -50,000

-30,000 30,000

Assets

Liabilities

+ Com. Stk.

Stockholders' Equity Retained Earnings Rev. Exp. -

Loss on Disposal

Account Div.

17,000

Equip.

Accum. Deprec.-Equipment=

50,000 -50,000

-30,000 30,000

Liabilities

+ Com. Stk.

Gain on Disposal

Stockholders' Equity Retained Earnings Rev. Exp. -

Notice that since the cash received from the sale is the same as the book value of the asset disposed, there is no gain or loss on disposal of plant assets.

Account Div.

No gain or loss

P8.2 Record transactions related to purchase, sales, retirements and depreciation At December 31, 2027, Arnold Corporation reported the following plant assets. Land Buildings $ Less: Accumulated depreciation -buildings Equipment Less: Accumulated depreciation -equipment Total plant assets

$ 26,500,000 11,925,000 40,000,000 5,000,000

3,000,000 14,575,000

35,000,000 52,575,000

During 2028, the following selected cash transactions occurred. Apr. 1 Purchased land for $2,200,000. May 1 Sold equipment that cost $600,000 when purchased on January 1, 2021. The equipment was sold for $170,000. June 1 Sold land for $1,600,000. The land cost $1,000,000. July 1 Purchased equipment for $1,100,000. Dec. 31 Retired equipment that cost $700,000 when purchased on December 31, 2018. No salvage value was received. Instructions a. Prepare a tabular summary that includes plant asset accounts and balances as shown on the December 31, 2027 balance sheet. b.

Enter the 2028 transactions in the tabular summary from part (a). Arnold uses straightline depreciation for buildings and equipment. The buildings are estimated to have a 40-year useful life and no salvage value; the equipment is estimated to have a 10-year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement. Record adjustments to accounts for depreciation for 2028. Prepare the plant assets section of Arnold's balance sheet at December 31, 2028.

c. d.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Assets

Cash a. Bal. 12/31/27 b. 2028 Apr. 1 May 1 1 June 1 July 1 Dec. 31

Land

Value Value Value Value Value

Buildings Value

Accum. Dep.Buildings

Value

Equip. Value

Value

? ?

Stockholders' Equity Retained Earnings

Com. Stk.

Rev.

- Exp.

- Div.

Accounts

Value ?

Text Text Text

Text

? ?

Text Text

? ?

Value Value ?

c. Adj. Dec. 31 31 d. Bal.

Accum. Dep.Equip.

Liabilities

? ?

? ? ?

ARNOLD CORPORATION Partial Balance Sheet December 31, 2028 Plant Assets* Land Buildings Less: Accumulated depreciation - buildings Equipment Less: Accumulated depreciation - equipment Total plant assets *See tabular summary above.

Value Value Value Value Value

After you have completed P8.2, consider the following additional question: Assume that the selling price of equipment and land changed to $168,000 and $1,300,000 respectively. Show the impact of these changes on the journal entries.

? ? ?

Accounts

Text Text Text Text

Text Text

P8.2 Record transactions related to purchase, sales, retirements and depreciation At December 31, 2027, Arnold Corporation reported the following plant assets. Land $ Buildings $ 26,500,000 Less: Accumulated depreciation -buildings 11,925,000 Equipment 40,000,000 Less: Accumulated depreciation -equipment 5,000,000 Total plant assets $

3,000,000 14,575,000 35,000,000 52,575,000

c. d.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Assets

Cash a. Bal. 12/31/27 b. 2028 Apr. 1 May 1 1 June 1 July 1 Dec. 31

Land 3,000,000

-2,200,000 170,000 1,600,000 -1,100,000

Buildings 26,500,000

Accum. Dep.Buildings

-11,925,000

Equip.

40,000,000

-5,000,000

-600,000

-20,000 440,000

Stockholders' Equity Retained Earnings Com. Stk. +

Rev.

- Exp.

Div.

Accounts

2,200,000 -20,000

Depreciation expense Gain on disposal Gain on disposal

-70,000

Depreciation expense

-662,500 -3,925,000

Depreciation expense Depreciation expense

10,000 600,000

-1,000,000 1,100,000 -70,000 700,000

-700,000 c. Adj. Dec. 31 31 d. Bal.

Accum. Dep.Equip.

Liabilities

-662,500 -3,925,000 4,200,000

26,500,000

-12,587,500

39,800,000

-7,875,000

$ 26,500,000 12,587,500 39,800,000 7,875,000

4,200,000 13,912,500

31,925,000 31,925,000

P8.2 Solution to additional question Assume that the selling price of equipment and land changed to $168,000 and $1,300,000 respectively. Show the impact of these changes on the tabular summary.

Assets

Cash a. Bal. 12/31/27 b. 2028 Apr. 1 May 1 1 June 1 July 1 Dec. 31

Land 3,000,000

-2,200,000 168,000 1,300,000 -1,100,000

Buildings 26,500,000

Accum. Dep.Buildings +

Equip.

-11,925,000

40,000,000

-5,000,000

-600,000

-20,000 440,000

Accum. Dep.Equip.

Stockholders' Equity Retained Earnings Com. Stk. +

Rev.

- Exp.

- Div.

Accounts

2,200,000

-1,000,000

-20,000

Depreciation expense Gain on disposal Gain on disposal

-70,000

Depreciation expense

-662,500 -3,925,000

Depreciation expense Depreciation expense

8,000 300,000

1,100,000 -700,000

c. Adj. Dec. 31 31 d. Bal.

Liabilities +

-70,000 700,000

-662,500 -3,925,000 4,200,000

26,500,000

-12,587,500

39,800,000

-7,875,000

Accounts

Depreciation expense Gain on disposal Gain on disposal Depreciation expense

Depreciation expense Depreciation expense

P9.7 Prepare a stockholders' equity section On January 1, 2027, Kimbel, Inc. had these stockholders' equity balances. Common Stock, $1 par (2,000,000 shares authorized, 600,000 shares issued and outstanding) Paid-in Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Income

600,000 1,500,000 700,000 60,000

During 2027, the following transactions and events occurred. 1. Issued 50,000 shares of $1 par value common stock for $3 per share. 2. Issued 60,000 shares of common stock for cash at $4 per share. 3. Purchased 20,000 shares of common stock for the treasury at $3.80 per share. 4. Declared and paid a cash dividend of $207,000. 5. Earned net income of $410,000. 6. Had other comprehensive income of $17,000. Instructions Prepare the stockholders' equity section of the balance sheet at December 31, 2027. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

KIMBEL INC. Partial Balance Sheet December 31, 2027 Stockholders' equity Paid-in capital Common stock, $1 par value, 2,000,000 shares authorized, 710,000* shares issued, and 690,000 shares outstanding Additional paid-in capital Paid-in capital in excess of par value- common stock Total paid-in capital Retained earnings Total paid-in capital and retained earnings Accumulated other comprehensive income Less: Treasury stock - common (20,000 shares) Total stockholders' equity

Value Value ? Value ? Value Value ?

After you have completed P9.7, consider this additional question. Assume that the number of shares issued in (1) and (2) changed to 55,000 and 70,000 respectively. Show the impact of these changes on the stockholders' equity section of the balance sheet.

600,000 1,500,000 700,000 60,000

710,000 1,780,000 ** $2,490,000 903,000 *** $3,393,000 77,000 76,000 $3,394,000

P9.7 Prepare a stockholders' equity section- Additional question On January 1, 2027, Kimbel, Inc. had these stockholders' equity balances. Common Stock, $1 par (2,000,000 shares authorized, 600,000 shares issued and outstanding) Paid-in Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Income

600,000 1,500,000 700,000 60,000

During 2027, the following transactions and events occurred. 1. Issued 50,000 shares of $1 par value common stock for $3 per share. 2. Issued 60,000 shares of common stock for cash at $4 per share. 3. Purchased 20,000 shares of common stock for the treasury at $3.80 per share. 4. Declared and paid a cash dividend of $207,000. 5. Earned net income of $410,000. 6. Had other comprehensive income of $17,000. Instructions Prepare the stockholders' equity section of the balance sheet at December 31, 2027. Assume that the number of shares issued in (1) and (2) changed to 55,000 and 70,000 respectively. Show the impact of these changes on the stockholders' equity section of the balance sheet. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

KIMBEL INC. Partial Balance Sheet December 31, 2027 Stockholders' equity Paid-in capital Common stock, $1 par value, 2,000,000 shares authorized, 725,000* shares issued, and 705,,000 shares outstanding Additional paid-in capital Paid-in capital in excess of par value- common stock Total paid-in capital Retained earnings Total paid-in capital and retained earnings Accumulated other comprehensive income Less: Treasury stock - common (20,000 shares) Total stockholders' equity *600,000 + 55,000 + 70,000 = 725,000 shares **$1,500,000 + (55,000 x $2) + (70,000 x $3) = $1,820,000 ***$700,000 - $207,000 + $410,000 = $903,000

725,000 1,820,000 ** 2,545,000 903,000 *** 3,448,000 77,000 76,000 $3,449,000

E10.3 Prepare horizontal analysis Here is financial information for Glitter, Inc.

Current assets Plant assets (net) Current liabilities Long-term liabilities Common stock, $1 par Retained earnings

December 31, 2027 $106,000 400,000 99,000 122,000 130,000 155,000

December 31, 2026 $90,000 350,000 65,000 90,000 115,000 170,000

Instructions Prepare a schedule showing a horizontal analysis for 2027, using 2026 as the base year. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

2027

Increase or (Decrease) Amount Percentage

2026

Assets Current assets Plant assets (net) Total assets

Value Value ?

? ? ?

Current liabilities Long-term liabilities Total liabilities

Value Value ?

? ? ?

Stockholders' equity Common stock, $1 par Retained earnings Total stockholders' equity

Value Value ?

? ? ?

Liabilities

Total liabilities and stockholders' equity

After you have completed E10.3, consider the additional question. 1. Assume that the 2027 balances for plant assets (net), long-term liabilities and retained earnings changed to $435,000, $147.0000, and $165,000 respectively. Show the impact of these changes on the horizontal analysis.

2027

Increase or (Decrease) Amount Percentage

2026

Assets Current assets Plant assets (net) Total assets

Value Value ?

? ? ?

Current liabilities Long-term liabilities Total liabilities

Value Value ?

? ? ?

Stockholders' equity Common stock, $1 par Retained earnings Total stockholders' equity

Value Value ?

? ? ?

Liabilities

Total liabilities and stockholders' equity

E10.3 Prepare horizontal analysis Here is financial information for Glitter, Inc.

Current assets Plant assets (net) Current liabilities Long-term liabilities Common stock, $1 par Reained earnings

December 31, 2027 $106,000 400,000 99,000 122,000 130,000 155,000

December 31, 2026 $90,000 350,000 65,000 90,000 115,000 170,000

2027

2026

Increase or (Decrease) Amount Percentage

Assets Current assets Plant assets (net) Total assets

$106,000 400,000 $506,000

$90,000 350,000 $440,000

$16,000 $50,000 $66,000

17.8% 14.3% 15.0%

Current liabilities Long-term liabilities Total liabilities

$99,000 122,000 $221,000

$65,000 90,000 $155,000

$34,000 $32,000 $66,000

52.3% 35.6% 42.6%

Stockholders' equity Common stock, $1 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$130,000 155,000 285,000 $506,000

$115,000 170,000 285,000 $440,000

$15,000 ($15,000) 0 $66,000

13.0% -8.8% 0.0% 15.0%

Liabilities

E10.3 Solution to additional question Assume that the 2027 balances for plant assets (net), long-term liabilities and retained earnings changed to $435,000, $147.0000, and $165,000 respectively. Show the impact of these changes on the horizontal analysis.

Increase or (Decrease) Amount Percentage

2027

2026

$106,000 435,000 $541,000

$90,000 350,000 $440,000

$16,000 $85,000 $101,000

17.8% 24.3% 23.0%

Current liabilities Long-term liabilities Total liabilities

$99,000 147,000 $246,000

$65,000 90,000 $155,000

$34,000 $57,000 $91,000

52.3% 63.3% 58.7%

Stockholders' equity Common stock, $1 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$130,000 165,000 295,000 $541,000

$115,000 170,000 285,000 $440,000

$15,000 ($5,000) 10,000 $101,000

13.0% -2.9% 3.5% 23.0%

Assets Current assets Plant assets (net) Total assets Liabilities

E10.4 Prepare vertical analysis Operating data for Joshua Corporation are presented below.

Sales revenue Cost of goods sold Selling expenses Administrative expenses Income tax expense Net income

2027 800,000 520,000 120,000 60,000 30,000 70,000

2026 $ 600,000 408,000 72,000 48,000 24,000 48,000

Instructions Prepare a schedule showing a vertical analysis for 2027 and 2026. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

JOSHUA CORPORATION Condensed Income Statement For the Years Ended December 31 2027 Amount Percent Sales Revenue Value ? Cost of goods sold Value ? Gross profit ? ? Selling expenses Value ? Administrative expenses Value ? Total operating expenses ? ? Income before income taxes Value ? Income tax expense ? ? Net income ? ?

2026 Amount Percent Value ? Value ? ? ? Value ? Value ? ? ? Value ? ? ? ? ?

After you have completed E10.4, consider the additional question. 1. Assume that sales revenue in 2027 changed to $755,00 and cost of goods changed to $512,000. Income tax rate is 30%. Show the impact of these changes on the vertical analysis of the income statement.

2026 Amount Value Value ? Value Value ? Value ? ?

Percent ? ? ? ? ? ? ? ? ?

E10.4 Prepare vertical analysis Operating data for Joshua Corporation are presented below.

Sales revenue Cost of goods sold Selling expenses Administrative expenses Income tax expense Net income

2027 800,000 520,000 120,000 60,000 30,000 70,000

2026 600,000 408,000 72,000 48,000 24,000 48,000

Instructions Prepare a schedule showing a vertical analysis for 2027 and 2026. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

JOSHUA CORPORATION Condensed Income Statement For the Years Ended December 31 2027 2026 Amount Percent Amount Percent Sales Revenue $ 800,000 100.0% $ 600,000 100.0% Cost of goods sold 520,000 65.0% 408,000 68.0% Gross profit 280,000 35.0% 192,000 32.0% Selling expenses 120,000 15.0% 72,000 12.0% Administrative expenses 60,000 7.5% 48,000 8.0% Total operating expenses 180,000 22.5% 120,000 20.0% Income before income taxes 100,000 12.5% 72,000 12.0% Income tax expense 30,000 3.8% 24,000 4.0% Net income $ 70,000 8.8% $ 48,000 8.0%

E10.4 Solution to additional question Assume that sales revenue in 2027 changed to $755,00 and cost of goods changed to $512,000. Income tax rate is 30%. Show the impact of these changes on the vertical analysis of the income statement.

JOSHUA CORPORATION Condensed Income Statement For the Years Ended December 31 2027 Amount Percent Sales Revenue $755,000 100.0% Cost of goods sold 512,000 67.8% Gross profit 243,000 32.2% Selling expenses 120,000 15.9% Administrative expenses 60,000 7.9% Total operating expenses 180,000 23.8% Income before income taxes 63,000 8.3% Income tax expense 18,900 2.5% Net income $44,100 5.8%

2026 Amount $600,000 408,000 192,000 72,000 48,000 120,000 72,000 24,000 $48,000

Percent 100.0% 68.0% 32.0% 12.0% 8.0% 20.0% 12.0% 4.0% 8.0%

Notice that in a vertical analysis, a change in sales revenue (the base amount), will result in a change in the percentage for every item in the income statement.

P10.3 Perform ratio analysis, and discuss change in financial position and operating results Condensed balance sheet and income statement data for Jergan Corporation are presented here.

Cash Accounts receivable (net) Other current assets Investments Plant and equipment (net)

JERGAN CORPORATION Balance Sheet December 31 2027 $30,000 50,000 90,000 55,000 500,000 $725,000

Current liabilities Long-term debt Common stock, $10 par Retained Earnings

$85,000 145,000 320,000 175,000 $725,000

2026 $20,000 45,000 95,000 70,000 370,000 $600,000

2025 $18,000 48,000 64,000 45,000 358,000 $533,000

$80,000 85,000 310,000 125,000 $600,000

$70,000 50,000 300,000 113,000 $533,000

2027 $740,000 40,000 700,000 425,000 275,000 180,000 95,000

2026 $600,000 30,000 570,000 350,000 220,000 150,000 70,000

JERGAN CORPORATION Income Statement For the Year Ended December 31 Sales revenue Less: Sales return and allowances Net sales Cost of goods sold Gross profit Operating expenses (including income taxes) Net income

Additional information: 1. The market price of Jergan's common stock was $7.00, $7.50, and $8.50 for 2025, 2026, and 2027, respectively. 2. You must compute dividends paid. All dividends were paid in cash. Instructions Compute the following ratios for 2026 and 2027. a. 1. Profit margin. 5. Price-earnings ratio. 2. Gross profit rate. 6. Payout ratio. 3. Asset turnover. 7. Debt to assets ratio. 4. Earnings per share. b. Based on the ratios calculated, discuss briefly the improvement or lack thereof in the financial position and operating results from 2026 to 2027 of Jergan Corporation. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

a. 1. Profit margin Net income Net sales Profit margin

2027 Value Value ?

2026 Value Value ?

2. Gross profit rate Gross profit Net sales Gross profit rate

2027 Value Value ?

2026 Value Value ?

2027 Value Value

2026

3. Asset turnover Total assets, 2027 Total assets, 2026 Total assets, 2025 Average total assets

Net sales Average total assets Asset turnover

Value Value ?

2027 Value Value ?

2026 Value Value ?

2027 Value Value

2026

4. Earnings per share Common shares outstanding, 2027 Common shares outstanding, 2026 Common shares outstanding, 2025 Average common shares outstanding

Value Value ?

2027 Value Value ?

2026 Value Value ?

2027 Value Value ?

2026 Value Value ?

Prior year's retained earnings Plus: current year net income Less: current year's retained earnings Cash dividends declared

2027 Value Value Value ?

2026 Value Value Value ?

Cash dividends declared (common) Net income Payout ratio

2027 Value Value ?

2026 Value Value ?

Net income - Pfd. Dividends Average common shares outstanding Earnings per share

5. Price-earnings ratio Stock price per share Earnings per share Price-earnings ratio

6. Payout ratio

7. Debt to assets ratio Current Liabilities Long-term debt Total liabilities Total assets Debt to assets ratio

2027 Value Value ? Value ?

2026 Value Value ? Value ?

After you have completed P10.3, consider the additional question: Assume that 2027 net income and total assets changed to $87,000 and total assets to $700,000. Show the impact of these changes on the ratios.

Profit margin Net income Net sales Profit margin

2027 Value Value ?

2026 Value Value ?

2027 Value Value

2026

Asset turnover Total assets, 2027 Total assets, 2026 Total assets, 2025 Average total assets

Net sales Average total assets Asset turnover

2026 Value Value ?

Gross profit rate Gross profit Net sales Gross profit rate

2027 Value Value ?

Value Value ?

2027 Value Value ?

2026 Value Value ?

2027 Value Value

2026

Earnings per share Common shares outstanding, 2027 Common shares outstanding, 2026 Common shares outstanding, 2025 Average common shares outstanding

Net income - Pfd. Dividends Average common shares outstanding Earnings per share

Value Value ?

2027 Value Value ?

2026 Value Value ?

Price-earnings ratio 2027 Value Value ?

2026 Value Value ?

Prior year's retained earnings Plus: current year net income Less: current year's retained earnings Cash dividends declared

2027 Value Value Value ?

2026 Value Value Value ?

Cash dividends declared (common) Net income Payout ratio

2027 Value Value ?

2026 Value Value ?

2027 Value Value ? Value ?

2026 Value Value ? Value ?

Stock price per share Earnings per share Price-earnings ratio

Payout ratio

Debt to assets ratio Current Liabilities Long-term debt Total liabilities Total assets Debt to assets ratio

P10.3 Perform ratio analysis, and discuss change in financial position and operating results Condensed balance sheet and income statement data for Jergan Corporation are presented here.

Cash Accounts receivable (net) Other current assets Investments Plant and equipment (net)

JERGAN CORPORATION Balance Sheet December 31 2027 $30,000 50,000 90,000 55,000 500,000 $725,000

2026 $20,000 45,000 95,000 70,000 370,000 $600,000

2025 $18,000 48,000 64,000 45,000 358,000 $533,000

$85,000 145,000 320,000 175,000 $725,000

$80,000 85,000 310,000 125,000 $600,000

$70,000 50,000 300,000 113,000 $533,000

2027 $740,000 40,000 700,000 425,000 275,000 180,000 95,000

2026 $600,000 30,000 570,000 350,000 220,000 150,000 70,000

Current liabilities Long-term debt Common stock, $10 par Retained Earnings

a. 1. Profit margin Net income Net sales Profit margin

2027 $95,000 $700,000 13.6%

2026 $70,000 $570,000 12.3%

2. Gross profit rate Gross profit Net sales Gross profit rate

2027 $275,000 $700,000 39.3%

2026 $220,000 $570,000 38.6%

2027 $725,000 $600,000

2026

3. Asset turnover Total assets, 2027 Total assets, 2026 Total assets, 2025 Average total assets

Net sales Average total assets Asset turnover

$662,500

$600,000 $533,000 $566,500

2027 $700,000 $662,500 1.06

2026 $570,000 $566,500 1.01

2027 32,000 31,000

2026

4. Earnings per share Common shares outstanding, 2027 Common shares outstanding, 2026 Common shares outstanding, 2025 Average common shares outstanding

Net income - Pfd. Dividends Average common shares outstanding Earnings per share

31,500

31,000 30,000 30,500

2027 $95,000 31,500 $3.02

2026 $70,000 30,500 $2.30

2027 $8.50 $3.02 2.8

2026 $7.50 $2.30 3.3

5. Price-earnings ratio Stock price per share Earnings per share Price-earnings ratio

6. Payout ratio Prior year's retained earnings Plus: current year net income Less: current year's retained earnings Cash dividends declared

2027 $125,000 95,000 175,000 $45,000

2026 $113,000 70,000 125,000 $58,000

Cash dividends declared (common) Net income Payout ratio

2027 $45,000 $95,000 47%

2026 $58,000 $70,000 83%

2027 $85,000 145,000 $230,000 $725,000 32%

2026 $80,000 85,000 $165,000 $600,000 28%

7. Debt to assets ratio Current Liabilities Long-term debt Total liabilities Total assets Debt to assets ratio

The underlying profitability of the corporation appears to have improved. For example, profit margin and earnings per share have both increased. The corporation's debt to assets ratio has increase but the improvements in profitability indicate that taking on more debt was a wise move.

P10.3 Perform ratio analysis, and discuss change in financial position and operating results Assume that 2027 net income and total assets changed to $87,000 and total assets to $700,000. Show the impact of these changes on the ratios.

Profit margin Net income Net sales Profit margin

2026 $70,000 $570,000 12.3%

2027 $275,000 $700,000 39.3%

2026 $220,000 $570,000 38.6%

2027 $700,000 $600,000

2026

Gross profit rate Gross profit Net sales Gross profit rate

2027 $87,000 $700,000 12.4%

Asset turnover Total assets, 2027 Total assets, 2026 Total assets, 2025 Average total assets

Net sales Average total assets Asset turnover

$650,000

$600,000 $533,000 $566,500

2027 $700,000 $650,000 1.08

2026 $570,000 $566,500 1.01

Earnings per share Common shares outstanding, 2027 Common shares outstanding, 2026 Common shares outstanding, 2025 Average common shares outstanding

31,500 2027 $87,000 31,500 $2.76

2026 $70,000 30,500 $2.30

2027 $8.50 $2.76 3.1

2026 $7.50 $2.30 3.3

Prior year's retained earnings Plus: current year net income Less: current year's retained earnings Cash dividends declared

2027 $125,000 87,000 175,000 $37,000

2026 $113,000 70,000 125,000 $58,000

Cash dividends declared (common) Net income Payout ratio

2027 $37,000 $87,000 43%

2026 $58,000 $70,000 83%

2027 $85,000 145,000 $230,000 $700,000 33%

2026 $80,000 85,000 $165,000 $600,000 28%

Price-earnings ratio Stock price per share Earnings per share Price-earnings ratio

2026 31,000 30,000 30,500

Net income - Pfd. Dividends Average common shares outstanding Earnings per share

2027 32,000 31,000

Payout ratio

Debt to assets ratio Current Liabilities Long-term debt Total liabilities Total assets Debt to assets ratio

E11.4 Determine the total amount of various types of costs Knight Company reports the following costs and expenses in May. Factory utilities $ 15,500 Depreciation on factory equipment 12,650 Depreciation on delivery truck 3,800 Indirect factory labor 48,900 Indirect materials 80,800 Direct materials used 137,600 Factory manager's salary 8,000 Direct labor 69,100 Sales salaries 46,400 Property taxes on factory building 2,500 Repairs to office equipment 1,300 Factory repairs 2,000 Advertising 15,000 Office supplies used 2,640 Instructions From the information, determine the total amount of: a. Manufacturing overhead. b. Product costs. c. Period costs. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Factory utilities Depreciation on factory equipment Indirect factory labor Indirect materials Factory manager's salary Property taxes on factory building Factory repairs Manufacturing overhead

b. Direct materials used Direct labor Manufacturing overhead

Product costs

c. Depreciation on delivery trucks Sales salaries Repairs to office equipment Advertising Office supplies used Period costs

When you have completed E11.4, respond to the additional question on the E11.4 Addl Ques worksheet.

E11.4 Solution Knight Company reports the following costs and expenses in May. Factory utilities $ 15,500 Depreciation on factory equipment 12,650 Depreciation on delivery truck 3,800 Indirect factory labor 48,900 Indirect materials 80,800 Direct materials used 137,600 Factory manager's salary 8,000 Direct labor 69,100 Sales salaries 46,400 Property taxes on factory building 2,500 Repairs to office equipment 1,300 Factory repairs 2,000 Advertising 15,000 Office supplies used 2,640 Instructions From the information, determine the total amount of: a. Manufacturing overhead. b. Product costs. c. Period costs. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Factory utilities Depreciation on factory equipment Indirect factory labor Indirect materials Factory manager's salary Property taxes on factory building Factory repairs Manufacturing overhead

b. Direct materials used Direct labor Manufacturing overhead

15,500 12,650 48,900 80,800 8,000 2,500 2,000 170,350

137,600 69,100 170,350

Product costs

c. Depreciation on delivery trucks Sales salaries Repairs to office equipment Advertising Office supplies used Period costs

377,050

3,800 46,400 1,300 15,000 2,640 69,140

E11.4 Additional Question Knight Company reports the following costs and expenses in May. Factory utilities $ 15,500 Depreciation on factory equipment 12,650 Depreciation on delivery truck 3,800 Indirect factory labor 48,900 Indirect materials 80,800 Direct materials used 137,600 Factory manager's salary 8,000 Direct labor 69,100 Sales salaries 46,400 Property taxes on factory building 2,500 Repairs to office equipment 1,300 Factory repairs 2,000 Advertising 15,000 Office supplies used 2,640 Instructions From the information, determine the total amount of: a. Manufacturing overhead. b. Product costs. c. Period costs. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that the following items changed: factory manager's salary $16,000; direct materials used $151,000; property taxes $36,000; and sales salaries $48,000. What impact do these changes have on manufacturing overhead, product and period costs?

a. Factory utilities Depreciation on factory equipment Indirect factory labor Indirect materials Factory manager's salary Property taxes on factory building Factory repairs Manufacturing overhead

b. Direct materials used Direct labor Manufacturing overhead Product costs

c. Depreciation on delivery trucks Sales salaries Repairs to office equipment Advertising Office supplies used Period costs

E11.4 Solution to Additional Question Knight Company reports the following costs and expenses in May. Factory utilities $ 15,500 Depreciation on factory equipment 12,650 Depreciation on delivery truck 3,800 Indirect factory labor 48,900 Indirect materials 80,800 Direct materials used 137,600 Factory manager's salary 8,000 Direct labor 69,100 Sales salaries 46,400 Property taxes on factory building 2,500 Repairs to office equipment 1,300 Factory repairs 2,000 Advertising 15,000 Office supplies used 2,640 Instructions From the information, determine the total amount of: a. Manufacturing overhead. b. Product costs. c. Period costs. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Factory utilities Depreciation on factory equipment Indirect factory labor Indirect materials Factory manager's salary Property taxes on factory building Factory repairs Manufacturing overhead

b. Direct materials used Direct labor Manufacturing overhead Product costs

c. Depreciation on delivery trucks Sales salaries Repairs to office equipment Advertising Office supplies used Period costs

15,500 12,650 48,900 80,800 16,000 36,000 2,000 211,850

151,000 69,100 170,350 390,450

3,800 48,000 1,300 15,000 2,640 70,740

E11.13 Prepare a cost of goods manufactured schedule and a partial income statement Cepeda Corporation has the following cost records for June 2027. Indirect factory labor Direct materials used Work in process, 6/1/27 Work in process, 6/30/27 Finished goods, 6/1/27 Finished goods, 6/30/27 Factory utilities Depreciation, factory equipment Direct labor Maintenance, factory equipment Indirect materials used Factory manager's salary

4,500 20,000 3,000 3,800 5,000 7,500 400 1,400 40,000 1,800 2,200 3,000

Instructions a. Prepare a cost of goods manufactured schedule for June 2027. b. Prepare an income statement through gross profit for June 2027 assuming sales revenue is $92,100. NOTE: Enter a formula or cell references into all input cells shaded in yellow for amounts not given. Type a value if you are unable to cell reference.

CEPEDA CORPORATION Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027 Work in process, June 1 Direct materials used Direct labor Manufacturing overhead Indirect labor Factory manager's salary Indirect materials used Maintenance, factory equipment Depreciation, factory equipment Factory utilities Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

CEPEDA CORPORATION Income Statement (partial) For the Month Ended June 30, 2027 Sales revenue Cost of goods sold Finished goods inventory, June 1 Cost of goods manufactured [from (a) above] Cost of goods available for sale Less: Finished goods inventory, June 30 Cost of goods sold Gross profit

When you have completed E11.13, respond to the additional question, on the E11.13 Add Ques worksheet.

E11.13 Solution Cepeda Corporation has the following cost records for June 2027. Indirect factory labor Direct materials used Work in process, 6/1/27 Work in process, 6/30/27 Finished goods, 6/1/27 Finished goods, 6/30/27 Factory utilities Depreciation, factory equipment Direct labor Maintenance, factory equipment Indirect materials used Factory manager's salary

$ 4,500 20,000 3,000 3,800 5,000 7,500 400 1,400 40,000 1,800 2,200 3,000

Instructions a. Prepare a cost of goods manufactured schedule for June 2027. b. Prepare an income statement through gross profit for June 2027 assuming sales revenue is $92,100. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

CEPEDA CORPORATION Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027 Work in process, June 1 Direct materials used $ 20,000 Direct labor 40,000 Manufacturing overhead Indirect labor $ 4,500 Factory manager's salary 3,000 Indirect materials used 2,200 Maintenance, factory equipment 1,800 Depreciation, factory equipment 1,400 Factory utilities 400 Total manufacturing overhead 13,300 Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

3,000

73,300 76,300 3,800 $ 72,500

$ 92,100 $

5,000 72,500 77,500 7,500 70,000 $ 22,100

E11.13 Additional Question Cepeda Corporation has the following cost records for June 2027. Indirect factory labor Direct materials used Work in process, 6/1/27 Work in process, 6/30/27 Finished goods, 6/1/27 Finished goods, 6/30/27 Factory utilities Depreciation, factory equipment Direct labor Maintenance, factory equipment Indirect materials used Factory manager's salary

4,500 20,000 3,000 3,800 5,000 7,500 400 1,400 40,000 1,800 2,200 3,000

Instructions a. Prepare a cost of goods manufactured schedule for June 2027. b. Prepare an income statement through gross profit for June 2027 assuming sales revenue is $92,100. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume the following balances changed: beginning work in process $4,200, direct labor $39,000, and indirect materials $2,700. Show the impact of these changes on the cost of goods manufactured schedule.

E11.13 Solution to Additional Question Cepeda Corporation has the following cost records for June 2027. Indirect factory labor Direct materials used Work in process, 6/1/27 Work in process, 6/30/27 Finished goods, 6/1/27 Finished goods, 6/30/27 Factory utilities Depreciation, factory equipment Direct labor Maintenance, factory equipment Indirect materials used Factory manager's salary

4,500 20,000 3,000 3,800 5,000 7,500 400 1,400 40,000 1,800 2,200 3,000

Instructions a. Prepare a cost of goods manufactured schedule for June 2027. b. Prepare an income statement through gross profit for June 2027 assuming sales revenue is $92,100. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

CEPEDA CORPORATION Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027 Work in process, June 1 Direct materials used $ 20,000 Direct labor 39,000 Manufacturing overhead Indirect labor $ 4,500 Factory manager's salary 3,000 Indirect materials used 2,700 Maintenance, factory equipment 1,800 Depreciation, factory equipment 1,400 Factory utilities 400 Total manufacturing overhead 13,800 Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

4,200

72,800 77,000 3,800 73,200

E11.17 Prepare a cost of goods manufactured schedule and present the ending inventories on the balance sheet An analysis of the accounts of Roberts Company reveals the following manufacturing cost data for the month ended June 30, 2027. Inventories Raw materials Work in process Finished goods

Beginning $ 9,000 5,000 9,000

Ending $ 13,100 7,000 8,000

Costs incurred: raw materials purchases $54,000, direct labor $47,000, manufacturing overhead $19,900. The specific overhead costs were: indirect labor $5,500, factory insurance $4,000, machinery depreciation $4,000, machinery repairs $1,800, factory utilities $3,100, and miscellaneous factory costs $1,500. (Assume that all raw materials used were direct materials.) Instructions a. Prepare the cost of goods manufactured schedule for the month ended June 30, 2027. b.

Show the presentation of the ending inventories on the June 30, 2027 balance sheet.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

ROBERTS COMPANY Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027 Work in process inventory, June 1 Direct materials Raw materials inventory, June 1 Raw materials purchases Total raw materials available for use Less: Raw materials inventory, June 30 Direct materials used Direct labor Manufacturing overhead Indirect labor Factory insurance Machinery depreciation Factory utilities Machinery repairs Miscellaneous factory costs Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

ROBERTS COMPANY (Partial) Balance Sheet June 30, 2027 Current assets Inventories Finished goods Work in process Raw materials

When you have completed E11.17, respond to the additional question, on the E11.17 Add Ques worksheet.

E11.17 Solution An analysis of the accounts of Roberts Company reveals the following manufacturing cost data for the month ended June 30, 2027. Inventories Raw materials Work in process Finished goods

Beginning $ 9,000 5,000 9,000

Ending $ 13,100 7,000 8,000

Show the presentation of the ending inventories on the June 30, 2027 balance sheet.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

ROBERTS COMPANY Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027 Work in process inventory, June 1 Direct materials Raw materials inventory, June 1 $ 9,000 Raw materials purchases 54,000 Total raw materials available for use 63,000 Less: Raw materials inventory, June 30 13,100 Direct materials used $ 49,900 Direct labor 47,000 Manufacturing overhead Indirect labor 5,500 Factory insurance 4,000 Machinery depreciation 4,000 Factory utilities 3,100 Machinery repairs 1,800 Miscellaneous factory costs 1,500 Total manufacturing overhead 19,900 Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

ROBERTS COMPANY (Partial) Balance Sheet June 30, 2027

Current assets Inventories Finished goods Work in process Raw materials

8,000 7,000 13,100

$ 28,100

5,000

116,800 121,800 7,000 114,800

E11.17 Additional Question An analysis of the accounts of Roberts Company reveals the following manufacturing cost data for the month ended June 30, 2027. Inventories Raw materials Work in process Finished goods

Beginning $ 9,000 5,000 9,000

Ending $ 13,100 7,000 8,000

Show the presentation of the ending inventories on the June 30, 2027 balance sheet.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that the inventory balances changed as follows: beginning raw materials $12,000, ending work in process $6,750 and ending finished goods $10,000. Show the impact of these changes on the cost of goods manufactured schedule and balance sheet.

ROBERTS COMPANY (Partial) Balance Sheet June 30, 2027

Current assets Inventories Finished goods Work in process Raw materials

E11.17 Solution to Additional Question An analysis of the accounts of Roberts Company reveals the following manufacturing cost data for the month ended June 30, 2027. Inventories Raw materials Work in process Finished goods

Beginning $ 9,000 5,000 9,000

Ending $ 13,100 7,000 8,000

Show the presentation of the ending inventories on the June 30, 2027 balance sheet.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

ROBERTS COMPANY Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027 Work in process inventory, June 1 Direct materials Raw materials inventory, June 1 $ 12,000 Raw materials purchases 54,000 Total raw materials available for use 66,000 Less: Raw materials inventory, June 30 13,100 Direct materials used $ 52,900 Direct labor 47,000 Manufacturing overhead Indirect labor 5,500 Factory insurance 4,000 Machinery depreciation 4,000 Factory utilities 3,100 Machinery repairs 1,800 Miscellaneous factory costs 1,500 Total manufacturing overhead 19,900 Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

ROBERTS COMPANY (Partial) Balance Sheet June 30, 2027

Current assets Inventories Finished goods Work in process Raw materials

$ 10,000 6,750 13,100

$ 29,850

5,000

119,800 124,800 6,750 118,050

P11.4 Prepare a cost of goods manufactured schedule, a partial income statement, and a partial balance sheet The following data were taken from the records of Clarkson Company for the fiscal year ended June 30, 2027. Raw Materials Inventory,7/1/26 Raw Materials Inventory, 6/30/27 Finished Goods Inventory, 7/1/26 Finished Goods Inventory, 6/30/27 Work in Process Inventory, 7/1/26 Work in Process Inventory, 6/30/27 Direct Labor Indirect Labor Accounts Receivable Factory Insurance Factory Machinery Depreciation Factory Utilities Office Utilities Expense Sales Revenue Sales Discounts Factory Manager's Salary Factory Property Taxes Factory Repairs Raw Materials Purchases Cash

48,000 39,600 96,000 75,900 19,800 18,600 139,250 24,460 27,000 4,600 16,000 27,600 8,650 534,000 4,200 58,000 9,600 1,400 96,400 32,000

Instructions a. Prepare a cost of goods manufactured schedule. (Assume all raw materials used were direct materials.) b. Prepare an income statement through gross profit. c. Prepare the current assets section of the balance sheet at June 30, 2027. NOTE:Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

CLARKSON COMPANY Cost of Goods Manufactured Schedule For the Year Ended June 30, 2027 Work in process inventory, July 1, 2026 Direct materials Raw materials inventory, July 1, 2026 Raw materials purchases Total raw materials available for use Less: Raw materials inventory, June 30, 2027 Direct materials used Direct labor Manufacturing overhead Factory manager's salary Factory utilities Indirect labor Factory machinery depreciation Factory property taxes Factory insurance Factory repairs Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

CLARKSON COMPANY Income Statement (Partial) For the Year Ended June 30, 2027 Sales revenues Sales revenue Less: sales discounts Net sales Cost of goods sold Finished goods inventory, July 1, 2026 Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory, June 30, 2027 Cost of goods sold Gross profit

CLARKSON COMPANY Balance Sheet (Partial) June 30, 2027 Assets Current assets Cash Accounts Receivable Inventories Finished goods Work in process Raw materials Total current assets

When you have completed P11.4, respond to the additional question, on the P11.4 Add Ques worksheet.

P11.4 Solution The following data were taken from the records of Clarkson Company for the fiscal year ended June 30, 2027. Raw Materials Inventory,7/1/26 Raw Materials Inventory, 6/30/27 Finished Goods Inventory, 7/1/26 Finished Goods Inventory, 6/30/27 Work in Process Inventory, 7/1/26 Work in Process Inventory, 6/30/27 Direct Labor Indirect Labor Accounts Receivable Factory Insurance Factory Machinery Depreciation Factory Utilities Office Utilities Expense Sales Revenue Sales Discounts Factory Manager's Salary Factory Property Taxes Factory Repairs Raw Materials Purchases Cash

48,000 39,600 96,000 75,900 19,800 18,600 139,250 24,460 27,000 4,600 16,000 27,600 8,650 534,000 4,200 58,000 9,600 1,400 96,400 32,000

Instructions a. Prepare a cost of goods manufactured schedule. (Assume all raw materials used were direct materials.) b. Prepare an income statement through gross profit. c. Prepare the current assets section of the balance sheet at June 30, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

CLARKSON COMPANY Cost of Goods Manufactured Schedule For the Year Ended June 30, 2027 Work in process inventory, July 1, 2026 Direct materials Raw materials inventory, July 1, 2026 $ 48,000 Raw materials purchases 96,400 Total raw materials available for use 144,400 Less: Raw materials inventory, June 30, 2027 39,600 Direct materials used $ 104,800 Direct labor 139,250 Manufacturing overhead Factory manager's salary 58,000 Factory utilities 27,600 Indirect labor 24,460 Factory machinery depreciation 16,000 Factory property taxes 9,600 Factory insurance 4,600 Factory repairs 1,400 Total manufacturing overhead 141,660 Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

19,800

385,710 405,510 18,600 $ 386,910

$ 534,000 4,200 $ 529,800 96,000 386,910 482,910 75,900 407,010 $ 122,790

CLARKSON COMPANY Balance Sheet (Partial) June 30, 2027 Assets Current assets Cash Accounts Receivable Inventories Finished goods Work in process Raw materials Total current assets

75,900 18,600 39,600

32,000 27,000

134,100 $ 193,100

P11.4 Additional Question The following data were taken from the records of Clarkson Company for the fiscal year ended June 30, 2027. Raw Materials Inventory,7/1/26 Raw Materials Inventory, 6/30/27 Finished Goods Inventory, 7/1/26 Finished Goods Inventory, 6/30/27 Work in Process Inventory, 7/1/26 Work in Process Inventory, 6/30/27 Direct Labor Indirect Labor Accounts Receivable Factory Insurance Factory Machinery Depreciation Factory Utilities Office Utilities Expense Sales Revenue Sales Discounts Factory Manager's Salary Factory Property Taxes Factory Repairs Raw Materials Purchases Cash

48,000 39,600 96,000 75,900 19,800 18,600 139,250 24,460 27,000 4,600 16,000 27,600 8,650 534,000 4,200 58,000 9,600 1,400 96,400 32,000

Instructions a. Prepare a cost of goods manufactured schedule. (Assume all raw materials used were direct materials.) b. Prepare an income statement through gross profit. c. Prepare the current assets section of the balance sheet at June 30, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that in preparing the cost of goods manufactured schedule, several errors were made. Raw materials purchases, sales revenue and factory depreciation should have been $106,400, $584,000 and $18,000 respectively. Show the impact of these changes on the cost of goods manufactured schedule, income statement and balance sheet.

CLARKSON COMPANY Balance Sheet (Partial) June 30, 2027 Assets Current assets Cash Accounts Receivable Inventories Finished goods Work in process Raw materials Total current assets

P11.4 Solution to Additional Question The following data were taken from the records of Clarkson Company for the fiscal year ended June 30, 2027. Raw Materials Inventory,7/1/26 Raw Materials Inventory, 6/30/27 Finished Goods Inventory, 7/1/26 Finished Goods Inventory, 6/30/27 Work in Process Inventory, 7/1/26 Work in Process Inventory, 6/30/27 Direct Labor Indirect Labor Accounts Receivable Factory Insurance Factory Machinery Depreciation Factory Utilities Office Utilities Expense Sales Revenue Sales Discounts Factory Manager's Salary Factory Property Taxes Factory Repairs Raw Materials Purchases Cash

48,000 39,600 96,000 75,900 19,800 18,600 139,250 24,460 27,000 4,600 16,000 27,600 8,650 534,000 4,200 58,000 9,600 1,400 96,400 32,000

Instructions a. Prepare a cost of goods manufactured schedule. (Assume all raw materials used were direct materials.) b. Prepare an income statement through gross profit. c. Prepare the current assets section of the balance sheet at June 30, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

CLARKSON COMPANY Cost of Goods Manufactured Schedule For the Year Ended June 30, 2027 Work in process inventory, July 1, 2026 Direct materials Raw materials inventory, July 1, 2026 $ 48,000 Raw materials purchases 106,400 Total raw materials available for use 154,400 Less: Raw materials inventory, June 30, 2027 39,600 Direct materials used $ 114,800 Direct labor 139,250 Manufacturing overhead Factory manager's salary 58,000 Factory utilities 27,600 Indirect labor 24,460 Factory machinery depreciation 18,000 Factory property taxes 9,600 Factory insurance 4,600 Factory repairs 1,400 Total manufacturing overhead 143,660 Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

19,800

397,710 417,510 18,600 $ 398,910

$ 584,000 4,200 $ 579,800 96,000 398,910 494,910 75,900 419,010 $ 160,790

CLARKSON COMPANY Balance Sheet (Partial) June 30, 2027 Assets Current assets Cash Accounts Receivable Inventories Finished goods Work in process Raw materials Total current assets

75,900 18,600 39,600

32,000 27,000

134,100 $ 193,100

P11.5 Prepare a cost of goods manufactured schedule and a correct income statement Empire Company is a manufacturer of smart phones. Its controller resigned in October 2027. An inexperienced assistant accountant has prepared the following income statement for the month of October 2027. EMPIRE COMPANY Income Statement For the Month Ended October 31, 2027 Sales Revenue $ 780,000 Less: Operating Expenses Raw materials purchases $ 264,000 Direct labor costs 190,000 Advertising expense 90,000 Selling and administrative salaries 75,000 Rent on factory facilities 60,000 Depreciation on sales equipment 45,000 Depreciation on factory equipment 31,000 Indirect labor cost 28,000 Utilities expense 12,000 Insurance expense 8,000 803,000 Net loss $ (23,000) Prior to October 2027, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.

1. Inventory balances at the beginning and end of October were:

Raw materials Work in process Finished goods

October 1 $ 18,000 20,000 30,000

October 31 $ 29,000 14,000 50,000

2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.

Instructions a. Prepare a schedule of cost of goods manufactured for October 2027. b. Prepare a correct income statement for October 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

EMPIRE COMPANY Cost of Goods Manufactured Schedule For the Month Ended October 31, 2027 Work in process inventory, October 1 Direct materials Raw materials inventory, October 1 Raw materials purchases Total raw materials available for use Less: Raw materials inventory, October 31 Direct materials used Direct labor Manufacturing overhead Factory facility rent Depreciation on factory equipment Indirect labor Factory utilities Factory insurance Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, October 31 Cost of goods manufactured

EMPIRE COMPANY Income Statement For the Month Ended October 31, 2027 Sales revenue Cost of goods sold Finished goods inventory, October 1 Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory, October 31 Cost of goods sold Gross profit Operating expenses Advertising expense Selling and administrative salaries Depreciation expense - sales equipment Insurance expense Utilities expense Total operating expenses Net income

When you have completed P11.5, respond to the additional question, on the P11.5 Add Ques worksheet.

P11.5 Solution Empire Company is a manufacturer of smart phones. Its controller resigned in October 2027. An inexperienced assistant accountant has prepared the following income statement for the month of October 2022. EMPIRE COMPANY Income Statement For the Month Ended October 31, 2027 Sales Revenue $ 780,000 Less: Operating Expenses Raw materials purchases $ 264,000 Direct labor costs 190,000 Advertising expense 90,000 Selling and administrative salaries 75,000 Rent on factory facilities 60,000 Depreciation on sales equipment 45,000 Depreciation on factory equipment 31,000 Indirect labor cost 28,000 Utilities expense 12,000 Insurance expense 8,000 803,000 Net loss $ (23,000) Prior to October 2027, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.

1. Inventory balances at the beginning and end of October were:

Raw materials Work in process Finished goods

October 1 $ 18,000 20,000 30,000

October 31 $ 29,000 14,000 50,000

2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities. Instructions a. Prepare a schedule of cost of goods manufactured for October 2027. b. Prepare a correct income statement for October 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

EMPIRE COMPANY Cost of Goods Manufactured Schedule For the Month Ended October 31, 2027 Work in process inventory, October 1 Direct materials Raw materials inventory, October 1 $ 18,000 Raw materials purchases 264,000 Total raw materials available for use 282,000 Less: Raw materials inventory, October 31 29,000 Direct materials used $ Direct labor Manufacturing overhead Factory facility rent 60,000 Depreciation on factory equipment 31,000 Indirect labor 28,000 Factory utilities 9,000 Factory insurance 4,800 Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, October 31 Cost of goods manufactured

20,000

253,000 190,000

132,800 575,800 595,800 14,000 $ 581,800

$ $

780,000

30,000 581,800 611,800 50,000 561,800 218,200 90,000 75,000 45,000 3,200 3,000 $

216,200 2,000

P11.5 Additional Question Empire Company is a manufacturer of smart phones. Its controller resigned in October 2027. An inexperienced assistant accountant has prepared the following income statement for the month of October 2027.

EMPIRE COMPANY Income Statement For the Month Ended October 31, 2027 Sales Revenue Less: Operating Expenses Raw materials purchases Direct labor costs Advertising expense Selling and administrative salaries Rent on factory facilities Depreciation on sales equipment Depreciation on factory equipment Indirect labor cost Utilities expense Insurance expense Net loss

780,000

803,000 (23,000)

264,000 190,000 90,000 75,000 60,000 45,000 31,000 28,000 12,000 8,000

Prior to October 2027, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.

1. Inventory balances at the beginning and end of October were:

Raw materials Work in process Finished goods

October 1 $ 18,000 20,000 30,000

October 31 $ 29,000 14,000 50,000

2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.

Additional Question

Assume that factory utilities expense and factory insurance expense changed to $15,000 and $9,000 respectively. Also assume that 80% of utilities expense and 65% of insurance expense apply to factory operations. Show the impact of these changes on the cost of goods manufactured schedule and the income statement.

P11.5 Solution to Additional Question Empire Company is a manufacturer of smart phones. Its controller resigned in October 2027. An inexperienced assistant accountant has prepared the following income statement for the month of October 2027.

EMPIRE COMPANY income Statement For the Month Ended October 31, 2027 Sales Revenue Less: Operating Expenses Raw materials purchases Direct labor costs Advertising expense Selling and administrative salaries Rent on factory facilities Depreciation on sales equipment Depreciation on factory equipment Indirect labor cost Utilities expense Insurance expense Net loss

780,000

803,000 (23,000)

264,000 190,000 90,000 75,000 60,000 45,000 31,000 28,000 12,000 8,000

1. Inventory balances at the beginning and end of October were:

Raw materials Work in process Finished goods

October 1 $ 18,000 20,000 30,000

October 31 $ 29,000 14,000 50,000

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question

EMPIRE COMPANY Cost of Goods Manufactured Schedule For the Month Ended October 31, 2027 Work in process inventory, October 1 Direct materials Raw materials inventory, October 1 $ 18,000 Raw materials purchases 264,000 Total raw materials available for use 282,000 Less: Raw materials inventory, October 31 29,000 Direct materials used $ Direct labor Manufacturing overhead Factory facility rent 60,000 Depreciation on factory equipment 31,000 Indirect labor 28,000 Factory utilities 12,000 Factory insurance 5,850 Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, October 31 Cost of goods manufactured

20,000

253,000 190,000

136,850 579,850 599,850 14,000 $ 585,850

$ $

780,000

30,000 585,850 615,850 50,000 565,850 214,150 90,000 75,000 45,000 3,150 3,000 $

216,150 (2,000)

CHAPTER 11 Using Excel to Make Decisions at Current Designs Topic(s): Information Needs of Managers, Special-Purpose Reports, and Cost Classifications Excel Functions and Tools: Cell Formatting Tools: Font Settings, Cell Styles, Alignment, Merge and Center, Row Height, Column Width, Cell Borders, Text Wrapping, Number Formatting

Mike Cichanowski founded Wenonah Canoe and later purchased Current Designs, a company that designs and manufactures kayaks. The kayak-manufacturing facility is located just a few minutes from the canoe company’s headquarters in Winona, Minnesota. Current Designs makes kayaks using two different processes. The rotational molding process uses high temperature to melt polyethylene powder in a closed rotating metal mold to produce a complete kayak hull and deck in a single piece. These kayaks are less labor-intensive and less expensive for the company to produce and sell. Its other kayaks use the vacuum-bagged composite lamination process (which we will refer to as the composite process). Layers of fiberglass or Kevlar® are carefully placed by hand in a mold and are bonded with resin. Then, a high-pressure vacuum is used to eliminate any excess resin that would otherwise add weight and reduce strength of the finished kayak. These kayaks require a great deal of skilled labor as each boat is individually finished. The exquisite finish of the vacuumbagged composite kayaks gave rise to Current Designs’ tag line, “A work of art, made for life.” Current Designs has the following managers: Mike Cichanowski, CEO Diane Buswell, Controller Deb Welch, Purchasing Manager Bill Johnson, Sales Manager Dave Thill, Kayak Plant Manager Rick Thrune, Production Manager for Composite Kayaks The company’s accounting data for the most recent period is presented here.

Product Costs Payee Winona Agency Bill Johnson (sales manager) Xcel Energy Winona Printing Jim Kaiser (sales Dave Thill (plant manager) Dana Schultz (kayak assembler) Composite One Fastenal Ravago

Purpose Property insurance for the manufacturing plant Payroll check - payment to sales manager Electricity for manufacturing plant Price lists for salespeople Sales commissions Payroll check - payment to plant manager

Direct Direct Mfg. Period Materials Labor Overhead Costs

Total Costs

3,200 1,700 450 85 1,250 1,450

Payroll check - payment to kayak assembler Bagging film used when kayaks are assembled; it is discarded after use.

760

Shop supplies - brooms, paper towels, etc. Polyethylene powder which is the main ingredient for the rotational molded kayaks.

890

260

3,170

Winona County

Property taxes on manufacturing plant

5,480

North American Composites Waste Management

Kevlar ® fabric for composite kayaks

4,930

Trash disposal for the company office building

660

None

Journal entry to record depreciation of manufacturing equipment

4,540

Instructions a. What are the primary information needs of each manager? b. Name one special-purpose management accounting report that could be designed for each manager. Include the name of the report, the information it would contain, and how frequently it should be issued. c.

Follow the step-by-step directions in the accompanying tutorial to complete the solution and to properly format a report. Part 1 a. Managers

Mike Cichanowski, CEO

Diane Buswell, Controller

Deb Welch, Purchasing Manager

Bill Johnson, Sales Manager

Dave Thill, Kayak Plant Manager

Rick Thrune, Production Manager for Composite Kayaks

Primary Information Needs

Manager Mike Cichanowski

Diane Buswell

Deb Welch

Bill Johnson

Dave Thill

Rick Thrune

Name of report

Information report would contain

Frequently issued

Product Costs Purpose Payee Direct Materials Direct Labor Manuf. Overhead Period Costs Total Costs Winona Property insurance for the manufacturing plant $ 3,200 Agency Bill Johnson Payroll check—payment to sales manager (sales 1,700 manager) Xcel Energy Electricity for manufacturing plant 450 Winona Price lists for salespeople 85 Printing Jim Kaiser Sales commissions (sales 1,250 representative) Dave Thill (plant manager) Dana Schultz (kayak assembler) Composite One Fastenal Ravago Winona County North American Composites Waste Management None Totals

Payroll check—payment to plant manager 1,450 Payroll check—payment to kayak assembler 760 Bagging film used when kayaks are assembled; it is discarded after use

260

Shop supplies—brooms, paper towels, etc. 890 Polyethylene powder which is the main ingredient for the rotational molded 3,170 kayaks Property taxes on manufacturing plant 5,480 Kevlar® fabric for composite kayaks 4,930 Trash disposal for the company office building

660

Journal entry to record depreciation of manufacturing equipment $

4,540 28,825

Mike Cichanowski founded Wenonah Canoe and later purchased Current Designs, a company that designs and manufactures kayaks. The kayak-manufacturing facility is located just a few minutes from the canoe company’s headquarters in Winona, Minnesota. Current Designs makes kayaks using two different processes. The rotational molding process uses high temperature to melt polyethylene powder in a closed rotating metal mold to produce a complete kayak hull and deck in a single piece. These kayaks are less labor-intensive and less expensive for the company to produce and sell. Its other kayaks use the vacuum-bagged composite lamination process (which we will refer to as the composite process). Layers of fiberglass or Kevlar® are carefully placed by hand in a mold and are bonded with resin. Then, a high-pressure vacuum is used to eliminate any excess resin that would otherwise add weight and reduce strength of the finished kayak. These kayaks require a great deal of skilled labor as each boat is individually finished. The exquisite finish of the vacuum-bagged composite kayaks gave rise to Current Designs’ tag line, “A work of art, made for life.” Current Designs has the following managers: Mike Cichanowski, CEO Diane Buswell, Controller Deb Welch, Purchasing Manager Bill Johnson, Sales Manager Dave Thill, Kayak Plant Manager Rick Thrune, Production Manager for Composite Kayaks The company’s accounting data for the most recent period is presented here.

Product Costs Payee Winona Agency Bill Johnson (sales manager) Xcel Energy Winona Printing Jim Kaiser (sales Dave Thill (plant manager)

Direct Materials

Direct Labor

Mfg. Period Overhead Costs

Total Costs

3,200 1,700 450 85 1,250 1,450

Dana Schultz (kayak assembler) Composite One

Payroll check - payment to kayak assembler Bagging film used when kayaks are assembled; it is discarded after use.

760

Fastenal

Shop supplies - brooms, paper towels, etc. Polyethylene powder which is the main ingredient for the rotational molded kayaks.

890

Ravago

260

3,170

Winona County Property taxes on manufacturing plant

5,480

North American Composites Waste Management

Kevlar ® fabric for composite kayaks

4,930

Trash disposal for the company office building

660

None

Journal entry to record depreciation of manufacturing equipment

4,540

Follow the step-by-step directions in the accompanying tutorial to complete the solution and to properly format a report. Part 1 a. Managers

Primary Information Needs

Mike Cichanowski, CEO

Mike Cichanowski, CEO, needs to know the overall financial picture of the company. He also needs to have a general picture of sales by territory and product line, and of cost per unit by product line.

Diane Buswell, Controller

Diane Buswell, Controller, needs all accounting-related information.

Deb Welch, Purchasing Manager

Deb Welch, Purchasing Manager, needs to know the costs of the components for each product.

Bill Johnson, Sales Manager

Bill Johnson, Sales Manager, needs to know sales by territory and product line.

Dave Thill, Kayak Plant Manager

Dave Thill, Kayak Plant Manager, needs to know all the costs of producing each type of kayak.

Rick Thrune, Production Manager for Composite Kayaks

Rick Thrune, Production Manager for Composite Kayaks, needs to know the costs related to the composite kayak production.

Manager Mike Cichanowski

Diane Buswell

Name of report

Projected revenues and expenses for a As needed possible new product line. and requested

Company-wide budget analysis

Revenues, expenses, and net income compared to the budgeted amounts for each.

Purchasing history

List of items purchased and most recent Monthly or cost for each item. available online

Sales Summary

Sales by product line and by customer.

Cost of Production Report

Direct materials, direct labor, and Monthly or manufacturing overhead costs assigned weekly to each product line.

Cost of Production Report for Composite Kayaks

Detailed direct material and direct labor Weekly costs for the composite kayaks.

Bill Johnson

Rick Thrune

Frequently issued

Analysis of proposed new product line

Deb Welch

Dave Thill

Information report would contain

Monthly

Monthly or weekly

c. Payee

Purpose

Product Costs Direct Direct Manuf. Materials Labor Overhead

Winona Agency Property insurance for the manufacturing plant

Period Costs

3,200

Total Costs $

Bill Johnson Payroll check—payment to (sales manager) sales manager

3,200

1,700

1,700 Xcel Energy

Electricity for manufacturing plant

450

Winona Printing Price lists for salespeople 85

85 Jim Kaiser (sales Sales commissions representative)

1,250

1,250 Dave Thill (plant Payroll check—payment to manager) plant manager

1,450

Dana Schultz Payroll check—payment to (kayak kayak assembler assembler) Composite One Bagging film used when kayaks are assembled; it is discarded after use Fastenal Shop supplies—brooms, paper towels, etc. Ravago

Winona County

760

Polyethylene powder which is the main ingredient for the rotational molded kayaks Property taxes on manufacturing plant

North American Composites

Kevlar® fabric for composite kayaks

Waste Management

Trash disposal for the company office building

1,450

760

260

890

3,170

5,480

4,930

660

660 None

Totals

Journal entry to record depreciation of manufacturing equipment

4,540 $

8,100

760

$ 16,270

4,540 $

3,695

28,825

Mike Cichanowski founded Wenonah Canoe and later purchased Current Designs, a company that designs and manufactures kayaks. The kayak-manufacturing facility is located just a few minutes from the canoe company’s headquarters in Winona, Minnesota. Current Designs makes kayaks using two different processes. The rotational molding process uses high temperature to melt polyethylene powder in a closed rotating metal mold to produce a complete kayak hull and deck in a single piece. These kayaks are less labor-intensive and less expensive for the company to produce and sell. Its other kayaks use the vacuum-bagged composite lamination process (which we will refer to as the composite process). Layers of fiberglass or Kevlar® are carefully placed by hand in a mold and are bonded with resin. Then, a high-pressure vacuum is used to eliminate any excess resin that would otherwise add weight and reduce strength of the finished kayak. These kayaks require a great deal of skilled labor as each boat is individually finished. The exquisite finish of the vacuum-bagged composite kayaks gave rise to Current Designs’ tag line, “A work of art, made for life.” Current Designs has the following managers: Mike Cichanowski, CEO Diane Buswell, Controller Deb Welch, Purchasing Manager Bill Johnson, Sales Manager Dave Thill, Kayak Plant Manager Rick Thrune, Production Manager for Composite Kayaks The company’s accounting data for the most recent period is presented here.

Product Costs Payee Winona Agency Bill Johnson (sales manager) Xcel Energy Winona Printing Jim Kaiser (sales Dave Thill (plant manager)

Direct Materials

Direct Labor

Mfg. Period Overhead Costs

Total Costs

3,200 1,700 450 85 1,250 1,450

Dana Schultz (kayak assembler) Composite One

Payroll check - payment to kayak assembler Bagging film used when kayaks are assembled; it is discarded after use.

760

Fastenal

Shop supplies - brooms, paper towels, etc. Polyethylene powder which is the main ingredient for the rotational molded kayaks.

890

Ravago

260

3,170

Winona County Property taxes on manufacturing plant

5,480

North American Composites Waste Management

Kevlar ® fabric for composite kayaks

4,930

Trash disposal for the company office building

660

None

Journal entry to record depreciation of manufacturing equipment

4,540

What-If? Question Current Designs estimated its product costs for an order from Special Sports, which are provided below in the solution section. The sales manager wants a report of the product costs associate with an order received from Special Sports. Format the report to submit for the sales manager.

Follow the step-by-step directions in the accompanying tutorial to complete the solution and to properly format a report. Product Costs for the Special Sports' Order Direct materials used in production Direct labor Indirect materials Indirect labor Factory rent Equipment depreciation Factory manager’s salary Factory utilities Property taxes on factory building Factory insurance Total product costs

15400 11200 1200 4300 2100 1600 3200 1100 700 900 41700

ations

pany minutes

ess a s

r to as d and at would deal of

Mike Cichanowski founded Wenonah Canoe and later purchased Current Designs, a company that designs and manufactures kayaks. The kayak-manufacturing facility is located just a few minutes from the canoe company’s headquarters in Winona, Minnesota. Current Designs makes kayaks using two different processes. The rotational molding process uses high temperature to melt polyethylene powder in a closed rotating metal mold to produce a complete kayak hull and deck in a single piece. These kayaks are less labor-intensive and less expensive for the company to produce and sell. Its other kayaks use the vacuum-bagged composite lamination process (which we will refer to as the composite process). Layers of fiberglass or Kevlar® are carefully placed by hand in a mold and are bonded with resin. Then, a high-pressure vacuum is used to eliminate any excess resin that would otherwise add weight and reduce strength of the finished kayak. These kayaks require a great deal of skilled labor as each boat is individually finished. The exquisite finish of the vacuum-bagged composite kayaks gave rise to Current Designs’ tag line, “A work of art, made for life.” Current Designs has the following managers: Mike Cichanowski, CEO Diane Buswell, Controller Deb Welch, Purchasing Manager Bill Johnson, Sales Manager Dave Thill, Kayak Plant Manager Rick Thrune, Production Manager for Composite Kayaks The company’s accounting data for the most recent period is presented here.

Product Costs Payee Winona Agency Bill Johnson (sales manager) Xcel Energy Winona Printing Jim Kaiser (sales Dave Thill (plant manager)

Direct Materials

Direct Labor

Mfg. Period Overhead Costs

Total Costs

3,200 1,700 450 85 1,250 1,450

Dana Schultz (kayak assembler) Composite One

Payroll check - payment to kayak assembler Bagging film used when kayaks are assembled; it is discarded after use.

760

Fastenal

Shop supplies - brooms, paper towels, etc. Polyethylene powder which is the main ingredient for the rotational molded kayaks.

890

Ravago

260

3,170

Winona County Property taxes on manufacturing plant

5,480

North American Composites Waste Management

Kevlar ® fabric for composite kayaks

4,930

Trash disposal for the company office building

660

None

Journal entry to record depreciation of manufacturing equipment

4,540

When Diane Buswell, controller for Current Designs, reviewed the accounting records for a recent period, she noted the cost items and amounts shown above (amounts are assumed). Enter the amount for each item in the appropriate cost category. Then sum the amounts in each cost category column. What-If? Question Current Designs estimated its product costs for an order from Special Sports, which are provided below in the solution section. The sales manager wants a report of the product costs associate with an order received from Special Sports. Format the report to submit for the sales manager.

Follow the step-by-step directions in the accompanying tutorial to complete the solution and to properly format a report. Product Costs for the Special Sports' Order

Direct materials used in production Direct labor Indirect materials Indirect labor Factory rent Equipment depreciation Factory manager’s salary Factory utilities Property taxes on factory building Factory insurance Total product costs

$ 15,400 11,200 1,200 4,300 2,100 1,600 3,200 1,100 700 900 $ 41,700

ations

pany minutes

ess a s

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Using Data Visualization to Analyze Data DA11.1 Data visualization can be used to review company results.

Gross Margin Year Percentage 56.7% 2007 56.8% 2008 57.1% 2009 59.2% 2010 59.3% 2011 59.8% 2012 59.3% 2013 58.3% 2014 57.8% 2015 57.0% 2016 56.3% 2017 56.7% 2018 For retailers, the gross margin percentage is a good indicator of how the company is doing, and it indicates what percentage of sales is available to cover selling and administration costs and generate profit. From publicly available data, we can calculate the gross margin percentage (Sales – Cost of goods sold) ÷ Sales and track it over time. Examine the chart for Inditex presented here. Hopefully, you immediately noticed that Inditex is able to maintain a relatively high and stable gross margin over the time period shown. However, management may have some concerns over the downward sloping trendline. Another measure of success, revenue per employee, can provide management with even more insight concerning its sales. This case will require you calculate and graph this data for Inditex, and then analyze the results. The trend line shows a steady decline over the years and should be a concern to Inditex's managers.

Line chart displaying gross m

62.0%

60.0%

Gross Margin Percentages

Example: Recall the Management Insight Supplying Today’s (Not Yesterday’s) Fashion presented in the chapter. Data analytics can help Inditex determine how it is performing over time. From publicly available data, we can calculate the gross margin percentage [(Sales – Cost of goods sold) ÷ Sales] and track it over time. Gross margin percentages for 12 years are presented here for Inditex.

58.0%

56.0%

54.0%

52.0%

50.0% 2007

management with even more insight concerning its sales. This case will require you calculate and graph this data for Inditex, and then analyze the results. The trend line shows a steady decline over the years and should be a concern to Inditex's managers.

Gross Margin Percentages

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Year Gross Margin Percentage

Linear (Gross Margin Percentage)

2017

2018

Using Data Visualization to Analyze Data DA11.1 Data visualization can be used to analyze trends in revenue. Problem Inditex is able to maintain a high and stable gross margin over this time period. Management should be quite pleased with this during a tough time in retail globally. Another measure of success, revenue per employee, can provide management with even more insight concerning its sales. Inditex’s net sales in millions and the number of employees from 2007 through 2018 are presented here.

Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Sales $ 9,435 10,407 11,084 12,527 13,793 15,946 16,724 18,117 20,900 23,311 25,336 26,145

Number of Employees 79,517 89,112 92,301 100,138 109,512 120,314 128,313 137,054 152,854 162,450 171,839 174,386

Student Work Area a. Calculation of Revenue per Employee Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

c. Response to part c

Instructions Use Excel or the visualization software of your or your instructor’s choice to perform the following. There are four parts to this problem. a. Calculate revenue per employee for each year. b. Graph the revenue per employee over the 12-year period using a clustered column chart with a trend line. Include axes labels, proper monetary formatting on the axes, and a descriptive chart title. c. What does the trend look like over time? Should management be concerned, cautiously optimistic, or pleased? Why? What factors may cause the changes in gross profit? Consider the gross profit example provided in the beginning of this problem in your response. d. What additional trends might be helpful for management to examine?

d. Response to part d

Student Work Area

Calculation of Revenue per Employee Revenue per Employee

c. Response to part c

d. Response to part d

b. Column chart for part b

Using Data Visualization to Analyze Revenue DA11.1 Data visualization can be used to analyze trends in revenue. Student Work Area

Inditex’s net sales in millions and the number of employees from 2007 through 2018 are presented here.

Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Sales $ 9,435 10,407 11,084 12,527 13,793 15,946 16,724 18,117 20,900 23,311 25,336 26,145

Number of Employees 79,517 89,112 92,301 100,138 109,512 120,314 128,313 137,054 152,854 162,450 171,839 174,386

Use Excel or the visualization software of your or your instructor’s choice to perform the following. There are four parts to this problem. a. Calculate revenue per employee for each year. b. Graph the revenue per employee over the 12-year period using a clustered column chart with a trend line. Include axes labels, proper monetary formatting on the axes, and a descriptive chart title. c. What does the trend look like over time? Should management be concerned, cautiously optimistic, or pleased? Why? What factors may cause the changes in gross profit? Consider the gross profit example provided in the beginning of this problem in your response. d. What additional trends might be helpful for management to examine?

a. Calculation of Revenue per Employee Revenue per Year Employee 118,654 2007 $ 116,786 2008 120,085 2009 125,097 2010 125,950 2011 132,537 2012 130,338 2013 2014 132,189 136,732 2015 2016 143,496 147,440 2017 149,926 2018

b. Column chart for part b

$150,000

Revenue Per Employee

Inditex is able to maintain a high and stable gross margin over this time period. Management should be quite pleased with this during a tough time in retail globally. Another measure of success, revenue per employee, can provide management with even more insight concerning its sales.

$145,000 $140,000 $135,000 $130,000 $125,000 $120,000 $115,000 $110,000

c. Response to part c Answers will vary. The revenue per employee is increasing over time, since 2012. When more revenue is generated per employee due to sa increase. Yes, management should be concerned because when reve should increase proportionately as well. The decline in gross profit may reduced selling prices to complete with online retailers.

d. Response to part d Answers will vary. The revenue per store may be helpful to see if store than others. It may be useful to also compare the revenue per store in the revenue per employee by store in Spain versus the U.S. An analys help identify if the cost of goods or reduced selling prices may be caus

b. Column chart for part b

Revenue per Employee $150,000 $145,000 $140,000 $135,000 $130,000 $125,000 $120,000 $115,000 $110,000 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Years Revenue per Employee

Linear (Revenue per Employee)

vary. The revenue per employee is increasing over time, while the gross profit seems to be declining When more revenue is generated per employee due to sales volume, it is logical that gross profit will s, management should be concerned because when revenue increases, the amount of gross profit ase proportionately as well. The decline in gross profit may be due to the cost of merchandise rising or ng prices to complete with online retailers.

vary. The revenue per store may be helpful to see if stores in any particular region are more successful It may be useful to also compare the revenue per store in Spain compared to the U.S., and separately per employee by store in Spain versus the U.S. An analysis of the change in cost of goods sold could if the cost of goods or reduced selling prices may be causing the decline in gross profit.

Using Data Visualization to Analyze Data DA11.2 Data visualization can be used to analyze trends in revenue. Problem You have an interview with the head office of Inditex. You realize that you need to have a better understanding about the company so that you can have several thoughtful questions prepared to ask during the interview. For this case, you will use Inditex’s performance information to create several visualizations that will help increase your knowledge of the company’s operations. Information about Inditex’s performance, US clothing store sales, and the European Union’s (EU) consumption of textiles is provided in the data that follow. Monetary amounts are in millions.

Net Income

Year

Net Sales

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

$9,435 $1,258 10,407 1,262 11,084 1,322 12,527 1,741 13,793 1,946 15,946 2,367 16,724 2,382 18,117 2,510 20,900 2,882 23,311 3,161 25,336 3,372 26,145 3,448

Total Number Number of Number of of Stores Stores Stores in Spain Abroad

3,691 4,264 4,607 5,044 5,527 6,009 6,340 6,683 7,013 7,292 7,475 7,490

1,747 1,896 1,900 1,925 1,932 1,930 1,858 1,822 1,826 1,787 1,688 1,635

1,944 2,368 2,707 3,119 3,595 4,079 4,482 4,861 5,187 5,505 5,787 5,855

Number of Employees

79,517 89,112 92,301 100,138 109,512 120,314 128,313 137,054 152,854 162,450 171,839 174,386

Student Work Area 1. Dashboard of three charts

a. Chart of clothing store sales in the Unite

Household Consumption of Clothing Store Textiles and Cost of Sales in the Clothing in the Goods Sold United States EU

$4,086 $161,620 4,493 157,700 4,756 151,370 5,105 158,280 5,612 168,100 6,417 176,130 6,802 178,990 7,548 183,130 8,811 187,150 10,032 189,670 11,076 $189,100 11,329

451,100 470,100 472,200 470,400 466,500 483,000 509,200 513,700 527,900 519,500

b. Chart of textile consumption in the Europ

Instructions Use Excel or the visualization software of your or your instructor’s choice to perform the following. There are three parts to this problem with the first part containing 3 sub-parts. 1.

Create a dashboard containing the following three charts.

a. Create a horizontal bar chart of US Clothing Store Sales from 2007 through 2018. Add a linear trendline, add axes labels, and include proper monetary formatting on the axes and a descriptive chart title. b. Create a horizontal bar chart of European Union Household Textile Consumption from 2007 to 2018. Add a linear trendline, add axes labels, and include proper monetary formatting on the axes and a descriptive chart title. c. Create an area map chart of Inditex’s net sales from 2007 to 2018. Add axes labels and include proper monetary formatting on the axes and a descriptive chart title. 2. What do you learn about Inditex that you can share in the interview? 3. What questions does your dashboard raise for you that you would like to ask in the interview?

c. Area map of net sales

2. Response to part 2

3. Response to part 3

Using Data Visualization to Analyze Data DA11.2 Data visualization can be used to analyze trends in revenue.

Net Sales

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

$9,435 $1,258 10,407 1,262 11,084 1,322 12,527 1,741 13,793 1,946 15,946 2,367 16,724 2,382 18,117 2,510 20,900 2,882 23,311 3,161 25,336 3,372 26,145 3,448

3,691 4,264 4,607 5,044 5,527 6,009 6,340 6,683 7,013 7,292 7,475 7,490

1,747 1,896 1,900 1,925 1,932 1,930 1,858 1,822 1,826 1,787 1,688 1,635

1,944 2,368 2,707 3,119 3,595 4,079 4,482 4,861 5,187 5,505 5,787 5,855

Number of Employees

79,517 89,112 92,301 100,138 109,512 120,314 128,313 137,054 152,854 162,450 171,839 174,386

$4,086 $161,620 4,493 157,700 4,756 151,370 5,105 158,280 5,612 168,100 6,417 176,130 6,802 178,990 7,548 183,130 8,811 187,150 10,032 189,670 11,076 $189,100 11,329

a. Chart of clothing store sales in the Unite

2017 2015 2013 2011 2009

451,100 470,100 472,200 470,400 466,500 483,000 509,200 513,700 527,900 519,500

Instructions Use Excel or the visualization software of your or your instructor’s choice to perform the following. There are three parts to this problem with the first part containing 3 sub-parts.

2007 $0

b. Chart of textile consumption in the Europ

Create a dashboard containing the following three charts.

2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 $0

c. Area map of net sales

$30,000 $25,000

Net Sales

1. Dashboard of three charts

Year

Net Income

Year

Total Number Number of Number of of Stores Stores Stores in Spain Abroad

Household Consumption of Clothing Store Textiles and Cost of Sales in the Clothing in the Goods Sold United States EU

Student Work Area

Year

Problem You have an interview with the head office of Inditex. You realize that you need to have a better understanding about the company so that you can have several thoughtful questions prepared to ask during the interview. For this case, you will use Inditex’s performance information to create several visualizations that will help increase your knowledge of the company’s operations. Information about Inditex’s performance, US clothing store sales, and the European Union’s (EU) consumption of textiles is provided in the data that follow. Monetary amounts are in millions.

$20,000 $15,000 $10,000

$5,000 $0

2. Response to part 2 Answers will vary but should address that cloth and EU are rising, with sales in the US rising f rising steeply. Household consumption in the E sales in the U.S.

3. Response to part 3 Answers will vary. Some question to ask are: W to maintain the growth in sales? Why are EU s in the US? Why is the number of total stores d online sales have on revenue generated at bri is the company doing to improve profitability?

Student Work Area Dashboard of three charts a. Chart of clothing store sales in the United States

Clothing Store Sales in the United States 2017 2015 2013 2011 2009 2007 $0

$50,000

$100,000

$150,000

$200,000

$250,000

Sales Revenue

b. Chart of textile consumption in the European Union

Household Textile Consumption in the EU 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 $0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

Textile Consumption in Millions

c. Area map of net sales

Area Map of Net Sales $30,000 $25,000 $20,000 $15,000 $10,000

$5,000 $0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Year

2. Response to part 2 Answers will vary but should address that clothing store sales in the U.S. and EU are rising, with sales in the US rising faster. Sales overall are also rising steeply. Household consumption in the EU seems to lag behind sales in the U.S.

3. Response to part 3 Answers will vary. Some question to ask are: What is the company doing to maintain the growth in sales? Why are EU sales so much greater than in the US? Why is the number of total stores declining? What impact do online sales have on revenue generated at brick-and-mortar stores? What is the company doing to improve profitability?

E13.9 Compute break-even point in sales units and in sales dollars The Palmer Acres Inn is trying to determine its break-even point during its off-peak season. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows. Salaries Property tax Depreciation (straight-line) Maintenance Maid service Other costs

5,900 per month 1,100 per month 1,000 per month 100 per month 14 per room 28 per room

Instructions Determine the inn's break-even point in (a) number of rented rooms per month and (b) sales dollars. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Contribution margin per room Rent per room Variable cost per room Contribution margin per room

Contribution margin ratio Contribution margin per room Rent per room Contribution margin ratio Fixed costs Break-even point in rooms Fixed costs Contribution margin per room Break-even point in rooms

Break-even point in dollars Break-even point in rooms Rent per room Break-even point in dollars OR Fixed costs Contribution margin ratio Break-even point in dollars

When you have completed E13.9, respond to the additional question, on the E13.9 Add Ques worksheet.

ell), into the

E13.9 Solution The Palmer Acres Inn is trying to determine its break-even point during its off-peak season. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows. Salaries Property tax Depreciation (straight-line) Maintenance Maid service Other costs

5,900 per month 1,100 per month 1,000 per month 100 per month 14 per room 28 per room

Contribution margin per room Rent per room Variable cost per room Contribution margin per room

Contribution margin ratio Contribution margin per room Rent per room Contribution margin ratio

$ $

60.00 42.00 18.00

18.00 60.00 30.00%

Fixed costs

8,100

Break-even point in rooms Fixed costs Contribution margin per room Break-even point in rooms

$ $

8,100 18.00 450

Break-even point in dollars Break-even point in rooms Rent per room Break-even point in dollars

$ $

450 60.00 27,000

OR Fixed costs Contribution margin ratio Break-even point in dollars

$ $

8,100 30.00% 27,000

ell), into the

E13.9 Additional Question The Palmer Acres Inn is trying to determine its break-even point during its off-peak season. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows. Salaries Property tax Depreciation (straight-line) Maintenance Maid service Other costs

5,900 per month 1,100 per month 1,000 per month 100 per month 14 per room 28 per room

Additional Question Assume that total fixed costs changed to $8,750 per month and the rental rate per room for a night changed to $65. Show the impact of these changes have on the calculations.

Contribution margin per room Rent per room Variable cost per room Contribution margin per room

Contribution margin ratio Contribution margin per room Rent per room Contribution margin ratio Fixed costs

Break-even point in rooms Fixed costs Contribution margin per room Break-even point in rooms

Break-even point in dollars Break-even point in rooms Rent per room Break-even point in dollars OR Fixed costs Contribution margin ratio Break-even point in dollars

ell), into the

E13.9 Solution to Additional Question The Palmer Acres Inn is trying to determine its break-even point during its off-peak season. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows. Salaries Property tax Depreciation (straight-line) Maintenance Maid service Other costs

5,900 per month 1,100 per month 1,000 per month 100 per month 14 per room 28 per room

Additional Question Assume that total fixed costs changed to $8,750 per month and the rental rate per room for a night changed to $65. Show the impact of these changes have on the calculations.

Contribution margin per room Rent per room Variable cost per room Contribution margin per room

Contribution margin ratio Contribution margin per room Rent per room Contribution margin ratio Fixed costs

$ $

65.00 42.00 23.00

23.00 65.00 35.38%

8,750

Break-even point in rooms Fixed costs Contribution margin per room Break-even point in rooms

Break-even point in dollars Break-even point in rooms Rent per room Break-even point in dollars

$ $

8,750 23.00 380

380 65.00 24,728

OR Fixed costs Contribution margin ratio Break-even point in dollars

$ $

8,750 35% 24,728

ell), into the

P13.3 Prepare a CVP income statement, and compute break-even point, contribution margin ratio, margin of safety ratio and sales for target net income.

Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle retailers. For the year 2027, management estimates the following revenues and costs.

Sales Direct materials Direct labor Manufacturing overhead−variable Manufacturing overhead−fixed Selling expenses−variable Selling expenses−fixed Administrative expenses−variable Administrative expenses−fixed

1,800,000 430,000 360,000 380,000 280,000 70,000 65,000 20,000 60,000

Instructions a. Prepare a CVP income statement for 2027 based on management estimates. Include columns for per unit and percent of sales information. b. Compute the break-even point in (1) sales units and (2) sales dollars. c. Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.) d. Determine the sales dollars required to earn net income of $180,000.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shade input cells.

JORGE COMPANY CVP Income Statement (Estimated) For the Year Ending December 31, 2027 Dollar Amounts Sales Variable expenses Cost of goods sold Selling expenses Administrative expenses Total variable expenses Contribution margin Fixed expenses Cost of goods sold Selling expenses Administrative expenses Total fixed expenses Net income

(1)

Break-even point in units Unit selling price Unit variable costs Unit contribution margin Fixed costs Unit contribution margin Break-even point in units

(2)

Break-even point in dollars Break-even point in units Unit selling price Break-even point in dollars

Per Unit

c. Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.)

Contribution margin ratio Unit contribution margin Unit selling price Contribution margin ratio Margin of safety ratio Total sales dollars Break-even sales (dollars) Margin of safety (dollars) Total sales Margin of safety ratio

d. Determine the sales dollars required to earn net income of $180,000. Sales dollars required to earn target income Fixed costs Target income Total fixed cost + target income Contribution margin ratio Sales dollars required

When you have completed P13.3, respond to the additional question, on the P13.3 Add Ques worksheet.

tion margin

16-ounce bottle to

or per unit and

ll percent.)

he yellow shaded

Percent of Sales

ll percent.)

heet.

P13.3 Solution Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers. For the year 2027, management estimates the following revenues and costs. Sales Direct materials Direct labor Manufacturing overhead−variable Manufacturing overhead−fixed Selling expenses−variable Selling expenses−fixed Administrative expenses−variable Administrative expenses−fixed

1,800,000 430,000 360,000 380,000 280,000 70,000 65,000 20,000 60,000

JORGE COMPANY CVP Income Statement (Estimated) For the Year Ending December 31, 2027

Sales Variable expenses Cost of goods sold Selling expenses Administrative expenses Total variable expenses Contribution margin Fixed expenses Cost of goods sold Selling expenses Administrative expenses Total fixed expenses Net income

(1)

Break-even point in units Unit selling price Unit variable costs Unit contribution margin Fixed costs Unit contribution margin Break-even point in units

(2)

Break-even point in dollars Break-even point in units Unit selling price Break-even point in dollars

Dollar Amounts $ 1,800,000 $

Per Unit $ 0.50

Percent of Sales 100%

0.35 0.15

70% 30%

1,170,000 70,000 20,000 1,260,000 540,000 280,000 65,000 60,000 $

$ $ $

$ $

405,000 135,000

0.50 0.35 0.15 405,000 15.00% 2,700,000

2,700,000 0.50 1,350,000

c. Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.) Contribution margin ratio Unit contribution margin Unit selling price Contribution margin ratio Margin of safety ratio Total sales dollars Break-even sales (dollars) Margin of safety (dollars) Total sales Margin of safety ratio

0.15 0.50 30.00%

1,800,000 1,350,000 450,000 1,800,000 25.00%

$ $

405,000 180,000 585,000 30.00% 1,950,000

P13.3 Additional Question Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16ounce bottle to retailers. For the year 2027, management estimates the following revenues and costs.

1,800,000 430,000 360,000 380,000 280,000 70,000 65,000 20,000 60,000

Additional Question Assume the unit selling price per bottle changed to $0.60 each, and fixed manufacturing costs increased to $300,000. Show impact of these changes on calculations.

(1)

Break-even point in units Unit selling price Unit variable costs Unit contribution margin Fixed costs Unit contribution margin Break-even point in units

(2)

Break-even point in dollars Break-even point in units Unit selling price Break-even point in dollars

Per Unit

Percent of Sales

P13.3 Solution to Additional Question Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers. For the year 2027, management estimates the following revenues and costs. Sales Direct materials Direct labor Manufacturing overhead−variable Manufacturing overhead−fixed Selling expenses−variable Selling expenses−fixed Administrative expenses−variable Administrative expenses−fixed

1,800,000 430,000 360,000 380,000 280,000 70,000 65,000 20,000 60,000

Additional Question Assume the unit selling price per bottle changed to $0.60 each, and fixed manufacturing costs increased to $300,000. Show impact of these changes on calculations.

JORGE COMPANY CVP Income Statement (Estimated) For the Year Ending December 31, 2027

(1)

Break-even point in units Unit selling price Unit variable costs Unit contribution margin Fixed costs Unit contribution margin Break-even point in units

(2)

Break-even point in dollars Break-even point in units Unit selling price Break-even point in dollars

Dollar Amounts $ 2,160,000 $

Per Unit $ 0.60

Percent of Sales 100.0%

0.35 0.25

58.3% 41.7%

1,170,000 70,000 20,000 1,260,000 900,000 300,000 65,000 60,000 $

$ $ $

$ $

425,000 475,000

0.60 0.35 0.25 425,000 25.0% 1,700,000

1,700,000 0.60 1,020,000

0.25 0.60 41.67%

2,160,000 1,020,000 1,140,000 2,160,000 52.78%

$ $

425,000 180,000 605,000 41.67% 1,452,000

CHAPTER 13 Using Excel to Make Decisions at Current Designs Topic(s): Cost-Volume-Profit Excel Functions and Tools: Break-even Chart Bill Johnson, sales manager, and Diane Buswell, controller at Current Designs are beginning to analyze the cost considerations for one of the composite models of the kayak division. They have provided the following production and operational costs, selling price necessary to produce one composite kayak and the profit desired. Kevlar® Resin and supplies Finishing kit (seat, rudder, ropes, etc.) Labor Selling and administrative expenses - variable Selling and administrative expenses - fixed Manufacturing overhead - fixed Selling price per unit Profit desired Expected units to be sold

250 per kayak 100 per kayak 170 per kayak 420 per kayak 400 per kayak 119,700 per year 240,000 per year 2,000 per kayak 270,600 1,000 kayaks

Based on the most recent sales forecast, Current Design plans to sell 1,000 units of this model. Using your results from part (c), calculate the margin of safety and the margin of safety ratio.

What-If? Question Suppose Current Designs locates a supplier that is able to provide fast-dry resin. While the resin cost will increase by $20 per kayak for this fast-dry formula, the fixed manufacturing overhead costs will decline by $72,980 per year by eliminating the rental of a drying machine. Perform what-if analysis to determine how many units Current Designs will need to produce and sell if these changes occur. Illustrate this change with a break-even chart. Should Current Designs make the change?

Suppose Current Designs locates a supplier that is able to provide fast-dry resin. While the resin cost will increase by $20 per kayak for this fast-dry formula, the fixed manufacturing overhead costs will decline by $72,980 per year by eliminating the rental of a drying machine. Perform what-if analysis to determine how many units Current Designs will need to produce and sell if these changes occur. Illustrate this change with a break-even chart. Should Current Designs make the change?

Follow the step-by-step directions in the accompanying tutorial to perform cost-volume-profit analysis and to create a break-even chart. Part 1 a. Variable cost items

Variable Unit Cost

Total variable costs b.

Unit contribution margin

Break-even point

units

Units to achieve goal

units

Actual (expected) sales Break-even sales Margin of safety in dollars Margin of safety ratio

re beginning to vision. They have y to produce one

hem finalize the price of the composite

Using the unit o achieve this goal.

0 units of this model. rgin of safety ratio.

. While the resin cost overhead costs will rm what-if analysis to e changes occur. change?

There is a Current Designs Excel Tutorial document available in the Wiley online course that gives stepby-step instructions for how to use this Excel Template.

. While the resin cost overhead costs will rm what-if analysis to e changes occur. change?

-volume-profit

le Unit Cost

250 per kayak 100 per kayak 170 per kayak 420 per kayak 400 per kayak 119,700 per year 240,000 per year 2,000 per kayak 270,600 1,000 kayaks

Based on the most recent sales forecast, Current Design plans to sell 1,000 units of this model. Using your results from part (c), calculate the margin of safety and the margin of safety ratio.

Follow the step-by-step directions in the accompanying tutorial to perform cost-volume-profit analysis and to create a break-even chart. Part 1 a.

Kevlar® Resin and supplies Finishing kit (seat, rudder, ropes, etc.) Labor Selling and administrative expenses - variable Total variable costs

Unit contribution margin

Break-even point

545 units

Units to achieve goal

955 units

Actual (expected) sales Break-even sales Margin of safety in dollars Margin of safety ratio

$ $

660

2,000,000 1,090,000 910,000 45.5%

250 100 170 420 400 1,340

re beginning to vision. They have y to produce one

hem finalize the price of the composite

Using the unit o achieve this goal.

0 units of this model. rgin of safety ratio.

. While the resin cost overhead costs will rm what-if analysis to e changes occur. change?

-volume-profit

This blank worksheet named CD13 Part 2 What-if has been created for you. After completing part 1, copy the worksheet containing your solution and paste to this blank worksheet using the instructions in the Part 2 tutorial.

250 per kayak 120 per kayak 170 per kayak 420 per kayak 400 per kayak 119,700 per year 167,020 per year 2,000 per kayak 270,600 1,000 kayaks

Bill and Diane have asked you to provide a cost-volume-profit analysis, to help them finalize the budget projections for the upcoming year. Bill has informed you that the selling price of the composite kayak will be $2,000. Instructions a. Calculate variable cost per unit. b. Determine the unit contribution margin. c. Using the unit contribution margin, determine the break-even point in units for d. Assume that Current Designs plans to earn $270,600 on this product line. Using the unit contribution margin, calculate the number of units that need to be sold to achieve this goal. e. Based on the most recent sales forecast, Current Design plans to sell 1,000 units of this model. Using your results from part (c), calculate the margin of safety and the margin of safety ratio. What-If? Question Suppose Current Designs locates a supplier that is able to provide fast-dry resin. While the resin cost will increase by $20 per kayak for this fast-dry formula, the fixed manufacturing overhead costs will decline by $72,980 per year by eliminating the rental of a drying machine. Perform what-if analysis to determine how many units Current Designs will need to produce and sell if these changes occur. Illustrate this change with a break-even chart. Should Current Designs make the change?

resin cost will increase by $20 per kayak for this fast-dry formula, the fixed manufacturing overhead costs will decline by $72,980 per year by eliminating the rental of a drying machine. Perform what-if analysis to determine how many units Current Designs will need to produce and sell if these changes occur. Illustrate this change with a break-even chart. Should Current Designs make the change?

Follow the step-by-step directions in the accompanying tutorial to perform cost-volume-profit analysis and to create a break-even chart. Part 1 a.

Kevlar® Resin and supplies Finishing kit (seat, rudder, ropes, etc.) Labor Selling and administrative expenses - variable Total variable costs

Unit contribution margin

Break-even point

448

units

Units to achieve goal

871

units

Actual (expected) sales Break-even sales Margin of safety in dollars Margin of safety ratio

250 120 170 420 400 1,360

640

$ 2,000,000 896,000 $ 1,104,000 55.2%

Part 2 - What-if? Number of units Sales revenue Total fixed costs Total costs

0 $

286,720 286,720

Break-even Chart $2,500,000 $2,000,000 $1,500,000 $1,000,000

448 896,000 286,720 896,000

1,000 $ 2,000,000 286,720 1,646,720

$1,000,000 $500,000

$0 Sales revenue

448 Total fixed costs

1,000 Total costs

gns are beginning to ak division. They necessary to produce

help them finalize the lling price of the

line. Using the unit d to achieve this

l 1,000 units of this y and the margin of

resin. While the manufacturing a drying machine. need to produce and Should Current

manufacturing a drying machine. need to produce and Should Current

cost-volume-profit

Using Data Visualization to Analyze Data DA13.1 Data visualization can be used to compare options. Example Consider the Management Insight box “Are Robotic Workers More Humane?” presented in the chapter. Data analytics can help Kroger determine if using robots in its warehouse would be a cost-effective decision. Consider the following chart, which compares income effects in both a manual and a robotic system. When using human labor in a manual system, we see that labor costs are substantial. When a robotic system is utilized, we see that depreciation is a larger cost item, and labor is much less.

Income statement data for a manual and a robotic system (in millions) Manual Robotic System System Revenue $900,000 $900,000 Cost of Groceries Sold 495,000 495,000 Labor in Warehouse 63,000 315,000 Variable Selling Costs 18,000 18,000 Contribution Margin 324,000 72,000 Depreciation 270,000 20,250 Other Fixed Costs 45,000 45,000 Net Operating Income $9,000 $6,750

Bar chart of the incom

Net Operating Income

Other Fixed Costs Depreciation Contribution Margin Variable Selling Costs Labor in Warehouse Cost of Groceries Sold

If we assume that revenues will increase 40% due to an increased sales volume, what effect will we see on net operating income? As shown in the following chart, the increase in net operating income is larger in an automated system. This is because the labor increase was a smaller dollar amount than the respective increase in a manual system, coupled with no increase in total fixed costs. This effect is often referred to as operating leverage, which is discussed further in Appendix G.

Bar chart of the incom Income statement data for a manual and a robotic system with a 40% increase in sales revenue (in millions) Manual Robotic System System Revenue $1,260,000 $1,260,000 Cost of Groceries Sold 693,000 693,000 Labor in Warehouse 88,200 441,000 Variable Selling Costs 25,200 25,200 Contribution Margin 453,600 100,800 Depreciation 270,000 20,250

Net Operating Income Other Fixed Costs Depreciation Contribution Margin Variable Selling Costs

Labor in Warehouse

Other Fixed Costs Net Operating Income

45,000 $138,600

45,000 $35,550

Cost of Groceries Sold

Income Effects of Manual and Robotic Systems Manual System

Robotic System

Net Operating Income

Other Fixed Costs Depreciation Contribution Margin Variable Selling Costs Labor in Warehouse Cost of Groceries Sold Revenue $0

$100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000

$ in Millions

Income Effects of Manual and Robotic Systems with 40% Sales Volume Increase Manual System Net Operating Income Other Fixed Costs Depreciation Contribution Margin Variable Selling Costs

Labor in Warehouse

Robotic System

Labor in Warehouse Cost of Groceries Sold Revenue $0

$200,000

$400,000

$600,000

$800,000

$ in Millions

$1,000,000

$1,200,000

$1,400,000

Using Data Visualization to Analyze Data DA 13.1 Data visualization can be used to compare income effects of short-term decisions. For this case, you will help a fast food restaurant evaluate the benefits of installing a kiosk in the lobby to automate customer orders, thus reducing the need for cashiers. This case requires you to compare income statement data for traditional and digital ordering for the restaurant, and then create and analyze a bar chart. Presented here are budgeted income statements for a small fast food restaurant. Traditionally, customers order face-to-face by telling the cashier the items they wish to purchase. In a digital system, customers order and use a credit or debit card to pay at the kiosk, reducing the need for cashiers. The company is contemplating changing to a digital ordering system with kiosks in the lobby. Comparative budgeted income statements using traditional and digital ordering are provided here.

Income statement data for a traditional and a digital ordering system Traditional Digital Ordering Ordering

Revenue Cost of goods sold Cashier labor Other variable costs Contribution margin Depreciation Other fixed costs Net operating income

$450,000 190,000 84,000 18,000 158,000 43,000 45,000 $70,000

$450,000 190,000 19,600 18,000 222,400 103,000 45,000 $74,400

Use Excel or the visualization software of your or your instructor’s choice to perform the following. There are four parts to this problem. a.

In the template provided, calculate the comparative income statement amounts for the digital and traditional ordering systems assuming an increase in revenue volume of 25%.

Create a bar chart showing the income statement components for the traditional and digital ordering systems that includes amounts both with and without the 25% revenue increase. Include a descriptive chart title, axes labels, axes formatting, and a legend.

By combining the income statement data with and without the revenue volume changes, it is easier to compare the changes in costs and operating income. Under which model does net operating income appear to increase more when volume increases? What costs changed to create the effect on operating income? Briefly explain why this occurs.

compare the changes in costs and operating income. Under which model does net operating income appear to increase more when volume increases? What costs changed to create the effect on operating income? Briefly explain why this occurs.

Identify other factors might you need to consider when increasing volume with a digital versus a traditional face-to-face ordering system.

cts of short-term decisions.

s of installing a kiosk in the lobby to case requires you to compare income and then create and analyze a bar chart. restaurant. Traditionally, customers se. In a digital system, customers order or cashiers. The company is e lobby. Comparative budgeted income

oice to perform the following. There are

Student Work Area

statement amounts for the digital and e volume of 25%.

a. Income statements

ts for the traditional and digital ordering % revenue increase. Include a descriptive

he revenue volume changes, it is easier to which model does net operating income changed to create the effect on

Traditional Ordering With No Increase

Revenue Cost of goods sold Cashier labor Other variable costs Contribution margin Depreciation Other fixed costs Net operating income

$450,000 190,000 84,000 18,000 158,000 43,000 45,000 $70,000

Traditional Ordering With 25% Increase

which model does net operating income changed to create the effect on

asing volume with a digital versus a

b. Bar chart

c. Response

d. Response

Digital Ordering With No Increase

$450,000 190,000 19,600 18,000 222,400 103,000 45,000 $74,400

Digital Ordering With 25% Increase

Income statement data for a traditional and a digital ordering system Traditional Digital Ordering Ordering

Revenue Cost of goods sold Cashier labor Other variable costs Contribution margin Depreciation Other fixed costs Net operating income

$450,000 190,000 84,000 18,000 158,000 43,000 45,000 $70,000

$450,000 190,000 19,600 18,000 222,400 103,000 45,000 $74,400

Use Excel or the visualization software of your or your instructor’s choice to perform the following. There are four parts to this problem. a.

In the template provided, calculate the comparative income statement amounts for the digital and traditional ordering systems assuming an increase in revenue volume of 25%. Create a bar chart showing the income statement components for the traditional and digital ordering systems that includes amounts both with and without the 25% revenue increase. Include a descriptive chart title, axes labels, axes formatting, and a legend. By combining the income statement data with and without the revenue volume changes, it is easier to compare the changes in costs and operating income. Under which model does net operating income appear to increase more when volume increases? What costs changed to create the effect on operating income? Briefly explain why this occurs.

Identify other factors might you need to consider when increasing volume with a digital versus a traditional face-to-face ordering system.

Student Work Area

a. Income statements Traditional Ordering With No Increase

Revenue Cost of goods sold Cashier labor Other variable costs Contribution margin Depreciation Other fixed costs Net operating income

$450,000 190,000 84,000 18,000 158,000 43,000 45,000 $70,000

Traditional Ordering With 25% Increase

$562,500 237,500 105,000 22,500 197,500 43,000 45,000 $109,500

Digital Ordering Digital Ordering With No With 25% Increase Increase

$450,000 190,000 19,600 18,000 222,400 103,000 45,000 $74,400

$562,500 237,500 24,500 22,500 278,000 103,000 45,000 $130,000

b. Bar chart Income Effect of a Digital and Manual Ordering System

Income Effect of a Digital and Manual Ordering System Digital Ordering With 25% Increase

Digital Ordering With No Increase

Traditional Ordering With 25% Increase

Traditional Ordering With No Increase

Net operating income

Other fixed costs Depreciation Contribution margin Other variable costs Cashier labor Cost of goods sold Revenue $0

$100,000

$200,000

$300,000

$400,000

$ in Millions

c. Response Net operating income increases more when a digital ordering system is used. This occurs because under a digital system, t no change in fixed costs, which consist primarily of depreciation and in amount, are much larger than variable costs. The increase in variable costs is smaller in a digital system because variable costs are smaller. Under a traditional system, there significant increase in total variable costs because variable costs are a larger portion of total costs compared to a digital sy

d. Response The restaurant should consider the economic effects of employees being laid off, the morale of employees that are still employed, the maintenance and possible down-time of the kiosk operating systems, the inability of some customers to use digital system, and other factors.

$500,000

e under a digital system, there is than variable costs. The a traditional system, there is a ts compared to a digital system.

mployees that are still y of some customers to use the

$600,000

Using Data Visualization at HydroHappy DA 13.2 Data visualization can be used to identify a better cost driver. HydroHappy management wants to examine its largest non–valueadded cost, selling costs, to see if it can identify a better cost driver in an effort to lower its total selling costs. The company currently uses the number of sales calls as its cost driver. For this case, you will generate scatter charts, as well as use Excel’s SLOPE and INTERCEPT functions, to help HydroHappy determine the best cost driver for selling costs. The company currently uses the number of sales calls as its cost driver. The cost accountant gathered the following information concerning possible cost drivers over the next 12 months for its $350,400 of expected selling costs. Monthly selling costs and activity data Number of Estimated Number of Number of Hours Selling Sales Calls Miles Driven Worked Costs January 1,920 15,173 1,946 $ 30,824 February 1,843 13,720 1,716 27,635 March 1,931 15,371 1,962 31,447 April 1,702 13,547 1,710 27,536 May 1,881 14,462 1,802 28,907 June 1,899 15,520 1,925 30,960 July 1,788 14,205 1,781 28,588 August 1,706 13,768 1,743 27,304 September 1,911 15,273 1,914 30,848 October 1,708 14,014 1,791 28,565 November 1,897 13,803 1,921 30,482 December 1,714 14,212 1,692 27,304 Totals 21,900 173,068 21,903 $ 350,400

Student Work Area a. Number of Sales Calls SLOPE INTERCEPT

a. Number of Miles Driven SLOPE INTERCEPT

Use Excel or the visualization software of your or your instructor’s choice to perform the following. There are four parts to this problem. a. For each cost driver, use the SLOPE and INTERCEPT functions to calculate the unit variable cost and total fixed costs. b. For each cost driver, create a scatter chart. Include a descriptive chart title, axes labels, axes formatting, and a linear forecast trend line of the predicted selling costs for each driver. c.

a, Number of Hours Worked SLOPE INTERCEPT

Examine the three scatter charts. The trend lines indicate the expected cost at each activity level. Are the data points a ‘good fit’ to the trend line of any of the three drivers? Recommend to HydroHappy’s managers the ‘best’ cost driver for selling costs. Support your recommendation. Why might HydroHappy's management think the SLOPE and INTERCEPT functions are a better option than using the high-low method? Support your response.

c. Response to part c

d. Response to part d

b. Scatter chart based on the number of sales calls

b. Scatter chart based on the number of miles driven

b. Scatter chart based on the number of hours worked

Monthly selling costs and activity data Number of Number of Number of Estimated Sales Miles Hours Selling Calls Driven Worked Costs January 1,920 15,173 1,946 $ 30,824 February 1,843 13,720 1,716 27,635 March 1,931 15,371 1,962 31,447 April 1,702 13,547 1,710 27,536 May 1,881 14,462 1,802 28,907 June 1,899 15,520 1,925 30,960 July 1,788 14,205 1,781 28,588 August 1,706 13,768 1,743 27,304 September 1,911 15,273 1,914 30,848 October 1,708 14,014 1,791 28,565 November 1,897 13,803 1,921 30,482 December 1,714 14,212 1,692 27,304 Totals 21,900 173,068 21,903 $ 350,400

Student Work Area a. Number of Sales Calls SLOPE $ 14.36 INTERCEPT

3,029

a. Number of Miles Driven SLOPE $ 1.77 INTERCEPT

3,844

a. Number of Hours Worked SLOPE $ 15.90

INTERCEPT

164

c. Response to part c The data points on the number of sales rather dispersed with only a few data po chart appears to have only three data po effective of a cost driver than the numbe hours worked chart shows a number of d points being dispersed. As such, the num predictor of the selling costs.

d. Response to part d Excel's SLOPE and INTERCEPT functio method uses only two points. The points and not representative of the other data, Using all the data points insures that var estimating future costs reflect the activity

b. Scatter chart based on the number of sales calls

Estimated Selling Costs Based on Number of Sales Calls Estimated Selling Costs

Linear (Estimated Selling Costs)

Estimated Selling Costs

$32,000 $31,000

$30,000 $29,000 $28,000 $27,000 1650

1700

1750

1800

1850

1900

1950

Number of Sales Calls

b. Scatter chart based on the number of miles driven

Estimated Selling Costs Based on Number of Miles Driven Estimated Selling Costs

Linear (Estimated Selling Costs)

Estimated Selling Costs

$32,000 $31,000 $30,000 $29,000 $28,000 $27,000 13000

13500

14000

14500

15000

15500

Number of Miles Driven

b. Scatter chart based on the number of hours worked

Estimated Selling Costs Based on Number of Hours Worked Estimated Selling Costs

ted Selling Costs

$32,000 $31,000

Linear (Estimated Selling Costs)

16000

Estimated Selling Costs

$31,000 $30,000 $29,000 $28,000 $27,000 1650

1700

1750

1800

1850

1900

Number of Hours Worked

n the number of sales calls scatter chart shows the actual data points with only a few data points touching the line. The number of miles driven have only three data points touching the trend line making it less driver than the number of sales calls. The data points on the number of art shows a number of data points touching the line with very few data ersed. As such, the number of hours worked appears to be a better elling costs.

nd INTERCEPT functions use all the data points, where the high-low two points. The points used in the high-low method may be extremes ative of the other data, which may skew the cost slope and intercept. points insures that variable and fixed costs amounts that will be used in costs reflect the activity that occurred in the past.

1950

2000

E14.5 Use incremental analysis for make-or-buy decision Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $4 and $5, respectively. Normal production is 30,000 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.95 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. Instructions a. Prepare the incremental analysis for the decision to make or buy the finials. b. Should Pottery Ranch buy the finials? c. Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $20,000. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Make Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual costs

Buy

Net income Increase (Decrease)

Make

Buy

Net income Increase (Decrease)

Total annual cost Opportunity cost Total cost

When you have completed E14.5, respond to the additional question, on the E14.5 Add Ques worksheet.

E14.5 Solution Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $4 and $5, respectively. Normal production is 30,000 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.95 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. Instructions a. Prepare the incremental analysis for the decision to make or buy the finials. b. Should Pottery Ranch buy the finials? c. Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $20,000. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Make Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual costs

120,000 $ 150,000 105,000 45,000 420,000 $

Net income Buy Increase (Decrease) $ 120,000 150,000 105,000 45,000 388,500 (388,500) 433,500 $ (13,500)

No, Pottery Ranch should not purchase the finials. As indicated by the incremental analysis, it would cost the company $13,500 more to purchase the finials.

Yes, by purchasing the finials, a total cost saving of $6,500 will result as shown below.

Make Total annual cost

Opportunity cost Total cost

420,000 $

Net income Buy Increase (Decrease) 433,500 $ (13,500)

20,000 $

440,000 $

20,000 433,500 $

6,500

E14.5 Additional Question Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $4 and $5, respectively. Normal production is 30,000 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.95 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. Instructions a. Prepare the incremental analysis for the decision to make or buy the finials. b. Should Pottery Ranch buy the finials? c. Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $20,000. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that the direct materials and direct labor cost per unit to make the finials are $4.75 and $5.50, respectively. What impact do these changes on your analysis and the decision to make-or-buy the finials?

a. Make Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual costs

Buy

Net income Increase (Decrease)

Make Total annual cost Opportunity cost Total cost

Buy

Net income Increase (Decrease)

E14.5 Solution to Additional Question Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $4 and $5, respectively. Normal production is 30,000 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.95 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. Instructions a. Prepare the incremental analysis for the decision to make or buy the finials. b. Should Pottery Ranch buy the finials? c. Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $20,000. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Make Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual costs

142,500 $ 165,000 115,500 45,000 468,000 $

Net income Buy Increase (Decrease) $ 142,500 165,000 115,500 45,000 388,500 (388,500) 433,500 $ 34,500

Yes, Schopp Inc. should purchase the finials. As indicated by the incremental analysis, it would cost the company $34,500 less to purchase the finials.

Yes. By purchasing the finials, a total cost saving of $54,500 will result as shown below.

Make Total annual cost

Opportunity cost Total cost

Buy

468,000 $

433,500

Net income Increase (Decrease) $ 34,500

20,000 $

488,000 $

20,000 433,500

54,500

E14.8 Prepare incremental analysis concerning make-or-buy decision. Innova uses 1,000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows. Direct materials Direct labor Overhead Total

65.00 45.00 126.50 236.50

Overhead costs include variable material handling costs of $6.50, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 60% variable costs and 40% fixed costs.

A vendor has offered to supply the IMC2 component at a price of $200 per unit. Instructions a. Should Innova purchase the component from the outside vendor if Innova’s unused facilities remain idle? b. Should Innova purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Innova need to make an accurate decision? Show your calculations. c. What are the qualitative factors that Innova will have to consider when making its decision?

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Per unit analysis Direct materials Direct labor Material handling Variable overhead costs Fixed overhead Purchase price Total unit cost

Make IMC2

Buy IMC2

Net income Increase (Decrease)

When you have completed E14.8, respond to the additional question, on the E14.8 Add Ques worksheet.

ne of its s.

plied to products on the basis e basis of direct labor dollars

va’s unused facilities remain

n use its facilities to ke an accurate decision? Show

making its decision?

erence a cell), into the yellow

14.8 Add Ques worksheet.

E14.8 Solution Innova uses 1,000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows. Direct materials Direct labor Overhead Total

65.00 45.00 126.50 236.50

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Per unit analysis Direct materials Direct labor Material handling Variable overhead costs Fixed overhead Purchase price Total unit cost

Make IMC2 $

65.00 45.00 6.50 72.00 48.00 236.50

Buy IMC2 $

48.00 200.00 248.00

Net income Increase (Decrease) $ 65.00 45.00 6.50 72.00 (200.00) $ (11.50)

The component should not be purchased from the outside vendor, as the per unit cost would be $11.50 greater than if the company made it.

E14.8 Additional Question Innova uses 1,000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows. Direct materials Direct labor Overhead Total

65.00 45.00 126.50 236.50

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that unit cost for direct materials changed to $68.00 and that overhead costs changed to $130.00. What impact do these changes have on the make-or-buy decision?

a. Per unit analysis Direct materials Direct labor Material handling Variable overhead costs Fixed overhead Purchase price Total unit cost

Make IMC2

Buy IMC2

Net income Increase (Decrease)

E14.8 Solution to Additional Question Innova uses 1,000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows. Direct materials Direct labor Overhead Total

65.00 45.00 126.50 236.50

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that unit cost for direct materials changed to $68.00 and that overhead costs changed to $130.00. What impact do these changes have on the make-or-buy decision?

a. Per unit analysis Direct materials Direct labor Material handling Variable overhead costs Fixed overhead Purchase price Total unit cost

Make IMC2 $

68.00 45.00 6.50 74.10 49.40 243.00

Buy IMC2 $

49.40 200.00 249.40

Net income Increase (Decrease) $ 68.00 45.00 6.50 74.10 (200.00) $ (6.40)

The unit should not be purchased from the outside vendor, as the per unit cost would be $6.40 greater than if they made it.

In order for Innova to make an accurate decision, they would have to know the opportunity cost of manufacturing the other product. As determined in (a), purchasing the product from outside would cost $$6,400 more ($1,000 x $6.40). Innova would have to increase their contribution margin by more than $6,400 through the manufacture of the other product, before it would be economical for them to purchase the IMC2 from the outside vendor.

Qualitative factors to consider would be (1) quality of the component (2) on-time delivery, (3) timeliness of delivery, and (4) reliability of the vendor.

E14.10 Determine whether to sell or process further, joint products

Stahl Inc. produces three separate products from a common process costing $100,000. Each of the products can be sold at the split-off point or can be processed further and then sold for a higher price. Shown here are cost and selling price data for a recent period.

Product 10 Product 12 Product 14

Sales Value at Split-off Point $ 60,000 15,000 55,000

Cost to Process Further 100,000 30,000 150,000

Sales Value after Further Processing $ 190,000 35,000 215,000

Instructions a. Determine total net income if all products are sold at the split-off point. b. Determine total net income if all products are sold after further processing. c. Using incremental analysis, determine which products should be sold at the split-off point and which should be processed further. d. Determine total net income using the results from (c) and explain why the net income is different from that determined in (b). NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Sales Joint costs Net income

Sales Joint costs Additional costs Net income

Product 10 Incremental revenue Incremental costs Incremental profit (loss)

Product 12

Product 14

Sales Joint costs Additional costs Net income

When you have completed E14.10, respond to the additional question, on the E14.10 Add Ques worksheet.

00,000. Each of the products can her price. Shown here are cost and

the split-off point and which

he net income is different

rence a cell), into the yellow

14.10 Add Ques worksheet.

E14.10 Solution Stahl Inc. produces three separate products from a common process costing $100,000. Each of the products can be sold at the split-off point or can be processed further and then sold for a higher price. Shown here are cost and selling price data for a recent period.

Product 10 Product 12 Product 14

Sales Value Cost to at Split-off Process Point Further $ 60,000 $ 100,000 15,000 30,000 55,000 150,000

Sales Value after Further Processing 190,000 35,000 215,000

Instructions a. Determine total net income if all products are sold at the split-off point. b. Determine total net income if all products are sold after further processing. c. Using incremental analysis, determine which products should be sold at the split-off point and which should be processed further. d. Determine total net income using the results from (c) and explain why the net income is different NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Sales Joint costs Net income

Sales Joint costs Additional costs Net income

130,000 (100,000) 30,000

440,000 (100,000) (280,000) 60,000

c. Incremental revenue Incremental costs Incremental profit (loss)

Product 10 Product 12 $ 130,000 $ 20,000 $ (100,000) (30,000) $ 30,000 $ (10,000) $

Product 14 160,000 (150,000) 10,000

Product 10 and 14 should be processed further and product 12 should be sold at the split-off point.

Sales Joint costs Additional costs Net income

420,000 (100,000) (250,000) 70,000

Net income is $10,000 ($70,000 - $60,000) higher in (d) than in (b) because product 12 is not processed further, thereby increasing overall profit $10,000.

E14.10 Additional Question Stahl Inc. produces three separate products from a common process costing $100,000. Each of the products can sold at the split-off point or can be processed further and then sold for a higher price. Shown here are cost and selling price data for a recent period.

Product 10 Product 12 Product 14

Sales Value Cost to at Split-off Process Point Further $ 60,000 $ 100,000 15,000 30,000 55,000 150,000

Sales Value after Further Processing $ 190,000 35,000 215,000

Additional Question

Assume that sales value at split-off point for Product 10 changed to $75,000 and the cost to process Produ 14 further changed to $162,000. What impact do these changes have on total net income at split-off point and after further processing?

Sales Joint costs Net income

Sales Joint costs Additional costs

Net income

Product 10 Incremental revenue Incremental costs Incremental profit (loss)

Sales Joint costs Additional costs Net income

Product 12

Product 14

00. Each of the products can be . Shown here are cost and

split-off point and which

t income is different

e a cell), into the yellow

nd the cost to process Product net income at split-off point

E14.10 Solution to Additional Question Stahl Inc. produces three separate products from a common process costing $100,000. Each of the products can be sold at the split-off point or can be processed further and then sold for a higher price. Shown here are cost and selling price data for a recent period.

Product 10 Product 12 Product 14

Sales Value Cost to Sales Value at Split-off Process after Further Point Further Processing $ 60,000 $ 100,000 $ 190,000 15,000 30,000 35,000 55,000 150,000 215,000

Instructions a. Determine total net income if all products are sold at the split-off point. b. Determine total net income if all products are sold after further processing. c. Using incremental analysis, determine which products should be sold at the split-off point and which should be processed further. d. Determine total net income using the results from (c) and explain why the net income is different NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question

Assume that sales value at split-off point for Product 10 changed to $75,000 and the cost to process Product 14 further changed to $162,000. What impact do these changes have on total net income at split-off point and after further processing?

Sales Joint costs Net income

$ $

145,000 (100,000) 45,000

Sales Joint costs Additional costs Net income

c. Incremental revenue Incremental costs Incremental profit (loss)

440,000 (100,000) (292,000) 48,000

Product 10 Product 12 Product 14 $ 115,000 $ 20,000 $ 160,000 (100,000) (30,000) (162,000) $ 15,000 $ (10,000) $ (2,000)

Product 10 should be processed further and product 12 and 14 should be sold at the split-off point.

Sales Joint costs Additional costs Net income

260,000 (100,000) (100,000) 60,000

Net income is $12,000 higher ($60,000 - $48,000) in (d) than in (b) because product 12 and 14 are not processed further, thereby increasing overall profit $12,000.

E14.11 Determine whether to sell or process further, joint products Kirk Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or each can be processed further and sold for a higher price. The company incurs joint costs of $180,000 to process one batch of the raw material that produces the three joint products. The following cost and sales information is available for one batch of each product.

Sales Value at

Allocated

Cost to Process

Split-off Point

Joint Costs

Further

Spock

$210,000

$40,000

$110,000

Uhura

300,000

60,000

85,000

Suhu

455,000

80,000

250,000

Instructions Determine whether each of the three joint products should be sold as is, or processed further.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Spock Sales value of processed product Sales value @ split-off point Incremental revenue Incremental costs Incremental profit (loss)

Uhura

When you have completed E14.11, respond to the additional question, on the E14.11 Add Ques worksheet.

products

mon raw material that it processes oducts can be sold as is, or each s joint costs of $180,000 to ducts. The following cost and

Sales Value of Processed Product

$300,000 400,000 800,000

or processed further.

to reference a cell), into the

Sulu

n the E14.11 Add Ques

E14.11 Solution Kirk Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or each can be processed further and sold for a higher price. The company incurs joint costs of $180,000 to process one batch of the raw material that produces the three joint products. The following cost and sales information is available for one batch of each product.

Spock Uhura Suhu

Sales Value at Split-off Point

Allocated Joint Costs

Cost to Process Further

Sales Value of Processed Product

$210,000 300,000 455,000

$40,000 60,000 80,000

$110,000 85,000 250,000

$300,000 400,000 800,000

Instructions Determine whether each of the three joint products should be sold as is, or processed further.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Sales value of processed product Sales value @ split-off point Incremental revenue Incremental costs Incremental profit (loss)

Spock 300,000 $ (210,000) 90,000 (110,000) (20,000) $

Uhura 400,000 $ (300,000) 100,000 (85,000) 15,000 $

Sulu 800,000 (455,000) 345,000 (250,000) 95,000

From the analysis above we see that Uhura and Sulu should be processed further because the incremental revenue exceeds the incremental costs, but Spock should be sold as is.

hat it an be sold as osts of he following

er.

), into the

E14.11 Additional Question Kirk Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or each can be processed further and sold for a higher price. The company incurs joint costs of $180,000 to process one batch of the raw material that produces the three joint products. The following cost and sales information is available for one batch of each product.

Spock Uhura Suhu

Sales Value at Split-off Point $210,000 300,000 455,000

Allocated Joint Costs $40,000 60,000 80,000

Cost to Process Further $110,000 85,000 250,000

Sales Value of Processed Product $300,000 400,000 800,000

Instructions Determine whether each of the three joint products should be sold as is, or processed further.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that sales value at split-off point for Uhura changed to $350,000 and the cost to process further for Sulu changed to $325,000. What impact do these changes have on the decision to sell as is or to process further for each product?

Spock Sales value of processed product Sales value @ split-off point Incremental revenue Incremental costs Incremental profit (loss)

Uhura

Sulu

that it can be sold int costs of . The

ther.

ell), into the

E14.11 Solution to Additional Question Kirk Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or each can be processed further and sold for a higher price. The company incurs joint costs of $180,000 to process one batch of the raw material that produces the three joint products. The following cost and sales information is available for one batch of each product.

Spock Uhura Suhu

Sales Value at Split-off Point $210,000 300,000 455,000

Allocated Joint Costs $40,000 60,000 80,000

Cost to Process Further $110,000 85,000 250,000

Instructions Determine whether each of the three joint products should be sold as is, or processed further.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Sales value of processed product Sales value @ split-off point Incremental revenue Incremental costs Incremental profit (loss)

Spock 300,000 $ (210,000) 90,000 (110,000) (20,000) $

Uhura 400,000 (350,000) 50,000 (85,000) (35,000)

From this analysis we see that Sulu should be processed further because the incremental revenue exceeds the incremental costs, but Spock and Uhura should be sold at the split-off point.

revenue exceeds the incremental costs, but Spock and Uhura should be sold at the split-off point.

n raw material that it processes ucts can be sold as is, or each can costs of $180,000 to process one wing cost and sales information is

Sales Value of Processed Product $300,000 400,000 800,000

r processed further.

reference a cell), into the

$350,000 and the cost to these changes have on the

Sulu 800,000 (455,000) 345,000 (325,000) 20,000

r because the incremental should be sold at the split-off

should be sold at the split-off

E14.15 Use incremental analysis concerning elimination of division. Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $26,000.”

Sales Cost of goods sold Gross profit Operating expenses Net income

The Other Five Divisions $ 1,664,200 $ 978,520 685,680 527,940 $ 157,740 $

Percy Division 100,000 $ 76,000 24,000 50,000 (26,000) $

Total 1,764,200 1,054,520 709,680 577,940 131,740

In the Percy Division, cost of goods sold is $61,000 variable and $15,000 fixed, and operating expenses are $30,000 variable and $20,000 fixed. None of the Percy Division’s fixed costs will be eliminated if the division is discontinued. Instructions Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Continue Sales Variable costs Cost of goods sold Operating expenses Total variable Contribution margin Fixed costs Cost of goods sold Operating expenses Total fixed Net income (loss)

Eliminate

Net income Increase (Decrease)

When you have completed E14.15, respond to the additional question, on the E14.15 Add Ques worksheet.

rformance of of directors and “our total profits

g expenses are ed if the division

answer.

l), into the

Ques worksheet.

E14.15 Solution Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $26,000.”

Sales Cost of goods sold Gross profit Operating expenses Net income

The Other Five Divisions $ 1,664,200 $ 978,520 685,680 527,940 $ 157,740 $

Percy Division 100,000 $ 76,000 24,000 50,000 (26,000) $

Total 1,764,200 1,054,520 709,680 577,940 131,740

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Net income Increase (Decrease) $ (100,000)

61,000 30,000 91,000 9,000

61,000 30,000 91,000 (9,000)

15,000 20,000 35,000 (26,000) $

15,000 20,000 35,000 (35,000) $

(9,000)

Continue Sales Variable costs Cost of goods sold Operating expenses Total variable Contribution margin Fixed costs Cost of goods sold Operating expenses Total fixed Net income (loss)

100,000

Eliminate $

Veronica is incorrect. The incremental analysis shows that net income will be $9,000 less if the Percy Division is eliminated. This amount equals the contribution margin that would be lost through discontinuing the division. (Note: None of the fixed costs can be avoided.)

performance of d of directors said, “our total

ing expenses are ated if the

r answer.

ell), into the

be $9,000 less if gin that would be be avoided.)

E14.15 Additional Question Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $26,000.”

Sales Cost of goods sold Gross profit Operating expenses Net income

The Other Five Divisions $ 1,664,200 $ 978,520 685,680 527,940 $ 157,740 $

Percy Division 100,000 $ 76,000 24,000 50,000 (26,000) $

Total 1,764,200 1,054,520 709,680 577,940 131,740

Additional Question Assume that variable cost of goods sold for the Percy Division changed to $68,000. Rather than allocate operating expenses on percentages, assume that fixed operating expenses would be $27,500 if not eliminated and $7,500 of this would be saved if eliminated. There would be no change to variable operating costs. How would these changes impact your answer?

Continue Sales Variable costs Cost of goods sold Operating expenses Total variable Contribution margin Fixed costs Cost of goods sold Operating expenses Total fixed Net income (loss)

Eliminate

Net income Increase (Decrease)

E14.15 Solution to Additional Question Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $26,000.”

Sales Cost of goods sold Gross profit Operating expenses Net income

The Other Five Divisions $ 1,664,200 $ 978,520 685,680 527,940 $ 157,740 $

Percy Division 100,000 $ 76,000 24,000 50,000 (26,000) $

Total 1,764,200 1,054,520 709,680 577,940 131,740

Additional Question Assume that variable cost of goods sold for the Percy Division changed to $68,000. Rather than allocate operating expenses on percentages, assume that fixed operating expenses would be $27,500 if not eliminated and $7,500 of this would be saved if eliminated. There woudl be no change to variable operating costs. How would these changes impact your answer?

Net income Increase (Decrease) $ (100,000)

68,000 30,000 98,000 2,000

68,000 30,000 98,000 (2,000)

15,000 27,500 42,500 (40,500) $

15,000 20,000 35,000 (35,000) $

(7,500) (7,500) 5,500

Continue Sales Variable costs Cost of goods sold Operating expenses Total variable Contribution margin Fixed costs Cost of goods sold Operating expenses Total fixed Net income (loss)

100,000

Eliminate $

Veronica is incorrect. The incremental analysis shows that net income will be $2,000 less if the Percy Division is eliminated. This amount equals the contribution margin that would be lost through discontinuing the division. (Note: None of the fixed manufacturing costs can be avoided.)

P14.3 Determine if product should be sold or processed further. Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces two products, a table cleaner and a floor cleaner, from a common set of chemical inputs (CDG). Each week, 900,000 ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $240,000. FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $14 per 25ounce bottle. The company decided not to process the table cleaner into TSR and TP based on the following analysis.

Production in ounces Revenue Costs: CDG costs* TCP costs Total costs Weekly gross profit

Table Cleaner 300,000 $ 204,000

70,000 70,000 134,000

Process Further Table Stain Table Remover (TSR) Polish (TP) Total 300,000 300,000 $ 168,000 $ 168,000 $ 336,000

52,500 50,000 102,500 65,500 $

105,000 100,000 205,000 131,000

* If table cleaner is not processed further, it is allocated at 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the total physical output. If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost. Instructions a. Determine if management made the correct decision to not process the table cleaner further by doing the following. (1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further. (2) Calculate the company's total weekly gross profit assuming the table cleaner is processed further. (3) Compare the resulting net incomes and comment on management's decision.

b. Compare the resulting net incomes and comment on management's decision.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. (1) Sales:

Floor Shine Table cleaner Total Revenue Costs: CDG Additional costs of Floor Shine Total costs Gross profit

(2) Sales: FloorShine Table Stain Remover Table Polish Total Revenue Costs: CDG Additional costs of FloorShine TCP Total costs Gross profit

(3)

Don't Process Table Cleaner Further

Process Table Cleaner Further

Net Income Increase (Decrease)

Incremental revenue Incremental costs Total

When you have completed P14.3, respond to the following question, on the P14.3 Add Ques worksheet.

P14.3 Solution Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces two products, a table cleaner and a floor cleaner, from a common set of chemical inputs (CDG). Each week, 900,000 ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $240,000. FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $14 per 25ounce bottle. The company decided not to process the table cleaner into TSR and TP based on the following analysis.

Production in ounces Revenue Costs: CDG costs* TCP costs Total costs Weekly gross profit

Table Cleaner 300,000 $ 204,000

70,000 70,000 134,000

Process Further Table Stain Table Remover (TSR) Polish (TP) Total 300,000 300,000 $ 168,000 $ 168,000 $ 336,000

52,500 50,000 102,500 65,500 $

105,000 100,000 205,000 131,000

Instructions a. Determine if management made the correct decision to not process the table cleaner further by doing the following. (1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further. (2) Calculate the company's total weekly gross profit assuming the table cleaner is processed further. (3) Compare the resulting net incomes and comment on management's decision. b. Compare the resulting net incomes and comment on management's decision. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. (1) Sales:

Floor Shine Table cleaner Total Revenue

Costs: CDG Additional costs of Floor Shine Total costs Gross profit

(2) Sales: FloorShine Table Stain Remover Table Polish Total Revenue Costs: CDG Additional costs of FloorShine TCP Total costs Gross profit

400,000 204,000 $

604,000

450,000 154,000

736,000

550,000 186,000

210,000 240,000

400,000 168,000 168,000

210,000 240,000 100,000

(3) If the table cleaner is processed further overall company profits will be $32,000 higher ($186,000 - $154,000). Therefore, management made the wrong decision by choosing to not process table cleaner further.

Don't Process Table Cleaner Further

Incremental revenue Incremental costs Total

$ $

204,000 204,000

Process Table Cleaner Further

$ $

Net Income Increase (Decrease)

336,000 $ 132,000 100,000 (100,000) 236,000 $ 32,000

When trying to decide if the table cleaner should be processed further into TSR and TP, only the relevant data need to be considered. All of the costs that occurred prior to the creation of the table cleaner are sunk costs and can be ignored. The decision should be made by comparing the incremental revenue from further processing to the incremental costs.

P14.3 Additional Question Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces two products, a table cleaner and a floor cleaner, from a common set of chemical inputs (CDG). Each week, 900,000 ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $240,000. FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $14 per 25ounce bottle. The company decided not to process the table cleaner into TSR and TP based on the following analysis.

Production in ounces Revenue Costs: CDG costs* TCP costs Total costs Weekly gross profit

Table Cleaner 300,000 $ 204,000

70,000 70,000 134,000

Process Further Table Stain Table Remover (TSR) Polish (TP) Total 300,000 300,000 $ 168,000 $ 168,000 $ 336,000

52,500 50,000 102,500 65,500 $

105,000 100,000 205,000 131,000

b. Compare the resulting net incomes and comment on management's decision.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that the selling price of the two table products after further processing changed to $13 for each 25-ounce bottle and the cost of TCP compound to further process changed to $120,000. How do these changes impact the decision to process or not process further?

a. (1) Sales:

Floor Shine Table cleaner Total Revenue Costs: CDG Additional costs of Floor Shine Total costs Gross profit

(2) Sales: FloorShine Table Stain Remover Table Polish Total Revenue Costs: CDG Additional costs of FloorShine TCP Total costs Gross profit

(3)

Don't Process Table Cleaner Further

Incremental revenue Incremental costs Total

Process Table Cleaner Further

Net Income Increase (Decrease)

P14.3 Solution to Additional Question Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces two products, a table cleaner and a floor cleaner, from a common set of chemical inputs (CDG). Each week, 900,000 ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $240,000. FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $14 per 25-ounce bottle. The company decided not to process the table cleaner into TSR and TP based on the following analysis.

Production in ounces Revenue Costs: CDG costs* TCP costs Total costs Weekly gross profit

Process Further Table Table Stain Table Cleaner Remover (TSR) Polish (TP) Total 300,000 300,000 300,000 $ 204,000 $ 168,000 $ 168,000 $ 336,000

70,000 70,000 134,000

52,500 50,000 102,500 65,500 $

105,000 100,000 205,000 131,000

a. (1) Sales:

Floor Shine Table cleaner Total Revenue Costs: CDG Additional costs of Floor Shine Total costs Gross profit

400,000 204,000 $

604,000

450,000 154,000

210,000 240,000

(2) Sales: FloorShine Table Stain Remover Table Polish Total Revenue

Costs: CDG Additional costs of FloorShine TCP Total costs Gross profit

400,000 156,000 156,000 $

712,000

570,000 142,000

210,000 240,000 120,000

(3) If the table cleaner is processed further overall company profits will be $12,000 lower. Therefore, management decision to not process table cleaner further would be justified in this case.

Don't Process Table Cleaner Further

Incremental revenue Incremental costs Total

$ $

204,000 204,000

Process Table Cleaner Further

$ $

Net Income Increase (Decrease)

312,000 $ 108,000 120,000 (120,000) 192,000 $ (12,000)

P14.5 Prepare incremental analysis concerning elimination of divisions.

Brislin Company has four operating divisions. During the first quarter of 2027, the company reported aggregate inco operations of $213,000 and the following divisional results. Division Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations

I 250,000 $ 200,000 75,000 (25,000) $

II 200,000 $ 192,000 60,000 (52,000) $

Analysis reveals the following percentages of variable costs in each division. I II Cost of good sold 70% 90% Selling and administrative expenses 40% 60%

III 500,000 300,000 60,000 140,000

III 80% 50%

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

Top management is very concerned about the unprofitable divisions (I and II). Consensus is that one or both of th should be discontinued.

Instructions a. Compute the contribution margin for Division I and II. b. Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division? c. Prepare a columnar condensed income statement for Brislin Company, assuming Division II is eliminated CVP format.) Division II’s unavoidable fixed costs are allocated equally to the continuing divisions. d.

Reconcile the total income from operations ($213,000) with the total income from operations without Div

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shade cells.

Sales

Division I

Division II

Variable costs Cost of goods sold Selling and administrative Total variable expenses Contribution margin

Eliminate

Net Income Increase (Decrease)

Eliminate

Net Income Increase (Decrease)

(1) Division I Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

Continue

(2) Division II Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

Continue

Student calculations:

BRISLIN COMPANY CVP Income Statement For the Quarter Ended March 31, 2027 Divisions I III IV Sales Variable costs Cost of goods sold Selling and administrative Total variable costs Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed costs Income (loss) from operations Student calculations:

When you have completed P14.5, respond to the following question, on the P14.5 Add Ques worksheet.

ny reported aggregate income from

IV 450,000 250,000 50,000 150,000

IV 75% 60%

us is that one or both of the divisions

) Division I and

ming Division II is eliminated. (Use the ontinuing divisions.

rom operations without Division II.

ell), into the yellow shaded input

Total

es worksheet.

P14.5 Solution Brislin Company has four operating divisions. During the first quarter of 2027, the company reported aggregate income from operations of $213,000 and the following divisional results. Division Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations

I 250,000 $ 200,000 75,000 (25,000) $

II 200,000 $ 192,000 60,000 (52,000) $

Analysis reveals the following percentages of variable costs in each division. I II Cost of good sold 70% 90% Selling and administrative expenses 40% 60%

III 500,000 $ 300,000 60,000 140,000 $

IV 450,000 250,000 50,000 150,000

III 80% 50%

IV 75% 60%

Discontinuance of any division would save 50% of the fixed costs and expenses for that division. Top management is very concerned about the unprofitable divisions (I and II). Consensus is that one or both of the divisions should be discontinued. Instructions a. Compute the contribution margin for Division I and II. b. Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division? c. Prepare a columnar condensed income statement for Brislin Company, assuming Division II is eliminated. (Use the CVP format.) Division II’s unavoidable fixed costs are allocated equally to the continuing divisions. d. Reconcile the total income from operations ($213,000) with the total income from operations without Division II. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Sales Variable costs Cost of goods sold Selling and administrative Total variable expenses Contribution margin

Division I Division II 250,000 $ 200,000 140,000 30,000 170,000 80,000 $

b. (1) Division I Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

Continue $ 80,000

172,800 36,000 208,800 (8,800)

Net Income Increase Eliminate (Decrease) $ - $ (80,000)

60,000 45,000 105,000 (25,000) $

30,000 22,500 52,500 (52,500) $

(2) Division II Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

Continue Eliminate $ (8,800) $ -

19,200 24,000 43,200 (52,000) $

30,000 22,500 52,500 (27,500)

Net Income Increase (Decrease) $ 8,800

9,600 12,000 21,600 (21,600) $

9,600 12,000 21,600 30,400

Division II should be eliminated as its negative contribution margin is $8,800. Income from operations would increase $30,400 if Division II is eliminated. Division I should be continued because it is producing positive con-tribution margin of $80,000. Income from operations will decrease $27,500 by discontinuing this division.

Sales Variable costs Cost of goods sold Selling and administrative Total variable costs Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed costs Income (loss) from operations

BRISLIN COMPANY CVP Income Statement For the Quarter Ended March 31, 2027 Divisions I III IV $ 250,000 $ 500,000 $ 450,000 $

Total 1,200,000

140,000 30,000 170,000 80,000

240,000 30,000 270,000 230,000

187,500 30,000 217,500 232,500

567,500 90,000 657,500 542,500

63,200 49,000 112,200 (32,200) $

63,200 34,000 97,200 132,800 $

65,700 24,000 89,700 142,800 $

192,100 107,000 299,100 243,400

(1) Division’s fixed cost of goods sold plus 1/3 of Division II’s unavoidable fixed cost of goods sold [$192,000 x (100% – 90%) x 50% = $9,600]. Each division’s share is $3,200. (2) Division’s fixed selling and administrative expense plus 1/3 of Division II’s unavoidable fixed selling and administrative expenses [$60,000 x (100% – 60%) x 50% = $12,000]. Each division’s share is $4,000.

d. Income from operations with Division II of $213,000 (given) plus incremental income of $30,400 from eliminating Division II = $243,400 income from operations without Division II.

P14.5 Additional Question Brislin Company has four operating divisions. During the first quarter of 2027, the company reported aggregate income from operations of $213,000 and the following divisional results. Division Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations

I 250,000 $ 200,000 75,000 (25,000) $

II 200,000 $ 192,000 60,000 (52,000) $

Analysis reveals the following percentages of variable costs in each division. I II Cost of good sold 70% 90% Selling and administrative expenses 40% 60%

III 500,000 $ 300,000 60,000 140,000 $

IV 450,000 250,000 50,000 150,000

III 80% 50%

IV 75% 60%

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that Division II's cost of goods sold and selling and administrative expenses changed to $180,000 and $75,000 respectively. How do these changes impact the decision to drop or not drop Division II?

Sales

Division I

Division II

Variable costs Cost of goods sold Selling and administrative Total variable expenses Contribution margin

Eliminate

Net Income Increase (Decrease)

Eliminate

Net Income Increase (Decrease)

b. (1) Division I Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

Continue

(2) Division II Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed expenses

Continue

Income (loss) from operations

Student calculations:

Total

I 250,000 $ 200,000 75,000 (25,000) $

II 200,000 $ 192,000 60,000 (52,000) $

Analysis reveals the following percentages of variable costs in each division. I II Cost of good sold 70% 90% Selling and administrative expenses 40% 60%

III 500,000 $ 300,000 60,000 140,000 $

IV 450,000 250,000 50,000 150,000

III 80% 50%

IV 75% 60%

Sales Variable costs Cost of goods sold Selling and administrative Total variable expenses Contribution margin

Division I Division II 250,000 $ 200,000 140,000 30,000 170,000 80,000 $

b. (1) Division I Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

(2) Division II Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

Continue $ 80,000

162,000 45,000 207,000 (7,000)

Net Income Increase Eliminate (Decrease) $ - $ (80,000)

60,000 45,000 105,000 (25,000) $

30,000 22,500 52,500 (52,500) $

30,000 22,500 52,500 (27,500)

Net Income Increase Continue Eliminate (Decrease) $ (7,000) $ - $ (7,000)

18,000 30,000 48,000 (55,000) $

9,000 15,000 24,000 (24,000) $

9,000 15,000 24,000 (31,000)

Division I should be continued because it is producing positive contribution margin of $80,000. Income from operations will decrease by $27,500 by discontinuing this division. Division II should be eliminated as its negative contribution margin is $7,000. Income from operations would increase $31,000 if Division II is eliminated.

Division II should be eliminated as its negative contribution margin is $7,000. Income from operations would increase $31,000 if Division II is eliminated.

BRISLIN COMPANY CVP Income Statement For the Quarter Ended March 31, 2027 Divisions I III IV $ 250,000 $ 500,000 $ 450,000 $

Total 1,200,000

140,000 30,000 170,000 80,000

240,000 30,000 270,000 230,000

187,500 30,000 217,500 232,500

567,500 90,000 657,500 542,500

63,000 50,000 113,000 (33,000) $

63,000 35,000 98,000 132,000 $

65,500 25,000 90,500 142,000 $

191,500 110,000 301,500 241,000

(1) Division's fixed cost of goods sold plus 1/3 of Division II's unavoidable fixed cost of goods sold [$180,000 x (100% -90%) x 50% = $9,000]. Each division's share is $3,000. (2) Division's fixed selling and administrative expense plus 1/3 of Division II's unavoidable fixed selling and administrative expenses [$75,000 x (100% - 60%) x 50% = $15,000]. Each division's share is $5,000.

d. Revised Division II net income(loss) = $200,000 - $180,000 - $75,000 = ($55,000); Revised total income from operations = (25,000) + ($55,000) +$140,000 + $150,000 = $210,000. Income from operations with Division II of $210,000* plus incremental income of $31,000 from eliminating Division II = $241,000 income from operations without Division II.

CHAPTER 14 Using Excel to Make Decisions at Current Designs Topic(s): Incremental Analysis Excel Functions and Tools: IF function Current Designs faces a number of important decisions that require incremental analysis. Consider each of the following situations independently. Situation 1 Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president of a brewing company. He was calling to inquire about the possibility of Current Designs producing “floating coolers” for a promotion his company was planning. These coolers resemble kayaks but are about one-third the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip. The company would be interested in purchasing 100 coolers for the upcoming summer. It is willing to pay $250 per cooler. The brewing company would pick up the coolers upon completion of the order. Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce the coolers. After careful analysis, the following costs were identified which include a modification of an existing mold to produce the coolers. Units desired by brewing company Costs of producing coolers: Direct materials Direct labor Variable overhead Fixed overhead Cost to modify existing mold Amount to be paid by brewing company

100 coolers $ $ $ $ $ $

80 60 20 1,000 2,000 250

per cooler per cooler per cooler

per cooler

Instructions a. Prepare an incremental analysis to determine whether Current Designs should accept this special order to produce the coolers. b. Discuss additional factors that Mike and Diane should consider if Current Designs is currently operating at full capacity. Situation 2 Current Designs is always working to identify ways to increase efficiency while becoming more environmentally conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the company should consider replacing the current rotomold oven as a way to realize savings from reduced energy consumption. The oven operates on natural gas, using 17,000 therms of natural gas for an entire year. A new, energy-efficient rotomold oven would operate on 15,000 therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new, energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for $10,000. Data are presented here.

entire year. A new, energy-efficient rotomold oven would operate on 15,000 therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new, energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for $10,000. Data are presented here.

Current oven operating data: Annual natural gas usage Expected current selling price New oven operating data: Annual natural gas usage Purchase price Expected useful life Average expected price of natural gas - part a Average expected price of natural gas - part b

$ $ $

17,000 therms 10,000 15,000 250,000 10 0.65 0.85

therms years per therm per therm

Instructions a. Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven, assuming that the average price for natural gas over the next 10 years will be $0.65 per therm. b. Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss how that might change your conclusion in part a. Situation 3 One of Current Designs’ competitive advantages is found in the ingenuity of its owner and CEO, Mike Cichanowski. His involvement in the design of kayak molds and production techniques has led to Current Designs being recognized as an industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the most important components of a kayak, the seat. The “Revolution Seating System” is a one-of-a-kind, rotating axis seat that gives unmatched, full-contact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a customizable seat position that maximizes comfort for the rider. Having just designed the “Revolution Seating System,” Current Designs must now decide whether to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows. Having just designed the “Revolution Seating System,” Current Designs must now decide whether to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to produce the seats, number of seats, and amount of fixed overhead to be avoided if seats are purchased are as follows. Costs to produce seats internally Direct materials Direct labor Variable overhead Fixed overhead Number of seats needed Avoidable fixed overhead costs Cost to buy seats from a supplier Opportunity cost (part b) Instructions

$ $ $ $

$ $

20.00 per seat 15.00 per seat 12.00 per seat 20,000 per year 3,000 seats 25% 50.00 per seat 20,000

a. Prepare an incremental analysis showing whether Current Designs should make or buy the “Revolution Seating System.” b. Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $20,000?

What if Questions Use the cost and revenue data in Situation 1. Current Designs has been approached by Dante Distribution Company that wishes to purchase 100 floating coolers for the same $250 per cooler price as offered by the brewing company. However, Dante wants the coolers to be made out of composite material that is lighter in weight, but costs about 20 percent more than the original direct material cost estimated. If Dante accepts this order, there will be no need for the modifications to the existing mold. What effect with this new order have on Current Design's income? Which order is the better option--the brewing company or the Dante order? Additional data for this situation are presented here. Cost increase in materials

20%

Follow the step-by-step directions in the accompanying tutorial to create a production cost report using cell references and the SUM function.

Part 1 - Situation 1 a. Reject Order

Accept Order

Revenues Costs:

Total costs Net income Based solely on financial considerations, Current Designs should

Additional factors to be considered if operating at full capacity.

Net Income Increase (Decrease)

Part 1 - Situation 2 a. Retain Oven

Replace Oven

Net Income Increase (Decrease)

Variable manufacturing costs New oven cost Proceeds from scrapping old oven Total 10-year costs Based solely on financial considerations, Current Designs should

b. Retain Oven

Replace Oven

Net Income Increase (Decrease)

Variable manufacturing costs New oven cost Proceeds from scrapping old oven Total 10-year costs Based solely on financial considerations, Current Designs should Discussion of the effect on the decision

Part 1 - Situation 3 a. Make Direct materials

Buy

Net Income Increase (Decrease)

Direct labor Variable overhead Fixed overhead Purchase price Total annual cost Based solely on financial considerations, Current Designs should

b. Make Total annual cost Opportunity cost Total cost Based solely on financial considerations, Current Designs should

Buy

Net Income Increase (Decrease)

er each of the

e president of “floating ut one-third eisure trip. ng to pay $250

o produce the an existing

pecial order

y operating at

e iane Buswell, alize savings ural gas for an s for an entire proximately seful life of urrent

s for an entire proximately seful life of urrent

otomold oven, m.

ars. If the $0.85 per

O, Mike Current nuity was e “Revolution eg support. It aximizes

ther to to produce must now or Current ats are

“Revolution could be

e Distribution offered by the that is lighter If Dante ect with this company or

rt using cell

Units desired by brewing company Costs of producing coolers: Direct materials Direct labor Variable overhead Fixed overhead Cost to modify existing mold Amount to be paid by brewing company

100 coolers $ $ $ $ $ $

80 60 20 1,000 2,000 250

per cooler per cooler per cooler

per cooler

year. After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new, energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for $10,000. Data are presented here. Current oven operating data: Annual natural gas usage Expected current selling price New oven operating data: Annual natural gas usage Purchase price Expected useful life Average expected price of natural gas - part a Average expected price of natural gas - part b

$ $ $

17,000 therms 10,000 15,000 250,000 10 0.65 0.85

therms years per therm per therm

$ $ $ $

$ $

20.00 per seat 15.00 per seat 12.00 per seat 20,000 per year 3,000 seats 25% 50.00 per seat 20,000

Instructions a. Prepare an incremental analysis showing whether Current Designs should make or buy the “Revolution Seating System.”

Prepare an incremental analysis showing whether Current Designs should make or buy the “Revolution Seating System.” b. Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $20,000? What if Questions Use the cost and revenue data in Situation 1. Current Designs has been approached by Dante Distribution Company that wishes to purchase 100 floating coolers for the same $250 per cooler price as offered by the brewing company. However, Dante wants the coolers to be made out of composite material that is lighter in weight, but costs about 20 percent more than the original direct material cost estimated. If Dante accepts this order, there will be no need for the modifications to the existing mold. What effect with this new order have on Current Design's income? Which order is the better option--the brewing company or the Dante order? Additional data for this situation are presented here. Cost increase in materials

20%

Follow the step-by-step directions in the accompanying tutorial to create a production cost report using cell references and the SUM function.

Part 1 - Situation 1 a.

Revenues Costs: Direct materials Direct labor Variable overhead Fixed overhead Cost to modify existing mold Total costs Net income

Reject Order $ -

Net Income Increase (Decrease) Accept Order $ 25,000 $ 25,000

Based solely on financial considerations, Current Designs should

8,000 6,000 2,000 1,000 2,000 19,000 6,000 $

(8,000) (6,000) (2,000) (1,000) (2,000) (19,000) 6,000 Accept the order

Additional factors to be considered if operating at full capacity. Assuming that Current Designs is currently operating with excess capacity, it should accept the order based on the calculations shown in part (a). If Current Designs is currently operating at full capacity, it would have to weigh its options. If it displaced production of regular kayaks in order to fill this order, it would have to consider the opportunity costs associated with this decision. The opportunity cost, when operating at full capacity, would be the lost contribution margin from regular sales given up in order to fulfill the special order. Alternatively, rather than reject the special order, it might consider temporarily expanding the plant’s capacity by adding an additional production shift to handle the special order. If this option were considered, it would have to identify all additional incremental costs (for example, overtime pay) that would be incurred.

would have to consider the opportunity costs associated with this decision. The opportunity cost, when operating at full capacity, would be the lost contribution margin from regular sales given up in order to fulfill the special order. Alternatively, rather than reject the special order, it might consider temporarily expanding the plant’s capacity by adding an additional production shift to handle the special order. If this option were considered, it would have to identify all additional incremental costs (for example, overtime pay) that would be incurred.

Part 1 - Situation 2 a.

Variable manufacturing costs New oven cost Proceeds from scrapping old oven Total 10-year costs

Net Income Increase (Decrease) Retain Oven Replace Oven $ 110,500 $ 97,500 $ 13,000 250,000 (250,000) (10,000) 10,000 $ 110,500 $ 337,500 $ (227,000)

Based solely on financial considerations, Current Designs should

Variable manufacturing costs New oven cost Proceeds from scrapping old oven Total 10-year costs

Not replace the oven

Net Income Increase (Decrease) Retain Oven Replace Oven $ 144,500 $ 127,500 $ 17,000 250,000 (250,000) (10,000) 10,000 $ 144,500 $ 367,500 $ (223,000)

Based solely on financial considerations, Current Designs should

Not replace the oven

Discussion of the effect on the decision Even with the cost of natural gas increasing at a faster than expected rate, Current Designs still should not replace the Rotomold oven as the rate increase does not cover the cost of the new oven.

Part 1 - Situation 3 a.

Direct materials Direct labor Variable overhead Fixed overhead Purchase price Total annual cost

Make 60,000 $ 45,000 36,000 20,000 161,000 $

Based solely on financial considerations, Current Designs should

Net Income Increase (Decrease) Buy $ 60,000 45,000 36,000 5,000 15,000 (150,000) 150,000 165,000 $ (4,000) Make

Total annual cost Opportunity cost Total cost

$ $

Make 161,000 $ 20,000 181,000 $

Based solely on financial considerations, Current Designs should

Net Income Increase (Decrease) Buy 165,000 $ (4,000) 20,000 165,000 $ 16,000 Buy

er each of the

e president of a loating ut one-third the re trip. The pay $250 per

o produce the an existing

pecial order to

y operating at

e iane Buswell, alize savings ural gas for an s for an entire proximately seful life of the nt Designs

proximately seful life of the nt Designs

otomold oven, m.

ars. If the $0.85 per

O, Mike Current nuity was e “Revolution eg support. It is mizes comfort

ther to to produce the t now decide nt Designs to hased are as

“Revolution

“Revolution could be used

e Distribution offered by the that is lighter If Dante ect with this company or the

rt using cell

This blank worksheet named CD14 Part 2 What-if has been created for you. After completing part 1, copy the worksheet containing your solution and paste to this blank worksheet using the instructions in the Part 2 tutorial.

100 coolers $ $ $ $ $ $

80.00 60.00 20.00 1,000.00 2,000.00 250.00

per cooler per cooler per cooler

per cooler

$ $ $

17,000 therms 10,000 15,000 250,000 10 0.65 0.85

therms years per therm per therm

$ $ $ $

$ $

20.00 per seat 15.00 per seat 12.00 per seat 20,000 per year 3,000 seats 25% 50.00 per seat 20,000

Instructions a. Prepare an incremental analysis showing whether Current Designs should make or buy the “Revolution Seating System.” b. Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $20,000?

Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $20,000? What if Questions Use the cost and revenue data in Situation 1. Current Designs has been approached by Dante Distribution Company that wishes to purchase 100 floating coolers for the same $250 per cooler price as offered by the brewing company. However, Dante wants the coolers to be made out of composite material that is lighter in weight, but costs about 20 percent more than the original direct material cost estimated. If Dante accepts this order, there will be no need for the modifications to the existing mold. What effect with this new order have on Current Design's income? Which order is the better option--the brewing company or the Dante order? Additional data for this situation are presented here. Cost increase in materials

20%

Follow the step-by-step directions in the accompanying tutorial to create a production cost report using cell references and the SUM function.

Part 1 - Situation 1

a. Revenues Costs: Direct materials Direct labor Variable overhead Fixed overhead Cost to modify existing mold Total costs Net income

Reject Order $ -

Net Income Increase (Decrease) Accept Order $ 25,000 $ 25,000

Based solely on financial considerations, Current Designs should

9,600 6,000 2,000 1,000 18,600 6,400 $

(9,600) (6,000) (2,000) (1,000) (18,600) 6,400 Accept the order

What effect with this new order have on Current Design's income? Which order is the better option-the brewing company or the Dante order? Based solely on financial considerations, Current Designs should accept the special order because net income is expected to increase by $6,400. The order from Dante Distribution Company is the better option as it generates $400 more net income than the order from the brewing company.

er each of the

e president of a loating ut one-third the re trip. The pay $250 per

o produce the an existing

pecial order to

y operating at

e iane Buswell, alize savings ural gas for an s for an entire proximately seful life of the nt Designs

proximately seful life of the nt Designs

otomold oven, m.

ars. If the $0.85 per

O, Mike Current nuity was e “Revolution eg support. It is mizes comfort

ther to to produce the t now decide nt Designs to hased are as

“Revolution could be used

could be used

e Distribution offered by the that is lighter If Dante ect with this company or the

rt using cell

E15.2 Prepare a sales budget for 2 quarters Edington Electronics Inc. produces and sells two models of calculators, XQ-103 and XQ-104. The calculators sell for $15 and $25, respectively. Because of the intense competition Edington faces, management budgets sales semiannually. Its projections for the first 2 quarters of 2027 are as follows.

Product XQ-103 XQ-104

Unit Sales Quarter 1 Quarter 2 20,000 22,000 12,000 15,000

No changes in selling prices are anticipated. Instructions Prepare a sales budget for the 2 quarters ending June 30, 2027. List the products and show units, selling price, and total sales by product and in total for each quarter and for the 6 months. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

EDINGTON ELECTRONICS INC. Sales Budget For the Six Months Ending June 30, 2027 Quarter 1 Product XQ-103 XQ-104 Totals

Units

Selling Price $ 15 25

Total Sales

Units

Quarter 2 Selling Price $ 15 25

Total Sales

Units

Six Months Selling Price $ 15 25

When you have completed E15.2, respond to the additional question, on the E15.2 Add Ques worksheet.

Total Sales

E15.2 Solution Edington Electronics Inc. produces and sells two models of calculators, XQ-103 and XQ-104. The calculators sell for $15 and $25, respectively. Because of the intense competition Edington faces, management budgets sales semiannually. Its projections for the first 2 quarters of 2027 are as follows. Unit Sales Quarter 1 Quarter 2 20,000 22,000 12,000 15,000

Product XQ-103 XQ-104

EDINGTON ELECTRONICS INC. Sales Budget For the Six Months Ending June 30, 2027 Quarter 1 Product XQ-103 XQ-104

Units 20,000 12,000

Selling Price $ 15 25

Total Sales 300,000 300,000

Units 22,000 15,000

Quarter 2 Selling Price $ 15 $ 25

Total Sales 330,000 375,000

Units 42,000 27,000

Six Months Selling Price $ 15 $ 25

Total Sales 630,000 675,000

Totals

32,000

600,000

37,000

705,000

69,000

1,305,000

E15.2 Additional Question Edington Electronics Inc. produces and sells two models of calculators, XQ-103 and XQ-104. The calculators sell for $15 and $25, respectively. Because of the intense competition Edington faces, management budgets sales semiannually. Its projections for the first 2 quarters of 2027 are as follows.

Product XQ-103 XQ-104

Unit Sales Quarter 1 Quarter 2 20,000 22,000 12,000 15,000

Additional Question Assume that the number of XQ-103 units sold in Quarter 2 and XQ-104 in Quarter 1 changed to 30,000 and 17,000 respectively. Revise the flexible budget report for the two quarters ending June 30, 2027.

EDINGTON ELECTRONICS INC. Sales Budget For the Six Months Ending June 30, 2027 Quarter 1 Product XQ-103 XQ-104 Totals

Units

Selling Price $ 15 25

Total Sales

Units

Quarter 2 Selling Price $ 15 25

Total Sales

Units

Six Months Selling Price $ 15 25

Total Sales

E15.2 Solution to Additional Question Edington Electronics Inc. produces and sells two models of calculators, XQ-103 and XQ-104. The calculators sell for $15 and $25, respectively. Because of the intense competition Edington faces, management budgets sales semiannually. Its projections for the first 2 quarters of 2027 are as follows.

Product XQ-103 XQ-104

Unit Sales Quarter 1 Quarter 2 20,000 22,000 12,000 15,000

EDINGTON ELECTRONICS INC. Sales Budget For the Six Months Ending June 30, 2027 Quarter 1 Product XQ-103 XQ-104 Totals

Units 20,000 17,000 37,000

Selling Price $ 15 25

$ $

Total Sales 300,000 425,000 725,000

Units 30,000 15,000 45,000

Quarter 2 Selling Price $ 15 $ 25 $

Total Sales 450,000 375,000 825,000

Units 50,000 32,000 82,000

Six Months Selling Price $ 15 $ 25 $

Total Sales 750,000 800,000 1,550,000

E15.4 Prepare quarterly production budgets

Turney Company produces and sells automobile batteries, the heavy-duty HD-240. The 2027 sales forecast is as follo

Quarter 1 2 3 4

HD-240 5,000 7,000 8,000 10,000

The January 1, 2027, inventory of HD-240 is 2,000 units. Management desires an ending inventory each quarter equa the next quarter’s sales. Sales in the first quarter of 2028 are expected to be 25% higher than sales in the same quart

Instructions Prepare quarterly production budgets for each quarter and in total for 2027.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shade cells.

TURNEY COMPANY Production Budget For the Year Ending December 31, 2027 Product HD-240 Quarter 1 2 3

Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

When you have completed E15.4, respond to the additional question, on the E15.4 Add Ques worksheet.

forecast is as follows.

each quarter equal to 40% of in the same quarter in 2027.

the yellow shaded input

sheet.

Year

E15.4 Solution Turney Company produces and sells automobile batteries, the heavy-duty HD-240. The 2027 sales forecast is as follows. Quarter 1 2 3 4

HD-240 5,000 7,000 8,000 10,000

The January 1, 2027, inventory of HD-240 is 2,000 units. Management desires an ending inventory each quarter equa to 40% of the next quarter’s sales. Sales in the first quarter of 2028 are expected to be 25% higher than sales in the same quarter in 2027. Instructions Prepare quarterly production budgets for each quarter and in total for 2027.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shade input cells.

TURNEY COMPANY Production Budget For the Year Ending December 31, 2027 Product HD-240 Quarter 1 2 3 Expected unit sales 5,000 7,000 8,000 Add: Desired ending finished goods units 2,800 3,200 4,000 Total required units 7,800 10,200 12,000 Less: Beginning finished goods units 2,000 2,800 3,200 Required production units 5,800 7,400 8,800

4 10,000 2,500 12,500 4,000 8,500

es forecast is as

ry each quarter equal er than sales in the

to the yellow shaded

Year

30,500

E15.4 Additional Question Turney Company produces and sells automobile batteries, the heavy-duty HD-240. The 2027 sales forecast is as follows. Quarter 1 2 3 4

HD-240 5,000 7,000 8,000 10,000

The January 1, 2027, inventory of HD-240 is 2,000 units. Management desires an ending inventory each quarter equal to 40% of the next quarter’s sales. Sales in the first quarter of 2028 are expected to be 25% higher than sales in the same quarter in 2027. Instructions Prepare quarterly production budgets for each quarter and in total for 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that sales for quarter 2, 3, and 4 changed to 7,500, 9,000 and 12,000 units. In addition, the desired ending inventory each quarter changed to 45% of the next quarter sales. Revise the quarterly production budgets for each quarter and in total for 2027.

TURNEY COMPANY Production Budget For the Year Ending December 31, 2027 Product HD-240 Quarter 1 2 3 Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

Year

E15.4 Solution to Additional Question Turney Company produces and sells automobile batteries, the heavy-duty HD-240. The 2027 sales forecast is as follows. Quarter 1 2 3 4

HD-240 5,000 7,000 8,000 10,000

TURNEY COMPANY Production Budget For the Year Ending December 31, 2027 Product HD-240 Quarter 1 2 3 Expected unit sales 5,000 7,500 9,000 Add: Desired ending finished goods units 3,375 4,050 5,400 Total required units 8,375 11,550 14,400 Less: Beginning finished goods units 2,000 3,375 4,050 Required production units 6,375 8,175 10,350

4 12,000 2,813 14,813 5,400 9,413

Year

34,313

E15.11 Prepare a manufacturing overhead budget for the year Atlanta Company is preparing its manufacturing overhead budget for 2027. Relevant data consist of the following. Units to be produced (by quarters): 10,000, 12,000, 14,000, 16,000. Direct labor: time is 1.5 hours per unit. Variable overhead costs per direct labor hour: indirect materials $0.80; indirect labor $1.20; maintenance $0.50. Fixed overhead costs per quarter: supervisory salaries $41,250 depreciation $15,000; maintenance $12,000. Instructions Prepare the manufacturing overhead budget for the year; showing quarterly data. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

ATLANTA COMPANY Manufacturing Overhead Budget For the Year Ending December 31, 2027 Quarter 1 2 3

Year

Variable costs Indirect materials Indirect labor Maintenance Total variable Fixed costs Supervisory salaries Depreciation Maintenance Total fixed Total manufacturing overhead Units to be produced Direct labor hours per unit Total direct labor hours

1.5

Manufacturing overhead rate per direct labor hour

When you have completed E15.11, respond to the additional question, on the E15.11 Add Ques worksheet.

E15.11 Solution Atlanta Company is preparing its manufacturing overhead budget for 2027. Relevant data consist of the following. Units to be produced (by quarters): 10,000, 12,000, 14,000, 16,000. Direct labor: time is 1.5 hours per unit. Variable overhead costs per direct labor hour: indirect materials $0.80; indirect labor $1.20; maintenance $0.50. Fixed overhead costs per quarter: supervisory salaries $41,250 depreciation $15,000; maintenance $12,000. Instructions Prepare the manufacturing overhead budget for the year; showing quarterly data. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

ATLANTA COMPANY Manufacturing Overhead Budget For the Year Ending December 31, 2027 Quarter 1 2 3 Variable costs Indirect materials Indirect labor Maintenance Total variable Fixed costs Supervisory salaries Depreciation Maintenance Total fixed Total manufacturing overhead Units to be produced Direct labor hours per unit Total direct labor hours

12,000 18,000 7,500 37,500

14,400 $ 21,600 9,000 45,000

16,800 25,200 10,500 52,500

Year

19,200 $ 28,800 12,000 60,000

62,400 93,600 39,000 195,000

35,000 15,000 12,000 62,000 99,500 $

35,000 15,000 12,000 62,000 107,000

35,000 15,000 12,000 62,000 $ 114,500 $

35,000 15,000 12,000 62,000 122,000 $

140,000 60,000 48,000 248,000 443,000

10,000 1.5 15,000

12,000 1.5 18,000

14,000 1.5 21,000

16,000 1.5 24,000

52,000 1.5 78,000

Manufacturing overhead rate per direct labor hour

5.68

E15.11 Additional Question Atlanta Company is preparing its manufacturing overhead budget for 2027. Relevant data consist of the following. Units to be produced (by quarters): 10,000, 12,000, 14,000, 16,000. Direct labor: time is 1.5 hours per unit. Variable overhead costs per direct labor hour: indirect materials $0.80; indirect labor $1.20; maintenance $0.50. Fixed overhead costs per quarter: supervisory salaries $41,250 depreciation $15,000; maintenance $12,000. Instructions Prepare the manufacturing overhead budget for the year; showing quarterly data. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question

Assume that the direct labor required per unit changed to 1.75 hour per unit and the variable overhead costs for indirect labor changed to $1.10. Revise the Manufacturing Overhead Budget to reflect these changes.

ATLANTA COMPANY Manufacturing Overhead Budget For the Year Ending December 31, 2027 Quarter 1 2 3

Year

1.75

Manufacturing overhead rate per direct labor hour

1.75

E15.11 Solution to Additional Question Atlanta Company is preparing its manufacturing overhead budget for 2027. Relevant data consist of the following. Units to be produced (by quarters): 10,000, 12,000, 14,000, 16,000. Direct labor: time is 1.5 hours per unit. Variable overhead costs per direct labor hour: indirect materials $0.80; indirect labor $1.20; maintenance $0.50. Fixed overhead costs per quarter: supervisory salaries $41,250 depreciation $15,000; maintenance $12,000. Instructions Prepare the manufacturing overhead budget for the year; showing quarterly data. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question

14,000 19,250 8,750 42,000

16,800 $ 23,100 10,500 50,400

19,600 26,950 12,250 58,800

Year

22,400 $ 30,800 14,000 67,200

72,800 100,100 45,500 218,400

35,000 15,000 12,000 62,000 $ 104,000 $

35,000 15,000 12,000 62,000 112,400

35,000 15,000 12,000 62,000 $ 120,800 $

35,000 15,000 12,000 62,000 129,200 $

140,000 60,000 48,000 248,000 466,400

10,000 1.75 17,500

12,000 1.75 21,000

14,000 1.75 24,500

16,000 1.75 28,000

52,000 1.75 91,000

Manufacturing overhead rate per direct labor hour

5.13

P15.1 Prepare budgeted income statement and supporting budgets. Cook Farm Supply Company manufactures and sells a pesticide called Snare. The following data are available for preparing budgets for Snare for the first 2 quarters of 2027. 1. Sales: quarter 1, 40,000 bags; quarter 2, 56,000 bags. Selling price is $60 per bag. 2. Direct materials: each bag of Snare requires 4 pounds of Gumm at a cost of $3.80 per pound and 6 pounds of Tarr at $1.50 per pound. 3. Desired inventory levels: Type of Inventory Snare (bags) Gumm (pounds) Tarr (pounds)

January 1 8,000 9,000 14,000

April 1 15,000 10,000 20,000

July 1 18,000 13,000 25,000

4. Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $16 per hour. 5. Selling and administrative expenses are expected to be 15% of sales plus $175,000 per quarter. 6. Interest expense is $100,000. 7. Income taxes are expected to be 20% of income before income taxes. Your assistant has prepared two budgets: (1) the manufacturing overhead budget shows expected costs to be 125% of direct labor cost, and (2) the direct materials budget for Tarr shows the cost of Tarr purchases to be $297,000 in quarter 1 and $439,500 in quarter 2. Instructions Prepare the budgeted multiple-step income statement for the first 6 months and all required operating budgets by quarters. (Note: Use variable and fixed in the selling and administrative expense budget.) Do not prepare the manufacturing overhead budget or the direct materials budget for Tarr.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

COOK FARM SUPPLY COMPANY Sales Budget For the Six Months Ending June 30, 2027 Quarter 1 Expected unit sales

Six Months

Unit selling price Total sales

COOK FARM SUPPLY COMPANY Production Budget For the Six Months Ending June 30, 2027 Quarter 1

Six Months

Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

COOK FARM SUPPLY COMPANY Direct Materials Budget - Gumm For the Six Months Ending June 30, 2027 Quarter 1 Units to be produced Direct materials per unit (lbs.) Total pounds needed for production Add: Desired ending direct materials (lbs.) Total materials required Less: Beginning direct materials (lbs.) Direct materials purchases Cost per pound Total cost of direct materials purchases

x 4 lbs.

3.80 $

COOK FARM SUPPLY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2027 Quarter 1 Units to be produced Direct labor hours per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost

16.00

3.80

Six Months

16.00

COOK FARM SUPPLY COMPANY Selling and Administrative Budget For the Six Months Ending June 30, 2027 Quarter 1

Six Months

Budgeted sales in units Variable (.15 x sales) Fixed Total

COOK FARM SUPPLY COMPANY Budgeted Income Statement For the Six Months Ending June 30, 2027 Sales revenue Cost of goods sold Gross Profit Selling and administrative expenses Income from operations Interest expense Income before income tax Income tax expense (20%) Net income Cost per bag Cost element

Unit Cost

Total

Direct materials Gumm Tarr Direct labor Manufacturing overhead (125% of direct labor cost) Total

When you have completed P15.1, respond to the additional question, on the P15.1 Add Ques worksheet.

P15.1 Solution Cook Farm Supply Company manufactures and sells a pesticide called Snare. The following data are available for preparing budgets for Snare for the first 2 quarters of 2027. 1. Sales: quarter 1, 40,000 bags; quarter 2, 56,000 bags. Selling price is $60 per bag. 2. Direct materials: each bag of Snare requires 4 pounds of Gumm at a cost of $3.80 per pound and 6 pounds of Tarr at $1.50 per pound. 3. Desired inventory levels: Type of Inventory Snare (bags) Gumm (pounds) Tarr (pounds)

January 1 8,000 9,000 14,000

April 1 15,000 10,000 20,000

July 1 18,000 13,000 25,000

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Expected unit sales Unit selling price Total sales

COOK FARM SUPPLY COMPANY Sales Budget For the Six Months Ending June 30, 2027 Quarter Six 1 2 Months 40,000 56,000 96,000 $ 60 $ 60 $ 60 $ 2,400,000 $ 3,360,000 $ 5,760,000

COOK FARM SUPPLY COMPANY Production Budget For the Six Months Ending June 30, 2027 Quarter 1 Expected unit sales 40,000 Add: Desired ending finished goods units 15,000 Total required units 55,000 Less: Beginning finished goods units 8,000 Required production units 47,000

COOK FARM SUPPLY COMPANY Direct Materials Budget - Gumm For the Six Months Ending June 30, 2027 Quarter 1 Units to be produced 47,000 Direct materials per unit (lbs.) x 4 lbs. Total pounds needed for production 188,000 Add: Desired ending direct materials (lbs.) 10,000 Total materials required 198,000 Less: Beginning direct materials (lbs.) 9,000 Direct materials purchases 189,000 Cost per pound $ 3.80 $ Total cost of direct materials purchases $ 718,200 $

Six Months

2 56,000 18,000 74,000 15,000 59,000

2 59,000 x 4 lbs. 236,000 13,000 249,000 10,000 239,000 3.80 908,200

106,000

Six Months

1,626,400

COOK FARM SUPPLY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2027 Quarter 1 Units to be produced 47,000 Direct labor hours per unit 0.25 Total required direct labor hours 11,750 Direct labor cost per hour $ 16.00 $ Total direct labor cost $ 188,000 $

Budgeted sales in units

COOK FARM SUPPLY COMPANY Selling and Administrative Budget For the Six Months Ending June 30, 2027 Quarter 1 40,000

Variable (.15 x sales) Fixed Total

$ $

360,000 $ 175,000 535,000 $

2 59,000 0.25 14,750 16.00 236,000 $

2 56,000 504,000 $ 175,000 679,000 $

864,000 350,000 1,214,000

5,760,000 3,187,200 2,572,800 1,214,000 1,358,800 100,000 1,258,800 251,760 1,007,040

Cost per bag Cost element Direct materials Gumm Tarr Direct labor Manufacturing overhead (125% of direct labor cost)

Unit Cost $

3.80 $ 1.50 16.00

424,000

Six Months 96,000

Six Months

Total 15.20 9.00 4.00 5.00

Total

33.20

P15.1 Additional Question Cook Farm Supply Company manufactures and sells a pesticide called Snare. The following data are available for preparing budgets for Snare for the first 2 quarters of 2027. 1. Sales: quarter 1, 40,000 bags; quarter 2, 56,000 bags. Selling price is $60 per bag. 2. Direct materials: each bag of Snare requires 4 pounds of Gumm at a cost of $3.80 per pound and 6 pounds of Tarr at $1.50 per pound. 3. Desired inventory levels: Type of Inventory Snare (bags) Gumm (pounds) Tarr (pounds)

January 1 8,000 9,000 14,000

April 1 15,000 10,000 20,000

July 1 18,000 13,000 25,000

Additional Question Assume that the expected unit sales in Quarter 1 changed to 36,000 bags of Snare. Also assume that the amount of direct material (Gum) used changed to 5 pounds per bag; and, that the direct labor rate changed to $18 per hour. Revise the budgets and budgeted income statement to reflect these changes.

COOK FARM SUPPLY COMPANY Sales Budget For the Six Months Ending June 30, 2027 Quarter 1 2 Expected unit sales Unit selling price Total sales

COOK FARM SUPPLY COMPANY Production Budget For the Six Months Ending June 30, 2027 Quarter 1 2 Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

Six Months 60

Six Months

COOK FARM SUPPLY COMPANY Direct Materials Budget - Gumm For the Six Months Ending June 30, 2027 Quarter 1 2 Units to be produced Direct materials per unit (lbs.) Total pounds needed for production Add: Desired ending direct materials (lbs.) Total materials required Less: Beginning direct materials (lbs.) Direct materials purchases Cost per pound Total cost of direct materials purchases

x 5 lbs.

3.80

Six Months

x 5 lbs.

3.80

COOK FARM SUPPLY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2027 Quarter 1 2 Units to be produced Direct labor hours per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost

18.00

Six Months

18.00

COOK FARM SUPPLY COMPANY Selling and Administrative Budget For the Six Months Ending June 30, 2027 Quarter 1 2 Budgeted sales in units Variable (.15 x sales) Fixed Total

Unit Cost

Total

Six Months

Total

P15.1 Solution to Additional Question Cook Farm Supply Company manufactures and sells a pesticide called Snare. The following data are available for preparing budgets for Snare for the first 2 quarters of 2027. 1. Sales: quarter 1, 40,000 bags; quarter 2, 56,000 bags. Selling price is $60 per bag. 2. Direct materials: each bag of Snare requires 4 pounds of Gumm at a cost of $3.80 per pound and 6 pounds of Tarr at $1.50 per pound. 3. Desired inventory levels: Type of Inventory Snare (bags) Gumm (pounds) Tarr (pounds)

January 1 8,000 9,000 14,000

April 1 15,000 10,000 20,000

July 1 18,000 13,000 25,000

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Expected unit sales Unit selling price Total sales

COOK FARM SUPPLY COMPANY Sales Budget For the Six Months Ending June 30, 2027 Quarter 1 2 36,000 56,000 $ 60 $ 60 $ 2,160,000 $ 3,360,000

COOK FARM SUPPLY COMPANY Production Budget For the Six Months Ending June 30, 2027 Quarter 1 Expected unit sales 36,000 Add: Desired ending finished goods units 15,000 Total required units 51,000 Less: Beginning finished goods units 8,000 Required production units 43,000

2 56,000 18,000 74,000 15,000 59,000

Six Months 92,000 $ 60 $ 5,520,000

Six Months

102,000

COOK FARM SUPPLY COMPANY Direct Materials Budget - Gumm For the Six Months Ending June 30, 2027 Quarter 1 2 Units to be produced 43,000 59,000 Direct materials per unit (lbs.) x 5 lbs. x 5 lbs. Total pounds needed for production 215,000 295,000 Add: Desired ending direct materials (lbs.) 10,000 13,000 Total materials required 225,000 308,000 Less: Beginning direct materials (lbs.) 9,000 10,000 Direct materials purchases 216,000 298,000 Cost per pound $ 3.80 $ 3.80 Total cost of direct materials purchases $ 820,800 $ 1,132,400

COOK FARM SUPPLY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2027 Quarter 1 Units to be produced 43,000 Direct labor hours per unit 0.25 Total required direct labor hours 10,750 Direct labor cost per hour $ 18.00 $ Total direct labor cost $ 193,500 $

Budgeted sales in units Variable (.15 x sales) Fixed Total

COOK FARM SUPPLY COMPANY Selling and Administrative Budget For the Six Months Ending June 30, 2027 Quarter 1 36,000 $ $

324,000 175,000 499,000

$ $

2 59,000 0.25 14,750 18.00 265,500

Six Months

459,000

Six Months 92,000

2 56,000 504,000 175,000 679,000

1,953,200

$ $

828,000 350,000 1,178,000

5,520,000 3,507,500 2,012,500 1,178,000 834,500 100,000 734,500 146,900 587,600

Cost per bag Cost element Direct materials Gumm Tarr Direct labor Manufacturing overhead (125% of direct labor cost) Total

Unit Cost $

Total

3.80 $ 1.50 18.00

19.00 9.00 4.50 5.63

38.13

P15.5 Prepare purchases and income statement budgets for a merchandiser

The budget committee of Suppar Company collects the following data for its San Miguel Store in preparing budg income statements for May and June 2027. 1. 2 3. 4.

Operating expenses are estimated to be as follows: Sales salaries $35,000 per month Advertising 6% of monthly sales Delivery expense 2% of monthly sales Sales commissions 5% of monthly sales Rent expense $5,000 per month Depreciation $800 per month Utilities $600 per month Insurance $500 per month Interest expense is $2,000 per month. Income taxes are estimated to be 20% of income before income taxe

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow sh input cells.

SUPPAR COMPANY San Miguel Store Merchandise Purchases Budget For the Months of May and June, 2027 May Budgeted sales Budgeted cost of goods sold Add: Desired ending merchandise inventory Total Less: Beginning merchandise inventory Required merchandise purchases

SUPPAR COMPANY San Miguel Store Budgeted Income Statement For the Months of May and June, 2027 May Sales revenue Cost of goods sold Beginning inventory Add: Purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold Gross profit Operating expenses Sales salaries Advertising* Delivery** Sales commissions*** Rent Depreciation Utilities Insurance Total Income from operations Interest expense Income before income taxes Income tax expense Net income

When you have completed P15.5, respond to the additional question, on the P15.5 Add Ques worksheet.

ets for a merchandiser

data for its San Miguel Store in preparing budgeted

d July are expected to be 5% higher than the

ry at 10% of the following month’s cost of goods sold.

mated to be 20% of income before income taxes.

in columnar form. umnar form. Show in the statements the details of

nable to reference a cell), into the yellow shaded

udget ne, 2027 June

ment ne, 2027 June

on, on the P15.5 Add Ques worksheet.

P15.5 Solution The budget committee of Suppar Company collects the following data for its San Miguel Store in preparing budgeted income statements for May and June 2027. 1. 2 3. 4.

Sales for May are expected to be $800,000. Sales in June and July are expected to be 5% higher than the preceding month. Cost of goods sold is expected to be 75% of sales. Company policy is to maintain ending merchandise inventory at 10% of the following month’s cost of goods sold. Operating expenses are estimated to be as follows: Sales salaries $35,000 per month Advertising 6% of monthly sales Delivery expense 2% of monthly sales Sales commissions 5% of monthly sales Rent expense $5,000 per month Depreciation $800 per month Utilities $600 per month Insurance $500 per month Interest expense is $2,000 per month. Income taxes are estimated to be 20% of income before income taxes.

Instructions a. Prepare the merchandise purchases budget for each month in columnar form. b. Prepare budgeted income statements for each month in columnar form. Show in the statements the details of cost of goods sold. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Budgeted sales

SUPPAR COMPANY San Miguel Store Merchandise Purchases Budget For the Months of May and June, 2027 May $ 800,000

Budgeted cost of goods sold Add: Desired ending merchandise inventory Total Less: Beginning merchandise inventory Required merchandise purchases

600,000 63,000 663,000 60,000 603,000

SUPPAR COMPANY San Miguel Store Budgeted Income Statement For the Months of May and June, 2027 May $ 800,000

Sales revenue Cost of goods sold Beginning inventory Add: Purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold Gross profit Operating expenses Sales salaries Advertising* Delivery** Sales commissions*** Rent Depreciation Utilities Insurance Total Income from operations Interest expense Income before income taxes Income tax expense Net income

$ $

June 840,000

630,000 66,150 696,150 63,000 633,150

June 840,000

60,000 603,000 663,000 63,000 600,000 200,000

63,000 633,150 696,150 66,150 630,000 210,000

35,000 48,000 16,000 40,000 5,000 800 600 500 145,900 54,100 2,000 52,100 10,420 41,680

35,000 50,400 16,800 42,000 5,000 800 600 500 151,100 58,900 2,000 56,900 11,380 45,520

P15.5 Additional Question The budget committee of Suppar Company collects the following data for its San Miguel Store in preparing budgeted income statements for May and June 2027. 1. 2 3. 4.

Additional Question Assume that expected sales in May changed to $875,000 and cost of goods sold changed to 70% of sales for both months. Revise the merchandising purchases budget and the budgeted income statement to reflect these changes.

SUPPAR COMPANY San Miguel Store Merchandise Purchases Budget For the Months of May and June, 2027 May

June

Budgeted sales Budgeted cost of goods sold Add: Desired ending merchandise inventory Total Less: Beginning merchandise inventory Required merchandise purchases

June

P15.5 Solution to Additional Question The budget committee of Suppar Company collects the following data for its San Miguel Store in preparing budgeted income statements for May and June 2027. 1. 2 3. 4.

Budgeted sales

SUPPAR COMPANY San Miguel Store Merchandise Purchases Budget For the Months of May and June, 2027 May $ 875,000

Budgeted cost of goods sold Add: Desired ending merchandise inventory Total Less: Beginning merchandise inventory Required merchandise purchases

612,500 64,313 676,813 61,250 615,563

SUPPAR COMPANY San Miguel Store Budgeted Income Statement For the Months of May and June, 2027 May $ 875,000

$ $

June 918,750

643,125 67,528 710,653 64,313 646,341

June 918,750

61,250 615,563 676,813 64,313 612,500 262,500

64,313 646,341 710,653 67,528 643,125 275,625

35,000 52,500 17,500 43,750 5,000 800 600 500 155,650 106,850 2,000 104,850 20,970

35,000 55,125 18,375 45,938 5,000 800 600 500 161,338 114,288 2,000 112,288 22,458

Net income

83,880

89,830

CHAPTER 15 Using Excel to Make Decisions at Current Designs Topic(s): Preparation of Budgets Excel Functions and Tools: Split screen tool; Absolute cell referencing Diane Buswell is preparing the 2027 budget for one of Current Designs’ rotomolded kayaks. Extensive meetings with members of the sales department and executive team have resulted in the following unit sales projections for 2027. 2027: Quarter 1 Quarter 2 Quarter 3 Quarter 4 2028: Quarter 1 Quarter 2

1,000 1,500 750 750 1,100 1,500

kayaks kayaks kayaks kayaks kayaks kayaks

Current Designs’ policy is to have finished goods ending inventory in a quarter equal to 20% of the next quarter’s anticipated sales. Ending inventory of finished goods at December 31, 2026, will be 200 rotomolded kayaks. Production of each kayak requires 54 pounds of polyethylene powder and a finishing kit (rope, seat, hardware, etc.). Company policy is that the ending inventory of polyethylene powder should be 25% of the amount needed for production in the next quarter. Assume that the ending inventory of polyethylene powder on December 31, 2026, is 19,400 pounds. The finishing kits can be assembled as they are needed. As a result, Current Designs does not maintain a significant inventory of the finishing kits. The polyethylene powder used in these kayaks costs $1.50 per pound, and the finishing kits cost $170 each. Production of a single kayak requires 2 hours of time by more experienced, type I employees and 3 hours of finishing time by type II employees. The type I employees are paid $15 per hour, and the type II employees are paid $12 per hour. Selling and administrative expenses for this line are expected to be $45 per unit sold plus $7,500 per quarter. Manufacturing overhead is assigned at 150% of labor costs. The cost and production data in tabular form are presented here. Desired ending inventory of polyethylene powder Desired ending inventory of finished units Estimated inventories Finished goods inventory at Dec. 31, 2026 Polyethylene powder at Dec. 31, 2026 Polyethylene powder at Dec. 31, 2026

25% of next month's production 20% of next month's unit sales 200 kayaks 19,400 pounds 15,930 pounds

Production requirements Polyethylene powder Finishing kit Type I employees labor time Type II employees labor time Manufacturing overhead Cost of polyethylene powder Cost of finishing kits Labor rate of type I employees Labor rate of type II employees Selling and administrative expenses Selling and administrative expenses

54 1 2 3 150% $

1.50 170.00 15.00 12.00 45.00 7,500

pounds kit hours hours of direct labor costs per pound per kit per hour per hour per unit sold per quarter

Instructions Prepare the production budget, direct materials budget, direct labor budget, manufacturing overhead budget, and selling and administrative budget for this product line by quarter and in total for 2027. What-if Question Perform what-if analysis to answer the following: Suppose the sales in units for the third quarter are now estimated to be 1,200 units. Adjust the budgets to reflect these changes.

Follow the step-by-step directions in the accompanying tutorial to prepare selected budgets for Current Designs.

CURRENT DESIGNS Production Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3

Quarter 4

Total

CURRENT DESIGNS Direct Materials Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3

Quarter 4

Total

Expected unit sales Add: desired ending finished goods units Total required units Less: beginning finished goods units Required production units

Units to be produced Pounds of polyethylene powder per unit Total pounds needed for production Add: desired ending inventory of powder Total pounds of powder required Less: beginning inventory of powder Pounds of polyethylene powder to be purchased Cost per pound Cost of polyethylene powder to be purchased Cost of required finishing kits Total costs for direct materials

CURRENT DESIGNS Direct Labor Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3

Quarter 4

Total

CURRENT DESIGNS Manufacturing Overhead Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3

Quarter 4

Total

Quarter 4

Total

Units to be produced Number of hours of more skilled labor/unit Total number of hours of more skilled labor Hourly rate for more skilled labor Total cost of more skilled labor Units to be produced Number of hours of less skilled labor/unit Total number of hours of less skilled labor Hourly rate for less skilled labor Total cost of less skilled labor Total cost for direct labor

Total costs for direct labor Manufacturing overhead rate per direct labor dollar Manufacturing overhead costs

CURRENT DESIGNS Selling and Administrative Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 Expected unit sales Variable selling and administrative costs Fixed selling and administrative costs Total selling and administrative costs

1,000 1,500 750 750 1,100 1,500

kayaks kayaks kayaks kayaks kayaks kayaks

25% of next month's production 20% of next month's unit sales 200 kayaks 19,400 pounds 15,930 pounds

54 1 2 3 150% $

1.50 170.00 15.00 12.00 45.00 7,500

pounds kit hours hours of direct labor costs per pound per kit per hour per hour per unit sold per quarter

Follow the step-by-step directions in the accompanying tutorial to prepare selected budgets for Current Designs.

CURRENT DESIGNS Production Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 1,000 1,500 750 300 150 150 1,300 1,650 900 200 300 150 1,100 1,350 750

Quarter 4 750 220 970 150 820

Total 4,000 220 4,220 200 4,020

CURRENT DESIGNS Direct Materials Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 Units to be produced 1,100 1,350 750 Pounds of polyethylene powder per unit 54 54 54 Total pounds needed for production 59,400 72,900 40,500 Add: desired ending inventory of powder 18,225 10,125 11,070 Total pounds of powder required 77,625 83,025 51,570 Less: beginning inventory of powder 19,400 18,225 10,125 Pounds of polyethylene powder to be purchased 58,225 64,800 41,445 Cost per pound $ 1.50 $ 1.50 $ 1.50 Cost of polyethylene powder to be purchased 87,338 97,200 62,168 Cost of required finishing kits 187,000 229,500 127,500 Total costs for direct materials $ 274,338 $ 326,700 $ 189,668

Quarter 4 820 54 44,280 15,930 60,210 11,070 49,140 $ 1.50 73,710 139,400 $ 213,110

Total 4,020 54 217,080 15,930 233,010 19,400 213,610 $ 1.50 320,415 683,400 $ 1,003,815

Expected unit sales Add: desired ending finished goods units Total required units Less: beginning finished goods units Required production units

CURRENT DESIGNS Direct Labor Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 Units to be produced 1,100 1,350 750 Number of hours of more skilled labor/unit 2 2 2 Total number of hours of more skilled labor 2,200 2,700 1,500 Hourly rate for more skilled labor $ 15.00 $ 15.00 $ 15.00 Total cost of more skilled labor $ 33,000 $ 40,500 $ 22,500 Units to be produced Number of hours of less skilled labor/unit Total number of hours of less skilled labor Hourly rate for less skilled labor Total cost of less skilled labor Total cost for direct labor

CURRENT DESIGNS Manufacturing Overhead Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total costs for direct labor $ 72,600 $ 89,100 $ 49,500 $ 54,120 $ Manufacturing overhead rate per direct labor dollar 150% 150% 150% 150% Manufacturing overhead costs $ 108,900 $ 133,650 $ 74,250 $ 81,180 $

Total 265,320 150% 397,980

Expected unit sales Variable selling and administrative costs Fixed selling and administrative costs Total selling and administrative costs

$ $

1,350 3 4,050 12.00 48,600 89,100

$ $

750 3 2,250 12.00 27,000 49,500

CURRENT DESIGNS Selling and Administrative Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 1,000 1,500 750 $ 45,000 $ 67,500 $ 33,750 7,500 7,500 7,500 $ 52,500 $ 75,000 $ 41,250

$ $

820 3 2,460 12.00 29,520 54,120

$ $

Total 4,020 2 8,040 15.00 120,600 4,020 3 12,060 12.00 144,720 265,320

1,100 3 3,300 12.00 39,600 72,600

Quarter 4 820 2 1,640 $ 15.00 $ 24,600

Quarter 4 750 $ 33,750 7,500 $ 41,250

$ $

Total 4,000 180,000 30,000 210,000

This blank worksheet named CD15 Part 2 What-if has been created for you. After completing part 1, copy the worksheet containing your solution and paste to this blank worksheet using the instructions in the Part 2 tutorial.

1,000 1,500 1,200 750 1,100 1,500

kayaks kayaks kayaks kayaks kayaks kayaks

25% of next month's production 20% of next month's unit sales 200 kayaks 19,400 pounds 15,930 pounds

54 1 2 3 150% $

1.50 170.00 15.00 12.00 45.00 7,500

pounds kit hours hours of direct labor costs per pound per kit per hour per hour per unit sold per quarter

Follow the step-by-step directions in the accompanying tutorial to prepare selected budgets for Current Designs.

CURRENT DESIGNS Production Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 1,000 1,500 1,200 300 240 150 1,300 1,740 1,350 200 300 240 1,100 1,440 1,110

Quarter 4 750 220 970 150 820

Total 4,450 220 4,670 200 4,470

CURRENT DESIGNS Direct Materials Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 Units to be produced 1,100 1,440 1,110 Pounds of polyethylene powder per unit 54 54 54 Total pounds needed for production 59,400 77,760 59,940 Add: desired ending inventory of powder 19,440 14,985 11,070 Total pounds of powder required 78,840 92,745 71,010 Less: beginning inventory of powder 19,400 19,440 14,985 Pounds of polyethylene powder to be purchased 59,440 73,305 56,025 Cost per pound $ 1.50 $ 1.50 $ 1.50 Cost of polyethylene powder to be purchased 89,160 109,958 84,038 Cost of required finishing kits 187,000 244,800 188,700 Total costs for direct materials $ 276,160 $ 354,758 $ 272,738

Quarter 4 820 54 44,280 15,930 60,210 11,070 49,140 $ 1.50 73,710 139,400 $ 213,110

Total 4,470 54 241,380 15,930 257,310 19,400 237,910 $ 1.50 356,865 759,900 $ 1,116,765

Expected unit sales Add: desired ending finished goods units Total required units Less: beginning finished goods units Required production units

CURRENT DESIGNS Direct Labor Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 Units to be produced 1,100 1,440 1,110 Number of hours of more skilled labor/unit 2 2 2 Total number of hours of more skilled labor 2,200 2,880 2,220 Hourly rate for more skilled labor $ 15.00 $ 15.00 $ 15.00 Total cost of more skilled labor $ 33,000 $ 43,200 $ 33,300 Units to be produced Number of hours of less skilled labor/unit Total number of hours of less skilled labor Hourly rate for less skilled labor Total cost of less skilled labor Total cost for direct labor

CURRENT DESIGNS Manufacturing Overhead Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total costs for direct labor $ 72,600 $ 95,040 $ 73,260 $ 54,120 $ Manufacturing overhead rate per direct labor dollar 150% 150% 150% 150% Manufacturing overhead costs $ 108,900 $ 142,560 $ 109,890 $ 81,180 $

Total 295,020 150% 442,530

Expected unit sales Variable selling and administrative costs Fixed selling and administrative costs Total selling and administrative costs

$ $

1,440 3 4,320 12.00 51,840 95,040

$ $

1,110 3 3,330 12.00 39,960 73,260

CURRENT DESIGNS Selling and Administrative Budget For the Year Ending December 31, 2027 Quarter 1 Quarter 2 Quarter 3 1,000 1,500 1,200 $ 45,000 $ 67,500 $ 54,000 7,500 7,500 7,500 $ 52,500 $ 75,000 $ 61,500

$ $

820 3 2,460 12.00 29,520 54,120

$ $

Total 4,470 2 8,940 15.00 134,100 4,470 3 13,410 12.00 160,920 295,020

1,100 3 3,300 12.00 39,600 72,600

Quarter 4 820 2 1,640 $ 15.00 $ 24,600

Quarter 4 750 $ 33,750 7,500 $ 41,250

$ $

Total 4,450 200,250 30,000 230,250

Data Visualization at HydroHappy DA15 Data visualization can be used to analyze production levels. HydroHappy has developed a new marketing plan that looks very promising for increased sales for the upcoming summer months. The biggest concern is that the production facility will not have the capacity to handle the additional production needed, as its capacity is 6,080 units per day. HydroHappy plans to keep 10% of the finished units needed for the next day in its ending inventory. As such, management wants insight into the number of units that will need to be produced to handle the increased sales. The company expects September 1, 2027 sales to be 5,020 units. The sales staff has provided the following estimates of unit sales for June, July, and August of 2027.

Date

6/1/27 6/2/27 6/3/27 6/4/27 6/5/27 6/6/27 6/7/27 6/8/27 6/9/27 6/10/27 6/11/27 6/12/27 6/13/27 6/14/27 6/15/27 6/16/27 6/17/27 6/18/27 6/19/27 6/20/27 6/21/27 6/22/27 6/23/27 6/24/27 6/25/27 6/26/27 6/27/27 6/28/27 6/29/27

Expected Unit Sales

4,630 5,091 5,198 5,550 5,280 5,089 5,656 5,553 4,989 5,771 5,005 5,899 5,933 5,756 5,652 6,247 6,094 5,388 5,630 6,073 5,960 5,815 5,449 5,697 6,208 5,006 5,711 5,750 5,602

Date

7/1/27 7/2/27 7/3/27 7/4/27 7/5/27 7/6/27 7/7/27 7/8/27 7/9/27 7/10/27 7/11/27 7/12/27 7/13/27 7/14/27 7/15/27 7/16/27 7/17/27 7/18/27 7/19/27 7/20/27 7/21/27 7/22/27 7/23/27 7/24/27 7/25/27 7/26/27 7/27/27 7/28/27 7/29/27

Expected Unit Sales

5,108 4,907 4,831 4,868 6,013 5,397 5,821 6,233 4,710 5,000 4,826 6,294 6,274 5,350 5,421 5,763 5,941 5,713 5,317 5,040 6,136 6,193 4,730 5,923 4,766 5,191 5,860 6,212 5,364

Date

8/1/27 8/2/27 8/3/27 8/4/27 8/5/27 8/6/27 8/7/27 8/8/27 8/9/27 8/10/27 8/11/27 8/12/27 8/13/27 8/14/27 8/15/27 8/16/27 8/17/27 8/18/27 8/19/27 8/20/27 8/21/27 8/22/27 8/23/27 8/24/27 8/25/27 8/26/27 8/27/27 8/28/27 8/29/27

Expected Unit Sales

5,989 6,190 5,682 6,160 5,962 6,267 5,460 5,309 4,926 5,172 5,842 4,963 4,709 4,829 6,181 5,567 5,622 5,718 5,324 5,336 6,111 5,058 6,193 5,267 4,727 5,045 5,659 5,846 5,661

Student Work Area

a. Solution to part a Beginning and ending finished and budgeted units to be produ

Date

Expected Unit Sales

4,630 5,091 5,198 5,550 5,280 5,089 5,656 5,553 4,989 5,771 5,005 5,899 5,933 5,756 5,652 6,247 6,094 5,388 5,630 6,073 5,960 5,815 5,449 5,697 6,208 5,006 5,711 5,750 5,602

6/30/27

5,211

7/30/27 7/31/27

5,980 6,059

8/30/27 8/31/27

5,732 4,976

For this case, you will generate Excel pivot tables and pivot line charts to analyze company capacity for estimated increased production levels. Instructions There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Calculate the beginning and ending inventory finished goods levels, and the budgeted units to be produced for each day over the months of June, July, and August of 2027. b. Because June will be the first month in which the new product will be produced, management is interested in visualizing the production levels for that month. Create a pivot table and a pivot line chart showing the daily production in units for June. Set the minimum and maximum vertical axis bounds at 4,500 and 6,300, respectively. Include a descriptive chart titles, axes labels, a legend, and a linear trend line. c. Identify any trends in production expected during June. d. Create a pivot table and a pivot chart with vertical columns showing the daily production in units for each day in the three month period in which production is expected to exceed capacity. Set the minimum and maximum vertical axis bounds at 5,950 and 6,350, respectively. Set the vertical axis option to display major units at 50. Include a descriptive chart titles and axes labels as deemed necessary. e. How many days in June, July, and August, respectively is production expected to exceed the capacity? What are the consequences of these shortages? Explain.

6/30/27 7/1/27 7/2/27 7/3/27 7/4/27 7/5/27 7/6/27 7/7/27 7/8/27 7/9/27 7/10/27 7/11/27 7/12/27 7/13/27 7/14/27 7/15/27 7/16/27 7/17/27 7/18/27 7/19/27 7/20/27 7/21/27 7/22/27 7/23/27 7/24/27 7/25/27 7/26/27 7/27/27 7/28/27 7/29/27 7/30/27 7/31/27 8/1/27 8/2/27 8/3/27 8/4/27 8/5/27 8/6/27 8/7/27 8/8/27 8/9/27 8/10/27 8/11/27 8/12/27 8/13/27 8/14/27 8/15/27

5,211 5,108 4,907 4,831 4,868 6,013 5,397 5,821 6,233 4,710 5,000 4,826 6,294 6,274 5,350 5,421 5,763 5,941 5,713 5,317 5,040 6,136 6,193 4,730 5,923 4,766 5,191 5,860 6,212 5,364 5,980 6,059 5,989 6,190 5,682 6,160 5,962 6,267 5,460 5,309 4,926 5,172 5,842 4,963 4,709 4,829 6,181

8/16/27 8/17/27 8/18/27 8/19/27 8/20/27 8/21/27 8/22/27 8/23/27 8/24/27 8/25/27 8/26/27 8/27/27 8/28/27 8/29/27 8/30/27 8/31/27

5,567 5,622 5,718 5,324 5,336 6,111 5,058 6,193 5,267 4,727 5,045 5,659 5,846 5,661 5,732 4,976

Work Area

on to part a ng and ending finished goods inventory geted units to be produced per day Ending Finished Goods

Beginning Finished Goods

b. Pivot table for part b

Pivot chart for part b

Required Production Units

c. Response to part c

d. Pivot table for part d

Pivot chart for part d

e. Response to part e

Date

Expected Unit Sales

4,630 5,091 5,198 5,550 5,280 5,089 5,656 5,553 4,989 5,771 5,005 5,899 5,933 5,756 5,652 6,247 6,094 5,388 5,630 6,073 5,960 5,815 5,449 5,697 6,208 5,006 5,711 5,750 5,602

Date

Expected Unit Sales

5,108 4,907 4,831 4,868 6,013 5,397 5,821 6,233 4,710 5,000 4,826 6,294 6,274 5,350 5,421 5,763 5,941 5,713 5,317 5,040 6,136 6,193 4,730 5,923 4,766 5,191 5,860 6,212 5,364

Date

Expected Unit Sales

5,989 6,190 5,682 6,160 5,962 6,267 5,460 5,309 4,926 5,172 5,842 4,963 4,709 4,829 6,181 5,567 5,622 5,718 5,324 5,336 6,111 5,058 6,193 5,267 4,727 5,045 5,659 5,846 5,661

Student Work Area

a. Solution to part a Beginning and ending finished and budgeted units to be produ

Date

Expected Unit Sales

4,630 5,091 5,198 5,550 5,280 5,089 5,656 5,553 4,989 5,771 5,005 5,899 5,933 5,756 5,652 6,247 6,094 5,388 5,630 6,073 5,960 5,815 5,449 5,697 6,208 5,006 5,711 5,750 5,602

6/30/27

5,211

7/30/27 7/31/27

5,980 6,059

8/30/27 8/31/27

5,732 4,976

For this case, you will generate Excel pivot tables and pivot line charts to analyze company capacity for estimated increased production levels. Instructions There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Calculate the beginning and ending inventory finished goods levels, and the budgeted units to be produced for each day over the months of June, July, and August of 2022. b. Because June will be the first month in which the new product will be produced, management is interested in visualizing the production levels for that month. Create a pivot table and a pivot line chart showing the daily production in units for June. Set the minimum and maximum vertical axis bounds at 4,500 and 6,300, respectively. Include a descriptive chart titles, axes labels, a legend, and a linear trend line. c. Identify any trends in production expected during June. d. Create a pivot table and a pivot chart with vertical columns showing the daily production in units for each day in the three month period in which production is expected to exceed capacity. Set the minimum and maximum vertical axis bounds at 5,950 and 6,350, respectively. Set the vertical axis option to display major units at 50. Include a descriptive chart titles and axes labels as deemed necessary. e. How many days in June, July, and August, respectively is production expected to exceed the capacity? What are the consequences of these shortages? Explain.

8/16/27 8/17/27 8/18/27 8/19/27 8/20/27 8/21/27 8/22/27 8/23/27 8/24/27 8/25/27 8/26/27 8/27/27 8/28/27 8/29/27 8/30/27 8/31/27

5,567 5,622 5,718 5,324 5,336 6,111 5,058 6,193 5,267 4,727 5,045 5,659 5,846 5,661 5,732 4,976

Work Area

Ending Finished Goods

Beginning Finished Goods

Required Production Units

509 520 555 528 509 566 555 499 577 501 590 593 576 565 625 609 539 563 607 596 582 545 570 621 501 571 575 560 521

463 509 520 555 528 509 566 555 499 577 501 590 593 576 565 625 609 539 563 607 596 582 545 570 621 501 571 575 560

4,676 5,102 5,233 5,523 5,261 5,146 5,646 5,497 5,067 5,694 5,094 5,902 5,915 5,746 5,712 6,232 6,023 5,412 5,674 6,062 5,946 5,778 5,474 5,748 6,088 5,077 5,715 5,735 5,563

b. Pivot table for part b Row Labels

Jun 1-Jun 2-Jun 3-Jun 4-Jun 5-Jun 6-Jun 7-Jun 8-Jun 9-Jun 10-Jun 11-Jun 12-Jun 13-Jun 14-Jun 15-Jun 16-Jun 17-Jun 18-Jun 19-Jun 20-Jun 21-Jun 22-Jun 23-Jun 24-Jun 25-Jun 26-Jun 27-Jun 28-Jun 29-Jun 30-Jun Grand Total

Pivot chart for part b

Sum of Required Production Units

166,941 4,676 5,102 5,233 5,523 5,261 5,146 5,646 5,497 5,067 5,694 5,094 5,902 5,915 5,746 5,712 6,232 6,023 5,412 5,674 6,062 5,946 5,778 5,474 5,748 6,088 5,077 5,715 5,735 5,563 5,201 166,941

Units to be Produced

on to part a ng and ending finished goods inventory geted units to be produced per day

6,300 6,100 5,900 5,700 5,500 5,300 5,100 4,900 4,700 4,500

c. Response to part c The month of June beg month. Without the tre middle of the month. T are expected to be ove at the beginning of Jun

521 511 491 483 487 601 540 582 623 471 500 483 629 627 535 542 576 594 571 532 504 614 619 473 592 477 519 586 621 536 598 606 599 619 568 616 596 627 546 531 493 517 584 496 471 483 618

5,201 5,088 4,899 4,835 4,983 5,951 5,439 5,862 6,081 4,739 4,983 4,973 6,292 6,182 5,357 5,455 5,781 5,918 5,673 5,289 5,150 6,142 6,047 4,849 5,807 4,809 5,258 5,895 6,127 5,426 5,988 6,052 6,009 6,139 5,730 6,140 5,993 6,186 5,445 5,271 4,951 5,239 5,754 4,938 4,721 4,964 6,120

d. Pivot table for part d Row Labels

16-Jun 25-Jun 8-Jul 12-Jul 13-Jul 21-Jul 28-Jul 2-Aug 4-Aug 6-Aug 15-Aug 23-Aug Grand Total

Pivot chart for part d

Sum of Required Production Units

6,232 6,088 6,081 6,292 6,182 6,142 6,127 6,139 6,140 6,186 6,120 6,100 73828.4

6,350

Units to be Produced

511 491 483 487 601 540 582 623 471 500 483 629 627 535 542 576 594 571 532 504 614 619 473 592 477 519 586 621 536 598 606 599 619 568 616 596 627 546 531 493 517 584 496 471 483 618 557

6,300 6,250 6,200 6,150 6,100 6,050 6,000 5,950

e. Response to part e Production is expected in August. These days prior to the expected o 6,300 units are needed through July 11 to com similar demand in futur the amount of stock it h

562 572 532 534 611 506 619 527 473 505 566 585 566 573 498 502

557 562 572 532 534 611 506 619 527 473 505 566 585 566 573 498

5,573 5,632 5,679 5,325 5,414 6,006 5,172 6,100 5,213 4,759 5,106 5,678 5,828 5,668 5,656 4,980

Pivot chart for part b

Units to Be Produced During June Total

Linear (Total)

1-Jun 2-Jun 3-Jun 4-Jun 5-Jun 6-Jun 7-Jun 8-Jun 9-Jun 10-Jun 11-Jun 12-Jun 13-Jun 14-Jun 15-Jun 16-Jun 17-Jun 18-Jun 19-Jun 20-Jun 21-Jun 22-Jun 23-Jun 24-Jun 25-Jun 26-Jun 27-Jun 28-Jun 29-Jun 30-Jun

6,300 6,100 5,900 5,700 5,500 5,300 5,100 4,900 4,700 4,500

c. Response to part c The month of June begins with fewer units required to be produced than at points later in the month. Without the trend line, the production line appears erratic with a peak during the middle of the month. The trend line provides a better indicator at what the production levels are expected to be over time. It slopes upward throughout June beginning about 5,300 units at the beginning of June to about 5,900 by the end of June.

Pivot chart for part d

Dates of Which Production is Expected to Exceed Capacity 6,350 6,300 6,250 6,200 6,150 6,100 6,050 6,000 5,950 16-Jun 25-Jun

8-Jul

12-Jul

13-Jul

21-Jul

28-Jul

2-Aug

4-Aug

6-Aug 15-Aug 23-Aug

e. Response to part e Production is expected to exceed capacity two days in June, five days in July, and five days in August. These days are not consecutive so extra production should be feasible on the day prior to the expected overages. July 12 seems to be the biggest issue during which almost 6,300 units are needed. Perhaps management can plan for extra production on July 9 through July 11 to compensate for the extra required units. If the company expects to see similar demand in future months, it will become necessary to expand its capacity, or modify the amount of stock it holds.

E16.3 Prepare flexible manufacturing overhead budget Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows. Indirect labor Indirect materials Utilities

1.00 0.70 0.40

Fixed overhead costs per month are supervision $4,000, depreciation $1,200, and property taxes $800. The company believes it will normally operate in a range of 7,000–10,000 direct labor hours per month. Instructions Prepare a monthly manufacturing overhead flexible budget for 2027 for the expected range of activity, using increments of 1,000 direct labor hours. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

MYERS COMPANY Monthly Manufacturing Overhead Flexible Budget For the Year 2027 Activity level Direct labor hours Variable costs Indirect labor Indirect materials Utilities Total variable cost Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

7,000

8,000

9,000

10,000

When you have completed E16.3, respond to the additional question, on the E16.3 Add Ques worksheet.

E16.3 Solution Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows. Indirect labor Indirect materials Utilities

1.00 0.70 0.40

7,000 $

7,000 4,900 2,800 14,700

8,000 $

8,000 5,600 3,200 16,800

4,000 1,200 800 6,000

$ 20,700

$ 22,800

9,000

10,000

9,000 6,300 3,600 18,900

$ 10,000 7,000 4,000 21,000

4,000 1,200 800 6,000

24,900

$ 27,000

E16.3 Additional Question Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows. Indirect labor Indirect materials Utilities

1.00 0.70 0.40

Additional Question Assume that the variable manufacturing overhead costs for indirect labor and indirect materials changed to $1.25 and $0.80 respectively. Revise the monthly manufacturing overhead flexible budget, using increments of 1,000 direct labor hours.

7,000

8,000

9,000

10,000

E16.3 Solution to Additional Question Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows. Indirect labor Indirect materials Utilities

1.00 0.70 0.40

7,000

8,000

8,750 5,600 2,800 17,150

$ 10,000 6,400 3,200 19,600

4,000 1,200 800 6,000

$ 23,150

$ 25,600

9,000

10,000

11,250 7,200 3,600 22,050

$ 12,500 8,000 4,000 24,500

4,000 1,200 800 6,000

28,050

$ 30,500

E16.4 Prepare flexible budget reports for manufacturing overhead costs, and comment on fin Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows. Indirect labor $ Indirect materials Utilities

1.00 0.70 0.40

Fixed overhead costs per month are supervision $4,000, depreciation $1,200, and property taxes $800. The compan believes it will normally operate in a range of 7,000–10,000 direct labor hours per month. In July 2027, Myers Company incurs the following manufacturing overhead costs. Variable Costs Indirect labor Indirect materials Utilities

8,800 5,800 3,200

Fixed Costs Supervision $ Depreciation Property taxes

4,000 1,200 800

Instructions a. Prepare a flexible budget performance report, assuming that the company worked 9,000 direct labor hou during the month. b. Prepare a flexible budget performance report, assuming that the company worked 8,500 direct labor hou during the month. c. Comment on your findings.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shade input cells.

MEYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2027

Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Utilities Total variable costs Fixed costs Supervision Depreciation Property taxes Total fixed costs

Budget at 9,000 DLH

Actual Costs 9,000 DLH

Difference Favorable F Unfavorable U

Total costs

Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Utilities Total variable costs Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

MEYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2027 Difference Budget at Actual Costs Favorable F 8,500 DLH 8,500 DLH Unfavorable U

Comment on your findings.

When you have completed E16.4, respond to the additional question, on the E16.4 Add Ques worksheet.

nd comment on findings

urs. Variable

xes $800. The company

9,000 direct labor hours 8,500 direct labor hours

into the yellow shaded

Difference Favorable F Unfavorable U

worksheet.

E16.4 Solution Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows. Indirect labor $ Indirect materials Utilities

1.00 0.70 0.40

Fixed overhead costs per month are supervision $4,000, depreciation $1,200, and property taxes $800. The company believes it will normally operate in a range of 7,000–10,000 direct labor hours per month. In July 2027, Myers Company incurs the following manufacturing overhead costs. Variable Costs Indirect labor Indirect materials Utilities

8,800 5,800 3,200

Fixed Costs Supervision $ Depreciation Property taxes

4,000 1,200 800

Instructions a. Prepare a flexible budget performance report, assuming that the company worked 9,000 direct labor hours during the month. b. Prepare a flexible budget performance report, assuming that the company worked 8,500 direct labor hours during the month. c. Comment on your findings. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

MEYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2027

Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Utilities Total variable costs Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

Budget at 9,000 DLH $

$ $

9,000 6,300 3,600 18,900

Difference Favorable F Unfavorable U

Actual Costs 9,000 DLH $

$ $

4,000 1,200 800 6,000

24,900

8,800 5,800 3,200 17,800

200 500 400 1,100

4,000 1,200 800 6,000

23,800

1,100

F F F F

MEYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2027

Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Utilities Total variable costs Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

Budget at 8,500 DLH $

8,500 5,950 3,400 17,850

Actual Costs 8,500 DLH

Difference Favorable F Unfavorable U

4,000 1,200 800 6,000 $

23,850

8,800 5,800 3,200 17,800 4,000 1,200 800 6,000

23,800

(300) 150 200 50

U F F F

0 0 0 0 $

c. Comment on your findings. In case (a) the performance for the month was satisfactory. In case (b) management may need to determine the cause of the unfavorable difference for indirect labor, or since the difference is small, 3.5% of budgeted cost for indirect labor, it might be considered immaterial.

E16.4 Additional Question Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows. Indirect labor

1.00

Indirect materials

0.70

Utilities

0.40

Fixed Costs $

8,800

Supervision

4,000

Indirect materials

5,800

Depreciation

1,200

Utilities

3,200

Property taxes

800

Additional Question Assume that actual direct labor hours was 8,750 for the month of July 31, 2027. Actual costs incurred for Indirect labor and indirect materials were $8,500 and $5,500. Revise the manufacturing overhead flexible budget report for July.

MEYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2027 Difference Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Utilities Total variable costs Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

Budget at 8,750 DLH

Actual Costs 8,750 DLH

Favorable F Unfavorable U

E16.4 Solution to Additional Question Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows. Indirect labor $ Indirect materials Utilities

1.00 0.70 0.40

Fixed overhead costs per month are supervision $4,000, depreciation $1,200, and property taxes $800. The company believes it will normally operate in a range of 7,000–10,000 direct labor hours per month. In July 2027, Myers Company incurs the following manufacturing overhead costs. Variable Costs Indirect labor Indirect materials Utilities

8,800 5,800 3,200

Fixed Costs Supervision $ Depreciation Property taxes

4,000 1,200 800

MEYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2027

Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Utilities Total variable costs Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

Budget at 8,750 DLH $

$ $

8,750 6,125 3,500 18,375

Difference Favorable F Unfavorable U

Actual Costs 8,750 DLH $

$ $

4,000 1,200 800 6,000

24,375

8,500 5,500 3,200 17,200

250 625 300 1,175

4,000 1,200 800 6,000

23,200

1,175

F F F F

E16.5 Prepare flexible selling expense budget Fallon Company uses flexible budgets to control its selling expenses. Monthly sales are expected to range from $170,000 to $200,000. Variable costs and their percentage relationship to sales are sales commissions 6%, advertising 4%, travel 3%, and delivery 2%. Fixed selling expenses will consist of sales salaries $35,000, depreciation on delivery equipment $7,000, and insurance on delivery equipment $1,000. Instructions Prepare a monthly selling expense flexible budget for each $10,000 increment of sales within the relevant range for the year ending December 31, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

FALLON COMPANY Monthly Selling Expense Flexible Budget For the Year Ended December 31, 2027 Activity level Sales revenue Variable expenses Sales commissions Advertising Traveling Delivery Total variable expenses Fixed expenses Sales salaries Depreciation Insurance Total fixed expenses

$170,000

$180,000

$190,000

$200,000

Total expenses

When you have completed E16.5, respond to the additional question on the E16.5 Add Ques worksheet.

E16.5 Solution Fallon Company uses flexible budgets to control its selling expenses. Monthly sales are expected to range from $170,000 to $200,000. Variable costs and their percentage relationship to sales are sales commissions 6%, advertising 4%, travel 3%, and delivery 2%. Fixed selling expenses will consist of sales salaries $35,000, depreciation on delivery equipment $7,000, and insurance on delivery equipment $1,000. Instructions Prepare a monthly selling expense flexible budget for each $10,000 increment of sales within the relevant range for the year ending December 31, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

$170,000 $

10,200 6,800 5,100 3,400 25,500

$180,000 $

35,000 7,000 1,000 43,000 $

68,500

10,800 7,200 5,400 3,600 27,000

$190,000 $

35,000 7,000 1,000 43,000 $

70,000

11,400 7,600 5,700 3,800 28,500

$200,000 $

35,000 7,000 1,000 43,000 $

71,500

12,000 8,000 6,000 4,000 30,000 35,000 7,000 1,000 43,000

73,000

E16.5 Additional Question Fallon Company uses flexible budgets to control its selling expenses. Monthly sales are expected to range from $170,000 to $200,000. Variable costs and their percentage relationship to sales are sales commissions 6%, advertising 4%, travel 3%, and delivery 2%. Fixed selling expenses will consist of sales salaries $35,000, depreciation on delivery equipment $7,000, and insurance on delivery equipment $1,000. Instructions Prepare a monthly selling expense flexible budget for each $10,000 increment of sales within the relevant range for the year ending December 31, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that variable costs and their percentage relationship to sales are sales commissions 7%, advertising 3.5%, traveling 4%, and delivery 1%. Revise the monthly flexible budget for the same increment of sales for the year ending December 31, 2027.

$170,000

$180,000

$190,000

$200,000

E16.5 Solution to Additional Question Fallon Company uses flexible budgets to control its selling expenses. Monthly sales are expected to range from $170,000 to $200,000. Variable costs and their percentage relationship to sales are sales commissions 6%, advertising 4%, travel 3%, and delivery 2%. Fixed selling expenses will consist of sales salaries $35,000, depreciation on delivery equipment $7,000, and insurance on delivery equipment $1,000. Instructions Prepare a monthly selling expense flexible budget for each $10,000 increment of sales within the relevant range for the year ending December 31, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

$170,000 $

11,900 5,950 6,800 1,700 26,350

$180,000 $

35,000 7,000 1,000 43,000 $

69,350

12,600 6,300 7,200 1,800 27,900

$190,000 $

35,000 7,000 1,000 43,000 $

70,900

13,300 6,650 7,600 1,900 29,450

$200,000 $

35,000 7,000 1,000 43,000 $

72,450

14,000 7,000 8,000 2,000 31,000 35,000 7,000 1,000 43,000

74,000

P16.1 Prepare flexible budget and budget report for manufacturing overhead Bumblebee Company estimates that 300,000 direct labor hours will be worked during the coming year, 2027, in the Packaging Department. On this basis, the following budgeted manufacturing overhead cost data are computed for the year. Fixed Overhead Costs

Variable Overhead Costs

Supervision

$96,000

Indirect labor

Depreciation

72,000

Indirect materials

90,000

Insurance

30,000

Repairs

69,000

Rent Property taxes

24,000 18,000

Utilities Lubricants

72,000 18,000

$240,000

$126,000

$375,000

It is estimated that direct labor hours worked each month will range from 27,000 to 36,000 hours. During October, 27,000 direct labor hours were worked, and the following overhead costs were incurred. Fixed overhead costs: supervision $8,000, depreciation $6,000, insurance $2,460, rent $2,000, and property taxes $1,500. Variable overhead costs: indirect labor $12,432, indirect materials $7,680, repairs $6,100, utilities $6,840, and lubricants $1,920. Instructions a. Prepare a monthly manufacturing overhead flexible budget for each increment of 3,000 direct labor hours over the relevant range for the year ending December 31, 2027. b. Prepare a flexible budget report for October. c. Comment on management's efficiency in controlling manufacturing overhead costs in October. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

BUMBLEBEE COMPANY Packaging Department Monthly Manufacturing Overhead Flexible Budget For the Year 2027 Activity level Direct labor hours Variable costs Indirect labor Indirect materials Repairs Utilities Lubricants Total variable costs Fixed costs Supervision Depreciation Insurance Rent Property taxes Total fixed costs Total costs

27,000

30,000

33,000

36,000 U or F

BUMBLEBEE COMPANY Packaging Department Manufacturing Overhead Flexible Budget Report For the Month Ended October 31, 2027 Difference Direct labor hours

Budget at

Actual Costs

Favorable F

27,000 DLH

Unfavorable U

Variable costs Indirect labor Indirect materials Repairs Utilities Lubricants Total variable costs Fixed costs Supervision Depreciation Insurance Rent Property taxes Total fixed costs Total costs

When you have completed P16.1, respond to the additional question, on the P16.1 Add Ques worksheet.

P16.1 Solution Bumblebee Company estimates that 300,000 direct labor hours will be worked during the coming year, 2027, in the Packaging Department. On this basis, the following budgeted manufacturing overhead cost data are computed for the year. Fixed Overhead Costs Supervision $96,000 Depreciation 72,000 Insurance 30,000 Rent 24,000 Property taxes 18,000 $240,000

Variable Overhead Costs Indirect labor $126,000 Indirect materials 90,000 Repairs 69,000 Utilities 72,000 Lubricants 18,000 $375,000

It is estimated that direct labor hours worked each month will range from 27,000 to 36,000 hours. During October, 27,000 direct labor hours were worked, and the following overhead costs were incurred. Fixed overhead costs: supervision $8,000, depreciation $6,000, insurance $2,460, rent $2,000, and property taxes $1,500. Variable overhead costs: indirect labor $12,432, indirect materials $7,680, repairs $6,100, utilities $6,840, and lubricants $1,920. Instructions a. Prepare a monthly manufacturing overhead flexible budget for each increment of 3,000 direct labor hours over the relevant range for the year ending December 31, 2027. b. Prepare a flexible budget report for October. c. Comment on management's efficiency in controlling manufacturing overhead costs in NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

27,000

Fixed costs Supervision Depreciation Insurance Rent Property taxes Total fixed costs Total costs

11,340 8,100 6,210 6,480 1,620 33,750

30,000

8,000 6,000 2,500 2,000 1,500 20,000 $

53,750

12,600 9,000 6,900 7,200 1,800 37,500

33,000

8,000 6,000 2,500 2,000 1,500 20,000 $

57,500

13,860 9,900 7,590 7,920 1,980 41,250

36,000

8,000 6,000 2,500 2,000 1,500 20,000 $

61,250

15,120 10,800 8,280 8,640 2,160 45,000

8,000 6,000 2,500 2,000 1,500 20,000 $

65,000

BUMBLEBEE COMPANY Packaging Department Manufacturing Overhead Flexible Budget Report For the Month Ended October 31, 2027

Direct labor hours Variable costs Indirect labor Indirect materials Repairs Utilities Lubricants Total variable costs

Budget at 27,000 DLH

Fixed costs Supervision Depreciation Insurance Rent Property taxes Total fixed costs Total costs

11,340 8,100 6,210 6,480 1,620 33,750

Actual Costs 27,000 DLH

8,000 6,000 2,500 2,000 1,500 20,000 $

53,750

Difference Favorable F Unfavorable U

12,432 7,680 6,100 6,840 1,920 34,972

8,000 6,000 2,460 2,000 1,500 19,960 $

54,932

1,092 420 110 360 300 1,222

40 40 $

1,182

U or F U F F U U U

F U

c. The overall performance of management was slightly unfavorable. However, none of the unfavorable differences exceeded 10% of budget except for lubricants (18.5%).

P16.1 Additional Question Bumblebee Company estimates that 300,000 direct labor hours will be worked during the coming year, 2027, in the Packaging Department. On this basis, the following budgeted manufacturing overhead cost data are computed for the year. Fixed Overhead Costs Supervision $96,000 Depreciation 72,000 Insurance 30,000 Rent 24,000 Property taxes 18,000 $240,000

Variable Overhead Costs Indirect labor $126,000 Indirect materials 90,000 Repairs 69,000 Utilities 72,000 Lubricants 18,000 $375,000

Additional Question Assume that during October, the actual direct labor hours worked changed to 27,500 hours. In addition, actual variable overhead costs incurred for indirect labor and indirect materials also changed to $13,500 and $8,200 respectively. Revise the flexible budget report for October.

27,500

30,000

33,000

36,000 U or F

BUMBLEBEE COMPANY Packaging Department Manufacturing Overhead Flexible Budget Report For the Month Ended October 31, 2027

Direct labor hours Variable costs Indirect labor Indirect materials Repairs Utilities Lubricants Total variable costs Fixed costs Supervision Depreciation Insurance Rent Property taxes Total fixed costs Total costs

Budget at 27,500 DLH

Actual Costs 27,500 DLH

Difference Favorable F Unfavorable U

P16.1 Solution to Additional Question Bumblebee Company estimates that 300,000 direct labor hours will be worked during the coming year, 2027, in the Packaging Department. On this basis, the following budgeted manufacturing overhead cost data are computed for the year. Fixed Overhead Costs Supervision $96,000 Depreciation 72,000 Insurance 30,000 Rent 24,000 Property taxes 18,000 $240,000

Variable Overhead Costs Indirect labor $126,000 Indirect materials 90,000 Repairs 69,000 Utilities 72,000 Lubricants 18,000 $375,000

It is estimated that direct labor hours worked each month will range from 27,000 to 36,000 hours.

During October, 27,000 direct labor hours were worked, and the following overhead costs were incurred. Fixed overhead costs: supervision $8,000, depreciation $6,000, insurance $2,460, rent $2,000, and property taxes $1,500. Variable overhead costs: indirect labor $12,432, indirect materials $7,680, repairs $6,100, utilities $6,840, and lubricants $1,920. Instructions a. Prepare a monthly manufacturing overhead flexible budget for each increment of 3,000 direct labor hours over the relevant range for the year ending December 31, 2027. b. Prepare a flexible budget report for October. c. Comment on management's efficiency in controlling manufacturing overhead costs in October. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

27,500

Fixed costs Supervision Depreciation Insurance Rent Property taxes Total fixed costs Total costs

11,550 8,250 6,325 6,600 1,650 34,375

30,000

8,000 6,000 2,500 2,000 1,500 20,000 $

54,375

12,600 9,000 6,900 7,200 1,800 37,500

33,000

8,000 6,000 2,500 2,000 1,500 20,000 $

57,500

36,000

13,860 9,900 7,590 7,920 1,980 41,250

U or F $ 15,120 10,800 8,280 8,640 2,160 45,000

8,000 6,000 2,500 2,000 1,500 20,000

61,250

65,000

BUMBLEBEE COMPANY Packaging Department Manufacturing Overhead Flexible Budget Report For the Month Ended October 31, 2027

Direct labor hours Variable costs Indirect labor Indirect materials Repairs Utilities Lubricants Total variable costs

Budget at 27,500 DLH

Actual Costs 27,500 DLH

Fixed costs Supervision Depreciation Insurance Rent Property taxes Total fixed costs Total costs

11,550 8,250 6,325 6,600 1,650 34,375

8,000 6,000 2,500 2,000 1,500 20,000 $

54,375

13,500 8,200 6,100 6,840 1,920 36,560

Difference Favorable F Unfavorable U $

8,000 6,000 2,460 2,000 1,500 19,960 $

56,520

1,950 50 225 240 270 2,185

40 40 $

2,225

U F F U U U

F U

P16.3 State total budgeted cost formula, and prepare flexible budget reports for 2 time periods Ratchet Company uses budgets in controlling costs. The August 2027 budget report for the company’s Assembling Department is as follows. Ratchet Company Budget Report Assembling Department For the Month Ended August 31, 2027

Manufacturing Cost Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable

Budget $

Fixed costs Rent Supervision Depreciation Total fixed Total costs

Actual

Difference Favorable F Unfavorable U

48,000 54,000 24,000 18,000 15,000 12,000 171,000

47,000 51,200 24,200 17,500 14,900 12,400 167,200

$1,000 2,800 200 500 100 400 3,800

12,000 17,000 6,000 35,000

0 0 0 0

202,200

$3,800 F

206,000

F F U F F U F

The monthly budget amounts in the report were based on an expected production of 60,000 units per month or 720,000 units per year. The Assembling Department manager is pleased with the report and expects a raise, or at least praise for a job well done. The company president, however, is unhappy with the results for August because only 58,000 units were produced. Instructions a. State the total monthly budgeted cost formula. b. Prepare a budget report for August using flexible budget data. Why does this report provide a better basis for evaluating performance than the report based on static budget data? c. In September, 64,000 units were produced. Prepare the budget report using flexible budget data, assuming (1) each variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in September as in August. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Fixed costs Total cost =

Variable cost +

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended August 31, 2027

Units Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable Fixed costs Rent Supervision Depreciation Total fixed Total costs

Budget at 58,000 units

Actual Costs 58,000 units

Difference Favorable F Unfavorable U

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended September 30, 2027

Units Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable

Budget at 64,000 units

Actual Costs 64,000 units

Difference Favorable F Unfavorable U

Fixed costs Rent Supervision Depreciation Total fixed Total costs

When you have completed P16.3, respond to the additional question, on the P16.3 Add Ques worksheet.

P16.3 Solution Ratchet Company uses budgets in controlling costs. The August 2027 budget report for the company’s Assembling Department is as follows. Ratchet Company Budget Report Assembling Department For the Month Ended August 31, 2027

Manufacturing Cost Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable

Budget $

Fixed costs Rent Supervision Depreciation Total fixed Total costs

Actual

Difference Favorable F Unfavorable U

48,000 54,000 24,000 18,000 15,000 12,000 171,000

47,000 51,200 24,200 17,500 14,900 12,400 167,200

$1,000 2,800 200 500 100 400 3,800

12,000 17,000 6,000 35,000

0 0 0 0

202,200

$3,800 F

206,000

F F U F F U F

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Total cost =

Fixed costs Variable cost $ 35,000 + $ 2.85 X

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended August 31, 2027

Units Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable

Budget at 58,000 units

Actual Costs 58,000 units

Fixed costs Rent Supervision Depreciation Total fixed Total costs

46,400 52,200 23,200 17,400 14,500 11,600 165,300

12,000 17,000 6,000 35,000 $

200,300

47,000 51,200 24,200 17,500 14,900 12,400 167,200

Difference Favorable F Unfavorable U $

12,000 17,000 6,000 35,000 $

202,200

600 1,000 1,000 100 400 800 1,900

U F U U U U U

1,900

This report provides a better basis for evaluating performance because the budget is based on the level of activity actually achieved. The manager should have to explain why every variable cost was over budget except for direct labor.

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended September 30, 2027

Units Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable

Budget at 64,000 units

Actual Costs 64,000 units

Difference Favorable F Unfavorable U

Fixed costs Rent Supervision Depreciation Total fixed Total costs

51,200 57,600 25,600 19,200 16,000 12,800 182,400

12,000 17,000 6,000 35,000 $

217,400

51,700 56,320 26,620 19,250 16,390 13,640 183,920

12,000 17,000 6,000 35,000 $

218,920

500 1,280 1,020 50 390 840 1,520

U F U U U U U

1,520

The manager's performance was slightly better in September than it was in August. However, each variable cost was slightly over budget again except for direct labor.

P16.3 Additional Question Ratchet Company uses budgets in controlling costs. The August 2027 budget report for the company’s Assembling Department is as follows. Ratchet Company Budget Report Assembling Department For the Month Ended August 31, 2027

Manufacturing Cost Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable

Budget $

Fixed costs Rent Supervision Depreciation Total fixed Total costs

Actual

Difference Favorable F Unfavorable U

48,000 54,000 24,000 18,000 15,000 12,000 171,000

47,000 51,200 24,200 17,500 14,900 12,400 167,200

$1,000 2,800 200 500 100 400 3,800

12,000 17,000 6,000 35,000

0 0 0 0

202,200

$3,800 F

206,000

F F U F F U F

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Costs Assume that the number of units produced in September changed to 68,000. Revise the flexible budget report for September assuming (1) each variable cost was 12% higher than its actual cost in August and (s) fixed costs remain the same.

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended August 31, 2027

Units Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable Fixed costs Rent Supervision Depreciation Total fixed Total costs

Budget at 58,000 units

Actual Costs 58,000 units

Difference Favorable F Unfavorable U

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended September 30, 2027

Units Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable Fixed costs Rent Supervision Depreciation Total fixed Total costs

Budget at 68,000 units

Actual Costs 68,000 units

Difference Favorable F Unfavorable U

P16.3 Solution to Additional Question Ratchet Company uses budgets in controlling costs. The August 2027 budget report for the company’s Assembling Department is as follows. Ratchet Company Budget Report Assembling Department For the Month Ended August 31, 2027

Manufacturing Cost Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable

Budget $

Fixed costs Rent Supervision Depreciation Total fixed Total costs

Actual

Difference Favorable F Unfavorable U

48,000 54,000 24,000 18,000 15,000 12,000 171,000

47,000 51,200 24,200 17,500 14,900 12,400 167,200

$1,000 2,800 200 500 100 400 3,800

12,000 17,000 6,000 35,000

0 0 0 0

202,200

$3,800 F

206,000

F F U F F U F

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended August 31, 2027

Units Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable

Budget at 58,000 units

Actual Costs 58,000 units

Fixed costs Rent Supervision Depreciation Total fixed Total costs

54,400 52,200 23,200 17,400 14,500 11,600 173,300

12,000 17,000 6,000 35,000 $

208,300

47,000 51,200 24,200 17,500 14,900 12,400 167,200

Difference Favorable F Unfavorable U $

12,000 17,000 6,000 35,000 $

202,200

7,400 1,000 1,000 100 400 800 6,100

U F U U U U U

6,100

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended September 30, 2027

Units Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable

Budget at 68,000 units

Actual Costs 68,000 units

Difference Favorable F Unfavorable U

Fixed costs Rent Supervision Depreciation Total fixed Total costs

54,400 61,200 27,200 20,400 17,000 13,600 193,800

12,000 17,000 6,000 35,000 $

228,800

52,640 57,344 27,104 19,600 16,688 13,888 187,264

12,000 17,000 6,000 35,000 $

222,264

1,760 3,856 96 800 312 288 6,536

U F U U U U U

6,536

The manager's performance was much better in September than it was in August. Each variable cost had a favorable variance except for maintenance which was slightly over budget by 2.1%.

CHAPTER 16 Using Excel to Make Decisions at Current Designs Topic(s): Preparation of a Flexible Budget Excel Functions and Tools: Copy and Paste tools; ABS function The Current Designs staff has prepared the annual manufacturing budget for the rotomolded line based on an estimated annual production of 4,000 kayaks during 2027. Each kayak will require 54 pounds of polyethylene powder and a finishing kit (rope, seat, hardware, etc.). The polyethylene powder used in these kayaks costs $1.50 per pound, and the finishing kits cost $170 each. Each kayak will use two kinds of labor—2 hours of type I labor from people who run the oven and trim the plastic, and 3 hours of work from type II workers who attach the hatches and seat and other hardware. The type I employees are paid $15 per hour, and the type II are paid $12 per hour. This data is provided here. Kayaks budgeted for production in 2027 4,000 Kayaks produced in the first quarter 1,050 Budgeted unit costs $ 1.50 per pound Polyethylene powder $ 170.00 each Finishing kits $ 15.00 per hour Type I labor $ 12.00 per hour Type II labor Budgeted labor usage 2 hours Type I labor 3 hours Type II labor Polyethylene powder required per kayak 54 pounds Finishing kits required per kayak 1 kit Manufacturing overhead is budgeted at $396,000 for 2027, broken down as follows. Variable costs Indirect materials Manufacturing supplies Maintenance and utilities

Fixed costs Supervision Insurance Depreciation $

40,000 53,800 88,000 181,800 90,000 14,400 109,800 214,200 396,000

During the first quarter, ended March 31, 2027, 1,050 units were actually produced with the following costs.

Costs incurred in first quarter Polyethylene powder Finishing kits Type I labor Type II labor Indirect materials Manufacturing supplies Maintenance and utilities Supervision Insurance Depreciation Total

87,000 178,840 31,500 39,060 10,500 14,150 26,000 20,000 3,600 27,450 $ 438,100

Instructions a. Prepare the annual manufacturing budget for 2027, assuming that 4,000 kayaks will be produced. b. Prepare the flexible budget for manufacturing for the quarter ended March 31, 2027. Assume activity levels of 900, 1,000, and 1,050 units. c. Assuming the rotomolded line is treated as a cost center, prepare a flexible budget report for manufacturing for the quarter ended March 31, 2027, when 1,050 units were produced.

What-if Question Perform what-if analysis to answer the following: Suppose the accountant identified an error in the number of kayaks actually produced and determined the actual production was 1,070 rather than the 1,050 kayaks. While the incurred costs given for the quarter ending March 31, 2027 were correct, the costs were actually for 1,070 kayaks, rather than the original 1,050 kayaks. Make changes in the flexible budget and the responsibility report to reflect the change to 1,070 kayaks. Indicate the differences observed in the report. Explain why some of the differences changed their respective favorable or unfavorable statuses.

Follow the steps in the accompanying tutorial to learn how to use Excel’s Copy and Paste tool and ABS function.

Current Designs Rotomolded Line Manufacturing Budget For the Year Ended December 31, 2027 Units to be produced Costs: Amount Variable cost Budgeted

Total variable costs Fixed costs

Total fixed costs Total costs

Current Designs Rotomolded Line Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2027 Units to be produced 900 1,000 Costs: Variable costs Polyethylene powder Finishing kits Labor -Type I Labor - Type II Indirect materials Manufacturing supplies Maintenance & utilities Total variable costs Fixed costs Supervision Insurance Depreciation Total fixed costs Total costs

Current Designs Rotomolded Line

1,050

Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2027 Flexible Budget Actual costs Production in units Costs: Variable costs Polyethylene powder Finishing kits Labor -Type I Labor -Type II Indirect materials Manufacturing supplies Maintenance & utilities Total variable costs Fixed costs Supervision Insurance Depreciation Total fixed costs Total costs

Difference F = favorable U = unfavorable

Fixed costs Supervision Insurance Depreciation $

40,000 53,800 88,000 181,800 90,000 14,400 109,800 214,200 396,000

During the first quarter, ended March 31, 2027, 1,050 units were actually produced with the following costs.

87,000 178,840 31,500 39,060 10,500 14,150 26,000 20,000 3,600 27,450 $ 438,100

Follow the steps in the accompanying tutorial to learn how to use Excel’s Copy and Paste tool and ABS function.

Current Designs Rotomolded Line Manufacturing Budget For the Year Ended December 31, 2027 Units to be produced 4,000 Costs: Amount Variable cost Budgeted Polyethylene powder $ 324,000 Finishing kits 680,000 Type I labor 120,000 Type II labor 144,000 Indirect materials 40,000 Manufacturing supplies 53,800 Maintenance and utilities 88,000 Total variable costs 1,449,800 Fixed costs Supervision Insurance Depreciation Total fixed costs

90,000 14,400 109,800 214,200

Total costs

Current Designs Rotomolded Line Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2027 Units to be produced 900 1,000 Costs: Variable costs Polyethylene powder $ 72,900 $ 81,000 Finishing kits 153,000 170,000 Labor -Type I 27,000 30,000 Labor - Type II 32,400 36,000 Indirect materials 9,000 10,000 Manufacturing supplies 12,105 13,450 Maintenance & utilities 19,800 22,000 Total variable costs 326,205 362,450 Fixed costs Supervision Insurance Depreciation Total fixed costs Total costs

$ 1,664,000

22,500 3,600 27,450 53,550 $ 379,755

Current Designs Rotomolded Line

22,500 3,600 27,450 53,550 416,000

1,050

85,050 178,500 31,500 37,800 10,500 14,123 23,100 380,573

22,500 3,600 27,450 53,550 434,123

Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2027 Flexible Budget Actual costs 1,050 1,050

Production in units Costs: Variable costs Polyethylene powder Finishing kits Labor -Type I Labor -Type II Indirect materials Manufacturing supplies Maintenance & utilities Total variable costs Fixed costs Supervision Insurance Depreciation Total fixed costs Total costs

85,050 178,500 31,500 37,800 10,500 14,123 23,100 380,573

22,500 3,600 27,450 53,550 $ 434,123

87,000 178,840 31,500 39,060 10,500 14,150 26,000 387,050

20,000 3,600 27,450 51,050 438,100

Difference F = favorable U = unfavorable

1,950 340 1,260 28 2,900 6,478

U U

2,500 2,500 3,978

U U U U

F U

This blank worksheet named CD16 Part 2 What-if has been created for you. After completing part 1, copy the worksheet containing your solution and paste to this blank worksheet using the instructions in the Part 2 tutorial.

CHAPTER 16 Using Excel to Make Decisions at Current Designs Topic(s): Preparation of a Flexible Budget Excel Functions and Tools: Copy and Paste tools; ABS function The Current Designs staff has prepared the annual manufacturing budget for the rotomolded line based on an estimated annual production of 4,000 kayaks during 2027. Each kayak will require 54 pounds of polyethylene powder and a finishing kit (rope, seat, hardware, etc.). The polyethylene powder used in these kayaks costs $1.50 per pound, and the finishing kits cost $170 each. Each kayak will use two kinds of labor—2 hours of type I labor from people who run the oven and trim the plastic, and 3 hours of work from type II workers who attach the hatches and seat and other hardware. The type I employees are paid $15 per hour, and the type II are paid $12 per hour. This data is provided here. Kayaks budgeted for production in 2027 4,000 Kayaks produced in the first quarter 1,070 Budgeted unit costs $ 1.50 per pound Polyethylene powder $ 170.00 each Finishing kits $ 15.00 per hour Type I labor $ 12.00 per hour Type II labor Budgeted labor usage 2 hours Type I labor 3 hours Type II labor Polyethylene powder required per kayak 54 pounds Finishing kits required per kayak 1 kit Manufacturing overhead is budgeted at $396,000 for 2027, broken down as follows. Variable costs Indirect materials Manufacturing supplies Maintenance and utilities

Fixed costs Supervision Insurance Depreciation $

40,000 53,800 88,000 181,800 90,000 14,400 109,800 214,200 396,000

During the first quarter, ended March 31, 2027, 1,050 units were actually produced with the following costs.

87,000 178,840 31,500 39,060 10,500 14,150 26,000 20,000 3,600 27,450 438,100

What-if Question Perform what-if analysis to answer the following: Suppose the accountant identified an error in the number of kayaks actually produced and determined the actual production was 1,070 rather than the 1,050 kayaks. While the incurred costs given for the quarter ending March 31, 2027 were correct, the costs were actually for 1,070 kayaks, rather than the original 1,050 kayaks. Indicate the differences observed in the report. Explain why some of the differences changed their respective favorable or unfavorable status.

Follow the steps in the accompanying tutorial to learn how to use Excel’s Copy and Paste tool and ABS function.

Current Designs Rotomolded Line Manufacturing Budget For the Year Ended December 31, 2027 Units to be produced Costs: Variable cost Polyethylene powder Finishing kits Type I labor Type II labor Indirect materials Manufacturing supplies Maintenance and utilities Total variable costs

4,000 Amount Budgeted $ 324,000 680,000 120,000 144,000 40,000 53,800 88,000 1,449,800

Fixed costs Supervision Insurance Depreciation Total fixed costs

90,000 14,400 109,800 214,200

Total costs

Current Designs Rotomolded Line Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2027 Units to be produced 900 1,000 Costs: Variable costs Polyethylene powder $ 72,900 $ 81,000 Finishing kits 153,000 170,000 Labor -Type I 27,000 30,000 Labor - Type II 32,400 36,000 Indirect materials 9,000 10,000 Manufacturing supplies 12,105 13,450 Maintenance & utilities 19,800 22,000 Total variable costs 326,205 362,450 Fixed costs Supervision Insurance Depreciation Total fixed costs Total costs

$ 1,664,000

22,500 3,600 27,450 53,550 379,755

Current Designs Rotomolded Line

22,500 3,600 27,450 53,550 416,000

1,070

86,670 181,900 32,100 38,520 10,700 14,392 23,540 387,822

22,500 3,600 27,450 53,550 441,372

Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2027 Flexible Budget Actual costs 1,050 1,050

86,670 181,900 32,100 38,520 10,700 14,392 23,540 387,822

22,500 3,600 27,450 53,550 441,372

87,000 178,840 31,500 39,060 10,500 14,150 26,000 387,050

20,000 3,600 27,450 51,050 438,100

Difference F = favorable U = unfavorable

330 3,060 600 540 200.00 242 2,460 772

U F F U F F U F

2,500 2,500 3,272

F F

Using Data Visualization to Analyze Data for Budgeting DA16.1 Data visualization can be used to help improve forecasts. Example Recall the section “Flexible Budget−A Case Study” presented in the chapter. Flexible budgeting is useful because it enables managers to evaluate performance in light of changing conditions. But the ability to react quickly to changing conditions is even more important. For example, consider the following charts, which present quarterly data for Honda sales in four regional markets. Student Work Area

Japan 300,000

Unit Sales

250,000 200,000 150,000 100,000 50,000 0

Years (by Quarter)

Chart for North America

North America 600,000

Unit Sales

500,000 400,000 300,000 200,000 100,000 0

Years (by Quarter)

Chart for Europe

Europe

Unit Sales

While the number of vehicles sold differs by region, the trends shown are used in forecasting sales and accompanying budgets. In examining the above charts, it appears that some regions will likely be more difficult to budget than others. For example, sales in Europe are the most volatile, as shown by the changing heights of the columns, and Japan is somewhat erratic. On the other hand, North America's and Asia's upward trends are much more consistent, making it easier to forecast sales in those regions. For this case, you will use Excel’s Forecast tool to create and analyze line charts. You will also consider qualitative factors that might

Chart for Japan

50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

Years (by Quarter)

Chart for Asia

Asia 700,000 600,000

Unit Sales

Quarterly Data for Honda Unit Sales For Selected Markets North Region Japan Europe Asia America 2013-Q1 180,830 456,329 47,315 303,206 2013-Q2 169,885 457,500 23,933 348,682 2013-Q3 208,703 435,806 30,403 345,725 2013-Q4 281,232 431,578 38,443 376,558 2014-Q1 277,059 452,262 40,846 326,279 2014-Q2 246,948 449,188 28,535 395,030 2014-Q3 221,127 454,920 22,584 360,860 2014-Q4 213,045 450,754 28,030 400,405 2015-Q1 186,562 454,874 35,452 351,125 2015-Q2 150,190 480,149 29,640 424,739 2015-Q3 176,038 482,222 28,635 411,856 2015-Q4 217,703 445,246 25,170 472,841 2016-Q1 216,968 511,458 31,248 457,866 2016-Q2 175,346 515,660 30,962 469,380 2016-Q3 193,980 474,666 31,700 492,848 2016-Q4 233,932 454,412 39,965 520,788 2017-Q1 207,119 492,324 46,617 528,012 2017-Q2 194,565 468,619 38,764 522,799 2017-Q3 187,813 434,054 37,796 586,113 2017-Q4 228,003 456,434 43,051 591,267 2018-Q1 218,835 505,383 44,491 548,132 2018-Q2 199,347 470,026 41,764 555,023 2018-Q3 216,144 385,774 35,049 597,765 2018-Q4 256,922 459,596 38,771 596,366 2019-Q1 239,424 486,134 35,184 543,337 2019-Q2 233,449 488,216 22,584 557,853 2019-Q3 210,348 439,026 25,520 561,999 2019-Q4 159,835 403,815 25,495 571,774

500,000 400,000 300,000 200,000 100,000 0

Yeasrs (by Quarter)

Using Data Visualization for Budgeting DA16.1 Data Visualization can be used to forecast sales. Student Work Area Monthly data for Honda unit sales from March 2018 through February 2020 in the United States are presented here. Date Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20

U.S. Unit Sales 115,504 100,736 100,373 103,263 67,546 111,880 98,194 125,425 111,412 83,153 112,116 104,214 107,661 109,068 113,314 106,267 91,011 102,666 96,735 110,506 84,290 67,168 102,806 99,278

Instructions There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Use the Forecast sheet tool to create a line chart to forecast Honda sales for the United States for March through August of 2020. Excel will automatically generate the forecast on a new worksheet. Name the new worksheet ‘Forecast Chart’. Include a descriptive chart title and labeled vertical axis on the chart. What does the trend show? b. What do you know about the COVID-19 pandemic in 2020 that might affect your reliance on the forecast for Honda? c. How would you use these forecasts if you were budgeting for sales and production at Honda in the US right now? Are there specific types of cars that may sell better than others?

a. Forecast sheet chart for part a - On

a. Response to part a

b. Response to part b

c. Response to part c

d. Response to part d

e. Response to part e

How would you use these forecasts if you were budgeting for sales and production at Honda in the US right now? Are there specific types of cars that may sell better than others? d. What non-quantitative factors should Honda consider in its budgeting process? e. What do you think are the strengths and limitations of using forecasts in business?

U.S. Unit Sales 115,504 100,736 100,373 103,263 67,546 111,880 98,194 125,425 111,412 83,153 112,116 104,214 107,661 109,068 113,314 106,267 91,011 102,666 96,735 110,506 84,290 67,168 102,806 99,278

a. Forecast sheet chart for part a Date US Sales Mar-18 115,504 Apr-18 100,736 May-18 100,373 May-18 100,373 Jun-18 103,263 Jul-18 67,546 Aug-18 111,880 Sep-18 98,194 Oct-18 125,425 Nov-18 111,412 Dec-18 83,153 Jan-19 112,116 Feb-19 104,214 Mar-19 107,661 Apr-19 109,068 May-19 113,314 Jun-19 106,267 Jul-19 91,011 Aug-19 102,666 Sep-19 96,735 Oct-19 110,506 Nov-19 84,290 Dec-19 67,168 Jan-20 102,806 Feb-20 99,278 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

a. Response to part a The trend is rather erratic with Decembe

b. Response to part b Covid-19 affected April 2020 significantly actual amount during the Covid-19 perio people being unemployed and the uncer

Covid-19 affected April 2020 significantly actual amount during the Covid-19 perio people being unemployed and the uncer

c. Response to part c Answers will vary. In a normal year wher levels should be decreased prior to seas have higher sales. This can mitigate ove

d. Response to part d Answers will vary. The downturn in the e effects of unemployment on its productio considered as people may buy cars at th Honda will need to assess its suppliers to

e. Response to part e Answers will vary. The forecasts rely prim economic situations. However, forecasts such as COVID or economic recessions. estimating for the future. The forecasting are forecasted, the more uncertain they

st sheet chart for part a Forecast(US Sales)

Lower Confidence Bound(US Sales) Upper Confidence Bound(US Sales)

106,580

Forecast of U.S. Honda Sales#NUM! in Units #NUM!

140,000 120,000

US Sales in Units

100,000 80,000 60,000 40,000

20,000 0

US Sales

99,278 95,253 94,738 94,223 93,708 93,193 92,679

Forecast(US Sales)

Lower Confidence Bound(US Sales)

Upper Confidence Bound(US Sales)

99,278 66,329 65,667 65,003 64,336 63,668 62,997

99,278 124,177 123,809 123,444 123,080 122,719 122,360

se to part a s rather erratic with December and July showing the lowest sales. August and October show peaks.

se to part b ffected April 2020 significantly making the forecasts for that month and months to follow unreliable. The unt during the Covid-19 period will likely be much less than the lower range of the forecast shown due to ng unemployed and the uncertainty of what the virus will do in the future.

ffected April 2020 significantly making the forecasts for that month and months to follow unreliable. The unt during the Covid-19 period will likely be much less than the lower range of the forecast shown due to ng unemployed and the uncertainty of what the virus will do in the future.

se to part c ill vary. In a normal year where pandemics and economic concerns do not impact the forecast, production uld be decreased prior to seasons in which sales are expected to be low, and higher for seasons expected to r sales. This can mitigate overstocking and lost sales due to inadequate inventory levels.

se to part d ill vary. The downturn in the economy due to COVIC is huge concern for Honda. Honda should consider the unemployment on its production facilities and on consuming buying habits. The sales mix may also be as people may buy cars at the lower end of the price range and shift to vehicles with better gas mileage. need to assess its suppliers to be sure it has the materials it needs for production.

se to part e ill vary. The forecasts rely primarily on Honda's historical data, which is somewhat reliable in ordinary situations. However, forecasts become unreliable with upsets in the economy due to unusual circumstances OVID or economic recessions. Management must consider unprecedented variables such as these in for the future. The forecasting time period is a consideration as well , and the farther in the future amounts sted, the more uncertain they become.

Upper Confidence Bound(US Sales)

Using Data Visualization for Budgeting DA16.2 Data visualization can be used to analyze seasonality is sales. Seasonality of sales can have a big impact on budgeting. Think of when people are more likely to buy cars. Data for Honda's worldwide unit sales from January 2018 through December 2019 are presented here. Data Set 1

Date

Worldwide Total Unit Sales

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

474,030 407,870 484,955 429,250 435,838 449,394 421,050 418,546 441,930 479,680 492,757 421,713 476,794 391,060 479,608 443,654 460,163 440,896 429,636 416,138 430,196 428,502 410,944 363,004

Data for Honda worldwide unit sales from January 2013 through February 2020 are presented here. Data Set 2 2013 2014 2015 2016 2017 2018 2019 2020 Date January 342,808 378,817 363,155 404,259 412,713 474,030 476,794 385,750 February 328,298 352,824 306,107 396,470 416,614 407,870 391,060 289,255 March 357,437 401,607 398,915 455,362 487,323 484,955 479,608 April 354,715 384,411 379,052 403,742 396,758 429,250 443,654 May 347,682 380,466 355,932 398,075 427,046 435,838 460,163 June 339,881 389,381 394,647 425,303 446,392 449,394 440,896 July 338,933 363,497 389,347 372,422 397,135 421,050 429,636 August 339,930 343,542 358,282 403,487 434,399 418,546 416,138 September 382,757 390,267 394,816 449,591 455,229 441,930 430,196 October 419,224 402,627 413,777 422,143 452,930 479,680 428,502 November 398,227 371,259 410,306 458,822 481,869 492,757 410,944 December 348,488 355,071 379,502 409,587 428,434 421,713 363,004

Instructions There are four parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. List the months you think would experience higher and lower sales on average for worldwide sales. Explain your choices. What factors do you think may influence sales in a particular month? b. Using data set 1, create a line chart with total worldwide unit sales for all months in 2018 and 2019 to see the seasonality on the y-axis and months on the x-axis. Include a descriptive chart title and labeled vertical axis. Ensure the y-axis dates are properly formatted. Designate a lower bound of 300,000 and an upper bound of 550,000 unit sales on the y-axis. What seasonality do you see? c. Using data set 2, create a second line chart with unit worldwide sales by month for each year except 2020 to visualize the seasonality on the y-axis and months on the x-axis. Include a descriptive chart title and labeled vertical axis. Designate a lower bound of 300,000 and an upper bound of 550,000 unit sales on the y-axis. Does this chart change your perspective on seasonality, or do the years look similar? Explain the seasonality pattern. d. What are the implications of seasonality on budgeting and production?

Student Work Area a. Response to part a

b. Chart for part b

b. Response to part b

c. Chart for part c

c. Response to part c

d. Response to part d

Using Data Visualization for Budgeting

DA16.2 Data visualization can be used to analyze seasonality is sales. Seasonality of sales can have a big impact on budgeting. Think of when people are more likely to buy cars. Data for Honda's worldwide unit sales from January 2018 through December 2019 are presented here. Data Set 1

Date

Worldwide Total Unit Sales

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

474,030 407,870 484,955 429,250 435,838 449,394 421,050 418,546 441,930 479,680 492,757 421,713 476,794 391,060 479,608 443,654 460,163 440,896 429,636 416,138 430,196 428,502 410,944 363,004

Student Work Area

a. Response to part a Student answers will vary. Car sales are lower in December because people have expenses relate holidays. Sales may be higher in May as students graduate and in September as they begin new jo selling price of vehicles is a consideration. Honda may be discounting the cars deeply to improve it sales at the end of a fiscal year.

b. Chart for part b

Honda's Worldwide Total Unit Sales 550,000

Unit Sales

500,000 450,000 400,000 350,000 300,000

Months

b. Response to part b From the chart, it appears that there are dips down in December and February. Peaks appear erra March and January.

c. Chart for part c

Monthly Worldwide Unit Sales by Year 550,000

Unit Sales

500,000

450,000

400,000

350,000

300,000

2013

2014

2015

2016

2017

2018

c. Response to part c Each of the years seem to follow a fairly similar pattern with low seasons in December and Februa levels of sales appear to occur in March and November. Most of the years show January with highe well.

d. Response to part d The company needs to be prepared with higher inventory levels at the beginning of high sales mon November and March. Management will need to reduce production before lower sales months, like and December.

people have expenses related to the tember as they begin new jobs. The the cars deeply to improve its reported

February. Peaks appear erratically in

2018

2019

ns in December and February. High ears show January with higher sales as

beginning of high sales months, like ore lower sales months, like February

E17.2 Compute standard materials costs Hank Itzek manufactures and sells homemade wine, and he wants to develop a standard cost per gallon. The following are required for production of a 50-gallon batch. 3,000 ounces of grape concentrate at $0.06 per ounce 54 pounds of granulated sugar at $0.30 per pound 60 lemons at $0.60 each 50 yeast tablets at $0.25 each 50 nutrient tablets at $0.20 each 2,600 ounces of water at $0.005 per ounce Hank estimates that 4% of the grape concentrate is wasted, 10% of the sugar is lost, and 25% of the lemons cannot be used. Instructions Compute the standard cost of the ingredients for one gallon of wine. (Carry computations to two decimal places.) NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells..

Ingredient

Standard Waste

Amount per Gallon

Standard Usage

Standard Price

Grape concentrate

oz.

0.06

Sugar

lb.

10%

0.30

Lemons

lemons

25%

0.60

Yeast

tablet

0.25

Nutrient

tablet

0.20

Water

oz.

0.01

Standard Cost per Gallon

Standard cost for one gallon of wine

When you have completed E17.2, respond to additional question, on the E17.2 Add Ques worksheet.

E17.2 Solution Hank Itzek manufactures and sells homemade wine, and he wants to develop a standard cost per gallon. The following are required for production of a 50-gallon batch. 3,000 ounces of grape concentrate at $0.06 per ounce 54 pounds of granulated sugar at $0.30 per pound 60 lemons at $0.60 each 50 yeast tablets at $0.25 each 50 nutrient tablets at $0.20 each 2,600 ounces of water at $0.005 per ounce Hank estimates that 4% of the grape concentrate is wasted, 10% of the sugar is lost, and 25% of the lemons cannot be used. Instructions Compute the standard cost of the ingredients for one gallon of wine. (Carry computations to two decimal places.) NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Ingredient

Amount per Gallon

Standard Waste

Standard Usage

Standard Price

Standard Cost per Gallon

Grape concentrate

60.00 oz.

62.50

0.06

Sugar

1.08 lb.

10%

1.20

0.30

0.36

Lemons

1.20 lemons

25%

1.60

0.60

0.96

Yeast

1.00 tablet

1.00

0.25

Nutrient

1.00 tablet

1.00

0.20

Water

52.00 oz.

52.00

0.01

0.26

Standard cost for one gallon of wine

3.75

5.78

E17.2 Additional Question Hank Itzek manufactures and sells homemade wine, and he wants to develop a standard cost per gallon. The following are required for production of a 50-gallon batch. 3,000 ounces of grape concentrate at $0.06 per ounce 54 pounds of granulated sugar at $0.30 per pound 60 lemons at $0.60 each 50 yeast tablets at $0.25 each 50 nutrient tablets at $0.20 each 2,600 ounces of water at $0.005 per ounce Hank estimates that 4% of the grape concentrate is wasted, 10% of the sugar is lost, and 25% of the lemons cannot be used. Instructions Compute the standard cost of the ingredients for one gallon of wine. (Carry computations to two decimal places.) NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume the standard waste for grape concentrate, sugar and lemons changed to 5%, 8% and 20% respectively. How will these changes impact the standard cost of one gallon of wine?

Ingredient

Standard Waste

Amount per Gallon

Standard Usage

Standard Price

Grape concentrate

oz.

0.06

Sugar

lb.

0.30

Lemons

lemons

20%

0.60

Yeast

tablet

0.25

Nutrient

tablet

0.20

Water

oz.

0.01

Standard cost for one gallon of wine

Standard Cost per Gallon

E17.2 Solution to Additional Question Hank Itzek manufactures and sells homemade wine, and he wants to develop a standard cost per gallon. The following are required for production of a 50-gallon batch. 3,000 ounces of grape concentrate at $0.06 per ounce 54 pounds of granulated sugar at $0.30 per pound 60 lemons at $0.60 each 50 yeast tablets at $0.25 each 50 nutrient tablets at $0.20 each 2,600 ounces of water at $0.005 per ounce Hank estimates that 4% of the grape concentrate is wasted, 10% of the sugar is lost, and 25% of the lemons cannot be used. Instructions Compute the standard cost of the ingredients for one gallon of wine. (Carry computations to two decimal places.) NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume the standard waste for grape concentrate, sugar and lemons changed to 5%, 8% and 20% respectively. How will these changes impact the standard cost of one gallon of wine?

Ingredient

Amount per Gallon

Standard Waste

Standard Usage

Standard Price

Standard Cost per Gallon

Grape concentrate

60.00 oz.

63.16

0.06

Sugar

1.08 lb.

1.17

0.30

0.35

Lemons

1.20 lemons

20%

1.50

0.60

0.90

Yeast

1.00 tablet

1.00

0.25

Nutrient

1.00 tablet

1.00

0.20

Water

52.00 oz.

52.00

0.01

0.26

Standard cost for one gallon of wine

3.79

5.75

E17.5 Compute materials price and quantity variance The standard cost of Product B manufactured by Pharrell Company includes three units of direct materials at $5.00 per unit. During June, 29,000 units of direct materials are purchased at a cost of $4.70 per unit, and 29,000 units of direct materials are used to produce 9,400 units of Product B. Instructions a. Compute the total materials variance and the price and quantity variances. b. Repeat (a), assuming the purchase price is $5.15 and the quantity purchased and used is 28,000 units. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Total materials variance AQ

Materials price variance: AQ AP

Materials quantity variance AQ SP

Total materials variance AQ AP

Materials price variance AQ AP

Materials quantity variance AQ SP

When you have completed E17.5, respond to the additional question on the E17.5 Add Ques worksheet.

E17.5 Solution The standard cost of Product B manufactured by Pharrell Company includes three units of direct materials at $5.00 per unit. During June, 29,000 units of direct materials are purchased at a cost of $4.70 per unit, and 29,000 units of direct materials are used to produce 9,400 units of Product B. Instructions a. Compute the total materials variance and the price and quantity variances. b. Repeat (a), assuming the purchase price is $5.15 and the quantity purchased and used is 28,000 units. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Total materials variance AQ 29,000

AP $4.70

$136,300

$141,000

SQ 28,200 =

Materials price variance: AQ AP 29,000 $4.70 $136,300

$145,000

Materials quantity variance AQ SP 29,000 $5.00 $145,000

$141,000

SP $5.00

$4,000 U

SQ 28,200 =

SP $5.00

$8,700 F

SQ 28,200

Total materials variance AQ AP 28,000 $5.15 $144,200

$4,700 F

AQ 29,000 =

SP $5.00

$3,200 U

SP $5.00

Materials price variance AQ AP 28,000 $5.15 $144,200

$140,000

AQ 28,000 =

Materials quantity variance AQ SP 28,000 $5.00 $140,000

$141,000

$4,200 U

SQ 28,200 =

SP $5.00

$1,000 F

SP $5.00

E17.5 Additional Question The standard cost of Product B manufactured by Pharrell Company includes three units of direct materials at $5.00 per unit. During June, 29,000 units of direct materials are purchased at a cost of $4.70 per unit, and 29,000 units of direct materials are used to produce 9,400 units of Product B. Instructions a. Compute the total materials variance and the price and quantity variances. b. Repeat (a), assuming the purchase price is $5.15 and the quantity purchased and used is 28,000 units. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume in part (a) that the purchase price of direct materials changed to $4.80 and the quantity purchased and used also changed to 30,000 units. Recalculate total materials variance and price and quantity variances.

Total materials variance AQ

Materials price variance: AQ AP

Materials quantity variance AQ SP

E17.5 Solution to Additional Question The standard cost of Product B manufactured by Pharrell Company includes three units of direct materials at $5.00 per unit. During June, 29,000 units of direct materials are purchased at a cost of $4.70 per unit, and 29,000 units of direct materials are used to produce 9,400 units of Product B. Instructions a. Compute the total materials variance and the price and quantity variances. b. Repeat (a), assuming the purchase price is $5.15 and the quantity purchased and used is 28,000 units. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Total materials variance AQ 30,000

AP $4.80

$144,000

$141,000

SQ 28,200 =

Materials price variance: AQ AP 30,000 $4.80 $144,000

$150,000

Materials quantity variance AQ SP 30,000 $5.00 $150,000

$141,000

$3,000 U

AQ 30,000 =

SP $5.00

$6,000 F

SQ 28,200 =

SP $5.00

$9,000 U

SP $5.00

E17.7 Compute materials and labor variances Levine Inc., which produces a single product, has prepared the following standard cost sheet for one unit of the product. Direct materials (8 pounds at $2.50 per pound) Direct labor (3 hours at $12 per hour)

$20 $36

During the month of April, the company manufactures 230 units and incurs the following actual costs. Direct materials purchased and used (1,900 pounds) $ 5,035 Direct labor (700 hours) 8,120 Instructions Compute the total, price, and quantity variances for materials and labor. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Total materials variance AQ AP

Materials price variance AQ AP

Materials quantity variance AQ SP

b. Total labor variance AH

Labor price variance AH AR

Labor quantity variance AH SR

When you have completed E17.7, respond to the additional question, on the E17.7 Add Ques worksheet.

E17.7 Solution Levine Inc., which produces a single product, has prepared the following standard cost sheet for one unit of the product. Direct materials (8 pounds at $2.50 per pound) Direct labor (3 hours at $12 per hour)

$20 $36

a. Total materials variance AQ AP 1,900 $2.65 $5,035

$4,600

Materials price variance AQ AP 1,900 $2.65 $5,035

$4,750

Materials quantity variance AQ SP 1,900 $2.50 $4,750

$4,600

SQ 1,840

SP $2.50

$435 U

AQ 1,900

SP $2.50

$285 U

SQ 1,840 $150 U

SP $2.50

b. Total labor variance AH AR 700 $11.60 $8,120

$8,280

Labor price variance AH AR 700 $11.60 $8,120

$8,280

SR $12.00 $160 F

AH 700

$8,400

Labor quantity variance AH SR 700 $12.00 $8,400

SH 690

SR $12.00 $280 F

SH 690

SR $12.00 $120 U

E17.7 Additional Question Levine Inc., which produces a single product, has prepared the following standard cost sheet for one unit of the product. Direct materials (8 pounds at $2.50 per pound) Direct labor (3 hours at $12 per hour)

$20 $36

Additional Question Assume that the actual quantity and price paid for direct material and labor changed to the following: Direct materials purchased and used (2,000 pounds) Direct labor (720 hours) Recalculate total variance, price and quantity variances for both direct materials and labor.

a. Total materials variance AQ AP

Materials price variance AQ AP

Materials quantity variance AQ SP

Labor price variance AH AR

Labor quantity variance AH SR

b. Total labor variance AH

E17.7 Solution to Additional Question Levine Inc., which produces a single product, has prepared the following standard cost sheet for one unit of the product. Direct materials (8 pounds at $2.50 per pound) Direct labor (3 hours at $12 per hour)

$20 $36

a. Total materials variance AQ AP 2,000 $2.518 $5,035

$4,600

Materials price variance AQ AP 2,000 $2.518

SQ 1,840

SP $2.50

$435 U

AQ 2,000

SP $2.50

$5,035

$5,000

$35 U

Materials quantity variance AQ SP 2,000 $2.500 $5,000

$4,600

b. Total labor variance AH AR 720 $11.278 $8,120

$8,640

SH 690

$8,280

SR $12.00 $160 F

AH 720

$8,640

Labor quantity variance AH SR 720 $12.00

SP $2.50

$400 U

$8,280

Labor price variance AH AR 720 $11.278 $8,120

SQ 1,840

SR $12.00 $520 F

SH 690

SR $12.00 $360 U

P17.2 Compute variances, and prepare income statement Ayala Corporation accumulates the following data relative to jobs started and finished during the month of June 2027. Cost and Production Data Raw materials unit cost Direct labor payroll Manufacturing overhead incurred Manufacturing overhead applied Budgeted fixed overhead for June Variable overhead rate per machine hour Fixed overhead rate per machine hour

Actual $ 2.25 120,960 189,500

Standard $ 2.10 120,000 189,000 55,250 3.00 1.30

Raw materials units Direct labor hours Machine hours expected to be used at normal capacity

10,600 14,400

10,000 15,000 42,500

Overhead is applied on the basis of standard machine hours. Three hours of machine time are required for each direct labor hour. The jobs were sold for $400,000. Selling and administrative expenses were $40,000. Assume that the amount of raw materials purchased equaled the amount used. Instructions a. Compute all of the variances for (1) direct materials and (2) direct labor. b. Compute the total overhead variance. c. Prepare an income statement for management. (Ignore income taxes.) NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Total materials variance: AQ

Materials price variance: AQ

Materials quantity variance: AQ SP

Total labor variance: AH

Labor Price variance: AH

Labor quantity variance: AH

b. Total Overhead Variance: =

Actual Overhead

Overhead Applied

AYALA CORPORATION Income Statement For the Month Ended June 30, 2027 Sales revenue Cost of goods sold (at standard) Gross profit (at standard) Variances Material price Materials quantity Labor price Labor quantity Overhead Total variance - favorable Gross profit (actual) Selling and administrative expenses Net income

When you have completed P17.2, respond to the following additional question, on the P17.2 Add Ques worksheet.

P17.2 Solution Ayala Corporation accumulates the following data relative to jobs started and finished during the month of June 2025. Cost and Production Data Raw materials unit cost Direct labor payroll Manufacturing overhead incurred Manufacturing overhead applied Budgeted fixed overhead for June Variable overhead rate per machine hour Fixed overhead rate per machine hour

Actual $ 2.25 120,960 189,500

Standard $ 2.10 120,000 189,000 55,250 3.00 1.30

Raw materials units Direct labor hours Machine hours expected to be used at normal capacity

10,600 14,400

10,000 15,000 42,500

a. Total materials variance: AQ 10,600

AP $2.25

$23,850

$21,000

Materials price variance: AQ

SQ 10,000

SP $2.10

$2,850 U

10,600

$2.25

$23,850

$22,260

10,600 $1,590 U

Materials quantity variance: AQ SP 10,600 $2.10 $22,260

Total labor variance: AH 14,400

SQ 10,000

$21,000

$120,000

Labor Price variance: AH 14,400

AR $8.40

$120,960

$115,200

Labor quantity variance: AH 14,400

SR $8.00

$115,200

$120,000

SP $2.10

$1,260 U

AR $8.40

$120,960

$2.10

SH 15,000

SR $8.00

$960 U

AH 14,400

SR $8.00

$5,760 U

SH 15,000

SR $8.00

$4,800

$4,000

b. Total Overhead Variance: =

Actual Overhead

Overhead Applied

$189,500

$193,500

1,590 1,260 5,760 4,800 4,000

400,000 334,500 65,500

U U U F F

190 65,690 40,000 25,690

P17.2 Additional Question Ayala Corporation accumulates the following data relative to jobs started and finished during the month of June 2027. Cost and Production Data Raw materials unit cost Direct labor payroll Manufacturing overhead incurred Manufacturing overhead applied Budgeted fixed overhead for June Variable overhead rate per machine hour Fixed overhead rate per machine hour Raw materials units Direct labor hours Machine hours expected to be used at normal capacity

Actual $ 2.25 120,960 189,500

Standard $ 2.10 120,000 189,000 55,250 3.00 1.30

10,600 14,400

10,000 15,000 42,500

Additional Questions 1. Assume that the actual price for raw materials changed to $2.30 and actual quantity of raw materials used changed to 11,000 units. Recompute total materials variance and price and quantity variances for materials. 2. Show the impact of the changes above on the income statement.

a. Total materials variance: AQ

Materials price variance: AQ

Materials quantity variance: AQ SP

P17.2 Solution to Additional Question Ayala Corporation accumulates the following data relative to jobs started and finished during the month of June 2027. Cost and Production Data Raw materials unit cost Direct labor payroll Manufacturing overhead incurred Manufacturing overhead applied Budgeted fixed overhead for June Variable overhead rate per machine hour Fixed overhead rate per machine hour Raw materials units Direct labor hours Machine hours expected to be used at normal capacity

Actual $ 2.25 120,960 189,500

Standard $ 2.10 120,000 189,000 55,250 3.00 1.30

10,600 14,400

10,000 15,000 42,500

a. Total materials variance: AQ 11,000

AP $2.30

$25,300

$21,000

Materials price variance: AQ 11,000

AP $2.30

$25,300

$23,100

SQ 10,000 $4,300 U

AQ 11,000

SP $2.10

$2,200 U

Materials quantity variance: AQ SP 11,000 $2.10 $23,100

SP $2.10

SQ 10,000

$21,000

SP $2.10

$2,100 U

2,200 2,100 5,760 4,800 4,000

400,000 334,500 65,500

U U U F F

(1,260) 64,240 40,000 24,240

The increase in quantity and price of materials used resulted in a larger unfavorable material price variance of $2,200 (instead of $1,590) and a larger unfavorable materials quantity variance of $2,100 (instead of $1,260). The impact on net income is a decrease of $1,450 (from $25,690 to $24,240).

CHAPTER 17 Using Excel to Make Decisions at Current Designs Topic(s): Standard Costs Excel Functions and Tools: Range naming; Conditional formatting, IF function The executive team at Current Designs has gathered to evaluate the company’s operations for the last month. One of the topics on the agenda is the special order from Huegel Hollow, which was presented in CD12. Recall that Current Designs had a special order to produce a batch of 20 kayaks for a client, and you were asked to determine the cost of the order and the cost per kayak. Mike Cichanowski asked the others if the special order caused any particular problems in the production process. Dave Thill, the production manager, made the following comments: “Since we wanted to complete this order quickly and make a good first impression on this new customer, we had some of our most experienced type I workers run the rotomold oven and do the trimming. They were very efficient and were able to complete that part of the manufacturing process even more quickly than the regular crew. However, the finishing on these kayaks required a different technique than what we usually use, so our type II workers took a little longer than usual for that part of the process.”

Deb Welch, who is in charge of the purchasing function, said, “We had to pay a little more for the polyethylene powder for this order because the customer wanted a color that we don’t usually stock. We also ordered a little extra since we wanted to make sure that we had enough to allow us to calibrate the equipment. The calibration was a little tricky, and we used all of the powder that we had purchased. Since the number of kayaks in the order was fairly small, we were able to use some rope and other parts that were left over from last year’s production in the finishing kits. We’ve seen a price increase for these components in the last year, so using the parts that we already had in inventory cut our costs for the finishing kits.” Instructions a. Based on the comments above, predict whether each of the following variances will be favorable or unfavorable. If you don’t have enough information to make a prediction, use “NEI” to indicate “Not Enough Information.” 1. 2. 3. 4. 5. 6. 7. 8.

Quantity variance for polyethylene powder. Price variance for polyethylene powder. Quantity variance for finishing kits. Price variance for finishing kits Quantity variance for type I workers. Price variance for type I workers. Quantity variance for type II workers. Price variance for type II workers.

b. Diane Buswell examined some of the accounting records and reported that Current Designs purchased 1,200 pounds of pellets for this order at a total cost of $2,040. Twenty (20) finishing kits were assembled at a total cost of $3,240. The payroll records showed that the type I employees worked 38 hours on this project at a total cost of $570. The type II finishing employees worked 65 hours at a total cost of $796.25. A total of 20 kayaks were produced for this order. The actual activity has been placed in the following table.

Diane Buswell examined some of the accounting records and reported that Current Designs purchased 1,200 pounds of pellets for this order at a total cost of $2,040. Twenty (20) finishing kits were assembled at a total cost of $3,240. The payroll records showed that the type I employees worked 38 hours on this project at a total cost of $570. The type II finishing employees worked 65 hours at a total cost of $796.25. A total of 20 kayaks were produced for this order. The actual activity has been placed in the following table. Actual activity for Huegel Hollow order: Purchases of polyethylene powder 1,200 pounds Finishing kits assembled 20 kits Type I labor hours 38 hours Type Il labor hours 65 hours Cost of polyethylene powder purchases $2,040 Cost of assembling finishing kits $3,240 Total type I labor cost $570 Total type Il labor cost $796.25 Number of units produced 20 kayaks The standards that had been developed for this model of kayak were used in CD12 and are reproduced here. For each kayak: Standards for each kayak: Pounds of polyethylene powder 54 pounds Finishing kits 1 each Type I labor hours 2 hours Type II labor hours 3 hours Cost of polyethylene power $1.50 per pound Cost of finishing kits $170.00 per kit Type I labor rate $15.00 per hour Type II labor rate $12.00 per hour Calculate the eight variances that are listed in part (a) of this problem.

What -if Question Perform what-if analysis to answer the following: Suppose the number of kayaks ordered by Huegel Hollow was 21 instead of 20. Identify which variances made no change in dollar amounts from the original kayaks produced. Explain why these variances remained the same.

1. 2. 3. 4. 5. 6. 7. 8.

Quantity variance for polyethylene powder. (AQ X SP) (SQ X SP)

Variance

Favorable/ Unfavorable

Price variance for polyethylene powder. (AQ X AP) (AQ X SP)

Variance

Favorable/ Unfavorable

Quantity variance for finishing kits. (AQ X SP) (SQ X SP)

Variance

Favorable/ Unfavorable

Price variance for finishing kits (AQ X AP)

Variance

Favorable/ Unfavorable

Variance

Favorable/ Unfavorable

Price variance for type I workers. (AH X AR) (AH X SR)

Variance

Favorable/ Unfavorable

Quantity variance for type II workers. (AH X SR) (SH X SR)

Variance

Favorable/ Unfavorable

Price variance for type II workers. (AH X AR) (AH X SR)

Variance

Favorable/ Unfavorable

(AQ X SP)

Quantity variance for type I workers. (AH X SR) (SH X SR)

Instructions a. Based on the comments above, predict whether each of the following variances will be favorable or unfavorable. If you don’t have enough information to make a prediction, use “NEI” to indicate “Not Enough Information.” 1. 2. 3. 4. 5. 6. 7. 8.

1. 2. 3. 4. 5. 6. 7. 8.

Unfavorable Unfavorable NEI Favorable Favorable NEI Unfavorable NEI

Quantity variance for polyethylene powder. (AQ X SP) (SQ X SP) $ 1,800 $ 1,620

Variance $ 180

Favorable/ Unfavorable Unfavorable

Variance 240

Favorable/ Unfavorable Unfavorable

Price variance for polyethylene powder. (AQ X AP) (AQ X SP) $ 2,040 $ 1,800

Quantity variance for finishing kits. (AQ X SP) (SQ X SP) $ 3,400 $ 3,400

Variance $ -

Favorable/ Unfavorable Favorable

Price variance for finishing kits (AQ X AP) $ 3,240

Variance $ 160

Favorable/ Unfavorable Favorable

Variance $ 30

Favorable/ Unfavorable Favorable

(AQ X SP) $ 3,400

Quantity variance for type I workers. (AH X SR) (SH X SR) $ 570 $ 600

Price variance for type I workers. (AH X AR) (AH X SR) $ 570 $ 570

Variance -

Favorable/ Unfavorable Favorable

Quantity variance for type II workers. (AH X SR) (SH X SR) $ 780 $ 720

Variance $ 60

Favorable/ Unfavorable Unfavorable

Price variance for type II workers. (AH X AR) (AH X SR) $ 796.25 $ 780.00

Variance $ 16.25

Favorable/ Unfavorable Unfavorable

This blank worksheet named CD17 Part 2 What-if has been created for you. After completing part 1, copy the worksheet containing your solution and paste to this blank worksheet using the instructions in the Part 2 tutorial.

Diane Buswell examined some of the accounting records and reported that Current Designs purchased 1,200 pounds of pellets for this order at a total cost of $2,040. Twenty (20) finishing kits were assembled at a total cost of $3,240. The payroll records showed that the type I employees worked 38 hours on this project at a total cost of $570. The type II finishing employees worked 65 hours at a total cost of $796.25. A total of 20 kayaks were produced for this order. The actual activity has been placed in the following table. Actual activity for Huegel Hollow order: Purchases of polyethylene powder 1,200 pounds Finishing kits assembled 20 kits Type I labor hours 38 hours Type Il labor hours 65 hours Cost of polyethylene powder purchases $2,040 Cost of assembling finishing kits $3,240 Total type I labor cost $570 Total type Il labor cost $796.25 Number of units produced 21 kayaks The standards that had been developed for this model of kayak were used in CD12 and are reproduced here. For each kayak: Standards for each kayak: Pounds of polyethylene powder 54 pounds Finishing kits 1 each Type I labor hours 2 hours Type II labor hours 3 hours Cost of polyethylene power $1.50 per pound Cost of finishing kits $170.00 per kit Type I labor rate $15.00 per hour Type II labor rate $12.00 per hour Calculate the eight variances that are listed in part (a) of this problem.

1. 2. 3. 4. 5. 6. 7. 8.

Unfavorable Unfavorable NEI Favorable Favorable NEI Unfavorable NEI

Quantity variance for polyethylene powder. (AQ X SP) (SQ X SP) $ 1,800 $ 1,701

Variance $ 99

Favorable/ Unfavorable Unfavorable

Price variance for polyethylene powder. (AQ X AP) (AQ X SP) $ 2,040 $ 1,800

Variance 240

Favorable/ Unfavorable Unfavorable

Quantity variance for finishing kits. (AQ X SP) (SQ X SP) $ 3,400 $ 3,570

Variance $ 170

Favorable/ Unfavorable Favorable

Price variance for finishing kits (AQ X AP) $ 3,240

Variance $ 160

Favorable/ Unfavorable Favorable

Variance $ 60

Favorable/ Unfavorable Favorable

(AQ X SP) $ 3,400

Quantity variance for type I workers. (AH X SR) (SH X SR) $ 570 $ 630

Price variance for type I workers. (AH X AR) (AH X SR) $ 570 $ 570

Variance -

Favorable/ Unfavorable Favorable

Quantity variance for type II workers. (AH X SR) (SH X SR) $ 780 $ 756

Variance $ 24

Favorable/ Unfavorable Unfavorable

Price variance for type II workers. (AH X AR) (AH X SR) $ 796.25 $ 780.00

Variance $ 16.25

Favorable/ Unfavorable Unfavorable

Data Visualization at HydroHappy DA17 Data Visualization can be used to analyze variances. HydroHappy’s managers want to see a visual comparison of its materials variances to better illustrate trends over time. For this case, you will use materials price and quantity variance data to create and analyze stacked area charts. Four materials are used in the production of water spinners. The budgeted costs per week for each of the four materials are presented here:

Static budget Flexible budget

Casings

Circuits

Gears

Switches

$ 186,500 192,500

$ 165,400 172,500

$ 188,000 184,500

$ 135,000 143,200

The company’s materials price and quantity variances for the four materials for the last 15 weeks are provided here. Positive amounts indicate favorable variances and negative amounts indicate unfavorable variances.

Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Casings Price

Circuits Price

$ (2,659) $ (2,400) 1,577 (1,540) 2,155 413 1,640 (65) 658 1,890 2,890 1,850 235 456 (580)

Gears Price

1,645 $ 54 (2,235) 2,245 4,580 1,600 2,930 (600) 1,789 1,732 3,215 (450) 3,401 (107) 2,321

1,976 $ (602) 56 (12) 843 1,871 (1,326) 1,674 1,365 (1,480) 671 (1,515) 1,613 (13) 875

Switches Price

1,782 $ (952) (668) (1,137) (1,826) 1,492 1,826 (15) 2,748 (760) 2,147 94 900 (773) 231

Casings Quantity

Circuits Quantity

Gears Quantity

Switches Quantity

1,138 $ (225) $ (574) $ (435) 1,567 180 275 (924) (2,005) 2,228 (1,133) (2,483) 1,043 234 659 403 (442) (1,615) (482) (288) (1,511) 2,253 (2,088) (1,538) (163) (1,622) (922) (10) (1,097) 806 127 (1,226) 1,780 (1,320) (1,308) 531 (689) (1,315) 842 (1,310) (134) 1,058 (562) 121 (1,469) (479) (362) (1,900) 2,104 398 (757) (2,499) 392 498 1,443 (2,119) 1,929 414 (919) (861)

Instructions There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Create a stacked area chart for the 15 weeks of material price variance data. Include a descriptive chart title, axes labels, and a legend in the chart. b. Evaluate any trends you see and indicate possible causes of the trends in the price variances. c. Create a stacked area chart for the 15 weeks of material quantity variance data. Include a descriptive chart title, axes labels, and a legend in the chart. d. Evaluate any trends you see and indicate possible causes of the trends in the quantity variances. e. Who is responsible for the price variances? The material variances?

Student Work Area a. Chart for material price variances

b. Response to part b.

c. Chart for material quantity variances

d. Response to part d

e. Response to part e

Static budget Flexible budget

Casings

Circuits

Gears

Switches

$ 186,500 192,500

$ 165,400 172,500

$ 188,000 184,500

$ 135,000 143,200

Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Casings Price

Circuits Price

$ (2,659) $ (2,400) 1,577 (1,540) 2,155 413 1,640 (65) 658 1,890 2,890 1,850 235 456 (580)

Gears Price

1,645 $ 54 (2,235) 2,245 4,580 1,600 2,930 (600) 1,789 1,732 3,215 (450) 3,401 (107) 2,321

1,976 $ (602) 56 (12) 843 1,871 (1,326) 1,674 1,365 (1,480) 671 (1,515) 1,613 (13) 875

Switches Price

1,782 $ (952) (668) (1,137) (1,826) 1,492 1,826 (15) 2,748 (760) 2,147 94 900 (773) 231

Casings Quantity

Circuits Quantity

Gears Quantity

Switches Quantity

Student Work Area a. Chart for material price variances

Material Price Variances $10,000 $8,000

Variance Amounts

$6,000 $4,000 $2,000 $0 1

-$2,000 -$4,000 -$6,000

Weeks Casings Price

Circuits Price

Gears Price

Switches Price

b. Response to part b. Most of the price variances are favorable as seen by the shaded peaks above the $0 axis. Circuits and switches appear to be the materials with the largest portion of the total price variance. Price variances were generally unfavorable but not in significant amounts for the first 4 weeks. They changed to primarily favorable variances after week 4. The largest favorable material variances occurred during weeks 5, 9, 11, and 13. The price of circuits and switches appear to show the largest fluctuations, perhaps due to supply and demand situations, or erratic buying habits of the purchasing department. Overall it appears that the actual prices of all 4 materials are below the standard amounts as shown by the favorable variances.

c. Chart for material quantity variances

Material Quantity Variances

Material Quantity Variances $3,000 $2,000

Variance Amounts

$1,000 $0 -$1,000

-$2,000 -$3,000 -$4,000 -$5,000

Weeks Casings Quantity

Circuits Quantity

Gears Quantity

Switches Quantity

d. Response to part d Most of the material variances are unfavorable as seen by the shaded peaks below the $0 axis. Switches appears to be the largest portion of the total quantity variance. Quantity variances were favorable but not in significant amounts for the first couple of weeks, then changed to primarily unfavorable variances from week 4 through week 10, with a mild spike in week 11, and a significant decline in week 12. Favorable variances returned primarily from material D during weeks 13 through 15. The variance of switches appears to experience the largest fluctuations. Causes of the unfavorable variances may be due to poor material planning in the standards, or lack of efficient use of materials such as excess waste during weeks 5 through 12. In addition, excess use may be due to poor quality materials during that same time period. Overall it appears that the although quantity variances were unfavorable for several weeks, there is a upward trend of favorable variances, the latter of which may be due to less material waste.

e. Response to part e The purchasing department is responsible for the materials price variances as the employees in that department are the ones who negotiate prices and quality standards. The production supervisors are responsible for the material quantity variances as they are responsible for controlling usage by employees in the production process. If the variance is deemed to be caused due to incorrect standards, the production engineer or manager who is responsible for planning and budgeting should be addressed.

E18.2 Compute cash payback period and net present value Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash flows.

Year 1 2 3 Total

AA $

7,000 9,000 12,000 28,000

BB 10,000 $ 10,000 10,000 30,000 $

CC 13,000 12,000 11,000 36,000

The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug’s required rate of return is 12%.

Instructions a. Compute each project’s payback period, indicating the most desirable project and the least desirable project using this method. (Round to two decimals and assume in your computations that cash flows occur evenly throughout the year.) b. Compute the net present value of each project. Does your evaluation change? (Round to nearest dollar.)

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Year 1 2 3

Project AA Net Annual Cumulative Net Cash Flow Cash Flow

Cash Payback Period: Cost of capital investment Cumulative net cash flow, year 2 Remaining cost to be recovered Net cash flow, year 3 Payback period, year 3 Total cash payback period in years

Project BB Cash Payback Period: Cost of capital investment Net annual cash flow Total cash payback period in years

Year 1 2 3

Project CC Net Annual Cumulative Net Cash Flow Cash Flow

Cash Payback Period: Cost of capital investment Cumulative net cash flow, year 1 Remaining cost to be recovered Net cash flow, year 2 Payback period, year 2 Total cash payback period in years Does your evaluation change?

12% Discount Year Factor 1 0.89286 2 0.79719 3 0.71178 Total present value Investment Net present value

Project AA Cash Present Flow Value

Project BB Cash Present Flow Value

Project CC Cash Flow

When you have completed E18.2, respond to the following additional question, on the E18.2 Add Ques worksheet.

n equipment ual cash flows.

not accept any

e least desirable that cash flows to nearest dollar.)

l), into the yellow

Project CC Present Value

2 Add Ques

E18.2 Solution Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash flows.

Year 1 2 3 Total

AA $

7,000 9,000 12,000 28,000

BB 10,000 $ 10,000 10,000 30,000 $

CC 13,000 12,000 11,000 36,000

The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug’s required rate of return is 12%.

a. Year 1 2 3

Project AA Net Annual Cumulative Net Cash Flow Cash Flow $ 7,000 $ 7,000 9,000 16,000 12,000 28,000

Cash Payback Period: Cost of capital investment Cumulative net cash flow, year 2 Remaining cost to be recovered Net cash flow, year 3 Payback period, year 3 Total cash payback period in years

22,000 16,000 6,000 12,000 0.50 2.50

Project BB Cash Payback Period: Cost of capital investment Net annual cash flow Total cash payback period in years

Year 1 2 3

22,000 10,000 2.20

22,000 13,000 9,000 12,000 0.75 1.75

Project CC Net Annual Cumulative Net Cash Flow Cash Flow $ 13,000 $ 13,000 12,000 25,000 11,000 36,000

Cash Payback Period: Cost of capital investment Cumulative net cash flow, year 1 Remaining cost to be recovered Net cash flow, year 2 Payback period, year 2 Total cash payback period in years

The most desirable project is CC because it has the shortest payback period. The least desirable project is AA because it has the longest payback period. As indicated, only CC is acceptable because its cash payback is 1.75 years.

12% Project AA Discount Cash Present Year Factor Flow Value 1 0.89286 $ 7,000 $ 6,250 2 0.79719 9,000 7,175 3 0.71178 12,000 8,541 Total present value 21,966 Investment (22,000) Net present value $ (34)

Project BB Cash Present Flow Value $ 10,000 $ 8,929 10,000 7,972 10,000 7,118 24,018 (22,000) $ 2,018

Project CC Cash Flow $ 13,000 12,000 11,000

Project CC is still the most desirable project. Also, on the basis of net present values, project BB is also acceptable. Project AA is not desirable.

n equipment ual cash flows.

not accept any

e least desirable that cash flows to nearest

l), into the

he least desirable s acceptable

Project CC Present Value $ 11,607 9,566 7,830 29,003 (22,000) $ 7,003

project BB is also

E18.2 Additional Question Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash flows.

Year 1 2 3 Total

AA $

7,000 9,000 12,000 28,000

BB 10,000 $ 10,000 10,000 30,000 $

CC 13,000 12,000 11,000 36,000

The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug’s required rate of return is 12%.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that the investment for equipment is $25,000. Recompute for each project's payback period and indicate the most desirable and least desirable project. (Round to two decimals and assume in your computations that cash flows occur evenly throughout the year.)

a. Year 1 2 3

Project AA Net Annual Cumulative Net Cash Flow Cash Flow

Cash Payback Period: Cost of capital investment Cumulative net cash flow, year 2 Remaining cost to be recovered Net cash flow, year 3 Payback period, year 3 Total cash payback period in years Project BB Cash Payback Period: Cost of capital investment Net annual cash flow Total cash payback period in years

Year 1 2 3

Project CC Net Annual Cumulative Net Cash Flow Cash Flow

Cash Payback Period: Cost of capital investment Cumulative net cash flow, year 2 Remaining cost to be recovered Total cash payback period in years Does your evaluation change?

12% Discount Year Factor 1 0.89286 2 0.79719 3 0.71178 Total present value Investment

Project AA Cash Present Flow Value

Project BB Cash Present Flow Value

Project CC Cash Flow

Net present value

equipment al cash flows.

not accept any

e least desirable that cash flows

to nearest dollar.)

), into the yellow

payback period nd assume in your

Project CC Present Value

E18.2 Solution to Additional Question Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash flows.

Year 1 2 3 Total

AA $

7,000 9,000 12,000 28,000

BB 10,000 $ 10,000 10,000 30,000 $

CC 13,000 12,000 11,000 36,000

The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug’s required rate of return is 12%.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Year 1 2 3

Project AA Net Annual Cumulative Net Cash Flow Cash Flow $ 7,000 $ 7,000 9,000 16,000 12,000 28,000

Year 1 2 3

25,000 16,000 9,000 12,000 0.75 2.75

25,000 10,000 2.50

25,000 25,000 2.00

Project CC Net Annual Cumulative Net Cash Flow Cash Flow $ 13,000 $ 13,000 12,000 25,000 11,000 36,000

Cash Payback Period: Cost of capital investment Cumulative net cash flow, year 2 Remaining cost to be recovered Total cash payback period in years

12% Project AA Discount Cash Present Year Factor Flow Value 1 0.89286 $ 7,000 $ 6,250 2 0.79719 9,000 7,175 3 0.71178 12,000 8,541 Total present value 21,966 Investment (25,000) Net present value $ (3,034)

Project BB Cash Present Flow Value $ 10,000 $ 8,929 10,000 7,972 10,000 7,118 24,018 48,037 $ 72,055

Project CC Cash Flow $ 13,000 12,000 11,000

Project CC is still the most desirable project. On the basis of net present values, projecta AA and BB are not acceptable since both have a negative present value.

n equipment ual cash flows.

not accept any

e least desirable that cash flows to nearest dollar.)

l), into the

ayback period nd assume in your

he least desirable s acceptable

Project CC Present Value $ 11,607 9,566 7,830 29,003 (25,000) $ 4,003

cta AA and BB are

E18.4 Compute net present value and profitability index BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided here.

Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows

Machine A $ 75,500 8 years -0$ 20,000 $ 5,000

Machine B $ 180,000 8 years -0$ 40,000 $ 10,000

Instructions Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Machine A Cash Flows

9% Discount Factor

Present Value

Cash Flows

9% Discount Factor

Present Value

Present value of net annual cash flows Less: Capital investment Net present value Profitability Index

Machine B Present value of net annual cash flows Capital investment Net present value Profitability Index

When you have completed E18.4, respond to the following additional question, on the E25.4 Add Ques worksheet.

E18.4 Solution BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided here. Machine A $ 75,500 8 years -0$ 20,000 $ 5,000

Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows

Machine B $ 180,000 8 years -0$ 40,000 $ 10,000

Machine A Present value of net annual cash flows Less: Capital investment Net present value Profitability Index

$ $

83,022 75,500

Cash Flows $ 15,000

Profitability Index

$ $

166,045 180,000

Present Value $ 83,022 75,500 $ 7,522

9% Discount Factor 5.53482

Present Value $ 166,045 180,000 $ (13,955)

1.10

Machine B Present value of net annual cash flows Capital investment Net present value

9% Discount Factor 5.53482

Cash Flows $ 30,000

0.92

Machine B has a negative net present value, and also a lower profitability index. Machine B should be rejected and Machine A should be purchased.

E18.4 Additional Question BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided here.

Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows

Machine A $ 75,500 8 years -0$ 20,000 $ 5,000

Machine B $ 180,000 8 years -0$ 40,000 $ 10,000

Additional Question Assume that the original cost of Machine A changed to $85,000 and has a salvage value of $10,000. Which machine should be purchased?

Machine A Cash Flows

9% Discount Factor

Present Value

Cash Flows

9% Discount Factor

Present Value

Present value of net annual cash flows Present value of salvage value Less: Capital investment Net present value Profitability Index

Machine B Present value of net annual cash flows Capital investment Net present value

Profitability Index

E18.4 Solution to Additional Question BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided here. Machine A $ 75,500 8 years -0$ 20,000 $ 5,000

Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows

Machine B $ 180,000 8 years -0$ 40,000 $ 10,000

Additional Question Assume that the original cost of Machine A changed to $85,000 and has a salvage value of $10,000. Which machine should be purchased?

Machine A Present value of net annual cash flows Present value of salvage value Less: Capital investment Net present value Profitability Index

$ $

83,022 85,000

Cash Flows $ 15,000 10,000

Present Value $ 83,022 5,019 85,000 $ 3,041

9% Discount Factor 5.53482

Present Value $ 166,045 180,000 $ (13,955)

0.98

Machine B Present value of net annual cash flows Capital investment Net present value

9% Discount Factor 5.53482 0.50187

Cash Flows $ 30,000

Profitability Index

$ $

166,045 180,000

0.92

Machine B has a negative net present value, and also a lower profitability index. Machine B should be rejected and Machine A should still be purchased.

P18.1 Compute annual rate of return, cash payback, and net present value U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.

Bono $ 160,000

Capital investment Annual net income: Year 1 2 3 4 5 Total $

14,000 14,000 14,000 14,000 14,000 70,000

Project Edge $ 175,000

Clayton $ 200,000

18,000 17,000 16,000 12,000 9,000 72,000 $

27,000 23,000 21,000 13,000 12,000 96,000

Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.) Instructions a. Compute the cash payback period for each project. (Round to two decimals.) b. Compute the net present value for each project. (Round to nearest dollar.) c. Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your computation.) d. Rank the projects on each of the foregoing bases. Which project do you recommend?

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Net income Depreciation Annual net cash flows

Project Bono Investment Annual net cash flows Payback period in years

Year 1 2 3 4 5

Project Edge Net Annual Cumulative Cash Flow Net Cash Flow

Cash Payback Period Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered Net cash flow, year 4 Payback period, year 4 Total cash payback period in years

Year 1 2 3 4 5

Project Clayton Net Annual Cumulative Cash Flow Net Cash Flow

Cash Payback Period Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered Net cash flow, year 4 Cash payback period, year 4 Total cash payback period in years

b. Project Bono Item Net annual cash flows Capital investment Negative net present value

Amount

Years 1-5

15% PV Factor 3.35216

Present Value

15% Discount Factor 0.86957 0.75614 0.65752 0.57175 0.49718

Year 1 2 3 4 5 Total Less: capital Investment Net present value

Project Edge Cash Present Flow Value

Bono

Project Clayton Cash Present Flow Value

Projects Edge

Clayton

Original Investment Value at end of useful life Average investment Average net income Average investment Annual rate of return

Project Bono Edge Clayton

Cash Payback

Net Present Value

Annual Rate of Return

Which project do you recommend?

When you have completed P18.1 respond to the following additional question, on the P18.1 Add Ques worksheet.

P18.1 Solution U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.

Capital investment $ Annual net income: Year 1 2 3 4 5 Total $

Bono 160,000 14,000 14,000 14,000 14,000 14,000 70,000

Project Edge $ 175,000

Clayton $ 200,000

18,000 17,000 16,000 12,000 9,000 72,000 $

27,000 23,000 21,000 13,000 12,000 96,000

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Net income Depreciation Annual net cash flows

$ $

Project Bono 14,000 Investment 32,000 Annual net cash flows 46,000 Payback period in years

$ 160,000 46,000 3.48

Year 1 2 3 4 5

Project Edge Net Annual Cumulative Cash Flow Net Cash Flow $ 53,000 $ 53,000 52,000 105,000 51,000 156,000 47,000 203,000 44,000 247,000

Cash Payback Period Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered Net cash flow, year 4 Payback period, year 4 Total cash payback period in years

Year 1 2 3 4 5

175,000 156,000 19,000 47,000 0.40 3.40

200,000 191,000 9,000 53,000 0.17 3.17

Project Clayton Net Annual Cumulative Cash Flow Net Cash Flow $ 67,000 $ 67,000 63,000 130,000 61,000 191,000 53,000 244,000 52,000 296,000

Cash Payback Period Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered Net cash flow, year 4 Cash payback period, year 4 Total cash payback period in years

b. Project Bono Item Amount Net annual cash flows $ 46,000 Capital investment Negative net present value

Years 1-5

15% PV Factor 3.35216

Present Value $ 154,199 160,000 $ (5,801)

15% Discount Factor 0.86957 0.75614 0.65752 0.57175 0.49718

Year 1 2 3 4 5 Total Less: capital Investment Net present value

Project Edge Project Clayton Cash Present Cash Present Flow Value Flow Value 53,000 $ 46,087 $ 67,000 $ 58,261 52,000 39,319 63,000 47,637 51,000 33,534 61,000 40,109 47,000 26,872 53,000 30,303 44,000 21,876 52,000 25,853 247,000 167,688 $ 296,000 202,163 175,000 200,000 $ (7,312) $ 2,163

Original Investment Value at end of useful life Average investment

Average net income Average investment Annual rate of return

Project Bono Edge Clayton

Cash Payback 3 2 1

Net Present Value 2 3 1

The best project is Clayton.

Projects Bono Edge 160,000 $ 175,000 80,000 $ 87,500 14,000 $ 80,000 17.50%

Annual Rate of Return 2 3 1

Clayton $ 200,000 $ 100,000

14,400 $ 19,200 87,500 100,000 16.46% 19.20%

P18.1 Additional Question U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.

Capital investment Annual net income: Year 1 2 3 4 5

Bono 160,000

Project Edge $ 175,000

Clayton $ 200,000

14,000 14,000 14,000 14,000 14,000 $Total 70,000

18,000 17,000 16,000 12,000 9,000 72,000

27,000 23,000 21,000 13,000 12,000 96,000

Additional Question Assume that the investment amount of Project Clayton changed to $190,000. Recalculate the payback period, net present value and annual return on Project Clayton. Respond to part d as it relates to this new information.

a. Net income Depreciation Annual net cash flows

Year 1 2 3 4 5

Project Bono Investment Annual net cash flows Payback period in years

Project Edge Net Annual Cumulative Cash Flow Net Cash Flow

Cash Payback Period Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered Net cash flow, year 4 Payback period, year 4 Total cash payback period in years

Year 1 2 3 4 5

Project Clayton Net Annual Cumulative Cash Flow Net Cash Flow

Cash Payback Period Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered Net cash flow, year 4 Cash payback period, year 4 Total cash payback period in years

b. Project Bono Item Amount Net annual cash flows Capital investment Negative net present value 15% Discount Factor 0.86957 0.75614 0.65752 0.57175 0.49718

Year 1 2 3 4 5 Total Less: capital Investment Net present value

Years 1-5

Project Edge Cash Present Flow Value

Bono Original Investment Value at end of useful life Average investment Average net income Average investment Annual rate of return

Project Bono Edge Clayton

Cash Payback

Net Present Value

Which project do you recommend?

Annual Rate of Return

15% PV Factor 3.35216

Present Value

Project Clayton Cash Present Flow Value

Projects Edge

Clayton

P18.1 Solution to Additional Question U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.

Capital investment $ Annual net income: Year 1 2 3 4 5 Total $

Bono 160,000 14,000 14,000 14,000 14,000 14,000 70,000

Project Edge $ 175,000

Clayton $ 200,000

18,000 17,000 16,000 12,000 9,000 72,000 $

27,000 23,000 21,000 13,000 12,000 96,000

Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.)

Instructions a. Compute the cash payback period for each project. (Round to two decimals.) b. Compute the net present value for each project. (Round to nearest dollar.) c. Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your computation.) d. Rank the projects on each of the foregoing bases. Which project do you recommend?

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Net income Depreciation Annual net cash flows

Year 1 2 3 4 5

$ $

Project Bono 14,000 Investment 32,000 Annual net cash flows 46,000 Payback period in years

Project Edge Net Annual Cumulative Cash Flow Net Cash Flow $ 53,000 $ 53,000 52,000 105,000 51,000 156,000 47,000 203,000 44,000 247,000

Cash Payback Period Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered Net cash flow, year 4 Payback period, year 4 Total cash payback period in years

Year 1 2 3 4 5

175,000 156,000 19,000 47,000 0.40 3.40

190,000 185,000 5,000 51,000 0.10 3.10

Project Clayton Net Annual Cumulative Cash Flow Net Cash Flow $ 65,000 $ 65,000 61,000 126,000 59,000 185,000 51,000 236,000 50,000 286,000

Cash Payback Period Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered Net cash flow, year 4 Cash payback period, year 4 Total cash payback period in years

$ 160,000 46,000 3.48

Project Bono Item Amount Net annual cash flows $ 46,000 Capital investment Negative net present value 15% Discount Factor 0.86957 0.75614 0.65752 0.57175 0.49718

Year 1 2 3 4 5 Total Less: capital Investment Net present value

Years 1-5

Original Investment Value at end of useful life Average investment

Average net income Average investment Annual rate of return

Project Bono Edge Clayton

Net Present Value 2 3 1

The best project is Clayton.

Present Value $ 154,199 160,000 $ (5,801)

Project Edge Project Clayton Cash Present Cash Present Flow Value Flow Value 53,000 $ 46,087 $ 65,000 $ 56,522 52,000 39,319 61,000 46,125 51,000 33,534 59,000 38,794 47,000 26,872 51,000 29,159 44,000 21,876 50,000 24,859 247,000 167,688 $ 286,000 195,459 175,000 190,000 $ (7,312) $ 5,459

Cash Payback 3 2 1

15% PV Factor 3.35216

Projects Bono Edge 160,000 $ 175,000 80,000 $ 87,500 14,000 $ 80,000 17.50%

Annual Rate of Return 2 3 1

Clayton $ 190,000 $ 95,000

14,400 $ 87,500 16.46%

19,200 95,000 20.21%

P18.4 Compute net present value considering intangible benefits Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $60,000 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased. Estimated useful life Initial cost Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value

8 years 60,000 8,000 6,000 12,000

Jane’s good friend, Rick Ryan, stopped by. He is trying to convince Jane that the tow truck will have other benefits that Jane hasn’t even considered. - Rick says cars that need towing need to be fixed. Thus, when Jane tows them to her facility, her repair revenues will increase. - Rick notes that the tow truck could have a plow mounted on it, thus saving Jane the cost of plowing her parking lot. (Rick will give her a used plow blade for free if Jane will plow Rick’s driveway.) - Rick points out that the truck will generate goodwill. People who are rescued by Jane’s tow truck will feel grateful and might be more inclined to use her service station in the future or buy gas there. - The tow truck will have “Jane’s Auto Care” on its doors, hood, and back tailgate—a form of free advertising wherever the tow truck goes. Rick estimates that, at a minimum, these benefits would be worth the following. Additional annual net cash flows from repair work $ Annual savings from plowing # Additional annual net cash flows from customer "goodwill" Additional annual net cash flows resulting from free advertising #

3,000 750 1,000 750

The company's cost of capital is 9%. Instructions a. Calculate the net present value, ignoring the additional benefits described by Rick. Should the tow truck be purchased? b. Calculate the net present value, incorporating the additional benefits suggested by Rick. Should the tow truck be purchased? c. Suppose Rick has been overly optimistic in his assessment of the value of the additional benefits. At a minimum, how much would the additional benefits have to be worth in order for the project to be accepted?

Suppose Rick has been overly optimistic in his assessment of the value of the additional benefits. At a minimum, how much would the additional benefits have to be worth in order for the project to be accepted? NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Cash Flows

9% Discount Factor

Present Value

Cash Flows

9% Discount Factor

Present Value

Present value of net annual cash flows Present value of cost of overhaul Present value of salvage value Less: capital investment Net present value Should the tow truck be purchased?

b. Present value of net annual cash flows Present value of cost of overhaul Present value of salvage value Less: capital investment Net present value Should the tow truck be purchased?

c. Net present value without intangibles Present value of intangibles Minimum value of intangibles to be acceptable How much would the additional benefits have to be worth in order for the project to be accepted?

When you have completed P18.4 respond to the following additional question, on the P18.4 Add Ques worksheet.

P18.4 Solution Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $60,000 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased. Estimated useful life Initial cost Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value

8 years 60,000 8,000 6,000 12,000

Jane’s good friend, Rick Ryan, stopped by. He is trying to convince Jane that the tow truck will - Rick says cars that need towing need to be fixed. Thus, when Jane tows them to her facility, - Rick notes that the tow truck could have a plow mounted on it, thus saving Jane the cost of - Rick points out that the truck will generate goodwill. People who are rescued by Jane’s tow - The tow truck will have “Jane’s Auto Care” on its doors, hood, and back tailgate—a form of Rick estimates that, at a minimum, these benefits would be worth the following. Additional annual net cash flows from repair work $ Annual savings from plowing # Additional annual net cash flows from customer "goodwill" Additional annual net cash flows resulting from free advertising #

3,000 750 1,000 750

Cash

9% Discount

Present

Present value of net annual cash flows Present value of cost of overhaul Present value of salvage value

Flows $ 8,000 (6,000) 12,000

Factor 5.53482 0.70843 0.50187

Less: capital investment Net present value

Value $ 44,279 (4,251) 6,022 46,050 60,000 $ (13,950)

Based on its negative net present value, the tow truck should not be purchased.

b. Present value of net annual cash flows Present value of cost of overhaul Present value of salvage value

Cash Flows $ 13,500 (6,000) 12,000

9% Discount Factor 5.53482 0.70843 0.50187

Less: capital investment Net present value

Present Value $ 74,720 (4,251) 6,022 76,491 60,000 $ 16,491

Based on the revised figures, the tow truck has a positive net present value and therefore should be purchased.

c. Net present value without intangibles Present value of intangibles Minimum value of intangibles to be acceptable

$ $

(13,950) 30,442

13,950

The present value of the intangible benefits was $30,441 (the increase in the net present value from a negative $13,950 to a positive $16,491). Rick's estimates of the value of these intangible benefits may be overly optimistic. In order for the project to be acceptable, the present value of the intangible benefits would only have to be $13,950. That is the amount by which the original estimate fell short of having a positive net present value.

P18.4 Additional Question Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $60,000 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased. Estimated useful life Initial cost Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value

8 years 60,000 8,000 6,000 12,000

3,000 750 1,000 750

Additional Question Assume that the initial cost of the tow truck and the salvage value changed to $75,000 and $10,000 respectively. Also assume that the annual cash flows changed to $11,000. What impact do these changes have on your calculations?

Cash Flows

9% Discount Factor

Present Value

Cash Flows

9% Discount Factor

Present Value

Present value of net annual cash flows Present value of cost of overhaul Present value of salvage value Less: capital investment Net present value Should the tow truck be purchased?

b. Present value of net annual cash flows Present value of cost of overhaul Present value of salvage value Less: capital investment Net present value Should the tow truck be purchased?

P18.4 Solution to Additional Question Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $60,000 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased. Estimated useful life Initial cost Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value

8 years 60,000 8,000 6,000 12,000

3,000 750 1,000 750

a. Present value of net annual cash flows Present value of cost of overhaul Present value of salvage value

Cash Flows $ 11,000 (6,000) 10,000

9% Discount Factor 5.53482 0.70843 0.50187

Less: capital investment Net present value

Present Value $ 60,883 (4,251) 5,019 61,651 75,000 $ (13,349)

Based on its negative net present value, the tow truck should not be purchased.

b. Present value of net annual cash flows Present value of cost of overhaul Present value of salvage value Less: capital investment Net present value

Cash Flows $ 16,500 (6,000) 10,000

9% Discount Factor 5.53482 0.70843 0.50187

Present Value $ 91,325 (4,251) 5,019 92,093 75,000 $ 17,093

Based on the revised figures, the tow truck has a positive net present value and therefore should be purchased.

c. Net present value without intangibles Present value of intangibles Minimum value of intangibles to be acceptable

$ $

(13,349) 30,442

13,349

The present value of the intangible benefits was $30,442 (the increase in the net present value from a negative $13,349 to a positive $17093). Rick's estimates of the value of these intangible benefits may be overly optimistic. In order for the project to be acceptable, the present value of the intangible benefits would only have to be $13,349. That is the amount by which the original estimate fell short of having a positive net present value.

CHAPTER 18 Using Excel® to Make Decisions at Current Designs Topic(s): Planning for Capital Investment Decisions: Annual rate of return, Payback period, NPV, IRR Excel® Functions and Tools: IRR function; NPV function A company that manufactures recreational pedal boats has approached Mike Cichanowski to ask if he would be interested in using Current Designs’ rotomold expertise and equipment to produce some of the pedal boat components. Mike is intrigued by the idea and thinks it would be an interesting way of complementing the present product line. One of Mike’s hesitations about the proposal is that the pedal boats are a different shape than the kayaks that Current Designs produces. As a result, the company would need to buy an additional rotomold oven in order to produce the pedal boat components. This project clearly involves risks, and Mike wants to make sure that the returns justify the risks. In this case, since this is a new venture, Mike thinks that a 15% discount rate is appropriate to use to evaluate the project. As an intern at Current Designs, Mike has asked you to prepare an initial evaluation of this proposal. To aid in your analysis, he has provided the following information and assumptions. Required rate of return Cost of new rotomold oven Salvage value of new rotomold oven Estimated useful life Projected annual results for the project: Sales Less Manufacturing costs Depreciation Shipping and administrative costs

15% $ 256,000 $ 8 years

$ 220,000 $ 140,000 32,000 22,000

194,000

Income before income taxes Income tax expense Net income

26,000 10,800 $

15,200

Instructions a. Compute the annual rate of return. b. Compute the payback period. c. Compute the net present value using a discount rate of 9%. Should the proposal be accepted using this discount rate? d. Compute the net present value using a discount rate of 15%. Should the proposal be accepted using this discount rate? What-if Question Perform what-if analysis to answer the following: What if Current Design's managers want to know the return the expected investment will provide? Use the IRR function to determine this rate. Input this rate into the NPV function to determine the new NPV. Explain the NPV using the IRR as the discount rate.

Follow the step-by-step directions in the accompanying tutorial to complete the solution and learn how to use Excel’s IRR and NPV functions to solve the Current Designs problem.

a. Net income Average investment Annual rate of return

b. Cost of investment Net annual cash flow Payback period in years

9% Annual cash flow Oven purchase Total NPV Accept the proposal?

d. NPV Accept the proposal?

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

ing Current Designs’ uld be an interesting

ns produces. As a clearly involves 15% discount rate is

he has provided the

determine this rate.

Year 8

15% $ 256,000 $ 8 years

$ 220,000 $ 140,000 32,000 22,000

194,000

Income before income taxes Income tax expense Net income

26,000 10,800 $

15,200

Follow the step-by-step directions in the accompanying tutorial to complete the solution and learn how to use Excel’s IRR and NPV functions to solve the Current Designs problem.

a. Net income Average investment Annual rate of return

15,200 128,000 11.88%

b. Cost of investment Net annual cash flow Payback period in years

$ 256,000 47,200 5.42

9% Annual cash flow

Year 0

Oven purchase

(256,000)

Year 1 $ 47,200

Total

$ (256,000) $

NPV

5,243

Accept the proposal?

d. NPV

Accept the proposal?

Yes

(44,198) No

47,200

Year 2 $ 47,200

Year 3 $ 47,200

Year 4 $ 47,200

Year 5 $ 47,200

Year 6 $ 47,200

Year 7 $ 47,200

47,200

ing Current Designs’ uld be an interesting

ns produces. As a clearly involves 15% discount rate is

he has provided the

determine this rate.

Year 8 $ 47,200

47,200

This blank worksheet named CD18 Part 2 What-if has been created for you. After completing part 1, copy the worksheet containing your solution and paste to this blank worksheet using the instructions in the Part 2 tutorial.

15% $ 256,000 $ 8 years

$ 220,000 $ 140,000 32,000 22,000

194,000

Income before income taxes Income tax expense Net income

26,000 10,800 $

15,200

Follow the step-by-step directions in the accompanying tutorial to complete the solution and learn how to use Excel’s IRR and NPV functions to solve the Current Designs problem.

a. Net income Average investment Annual rate of return

15,200 128,000 11.88%

b. Cost of investment Net annual cash flow Payback period in years

$ 256,000 47,200 5.42

9% Annual cash flow

Year 0 $

Year 1 47,200

Year 2 47,200

Year 3 47,200

Year 4 47,200

Year 5 47,200

Year 6 47,200

Year 7 47,200

Oven purchase

(256,000)

Total

$ (256,000) $

47,200

NPV

5,243

Accept the proposal?

d. NPV

Accept the proposal?

IRR

9.5486%

IRR

9.5486%

Yes

ing Current Designs’ uld be an interesting

ns produces. As a clearly involves 15% discount rate is

he has provided the

determine this rate.

Year 8 47,200

47,200

Using Data Visualization to Analyze Data DA18.1 Data visualization can be used to help analyze investment decisions.

Year

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Investment in Solar

Annual Electricity Savings

$ (43,500) $

6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500

Cumulative Savings

(37,000) (30,500) (24,000) (17,500) (11,000) (4,500) 2,000 8,500 15,000 21,500 28,000 34,500 41,000 47,500 54,000 60,500

Source: https://www.infiniteenergy.com.au/commercial-solar-system-sizecomparison/

Vertical column chart o

$80,000 $60,000

$40,000

Cash Flows

Example: Recall the Environmental, Social, and Governance Insight box “Big Spenders” presented in the chapter. However, not all upgrades to clean energy need to be quite so large. Data concerning an investment in solar panels for a factory in Australia are presented here. The visual shows that the company will recover its solar-panel investment during 2025, during the investment's sixth year of its expected 16-year life. With an estimate of $0.12 per kilowatt hour, the annual savings will be around $6,500.

$20,000 $0 -$20,000 -$40,000 -$60,000

Net Investment Recovery in a Solar Panel System $80,000 $60,000

$40,000 $20,000 $0 2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

-$20,000 -$40,000 -$60,000 Investment in Solar

Annual Electricity Savings

Cumulative Savings

2032

2033

2034

2035

Using Data Visualization to Analyze Data DA18.1 Data visualization can be used to help analyze investment decisions. Two tables of data are presented below. The first shows the potential cash flows over the life of an investment in solar panels at end of year amounts, and considers all financial considerations. The second table displays the present value of the solar project at different rates of return. The present value varies with the discount rate.

Potential Cash Flows of Solar Panel Investment Investment in Annual Electricity Cumulative Year Solar Savings Savings 2020 $ (43,500) $ 6,500 $ (37,000) 2021 6,500 (30,500) 2022 6,500 (24,000) 2023 6,500 (17,500) 2024 6,500 (11,000) 2025 6,500 (4,500) 2026 6,500 2,000 2027 6,500 8,500 2028 6,500 15,000 2029 6,500 21,500 2030 6,500 28,000 2031 6,500 34,500 2032 6,500 41,000 2033 6,500 47,500 2034 6,500 54,000 2035 6,500 60,500 Present Values of Solar Panel Project Discount Rate Net Present Value 5.00% $ 26,946 7.50% 15,920 10.00% 7,354 12.50% 601 15.00% (4,797) 17.50% (9,171) 20.00% (12,758) Instructions

There are seven parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Create a line chart that shows the relationship between the discount rate (x) and the present value (y). Include a descriptive chart title, axes labels, and a legend. b. What trends do you notice in the chart?

c. What discount rate do you think makes the most sense in the current environment? d. What other sensitivity analyses do you recommend with the data? e. Solar panels have an expected life of 25 and 30 years. The data for the chart you created in part a are for 16 years. Calculate the net present value over 25 years at the same discount rates as used in the first analysis from 5% to 20% using the data that follows. Potential Cash Flows of Solar Panel Investment Year

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044

Investment in Solar

Annual Electricity Savings

(43,500) $

6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500

f. Create a line chart that shows the relationship between the discount rate (x) and the present value (y). Include a descriptive chart title, axes labels, and a legend. g. How do the two charts compare? What is the impact on decision making? What other non-financial issues should be considered by management?

Student Work Area a. Chart for part a

b. Response to part b

c. Response to part c

d. Response to part d

e. NPV calculation NPV at n = 25 Discount Rate Net Present Value 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0%

f. Chart for part f

g. Response to part g

There are seven parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Create a line chart that shows the relationship between the discount rate (x) and the present value (y). Include a descriptive chart title, axes labels, properly formatted axes amounts, and a legend. b. What trends do you notice in the chart?

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044

Investment in Solar

Annual Electricity Savings

(43,500) $

6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500

f. Create a line chart that shows the relationship between the discount rate (x) and the present value (y). Include a descriptive chart title, axes labels, properly formatted axes amounts, and a legend. g. How do the two charts compare? What is the impact on decision making? What other non-financial issues should be considered by management?

Student Work Area a. Chart for part a

Net Present Value at Various Discount Rates, 16 years $30,000 $25,000

Net Present Value

$20,000 $15,000 $10,000 $5,000 $0 0.0% -$5,000

5.0%

10.0%

15.0%

20.0%

-$10,000 -$15,000

Discount Rate

b. Response to part b The higher the discount rate, the lower the present value of the project. As the discount rate increases, the project is less likely to be accepted because the NPV becomes decreases. At about 12.5%, the NPV drops below zero indicating that the project does not meet the required rate of return. At very low rates the project is deemed acceptable. The company should use the rate that it deems to be the minimum return it will accept.

c. Response to part c Student answers will vary. However, they should consider that in the current environment, interest rates are fairly low. Corporations can borrow funds at a low rate to invest in projects. Many students will likely suggest a rate at the lower end, perhaps 5% or 7.5%. Other inputs to the NPV formula should be considered and may include, What if the investment costs much more or less than stated? What is the effect on net income as it will differ from cash flows used int he analysis? What is the effect of various inflation rates on the present value?

d. Response to part d Student answers will vary. Other inputs to the NPV formula should be considered and may include, What if the investment costs much more or less than stated? What is the effect on net income? What is the effect of various inflation rates on the present value?

Student answers will vary. Other inputs to the NPV formula should be considered and may include, What if the investment costs much more or less than stated? What is the effect on net income? What is the effect of various inflation rates on the present value?

e. NPV calculation NPV at n = 25 Discount Rate Net Present Value 5.0% $ 48,111 7.5% 28,955 10.0% 15,501 12.5% 5,764 15.0% (1,483) 17.5% (7,016) 20.0% (11,341)

f. Chart for part f

Net Present Value at Various Discount Rates, 25 Years $60,000 $50,000

Net Present Value

$40,000 $30,000 $20,000 $10,000 $-

0.0% $(10,000) $(20,000)

5.0%

10.0%

15.0%

20.0%

Discount Rate

g. Response to part g Student answers will vary. A longer life for the solar panels increases the NPV of the project because cash flows are expected for nine more years in the 25-year model. Rather than generating a return of near 12.5% in the 16-year analysis, the return is now closer to 15% assuming a 25-year year analysis. Management should consider is there other energy alternatives such as wind power farms, if there are environmental issues to be considered such as the location of the solar panels, and will the panels increase the potential of legal needs (i.e. lawsuits by residents?)

s, 16 years

20.0%

25.0%

As the discount rate increases, ases. At about 12.5%, the NPV ate of return. At very low rates the eems to be the minimum return it

ent environment, interest rates ojects. Many students will likely NPV formula should be less than stated? What is the What is the effect of various

nsidered and may include, What t on net income? What is the

s, 25 Years

20.0%

25.0%

NPV of the project because cash n generating a return of near a 25-year year analysis. wind power farms, if there are anels, and will the panels

Data Visualization at HydroHappy DA18.2 Data visualization can be used to help analyze investment decisions. HydroHappy’s managers believe the net present value method provides the best information to make capital budgeting decisions. In addition, the NPV analysis indicates that purchasing new forklifts will result in a higher return than retaining and overhauling the old forklifts. As such, management plans to pursue the purchase of new forklifts with an estimated productive life of 8 years. The production engineers have indicated that there are several different models of forklifts, one of which may be a better option than the other models used in the analysis. The accountant has gathered the following data concerning the purchase prices and has estimated the net annual cash flow and salvage values of eight models.

Salvage Equipment Value Old Net Annual Investment Cost Equipment Cash Flow A ($200,000) $42,000 $43,900 B 50,800 (212,000) 42,000 C 47,100 (184,000) 42,000 D 46,200 (185,000) 42,000 E 57,400 (266,000) 42,000 F 52,800 (225,000) 42,000 G 51,900 (217,000) 42,000 H 49,900 (242,000) 42,000

Salvage Value $90,000 47,000 18,000 16,000 56,000 24,000 32,000 76,000

Instructions There are six parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. For each possible investment, A through H, determine the net present value using the NPV function at 8%, 7%, 6%, 5%, and 4% discount rates, and determine the profitability index at 6% for each investment. b. To help management visualize the data, create a clustered column chart that displays the NPVs at each discount rate. Include a descriptive chart title, axes labels, a legend, and format the vertical axis amounts. Set the vertical axis to a maximum bound of $210,000, with major units at 10,000 and minor units at 5,000. c. What trends do you see in the NPVs of the eight investments as a whole? What causes this trend to exist? d. Which investment appears to be the best investment based solely on the NPV dollar amount? Interpret the NPV of the most profitable investment. Does the discount rate affect your decision? Explain why or why not.

Which investment appears to be the best investment based solely on the NPV dollar amount? Interpret the NPV of the most profitable investment. Does the discount rate affect your decision? Explain why or why not. e. Create a clustered horizontal bar chart to allow you to visualize the profitability indices for the eight investments. Include a descriptive chart title and axes labels, and format the vertical axis amounts. f. Does you choice of the ‘best’ investment change compared to your response in part d? What information does the profitability index provide that is not available when you compare the NPV of the possible investments?

Student Work Area

a. Table of cash flows, NPVs, and profitability indices for eight investments

Equipment cost Salvage value old Net annual cash flow Salvage value new NPV at 8% NPV at 7% NPV at 6% NPV at 5% NPV at 4% Profitability index

b. Chart for part b

A ($200,000) 42,000 43,900 90,000

Cash Flows of Possible Investments B C D E F ($212,000) ($184,000) ($185,000) ($266,000) ($225,000) 42,000 42,000 42,000 42,000 42,000 50,800 47,100 46,200 57,400 52,800 47,000 18,000 16,000 56,000 24,000

G ($217,000) 42,000 51,900 32,000

c. Response to part c

d. Response to part d

e. Chart for part e

f. Response to part f

H ($242,000) 42,000 49,900 76,000

Data Visualization at HydroHappy DA18.2 Data visualization can be used to help analyze investment decisions. HydroHappy’s managers believe the net present value method provides the best information to make capital budgeting decisions. In addition, the NPV analysis indicates that purchasing new forklifts will be provide a higher return than retaining and overhauling the old forklifts. As such, management plans to pursue the purchase of new forklifts with an estimated productive life of 8 years. The production engineers have indicated that there are several different models of forklifts, one of which may be a better option than the other models used in the analysis. The accountant has gathered the following data concerning the purchase prices and has estimated the net annual cash flow and salvage values of eight models.

Salvage Value $90,000 47,000 18,000 16,000 56,000 24,000 32,000 76,000

e. Create a clustered horizontal bar chart to allow you to visualize the profitability indices for the eight investments. Include a descriptive chart title and axes labels, and format the vertical axis amounts. . f. Does your choice of the ‘best’ investment change compared to your response in part d? What information does the profitability index provide that is not available when you compare the NPV of the possible investments?

Student Work Area

a. Table of cash flows, NPVs, and profitability indices for eight investments Cash Flows of Possible Investments B C D E F ($212,000) ($184,000) ($185,000) ($266,000) ($225,000) 42,000 42,000 42,000 42,000 42,000 50,800 47,100 46,200 57,400 52,800 47,000 18,000 16,000 56,000 24,000 147,322 138,392 131,139 136,112 133,389 160,696 149,724 142,186 151,345 146,253 174,946 161,775 153,931 167,577 159,935 190,143 174,600 166,430 184,891 174,502 206,366 188,265 179,744 203,378 190,025 1.03 1.14 1.08 0.75 0.87

A ($200,000) 42,000 43,900 90,000 142,902 156,521 171,077 186,651 203,330 1.08

Equipment cost Salvage value old Net annual cash flow Salvage value new NPV at 8% NPV at 7% NPV at 6% NPV at 5% NPV at 4% Profitability index

G ($217,000) 42,000 51,900 32,000 140,539 153,535 167,365 182,100 197,812 0.96

b. Chart for part b

NPV of Investment Opportunities from 8% to 4%

Net Present Value

NPV at 8%

NPV at 7%

NPV at 6%

NPV at 5%

NPV at 4%

$210,000 $200,000 $190,000 $180,000 $170,000 $160,000 $150,000 $140,000 $130,000 $120,000 $110,000 $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 A

Possible Investments

c. Response to part c The NPV amounts decrease as the discount rates increase for each possible investment at each. Each increase in the discount rate causes the amount of interest cost to increase and the 'principal' or NPV amount to decline, as the total cash flows remain the same regardless of the rate.

d. Response to part d Investment B appears to be the best investment as seen by its larger NPV at all discount rates. The NPV of the investment B indicates that the investment will generate a return that exceeds the required rate of return. The dollar amount of the NPV has little relevance as the operating costs and future salvage values of each possible investment differs. The NPV is relative to the discount rate. When the NPVs of the eight investments are compared using the same discount rate, the choice of the 'best' investment remains the same.

e. Chart for part e

Profitability index

Possible Investments

H G F E D C B A -

0.20

0.40

0.60

0.80

1.00

1.20

Profitability Indices

f. Response to part f Yes. My choice of the possible investment is now project C as it has the higher profitability index. The profitability index allows the comparison of the relative desirability of projects that require differing initial investments. The NPV method output is based only on the return, while the profitability index considers the initial investment.

H ($242,000) 42,000 49,900 76,000 127,818 142,200 157,552 173,954 191,496 0.79

each. Each increase in mount to decline, as

es. The NPV of the ate of return. The es of each possible stments are compared

dex. The profitability investments. The NPV nvestment.

P19.3 Prepare the operating activities section-indirect method. The income statement of Munsun Company is presented here. MUNSUN COMPANY Income Statement For the Year Ended November 30, 2027 Sales revenue $ 7,600,000 Cost of goods sold Beginning inventory $ 1,900,000 Purchases 4,400,000 Goods available for sale 6,300,000 Ending inventory 1,600,000 Total cost of goods sold 4,700,000 Gross profit 2,900,000 Operating expenses Selling expenses 450,000 Administrative expenses 700,000 1,150,000 Net income $ 1,750,000 Additional information: 1. Accounts receivable decreased $380,000 during the year, and inventory decreased $300,000. 2. Prepaid expenses increased $150,000 during the year. 3. Accounts payable to suppliers of merchandise decreased $350,000 during the year. 4. Accrued expenses payable decreased $100,000 during the year. 5. Administrative expenses include depreciation expense of $110,000. Instructions Complete the operating activities section of the statement of cash flows for the year ended November 30, 2027, for Munsun Company, using the indirect method. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

MUNSUN COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2027 Cash flows from operating activities ?

Value Value Value Value Value Value

? ?

When you have completed this problem, respond to the additional question on the P19.3 Add Ques worksheet.

P19.3 Solution The income statement of Munsun Company is presented here. MUNSUN COMPANY Income Statement For the Year Ended November 30, 2027 Sales revenue $ 7,600,000 Cost of goods sold Beginning inventory $ 1,900,000 Purchases 4,400,000 Goods available for sale 6,300,000 Ending inventory 1,600,000 Total cost of goods sold 4,700,000 Gross profit 2,900,000 Operating expenses Selling expenses 450,000 Administrative expenses 700,000 1,150,000 Net income $ 1,750,000 Additional information: 1. Accounts receivable decreased $380,000 during the year, and inventory decreased $300,000. 2. Prepaid expenses increased $150,000 during the year. 3. Accounts payable to suppliers of merchandise decreased $350,000 during the year. 4. Accrued expenses payable decreased $100,000 during the year. 5. Administrative expenses include depreciation expense of $110,000. Instructions Complete the operating activities section of the statement of cash flows for the year ended November 30, 2027, for Munsun Company, using the indirect method. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

MUNSUN COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2027 Cash flows from operating activities $ 1,750,000 Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 110,000 Decrease in accounts receivable 380,000 Decrease in inventory 300,000 Increase in prepaid expenses (150,000) Decrease in accounts payable (350,000) Decrease in accrued expenses payable (100,000) 190,000 Net cash provided by operating activities $ 1,940,000

P19.3 Additional Question The income statement of Munsun Company is presented here. MUNSUN COMPANY Income Statement For the Year Ended November 30, 2027 Sales revenue $ 7,600,000 Cost of goods sold Beginning inventory $ 1,900,000 Purchases 4,400,000 Goods available for sale 6,300,000 Ending inventory 1,600,000 Total cost of goods sold 4,700,000 Gross profit 2,900,000 Operating expenses Selling expenses 450,000 Administrative expenses 700,000 1,150,000 Net income $ 1,750,000 Additional information: 1. Accounts receivable decreased $380,000 during the year, and inventory decreased $300,000. 2. Prepaid expenses increased $150,000 during the year. 3. Accounts payable to suppliers of merchandise decreased $350,000 during the year. 4. Accrued expenses payable decreased $100,000 during the year. 5. Administrative expenses include depreciation expense of $110,000. Instructions Complete the operating activities section of the statement of cash flows for the year ended November 30, 2027, for Munsun Company, using the indirect method. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Assume that depreciation expense is now $98,000,and accounts receivable and accounts payable have now decreased by $320,000 and $300,000, respectively. Show the impact of these changes on the operating section of the statement of cash flows.

MUNSUN COMPANY

Partial Statement of Cash Flows For the Year Ended November 30, 2027 Cash flows from operating activities ?

Value Value Value Value Value Value

? ?

ased $300,000.

ce a cell), into the

payable have now he operating section of the

P19.3 Additional Question Solution The income statement of Munsun Company is presented here. MUNSUN COMPANY Income Statement For the Year Ended November 30, 2027 Sales revenue $ Cost of goods sold Beginning inventory $ 1,900,000 Purchases 4,400,000 Goods available for sale 6,300,000 Ending inventory 1,600,000 Total cost of goods sold Gross profit Operating expenses Selling expenses 450,000 Administrative expenses 700,000 Net income $

7,600,000

4,700,000 2,900,000

1,150,000 1,750,000

Additional information: 1. Accounts receivable decreased $380,000 during the year, and inventory decreased $300,000. 2. Prepaid expenses increased $150,000 during the year. 3. Accounts payable to suppliers of merchandise decreased $350,000 during the year. 4. Accrued expenses payable decreased $100,000 during the year. 5. Administrative expenses include depreciation expense of $110,000. Instructions Complete the operating activities section of the statement of cash flows for the year ended November 30, 2027, for Munsun Company, using the indirect method. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

MUNSUN COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2027 Cash flows from operating activities $ Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 98,000 Decrease in accounts receivable 320,000 Decrease in inventory 300,000 Increase in prepaid expenses (150,000) Decrease in accounts payable (300,000) Decrease in accrued expenses payable (100,000) Net cash provided by operating activities $

1,750,000

168,000 1,918,000

e have now decreased on of the statement of

P19.4 Prepare the operating activities section-indirect method. Rewe Company's income statement contained the condensed information below. REWE COMPANY Income Statement For the Year Ended December 31, 2027 Service revenue Operating expenses, excluding depreciation Depreciation expense Loss on disposal of plant assets Income before income taxes Income tax expense Net income

$ 970,000 $ 614,000 55,000 16,000

685,000 285,000 56,000 $ 229,000

REWE COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities

When you have completed this problem, respond to the additional question on the P19.4 Add Ques worksheet.

tion below.

ws using the indirect method.

e to reference a cell), into the

estion on the P19.4 Add Ques

P19.4 Solution Rewe Company's income statement contained the condensed information below. REWE COMPANY Income Statement For the Year Ended December 31, 2027 Service revenue Operating expenses, excluding depreciation Depreciation expense Loss on disposal of plant assets Income before income taxes Income tax expense Net income

$ 970,000 $ 614,000 55,000 16,000

685,000 285,000 56,000 $ 229,000

REWE COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income $ 229,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 55,000 Loss on disposal of plant assets 16,000 Increase in accounts receivable (10,000) Increase in accounts payable 9,000 Increase in income taxes payable 6,000 76,000 Net cash provided by operating activities $ 305,000

using the indirect method. reference a cell), into the yellow

P19.4 Additional Question Rewe Company's income statement contained the condensed information below. REWE COMPANY Income Statement For the Year Ended December 31, 2027 Service revenue Operating expenses, excluding depreciation Depreciation expense Loss on disposal of plant assets Income before income taxes Income tax expense Net income

$ 970,000 $ 614,000 55,000 16,000

685,000 285,000 56,000 $ 229,000

Rewe's balance sheet contained the comparative data at December 31. 2027 2026 Accounts receivable $ 70,000 $ 60,000 Accounts payable 41,000 32,000 Income taxes payable 13,000 7,000 Accounts payable pertain to operating expenses. Instructions Complete the operating activities section of the statement of cash flows using the indirect method. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells. Assume that the 2027 accounts receivable, accounts payable, and income taxes payable balances are now $75,000, $39,000, and $4,500, respectively, Show the impact of these changes on the operating activities section of the statement of cash flows. REWE COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities

ation below.

ws using the indirect method.

le to reference a cell), into the yellow

ome taxes payable balances are now hanges on the operating activities

P19.4 Additional Question Solution Rewe Company's income statement contained the condensed information below. REWE COMPANY Income Statement For the Year Ended December 31, 2027 Service revenue Operating expenses, excluding depreciation Depreciation expense Loss on disposal of plant assets Income before income taxes Income tax expense Net income

$ 970,000 $ 614,000 55,000 16,000

685,000 285,000 56,000 $ 229,000

Net cash provided by operating activities

$ 289,500

P19.5 Prepare a statement of cash flows--indirect method, and compute free cash flow. Presented below are the financial statements of Warner Company. WARNER COMPANY Comparative Balance Sheet December 31 Assets Cash Accounts receivable Inventory Property, plant, and equipment Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Total

2025 2024 $ 35,000 $ 20,000 20,000 14,000 28,000 20,000 60,000 78,000 (32,000) (24,000) $ 111,000 $ 108,000

19,000 $ 15,000 7,000 8,000 17,000 33,000 18,000 14,000 50,000 38,000 $ 111,000 $ 108,000

WARNER COMPANY Income Statement For the Year Ended December 31, 2027 Sales Revenue Cost of goods sold Gross profit Selling expenses Administrative expenses Income from operations Interest expense Income before income taxes Income tax expense Net income

$ 242,000 175,000 67,000 $

18,000 6,000

24,000 43,000 3,000 40,000 8,000 $ 32,000

Additional data: 1. Depreciation expense was $17,500. 2. Dividends declared and paid were $20,000. 3. During the year equipment was sold for $8,500 cash. This equipment cost $18,000 originally and had accumulated depreciation of $9,500 at the time of sale.

Instructions a. Complete the statement of cash flows using the indirect method. b. Compute free cash flow.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow sh input cells.

WARNER COMPANY Statement of Cash Flows For the Year Ended December 31, 2027

Free cash flow

When you have completed this problem, respond to the additional question on the P19.5 Add Ques worksheet.

eference a cell), into the yellow shaded

on the P19.5 Add Ques worksheet.

P19.5 Solution Presented below are the financial statements of Warner Company. WARNER COMPANY Comparative Balance Sheet December 31 Assets Cash Accounts receivable Inventory Property, plant, and equipment Accumulated depreciation Total

2027 2026 $ 35,000 $ 20,000 20,000 14,000 28,000 20,000 60,000 78,000 (32,000) (24,000) $ 111,000 $ 108,000

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Total

$ 19,000 7,000 17,000 18,000 50,000 $ 111,000

$ 15,000 8,000 33,000 14,000 38,000 $ 108,000

$ 242,000 175,000 67,000 $ 18,000 6,000

24,000 43,000 3,000 40,000 8,000 $ 32,000

WARNER COMPANY Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income $ 32,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 17,500 Increase in accounts receivable (6,000) Increase in inventory (8,000) Increase in accounts payable 4,000 Decrease in income taxes payable (1,000) 6,500 Net cash provided by operating activities 38,500 Cash flows from investing activities Sale of equipment

8,500

Net cash provided by operating activities Cash flows from financing activities Issuance of common stock Redemption of bonds Payment of dividends

8,500

4,000 (16,000) (20,000)

Net cash used by financing activities

(32,000)

Net increase in cash Cash at beginning of period Cash at end of period

Free cash flow

15,000 20,000 $ 35,000

$ 18,500

ence a cell), into the yellow shaded

P19.5 Additional Question Presented below are the financial statements of Warner Company. WARNER COMPANY Comparative Balance Sheet December 31 Assets Cash Accounts receivable Inventory Property, plant, and equipment Accumulated depreciation Total

2027 2026 $ 35,000 $ 20,000 20,000 14,000 28,000 20,000 60,000 78,000 (32,000) (24,000) $ 111,000 $ 108,000

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Total

$ 19,000 7,000 17,000 18,000 50,000 $ 111,000

$ 15,000 8,000 33,000 14,000 38,000 $ 108,000

$ 242,000 175,000 67,000 $ 18,000 6,000

24,000 43,000 3,000 40,000 8,000 $ 32,000

Instructions a. Complete the statement of cash flows using the indirect method. b. Compute free cash flow. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells. Assume that 2027 accounts receivable, inventory, and accounts payable balances are now $19,000, $31,000 and $21,000, respectively. Show the impact of these changes on the statement of cash flows and the ratio. a.

WARNER COMPANY Statement of Cash Flows For the Year Ended December 31, 2027

Free cash flow

P19.5 Additional Question Solution Presented below are the financial statements of Warner Company. WARNER COMPANY Comparative Balance Sheet December 31 Assets Cash Accounts receivable Inventory Property, plant, and equipment Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Total

2025 $ 35,000 $ 20,000 28,000 60,000 (32,000) $ 111,000 $

2024 20,000 14,000 20,000 78,000 (24,000) 108,000

15,000 8,000 33,000 14,000 38,000 108,000

19,000 $ 7,000 17,000 18,000 50,000 $ 111,000 $

18,000 6,000

242,000 175,000 67,000 24,000 43,000 3,000 40,000 8,000 32,000

Additional data: 1. Depreciation expense was $17,500. 2. Dividends declared and paid were $20,000. 3. During the year equipment was sold for $8,500 cash. This equipment cost $18,000

originally and had accumulated depreciation of $9,500 at the time of sale.

WARNER COMPANY Statement of Cash Flows For the Year Ended December 31, 2027 Cash flows from operating activities Net income $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 17,500 Increase in accounts receivable (5,000) Increase in inventory (11,000) Increase in accounts payable 6,000 Decrease in income taxes payable (1,000) Net cash provided by operating activities Cash flows from investing activities Sale of equipment

8,500

4,000 (16,000) (20,000)

Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period

6,500 38,500

8,500

Net cash provided by operating activities Cash flows from financing activities Issuance of common stock Redemption of bonds Payment of dividends

32,000

(32,000)

15,000 20,000 35,000

Free cash flow

18,500

are now $19,000, $31,000 and h flows and the ratio.

Using Data Visualization to Analyze Cash Flows DA19.1 Data visualization can be used to illustrate cash flows. Example Consider the Accounting Across the Organization box “Burning Through Our Cash” presented in the chapter. The three tech companies listed, Box, FireEye, and MobileIron, have all issued stock to the public. As mentioned, prior to making investments in these companies, the investors most likely closely examined each respective company's cash flows. The investors want to be sure that these companies are able to generate enough cash to satisfy liabilities, pay dividends, and grow the company. The amounts of operating cash flows in thousands for these three companies are presented here.

Year 2016 2017 2018 2019

Box FireEye MobileIron (1,218) $ (14,585) $ (11,729) 61,822 17,640 3,036 55,321 17,381 14,157 44,713 67,537 (2,406)

We can use data visualization to understand the pattern of cash flows for companies such as these. For example, consider the chart presented here. FireEye has an upward sloping trajectory, making its operating cash flows look more promising than the others. Box's operating cash flows have the steepest downward trend beginning in 2017, making it the company with the biggest concerns. MobileIron had a steady increase for the first two years but has taken a recent downturn, making it a second company that investors will want to watch closely.

Source: https://finance.yahoo.com/

Chart of Operating Cash Flows of Three Companies Cash Flows from Operating Activities for 2019 to 2016 $80,000 $70,000

Operating Cash Flows (In thousands)

$60,000 $50,000 $40,000

$30,000 $20,000 $10,000 $2016

2017

2018

$(10,000) $(20,000) Box

FireEye

MobileIron

2019

Using Data Visualization to Analyze Cash Flows DA19.1 Excerpts from the cash flow statements for 2016 through 2020 fiscal years of the three tech companies, Box, FireEye, and MobileIron, mentioned in the Burning Through Our Cash article in the chapter are presented here. BOX Box, Inc. Year Ending Operating CF Investing CF Financing CF End Cash Balance Jan. 31, 2020 $44,713 ($13,296) ($53,416) $195,586 Jan. 31, 2019 55,321 (16,151) (29,567) 217,756 Jan. 31, 2018 61,822 (11,715) (19,830) 208,076 Jan. 31, 2017 (1,218) (7,572) 479 177,391 FEYE FireEye, Inc. Year Ending Operating CF Investing CF Financing CF End Cash Balance Dec. 31, 2019 $67,537 ($169,036) $26,273 $334,603 Dec. 31, 2018 17,381 (48,517) 260,074 409,829 Dec. 31, 2017 17,640 (59,323) (1,093) 180,891 Dec. 31, 2016 (14,585) (189,696) 25,846 223,667 MOBL MobilIron, Inc. Year Ending Operating CF Investing CF Financing CF End Cash Balance Dec. 31, 2019 ($2,406) ($494) ($7,298) $94,415 Dec. 31, 2018 14,157 3,891 732 104,613 Dec. 31, 2017 3,036 22,991 5,763 85,833 Dec. 31, 2016 (11,729) 12,567 5,971 54,043 Instructions There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. In the space provided for part a in the Student Work Area, input a mathematical formula that calculates the net change in cash for each company and for each year. Input a value of zero for the burn rate if the net cash flow is positive. (Hint: Use the SUM function to calculate the “Change in Cash” for each company for each year). Note: The beginning cash balance plus or minus the net change in cash flows during the year may not reconcile to the ending cash balance due to exchange rate differences disclosed in Box, Inc.'s annual report. b. In the space provided for part b in the Student Work Area, calculate the burn rate for the years that there is a net decrease in cash flows. The burn rate is calculated by dividing the ending cash balance by the change in cash. c. Examine the components of calculating the burn rate. Which company(ies) have burn rates that cause you the least and the most concern? Explain.

d. Create a separate clustered column chart for each company. Show the amount of cash flow by type of cash flow activity for the four years. Include a descriptive chart title, axes labels, properly formatted axes, and a legend for each chart. e. Describe each chart and what information each provides to investors. Source: https://finance.yahoo.com/

Student Work Area a. Calculations for part a BOX Year Ending Jan. 31, 2020 Jan. 31, 2019 Jan. 31, 2018 Jan. 31, 2017 FEYE Year Ending Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 MOBL Year Ending Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016

b. Calculations for part b

Net Change in Cash

Burn Rate

Net Change in Cash

Burn Rate

Net Change in Cash

Burn Rate

c. Response to part c.

d. Chart for part d, Box, Inc.

d. Chart for part d, FireEye, Inc.

d. Chart for part d, MobileIron, Inc.

e. Response to part e, Box, Inc.

e. Response to part e, FireEye, Inc.

e. Response to part e, MobileIron, Inc.

Box, Inc. Operating CF $44,713 55,321 61,822 (1,218)

Investing CF ($13,296) (16,151) (11,715) (7,572)

Financing CF End Cash Balance ($53,416) $195,586 (29,567) 217,756 (19,830) 208,076 479 177,391

FEYE Year Ending Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016

FireEye, Inc. Operating CF $67,537 17,381 17,640 (14,585)

Investing CF ($169,036) (48,517) (59,323) (189,696)

Financing CF End Cash Balance $26,273 $334,603 260,074 409,829 (1,093) 180,891 25,846 223,667

MOBL Year Ending Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016

MobilIron, Inc. Operating CF ($2,406) 14,157 3,036 (11,729)

Investing CF ($494) 3,891 22,991 12,567

Financing CF End Cash Balance ($7,298) $94,415 732 104,613 5,763 85,833 5,971 54,043

Instructions There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. In the space provided for part a in the Student Work Area, input a mathematical formula that calculates the net change in cash for each company and for each year. Input a value of zero for the burn rate if the net cash flow is positive. (Hint: Use the SUM function to calculate the “Change in Cash” for each company for each year). Note: The beginning cash balance plus or minus the net change in cash flows during the year may not reconcile to the ending cash balance due to exchange rate differences disclosed in Box, Inc.'s annual report.

b. In the space provided for part b in the Student Work Area, calculate the burn rate for the years that there is a net decrease in cash flows. The burn rate is calculated by dividing the ending cash balance by the change in cash. c. Examine the components of calculating the burn rate. Which company(ies) have burn rates that cause you the least and the most concern? Explain.

Student Work Area a. Calculations for part a BOX Year Ending Net Change in Cash Jan. 31, 2020 ($21,999) Jan. 31, 2019 9,603 Jan. 31, 2018 30,277 Jan. 31, 2017 (8,311) FEYE Year Ending Net Change in Cash Dec. 31, 2019 ($75,226) Dec. 31, 2018 228,938 Dec. 31, 2017 (42,776) Dec. 31, 2016 (178,435)

b. Calculations for part b Burn Rate 8.9 0.0 0.0 21.3

Burn Rate 4.4 0.0 4.2 1.3

d. Chart for part d, Box, Inc.

Box, Inc. ( $80,000 $60,000

Cash Flow Amount

ree tech icle in the

e years that cash balance

ates that cause

$20,000 $0 Jan. 31, 2020

($20,000) ($40,000) ($60,000)

MOBL Year Ending Net Change in Cash Dec. 31, 2019 ($10,198) Dec. 31, 2018 18,780 Dec. 31, 2017 31,790 Dec. 31, 2016 6,809

Burn Rate 9.3 0.0 0.0 0.0

Operating CF

d. Chart for part d, FireEye, Inc

FireEye, Inc.

structor’s

$300,000

c. Response to part c. MobilIron presents the least concern as it has only a single year with a negative change in cash, and it would take nine years to use up its cash position. Although Box has two years with negative changes in cash, it has a larger cash balance and it would take a while to burn all the cash. FireEye is the company that is most concerning as it has three years with a negative change in cash, and it is estimated that it will take one to four years to burn through its cash on hand.

$250,000 $200,000

Cash Flow Amount

that calculates e burn rate if sh” for each e in cash flows rences

$40,000

$150,000 $100,000 $50,000 $0 ($50,000) ($100,000) ($150,000) ($200,000) ($250,000)

Dec. 31, 2019

flow by type of y formatted

d. Chart for part d, MobileIron,

MobileIron $25,000

Cash Flow amount

$20,000 $15,000 $10,000 $5,000 $0 Dec. 31, 2019 ($5,000) ($10,000) ($15,000)

e. Response to part e, Box, Inc. Box has good cash flow from operations, although it is on a downward trend. The company appears to be using cash from operations to invest in long-term assets an pay its obligations.

Box, Inc. (BOX) Cash Flow over Time

Jan. 31, 2020

Jan. 31, 2019

Jan. 31, 2018

Jan. 31, 2017

Year End Date Operating CF

Investing CF

Financing CF

FireEye, Inc. (FEYE) Cash Flow over Time

Dec. 31, 2019

Dec. 31, 2018

Dec. 31, 2017

Date Operating CF

Investing CF

Financing CF

Dec. 31, 2016

e. Response to part e, FireEye, Inc. While positive for the most recent three ye presented on the chart, FireEye has positiv but weak cash flows from operations in 20 and 2018. During the most recent three ye the company appeared to be covering operations with its cash flows, and purchas long-term assets. It obtained funds from financing in 2016, 2018, and 2019.. In 201 appears to be using cash on hand and from financing to fund operations and to invest i large amount of long-term assets.

Operating CF

Investing CF

Financing CF

MobileIron, Inc. (MOBL) Cash Flow over Time

Dec. 31, 2019

Dec. 31, 2018

Dec. 31, 2017

Date Operating CF

Investing CF

Financing CF

Dec. 31, 2016

e. Response to part e, MobileIron, Inc. MobileIron appears that in 2016 to be sellin off long-term assets to fund operations. In 2017 & 2018, it has a positive cash flow wh indicates it is generating enough cash flow fund operations. During 2019, the compan appears to have operating cash flow proble and appears to be paying off debt and purchasing long-term assets with cash acquired in 2017 from the sale of long-term assets.

e, Box, Inc. ow from operations, wnward trend. The be using cash from n long-term assets and

e, FireEye, Inc. e most recent three years art, FireEye has positive, from operations in 2017 e most recent three years, ed to be covering ash flows, and purchasing obtained funds from 18, and 2019.. In 2016, it cash on hand and from erations and to invest in a -term assets.

e, MobileIron, Inc. hat in 2016 to be selling to fund operations. In a positive cash flow which ting enough cash flow to ng 2019, the company rating cash flow problems aying off debt and m assets with cash m the sale of long-term

Using Data Analytics to Evaluate Industry Cash Flows DA19.2 By evaluating the cash flows of top competitors within an industry, financial statement users can make certain generalizations about that industry overall. This will help them to better evaluate the cash flows of another company within that industry. Below are excerpts from the cash flow statements for four competitors in the pharmaceutical industry, Merck & Co., Novartis, GlaxoSmithKline, and Pfizer, their respective fiscal years ending in 2019.

Merck & Co. Operating cash flow Investing cash flow Financing cash flow

$13,440,000 (2,629,000) (8,861,000)

Novartis Operating cash flow Investing cash flow Financing cash flow

$13,625,000 (2,226,000) (13,627,000)

GlaxoSmithKline Operating cash flow Investing cash flow Financing cash flow

$8,020,000 (5,354,000) (1,840,000)

Pfizer Operating cash flow Investing cash flow Financing cash flow

$12,588,000 (3,945,000) (8,485,000)

Instructions There are three parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Use the SUM function to calculate the “Change in Cash” for each company in the Student Work Area. b. Create a separate waterfall chart for each company showing the amount of cash flow by cash flow activity and the changes in cash flow. Include a descriptive chart title, axes labels, properly formatted axes, and a legend for each chart. c. What generalizations can you make about this industry’s cash flow based on the chart in part b? Describe in general how the companies obtained its funds and for what purpose they used their respective funds. Which of the three cash flow activities is most important and why? Source: https://finance.yahoo.com/

b. Chart for GlaxoSmit

b. Chart for Pfizer for p

c. Response to part c.

Student Work Area a. Change in cash for each company Merck & Co. GlaxoSmithKline Novartis Pfizer Operating cash flow $ 13,440,000 $ 13,625,000 $ 8,020,000 $ 12,588,000 Investing cash flow (2,629,000) (2,226,000) (5,354,000) (3,945,000) Financing cash flow (8,861,000) (13,627,000) (1,840,000) (8,485,000) Change in cash

b. Chart for Merck & Co. for part b.

b. Chart for Novartis for part b.

b. Chart for GlaxoSmithKline for part b.

b. Chart for Pfizer for part b.

c. Response to part c.

Merck & Co. Operating cash flow Investing cash flow Financing cash flow

$13,440,000 (2,629,000) (8,861,000)

Novartis Operating cash flow Investing cash flow Financing cash flow

$13,625,000 (2,226,000) (13,627,000)

GlaxoSmithKline Operating cash flow Investing cash flow Financing cash flow

$8,020,000 (5,354,000) (1,840,000)

Pfizer Operating cash flow Investing cash flow Financing cash flow

$12,588,000 (3,945,000) (8,485,000)

Source: https://finance.yahoo.com/

b. Chart for G

b. Chart for Pf

c. Response to

b. Chart for Merck & Co. for part b.

b. Chart for Novartis for part b.

b. Chart for GlaxoSmithKline for part b.

b. Chart for Pfizer for part b.

c. Response to part c. All four companies have strong cash flows from operations. All appear to have generated enough funds from operations, and used those funds for expansion through investing activities, and to repay financing activities. Novartis failed to generate enough from operating cash flows to cover what it used in investing and financing activities, resulting in a negative net change in cash. Generating funds from operations is the most important activity to sustain a company because net cash provided by operating activities indicates the cash-generating capability of a company. A company cannot continually obtain cash from financing and use it for investing activities as this increases debt and dilutes the ownership of a company.

All four companies have strong cash flows from operations. All appear to have generated enough funds from operations, and used those funds for expansion through investing activities, and to repay financing activities. Novartis failed to generate enough from operating cash flows to cover what it used in investing and financing activities, resulting in a negative net change in cash. Generating funds from operations is the most important activity to sustain a company because net cash provided by operating activities indicates the cash-generating capability of a company. A company cannot continually obtain cash from financing and use it for investing activities as this increases debt and dilutes the ownership of a company.

ated enough funds d to repay financing t it used in investing from operations is the g activities indicates ash from financing and mpany.

Using Data Visualization to Understand Financing Cash Flows DA19.3 Data visualization can be used to understand financing cash flows Financing activities include issuing or paying off debt and buying or selling stock. Users can find this information in statement of cash flows. Nike, Inc.’s financing activities for the past six fiscal years are presented here.

Nike, Inc.’s financing activities for fiscal years ending May 31 (in millions) Financian Activities 2020 2019 2018 2017 2016 2015 Notes payable $ 49 $ (325) $ 13 $ 327 $ (67) $ (63) Proceeds from borrowings 6,134 1,482 981 Repayment of borrowings (6) (6) (44) (106) (7) Payments on capital leases (27) (23) (17) (7) (19) Proceeds from stock options issuances 885 700 733 489 507 514 Excess tax benefits-share-based payments 177 281 218 Repurchase of common stock (3,067) (4,286) (4,254) (3,223) (3,238) (2,534) Dividends (1,452) (1,332) (1,243) (1,133) (1,022) (899) Other financing activities (58) (17) (55) Cash provided (used) by financing activities$ 2,491 $ (5,293) $ (4,835) $ (1,942) $ (2,671) $ (2,790) Source: https://www.stock-analysis-on.net/NYSE/Company/Nike-Inc/Financial-Statement/Statement-of-Cash-Flows

Instructions There are two parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to pe following: a. Create a waterfall chart for fiscal year 2020 showing the sources and uses of cash. Include a descriptive chart ti labels, and a legend in the chart. b. What are the major uses of cash for financing for the financing activities?

ind this information in the ented here.

Student Work Area a. Chart for part a

t-of-Cash-Flows

structor’s choice to perform the

de a descriptive chart title, axes

b. Response to part b

Instructions There are two parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Create a waterfall chart for fiscal year 2020 showing the sources and uses of cash. Include a descriptive chart ti axes labels, and a legend in the chart. b. What are the major uses of cash for financing for the financing activities?

ind this information in the ented here.

Student Work Area a. Chart for part a

t-of-Cash-Flows

structor’s choice to

de a descriptive chart title,

b. Response to part b The primary source of financing funds for Nike is borrowing money as seen by the $6,134 million cash inflow. Regarding the financing activities, the cash is used primarily to buy back the company's own stock and pay dividends.

y as seen by the cash is used .

11 - 1 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 11

WATERWAYS CORPORATION

Managerial Accounting 11-2

11 - 3 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

Managerial Accounting 11-4

WC 11 (Continued) WATERWAYS CORPORATION Balance Sheet (partial) November 30, 2027 Assets Current assets Cash Accounts receivable Inventories Finished goods inventory $68,800 Work in process inventory 42,000 Raw materials inventory 52,700 Prepaid expenses Total current assets

$260,000 275,000

163,500 41,250 $739,750

LO3 BT: AN Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

E12.1 Record factory labor Total factory labor costs related to factory workers for Larkin Company during the month of January are $90,000. Of the total accumulated cost of factory labor, 85% is related to direct labor and 15% is attributable to indirect labor. Instructions Using the format shown in Illustration 12.12 a. Record the factory labor costs for the month of January. b. Assign the factory labor to production. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells. (a) and (b) Manufacturing Costs Raw Materials Inventory (a) Incurred factory labor (b) Direct labor (b) Indirect labor Balances

When you have completed E12.1, respond to the additional question, on the E12.1 Add Ques worksheet.

y during the y labor, 85% is related to direct labor and

ble to reference a cell), into the yellow

Manufacturing Costs Factory Labor

on the E12.1 Add Ques worksheet.

Work in Process Inventory Manufacturing Overhead

E12.1 Solution Total factory labor costs related to factory workers for Larkin Company during the month of January are $90,000. Of the total accumulated cost of factory labor, 85% is related to direct labor and 15% is attributable to indirect labor. Instructions Using the format shown in Illustration 12.12 a. Record the factory labor costs for the month of January. b. Assign the factory labor to production. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells. (a) and (b) Manufacturing Costs Raw Materials Inventory (a) Incurred factory labor (b) Direct labor (b) Indirect labor Balances

y during the y labor, 85% is related to direct labor and

ble to reference a cell), into the yellow

Manufacturing Costs Work in Process Inventory Factory Labor Manufacturing Overhead $ 90,000 $ 76,500 $ (76,500) $ (13,500) $ 13,500 $ - $ 13,500 $ 76,500

E12.1 Additional Question Total factory labor costs related to factory workers for Larkin Company during the month of January are $90,000. Of the total accumulated cost of factory labor, 85% is related to direct labor and 15% is attributable to indirect labor. Instructions Using the format shown in Illustration 12.12 a. Record the factory labor costs for the month of January. b. Assign the factory labor to production. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells. Additional Question Assume that factory wages changed changed to $78,000. Also assume that 80% of total labor costs is related to direct labor. Revise the assignment of factory labor to production.

(a) and (b) Manufacturing Costs Raw Materials Inventory (a) Incurred factory labor (b) Direct labor (b) Indirect labor Balances

y during the y labor, 85% is related to direct labor and

ble to reference a cell), into the yellow

labor. Revise the assignment

Manufacturing Costs Factory Labor

Work in Process Inventory Manufacturing Overhead

(a) and (b) Manufacturing Costs Raw Materials Inventory (a) Incurred factory labor (b) Direct labor (b) Indirect labor Balances

y during the y labor, 85% is related to direct labor and

ble to reference a cell), into the yellow

labor. Revise the assignment

Manufacturing Costs Work in Process Inventory Factory Labor Manufacturing Overhead $ 78,000 $ 62,400 $ (62,400) $ (15,600) $ 15,600 $ - $ 15,600 $ 62,400

E12.5 Compute the manufacturing overhead rate and under- or overapplied overhead Ikerd Company applies overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $300,000 for the year, and machine usage is estimated at 125,000 hours. For the year, $322,000 of overhead costs are incurred and 130,000 hours are used. Instructions a. Compute the manufacturing overhead rate for the year. b. What is the amount of under-or overapplied overhead at December 31? c. Indicate the effect of the adjustments to assign the under- or overapplied overhead for the year to cost of goods sold. NOTE: Enter a formula or cell references into all input cells shaded in yellow for amounts not given. Type a value if you are unable to cell reference.

a. Estimated total overhead cost Estimated machine hours Overhead rate

b. Actual machine hours used Manufacturing overhead applied Manufacturing overhead incurred Manufacturing overhead over (underapplied)

Indicate the effect of the adjustment to assign the under- or overapplied overhead for the year to c. cost of goods sold.

When you have completed E12.5, respond to the additional question, on the E12.5 Add Ques worksheet.

overapplied

verhead costs are expected .

overhead for the year to

w for amounts not given.

verhead for the year to

2.5 Add Ques worksheet.

E12.5 Solution Ikerd Company applies overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $300,000 for the year, and machine usage is estimated at 125,000 hours.

For the year, $322,000 of overhead costs are incurred and 130,000 hours are used. Instructions a. Compute the manufacturing overhead rate for the year. b. What is the amount of under-or overapplied overhead at December 31? c. Prepare the adjusting entry to assign the under- or overapplied overhead for the year to cost of goods sold. NOTE: Enter a formula or cell references into all input cells shaded in yellow for amounts not given. Type a value if you are unable to cell reference.

a. Estimated total overhead cost Estimated machine hours Overhead rate

$ $

b. Actual machine hours used Manufacturing overhead applied Manufacturing overhead incurred Manufacturing overhead over (underapplied)

300,000 125,000 2.40

130,000 $ $

312,000 322,000 (10,000)

c. Indicate the effect of the adjustment to assign the under- or overapplied overhead for the The adjustment to assign the underapplied overhead to Cost of Goods Sold will decrease Manufacturing Overhead and increase Cost of Goods Sold.

E12.5 Additional Question Ikerd Company applies overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $300,000 for the year, and machine usage is estimated at 125,000 hours.

For the year, $322,000 of overhead costs are incurred and 130,000 hours are used. Instructions a. Compute the manufacturing overhead rate for the year. b. What is the amount of under-or overapplied overhead at December 31? c. Prepare the adjusting entry to assign the under- or overapplied overhead for the year to cost of goods sold. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that the estimated total overhead for the year changed to $350,000. Determine the impact on this change on the overhead rate, and the amount of manufacturing overhead over(under) applied. Revise the journal to dispose of over (under) applied overhead. What is the effect of the adjustments to cost of goods sold?

a. Estimated total overhead cost Estimated machine hours Overhead rate

b. Actual machine hours used Manufacturing overhead applied Manufacturing overhead incurred Manufacturing overhead over (underapplied) c. What is the effect of the adjustement to Cost of Goods Sold?

E12.5 Solution to Additional Question Ikerd Company applies overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $300,000 for the year, and machine usage is estimated at 125,000 hours.

For the year, $322,000 of overhead costs are incurred and 130,000 hours are used. Instructions a. Compute the manufacturing overhead rate for the year. b. What is the amount of under-or overapplied overhead at December 31? c. Prepare the adjusting entry to assign the under- or overapplied overhead for the year to cost of goods sold. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that the estimated total overhead for the year changed to $350,000. Determine the impact on this change on the overhead rate, the amount of manufacturing overhead over(under) applied. Revise the journal to dispose of over (under) applied overhead.

a. Estimated total overhead cost Estimated machine hours Overhead rate

$ $

b. Actual machine hours used Manufacturing overhead applied Manufacturing overhead incurred Manufacturing overhead over (underapplied)

350,000 125,000 2.80

130,000 $ $

364,000 322,000 42,000

c. Indicate the effect of the adjustment to assign the under- or overapplied overhead for the The adjustment to assign the overapplied overhead to Cost of Goods Sold will increase Manufacturing Overhead and decrease Cost of Goods Sold.

The adjustment to assign the overapplied overhead to Cost of Goods Sold will increase Manufacturing Overhead and decrease Cost of Goods Sold.

E12.9 Prepare a cost of goods manufactured schedule and partial financial statements At May 31, 2027, the accounts of Lopez Company show the following. 1. May 1 inventories - finished goods $12,600, work in process $14,700 and raw materials $8,200. 2. May 31 inventories - finished goods $9,500, work in process, $15,900, and raw materials, $7,100. 3. Increases to work in process were direct materials, $62,400, direct labor $50,000, and manufacturing overhead applied $40,000. 4. Sales revenue totaled $215,000. Instructions a. Prepare a condensed cost of goods manufactured schedule for May 2027. b. Prepare an income statement for May 2027 through gross profit. c. Indicate the balance sheet presentation of the manufacturing inventories at May 31, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

LOPEZ COMPANY Cost of Goods Manufactured Schedule For the Month Ended May 31, 2027 Work in process, May 1 Direct materials used Direct labor Manufacturing overhead applied Total manufacturing costs Total cost of work in process Less: Work in process, May 31 Cost of goods manufactured

LOPEZ COMPANY Income Statement (Partial) For the Month Ended May 31, 2027 Sales revenue Cost of goods sold Finished goods, May 1 Cost of goods manufactured Cost of goods available for sale Less: Finished goods, May 31 Cost of goods sold Gross profit

LOPEZ COMPANY Balance Sheet (Partial) May 31, 2027 Current assets: Finished goods inventory Work in process inventory Raw materials inventory

When you have completed E12.9, respond to the additional question, on the E12.9 Add Ques worksheet.

E12.9 Solution At May 31, 2027, the accounts of Lopez Company show the following. 1. May 1 inventories - finished goods $12,600, work in process $14,700 and raw materials $8,200. 2. May 31 inventories - finished goods $9,500, work in process, $15,900, and raw materials, $7,100. 3. Increases to work in process were direct materials, $62,400, direct labor $50,000, and manufacturing overhead applied $40,000. 4. Sales revenue totaled $215,000. Instructions a. Prepare a condensed cost of goods manufactured schedule for May 2027. b. Prepare an income statement for May 2027 through gross profit. c. Indicate the balance sheet presentation of the manufacturing inventories at May 31, 2027.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

$ $

14,700

62,400 50,000 40,000 152,400 167,100 15,900 $ 151,200

$ 215,000 $

12,600 15,900 28,500 9,500 19,000 $ 196,000

LOPEZ COMPANY Balance Sheet (Partial) May 31, 2027 Current assets: Finished goods inventory Work in process inventory Raw materials inventory

9,500 15,900 7,100

32,500

E12.9 Additional Question At May 31, 2027, the accounts of Lopez Company show the following. 1. May 1 inventories - finished goods $12,600, work in process $14,700 and raw materials $8,200. 2. May 31 inventories - finished goods $9,500, work in process, $15,900, and raw materials, $7,100. 3. Increases to work in process were direct materials, $62,400, direct labor $50,000, and manufacturing overhead applied $40,000. 4. Sales revenue totaled $215,000. Instructions a. Prepare a condensed cost of goods manufactured schedule for May 2027. b. Prepare an income statement for May 2027 through gross profit. c. Indicate the balance sheet presentation of the manufacturing inventories at May 31, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Questions Assume that the total costs for direct materials used, direct labor incurred, and manufcturing overhead applied changed to $81,400, $63,600 and $45,000 respectively. Show the impact of these changes on the cost of goods manufactured schedule, income statement and balance sheet.

LOPEZ COMPANY Balance Sheet (Partial) May 31, 2027 Current assets: Finished goods inventory Work in process inventory Raw materials inventory

E12.9 Soluton to Additional Question At May 31, 2027, the accounts of Lopez Company show the following. 1. May 1 inventories - finished goods $12,600, work in process $14,700 and raw materials $8,200. 2. May 31 inventories - finished goods $9,500, work in process, $15,900, and raw materials, $7,100. 3. Increases to work in process were direct materials, $62,400, direct labor $50,000, and manufacturing overhead applied $40,000. 4. Sales revenue totaled $215,000. Instructions a. Prepare a condensed cost of goods manufactured schedule for May 2027. b. Prepare an income statement for May 2027 through gross profit. c. Indicate the balance sheet presentation of the manufacturing inventories at May 31, 2027. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

14,700

190,000 204,700 15,900 188,800

215,000

191,900 23,100

9,500 15,900 7,100 $

32,500

81,400 63,600 45,000

12,600 188,800 201,400 9,500

LOPEZ COMPANY Balance Sheet (Partial) May 31, 2027 Current assets: Finished goods inventory Work in process inventory Raw materials inventory

P12.3 Record transactions in a job order cost system and prepare cost of goods manufactu

Case Inc. is a construction company specializing in custom patios. The patios are constructed of concrete, brick, lumber, depending on customer preference. On June 1, 2027, the general ledger for Case Inc. contains the follow Raw Materials Inventory Work in Process Inventory Manufacturing Overhead Applied Manufacturing Overhead Incurred

4,200 5,540 32,640 31,650

Subsidiary data for Work in Process Inventory on June 1 are as follows. Job Cost Sheets Cost Element Direct materials Direct labor Manufacturing overhead

Rodgers 600 $ 320 400 1,320 $

Customer Job Stevens 800 540 675 2,015

During June, raw materials purchased on account were $4,900, and $4,800 of factory wages were paid. Additiona consisted of depreciation on equipment $900 and miscellaneous costs of $400 incurred on account. A summary of materials requisition slips and time tickets for June shows the following.

Customer Job Rodgers Koss Stevens Linton Rodgers General use

Materials Requisition Slips $ 800 $ 2,000 500 1,300 300 4,900 1,500 $ 6,400 $

Time Tickets 850 800 360 1,200 390 3,600 1,200 4,800

Instructions a. Using the format shown in Illustration 12.24, record the June transactions: (1) for purchase of raw materials, factory labor costs incurred, and manufacturing overhead costs incurred (2) assignment of direct materials, labor, and overhead to production (3) completion of jobs and sale of goods. b. Reconcile the balance in Work in Process Inventory with the costs of unfinished jobs. c. Prepare a cost of goods manufactured schedule for June.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow sh

Beginning balance 1. Purchased raw materials 1. Incurred factory labor 1. Miscellaneous overhead costs 1. Factory equipment depreciation 2. Direct materials 2 Indirect materials 2. Direct labor 2. Indirect labor 2. Assigned overhead 3. Completion of jobs 3. Sale of jobs Ending balance

Manufacturing Costs Raw Materials Inventory $ 4,200

Job Rodgers Stevens Linton

Factory Labor

Direct Materials

b. 6/30 Balance in Work in Process Inventory Unfinished Job (Koss) Direct materials

Direct labor Assigned Overhead Total cost of Koss Job

C Cost of Goods M For the Month Work in process, June 1 Direct materials used Direct labor Manufacturing overhead applied Total manufacturing costs Total cost of work in process Less: Work in process, June 30 Cost of goods manufactured

are cost of goods manufactured schedule.

are constructed of concrete, brick, fiberglass, and ger for Case Inc. contains the following data.

ob $

Linton 900 580 725 2,205

factory wages were paid. Additional overhead costs 0 incurred on account.

ollowing.

bor cost throughout the year. The patios for customers l of $18,900. Each customer paid in full at the time of

cturing overhead costs incurred

eference a cell), into the yellow shaded input cells.

Costs

Work in Process Inventory Manufacturing Overhead $ (990) $

Direct labor

Finished Goods Inventory

55,400

Manufacturing Overhead

Total Costs

CASE INC. Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027

Cost of Goods Sold

P12.3 Record transactions in a job order cost system and prepare cost of goods manufactu

4,200 5,540 32,640 31,650

Subsidiary data for Work in Process Inventory on June 1 are as follows. Job Cost Sheets Cost Element Direct materials Direct labor Manufacturing overhead

Rodgers 600 $ 320 400 1,320 $

Customer Job Stevens 800 540 675 2,015

Customer Job Rodgers Koss Stevens Linton Rodgers General use

Materials Requisition Slips $ 800 $ 2,000 500 1,300 300 4,900 1,500 $ 6,400 $

Time Tickets 850 800 360 1,200 390 3,600 1,200 4,800

Overhead was assigned to jobs at the same rate of $1.25 per dollar of direct labor cost throughout the year. The p Rodgers, Stevens, and Linton were completed during June and sold for a total of $18,900. Each customer paid in sale. Instructions a. Using the format shown in Illustration 12.24, record the June transactions: (1) for purchase of raw materials, factory labor costs incurred, and manufacturing overhead costs incurred (2) assignment of direct materials, labor, and overhead to production (3) completion of jobs and sale of goods. b. Reconcile the balance in Work in Process Inventory with the costs of unfinished jobs. c. Prepare a cost of goods manufactured schedule for June.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow sh

Manufacturing Costs Raw Materials Inventory $ 4,200 $ 4,900

$ $

Factory Labor

4,800

$ $

(3,600) (1,200)

(4,900) (1,500)

Job Rodgers Stevens Linton

2,700

Direct Materials $1,700 1,300 2,200

b. 6/30 Balance in Work in Process Inventory Unfinished Job (Koss)

Direct materials Direct labor Assigned Overhead Total cost of Koss Job

When you have completed P12.3, respond to the additional question, on the P12.3 Add Ques worksheet.

are cost of goods manufactured schedule.

are constructed of concrete, brick, fiberglass, and ger for Case Inc. contains the following data.

ob $

Linton 900 580 725 2,205

factory wages were paid. Additional overhead costs 0 incurred on account.

following.

abor cost throughout the year. The patios for customers al of $18,900. Each customer paid in full at the time of

cturing overhead costs incurred

eference a cell), into the yellow shaded input cells.

Costs

Work in Process Inventory Finished Goods Inventory Manufacturing Overhead $ (990) $ 5,540

$ $ $ $ $

400 900 4,900

3,600

1,500 1,200 (4,500) $ $ (1,490) $

Direct labor $1,560 900 1,780

3,800

4,500 (14,740) $ $ 3,800 $

Manufacturing Overhead $1,950 1,125 2,225

14,740 (14,740) -

Total Costs $5,210 3,325 6,205 $14,740

$ $ $ $

2,000 800 1,000 3,800

CASE INC. Cost of Goods Manufactured Schedule For the Month Ended June 30, 2027

P12.3 Add Ques worksheet.

$ $ $

4,900 3,600 4,500

Cost of Goods Sold

$ $

14,740 14,740

5,540

$ $ $ $

13,000 18,540 3,800 14,740

P12.3 Record transactions in a job order cost system and prepare cost of goods manufactu

4,200 5,540 32,640 31,650

Subsidiary data for Work in Process Inventory on June 1 are as follows. Job Cost Sheets Cost Element Direct materials Direct labor Manufacturing overhead

Rodgers 600 $ 320 400 1,320 $

Customer Job Stevens 800 $ 540 675 2,015 $

Linton 900 580 725 2,205

Customer Job Rodgers Koss Stevens Linton Rodgers General use

Materials Requisition Slips $ 800 $ 2,000 500 1,300 300 4,900 1,500 $ 6,400 $

Time Tickets 850 800 360 1,200 390 3,600 1,200 4,800

Overhead was assigned to jobs at the same rate of $1.25 per dollar of direct labor cost throughout the year. The p customers Rodgers, Stevens, and Linton were completed during June and sold for a total of $18,900. Each custom the time of sale. Instructions a. Using the format shown in Illustration 12.24, record the June transactions: (1) for purchase of raw materials, factory labor costs incurred, and manufacturing overhead costs incurred (2) assignment of direct materials, labor, and overhead to production (3) completion of jobs and sale of goods. b. Reconcile the balance in Work in Process Inventory with the costs of unfinished jobs. c. Prepare a cost of goods manufactured schedule for June.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow sh

Additional Question Assume that indirect labor and raw materials purchases changed to $1,400 and $6,800 respectively. Also assume that overh the rate of $1.50 per dollar of direct labor. The three completed jobs were sold for $22,000 cash. Revise the journal entries t changes.

Manufacturing Costs Raw Materials Inventory $ 4,200

Factory Labor

Manufacturing Overhead $ (990)

Direct

Job Rodgers Stevens Linton

Materials

labor

goods manufactured schedule.

ed of concrete, brick, fiberglass, and c. contains the following data.

s were paid. Additional overhead costs account.

ughout the year. The patios for f $18,900. Each customer paid in full at

ead costs incurred

l), into the yellow shaded input cells.

Also assume that overhead is applied at vise the journal entries to reflect these

Work in Process Inventory

Finished Goods Inventory

5,540

Manufacturing

Total

Cost of Goods Sold

Overhead

Costs

P12.3 Record transactions in a job order cost system and prepare cost of goods manufactu

4,200 5,540 32,640 31,650

Subsidiary data for Work in Process Inventory on June 1 are as follows. Job Cost Sheets Cost Element Direct materials Direct labor Manufacturing overhead

Rodgers 600 $ 320 400 1,320 $

Customer Job Stevens 800 $ 540 675 2,015 $

Linton 900 580 725 2,205

Customer Job Rodgers Koss Stevens Linton Rodgers General use

Materials Requisition Slips $ 800 $ 2,000 500 1,300 300 4,900 1,500 $ 6,400 $

Time Tickets 850 800 360 1,200 390 3,600 1,200 4,800

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow sh

Manufacturing Costs Raw Materials Inventory $ 4,200 $ 6,800

Factory Labor

$ $

Manufacturing Overhead $ (990)

5,000 $ $

400 900

1,500

$ $

(3,600) (1,400) $ $

1,400 (5,400)

(2,190)

(4,900) (1,500)

4,600

Job Rodgers Stevens Linton

Direct Materials $ $ $

1,700 1,300 2,200

$ $ $

Direct labor 1,560 900 1,780

*Manufacturing overhead applied = $1.50 x direct labor amount

goods manufactured schedule.

ed of concrete, brick, fiberglass, and c. contains the following data.

s were paid. Additional overhead costs account.

ughout the year. The patios for f $18,900. Each customer paid in full at

ead costs incurred

l), into the yellow shaded input cells.

Also assume that overhead is applied at vise the journal entries to reflect these

Work in Process Inventory

Finished Goods Inventory

5,540

4,900

3,600

$ $

5,400 (15,800) $ $ 3,640 $

15,800 (15,800) $ - $

Cost of Goods Sold

15,800 15,800

bor amount

$ $ $

Manufacturing Overhead* 2,340 1,350 2,670

Total Costs $ $ $ $

5,600 3,550 6,650 15,800

P12.5 Solution

Phillips Corporation’s fiscal year ends on November 30. The following accounts are found in its job order cost accoun month of the new fiscal year.

Beginning balance Purchase raw materials Incur factory labor Raw materials are used Factory labor is used Incur manufacturing overhead Assign manufacturing overhead Complete Jobs Sell Jobs Ending Balance

Manufacturing Costs Raw Materials Factory Manufact. Work in Process Inventory Labor Overhead Inventory (a) (b) $ 17,225 12,025 $ (16,850) 2,900 (c) (k) (l) $ 8,400 1,245 (m) (d) (f) $

7,975

(n)

(e)

Other data:

1. On December 1, two jobs were in process: Job No. 154 and Job No. 155. These jobs had combine $9,750 and combined direct labor costs of $15,000. Overhead was applied at a rate that was 75%

2. During December, Job Nos. 156, 157, and 158 were started. On December 31, Job No. 158 was un charges for direct materials $3,800 and direct labor $4,800, plus manufacturing overhead. All job were completed in December.

3. On December 1, Job No. 153 was in the finished goods warehouse. It had a total cost of $5,000. O was the only finished job that was not sold. It had a cost of $4,000. 4. Manufacturing overhead was $1,470 underapplied in December.

Instructions List the items (a) through (m) and indicate the amount pertaining to each letter.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shade

Beginning balance, raw materials Total requisitions Ending balance, raw materials Less: purchases Beginning balance, raw materials

Beginning work in process Direct materials Direct labor Overhead applied

Raw materials used Requisitions of raw materials Less: indirect materials Raw materials used

Overhead applied Direct labor Overhead applied

Ending work in process Direct materials Direct labor Overhead applied

Completed Jobs Beginning balance, work in process Direct materials Direct labor Overhead applied Less: ending work in process Jobs completed

Beginning balance, finished goods

Jobs completed

Cost of goods sold Beginning finished goods Jobs completed Less: ending finished goods Cost of goods sold

Ending finished goods

Wages assigned to work in process

Indirect labor Factory wages Less: direct labor Indirect labor

Overhead applied Direct labor Overhead applied

Total manufacturing overhead Raw materials used Factory labor used

Incur manufacturing overhead

Assign manufacturing overhead Total manufacturing overhead

Cost of goods sold

Total cost of goods sold

ob order cost accounting system for the first

Finished Goods Inventory (g)

(h) (i) (j)

Cost of Goods Sold

(o) (p)

se jobs had combined direct materials costs of a rate that was 75% of direct labor cost.

, Job No. 158 was unfinished. This job had ng overhead. All jobs, except for Job No. 158,

otal cost of $5,000. On December 31, Job No. 157

o the yellow shaded input cells.

Beginning balance, raw materials Total requisitions Ending balance, raw materials Less: purchases Beginning balance, raw materials

Beginning work in process Direct materials Direct labor Overhead applied

$ c.

Raw materials used Requisitions of raw materials Less: indirect materials Raw materials used

Overhead applied Direct labor Overhead applied

Ending work in process Direct materials Direct labor Overhead applied

16,850 7,975 17,225 7,600

9,750 15,000 11,250 36,000

16,850 2,900 13,950

$ $

8,400 6,300

3,800 4,800 3,600 12,200

Completed Jobs Beginning balance, work in process Direct materials Direct labor Overhead applied Less: ending work in process Jobs completed

36,000 13,950 8,400 6,300 12,200 52,450

Beginning balance, finished goods

5,000

Jobs completed

52,450

Cost of goods sold Beginning finished goods Jobs completed Less: ending finished goods Cost of goods sold

$ $ $

5,000 52,450 4,000 53,450

Ending finished goods

4,000

Wages assigned to work in process

12,025

Indirect labor Factory wages Less: direct labor Indirect labor

$ $

12,025 8,400 3,625

$ $

8,400 6,300

Overhead applied Direct labor Overhead applied

Additional Question Assume that material requisitions changed to $17,600. Show the impact of this change on the item

Beginning balance, raw materials Total requisitions Ending balance, raw materials Less: purchases Beginning balance, raw materials

Beginning work in process Direct materials Direct labor Overhead applied

Direct materials Requisitions of raw materials Less: indirect materials Direct materials

Overhead applied Direct labor Overhead applied

Ending work in process Direct materials Direct labor Overhead applied

Completed Jobs Beginning balance, work in process Direct materials

Direct labor Overhead applied Less: ending work in process Jobs completed

Beginning balance, finished goods

Jobs completed

Cost of goods sold Beginning finished goods Jobs completed Less: ending finished goods Cost of goods sold

Ending finished goods

Wages assigned to work in process

Indirect labor Factory wages Less: direct labor Indirect labor

Overhead applied Direct labor Overhead applied

mpact of this change on the items listed.

Additional Question Assume that material requisitions changed to $17,600. Show the impact of this change on the item

Beginning balance, raw materials Total requisitions Ending balance, raw materials Less: purchases Beginning balance, raw materials

Beginning work in process Direct materials Direct labor Overhead applied

$ c.

Direct materials Requisitions of raw materials Less: indirect materials Direct materials

Overhead applied Direct labor Overhead applied

Ending work in process Direct materials Direct labor Overhead applied

Completed Jobs Beginning balance, work in process Direct materials

9,750 15,000 11,250 36,000

17,600 2,900 14,700

$ $

8,400 6,300

3,800 4,800 3,600 12,200

17,600 7,975 17,225 8,350

36,000 14,700

Direct labor Overhead applied Less: ending work in process Jobs completed

8,400 6,300 12,200 53,200

Beginning balance, finished goods

5,000

Jobs completed

53,200

Cost of goods sold Beginning finished goods Jobs completed Less: ending finished goods Cost of goods sold

$ $ $

5,000 53,200 4,000 54,200

Ending finished goods

4,000

Wages assigned to work in process

12,025

Indirect labor Factory wages Less: direct labor Indirect labor

$ $

12,025 8,400 3,625

Overhead applied Direct labor Overhead applied

$ $

8,400 6,300

mpact of this change on the items listed.

CHAPTER 12 Using Excel to Make Decisions at Current Designs Topic(s): Job Order Costing Excel Functions and Tools: Using Mathematical Formulas

Huegel Hollow Resort has ordered 20 rotomolded kayaks from Current Designs. Each kayak will be formed in the rotomolded oven, cooled, and then have the excess plastic trimmed away. Then, the hatches, seat, ropes, and bungees will be attached to the kayak. Dave Thill, the kayak plant manager, knows that manufacturing each kayak requires 54 pounds of polyethylene powder and a finishing kit (rope, seat, hardware, etc.). The polyethylene powder used in these kayaks costs $1.50 per pound, and the finishing kits cost $170 each. Each kayak will use two kinds of labor: 2 hours of more-skilled type I labor from people who run the oven and trim the plastic, and 3 hours of less-skilled type II labor from people who attach the hatches and seat and other hardware. The type I employees are paid $15 per hour, and the type II employees are paid $12 per hour. For purposes of this problem, assume that overhead is applied to all jobs at a rate of 150% of direct labor costs. The data for this problem are provided here. Number of kayaks ordered Resources required for each kayak Polyethylene powder Finishing kit Type I labor Type II labor Manufacturing overhead Costs Polyethylene powder Finishing kits Type I labor rate Type II labor rate

54 pounds 1 each 2 hours 3 hours 150% of direct labor cost $

1.50 170.00 15.00 12.00

per pound each per hour per hour

Instructions Determine the total cost of the Huegel Hollow order and the cost of each individual kayak in the order. Identify costs as direct materials, direct labor, or manufacturing overhead.

Follow the step-by-step directions in the accompanying tutorial to complete the solution using mathematical formulas.

Follow the step-by-step directions in the accompanying tutorial to complete the solution using mathematical formulas. Cost for one kayak: Direct Materials Polyethylene powder Finishing kit Direct Labor More-skilled Less-skilled Manufacturing overhead Total cost of one kayak Cost for order of 20 kayaks

CHAPTER 12 Using Excel to Make Decisions at Current Designs Topic(s): Job Order Costing Excel Functions and Tools: Using Mathematical Formulas

54 pounds 1 each 2 hours 3 hours 150% of direct labor cost $

1.50 170.00 15.00 12.00

per pound each per hour per hour

Instructions Determine the total cost of the Huegel Hollow order and the cost of each individual kayak in the order. Identify costs as direct materials, direct labor, or manufacturing overhead.

Follow the step-by-step directions in the accompanying tutorial to complete the solution using mathematical formulas. Cost for one kayak: Direct Materials Polyethylene powder Finishing kit

81 170

Direct Labor More-skilled Less-skilled

30 36

Manufacturing overhead

Total cost of one kayak

416

Cost for order of 20 kayaks

$ 8,320

This blank worksheet named CD12 Part 2 What-if has been created for you. After completing Part 1, copy the worksheet containing your solution and paste to this blank worksheet using the instructions in the Part 2 tutorial.

CHAPTER 12 Using Excel to Make Decisions at Current Designs Topic(s): Job Order Costing Excel Functions and Tools: Using Mathematical Formulas

54 pounds 1 each 1 hours 3 hours 150% of direct labor cost $

1.65 170.00 15.00 12.00

per pound each per hour per hour

What-If? Question Perform what-if analysis to answer the following question: Suppose Current Designs is able to purchase a higher quality type of polyethylene power at a cost of $1.65 per pound, which will enable to the company to reduce the number of hours of type I labor to 1 hour. What will be the new cost of each kayak?

Suppose Current Designs is able to purchase a higher quality type of polyethylene power at a cost of $1.65 per pound, which will enable to the company to reduce the number of hours of type I labor to 1 hour. What will be the new cost of each kayak?

Follow the step-by-step directions in the accompanying tutorial to complete the solution using mathematical formulas. Part 2a Cost for one kayak: Direct Materials Polyethylene powder Finishing kit

89 170

Direct Labor More-skilled Less-skilled

15 36

Manufacturing overhead

Total cost of one kayak

387

Cost for order of 20 kayaks

7,732

Using DataVisualization to Analyze Data DA12.1 Data Visualization can be used to review profitability. Example: Recall the Feature Story “Profiting from the Silver Screen” presented at the beginning of the chapter. Data analytics can help movie executives understand industry performance. Industry experts track box office receipts, production costs, and estimated gross profit. From publicly available data, we can get an estimate of these amounts. The data below were used to generate the adjacent chart and consist of domestic, international, and worldwide box office revenues (gross amount) and production costs for the 25 top grossing comedies based on books. The graphed data for comedy films derived from books is presented. What do you observe?

Released

Title

Production Budget

Domestic BO

International Box Office

Worldwide Box Office

1993

Mrs. Doubtfire

$25,000,000

$219,195,051

$222,090,952

$441,286,003

2006

The Devil Wears Prada

$35,000,000

$124,740,460

$201,332,695

$326,073,155

2008

Marley & Me

$60,000,000

$143,153,751

$104,658,260

$247,812,011

2008

Yes Man

$50,000,000

$97,690,976

$128,300,000

$225,990,976

1996

The First Wives Club

$30,000,000

$105,489,203

$76,000,000

$181,489,203

2001

The Princess Diaries

$30,000,000

$108,244,774

$57,090,000

$165,334,774

2012

The Best Exotic Marigold Hotel

$10,000,000

$46,383,639

$88,256,141

$134,639,780

2002

Mr. Deeds

$50,000,000

$126,293,452

$44,976,083

$171,269,535

2004

Mean Girls

$18,000,000

$86,047,227

$44,905,799

$130,953,026

1967

The Graduate

$104,397,102

$36,841

$104,433,943

2009

Julie & Julia

$40,000,000

$94,125,426

$37,390,752

$131,516,178

1995

Get Shorty

$30,250,000

$72,021,008

$43,000,000

$115,021,008

1974

Young Frankenstein

$2,800,000

$86,300,000

2010

Easy A

$8,000,000

$58,401,464

$17,799,257

$76,200,721

1987

The Witches of Eastwick

$63,749,955

1996

Striptease

$50,000,000

$33,109,743

$80,200,000

$113,309,743

2003

Matchstick Men Eternal Sunshine of the Spotless Mind Oh, God!

$36,873,198

$22,292,102

$59,165,300

$20,000,000

$34,366,518

$38,204,244

$72,570,762

$51,061,196

2004 1977

$47,118,057

$27,000,000

$69,586,544

$4,240,224

$73,826,768

1985

The Toy The Divine Secrets of the Ya-Ya Siste… Fletch

$46,700,000

2004

Christmas with the Kranks

$50,000,000

$73,701,902

$22,767,285

$96,469,187

2016

Office Christmas Party

$45,000,000

$54,767,494

$36,555,805

$91,323,299

2007

The Nanny Diaries

$25,926,673

$20,064,522

$45,991,195

1982 2002

Data source: https://www.the-numbers.com/

You can see that Mrs.Doubtfire has the highest box-office sales and relatively low production costs. But, does that mean it also has the highest gross profit? For case DA12.1, you will look closer at the costs and revenues for these movies by calculating gross profit and then graphing and analyzing the results.

Column chart of the revenue and production costs of comedies based on books

Worldwide Box Office Revenue, Production Costs, and Estimated Profit of Comedies Based on Books $500,000,000 $450,000,000 $400,000,000

Amounts in Millions

$350,000,000 $300,000,000 $250,000,000 $200,000,000

$150,000,000 $100,000,000 $50,000,000 $0

ted Profit Production Budget Worldwide Box Office

Using Data Visualization to Analyze Data DA12.1 Data visualization can be used to compare profitability. Problem You are interested in the effect of production budget costs on the profitability of movies. The data below consist of domestic, international, and worldwide box office revenues and production costs for the 25 top domestic grossing comedies based on books. Data of the Top 25 Domestic Grossing Movies Based on Books Released

Title

Production Budget

Domestic BO

International Worldwide BO BO

1993

Mrs. Doubtfire

$25,000,000

$219,195,051

$222,090,952

$441,286,003

2006

The Devil Wears Prada

35,000,000

124,740,460

201,332,695

326,073,155

2008

Marley & Me

60,000,000

143,153,751

104,658,260

247,812,011

2008

Yes Man

50,000,000

97,690,976

128,300,000

225,990,976

1996

The First Wives Club

30,000,000

105,489,203

76,000,000

181,489,203

2001

The Princess Diaries

30,000,000

108,244,774

57,090,000

165,334,774

2012

The Best Exotic Marigold Hotel

10,000,000

46,383,639

88,256,141

134,639,780

2002

Mr. Deeds

50,000,000

126,293,452

44,976,083

171,269,535

2004

Mean Girls

18,000,000

86,047,227

44,905,799

130,953,026

1967

The Graduate

104,397,102

36,841

104,433,943

2009

Julie & Julia

40,000,000

94,125,426

37,390,752

131,516,178

1995

Get Shorty

30,250,000

72,021,008

43,000,000

115,021,008

1974

Young Frankenstein

2,800,000

86,300,000

2010

Easy A

8,000,000

58,401,464

17,799,257

76,200,721

1987

The Witches of Eastwick

63,749,955

1996

Striptease

50,000,000

33,109,743

80,200,000

113,309,743

2003

Matchstick Men

2004

Eternal Sunshine of the Spotless Mind

1977

Oh, God!

1982

The Toy

2002

The Divine Secrets of the Ya-Ya Siste…

1985

Fletch

2004

36,873,198

22,292,102

59,165,300

20,000,000

34,366,518

38,204,244

72,570,762

51,061,196

47,118,057

27,000,000

69,586,544

4,240,224

73,826,768

46,700,000

Christmas with the Kranks

50,000,000

73,701,902

22,767,285

96,469,187

2016

Office Christmas Party

45,000,000

54,767,494

36,555,805

91,323,299

2007

The Nanny Diaries

25,926,673

20,064,522

45,991,195

Data source: https://www.the-numbers.com/movies/report/Comedy/All/All/All/All/Based-on-Fictional-Book-or-ShortStory/All/All/All/None/None/None/None/None/None/None/None/None/None?view-order-by=domestic-box-office&show-releaseyear=On&view-order-direction=desc&show-production-budget=On&show-domestic-box-office=On&show-international-boxoffice=On&show-worldwide-box-office=On

Instructions a. Using the data, calculate an estimate of gross profit on each movie b. Rank the movies from highest to lowest profitability. c. Create a pivot table to summarize and rank the gross profit by year. d. Create a vertical bar pivot chart to visualize the profit by year. Include a descriptive chart title and labeled vertical axes.

Create a vertical bar pivot chart to visualize the profit by year. Include a descriptive chart title and labeled vertical axes. e. Is there an effect based on year of release? Explain. What may be the cause for this effect? f. Identify other factors may affect profitability of the movies.

Student Work Area

a. and b. Gross profit and ranking Year

Estimated Gross Profit

1993 2006 2008 2008 1996 2001 2012 2002 2004 1967 2009 1995 1974 2010 1987 1996 2003 2004 1977 1982 2002 1985 2004 2016 2007

d. Vertical bar pivot chart

c. Pivot table to summarize gross profit by year

e. Response to part e

Response to part f

ot table to summarize gross profit by ar

Using Data Visualization to Analyze Data DA12.1 Data visualization can be used to compare profitability. Problem The data below consist of domestic, international, and worldwide box office revenues and production costs for the 25 top domestic grossing comedies based on books. Data of the Top 25 Domestic Grossing Movies Based on Books Released

Title

Production Budget

Domestic BO

International Worldwide BO BO

1993

Mrs. Doubtfire

$25,000,000

$219,195,051

$222,090,952

$441,286,003

2006

The Devil Wears Prada

35,000,000

124,740,460

201,332,695

326,073,155

2008

Marley & Me

60,000,000

143,153,751

104,658,260

247,812,011

2008

Yes Man

50,000,000

97,690,976

128,300,000

225,990,976

1996

The First Wives Club

30,000,000

105,489,203

76,000,000

181,489,203

2001

The Princess Diaries

30,000,000

108,244,774

57,090,000

165,334,774

2012

The Best Exotic Marigold Hotel

10,000,000

46,383,639

88,256,141

134,639,780

2002

Mr. Deeds

50,000,000

126,293,452

44,976,083

171,269,535

2004

Mean Girls

18,000,000

86,047,227

44,905,799

130,953,026

1967

The Graduate

104,397,102

36,841

104,433,943

2009

Julie & Julia

40,000,000

94,125,426

37,390,752

131,516,178

1995

Get Shorty

30,250,000

72,021,008

43,000,000

115,021,008

1974

Young Frankenstein

2,800,000

86,300,000

2010

Easy A

8,000,000

58,401,464

17,799,257

76,200,721

1987

The Witches of Eastwick

63,749,955

1996

Striptease

50,000,000

33,109,743

80,200,000

113,309,743

2003

Matchstick Men

36,873,198

22,292,102

59,165,300

2004

Eternal Sunshine of the Spotless Mind

20,000,000

34,366,518

38,204,244

72,570,762

1977

Oh, God!

51,061,196

1982

The Toy

47,118,057

2002

The Divine Secrets of the Ya-Ya Siste…

27,000,000

69,586,544

4,240,224

73,826,768

1985

Fletch

46,700,000

2004

Christmas with the Kranks

50,000,000

73,701,902

22,767,285

96,469,187

2016

Office Christmas Party

45,000,000

54,767,494

36,555,805

91,323,299

2007

The Nanny Diaries

25,926,673

20,064,522

45,991,195

e. Is there an effect based on year of release? Explain. What may be the cause for this effect? f. Identify other factors may affect profitability of the movies.

Student Work Area

a. and b. Gross profit and ranking Year

Estimated Gross Profit

1993 2006 2008 2008 1996 2001 2012 2002 2004 1967 2009 1995 1974 2010 1987 1996 2003 2004 1977 1982 2002 1985 2004 2016 2007

$416,286,003 291,073,155 187,812,011 175,990,976 151,489,203 135,334,774 124,639,780 121,269,535 112,953,026 104,433,943 91,516,178 84,771,008 83,500,000 68,200,721 63,749,955 63,309,743 59,165,300 52,570,762 51,061,196 47,118,057 46,826,768 46,700,000 46,469,187 46,323,299 45,991,195

c. Pivot table to summarize gross profit by year Row Labels 1967 1974 1977 1982 1985 1987 1993 1995 1996 2001 2002 2003 2004 2006 2007 2008 2009 2010 2012 2016 Grand Total

d. Vertical bar pivot chart Sum of Estimated Gross Profit

$450,000,000 $400,000,000 $350,000,000

Gross Profit by Yea of Comedies Based on Books

$350,000,000

Gross Profit

$300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 1967 1974 1977 1982 1985 1987 1993 1995 1996

Year

e. Response to part e It appears that movies released in 1993 generated the largest amount of gross profit followed by releases in 2008. The least amounts of gross profit appear to be 2007 and 2016, with minimal profits also generated in 1977 through 1987 each at $50 million or less. Overall the gross profit is erratic over the 10 year period. The variability may be caused by the quality of the movies released, the popularity of the stars in the movies, and the source of books on which the movies are based. A possible reason is that 2008 may have been a good year due to the economic downturn, in which people went to a movie theater rather than more expensive forms of entertainment.

Response to part f Movie producers should notice that because of the variability in profit, the year of release does not likely affect the profitability. Many other factors likely affect profitability. Management should look at other metrics such as the popularity of cast members, the quality of the authors that write the books on which the movies are based, the strength of the marketing programs, the effect of other movies released at the same time, the timing of the release date, and many other factors.

ot table to summarize gross profit by ar Sum of Estimated Gross Profit 104,433,943 83,500,000 51,061,196 47,118,057 46,700,000 63,749,955 416,286,003 84,771,008 214,798,946 135,334,774 168,096,303 59,165,300 211,992,975 291,073,155 45,991,195 363,802,987 91,516,178 68,200,721 124,639,780 46,323,299 2,718,555,775

it by Yea of Comedies Based on Books

1996 2001 2002 2003 2004 2006 2007 2008 2009 2010 2012 2016

d the largest amount of gross profit followed by it appear to be 2007 and 2016, with minimal profits million or less. Overall the gross profit is erratic used by the quality of the movies released, the ce of books on which the movies are based. A od year due to the economic downturn, in which expensive forms of entertainment.

e variability in profit, the year of release does not ely affect profitability. Management should look at ers, the quality of the authors that write the books e marketing programs, the effect of other movies se date, and many other factors.

Using Data Visualization to Analyze Data DA12.2 Data visualization can be used to compare profitability. Problem You are interested in the effect of production budget costs on the profitability of movies. Data from the 25 largest expenditures on production costs from the top 100 comedies derived from books is presented here. Released 2005

Title

2004

Be Cool Primary Colors Marley & Me Practical Magic Mr. Deeds Yes Man Christmas with the Kranks Striptease Office Christmas Party Multiplicity Holmes & Watson One for the Money Julie & Julia Legal Eagles Fever Pitch Memoirs of an Invisible Man The Devil Wears Prada Ella Enchanted Wonder Boys Scrooged Get Shorty The Princess Diaries The First Wives Club Without a Paddle

2002

The Divine Secrets of the Ya-Ya Siste…

1998 2008 1998 2002 2008 2004 1996 2016 1996 2018 2012 2009 1986 2005 1992 2006 2004 2000 1988 1995 2001 1996

Production Budget

Domestic BO

$75,000,000

$55,849,401

International BO

Worldwide Box Office

$39,094,616

$94,944,017

65,000,000

39,017,984

60,000,000

143,153,751

104,658,260

247,812,011

60,000,000

46,850,558

21,486,439

68,336,997

50,000,000

126,293,452

44,976,083

171,269,535

50,000,000

97,690,976

128,300,000

225,990,976

50,000,000

73,701,902

22,767,285

96,469,187

50,000,000

33,109,743

80,200,000

113,309,743

45,000,000

54,767,494

36,555,805

91,323,299

45,000,000

20,133,326

42,000,000

30,568,743

11,357,862

41,926,605

42,000,000

26,414,527

9,782,694

36,197,221

40,000,000

94,125,426

37,390,752

131,516,178

40,000,000

49,851,591

40,000,000

42,071,069

8,000,000

50,071,069

40,000,000

14,358,033

35,000,000

124,740,460

201,332,695

326,073,155

35,000,000

22,913,677

35,000,000

19,389,454

14,033,031

33,422,485

32,000,000

59,450,353

30,250,000

72,021,008

43,000,000

115,021,008

30,000,000

108,244,774

57,090,000

165,334,774

30,000,000

105,489,203

76,000,000

181,489,203

30,000,000

58,156,435

6,964,845

65,121,280

27,000,000

69,586,544

4,240,224

73,826,768

Data source: https://www.the-numbers.com/movies/report/Comedy/All/All/All/All/Based-on-Fictional-Book-or-ShortStory/All/All/All/None/None/None/None/None/None/None/None/None/None?view-order-by=domestic-box-office&show-release-year=On&view-orderdirection=desc&show-production-budget=On&show-domestic-box-office=On&show-international-box-office=On&show-worldwide-box-office=On

Instructions a. Create a pivot table to summarize the production budget costs for worldwide box office receipts and the estimated gross profit. Sort the data by estimated grpss profit high to low. b. Create a vertical bar pivot chart to visualize the production budget costs and estimated gross profit for worldwide box office receipts for each movie. Include a descriptive chart title and label the vertical axis.

c. Which three films are the most unprofitable? Does this appear to be due to production costs or worldwide box office receipts? Justify your answer. d. Does the amount of production costs appear to be the driving factor of profitability? Explain.

Student Work Area

s. Data from the 25 ks is presented here. a. Pivot table to summarize gross profit by year Estimated Gross Profit

$19,944,017 (25,982,016) 187,812,011 8,336,997 121,269,535 175,990,976 46,469,187 63,309,743 46,323,299 (24,866,674) (73,395) (5,802,779) 91,516,178 9,851,591 10,071,069 (25,641,967) 291,073,155 (12,086,323) (1,577,515) 27,450,353 84,771,008 135,334,774 151,489,203 35,121,280 46,826,768

-release-year=On&view-order-worldwide-box-office=On

de box office receipts and ow.

nd estimated gross profit rt title and label the

b. Vertical bar pivot chart

o production costs or

fitability? Explain.

c. Response to part c

d. Response to part d

Using Data Visualization to Analyze Data DA12.2 Data visualization can be used to compare profitability. You are interested in the effect of production budget costs on the profitability of movies. Data from the 25 largest expenditures on production costs from the top 100 comedies derived from books is presented here.

Released

Title

2005

2004

2002

The Divine Secrets of the Ya-Ya Siste…

1998 2008 1998 2002 2008 2004 1996 2016 1996 2018 2012 2009 1986 2005 1992 2006 2004 2000 1988 1995 2001 1996

Production Budget

Domestic BO

International BO

Worldwide Box Office

$75,000,000

$55,849,401

$39,094,616

$94,944,017

65,000,000

39,017,984

60,000,000

143,153,751

104,658,260

247,812,011

60,000,000

46,850,558

21,486,439

68,336,997

50,000,000

126,293,452

44,976,083

171,269,535

50,000,000

97,690,976

128,300,000

225,990,976

50,000,000

73,701,902

22,767,285

96,469,187

50,000,000

33,109,743

80,200,000

113,309,743

45,000,000

54,767,494

36,555,805

91,323,299

45,000,000

20,133,326

42,000,000

30,568,743

11,357,862

41,926,605

42,000,000

26,414,527

9,782,694

36,197,221

40,000,000

94,125,426

37,390,752

131,516,178

40,000,000

49,851,591

40,000,000

42,071,069

8,000,000

50,071,069

40,000,000

14,358,033

35,000,000

124,740,460

201,332,695

326,073,155

35,000,000

22,913,677

35,000,000

19,389,454

14,033,031

33,422,485

32,000,000

59,450,353

30,250,000

72,021,008

43,000,000

115,021,008

30,000,000

108,244,774

57,090,000

165,334,774

30,000,000

105,489,203

76,000,000

181,489,203

30,000,000

58,156,435

6,964,845

65,121,280

27,000,000

69,586,544

4,240,224

73,826,768

Data source: https://www.the-numbers.com/movies/report/Comedy/All/All/All/All/Based-on-Fictional-Book-or-ShortStory/All/All/All/None/None/None/None/None/None/None/None/None/None?view-order-by=domestic-box-office&show-release-year=On&view-orderdirection=desc&show-production-budget=On&show-domestic-box-office=On&show-international-box-office=On&show-worldwide-box-office=On

Which three films are the most unprofitable? Does this appear to be due to production costs or worldwide box office receipts? Justify your answer. d. Does the amount of production costs appear to be the driving factor of profitability? Explain.

s. Data from the 25 ks is presented here. Estimated Gross Profit

Student Work Area a. Pivot table to summarize gross profit by year Sum of Estimated Sum of Production Gross Profit Budget Row Labels The Devil Wears Prada $291,073,155 $35,000,000 Marley & Me 187,812,011 60,000,000 Yes Man 175,990,976 50,000,000 The First Wives Club 151,489,203 30,000,000 The Princess Diaries 135,334,774 30,000,000 Mr. Deeds 121,269,535 50,000,000 Julie & Julia 91,516,178 40,000,000 Get Shorty 84,771,008 30,250,000 Striptease 63,309,743 50,000,000 The Divine Secrets of the Ya-Ya Siste… 46,826,768 27,000,000 Christmas with the Kranks 46,469,187 50,000,000 Office Christmas Party 46,323,299 45,000,000 Without a Paddle 35,121,280 30,000,000 Scrooged 27,450,353 32,000,000 Be Cool 19,944,017 75,000,000 Fever Pitch 10,071,069 40,000,000 Legal Eagles 9,851,591 40,000,000 Practical Magic 8,336,997 60,000,000 Holmes & Watson (73,395) 42,000,000 Wonder Boys (1,577,515) 35,000,000 One for the Money (5,802,779) 42,000,000 Ella Enchanted (12,086,323) 35,000,000 Multiplicity (24,866,674) 45,000,000 Memoirs of an Invisible Man (25,641,967) 40,000,000 Primary Colors (25,982,016) 65,000,000 Grand Total 1,456,930,475 1,078,250,000

-release-year=On&view-order-worldwide-box-office=On

b. Vertical bar pivot chart Sum of Estimated Gross ProfitSum of Production BudgetSum of Worldwide Box Office $350,000,000

nd estimated gross profit rt title and label the

$300,000,000

o production costs or

nd Estimated Gross Profit

de box office receipts and ow.

$250,000,000 $200,000,000

Revenue, Production Costs, and Estimated Gross Profit for Wo

fitability? Explain.

Product Costs and Estimated Gross Profit

o production costs or

$200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 -$50,000,000

Title

c. Response to part c The three most unprofitable films appear at the far right of the chart" Multiplicity, Mem Colors. The revenue, or box office receipts, appear to be the primary cause, as the rev than the more profitability movies. This can be seen as the bars representing producti profitable movies than they are for the more profitabile films.

d. Response to part d There does not appear to be a correlation between profiitability and the production cos unprofitable movies appear to be just as large and in many cases larger than costs inc Apparently there are other factors that drive profitability of movies.

Sum of Worldwide Box Office $326,073,155 247,812,011 225,990,976 181,489,203 165,334,774 171,269,535 131,516,178 115,021,008 113,309,743 73,826,768 96,469,187 91,323,299 65,121,280 59,450,353 94,944,017 50,071,069 49,851,591 68,336,997 41,926,605 33,422,485 36,197,221 22,913,677 20,133,326 14,358,033 39,017,984 2,535,180,475

dwide Box Office

d Estimated Gross Profit for Worldwide Box Receipts Values Sum of Estimated Gross Profit Sum of Production Budget Sum of Worldwide Box Office

Sum of Worldwide Box Office

t of the chart" Multiplicity, Memoris of an Invisible Man, and Primary be the primary cause, as the revenue is much smaller for these films the bars representing production costs are larger for the lease films.

fiitability and the production cost budget. The production costs on the many cases larger than costs incurred on profitability movies. y of movies.

Data Visualization at HydroHappy DA12.3 Data visualization can be used to can be used to visualize job costs. HydroHappy rents giant water slides for parties and other events. In recent months, the slides have become extremely popular with middle and high school parties as the slides are large enough to accommodate adults. HydroHappy has a team that loads the company's trucks with the respective slides that customers order, transports the slides and sets up and assembles the slides at the customers' chosen locations, and dismantles the slides and loads them back on the truck and transport the slides back to HydroHappy's warehouse when the event is complete. Slide rentals run between 1 and 3 days. In the past, HydroHappy has not kept job cost records due to having only 2 or 3 jobs per week. Now that demand has increased, HydroHappy has purchased 5 new slides and runs several jobs concurrently. The company now needs to track the costs by job so it can assess the profitability of each job. The company requires prepayment at the time each slide is ordered and it recognizes revenue when each job is complete due to the short-term rental periods. The company often preloads trucks and incurs wages prior to delivery and assembly of the slides to the customer. The following direct job costs and revenues related to all jobs completed during the last week of June have been listed by the bookkeeper.

Costs Type Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Transport costs 66 Transport costs 76 Transport costs 81 Transport costs 346 Transport costs 60 Transport costs 77 Transport costs 65 Transport costs 38 Transport costs 47 Transport costs 65 Supplies 38 Supplies 32 Supplies 85 Supplies 52 Supplies 36 Supplies 33 Supplies 53 Supplies 43

Revenue Job # $ 780 12 415 14 385 15 2,450 16 275 17 450 18 725 19 616 20 12 14 15 16 17 19 14 16 17 19 12 14 15 16 17 18 19 20

Wages Wages Wages Wages Wages Wages Wages Wages

128 135 265 720 88 185 243 180

12 14 15 16 17 18 19 20

Instructions There are six parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Create a pivot table that lists the revenue and costs by job number along with total job costs. b. Create a clustered column pivot chart showing the total revenue and costs by job. Include a descriptive chart title, axes labels, formatted axes, and a legend. c. Identify any jobs that appear to be unprofitable. What may have caused the lack of profitability? d. Complete the table in the Student Work Area by inputting formulas to calculate gross profit and the gross profit ratios of the 8 jobs. The company allocates overhead to jobs based on 10% of sales in calculating gross profit. e. Create a combo chart from your table in part d. The chart should graph total revenue and the amount of gross profit in columns, and the gross profit rate should be graphed as a line on the chart. Include a descriptive chart title, axes labels, formatted axes, and a legend.

f. What trend do you see in the gross profit ratios? What concerns should HydroHappy managers have concerning the trend. Explain.

f. Respo

Student Work Area a. Pivot table for part a

b. Pivot chart for part b

c. Response to part c

d. Table for part d Table of revenue, gross profit, and the gross profit ratio of all jobs Job Number

12 14 15 16 17 18 19 20

Revenue

e. Chart for part e

780 415 385 2,450 275 450 725 616

Gross Profit

Gross Profit %

f. Response for part f

Data Visualization at HydroHappy DA12.3 Data visualization can be used to can be used to visualize job costs. HydroHappy rents giant water slides for parties and other events. In recent months, the slides have become very popular with middle and high school parties as the slides are large enough to accommodate adults. HydroHappy has a team that loads the company's trucks with the respective slides that customers order, transports the slides and sets up and assembles the slides at the customers' chosen locations, and dismantles the slides and loads them back on the truck and transport the slides back to HydroHappy's warehouse when the event is complete. Slide rentals run between 1 and 3 days. In the past, HydroHappy has not kept job cost records due to having only 2 or 3 jobs per week. Now that demand has increased, HydroHappy has purchased 5 new slides and runs several jobs concurrently. The company now needs to track the costs by job so it can assess the profitability of each job. The company requires prepayment at the time each slide is ordered and it recognizes revenue when each job is complete due to the short-term rental periods. The company often preloads trucks and incurs wages prior to delivery and assembly of the slides to the customer. The following direct job costs and revenues related to all jobs completed during the last week of June have been listed by the bookkeeper.

66 76 81 346 60 77 65 38 47 65 38 32 85 52 36 33 53 43 128 135 265 720 88 185 243 180

Revenue Job # $ 780 12 415 14 385 15 2,450 16 275 17 450 18 725 19 616 20 12 14 15 16 17 19 14 16 17 19 12 14 15 16 17 18 19 20 12 14 15 16 17 18 19 20

Student Work Area a. Pivot table for part a Row Labels Sum of Revenue 12 $ 780 14 415 15 385 16 2,450 17 275 18 450 19 725 20 616 Grand Total $ 6,096

Sum of Costs $ 232 308 431 1,156 231 218 438 223 $ 3,237

Sum of RevenueSum of Costs

Revenue and Cost of Job Completed, Last Week of June $2,500

$2,000

$1,500

Values Sum of Revenue Sum of Costs

$1,000

$500

Job #

Type

d. Table for part d Table of revenue, gross profit, and the gross profit ratio of all jobs Job Number

12 14 15 16 17 18 19 20

Revenue

Gross Profit

780 415 385 2,450 275 450 725 616

Gross Profit %

470 66 (85) 1,049 17 187 215 331

60.3% 15.8% -21.9% 42.8% 6.0% 41.6% 29.6% 53.8%

e. Chart for part e

Revenue and Gross Profit of All Jobs $3,000

f. What trend do you see in the gross profit ratios? What concerns should HydroHappy managers have concerning the trend. Explain.

70.0% 60.0%

$2,500

50.0%

Gross Profit

$2,000

40.0% 30.0%

$1,500

20.0% $1,000

10.0% 0.0%

$500

-10.0% $12

$(500)

Gross Profit

-20.0%

-30.0%

Job Numbers Revenue

Job Number

c. Response to part c The costs of job 15 exceed the revenue earned making it an unprofitable job. Some of the job costs may be greater than expected, or perhaps the price charged to the customers was not enough to cover costs.

c. Identify any jobs that appear to be unprofitable. What may have caused the lack of profitability/ d. Complete the table in the Student Work Area by inputting formulas to calculate gross profit and the gross profit ratios of the 8 jobs. The company allocates overhead to jobs based on 10% of sales in calculating gross profit. e. Create a combo chart from your table in part d. The chart should graph total revenue and the amount of gross profit in columns, and the gross profit rate should be graphed as a line on the chart. Include a descriptive chart title, axes labels, formatted axes, and a legend.

b. Pivot chart for part b

Costs and Revenues

Costs

Gross Profit %

Type Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Slide rental revenue Transport costs Transport costs Transport costs Transport costs Transport costs Transport costs Transport costs Transport costs Transport costs Transport costs Supplies Supplies Supplies Supplies Supplies Supplies Supplies Supplies Wages Wages Wages Wages Wages Wages Wages Wages

Gross Profit %

f. Response for part f The gross profit rate appears to fluctuate erratically over time. Jobs 14 and 20 appear to generate more profit out of each dollar of revenue earned. Jobs 15 and 17 are the least profitable, with job 15 having costs that exceed the revenue. Management will want to examine how it controls costs to avoid cost overruns. Managers will also want to examine how it prices each job, which should include extra charges to customers depending on unique circumstances such as the distance to the setup location, obstacles that may impede assembly such as trees, fences, and other challenges that may cause extra labor and materials costs. It would be helpful for managers to examine which costs are causing the reduction of profit for the jobs that are unprofitable. Managers may also want to examine the activity base used to allocate overhead costs, as sales revenue is not what causes overhead costs to exist.

13 - 1 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 13

WATERWAYS CORPORATION

(Note: Some figures are rounded.) (a) (1) The contribution margin ratio is 35% ($1,023,120  $2,923,200): WATERWAYS CORPORATION Contribution Margin Income Statement for Water Control and Timer Per Percent Total Unit Sales (696,000 units) $2,923,200 $4.20 Variable expenses 1,900,080 2.73 Contribution margin 1,023,120 $1.47 Fixed Expenses 683,256 Net income from product $339,864

of Sales 100% 65% 35%

(2) Break-even point in sales units = 464,800 units Fixed expenses Unit CM

$683,256 $1.47

= 464,800 units

Break-even point in sales dollars = $1,952,160 Fixed expenses CM ratio

$683,256 0.35

= $1,952,160

(3) Margin of safety in dollars = $ 971,040 Sales Less: Break-even in dollars

$2,923,200 1,952,160 $ 971,040

Margin of safety ratio = 33% Margin of safety in dollars Sales

$971,040 $2,923,200 = 33% (rounded)

Cost-Volume-Profit 13-2

WC 13 (Continued) (4) Waterways would have to sell an additional 23,120 units. 10% increase in income Current income units Total projected income Fixed expense Total CM

= $ 33,986.40 +339,864.00

$1,057,106.40 $1.47 = 719,120

373,850.40 +683,256.00 $1,057,106.40

13 - 3 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 13 (Continued) Waterways Corporation Sprinkler Units (current sales) Per Percent Total Unit Sales Sales (491,740)

$13,031,110 $26.50 100%

Variable expenses: Manufacturing $6,863,512 Variable expenses: Selling and administrative 2,651,657 73% Contribution margin 27% Fixed expenses: Manufacturing $2,050,140 Fixed expenses: Selling and administrative 794,950 Net income from sprinkler units

9,515,169

19.35

3,515,941 $ 7.15

2,845,090 $ 670,851

Cost-Volume-Profit 13-4

WC 13 (Continued) Waterways Corporation Sprinkler Units (no price change) Per Percent Total Unit of Sales Sales (540,914) Variable expenses Contribution margin Fixed expenses Net income from sprinkler units

$14,334,221.00 10,845,325.70 3,488,895.30 2,845,090.00 $ 643,805.30

$26.50 20.05 $ 6.45

100% 76% 24%

LO 3,4,5 BT: AN Difficulty: Moderate TOT: 75 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

14 - 1 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 14

WATERWAYS CORPORATION

Unit profit $1.60 $56,000 a year

Added profit with Canadian Co. 15,000 × $0.20

Unit profit $0.20 $3,000

Revenues Costs Net income

Reject Order $0 0 $0

Accept Order $39,000 36,000** $ 3,000

Net Income Increase (Decrease) $39,000* (36,000) $ 3,000

Revenues Costs Net income

Reject Order $0 0 $0

Accept Order $6,200* 4,600** $1,600

Net Income Increase (Decrease) $6,200 (4,600) $1,600

Incremental Analysis 14-2

*2,000 × $3.10 **2,000 × $2.30 Incremental analysis indicates that Waterways should accept the special order because net income increases by $1,600. (c) Accepting both special orders would increase net income by $4,600. Currently, Waterways is earning a contribution margin of $56,000 (35,000 units × $1.60) on the connectors. If it accepts both special orders, contribution margin would increase by $4,600 or 8.2%. Acceptance would depend on management’s opinion regarding the added shift. Part 2 (a) The cost to make the units is $460,000 ($1.00 × 460,000 units). The cost to purchase the units is $377,200 ($0.82 × 460,000). However, the fixed manufacturing cost that cannot be eliminated by buying the units amounts to $92,000 ($0.20 × 460,000). The total cost of purchasing exceeds the total cost of making by $9,200. The company should continue to make the fitting. Variable and fixed manufacturing costs Fixed manufacturing cost not eliminated Total annual cost

Variable manufacturing costs ($1.00 – $0.20) Fixed manufacturing costs ($0.20) Purchase price ($0.82) Total cost

Make

Buy

Income Change

$460,000

$377,200

$82,800

$ 92,000

(92,000) ($9,200) Net Income Increase (Decrease)

Make Part

Buy Part

$368,000* 92,000**

0 92,000

$ 368,000 0

0 $460,000

377,200*** $469,200

(377,200) $ (9,200)

14 - 3 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

*460,000 × $0.80 **460,000 × $0.20 ***460,000 × $0.82 (b) (1) The opportunity cost is $1,380. Cost of buying timer Cost of making timer Opportunity cost

$ 6,330 (4,950) $ 1,380

(500 × $12.66) (500 × $9.90)

Variable costs ($1.00 – $0.20) Fixed costs ($0.20) Purchase price ($0.82) Total annual cost Opportunity cost Total cost

Make Part $368,000 92,000 0 $460,000 1,380 $461,380

Buy Part $ 0 92,000 377,200 $469,200 0 $469,200

Net Income Increase (Decrease) $ 368,000 0 (377,200) $ (9,200) 1,380 $ (7,820)

Part 3 Replacing the machine will result in a net loss of $3,000. Waterways should keep the old machine for the 2 years remaining.

Revenues Production costs New machine cost Total

Retain Machine $221,000* 169,000** 0 $ 52,000

Replace Machine $442,000*** 338,000**** 55,000 $ 49,000

Net Income Increase (Decrease) $ 221,000 (169,000) (55,000) $ (3,000)

Incremental Analysis 14-4

**$6.50 × 50 units per day × 260 days × 2 years ***$8.50 × 100 units per day × 260 days × 2 years ****$6.50 × 100 units per day × 260 days × 2 years

Profits from machine for 2 years Cost of new machine Total

Retain Machine $52,000* 0 $52,000

Replace Machine $104,000 (55,000) $ 49,000

Income Change $ 52,000 (55,000) $ (3,000)

*($8.50 – $6.50) × 50 units per day × 260 days × 2 years LO2, 3, 5 BT: AN Difficulty: Moderate TOT: 90 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

15 - 1 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 15

WATERWAYS CORPORATION

(a) Sales budget WATERWAYS CORPORATION Sales Budget For the First Quarter of 2027 First Quarter January

February

March

Quarter

Expected unit sales 113,000 Unit selling price × $ 12 Total sales $1,356,000

112,500 × $ 12 $1,350,000

116,000 × $ 12 $1,392,000

341,500 × $ 12 $4,098,000

January February March 113,000 112,500 116,000

Quarter 341,500

11,250 124,250

11,600 124,100

12,500* 128,500

12,500 354,000

11,300** 11,250 112,950 112,850

11,600 116,900

11,300 342,700

*12,500 is 10% of April’s budgeted sales units **11,300 is 10% of January’s sales units

Budgetary Planning 15-2

WC 15 (Continued) (c) Direct materials budget WATERWAYS CORPORATION Direct Materials Budget For the First Quarter of 2027 First Quarter

January 112,950 ×2 225,900 11,285 237,185 11,295** 225,890 × $0.75 $169,418

February 112,850 × 2 225,700 11,690 237,390 11,285 226,105 × $0.75 $ 169,579

March 116,900 × 2 233,800 12,625* 246,425 11,690 234,735 × $0.75 $176,051

Quarter 342,700 × 2 685,400 12,625 698,025 11,295 686,730 × $0.75 $515,048

15 - 3 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

(d) Direct labor budget WATERWAYS CORPORATION Direct Labor Budget For the First Quarter of 2027 First Quarter January Units to be produced (from part b) Direct labor time (hours per unit) Total required direct laborhours Direct labor cost per hour Total direct labor cost

(e)

112,950

February 112,850

March 116,900

Quarter 342,700

× 0.2

22,590

22,570

23,380

68,540

× $8 $180,720

× $8 $180,560

× $8 $187,040

× $8 $548,320

Manufacturing overhead budget WATERWAYS CORPORATION Manufacturing Overhead Budget For the First Quarter of 2027 First Quarter January

February

March

Quarter

$ 6,777

$ 6,771

$ 7,014

$ 20,562

11,295 10,165 5,647 33,884

11,285 10,157 5,643 33,856

11,690 10,521 5,845 35,070

34,270 30,843 17,135 102,810

42,000 16,800 2,675 1,200 1,300 63,975 $97,859

42,000 16,800 2,675 1,200 1,300 63,975 $97,831

42,000 16,800 2,675 1,200 1,300 63,975 $99,045

126,000 50,400 8,025 3,600 3,900 191,925 $294,735

Total manufacturing overhead Direct labor hours (from part d) 22,590 22,570 23,380 Predetermined overhead rate for the quarter $294,735 ÷ 68,540 hours =

$294,735 68,540 $4.30

Variable costs Indirect materials (30¢ per hour) Indirect labor (50¢ per hour) Utilities (45¢ per hour) Maintenance (25¢ per hour) Total variable costs Fixed costs Salaries Depreciation Property taxes Insurance Maintenance Fixed manufacturing overhead Total manufacturing overhead

Budgetary Planning 15-4

WC 15 (Continued) (f)

× $1.60 $180,800

February 112,500 × $1.60 $180,000

March 116,000 × $1.60 $185,600

× $1.60 $546,400

15,000 1,400 72,000 2,500 3,000 93,900 $274,700

15,000 1,400 72,000 2,500 3,000 93,900 $273,900

15,000 1,400 72,000 2,500 3,000 93,900 $279,500

45,000 4,200 216,000 7,500 9,000 281,700 $828,100

January 113,000

Quarter 341,500

15 - 5 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 15 (Continued) (g) Collections from customers Schedule of Expected Collections from Customers March February

January

Accounts receivable, 12/31/26

$ 183,780

January ($1,356,000)

$ 203,400**

1,152,600*

1,147,500

$ 202,500

$1,350,900

1,183,200 $1,385,70 0

February ($1,350,000) March ($1,392,000) $1,336,38 0

Total cash collections

*85% of sales collected in month of sale (85% × $1,356,000) **15% of sales collected in month after sale (15% × $1,356,000)

February

$ 84,709 84,790 $169,499

March

Quarter

$ 84,789 88,026 $172,815

$120,595 169,418 169,579 88,026 $547,618

*Purchase payments 50% in month of purchase and 50% in month after purchase

Budgetary Planning 15-6

WC 15 (Continued) (i)

Cash budget

Beginning cash balance Add: Receipts

WATERWAYS CORPORATION Cash Budget For the first Quarter of 2027 First Quarter February January $ 100,500 $ 800,097

March $ 819,474

Quarter $ 100,500

1,336,380 1,436,880

1,350,900 2,150,997

1,385,700 2,205,174

4,072,980 4,173,480

205,304 180,720 81,059 272,200 0 12,500 751,783

169,499 180,560 81,031 271,400 500,000 12,500 1,214,990

172,815 187,040 82,245 277,000 0 12,500 731,600

547,618 548,320 244,335 820,600 500,000 37,500 2,698,373

685,097

936,007

1,473,574

1,475,107

115,000 —

— (115,000)

— —

115,000 (115,000)

(1,533)

—

(1,533)

— $ 800,097

819,474

$1,473,574

*Adjusted for depreciation ** Interest calculated as $115,000 × 0.08 × 2/12 = $1,533 LO2, 3, 4 BT: AP Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation

$1,473,574

16 - 1 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 16

WATERWAYS CORPORATION

(a)

WATERWAYS CORPORATION Manufacturing Overhead Flexible Budget For the Month of March Production in units Variable costs Indirect materials ($.05/unit)a Indirect labor ($.12/unit)b Utilities ($.10/unit)c Maintenance ($.07/unit)d Total variable costs ($.34/unit) Fixed Costs Salaries Depreciation Property taxes Insurance Janitorial Total fixed costs Total budgeted costs

115,500

116,500

117,500

118,500

119,500

5,925 14,220 11,850

$ 5,975 14,340 11,950

5,775 13,860 11,550

5,825 13,980 11,650

5,875 14,100 11,750

8,085

8,155

8,225

8,295

8,365

39,270

39,610

39,950

40,290

40,630

42,000 16,800 3,000 1,200

1,500 64,500 $103,770

1,500 64,500 $104,110

1,500 64,500 $104,450

1,500 64,500 $104,790

1,500 64,500 $105,130

Budgetary Control and Responsibility Accounting 16-2

WC 16 (Continued) (b)

WATERWAYS CORPORATION Manufacturing Overhead Flexible Budget Report For the Month of March

Actual 118,500

Difference Favorable Unfavorable

5,910 14,195 11,880 8,275 40,260

$15 F 25 F 30 U 20 F 30 F

42,000 16,800 3,000 1,200 1,500 64,500 $ 104,760

0 0 0 0 0 0 $30 F

Budget 118,500 $

5,925 14,220 11,850 8,295 40,290

42,000 16,800 3,000 1,200 1,500 64,500 $104,790

(c)

WATERWAYS CORPORATION Responsibility Report Manufacturing Overhead For the Month of March

Controllable Costs Indirect materials Indirect labor Utilities Maintenance

Budget $ 5,925 14,220 11,850

Actual $ 5,910 14,195 11,880

Difference Favorable Unfavorable $15 F $25 F $30 U

8,295 $40,290

8,275 $40,260

$20 F $30 F

LO2, 3 BT: AN Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Performance Measurement

17 - 1 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 17

WATERWAYS CORPORATION

(a) Materials Price Variance Actual Quantity × Actual Price 229,000 lbs. × $0.78 = $178,620

Actual Quantity × Standard Price

less

229,000 lbs. × $0.80* = $183,200

less

= $4,580 F

*Standard price per pound: Material price per lb. Metal = $0.63 Plastic = Rubber 0.22 Total $1.60

lbs. per unit

Price per lb. =

1.00

$0.63

0.75 0.75 0.25

2.00 lbs

$1.60 ÷ 2.00 lbs. = $0.80/lb.

Std.

× 0.88

1.00 = =

Standard Costs and Balanced Scorecard 17-2

WC 17 (Continued) (b) Materials Quantity Variance Actual Quantity × Standard Price 229,000 lbs. × $0.80 = $183,200

less

Standard Quantity × Standard Price 231,000 lbs.* × $0.80 = $184,800

less

= $1,600 F F

*115,500 units × 2 lbs. = 231,000 lbs. (c) Total Materials Variance Actual Quantity × Actual Price 229,000 lbs. × $0.78 = $178,620

less

Standard Quantity × Standard Price 231,000 lbs.* × $0.80 = $184,800

*115,500 units × 2 lbs. = 231,000 lbs.

= $6,180 F

17 - 3 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 17 (Continued) (d) Labor Price Variance Actual Hours × Actual Rate 34,650 hrs.* × $7.80 = $270,270

less

Actual Hours × Standard Rate 34,650 hours × $8.00 = $277,200

= $6,930 F

*115,500 units × 0.30 hrs./unit = 34,650 hrs. (e) Labor Quantity Variance Actual Hours × Standard Rate 34,650 hours × $8.00 = $277,200

less

Standard Hours × Standard Rate 28,875 hours* × $8.00 = $231,000

= $46,200 U

*115,500 units × 0.25 hrs./unit = 28,875 hrs. (f) Total Labor Variance Actual Hours × Actual Rate 34,650 hrs. × $7.80 = $270,270

less

Standard Hours × Standard Rate 28,875 hrs. × $8.00 = $231,000

= $39,270 U

Standard Costs and Balanced Scorecard 17-4

(g) Total Overhead Variance Actual Overhead $128,473 less ($54,673 + $73,800)

Overhead Applied* $123,585 ($4.28 × 28,875 hours)

= $4,888 U

*Based on standard hours allowed for 115,500 units, 115,500 × .25 hrs. = 28,875 hours)

18 - 1 Waterways Continuing Case Solution for Kimmel, Survey of Accounting, 3e

WC 18 (a)

WATERWAYS CORPORATION

(1)

NET PRESENT VALUE Buy New Backhoes

Equipment purchase Salvage value of old equip Net cash flow Salvage value of new equip Net present value

Time Period 0 0 1-8

Cash Flow × $(200,000) 42,000 43,900

8% Discount Rate = 1 1 5.74664

90,000

0.54027

Present Value $ (200,000) 42,000 252,277 48,624 $ 142,901

NET PRESENT VALUE Keep Old Backhoes

Overhaul cost Net cash flow

Time Period 1 1-8

Cash Flow × $(55,000) 30,425

8% Discount Present Rate = Value 0.92593 $ (50,926) 5.74664 174,842

15,000

0.54027

Salvage value Net present value

8,104 $ 132,020

(2)

PAYBACK METHOD Cost of Capital Investment  Net Annual Cash Flow = Cash Payback Period

New

Old

Cost of Capital Investment

$158,000

$55,000

Net annual cash flow

$ 43,900

$30,425

Payback time

3.60 years

1.81 years

Planning for Capital Investments 18-2

WC 18 (Continued) (3)

PROFITABILITY INDEX Present Value of Net Cash Flows  Initial Investment = Profitability Index

New

Old

Present Value of Net Cash Flows

$300,901

$182,946

Initial investment

$158,000

$ 55,000

Profitability index

1.90

3.33

(4)

INTERNAL RATE OF RETURN Investment Required  Net Annual Cash Flows = Internal Rate of Return Factor

New $158,000 $43,900

= 3.59909

(b)

(c)

LO1, 2, 3, 4 BT: AN Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Measurement IMA: Investment Decisions

BEE.24 Determine interest rate. Carly Simon wishes to invest a sum of money on July 1, 2027, and have it accumulate to a larger amount by July 1, 2037. Information on the investment follows. Amount to invest on July 1, 2027 Amount to be accumulated to on July 1, 2037

$ 18,000 50,000

Instructions Use Excel to determine at what exact annual rate of interest Carly must invest the initial amount. NOTE: Use Excel RATE function with cell references to the numeric amounts in the Problem data.

Interest rate

When you have completed BEE.24, consider the following additional question. Assume that the initial investment is $20,000 rather than $18,000. Show the interest rate with this change.

Interest rate

BEE.24 Determine interest rate.

Carly Simon wishes to invest a sum of money on July 1, 2027, and have it accumulate to a larger amount by July 1, 2037. Information on the investment follows. Amount to invest on July 1, 2027 Amount to be accumulated to on July 1, 2037

$ 18,000 50,000

Interest rate

10.76%

When you have completed BEE.24, consider the following additional question. Assume that the initial investment is $20,000 rather than $18,000. Show the interest rate with this change.

Interest rate

9.60%

BEE.25 Determine interest rate.

On July 17, 2026, Keith Urban borrowed money from his grandfather to open a clothing store. Starting July 17, 2027, Keith has to make equal annual payments to repay the loan. Information on the loan follows. Amount borrowed on July 17, 2026 Amount of each annual payment Number of annual payments

$ 42,000 6,500 10

Instructions Use Excel to determine what interest rate Keith is paying. NOTE: Use the Excel RATE function with cell references to the numeric amounts in the Problem data.

Interest rate

When you have completed BEE.25, consider the following additional question. Assume that the amount borrowed is $45,000 rather than $42,000. Show the interest rate with this change.

Interest rate

BEE.25 Determine interest rate.

$ 42,000 6,500 10

Instructions Use Excel to determine what interest rate Keith is paying. NOTE: Use the Excel RATE function with cell references to the numeric amounts in the Problem data.

Interest rate

8.85%

When you have completed BEE.25, consider the following additional question. Assume that the amount borrowed is $45,000 rather than $42,000. Show the interest rate with this change.

Interest rate

7.31%

BEE.26 Determine interest rate.

As the purchaser of a new house, Carrie Underwood has signed a mortgage note to pay the Nashville National Bank and Trust Co. every 6 months, at the end of which time she will own the house. At the date the mortgage is signed, Underwood made a down payment. The first semi-annual payment will be made 6 months after the date the mortgage is signed. Information on the mortgage follows. Amount of each semi-annual payment Purchase price of home Down payment Number of years of payments

$ 8,400 198,000 20,000 20

Instructions Using Excel, compute the exact rate of interest earned on the mortgage by the bank. NOTE: Use the Excel RATE function with cell references to the numeric amounts in the Problem data.

Semi-annual interest rate

When you have completed BEE.26, consider the following additional question. Assume that the amount of each payment is $9,500 rather than $8,400. What is the interest rate with this change?

Semi-annual interest rate

BEE.26 Determine interest rate.

$ 8,400 198,000 20,000 20

Instructions Using Excel, compute the exact rate of interest earned on the mortgage by the bank. NOTE: Use the Excel RATE function with cell references to the numeric amounts in the Problem data.

Semi-annual interest rate

3.55%

When you have completed BEE.26, consider the following additional question. Assume that the amount of each payment is $9,500 rather than $8,400. What is the interest rate with this change?

Semi-annual interest rate

4.37%

BEE.27 Various time value of money situations. a. On June 1, 2026, Jennifer Lawrence purchases lakefront property from her neighbor, Josh Hutcherson, and agrees to pay the purchase price in annual payments, the first payment to be payable June 1, 2027. Interest is compounded at an annual rate which is implicit in the payments. Information on the purchase follows. Information concerning the purchase is provided here. Amount of each annual payment Annual interest rate Number of payments

16,000 7.35% 7

b. On January 1, 2026, Gerrard Corporation purchased bonds of Sterling Inc. The bonds mature on January 1, 2036, and pay interest annually beginning January 1, 2027. Information concerning the bonds is provided here. Face value of each bond Number of bonds purchased Coupon rate on bonds Term of bonds in years Bond yield rate

1,000 200 8.00% 10 10.65%

Instructions Using Excel, solve for the unknowns in each of the situations. a. What is the purchase price of the property? b. How much did Gerrard pay for the bonds? NOTE: Use the Excel PV function with cell references to the numeric amounts in the Problem data.

Purchase price of property

Amount Gerrard paid for bonds

When you have completed BEE.27, consider the following additional question. a. Assume that the annual interest rate is 8.47% rather than 7.35%. What is the purchase price of the property with this change? b. Assume that the bond yield rate is 6.44%. What is the amount Gerrard paid for the bonds with this change?

Purchase price of property

Amount Gerrard paid for bonds

16,000 7.35% 7

1,000 200 8.00% 10 10.65%

Purchase price of property

$85,186.34

Amount Gerrard paid for bonds

$168,323.64

Purchase price of property

$81,979.51

Amount Gerrard paid for bonds

$222,492.26

BEE.28 Various time value of money situations. a. Lynn Anglin has a balance owed from the purchase of her new sport utility vehicle. The debt bears interest compounded monthly. Lynn wishes to pay the debt and interest in equal monthly payments, beginning one month hence. Information concerning the debt is provided here. Total debt owed Annual interest rate Number of years over which to pay debt

42,000 7.80% 8

b. On January 1, 2027, Roger Molony offers to buy Dave Feeney’s used snowmobile for $8,000, payable in equal annual installments, which are to include interest on the unpaid balance and a portion of the principal. Information concerning the debt is provided here. Purchase price of snowmobile Number of equal annual installments Annual interest rate

8,000 5 7.25%

Instructions Using Excel, provide a solution to each of the situations. a. What equal monthly payments will pay off the debt and interest? b. If the first payment is to be made on December 31, 2027, how much will each payment be? NOTE: Use the Excel PV function with cell references to the numeric amounts in the Problem data.

Amount of each payment

When you have completed BEE.28, consider the following additional question. a. Assume that the annual interest rate is 8.5% rather than 7.8%. What will be the equal monthly payments to pay off the debt and interest? b. Assume that the payments are monthly rather than annually. How much will each payment be?

Amount of each payment

w sport utility vehicle. The debt bears interest est in equal monthly payments, beginning ed here.

s used snowmobile for $8,000, payable the unpaid balance and a portion of the

much will each payment be?

meric amounts in the Problem data.

nal question. 8%. What will be the equal monthly

ly. How much will each payment be?

42,000 7.80% 8

8,000 5 7.25%

Amount of each payment

$589.48

Amount of each payment

$1,964.20

Amount of each payment

$237,112.76

Amount of each payment

$159.35

w sport utility vehicle. The debt bears interest est in equal monthly payments, beginning ed here.

s used snowmobile for $8,000, payable the unpaid balance and a portion of the

much will each payment be?

meric amounts in the Problem data.

nal question. 8%. What will be the equal monthly

ly. How much will each payment be?

BEE.29 Determine internal rate of return.

Renolds Corporation is considering two alternative investments in excavating equipment, investment A or investment B. Both investments require an initial investment, have positive annual cash flows, and have estimated salvage values. Information concerning the two investments is provided here.

Initial investment Cash flows per year Estimated salvage value Useful life of both investments

Investment A Investment B $ 184,000 $ 234,000 27,500 32,800 21,000 19,000 12 years

Instructions Using Excel, determine the internal rate of return of each project to decide which is more desirable. NOTE: Use the Excel IRR function with cell references to the numeric amounts in the Problem data.

Year Initial invest. 1 2 3 4 5 6 7 8 9 10 11 12

Inflow/(Outflow) Investment A Investment B

IRR

When you have completed BEE.29, consider the following additional question. Assume that the amount of each investment is $40,000 more. What is the internal rate of return of each investment with this change?

Year Initial invest. 1 2 3 4 5 6 7 8 9 10 11 12 IRR

Inflow/(Outflow) Investment A Investment B

BEE.29 Determine internal rate of return.

Initial investment Cash flows per year Estimated salvage value Useful life of both investments

12 years

Inflow/(Outflow) Year Investment A Investment B Initial invest. $ (184,000) $ (234,000) 1 27,500 32,800 2 27,500 32,800 3 27,500 32,800 4 27,500 32,800 5 27,500 32,800 6 27,500 32,800 7 27,500 32,800 8 27,500 32,800 9 27,500 32,800 10 27,500 32,800 11 27,500 32,800 12 48,500 51,800 IRR

11.06%

9.62%

Inflow/(Outflow) Year Investment A Investment B Initial invest. $ (224,000) $ (274,000) 1 27,500 32,800 2 27,500 32,800 3 27,500 32,800 4 27,500 32,800 5 27,500 32,800 6 27,500 32,800 7 27,500 32,800 8 27,500 32,800 9 27,500 32,800 10 27,500 32,800 11 27,500 32,800 12 27,500 32,800 IRR

6.53%

6.07%

EF.1 Assign overhead using traditional costing and ABC Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining (machine hours) and machine setup (number of setups). The total estimated machine hours is 2,000, and the total estimated number of setups is 500. Presented below is information related to each product’s use of cost drivers.

Direct labor costs Machine hours Setup hours

Standard 50,000 1,000 100

Custom $ 100,000 1,000 400

Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost pool. Instructions a. Compute the overhead rate using the traditional (plantwide) approach. b. Compute the overhead rates using the activity-based costing approach. c. Determine the difference in allocation between the two approaches. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells..

Estimated overhead Direct labor costs

= Predetermined overhead rate

Activity cost pools Machining Machine setup

of direct labor cost

Cost drivers Machine hours Setup hours

Activity-based overhead rates Machining: =

Overhead

per machine hour

Machine setup: =

per setup hour

Traditional costing: Standard

Custom

Standard

Custom

Standard Custom

Activity-based costing Machining: Standard Custom Machine setup: Standard Custom Total OH allocation

Difference between traditional costing and ABC:

When you have completed EF.1, respond to the additional question, on the EF.1 Add Ques worksheet.

EF.1 Solution Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining (machine hours) and machine setup (number of setups). The total estimated machine hours is 2,000, and the total estimated number of setups is 500. Presented below is information related to each product’s use of cost drivers. Standard $ 50,000 1,000 100

Direct labor costs Machine hours Setup hours

Custom $ 100,000 1,000 400

Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost Instructions a. Compute the overhead rate using the traditional (plantwide) approach. b. Compute the overhead rates using the activity-based costing approach. c. Determine the difference in allocation between the two approaches. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells..

Estimated overhead Direct labor costs $ $

= Predetermined overhead rate

240,000 = 150,000

Activity cost pools Machining Machine setup

160% of direct labor cost

Cost drivers Machine hours Setup hours

Activity-based overhead rates Machining: $ 140,000 = $ 2,000 Machine setup: $ 100,000 = $

Overhead 140,000 100,000

per machine hour

200

per setup hour

500

Traditional costing: Standard Custom

Activity-based costing Machining: Standard Custom

Standard $ 80,000 $

Standard $

160,000

Custom

70,000 $

Machine setup: Standard Custom Total OH allocation

Custom

70,000

20,000 80,000 $

90,000

150,000

Difference between traditional costing and ABC: The ABC method of OH allocation results in $10,000 ( $90,000 minus $80,000) more in OH allocation to standard handbags and $10,000 ($150,000 minus $160,000) less OH allocation to custom handbags.

EF.1 Additional Question Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining (machine hours) and machine setup (number of setups). The total estimated machine hours is 2,000, and the total estimated number of setups is 500. Presented below is information related to each product’s use of cost drivers.

Direct labor costs Machine hours Setup hours

Standard $ 50,000 1,000 100

Custom $ 100,000 1,000 400

Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost Instructions a. Compute the overhead rate using the traditional (plantwide) approach. b. Compute the overhead rates using the activity-based costing approach. c. Determine the difference in allocation between the two approaches. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells..

Additional Question Assume that total estimated overhead costs are $285,000. Overhead cost allocated to the machining activity cost pool is $150,000 and $135,000 is allocated to the machine setup activity cost pool. Redo instructions (a) to (c).

Estimated overhead Direct labor costs

= Predetermined overhead rate

Activity cost pools Machining Machine setup

of direct labor cost

Cost drivers Machine hours Setup hours

Activity-based overhead rates Machining: =

Overhead

per machine hour

Machine setup: =

per setup hour

Traditional costing: Standard

Custom

Standard

Custom

Standard Custom

Activity-based costing Machining: Standard Custom Machine setup: Standard Custom Total OH allocation

Difference between traditional costing and ABC:

EF.1 Solution to Additional Question Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining (machine hours) and machine setup (number of setups). The total estimated machine hours is 2,000, and the total estimated number of setups is 500. Presented below is information related to each product’s use of cost drivers.

Direct labor costs Machine hours Setup hours

Standard $ 50,000 1,000 100

Custom $ 100,000 1,000 400

Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost Instructions a. Compute the overhead rate using the traditional (plantwide) approach. b. Compute the overhead rates using the activity-based costing approach. c. Determine the difference in allocation between the two approaches. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells..

Estimated overhead Direct labor costs

= Predetermined overhead rate

$ $

285,000 = 150,000

Activity cost pools Machining Machine setup

190% of direct labor cost

Cost drivers Machine hours Setup hours

Activity-based overhead rates Machining: $ 150,000 = $ 2,000

per machine hour

270

per setup hour

Standard $ 95,000

Custom

Machine setup: $ 135,000 = $ 500

Overhead $ 150,000 135,000

Traditional costing: Standard Custom

Activity-based costing Machining: Standard Custom Machine setup: Standard Custom

Standard $

190,000

Custom

75,000 $

75,000

27,000 108,000

EF.4 Assign overhead using traditional costing and ABC Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information.

Estimated wheels produced Direct labor hours per wheel

Car 40,000 1

Truck 10,000 3

Total estimated overhead costs for the two product lines are $770,000. Instructions a. Compute the overhead cost assigned to the car wheels and truck wheels, assuming that direct labor hours is used to assign overhead costs. b. Hermann is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the truck wheels product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs.

Activity Cost Pools Setting up machines Assembling Inspection

Estimated Overhead Costs $220,000 280,000 270,000

Expected Use of Cost Drivers 1,000 setups 70,000 labor hours 1,200 inspections

Compute the activity-based overhead rates for these three cost pools. c. Compute the cost that is assigned to the car wheels and truck wheels product lines using an activitybased costing system, given the following information. Use of Cost Drivers per Product Car Number of setups Direct labor hours Number of inspections d. What do you believe Hermann should do?

Truck 200 40,000 100

800 30,000 1,100

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Direct labor hours for car wheels Direct labor hours for truck wheels Total direct labor hours Total estimated overhead Total direct labor hours OH rate/DLH

Overhead assigned: Direct labor hours Overhead rate / direct labor hour Total OH assigned

Car wheels

Activity Cost Pool Setting up machines Assembling Inspection

Estimated OH

Car Wheels Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned

Expected Use of Cost Driver

Truck Wheels Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned

Expected Use of Cost Driver

Expected Use of Cost Drivers

Truck wheels

Total

ABC OH Rate /setup /labor hour /inspection

ABC OH Rates

Cost Assigned

d. What do you believe Hermann should do?

When you have completed EF.4, respond to the additional question, on the EF.4 Add Ques worksheet.

EF.4 Solution Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information.

Estimated wheels produced Direct labor hours per wheel

Car 40,000 1

Truck 10,000 3

Activity Cost Pools Setting up machines Assembling Inspection

Estimated Overhead Costs $220,000 280,000 270,000

Expected Use of Cost Drivers 1,000 setups 70,000 labor hours 1,200 inspections

Truck 200 40,000 100

800 30,000 1,100

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Direct labor hours for car wheels Direct labor hours for truck wheels Total direct labor hours

40,000 30,000 70,000

Total estimated overhead Total direct labor hours OH rate/DLH

Overhead assigned: Direct labor hours Overhead rate / direct labor hour Total OH assigned

Car wheels 40,000 $ 11.00 $ 440,000

Activity Cost Pool Setting up machines Assembling Inspection

Expected Use ABC OH of Cost Drivers = Rate 1,000 $ 220 /setup 70,000 4 /labor hour 1,200 225 /inspection

Car Wheels Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned

Expected Use × of Cost Driver 200 $ 40,000 100

ABC OH

Truck Wheels Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned

Expected Use × of Cost Driver 800 $ 30,000 1,100

ABC OH Cost Rates = Assigned 220.00 $ 176,000 4.00 120,000 225.00 247,500 $ 543,500

÷ Estimated OH $ 220,000 280,000 270,000

770,000 70,000 11.00

Truck wheels 30,000 $ 11.00 $ 330,000

Total

770,000

Cost Rates = Assigned 220.00 $ 44,000 4.00 160,000 225.00 22,500 $ 226,500

d. What do you believe Hermann should do? Assuming that the cost drivers are a reasonable representation of what is occurring in the two product lines, it seems appropriate to switch to activity-based costing. By using this system, more accurate cost information is developed which should lead to better allocation of resources and pricing decisions in the future.

EF.4 Additional Question Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information.

Estimated wheels produced Direct labor hours per wheel

Car 40,000 1

Truck 10,000 3

Activity Cost Pools Setting up machines Assembling Inspection

Estimated Overhead Costs $220,000 280,000 270,000

Expected Use of Cost Drivers 1,000 setups 70,000 labor hours 1,200 inspections

Truck 200 40,000 100

800 30,000 1,100

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that total estimated overhead costs changed to $850,000 and the estimated overhead for Setting up machines and Assembly changed to $260,000 and $320,000 respectively. Redo instructions (a) to (c). Round overhead rates to two decimal points.

Assume that total estimated overhead costs changed to $850,000 and the estimated overhead for Setting up machines and Assembly changed to $260,000 and $320,000 respectively. Redo instructions (a) to (c). Round overhead rates to two decimal points.

a. Direct labor hours for car wheels Direct labor hours for truck wheels Total direct labor hours Total estimated overhead Total direct labor hours OH rate/DLH

Overhead assigned: Direct labor hours Overhead rate / direct labor hour Total OH assigned

Activity Cost Pool Setting up machines Assembling Inspection

Estimated OH

Car Wheels Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned

Expected Use of Cost Driver

Truck Wheels Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned

Expected Use of Cost Driver

Car wheels

Truck wheels

Expected Use of Cost Drivers

ABC OH Rate

Total

/setup /labor hour /inspection

ABC OH Rates

Cost Assigned

ABC OH Rates

Cost Assigned

EF.4 Solution to Additional Question Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information.

Estimated wheels produced Direct labor hours per wheel

Car 40,000 1

Truck 10,000 3

Activity Cost Pools Setting up machines Assembling Inspection

Estimated Overhead Costs $220,000 280,000 270,000

Expected Use of Cost Drivers 1,000 setups 70,000 labor hours 1,200 inspections

Truck 200 40,000 100

800 30,000 1,100

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Direct labor hours for car wheels Direct labor hours for truck wheels Total direct labor hours

40,000 30,000 70,000

Total estimated overhead Total direct labor hours OH rate/DLH

Overhead assigned: Direct labor hours Overhead rate / direct labor hour Total OH assigned

Car wheels 40,000 $ 12.14 $ 485,714

Activity Cost Pool Setting up machines Assembling Inspection

Expected Use ABC OH of Cost Drivers = Rate 1,000 $ 260.00 /setup 70,000 4.57 /labor hour 1,200 225.00 /inspection

÷ Estimated OH 260,000 320,000 270,000

850,000 70,000 12.14

Truck wheels 30,000 $ 12.14 $ 364,286

Car Wheels Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned

Expected Use × of Cost Driver 200 $ 40,000 100

ABC OH

Cost Rates = Assigned 260.00 $ 52,000 4.57 182,857 225.00 22,500 $ 257,357

Truck Wheels Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned

Expected Use × of Cost Driver 800 $ 30,000 1,100

ABC OH Cost Rates = Assigned 260.00 $ 208,000 4.57 137,143 225.00 247,500 $ 592,643

Total

850,000

EF.9 Compute overhead rates and assign overhead using ABC Air United, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated overhead costs reveals the following activities. Activities 1. Materials handling 2. Machine setups 3. Quality inspections

Cost Drivers Number of requisitions Number of setups Number of inspections

Total Cost $40,000 21,500 33,000 $94,500

The cost driver volume for each product was as follows. Cost Drivers Number of requisitions Number of setups Number of inspections

Instruments 400 200 200

Gauges 600 300 400

Total 1,000 500 600

Instructions a. Determine the overhead rate for each activity. b. Assign the manufacturing overhead costs for April to the two products using activity-based costing. c. Write a memorandum to the president of Air United explaining the benefits of activity-based costing. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Activity Cost Pools Materials handling Machine setups Quality inspections

Estimated Overhead

Expected Use of Cost Driver/ Activity

Activity-Based OH Rates / requisition / setup / inspection

b. Cost Driver Requisitions Machine setups Inspections Total costs assigned

Instruments Number Cost

Gauges Number

Cost

Units produced OH cost per unit ` c. Write a memorandum to the president of Air United explaining the benefits of activity-based costing.

When you have completed EF.9, respond to the additional question, on the EF.9 Add Ques worksheet.

Cost Assigned

EF.9 Solution Air United, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated overhead costs reveals the following activities. Activities 1. Materials handling 2. Machine setups 3. Quality inspections

Cost Drivers Number of requisitions Number of setups Number of inspections

Total Cost $40,000 21,500 33,000 $94,500

The cost driver volume for each product was as follows. Cost Drivers Number of requisitions Number of setups Number of inspections

Instruments 400 200 200

Gauges 600 300 400

Total 1,000 500 600

Expected Use of Cost Driver/ Activity 1,000 500 600

Activity Cost Pools Materials handling Machine setups Quality inspections

Estimated Overhead $ 40,000 21,500 33,000

Cost Driver Requisitions Machine setups Inspections Total costs assigned

Instruments Number Cost 400 $ 16,000 200 8,600 200 11,000 $ 35,600

Units produced

Activity-Based OH Rates $ 40.00 / requisition 43.00 / setup 55.00 / inspection

Gauges Number 600 300 400

Cost 24,000 12,900 22,000 58,900 300

Cost Assigned $ 40,000 21,500 33,000 $ 94,500

OH cost per unit

712.00

196.33

` c. Write a memorandum to the president of Air United explaining the benefits of activity-based costing. MEMO To: From: Re:

President, Major Instrument, Inc. Student Benefits of activity-based costing (ABC)

ABC focuses on the activities performed in producing a product. Overhead costs are assigned to products based on cost drivers that measure the activities performed on the product. The primary benefit of ABC is more accurate and meaningful product costing. This improved cost data can lead to reduced costs as managers become more aware of the underlying causes of cost incurrence. Thus, control over costs is enhanced. The improved cost data should also lead to better management decisions. More accurate product costing should contribute to setting selling prices which will help achieve desired profitability levels. In addition, it should be helpful in deciding whether to make or buy a product part or component, and sometimes even whether to eliminate a product.

EF.9 Additional Question Air United, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated overhead costs reveals the following activities. Activities 1. Materials handling 2. Machine setups 3. Quality inspections

Cost Drivers Number of requisitions Number of setups Number of inspections

Total Cost $40,000 21,500 33,000 $94,500

The cost driver volume for each product was as follows. Cost Drivers Number of requisitions Number of setups Number of inspections

Instruments 400 200 200

Gauges 600 300 400

Total 1,000 500 600

Instructions a. Determine the overhead rate for each activity. b. Assign the manufacturing overhead costs for April to the two products using activity-based costing. c. Write a memorandum to the president of Air United explaining the benefits of activitybased costing. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that total estimated overhead costs changed to $190,000 and the estimated overhead for materials handling, machine setup and quality inspection changed to $105,000, $38,000 and $47,000 respectively. Redo instructions (a) to (b) and round overhead rates to two decimal points.

a. Activity Cost Pools Materials handling Machine setups Quality inspections

Estimated Overhead

Expected Use of Cost Driver/ Activity

Activity-Based OH Rates / requisition / setup / inspection

b. Cost Driver Requisitions Machine setups Inspections Total costs assigned Units produced OH cost per unit

Instruments Number Cost

Gauges Number

Cost

Cost Assigned

EF.9 Solution to Additional Question Air United, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated overhead costs reveals the following activities. Activities 1. Materials handling 2. Machine setups 3. Quality inspections

Cost Drivers Number of requisitions Number of setups Number of inspections

Total Cost $40,000 21,500 33,000 $94,500

The cost driver volume for each product was as follows. Cost Drivers Number of requisitions Number of setups Number of inspections

Instruments 400 200 200

Gauges 600 300 400

Total 1,000 500 600

Instructions a. Determine the overhead rate for each activity. b. Assign the manufacturing overhead costs for April to the two products using activity-based costing. c. Write a memorandum to the president of Air United explaining the benefits of activitybased costing. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Expected Use of Cost Driver/ Activity 1,000 500 600

Activity Cost Pools Materials handling Machine setups Quality inspections

Estimated Overhead $ 105,000 38,000 47,000

Cost Driver Requisitions Machine setups Inspections Total costs assigned

Instruments Number Cost 400 $ 42,000 200 15,200 200 15,667 $ 72,867

Units produced OH cost per unit

Activity-Based OH Rates $ 105.00 / requisition 76.00 / setup 78.33 / inspection

Gauges Number 600 300 400

Cost $ 63,000 22,800 31,333 $ 117,133

50 $

1,457.33

300 $

390.44

Cost Assigned $ 105,000 38,000 47,000 $ 190,000

PF.1 Assign overhead using traditional costing and ABC; compute unit costs; classify activities as value- or non-value-added

Combat Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi-purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hours × (54,000 + 10,200)]. Estimated annual manufacturing overhead is $1,584,280. Thus, the predetermined overhead rate is $16.45 or ($1,584,280 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models. The company’s managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.

Activity Cost Pools Receiving Forming Assembling Testing Painting Packing and shipping

Cost

Estimated

Estimated Use of Cost

Drivers

Overhead

Drivers

Pounds Mach. hrs Parts Tests Gallons Pounds

80,400 150,500 412,300 51,000 52,580 837,500

1,584,280

335,000 35,000 217,000 25,500 5,258 335,000

Expected Use of Drivers by Product Commerci al Home 215,000 27,000 165,000 15,500 3,680 215,000

120,000 8,000 52,000 10,000 1,578 120,000

Instructions a. Under traditional product costing, compute the total unit cost of each product. Prepare a simple comparative schedule of the individual costs by product (similar to Illustration 4.4). b. Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). c. Prepare a schedule assigning each activity’s overhead cost pool to each product based on the use of cost drivers. (Include a computation of overhead cost per unit, rounding to the nearest cent.) d. Compute the total cost per unit for each product under ABC. e. Classify each of the activities as a value-added activity or a non-value-added activity. f. Comment on (1) the comparative overhead cost per unit for the two products under ABC, and (2) the comparative total costs per unit under traditional costing and ABC. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Products Commercial Home Model Model

Manufacturing Costs Direct materials Direct labor Overhead Total unit cost

b. Activity Cost Pool

Estimated Overhead

Expected Use of Cost Drivers

ABC OH Rate

Pounds Mach. hrs Parts Tests Gallons Pounds

Receiving Forming Assembling Testing Painting Packing and shipping

/ pound / MH / part / test / gallon / pound

Home Model Activity Cost Pool

Expected Use of Drivers

Commercial Model

ABC OH Rates

Cost Assigned

Home Model

Commercial Model

Receiving Forming Assembling Testing Painting Packing and shipping Total cost assigned Units produced OH cost per unit

d. ABC Manufacturing Costs Direct materials Direct labor Overhead Total cost per unit

Expected Use of Drivers

ABC OH Rates

Activity Receiving Forming Assembly Testing Painting Packing and shipping

Value- vs. Non-Value-Added

f.1 Comment on (1) the comparative overhead cost per unit for the two products under ABC, and (2) the comparative total costs per unit under traditional costing and ABC.

f.2 Comment on the comparative total costs per unit under traditional costing and ABC.

When you have completed PF.1, respond to the additional question, on the PF.1 Add Ques worksheet.

; classify activities

ome fire extinguisher and er that holds 2 1/2 pounds allon cylinder that holds r completion. Therefore, turing overhead is hour. The direct materials is $19 per unit for both the

overhead by cost pool as

comparative schedule of

er cost driver). of cost drivers. (Include a

yellow shaded input

ercial Model Cost Assigned

PF.1 Solution Combat Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi-purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hours × (54,000 + 10,200)]. Estimated annual manufacturing overhead is $1,584,280. Thus, the predetermined overhead rate is $16.45 or ($1,584,280 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models. The company’s managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.

Activity Cost Pools Receiving Forming Assembling Testing Painting Packing and shipping

Cost

Estimated

Estimated Use of Cost

Drivers

Overhead

Drivers

Pounds Mach. hrs Parts Tests Gallons Pounds

80,400 150,500 412,300 51,000 52,580 837,500

1,584,280

335,000 35,000 217,000 25,500 5,258 335,000

Expected Use of Drivers by Product Commerci al Home 215,000 27,000 165,000 15,500 3,680 215,000

120,000 8,000 52,000 10,000 1,578 120,000

Products Commercial Home Model Model $ 18.50 $ 26.50 19.00 19.00 24.68 24.68 $ 62.18 $ 70.18

Manufacturing Costs Direct materials Direct labor Overhead Total unit cost

Estimated Overhead

Activity Cost Pool Receiving Forming Assembling Testing Painting Packing and shipping

Expected Use of Cost Drivers

80,400 150,500 412,300 51,000 52,580 837,500 $ 1,584,280

335,000 35,000 217,000 25,500 5,258 335,000

ABC OH Rate

Pounds Mach. hrs Parts Tests Gallons Pounds

Home Model Activity Cost Pool Receiving Forming Assembling Testing Painting Packing and shipping

Expected Use of Drivers 215,000 27,000 165,000 15,500 3,680 215,000

0.24 4.30 1.90 2.00 10.00 2.50

Total cost assigned

Cost Assigned $

51,600 116,100 313,500 31,000 36,800 537,500

1,086,500

Units produced

ABC Manufacturing Costs Direct materials Direct labor Overhead Total cost per unit

Expected Use of Drivers 120,000 8,000 52,000 10,000 1,578 120,000

ABC OH Rates

Cost Assigned

28,800 34,400 98,800 20,000 15,780 300,000

497,780

0.24 4.30 1.90 2.00 10.00 2.50

54,000

OH cost per unit

0.24 / pound 4.30 / MH 1.90 / part 2.00 / test 10.00 / gallon 2.50 / pound

Commercial Model

ABC OH Rates $

Home Model $ 18.50 19.00 20.12 $ 57.62

20.12

Commercial Model $ 26.50 19.00 48.80 $ 94.30

10,200 $

48.80

Activity Receiving Forming Assembly Testing Painting Packing and shipping

Value- vs. Non-Value-Added Non-value-added Value-added Value-added Non-value-added Value-added Value-added

f.1 Comment on (1) the comparative overhead cost per unit for the two products under ABC, and (2) the comparative total costs per unit under traditional costing and ABC. Activity-based costing shows the commercial model absorbs nearly 2 1/2 times ($48.80 ÷ $20.12) as much overhead per unit as the home model.

f.2 Comment on the comparative total costs per unit under traditional costing and ABC. The comparison of ABC and traditional costing shows that the proper amount of overhead assigned to the two products is not equal at $24.68 but rather $20.12 for the home model and $48.80 for the commercial model. Under traditional costing, the margin of error on the commercial model was almost 100%, an understatement of $24.12 on an assignment of $24.68. These distorted overhead assignments have likely led to overpricing the home model and underpricing the commercial model.

PF.1 Additional Question Combat Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi-purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hours × (54,000 + 10,200)]. Estimated annual manufacturing overhead is $1,584,280. Thus, the predetermined overhead rate is $16.45 or ($1,584,280 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models. The company’s managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.

Activity Cost Pools Receiving Forming Assembling Testing Painting Packing and shipping

Cost

Estimated

Estimated Use of Cost

Drivers

Overhead

Drivers

Pounds Mach. hrs Parts Tests Gallons Pounds

80,400 150,500 412,300 51,000 52,580 837,500

1,584,280

335,000 35,000 217,000 25,500 5,258 335,000

Expected Use of Drivers by Product Commerci al Home 215,000 27,000 165,000 15,500 3,680 215,000

120,000 8,000 52,000 10,000 1,578 120,000

Additional Question Assume that total estimated overhead costs for Receiving, Assembly and Painting changed to $110,400, $425,000, and $72,600 respectively. Redo instructions (a) to (c) and round overhead rates to two decimal points.

Products Commercial Home Model Model

Manufacturing Costs Direct materials Direct labor Overhead Total unit cost

b. Activity Cost Pool Receiving Forming Assembling Testing Painting Packing and shipping

Estimated Overhead

Expected Use of Cost Drivers

ABC OH Rate

Pounds Mach. hrs Parts Tests Gallons Pounds

/ pound / MH / part / test / gallon / pound

Home Model Activity Cost Pool Receiving Forming Assembling Testing Painting Packing and shipping Total cost assigned Units produced OH cost per unit

Expected Use of Drivers

ABC OH Rates

Commercial Model Cost Assigned

Expected Use of Drivers

ABC OH Rates

Cost Assigned

PF.1 Solution to Additional Question Combat Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi-purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hours × (54,000 + 10,200)]. Estimated annual manufacturing overhead is $1,584,280. Thus, the predetermined overhead rate is $16.45 or ($1,584,280 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models. The company’s managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.

Activity Cost Pools Receiving Forming Assembling Testing Painting Packing and shipping

Cost

Estimated

Estimated Use of Cost

Drivers

Overhead

Drivers

Pounds Mach. hrs Parts Tests Gallons Pounds

80,400 150,500 412,300 51,000 52,580 837,500

1,584,280

335,000 35,000 217,000 25,500 5,258 335,000

Expected Use of Drivers by Product Commerci al Home 215,000 27,000 165,000 15,500 3,680 215,000

120,000 8,000 52,000 10,000 1,578 120,000

Products Commercial Home Model Model $ 18.50 $ 26.50 19.00 19.00 24.68 24.68 $ 62.18 $ 70.18

Manufacturing Costs Direct materials Direct labor Overhead Total unit cost

Estimated Overhead

Activity Cost Pool Receiving Forming Assembling Testing Painting Packing and shipping

110,400 150,500 425,000 51,000 72,600 837,500 $ 1,647,000

Expected Use of Cost Drivers

335,000 35,000 217,000 25,500 5,258 335,000

ABC OH Rate

Pounds Mach. hrs Parts Tests Gallons Pounds

0.33 / pound 4.30 / MH 1.96 / part 2.00 / test 13.81 / gallon 2.50 / pound

Home Model Activity Cost Pool Receiving Forming Assembling Testing Painting Packing and shipping Total cost assigned

Expected Use of Drivers 215,000 27,000 165,000 15,500 3,680 215,000

Commercial Model

ABC OH Rates $

0.33 4.30 1.96 2.00 13.81 2.50

Cost Assigned $

70,854 116,100 323,157 31,000 50,812 537,500

1,129,422

Units produced OH cost per unit

Expected Use of Drivers 120,000 8,000 52,000 10,000 1,578 120,000

ABC OH Rates

Cost Assigned

39,546 34,400 101,843 20,000 21,788 300,000

517,578

0.33 4.30 1.96 2.00 13.81 2.50

54,000 $

20.92

10,200 $

50.74

PF.2 Assign overhead to products using ABC and evaluate decision Schultz Electronics manufactures two ultra-high-definition television models: the Royale, which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2027 was as follows. Traditional Costing Direct materials Direct labor ($20 per hours) Manufacturing overhead ($38 per DLH) Total per unit cost

Royale $

700 120 228 1,048

Majestic $ 420 100 190 $ 710

In 2027, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $38 per direct labor hour was determined by dividing total estimated manufacturing overhead of $7,600,000 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was Royale $552 ($1,600 − $1,048) and Majestic $590 ($1,300 − $710). Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model. Before finalizing its decision, management asks Schultz’s controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2027. Activity Cost Pools Purchasing Machine setups Machining Quality control

Cost Drivers Number of orders Number of setups Machine hours Number of inspections

Estimated Overhead $

1,200,000 900,000 4,800,000 700,000

Estimated Use of Cost Drivers 40,000 18,000 120,000 28,000

Majestic 23,000 13,000 45,000 17,000

Total 40,000 18,000 120,000 28,000

Activity-Based Overhead Rates $30/order $50/setup $40/hour $25/inspection

The cost drivers used for each product were: Cost Drivers Purchase orders Machine setups Machine hours Inspections

Royale 17,000 5,000 75,000 11,000

Instructions a. Assign the total 2027 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit. b. What was the cost per unit and gross profit of each model using ABC costing? c. Are management's future plans for the two models sound? Explain.

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Royale Overhead Rate

Drivers Used

Majestic

Cost Assigned

Drivers Used

Royale

Majestic

Cost Assigned

Total Overhead

Purchase order Machine setups Machine hours Inspections Total assigned costs Units produced Cost per unit

b. Direct materials Direct labor Manufacturing overhead Total cost per unit Sales price per unit Cost per unit Gross profit per unit

When you have completed PF.2, respond to the following additional question, on the PF.2 Add Ques worksheet.

PF.2 Solution Schultz Electronics manufactures two ultra-high-definition television models: the Royale, which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2027 was as follows. Traditional Costing Direct materials Direct labor ($20 per hours) Manufacturing overhead ($38 per DLH) Total per unit cost

Royale $ 700 120 228 $ 1,048

Majestic $ 420 100 190 $ 710

Cost Drivers Number of orders Number of setups Machine hours Number of inspections

Estimated Overhead $ 1,200,000 900,000 4,800,000 700,000

Estimated Use of Cost Drivers 40,000 18,000 120,000 28,000

Majestic 23,000 13,000 45,000 17,000

Total 40,000 18,000 120,000 28,000

Activity-Based Overhead Rates $30/order $50/setup $40/hour $25/inspection

The cost drivers used for each product were: Cost Drivers Purchase orders Machine setups Machine hours Inspections

Royale 17,000 5,000 75,000 11,000

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Royale Overhead Rate

Drivers Used

Purchase order Machine setups Machine hours Inspections Total assigned costs

17,000 5,000 75,000 11,000

Units produced Cost per unit

b. Direct materials Direct labor Manufacturing overhead Total cost per unit Sales price per unit Cost per unit Gross profit per unit

Majestic

Cost Assigned

Drivers Used

510,000 250,000 3,000,000 275,000 4,035,000

23,000 13,000 45,000 17,000

25,000 $

Royale $ 700.00 120.00 161.40 $ 981.40

Majestic $ 420.00 100.00 356.50 $ 876.50

690,000 650,000 1,800,000 425,000 3,565,000

Overhead

1,200,000 900,000 4,800,000 700,000 7,600,000

10,000

161.40

1,600.00 981.40 618.60

Total

Cost Assigned

356.50

1,300.00 876.50 423.50

c. Management’s future plans for the two television models are not sound. Under ABC costing, the Royale model is $195.10 ($618.60 – $423.50) per unit more profitable than the Majestic model. If any product should be phased out, it is the Majestic. But, by applying ABC and activity-based management analysis, Schultz may determine how to reduce the costs of producing the Majestic model.

PF.2 Additional Question Schultz Electronics manufactures two ultra-high-definition television models: the Royale, which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2027 was as follows. Traditional Costing Direct materials Direct labor ($20 per hours) Manufacturing overhead ($38 per DLH) Total per unit cost

Royale $ 700 120 228 $ 1,048

Majestic $ 420 100 190 $ 710

Cost Drivers Number of orders Number of setups Machine hours Number of inspections

Estimated Overhead $ 1,200,000 900,000 4,800,000 700,000

Estimated Use of Cost Drivers 40,000 18,000 120,000 28,000

Majestic 23,000 13,000 45,000 17,000

Total 40,000 18,000 120,000 28,000

Activity-Based Overhead Rates $30/order $50/setup $40/hour $25/inspection

The cost drivers used for each product were: Cost Drivers Purchase orders Machine setups Machine hours Inspections

Royale 17,000 5,000 75,000 11,000

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that the purchase orders used by Royale and Majestic changed to 19,000 and 21,000 respectively. Also assume that the number of inspections used by Royale and Majestic models changed to 12,000 and 16,000 respectively. Redo instructions (a) to (c) and round cost and gross profit per unit to two decimal points.

Royale Overhead Rate

Drivers Used

Majestic

Cost Assigned

Drivers Used

Royale

Majestic

Purchase order Machine setups Machine hours Inspections Total assigned costs Units produced Cost per unit

b. Direct materials Direct labor Manufacturing overhead Total cost per unit Sales price per unit Cost per unit Gross profit per unit

Cost Assigned

Total Overhead

PF.2 Solution to Additional Question Schultz Electronics manufactures two ultra-high-definition television models: the Royale, which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2027 was as follows. Traditional Costing Direct materials Direct labor ($20 per hours) Manufacturing overhead ($38 per DLH) Total per unit cost

Royale 700 120 228 $ 1,048 $

Majestic 420 100 190 $ 710 $

Cost Drivers Number of orders Number of setups Machine hours Number of inspections

Estimated Overhead $ 1,200,000 900,000 4,800,000 700,000

Estimated Use of Cost Drivers 40,000 18,000 120,000 28,000

Majestic 23,000 13,000 45,000 17,000

Total 40,000 18,000 120,000 28,000

Activity-Based Overhead Rates $30/order $50/setup $40/hour $25/inspection

The cost drivers used for each product were: Cost Drivers Purchase orders Machine setups Machine hours Inspections

Royale 17,000 5,000 75,000 11,000

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Royale Overhead Rate

Drivers Used

Purchase order Machine setups Machine hours Inspections Total assigned costs

19,000 5,000 75,000 12,000

Units produced Cost per unit

b. Direct materials Direct labor Manufacturing overhead Total cost per unit Sales price per unit Cost per unit Gross profit per unit

Majestic

Cost Assigned

Drivers Used

570,000 250,000 3,000,000 300,000 4,120,000

21,000 13,000 45,000 16,000

25,000 $

Royale $ 700.00 120.00 164.80 $ 984.80

Majestic $ 420.00 100.00 348.00 $ 868.00

630,000 650,000 1,800,000 400,000 3,480,000

Overhead

1,200,000 900,000 4,800,000 700,000 7,600,000

10,000

164.80

1,600.00 984.80 615.20

Total

Cost Assigned

348.00

1,300.00 868.00 432.00

c. Management’s future plans for the two television models are not sound. Under ABC costing, the Royale model is $183.20 ($615.20 – $432.00) per unit more profitable than the Majestic model. If any product should be phased out, it is the Majestic. But, by applying ABC and activity-based management analysis, Schultz may determine how to reduce the costs of producing the Majestic model.

EG.1 Compute break-even point and margin of safety The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $60 a night. Operating costs are as follows. Salaries Utilities Depreciation Maintenance Maid service Other costs

10,600 2,400 1,500 800 8 34

per month per month per month per month per room per room

Instructions a. Determine the inn's break-even point in (1) number of rented rooms per month and (2) sales dollars. b. If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), what is (1) the monthly margin of safety in dollars and (2) the margin of safety ratio?

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

(1) Breakeven point in rooms Rental per room Variable cost per room Contribution margin per room Fixed costs Contribution margin per room Break-even point in rooms

(2) Break-even point in dollars Contribution margin per room Rental per room Contribution margin ratio Break-even point in rooms Rental per room Break-even point in dollars OR Fixed cost Contribution margin ratio Break-even point in dollars

(1) Margin of safety in dollars Expected rental revenues Break-even sales Margin of safety in dollars (2)

Margin of safety ratio Margin of safety in dollars Expected rental revenues Margin of safety ratio

When you have completed EG.1, respond to the additional questions on the EG.1 Additional Question worksheet.

EG.1 Solution The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $60 a night. Operating costs are as follows. Salaries Utilities Depreciation Maintenance Maid service Other costs

10,600 2,400 1,500 800 8 34

per month per month per month per month per room per room

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

(1) Breakeven point in rooms Rental per room Variable cost per room Contribution margin per room Fixed costs Contribution margin per room Break-even point in rooms

$ $ $ $

60.00 42.00 18.00 15,300 18.00 850

(1) Margin of safety in dollars Expected rental revenues Break-even sales Margin of safety in dollars (2)

Margin of safety ratio Margin of safety in dollars Expected rental revenues Margin of safety ratio

$ $

$ $ $ $

$ $

18.00 60.00 30.0% 850 60.00 51,000 15,300 30.0% 51,000

90,000 51,000 39,000

39,000 90,000 43.3%

EG.1 Additional Question The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $60 a night. Operating costs are as follows. Salaries Utilities Depreciation Maintenance Maid service Other costs

10,600 2,400 1,500 800 8 34

per month per month per month per month per room per room

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Questions a. Assume that the rental rate per room changed to $65 per night. Recalculate breakeven point in units and dollars. Round CM ratio to one decimal point. b. If the inn plans to rent 60 rooms average per day at the new rate of $65 per night, recalculate the margin of safety in dollars and the margin of safety ratio.

(1) Breakeven point in rooms Rental per room Variable cost per room Contribution margin per room Fixed costs Contribution margin per room Break-even point in rooms

(1) Margin of safety in dollars Expected rental revenues Break-even sales Margin of safety in dollars (2)

Margin of safety ratio Margin of safety in dollars Expected rental revenues Margin of safety ratio

EG.1 Solution to Additional Question The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $60 a night. Operating costs are as follows. Salaries Utilities Depreciation Maintenance Maid service Other costs

10,600 2,400 1,500 800 8 34

per month per month per month per month per room per room

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

(1) Breakeven point in rooms Rental per room Variable cost per room Contribution margin per room Fixed costs Contribution margin per room Break-even point in rooms

$ $ $ $

65.00 42.00 23.00 15,300 23.00 665

(1) Margin of safety in dollars Expected rental revenues Break-even sales Margin of safety in dollars (2)

Margin of safety ratio Margin of safety in dollars Expected rental revenues Margin of safety ratio

$ $

$ $ $ $

$ $

23.00 65.00 35.4% 665 65.00 43,239 15,300 35.4% 43,239

117,000 43,239 73,761

73,761 117,000 63.0%

EG.3 Compute net income under different alternatives Barnes Company reports the following operating results for the month of August: sales $325,000 (units 5,000); variable costs $210,000; and fixed costs $75,000. Management is considering the following independent courses of action to increase net income. a.

Increase selling price by 10% with no change in total variable costs or sales volume.

b. c.

Reduce variable costs to 58% of sales. Reduce fixed costs by $15,000.

Instructions Compute the net income to be earned under each independent alternative. Which course of action will produce the highest net income? NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Current selling price New selling price Total sales Less: variable costs Contribution margin Less: fixed costs Net income

Total sales Less: variable costs Contribution margin Less: fixed costs Net income

When you have completed EG.3, respond to the additional questions on the EG.3 Additional Question worksheet.

EG.3 Solution Barnes Company reports the following operating results for the month of August: sales $325,000 (units 5,000); variable costs $210,000; and fixed costs $75,000. Management is considering the following independent courses of action to increase net income. a.

Increase selling price by 10% with no change in total variable costs or sales volume.

b. c.

Reduce variable costs to 58% of sales. Reduce fixed costs by $15,000.

Current selling price New selling price

$ $

65.00 71.50

Total sales Less: variable costs Contribution margin Less: fixed costs Net income

357,500 210,000 147,500 75,000 72,500

Total sales Less: variable costs Contribution margin Less: fixed costs Net income

325,000 188,500 136,500 75,000 61,500

325,000 210,000 115,000 60,000 55,000

E19.3 Additional Question Barnes Company reports the following operating results for the month of August: sales $325,000 (units 5,000); variable costs $210,000; and fixed costs $75,000. Management is considering the following independent courses of action to increase net income. a.

Increase selling price by 10% with no change in total variable costs or sales volume.

b. c.

Reduce variable costs to 58% of sales. Reduce fixed costs by $15,000.

Additional Question Repond to the following independent scenarios.

a. b. c.

Assume that unit selling price increased 5% with no change in total variable costs or sales volume. Assume variable costs decreased to 53% of sales. Assume that fixed costs increased by $20,000. Which course of action will produce the highest net income?

Current selling price New selling price Total sales Less: variable costs Contribution margin Less: fixed costs Net income

Total sales Less: variable costs Contribution margin Less: fixed costs Net income

EG.3 Solution to Additional Question Barnes Company reports the following operating results for the month of August: sales $325,000 (units 5,000); variable costs $210,000; and fixed costs $75,000. Management is considering the following independent courses of action to increase net income. a.

Increase selling price by 10% with no change in total variable costs or sales volume.

b. c.

Reduce variable costs to 58% of sales. Reduce fixed costs by $15,000.

Additional Question Repond to the following independent scenarios.

a. b. c.

Current selling price New selling price

$ $

65.00 68.25

Total sales Less: variable costs Contribution margin Less: fixed costs Net income

341,250 210,000 131,250 75,000 56,250

Total sales Less: variable costs Contribution margin Less: fixed costs Net income

325,000 172,250 152,750 75,000 77,750

325,000 210,000 115,000 95,000 20,000

Using Data Visualization to Analyze Data DAG.1 Data visualization can be used to identify business expansion opportunities.

Chart of Gaming Reve Example: Data analytics can help companies know where opportunities lie. For example, while Caesars Entertainment uses data analytics to maximize its in-house profitability, other gaming companies may look to expand through outside operations. Gaming revenue by state for the years, 2001, 2009, and 2018 are presented here, and were used to present the adjacent chart.

West Virginia South Dakota Rhode Island Pennsylvania Oklahoma

Source: https://gaming.unlv.edu/reports/national_annual_revenues.pdf and https://www.americangaming.org/wp-content/uploads/2019/06/AGA-2019-State-of-the-States_FINAL1.pdf

Consider the following chart, based upon the gaming revenue by state in 2018, 2009, and 2001. You can see that some states have companies that have grown their gaming revenue significantly, while others have companies with declining gaming revenue. Managers look for states that have growth potential when deciding where to expand.

New York New Mexico New Jersey Nevada Missouri

State

Gaming Revenue by State, 2001, 2009, and 2018 2001 2009 2018 Colorado $ 676,674 $ 734,591 $ 842,104 Delaware 526,630 564,239 432,512 Florida 0 216,747 569,016 Illinois 1,783,958 1,428,923 1,373,456 Indiana 1,841,842 2,798,195 2,240,835 Iowa 922,867 1,380,744 1,467,332 Kansas 0 1,990 408,574 Louisiana 1,883,233 2,455,526 2,561,460 Maine 0 59,198 143,733 Maryland 0 0 1,746,364 Massachusetts 0 0 273,073 Michigan 1,006,993 1,339,479 1,444,100 Mississippi 2,700,438 2,464,662 2,142,060 Missouri 1,100,000 1,735,000 1,754,466 Nevada 9,468,599 10,392,675 11,917,370 New Jersey 4,303,078 3,943,171 2,903,478 New Mexico 87,900 243,940 235,445 New York 0 1,019,279 2,587,743 Ohio 0 0 1,863,937 Oklahoma 0 94,130 139,606 Pennsylvania 0 1,964,570 3,251,197 Rhode Island 253,742 461,169 656,549 South Dakota 58,609 101,898 106,324 West Virginia 438,091 905,590 623,765 Total $ 27,052,654 $ 34,305,716 $ 41,684,497

Mississippi Michigan Massachusetts Maryland Maine

Louisiana Kansas

Indiana Illinois Florida Delaware Colorado

Gaming Revenue by State, 2018, 2009, 2001 West Virginia

2018

2009

2001

South Dakota Rhode Island Pennsylvania Oklahoma Ohio New York New Mexico New Jersey Nevada Missouri Mississippi Michigan Massachusetts Maryland Maine

Louisiana Kansas Iowa Indiana Illinois Florida Delaware Colorado $-

$2,000,000

$4,000,000

$6,000,000

Gaming Revenue

$8,000,000

$10,000,000

$12,000,000

Using Data Visualization to Analyze Data DAG.1 Data visualization can be used to identify business expansion opportunities.

Problem Caesars Entertainment is analyzing growth potential by looking at Gaming Revenue by State for the years 2001, 2009, and 2018. Managers look for states that have growth potential when deciding where to expand. For this case, you will take a closer look at this data, to identify which states hold potential for further expansion of gaming revenue.

Gaming Revenue by State, 2001, 2009, and 2018 2001 2001% 2009 2009% 2018 2018% Colorado $ 676,674 2.5% $ 734,591 2.1% $ 842,104 2.0% Delaware 526,630 1.9% 564,239 1.6% 432,512 1.0% Florida 0 0.0% 216,747 0.6% 569,016 1.4% Illinois 1,783,958 6.6% 1,428,923 4.2% 1,373,456 3.3% Indiana 1,841,842 6.8% 2,798,195 8.2% 2,240,835 5.4% Iowa 922,867 3.4% 1,380,744 4.0% 1,467,332 3.5% Kansas 0 0.0% 1,990 0.0% 408,574 1.0% Louisiana 1,883,233 7.0% 2,455,526 7.2% 2,561,460 6.1% Maine 0 0.0% 59,198 0.2% 143,733 0.3% Maryland 0 0.0% 0 0.0% 1,746,364 4.2% Massachusetts 0 0.0% 0 0.0% 273,073 0.7% Michigan 1,006,993 3.7% 1,339,479 3.9% 1,444,100 3.5% Mississippi 2,700,438 10.0% 2,464,662 7.2% 2,142,060 5.1% Missouri 1,100,000 4.1% 1,735,000 5.1% 1,754,466 4.2% Nevada 9,468,599 35.0% 10,392,675 30.3% 11,917,370 28.6% New Jersey 4,303,078 15.9% 3,943,171 11.5% 2,903,478 7.0% New Mexico 87,900 0.3% 243,940 0.7% 235,445 0.6% New York 0 0.0% 1,019,279 3.0% 2,587,743 6.2% Ohio 0 0.0% 0 0.0% 1,863,937 4.5% Oklahoma 0 0.0% 94,130 0.3% 139,606 0.3% Pennsylvania 0 0.0% 1,964,570 5.7% 3,251,197 7.8% Rhode Island 253,742 0.9% 461,169 1.3% 656,549 1.6% South Dakota 58,609 0.2% 101,898 0.3% 106,324 0.3% West Virginia 438,091 1.6% 905,590 2.6% 623,765 1.5% Total

$ 27,052,654

100.0% $ 34,305,716

100.0% $ 41,684,497

100.0%

Source: https://gaming.unlv.edu/reports/national_annual_revenues.pdf and https://www.americangaming.org/wpcontent/uploads/2019/06/AGA-2019-State-of-the-States_FINAL-1.pdf

There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following:

a. Scan the percentage of each year's total revenue for 2001, 2009, and 2018. What trends do you see? b. In the yellow shaded cells in the data table, input formulas to calculate the percentage change from 2001 to 2009, 2009 to 2018, and 2001 to 2018 [Percent change = (Later date value – Earlier date value) ÷ Earlier date value]. Use the IFERROR function to calculate to avoid a division by zero error. c. Apply conditional formatting to all cells containing percentages to highlight the top three percentage changes in each column in orange shading, and the bottom three percentage changes in each column in blue shading (other than 0%). d. Generate a column chart that graphs the percentage changes from 2001 to 2009 and 2009 to 2018 for all states except Kansas, and any states which display a zero percentage change through 2018. Include a descriptive chart title, axes labels, and a legend. e. Why do you think it is best to exclude Kansas from the chart in part d? Identify which states hold the highest potential and lowest potential for further expansion of gaming revenue. Explain,

Student Work Area a. Response to part a

b and c. Calculations of percentage changes and conditional formatting of percentages Gaming Revenue Percentage Changes Between 2001-2009, 2009-2018, and 2001-2018 % Change % Change % Change 2001 2009 2018 2001-2009 2009-2018 2001-2018 Colorado $ 676,674 $ 734,591 $ 842,104 Delaware 526,630 564,239 432,512 Florida 0 216,747 569,016 Illinois 1,783,958 1,428,923 1,373,456 Indiana 1,841,842 2,798,195 2,240,835 Iowa 922,867 1,380,744 1,467,332 Kansas 0 1,990 408,574 Louisiana 1,883,233 2,455,526 2,561,460 Maine 0 59,198 143,733 Maryland 0 0 1,746,364 Massachusetts 0 0 273,073 Michigan 1,006,993 1,339,479 1,444,100 Mississippi 2,700,438 2,464,662 2,142,060 Missouri 1,100,000 1,735,000 1,754,466 Nevada 9,468,599 10,392,675 11,917,370 New Jersey 4,303,078 3,943,171 2,903,478 New Mexico 87,900 243,940 235,445 New York 0 1,019,279 2,587,743 Ohio 0 0 1,863,937 Oklahoma Pennsylvania Rhode Island

0 0 253,742

94,130 1,964,570 461,169

139,606 3,251,197 656,549

South Dakota West Virginia Total

58,609 438,091

101,898 905,590

106,324 623,765

$ 27,052,654

$ 34,305,716

$ 41,684,497

d Column chart for part d

e. Response to part e

Using Data Visualization to Analyze Data DAG.1 Data visualization can be used to can be used to identify where opportunities lie.

Gaming Revenue by State, 2001, 2009, and 2018 2001 2001% 2009 2009% 2018 Colorado $ 676,674 2.5% $ 734,591 2.1% $ 842,104 Delaware 526,630 1.9% 564,239 1.6% 432,512 Florida 0 0.0% 216,747 0.6% 569,016 Illinois 1,783,958 6.6% 1,428,923 4.2% 1,373,456 Indiana 1,841,842 6.8% 2,798,195 8.2% 2,240,835 Iowa 922,867 3.4% 1,380,744 4.0% 1,467,332 Kansas 0 0.0% 1,990 0.0% 408,574 Louisiana 1,883,233 7.0% 2,455,526 7.2% 2,561,460 Maine 0 0.0% 59,198 0.2% 143,733 Maryland 0 0.0% 0 0.0% 1,746,364 Massachusetts 0 0.0% 0 0.0% 273,073 Michigan 1,006,993 3.7% 1,339,479 3.9% 1,444,100 Mississippi 2,700,438 10.0% 2,464,662 7.2% 2,142,060 Missouri 1,100,000 4.1% 1,735,000 5.1% 1,754,466 Nevada 9,468,599 35.0% 10,392,675 30.3% 11,917,370 New Jersey 4,303,078 15.9% 3,943,171 11.5% 2,903,478 New Mexico 87,900 0.3% 243,940 0.7% 235,445 New York 0 0.0% 1,019,279 3.0% 2,587,743 Ohio 0 0.0% 0 0.0% 1,863,937 Oklahoma 0 0.0% 94,130 0.3% 139,606 Pennsylvania 0 0.0% 1,964,570 5.7% 3,251,197 Rhode Island 253,742 0.9% 461,169 1.3% 656,549 South Dakota 58,609 0.2% 101,898 0.3% 106,324 West Virginia 438,091 1.6% 905,590 2.6% 623,765 Total

$ 27,052,654

100.0% $ 34,305,716

100.0% $ 41,684,497

2018% 2.0% 1.0% 1.4% 3.3% 5.4% 3.5% 1.0% 6.1% 0.3% 4.2% 0.7% 3.5% 5.1% 4.2% 28.6% 7.0% 0.6% 6.2% 4.5% 0.3% 7.8% 1.6% 0.3% 1.5% 100.0%

Source: https://gaming.unlv.edu/reports/national_annual_revenues.pdf and https://www.americangaming.org/wpcontent/uploads/2019/06/AGA-2019-State-of-the-States_FINAL-1.pdf

There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Scan the percentage of each year's total revenue for 2001, 2009, and 2018. What trends do you see?

Scan the percentage of each year's total revenue for 2001, 2009, and 2018. What trends do you see? b. In the yellow shaded cells in the data table, input formulas to calculate the percentage change from 2001 to 2009, 2009 to 2018, and 2001 to 2018 [Percent change = (Later date value – Earlier date value) ÷ Earlier date value]. Use the IFERROR function to calculate to avoid a division by zero error. c. Apply conditional formatting to all cells containing percentages to highlight the top three percentage changes in each column in orange shading, and the bottom three percentage changes in each column in blue shading (other than 0%). d. Generate a column chart that graphs the percentage changes from 2001 to 2009 and 2009 to 2018 for all states except Kansas, and any states which display a zero percentage change through 2018. Include a descriptive chart title, axes labels, and a legend. e. Why do you think it is best to exclude Kansas from the chart in part d? Identify which states hold the highest potential and lowest potential for further expansion of gaming revenue. Explain.

Student Work Area a. Response to part a Nevada has the largest proportion of gaming revenue followed by New Jersey in all years. However, Nevada's percentage of total revenues is declining, even though it has growth in the total dollars of revenue. New states have entered the market of gaming and their respective revenue amounts appear to be increasing each year with New York, Pennsylvania, and Maryland appearing the states with the largest growth.

b and c. Calculations of percentage changes and conditional formatting of percentages Gaming Revenue Percentage Changes Between 2001-2009, 2009-2018, and 2001-2018 % Change % Change 2001 2009 2018 2001-2009 2009-2018 Colorado $ 676,674 $ 734,591 $ 842,104 8.6% 14.6% Delaware 526,630 564,239 432,512 7.1% -23.3% Florida 0 216,747 569,016 0.0% 162.5% Illinois 1,783,958 1,428,923 1,373,456 -19.9% -3.9% Indiana 1,841,842 2,798,195 2,240,835 51.9% -19.9% Iowa 922,867 1,380,744 1,467,332 49.6% 6.3% Kansas 0 1,990 408,574 0.0% Louisiana 1,883,233 2,455,526 2,561,460 30.4% 4.3% Maine 0 59,198 143,733 0.0% 142.8% Maryland 0 0 1,746,364 0.0% 0.0% Massachusetts 0 0 273,073 0.0% 0.0% Michigan 1,006,993 1,339,479 1,444,100 33.0% 7.8% Mississippi 2,700,438 2,464,662 2,142,060 -8.7% -13.1% Missouri 1,100,000 1,735,000 1,754,466 57.7% 1.1% Nevada 9,468,599 10,392,675 11,917,370 9.8% 14.7% New Jersey 4,303,078 3,943,171 2,903,478 -8.4% -26.4% New Mexico 87,900 243,940 235,445 177.5% -3.5% New York 0 1,019,279 2,587,743 0.0% 153.9% Ohio 0 0 1,863,937 0.0% 0.0% Oklahoma 0 94,130 139,606 0.0% 48.3% Pennsylvania 0 1,964,570 3,251,197 0.0% 65.5% Rhode Island 253,742 461,169 656,549 81.7% 42.4% South Dakota 58,609 101,898 106,324 73.9% 4.3%

West Virginia Total

438,091

905,590

623,765

$ 27,052,654

$ 34,305,716

$ 41,684,497

106.7% 26.8%

-31.1% 21.5%

d Column chart for part d 200.0%

Percentage Change in Gaming Revenue from 2001 to 2018 % Change 2001-2009

% Change 2009-2018

Percentage Change

150.0%

100.0%

50.0%

0.0%

-50.0%

e. Response to part e Kansas was omitted due its huge percentage increase. Including it would cause the other data to look so small that the graph would not be meaningful. From 2001 through 2009, New Mexico, Rhode Island, and West Virginia showed the largest growth in gaming revenue. In examining the data with conditional formatting, though it appears that these three states all experienced a decline in revenue from 2009 through 2018, likely due to the economic issues the U.S. experienced during this time period. Due to the continued growth through 2018 of Rhode Island and New Mexico, these two states look like they have strong potential for continued growth. New Jersey, Mississippi, and Illinois appear to be on downward trend and likely have the least potential for expansion. In examining the conditionally formatted data, it appears a number of states that did not generate gaming revenue in 2001, began gaming operations by 2009, and have continued growth through 2018. These states, along with West Virginia, New Jersey, and Delaware appear on a downward trend, especially New Jersey due to declines over both 10-year periods covered by the chart. One may expect more states to begin new gaming operations and to increase operations, and as this occurs, Nevada's proportion of gaming revenue may continue to decline.

Delaware appear on a downward trend, especially New Jersey due to declines over both 10-year periods covered by the chart. One may expect more states to begin new gaming operations and to increase operations, and as this occurs, Nevada's proportion of gaming revenue may continue to decline.

y in all years. However, h in the total dollars of revenue amounts nd appearing the states

of percentages 018, and 2001-2018 % Change 2001-2018 24.4% -17.9% 0.0% -23.0% 21.7% 59.0% 0.0% 36.0% 0.0% 0.0% 0.0% 43.4% -20.7% 59.5% 25.9% -32.5% 167.9% 0.0% 0.0% 0.0% 0.0% 158.7% 81.4%

42.4% 54.1%

nue from 2001 to 2018

ge 2009-2018

se the other data to look

howed the largest though it appears that 18, likely due to the ntinued growth through strong potential for ward trend and likely ed data, it appears a ng operations by 2009, ginia, New Jersey, and s over both 10-year ing operations and to nue may continue to

s over both 10-year ing operations and to nue may continue to

Data Visualization at HydroHappy DAG.2 Data visualization can be used to can be used to visualize the breakeven point. Problem HydroHappy management wants to examine the profitability of its small retail shop near the beach in St. Thomas, Virgin Islands. The shop rents and sells two unique products, boogie boards and skim boards, referred to by the locals as a “Boogie” and a “Skimmy.” Even though the rental operations are profitable, the retail operations may not be covering the related costs. On average, the company sells two Skimmy board for every Boogie. Forecasted data is presented here for incremental levels of volume, the unit selling price (SP), unit variable cost (VC), and total fixed costs for the retail operations.

Units 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400

Boogies Unit SP Unit VC Units $ 32.00 $ 12.00 32.00 12.00 40 32.00 12.00 80 32.00 12.00 120 32.00 12.00 160 32.00 12.00 200 32.00 12.00 240 32.00 12.00 280 32.00 12.00 320 32.00 12.00 360 32.00 12.00 400 32.00 12.00 440 32.00 12.00 480 32.00 12.00 520 32.00 12.00 560 32.00 12.00 600 32.00 12.00 640 32.00 12.00 680 32.00 12.00 720 32.00 12.00 760 32.00 12.00 800

Skimmys Unit SP Unit VC $ 19.00 $ 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32 19.00 8.32

Fixed Costs $ 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200

Instructions There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. In the yellow shaded column in the student work area, input formulas to calculate the total revenue and total variables costs for each product at each level of activity given in the data, and the total revenue and total variable costs for both products based on the current sales mix.

Student Work Area

a. Table for part a Table to calculate total reven for both products Boogies Revenue

c. Calculation of break-even

Break-even point in sales unit Break-even point in sales reve

b. Create a breakeven chart (line chart) that that graphs the company's total sales revenue, fixed costs, and total variable costs. Include a descriptive chart title, axes labels, and a legend. c. Calculate the multiple product breakeven point in total number of sales units and sales revenue for both products and separately for each product using formulas presented in your textbook. d. Compare your answer to part c with the break-even point on the break-even chart created in part b. What do you notice as it relates to the three lines in the chart as compared to amounts you calculated in part c? e. The selling prices in the data presented below reflect a decrease in selling price of $5 for skimmys and an increase in selling price of $5 for boogies. Copy the data your created in part a to the space designated in part e of the student work area. Your table should automatically populate with new values if you used formulas in part a. Create another break-even chart using the new data. What happened to the break-even point? Given that the change in the selling prices of the two products offset each other, why did the break-even point change? Explain.

Units 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400

Boogies Unit SP Unit VC Units $ 37.00 $ 12.00 37.00 12.00 40 37.00 12.00 80 37.00 12.00 120 37.00 12.00 160 37.00 12.00 200 37.00 12.00 240 37.00 12.00 280 37.00 12.00 320 37.00 12.00 360 37.00 12.00 400 37.00 12.00 440 37.00 12.00 480 37.00 12.00 520 37.00 12.00 560 37.00 12.00 600 37.00 12.00 640 37.00 12.00 680 37.00 12.00 720 37.00 12.00 760 37.00 12.00 800

Skimmys Unit SP Unit VC $ 14.00 $ 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32 14.00 8.32

Fixed Costs $ 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200

d. Response to part d

e. Table for part e Table to calculate total reven for both products given chan Boogies Revenue

e. Response to part e

Student Work Area a. Table for part a Table to calculate total revenue and total variables costs for each product and for both products Boogies Skimmys Total Total Total Fixed Revenue VC Revenue VC Units Costs Costs $ 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200

c. Calculation of break-even points Boogies Break-even point in sales units Break-even point in sales revenue

Skimmys

Total

b. Chart for part b

d. Response to part d

e. Response to part e

e. Chart for part e

Units 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400

Fixed Costs $ 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200

Student Work Area

a. Table for part a Table to calculate total reven for both products Boogies Revenue $ 640 1,280 1,920 2,560 3,200 3,840 4,480 5,120 5,760 6,400 7,040 7,680 8,320 8,960 9,600 10,240 10,880 11,520 12,160 12,800

c. Calculation of break-even

Break-even point in sales unit Break-even point in sales reve

Units 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400

Fixed Costs $ 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200 9,200

d. Response to part d The point at which the total var break-even point in sales units to the x-axis crosses at approx line drawn to the y-axis from th $16,000, the break-even point

e. Table for part e Table to calculate total reven for both products given chan Boogies Revenue $ 740 1,480 2,220 2,960 3,700 4,440 5,180 5,920 6,660 7,400 8,140 8,880 9,620 10,360 11,100 11,840 12,580 13,320 14,060 14,800

e. Response to part e The break-even point has incre sales revenue appears to be a same mix. If you examine each should see that the number of of 1 to 2. Because Skimmys co Boogies, overall more total uni

The break-even point has incre sales revenue appears to be a same mix. If you examine each should see that the number of of 1 to 2. Because Skimmys co Boogies, overall more total uni

Student Work Area

c. Calculation of break-even points Break-even point in sales units Break-even point in sales revenue

Boogies Skimmys 222 445 $ 7,118 $ 8,453

Total 667 $ 15,571

b. Chart for part b

$30,000

$25,000

Total Revenue and Costs

a. Table for part a Table to calculate total revenue and total variables costs for each product and for both products Boogies Skimmys Total Total Total Fixed Revenue VC Revenue VC Costs Units Costs $ $ $ $ 9,200 $ 9,200 240 760 333 60 1,400 9,773 9,200 480 1,520 666 120 2,800 10,346 9,200 720 2,280 998 180 4,200 10,918 9,200 960 3,040 1,331 240 5,600 11,491 9,200 1,200 3,800 1,664 300 7,000 12,064 9,200 1,440 4,560 1,997 360 8,400 12,637 9,200 1,680 5,320 2,330 420 9,800 13,210 9,200 1,920 6,080 2,662 480 11,200 13,782 9,200 2,160 6,840 2,995 540 12,600 14,355 9,200 2,400 7,600 3,328 600 14,000 14,928 9,200 2,640 8,360 3,661 660 15,400 15,501 9,200 2,880 9,120 3,994 720 16,800 16,074 9,200 3,120 9,880 4,326 780 18,200 16,646 9,200 3,360 10,640 4,659 840 19,600 17,219 9,200 3,600 11,400 4,992 900 21,000 17,792 9,200 3,840 12,160 5,325 960 22,400 18,365 9,200 4,080 12,920 5,658 1,020 23,800 18,938 9,200 4,320 13,680 5,990 1,080 25,200 19,510 9,200 4,560 14,440 6,323 1,140 26,600 20,083 9,200 4,800 15,200 6,656 1,200 28,000 20,656 9,200

$20,000

$15,000

$10,000

$5,000

d. Response to part d The point at which the total variable costs line crosses the total revenue line is the break-even point in sales units. A vertical line drawn down from the break-even point to the x-axis crosses at approximately 667 units as calculated in part b. A horizontal line drawn to the y-axis from the break-even point corresponds to just under $16,000, the break-even point in sales revenue as calculated in part b.

e. Response to part e The break-even point has increased to about 780 units, while the break-even point in sales revenue appears to be about the same. There is not an equal offset due to the same mix. If you examine each level of units sold for Boogies and Skimmys, you should see that the number of Skimmys sold is twice that of Boogies, or a sales mix of 1 to 2. Because Skimmys contribute less per unit to contribution margin than Boogies, overall more total units of product must be sold to breakeven.

e. Chart for part e

$30,000

$25,000

Total Revenue and Costs

e. Table for part e Table to calculate total revenue and total variables costs for each product and for both products given changes in selling prices Boogies Skimmys Total Total Total Fixed Revenue VC Revenue VC Costs Units Costs $ $ $ $ 9,200 $ 9,200 240 560 333 60 1,300 9,773 9,200 480 1,120 666 120 2,600 10,346 9,200 720 1,680 998 180 3,900 10,918 9,200 960 2,240 1,331 240 5,200 11,491 9,200 1,200 2,800 1,664 300 6,500 12,064 9,200 1,440 3,360 1,997 360 7,800 12,637 9,200 1,680 3,920 2,330 420 9,100 13,210 9,200 1,920 4,480 2,662 480 10,400 13,782 9,200 2,160 5,040 2,995 540 11,700 14,355 9,200 2,400 5,600 3,328 600 13,000 14,928 9,200 2,640 6,160 3,661 660 14,300 15,501 9,200 2,880 6,720 3,994 720 15,600 16,074 9,200 3,120 7,280 4,326 780 16,900 16,646 9,200 3,360 7,840 4,659 840 18,200 17,219 9,200 3,600 8,400 4,992 900 19,500 17,792 9,200 3,840 8,960 5,325 960 20,800 18,365 9,200 4,080 9,520 5,658 1,020 22,100 18,938 9,200 4,320 10,080 5,990 1,080 23,400 19,510 9,200 4,560 10,640 6,323 1,140 24,700 20,083 9,200 4,800 11,200 6,656 1,200 26,000 20,656 9,200

$20,000

$15,000

$10,000

$5,000

The break-even point has increased to about 780 units, while the break-even point in sales revenue appears to be about the same. There is not an equal offset due to the same mix. If you examine each level of units sold for Boogies and Skimmys, you should see that the number of Skimmys sold is twice that of Boogies, or a sales mix of 1 to 2. Because Skimmys contribute less per unit to contribution margin than Boogies, overall more total units of product must be sold to breakeven.

Break-even Chart Total Revenue

Total Costs

Total Units

Fixed Costs

Break-even Chart With Increased Selling Price Total Revenue

Total Costs

Total Units

Fixed Costs

EH.1 Compute Target Cost Mesa Cheese Company has developed a new cheese slicer called Slim Slicer. The company plans to sell this slicer through its online website. Given market research, Mesa believes that it can charge $20 for the Slim Slicer. Prototypes of the Slim Slicer, however, are costing $22. By using cheaper materials and gaining efficiencies in mass production, Mesa believes it can reduce Slim Slicer’s cost substantially. Mesa wishes to earn a return of 40% of the selling price.

Instructions a. Compute the target cost for the Slim Slicer. b. When is target costing particularly helpful in deciding whether to produce a given product?

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Market price Desired profit Target cost

When you have completed EH.1, respond to the additional question, on the EH.1 Additional Question worksheet.

EH.1 Solution Mesa Cheese Company has developed a new cheese slicer called Slim Slicer. The company plans to sell this slicer through its online website. Given market research, Mesa believes that it can charge $20 for the Slim Slicer. Prototypes of the Slim Slicer, however, are costing $22. By using cheaper materials and gaining efficiencies in mass production, Mesa believes it can reduce Slim Slicer’s cost substantially. Mesa wishes to earn a return of 40% of the selling price.

Instructions a. Compute the target cost for the Slim Slicer. b. When is target costing particularly helpful in deciding whether to produce a given product?

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Market price Desired profit Target cost

$ $

20.00 8.00 12.00

Target costing is particularly helpful when a company faces a competitive market. In this case, the price is affected by supply and demand, so no company in the industry can affect price. Therefore, to earn a profit, companies must focus on controlling costs.

EH.1 Additional Question Mesa Cheese Company has developed a new cheese slicer called Slim Slicer. The company plans to sell this slicer through its online website. Given market research, Mesa believes that it can charge $20 for the Slim Slicer. Prototypes of the Slim Slicer, however, are costing $22. By using cheaper materials and gaining efficiencies in mass production, Mesa believes it can reduce Slim Slicer’s cost substantially. Mesa wishes to earn a return of 40% of the selling price.

Instructions a. Compute the target cost for the Slim Slicer. b. When is target costing particularly helpful in deciding whether to produce a given product?

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Cost Assume that the company wishes to earn a return of 50% of the selling price and believe that it can sell its product for $21. What is the revised target cost? (Round to 2 decimal points.)

Market price Desired profit Target cost

EH.1 Solution to Additional Question Mesa Cheese Company has developed a new cheese slicer called Slim Slicer. The company plans to sell this slicer through its online website. Given market research, Mesa believes that it can charge $20 for the Slim Slicer. Prototypes of the Slim Slicer, however, are costing $22. By using cheaper materials and gaining efficiencies in mass production, Mesa believes it can reduce Slim Slicer’s cost substantially. Mesa wishes to earn a return of 40% of the selling price.

Instructions a. Compute the target cost for the Slim Slicer. b. When is target costing particularly helpful in deciding whether to produce a given product?

NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Market price Desired profit Target cost

$ $

21.00 10.50 10.50

EH.4 Use cost-plus pricing to determine selling price Kaspar Corporation makes a commercial-grade cooking griddle. The following information is available for Kaspar Corporation’s anticipated annual volume of 30,000 units.

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 17.00 8.00 11.00

Total

300,000

4.00 150,000

The company uses a 40% markup percentage on total cost. Instructions a. Compute the total unit cost. b. Compute the target selling price. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Compute the total unit cost. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Total cost per unit

Compute the target selling price. Total cost per unit Markup Target selling price

Per Unit

When you have completed EH.4, respond to the additional question, on the EH.4 Additional Question worksheet.

EH.4 Solution Kaspar Corporation makes a commercial-grade cooking griddle. The following information is available for Kaspar Corporation’s anticipated annual volume of 30,000 units.

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 17.00 8.00 11.00

Total

300,000

4.00 150,000

Compute the target selling price. Total cost per unit Markup Target selling price

Per Unit $ 17.00 8.00 11.00 10.00 4.00 5.00 $ 55.00

$ $

55.00 22.00 77.00

EH.4 Additional Question Kaspar Corporation makes a commercial-grade cooking griddle. The following information is available for Kaspar Corporation’s anticipated annual volume of 30,000 units.

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 17.00 8.00 11.00

Total

300,000

4.00 150,000

Additional Question Assume that annual volume changed to 25,000 units and the markup percentage changed to 45% on total cost. Show the impact of these changes on total unit cost and target selling price.

Per Unit

Compute the target selling price. Total cost per unit Markup Target selling price

EH.4 Solution to Additional Question Kaspar Corporation makes a commercial-grade cooking griddle. The following information is available for Kaspar Corporation’s anticipated annual volume of 30,000 units.

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 17.00 8.00 11.00

Total

300,000

4.00 150,000

Per Unit $ 17.00 8.00 11.00 12.00 4.00 6.00 $ 58.00

Compute the target selling price. Total cost per unit Markup Target selling price

$ $

58.00 26.10 84.10

EH.5 Use cost-plus pricing to determine various amounts Schopp Corporation makes a mechanical stuffed alligator that sings the Martian national anthem. The following information is available for Schopp Corporation’s anticipated annual volume of 500,000 units.

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 7.00 11.00 15.00

Total

3,000,000

14.00 1,500,000

The company has a desired ROI of 25%. It has invested assets of $28,000,000. Instructions a. Compute the total unit cost. b. Compute the desired ROI per unit. c. Compute the markup percentage using total cost per unit. d. Compute the target selling price. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Per Unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Total unit cost

b. Invested assets Desired ROI percentage Return on investment (net income) Estimated annual sales volume (Units)

Desired ROI per unit (Net income per unit)

c. Desired ROI per unit (Net income per unit) Total unit cost Markup Percentage

d. Total unit cost Desired ROI per unit (Net income per unit) Target selling price

When you have completed EH.5, respond to the additional question, on the EH.5 Additional Question worksheet.

m. The 000 units.

nto the

estion

EH.5 Solution Schopp Corporation makes a mechanical stuffed alligator that sings the Martian national anthem. The following information is available for Schopp Corporation’s anticipated annual volume of 500,000 units.

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 7.00 11.00 15.00

Total

3,000,000

14.00 1,500,000

a. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Total unit cost

b. Invested assets Desired ROI percentage Return on investment (net income) Estimated annual sales volume (Units)

$ $

Per Unit 7.00 11.00 15.00 6.00 14.00 3.00 56.00

28,000,000 25% 7,000,000 500,000

Desired ROI per unit (Net income per unit)

14.00

c. Desired ROI per unit (Net income per unit) Total unit cost Markup Percentage

$ $

14.00 56.00 25%

d. Total unit cost Desired ROI per unit (Net income per unit) Target selling price

56.00 14.00 70.00

EH.5 Additional Question Schopp Corporation makes a mechanical stuffed alligator that sings the Martian national anthem. The following information is available for Schopp Corporation’s anticipated annual volume of 500,000 units.

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 7.00 11.00 15.00

Total

3,000,000

14.00 1,500,000

Additional Question Assume that the company wishes to earn a return of 30% of the selling price. What is the impact of this change on your calculations? (Round to nearest dollar.)

b. Invested assets Desired ROI percentage Return on investment (net income) Estimated annual sales volume (Units) Desired ROI per unit (Net income per unit)

c. Desired ROI per unit (Net income per unit) Total unit cost Markup Percentage

d. Total unit cost Desired ROI per unit (Net income per unit) Target selling price

EH.5 Solution to Additional Question Schopp Corporation makes a mechanical stuffed alligator that sings the Martian national anthem. The following information is available for Schopp Corporation’s anticipated annual volume of 500,000 units.

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 7.00 11.00 15.00

Total

3,000,000

14.00 1,500,000

Additional Question Assume that the company wishes to earn a return of 30% of the selling price. What is the impact of this change on your calculations? (Round to nearest dollar.)

a. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Total unit cost

Per Unit 7.00 11.00 15.00 6.00 14.00 3.00 56.00

b. Invested assets Desired ROI percentage Return on investment (net income) Estimated annual sales volume (Units) Desired ROI per unit (Net income per unit)

c. Desired ROI per unit (Net income per unit) Total unit cost Markup Percentage

$ $

16.80 56.00 30%

d. Total unit cost Desired ROI per unit (Net income per unit) Target selling price

56.00 16.80 72.80

$ $

28,000,000 30% 8,400,000 500,000 16.80

An increase of ROI percentage from 25% to 30% resulted in an increase of desired ROI per unit to $16.80 (instead of $14) and a higher target selling price of $72.80 (instead of $70).

PH.1 Use cost-plus pricing to determine various amounts. National Corporation needs to set a target price for its newly designed product M14–M16. The following data relate to this new product.

Direct materials $ Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 25 40 10

Total

1,440,000

5 960,000

These costs are based on a budgeted volume of 80,000 units produced and sold each year. National uses cost-plus pricing methods to set its target selling price. The markup percentage on total unit cost is 40%. Instructions a. Compute the total unit variable cost, total unit fixed cost, and total unit cost for M14–M16. b. Compute the desired ROI per unit for M14-M16. c. Compute the target selling price for M14-M16. d. Compute unit variable cost, unit fixed cost, and unit total cost assuming that 60,000 M14–M16s are produced and sold during the year. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative exp. Unit variable cost Total costs Fixed manufacturing overhead Fixed selling and administrative exp. Fixed cost per unit

÷ ÷ ÷ ÷

Budgeted Volume

= = = =

Cost per Unit

Unit variable cost Unit fixed cost Total unit cost

b. Total unit cost Markup percentage Desired ROI per unit in dollars

c. Total unit cost Desired ROI per unit in dollars Target selling price

d. Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative exp. Unit variable cost

Total costs Fixed manufacturing overhead Fixed selling and administrative exp. Fixed cost per unit

÷ ÷ ÷ ÷

Budgeted Volume

= = = =

Cost per Unit

Unit variable cost Fixed cost per unit Total cost per unit

When you have completed PH.1, respond to the additional question, on the PH.1 Additional Question worksheet.

The following

National tal unit cost

M16.

M14–M16s are

l), into the

al Question

PH.1 Solution National Corporation needs to set a target price for its newly designed product M14–M16. The following data relate to this new product.

Direct materials $ Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 25 40 10

Total

1,440,000

5 960,000

These costs are based on a budgeted volume of 80,000 units produced and sold each year. National uses cost-plus pricing methods to set its target selling price. The markup percentage on total unit cost is 40%. Instructions a. Compute the total unit variable cost, total unit fixed cost, and total unit cost for M14–M16. b. Compute the desired ROI per unit for M14-M16. c. Compute the target selling price for M14-M16. d. Compute unit variable cost, unit fixed cost, and unit total cost assuming that 60,000 M14–M16s are NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative exp. Unit variable cost

25.00 40.00 10.00 5.00 80.00 Total costs

Fixed manufacturing overhead Fixed selling and administrative exp. Fixed cost per unit

Unit variable cost Unit fixed cost Total unit cost

b. Total unit cost Markup percentage Desired ROI per unit in dollars

$ $

c. Total unit cost Desired ROI per unit in dollars Target selling price

d. Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative exp. Unit variable cost

Fixed manufacturing overhead Fixed selling and administrative exp. Fixed cost per unit Unit variable cost Fixed cost per unit Total cost per unit

1,440,000 960,000 2,400,000

÷ ÷ ÷ ÷

Budgeted Volume 60,000 60,000 60,000

= = =

Cost per Unit $ 18.00 12.00 30.00

= = = =

Cost per Unit $ 24.00 16.00 40.00

80.00 30.00 110.00

110.00 40% 44.00

110.00 44.00 154.00

25.00 40.00 10.00 5.00 80.00

Total costs $ 1,440,000 960,000 $ 2,400,000 $

÷ ÷ ÷

Budgeted Volume 80,000 80,000 80,000

80.00 40.00 120.00

The

National tal unit cost

M16.

M14–M16s

l), into the

PH.1 Additional Question National Corporation needs to set a target price for its newly designed product M14–M16. The following data relate to this new product.

Direct materials $ Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 25.00 40.00 10.00

Total

1,440,000

5.00 960,000

Instructions a. Compute the total unit variable cost, total unit fixed cost, and total unit cost for M14–M16. b. Compute the desired ROI per unit for M14-M16. c. Compute the target selling price for M14-M16. d. Compute unit variable cost, unit fixed cost, and unit total cost assuming that 60,000 M14–M16s are produced and sold during the year. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional Question Assume that the company wishes to earn a return of 45% of the selling price and variable manufacturing overhead costs increase to $12. What is the impact of this change on part (a), (b) and (c) of your calculations? (Round calculation of desired ROI per unit and target selling price to 2 decimal points)

a. Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative exp.

Unit variable cost Total costs Fixed manufacturing overhead Fixed selling and administrative exp. Fixed cost per unit

÷ ÷ ÷

Unit variable cost Unit fixed cost Total unit cost

b. Total unit cost Markup percentage Desired ROI per unit in dollars

c. Total unit cost Desired ROI per unit in dollars Target selling price

$ $

Budgeted Volume

= = = =

Cost per Unit

PH.1 Solution to Additional Question National Corporation needs to set a target price for its newly designed product M14–M16. The following data relate to this new product.

Direct materials $ Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit 25.00 40.00 10.00

Total

1,440,000

5.00 960,000

a. Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative exp.

25.00 40.00 12.00 5.00

Unit variable cost

82.00 Total costs

Fixed manufacturing overhead Fixed selling and administrative exp. Fixed cost per unit

Unit variable cost Unit fixed cost Total unit cost

b. Total unit cost Markup percentage Desired ROI per unit in dollars

c. Total unit cost Desired ROI per unit in dollars Target selling price

$ $

1,440,000 960,000 2,400,000

÷ ÷ ÷ ÷

Budgeted Volume 80,000 80,000 80,000

= = = =

Cost per Unit $ 18.00 12.00 30.00

82.00 30.00 112.00

112.00 45% 50.40

112.00 50.40 162.40

The increase of variable manufacturing overhead to $12 per unit and the increase of markup percentage to 45% resulted in a higher desired ROI per unit of $50.40 (instead of $44) and a higher target selling price of $162.40 (instead of $154).

Using Data Visualization to Analyze Data DA H Data visualization can help Broadway theatre analysts to understand ticket prices.

Example: Ticket prices are dynamic and respond quickly to changes in demand. For example, take a look at the fo chart. How might you explain some of the biggest drops in ticket prices in the first week of 2020? Data based upon percentage change in ticket prices by show during the week ending January 5, 2020 are presented here.

Attendance Attendance Current Previous Week Week

Avg Ticket Price Current Week

HAMILTON 3,194,411 3,646,320 10,757 10,755 THE LION KING 2,493,061 3,484,184 13,431 15,227 WICKED 2,200,110 3,217,944 15,358 17,334 MOULIN ROUGE! 2,085,754 2,716,892 10,469 11,744 ALADDIN 1,807,151 2,462,504 13,622 15,372 WEST SIDE STORY 20201,730,917 1,807,026 13,920 13,920 TO KILL A MOCKINGBIRD1,724,760 2,080,918 11,585 11,597 HARRY POTTER AND THE 1,602,106 CURSED CHILD, 2,049,310 PARTS 12,976 ONE AND TWO 12,976 TINA - THE TINA TURNER1,588,633 MUSICAL 2,276,569 10,381 13,362 AIN'T TOO PROUD 1,507,514 1,865,017 11,022 11,305 HADESTOWN 1,451,289 1,693,119 7,447 7,439 BEETLEJUICE 1,435,799 2,175,859 10,680 13,733 THE BOOK OF MORMON 1,409,907 1,632,087 8,605 8,666 FROZEN 2018 1,397,782 2,186,427 13,453 15,153 THE PHANTOM OF THE OPERA 1,375,934 2,039,104 11,167 14,356 WAITRESS 1,316,747 1,270,490 8,444 8,385 MEAN GIRLS 1,297,303 1,784,978 9,746 10,900 THE ILLUSIONISTS - MAGIC 1,268,153 OF THE HOLIDAYS 2,003,271 2019 11,519 17,517 DEAR EVAN HANSEN 1,245,047 1,625,362 7,995 7,997 AMERICAN UTOPIA 1,237,144 1,102,231 6,709 5,747 JAGGED LITTLE PILL 1,113,295 1,277,012 8,951 8,984 COME FROM AWAY 1,073,381 1,399,907 8,544 8,536 FREESTYLE LOVE SUPREME 971,365 926,817 5,971 5,832 TOOTSIE 955,611 1,092,877 10,827 11,129 CHICAGO 883,805 1,056,682 7,918 8,583 DERREN BROWN: SECRET661,050 714,998 6,005 6,065 THE LIGHTNING THIEF 655,762 656,156 8,298 8,044 SLAVA'S SNOWSHOW 2019570,732 760,863 6,777 7,376 SLAVE PLAY 541,916 490,146 6,017 5,601 OKLAHOMA! 2019 521,044 609,562 5,025 4,986 THE SOUND INSIDE 447,916 479,367 5,511 5,665 A CHRISTMAS CAROL 2019 $418,556 $954,054 4,744 6,758 THE INHERITANCE 409,320 426,366 4,935 4,664 A SOLDIER'S PLAY 286,010 169,754 4,932 2,216 GRAND HORIZONS 151,061 186,295 3,319 3,861 MY NAME IS LUCY BARTON65,298 $ 619

296.96 185.62 143.25 199.23 132.66 124.35 148.88 123.47 153.03 136.77 194.88 134.44 163.85 103.90 123.21 155.94 133.11 110.09 155.73 184.40 124.38 125.63 162.68 88.26 111.62 110.08 79.03 84.22 90.06 103.69 81.28 $88.23 82.94 57.99 45.51 105.49

Show

Gross Revenue

Gross Previous Week

Avg Ticket Price Prev Week

339.03 228.82 185.64 231.34 160.19 129.82 179.44 157.93 170.38 164.97 227.60 158.44 188.33 144.29 142.04 151.52 163.76 114.36 203.25 191.79 142.14 164.00 158.92 98.20 123.11 117.89 81.57 103.15 87.51 122.25 84.62 $141.17 91.42 76.60 48.25

Source: https://www.broadwayleague.com/research/grosses-broadway-nyc/#weekly_grosses

You can see that A Christmas Carol has the biggest average weekly price drop. Since the data are from Janua February, and March 2020, we would expect this drop. The show would have had its highest sales and prices in No and December, during the holiday season. Using data analytics to get big-picture results often leads to additional a this case, you will use tree map visualizations and an Excel combo chart to delve deeper into the possible causes a of dynamic Broadway ticket prices. The tree map displays the top 10 shows by revenue. Are you able to see which shows produced the largest rev Hamilton, The Lion King, and Wicked are the top revenue producers during the time period covered by the data.

Column Chart of Percentage Change in Ticket Prices by Show During the First W

le, take a look at the following 20? Data based upon the sented here.

THE ILLUSIONISTS - MAGIC OF THE…

MEAN GIRLS

WAITRESS

THE PHANTOM OF THE OPERA

FROZEN 2018

THE BOOK OF MORMON

BEETLEJUICE

HADESTOWN

AIN'T TOO PROUD

TINA - THE TINA TURNER MUSICAL

HARRY POTTER AND THE CURSED…

TO KILL A MOCKINGBIRD

WEST SIDE STORY 2020

ALADDIN

MOULIN ROUGE!

WICKED

2.9%

5.0% 0.0%

PERCENTAGE CHANGE

-42.07 -12.4% -43.20 -18.9% -42.39 -22.8% -32.11 -13.9% -27.53 -17.2% -5.47 -4.2% -30.56 -17.0% -34.46 -21.8% -17.34 -10.2% -28.20 -17.1% -32.72 -14.4% -24.00 -15.1% -24.48 -13.0% -40.39 -28.0% -18.82 -13.3% 4.42 2.9% -30.65 -18.7% -4.27 -3.7% -47.52 -23.4% -7.39 -3.9% -17.77 -12.5% -38.37 -23.4% 3.76 2.4% -9.94 -10.1% -11.49 -9.3% -7.81 -6.6% -2.54 -3.1% -18.94 -18.4% 2.55 2.9% -18.56 -15.2% -3.34 -3.9% -$52.95 -37.5% -8.47 -9.3% -18.61 -24.3% -2.74 -5.7% 105.49 #DIV/0!

HAMILTON

Change in % Change Price in Price

THE LION KING

Percentage Change in Ticket Prices by Show during the

-5.0%

-3.7%

-4.2%

-10.0% -10.2%

-15.0% -12.4% -20.0% -25.0%

-18.9%

-13.9% -17.2% -17.0%

-22.8%

-13.0% -13.3% -14.4% -15.1% -17.1%

-21.8%

-30.0% -35.0% -40.0%

Tree Map of Top Revenue Producting Shows

-18.7% -23.4%

-28.0%

he data are from January, sales and prices in November n leads to additional analysis. In the possible causes and effects

roduced the largest revenue? overed by the data.

3.7%

-23.4% -3.9%

-12.5% 2.4%

-3.1% -6.6% -9.3% -10.1%

-23.4%

-37.5%

-3.9%

2.9%

-9.3%

-18.4% -15.2%

-24.3% -5.7%

MY NAME IS LUCY BARTON

GRAND HORIZONS

A SOLDIER'S PLAY

THE INHERITANCE

A CHRISTMAS CAROL 2019

THE SOUND INSIDE

OKLAHOMA! 2019

SLAVE PLAY

SLAVA'S SNOWSHOW 2019

THE LIGHTNING THIEF

DERREN BROWN: SECRET

CHICAGO

TOOTSIE

FREESTYLE LOVE SUPREME

COME FROM AWAY

JAGGED LITTLE PILL

AMERICAN UTOPIA

DEAR EVAN HANSEN

THE ILLUSIONISTS - MAGIC OF THE…

ces by Show during the First Week of 2020

0.0%

Using Data Visualization to Analyze Data DA H Data analytics can help Broadway theatre analysts understand ticket trends and opportunities. As chair of training for a national professional association, you are organizing a training conference in New York City. Among necessary costs such as meals, conference facility rental, and entertainment, you want to keep the cost as reasonable as possible. Each year, the conference participants have enjoyed attending a Broadway show which is included with the registration. One challenge for you is to examine show ticket prices and select a popular show. Two factors that indicate the popularity of shows are total revenue and attendance. You have waited until a couple of weeks before the conference to examine these factors. A table containing gross revenue, attendance, and the percent of capacity of attendees from 29 Broadway shows for the week ending March 8, 2020 are presented here.

Show WEST SIDE STORY 2020

Gross Revenue $

Gross Previous Week

Attendance Current Average % of Week Ticket Price Capacity

1,503,738 $

1,598,947

13,920

108.03

100%

1,002,597

1,092,063

13,290

75.44

90%

HARRY POTTER AND THE CURSED CHILD, 994,703 PARTS ONE 838,927 AND TWO 12,863

77.33

99%

WICKED

1,254,306

1,202,090

12,479

100.51

90%

THE LION KING

1,186,505

1,414,594

12,391

95.76

88%

FROZEN 2018

798,610

925,094

12,323

64.81

81%

BEETLEJUICE

1,023,780

1,077,912

11,373

90.02

90%

HAMILTON

2,688,721

2,696,189

10,756 $

249.97

102%

MOULIN ROUGE!

1,514,717

1,571,114

10,416

145.42

98%

TINA - THE TINA TURNER MUSICAL 1,225,999

1,320,766

10,004

122.55

80%

TO KILL A MOCKINGBIRD

1,237,497

1,132,279

9,811

126.13

91%

AIN'T TOO PROUD

$920,904

$1,015,750

9,364

98.35

80%

MEAN GIRLS

775,193

778,089

8,873

87.37

88%

THE PHANTOM OF THE OPERA

652,565

639,216

8,856

73.69

68%

COME FROM AWAY

797,781

804,636

8,418

94.77

100%

JAGGED LITTLE PILL

801,671

845,496

8,326

96.29

93%

SIX

884,878

896,885

8,066

109.70

99%

THE BOOK OF MORMON

929,168

897,000

7,960

116.73

98%

DEAR EVAN HANSEN

981,271

965,733

7,638

128.47

98%

1,086,478

1,016,675

7,389

147.04

101%

CHICAGO

536,991

546,842

6,537

82.15

75%

THE MINUTES

419,765

437,237

6,270

66.95

67%

GIRL FROM THE NORTH COUNTRY 477,388

503,694

6,156

77.55

79%

ALADDIN

HADESTOWN

THE INHERITANCE

430,157

409,086

5,328

80.74

70%

HANGMEN

357,100

139,321

1,542

231.58

83%

COMPANY 2020

779,588

102%

DIANA

376,471

86%

THE LEHMAN TRILOGY

188,126

100%

WHO'S AFRAID OF VIRGINIA WOOLF?344,818 2020

94%

Source: https://www.broadwayleague.com/research/grosses-broadway-nyc/#weekly_grosses

There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Sort the data in the data table above in order of the largest to smallest attendance. Create a tree map visualization for the top 16 shows based upon ticket prices for the week of March 8, 2020. Include a descriptive chart title. b. Create a second tree map visualization, again sorted by attendance, for the top 16 shows based upon the largest attendance for the week ending March 8, 2020. Include a descriptive chart title. c. Examine the two charts. What are the top 3 shows based on attendance, and what are the top 3 in ticket prices? What might cause a difference between the two? d. Create a visualization using a combo chart for the top 16 shows with a clustered columns for attendance and a line chart for ticket prices on the secondary axis. Include a descriptive chart title and labeled vertical axes. Hint: Combo chart is a chart option in Excel. e. Does it appear that the shows with the highest ticket prices derive their respective rankings from high attendance, or a combination? What insights can help you choose the 'best' show for the conference? Suggest another analysis that may help finalizing the selection for the choice.

and

nference in rtainment, you ave enjoyed s to examine ows are total o examine attendees

Student Work Area a. Chart for part a

b. Chart for part b

c. Response to part c

instructor’s

eate a tree h 8, 2020.

ows based chart title. e the top 3 in

mns for ve chart title

d. Chart for part d

kings from w for the oice.

e. Response to part e

Using Data Visualization to Analyze Data DA H Data analytics can help Broadway theatre analysts understand ticket trends and opportunities. As chair of training for a national professional association, you are organizing a training conference in New York City. Among necessary costs such as meals, conference facility rental, and entertainment, you want to keep the cost as reasonable as possible. Each year, the conference participants have enjoyed attending a Broadway show which is included with the conference registration fee. One challenge for you is to examine show ticket prices and select a popular show. Two factors that indicate the popularity of shows are total revenue and attendance. You have waited until a couple of weeks before the conference to examine these factors. A table containing gross revenue, attendance, and the percent of capacity of attendees from 29 Broadway shows for the week ending March 8, 2020 are presented here.

Show WEST SIDE STORY 2020

Gross Revenue $

Gross Previous Week

Attendance Current Average % of Week Ticket Price Capacity

1,503,738 $

1,598,947

13,920

108.03

100%

1,002,597

1,092,063

13,290

75.44

90%

HARRY POTTER AND THE CURSED CHILD, 994,703 PARTS ONE 838,927 AND TWO 12,863

77.33

99%

WICKED

1,254,306

1,202,090

12,479

100.51

90%

THE LION KING

1,186,505

1,414,594

12,391

95.76

88%

FROZEN 2018

798,610

925,094

12,323

64.81

81%

BEETLEJUICE

1,023,780

1,077,912

11,373

90.02

90%

HAMILTON

2,688,721

2,696,189

10,756 $

249.97

102%

MOULIN ROUGE!

1,514,717

1,571,114

10,416

145.42

98%

TINA - THE TINA TURNER MUSICAL 1,225,999

1,320,766

10,004

122.55

80%

TO KILL A MOCKINGBIRD

1,237,497

1,132,279

9,811

126.13

91%

AIN'T TOO PROUD

$920,904

$1,015,750

9,364

98.35

80%

MEAN GIRLS

775,193

778,089

8,873

87.37

88%

THE PHANTOM OF THE OPERA

652,565

639,216

8,856

73.69

68%

COME FROM AWAY

797,781

804,636

8,418

94.77

100%

JAGGED LITTLE PILL

801,671

845,496

8,326

96.29

93%

SIX

884,878

896,885

8,066

109.70

99%

THE BOOK OF MORMON

929,168

897,000

7,960

116.73

98%

DEAR EVAN HANSEN

981,271

965,733

7,638

128.47

98%

1,086,478

1,016,675

7,389

147.04

101%

CHICAGO

536,991

546,842

6,537

82.15

75%

THE MINUTES

419,765

437,237

6,270

66.95

67%

GIRL FROM THE NORTH COUNTRY 477,388

503,694

6,156

77.55

79%

ALADDIN

HADESTOWN

THE INHERITANCE

430,157

409,086

5,328

80.74

70%

HANGMEN

357,100

139,321

1,542

231.58

83%

COMPANY 2020

779,588

102%

DIANA

376,471

86%

THE LEHMAN TRILOGY

188,126

100%

WHO'S AFRAID OF VIRGINIA WOOLF?344,818 2020

94%

Source: https://www.broadwayleague.com/research/grosses-broadway-nyc/#weekly_grosses

There are five parts to this problem. Use Excel or the visualization software of your or your instructor’s choice to perform the following: a. Sort the data in the data table in order of the largest to smallest attendance. Create a tree map visualization for the top 16 shows based upon ticket prices for the week of March 8, 2020. Include a descriptive chart title. b. Create a second tree map visualization, again sorted by attendance, for the top 16 shows based upon the largest attendance for the week ending March 8, 2020. Include a descriptive chart title. c. Examine the two charts. What are the top 3 shows based on attendance, and what are the top 3 in ticket prices? What might cause a difference between the two? d. Create a visualization using a combo chart for the top 16 shows with clustered columns for attendance and a line chart for ticket prices on the secondary axis. Include a descriptive chart title and labeled vertical axes. Hint: Combo chart is a chart option in Excel. e. Does it appear that the shows with the highest ticket prices derive their respective rankings from high attendance, or a combination? What insights can help you choose the 'best' show for the conference? Suggest another analysis that may help finalizing the selection for the choice.

and

nference in rtainment, you ave enjoyed allenge for you opularity of he conference f capacity of e.

Student Work Area a. Chart for part a

b. Chart for part b

instructor’s

c. Response to part c Of the top 16 attended shows, Hamilton commanded the largest ticket prices, followed by Moulin Rouge and To Kill a Mockingbird. In general, the theaters are able to charge more for the most popular shows. However, as seen on the second tree map, the most well attended shows were West Side Story 2020, Aladdin, and Harry Potter and the Cursed Child. Factors that may cause ticket prices to not be as expected include how many weeks the show has been on Broadway, competing films, popularity of performers, and others.

tree map 020. Include a

ows based chart title. e the top 3 in

kings from w for the oice.

d. Chart for part d

Ticket Prices vs. Attendance for the Top 16 Attended Shows

Attendance

ns for ve chart title

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

Attendance Current Week

Average Ticket Price

e. Response to part e In general, the theaters are able to charge more for the most popular shows. However, the show with the highest ticket prices, Hamilton, may not appear as the most well attended of the top 16 shows due to the theater's capacity. There are 7 shows with higher attendance. perhaps due to higher capacity theaters, that have significantly lower ticket prices. The 'best' choice is West Side Story 2020 as it's attendance indicates popularity, followed by Aladdin, and neither of these shown have significantly large ticket prices. Another helpful analysis to help solidify the show choice would be to compare weekly attendance with ticket prices. Some shows may be declining in attendance suggesting declining popularity over time. This will help visualize the trends in average ticket prices over time.

'best' choice is West Side Story 2020 as it's attendance indicates popularity, followed by Aladdin, and neither of these shown have significantly large ticket prices. Another helpful analysis to help solidify the show choice would be to compare weekly attendance with ticket prices. Some shows may be declining in attendance suggesting declining popularity over time. This will help visualize the trends in average ticket prices over time.

prices, followed by ble to charge more p, the most well and the Cursed de how many weeks mers, and others.

Attended Shows

hows. However, the most well attended of higher attendance. cket prices. The larity, followed by es. Another helpful attendance with declining popularity er time.

$250 $200 $150

$100 $50 $-

Ticket Prices

$300

larity, followed by es. Another helpful attendance with declining popularity er time.

APPENDIX H Pricing Learning Objectives 1. 2. 3. 4.

Compute a target cost when the market determines a product price. Compute a target selling price using cost-plus pricing. Use time-and-material pricing to determine the cost of services provided. Determine a transfer price using the negotiated, cost-based, and market-based approaches.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

H-1

ANSWERS TO QUESTIONS 1.

The first type of pricing environment is where the company is a price taker; that is, the company does not set the price, but instead the price is set by a competitive market. In the second type of situation, the company sets the price. This happens most often when the product is specially made for a customer or there are few or no other producers capable of manufacturing a similar item.

LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

A company focuses on target cost when it cannot influence the market price. The target cost is determined by subtracting the desired profit per unit from the market-determined selling price.

LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

IMA: Decision Analysis

The basic formula to determine the target selling price in cost-plus pricing is: Target selling price = Cost + Markup

LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

IMA: Decision Analysis

The basic formula to determine the target selling price in cost-plus pricing is: Target unit selling = Cost + (Markup percentage × Cost) price $23.40 = $18 + (30% × $18)

LO2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement [$18 + (30% × $18) = $23.40] [Cost + (Markup % × Cost) = Target sell. price]

The basic formula to compute the markup percentage is: Markup percentage =

Markup (Desired ROI per unit) Total unit cost

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

IMA: Decision Analysis

Total unit cost base, excluding selling and administrative expenses ............................... Unit selling and administrative expenses ........................................................................ Total unit cost .................................................................................................................

$60 15 $75

The markup percentage is computed as follows: $6 = 8% $75 LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [($60 + $15 = $75); ($6 ÷ $75 = 8%)] [Unit cost excluding S&A + Unit S&A = Tot. unit cost); (ROI/unit ÷ Tot. unit cost = Markup %)]

The markup percentage is: $6 = 24% $25 Unit variable cost ............................................................................................................ Unit fixed cost ................................................................................................................. Desired ROI per unit ....................................................................................................... Target unit selling price...................................................................................................

$16 9 6 $31

LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [($16 + $9 + $6 = $31); ($6 ÷ ($16 + $9)= 24%)] [(Unit VC + Unit FC + Desired ROI/unit = Target sell. price); (Desired ROI/unit ÷ (Unit VC + Unit FC) = Markup %)]

H-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Appendix H Questions (Continued) 8.

Time-and-material pricing is most often used in service industries. It involves two pricing rates, one for the labor used on a job, while the other involves the materials used. Each typically has a profit rate factored into it.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

The material loading charge is a fee added to each bill to cover the costs of purchasing, receiving, handling, and storing materials, plus any desired profit margin on the materials themselves. The material loading charge is expressed as a percentage of the total estimated costs of parts and materials for the year.

LO3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

*10.

A transfer price is the price used to record the transfer of goods or services between two divisions in the same company. Setting a fair transfer price is important because an improper price will benefit one division while hurting the other.

LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

*11.

The objective of an appropriate transfer price is to maximize the return to the whole company and not cause divisional performance to decline.

LO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

*12.

The three approaches for determining transfer prices are: (1) Negotiated transfer prices (2) Cost-based transfer prices (3) Market-based transfer prices

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

*13.

When a cost-based transfer price is used, the exchange of goods between divisions is recorded by using the costs incurred by the selling division. This may either be the variable costs or the variable costs with an additional markup to cover fixed costs. The primary advantage of this approach is that it is relatively simple to use. The disadvantage is that it understates the selling division’s contribution to the company’s total contribution margin. Finally, it reduces the selling division’s incentive to control cost.

LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA Decision Analysis

*14.

The general formula for determining the minimum transfer price that the selling division should be willing to accept is: Minimum transfer price = Variable cost + Opportunity cost

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

*15.

When determining the minimum transfer price, the opportunity cost is the contribution margin that would be received if the goods were sold externally.

LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

*16.

A company is likely to use a negotiated transfer price rather than a market-based price when the selling division has excess capacity, and is therefore eager to expand production, or when a market price does not exist (e.g., for a special order).

LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

H-3

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE H.1 In order to obtain a profit of $10 per drive, Ortega must set its target cost at $35 per drive ($45 – $10). It will then need to form a design team that will design a product that will meet quality specifications without exceeding the target cost. LO1 BT: AP Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

BRIEF EXERCISE H.2 Direct materials ....................................................................................... Direct labor .............................................................................................. Variable manufacturing overhead .......................................................... Fixed manufacturing overhead .............................................................. Variable selling and administrative expenses ....................................... Fixed selling and administrative expenses ........................................... Total unit cost .................................................................................. Total unit cost

(Markup percentage × Total unit cost)

$56

(30%×$56)

$12 8 6 14 4 12 $56

= Target unit selling price =

$72.80

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [($12 + $8 + $6 + $14 + $4 + $12 = $56); ($56 + (30% × $56) = $72.80)] [(DM/unit + DL/unit + Var. mfg. OH/unit + Fix. mfg. OH/unit + Var. S&A exp./unit + Fix. S&A exp./unit = Tot. unit cost); (Tot. unit cost + (Markup % × Tot. unit cost) = Target unit sell. price)]

BRIEF EXERCISE H.3 ROI per unit = =

(Total investment × Desired ROI percentage) Number of units ($10,000,000 × 12%) 50,000

= $24

LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [($10,000,000 × 12%) ÷ 50,000 = $24] [(Tot. invest. × Desired ROI %) ÷ No. of units = ROI/unit]

H-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE H.4 The markup percentage would be: $30 = 18.75% $36 + $24 + $18 + $40 + $14 + $28 LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [$30 ÷ ($36 + $24 + $18 + $40 + $14 + $28) = 18.75%] [Desired ROI/unit ÷ (DM/unit + DL/unit + VOH/unit + FOH/unit + Var. S&A/unit + Fix. S&A/unit) = Markup %]

BRIEF EXERCISE H.5 The markup percentage is equal to Desired ROI per unit divided by total unit cost. The desired ROI per unit is computed as follows: Desired ROI per unit =

$1,500,000 × 20% = $30 10,000 units

[($1,500,000 × 20%) ÷ 10,000 = $30] [(Investment × Bud. ROI %) ÷ Est. units of prod. = Desired ROI/unit]

The total unit cost is computed as follows: Total unit cost =

$1,100,000 + $100,000 = $120 10,000 units

[($1,100,000 + $100,000) ÷ 10,000 = $120] [(VC + FC) ÷ Est. units of prod. = Tot. unit cost]

The markup percentage is computed as follows: Desired ROI per unit = Total unit cost

$30 = 25% $120

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

BRIEF EXERCISE H.6 Rooney’s total bill would equal: (10.5 hours × $42) + $700 + ($700 × 40%) = $1,421 LO3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(10.5 × $42) + $700 + ($700 × 40%) = $1,421] [(No. hrs. worked × Hrly. rate) + Mat. used + (Mat. used × Mat. loading %) = Tot. bill]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

H-5

BRIEF EXERCISE H.7 The minimum unit transfer price is equal to the division’s unit variable cost plus its opportunity cost. The opportunity cost is equal to its contribution margin on goods sold to external parties. Thus, the minimum transfer price in this case is: Minimum unit transfer price = $25 + ($45 – $25) = $45. LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [$25 + ($45 - $25) = $45] [Unit VC + (Lost USP – Unit VC) = Min. unit transfer price]

BRIEF EXERCISE H.8 If the division has excess capacity, then its opportunity cost is zero. In this case, the minimum transfer price is: Minimum unit transfer price = $25 + $0 = $25. LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis ($25 + $0 = $25) (UVC + Opp. Cost = Min. unit transfer price)

BRIEF EXERCISE H.9 The minimum unit transfer price is equal to the division’s unit variable cost plus its opportunity cost. In this case the minimum transfer price is: Minimum transfer price = $27 + ($45 – $25) = $47. LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [$27 + ($45 - $25) = $47] [New UVC + (Lost USP – Regular UVC) = Min. unit transfer price]

H-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DO IT! EXERCISES DO IT! H.1 The desired profit for this new product line is $320,000 ($2,000,000 × 16%) Each filter must result in $0.32 of profit ($320,000 ÷ 1,000,000 units) [($2,000,000 × 16%) ÷ 1,000,000 = $0.32] [(Invest. × Min. ROR) ÷ Est. no. of units to be sold = Profit/filter]

Market price – Desired profit = Target cost per unit $3 – $0.32 = $2.68 per unit LO1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

DO IT! H.2 Direct materials.............................................................. Direct labor .................................................................... Variable manufacturing overhead ................................ Fixed manufacturing overhead ..................................... Variable selling and administrative expenses ............. Fixed selling and administrative expenses ................. Total unit costs ........................................................

$18 9 5 6 3 7 $48

Total unit cost + (Total unit cost × Markup percentage) = Target unit selling price

$48

($48 × 30%)

$62.40

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [($18 + $9 + $5 + $6 + $3 + $7) + ($48 × 30%) = $62.40] [(DM/unit + DL/unit + VOH/unit + Fix. OH/unit + Var. S&A/unit + Fix. S&A/unit) + (Tot. unit cost × Markup %) = Target unit sell. price]

DO IT! H.3

Repair-technicians’ wages Fringe benefits Overhead

Total Cost ÷ Total Hours = $110,000 5,000 40,000 5,000 50,000 5,000 $200,000 5,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

Per Hour Charge $22 8 10 $40 20 $60

(For Instructor Use Only)

H-7

DO IT! H.3 (Continued) Materials cost .............................................. Materials loading charge ($70 × 60%) ........ Total materials cost .....................................

$ 70 42 $112

Cost of dishwasher repair Labor costs ($60 × 1.5) ........................ Materials cost ...................................... Total repair cost ..........................................

$ 90 112 $202

LO3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(($110,000 ÷ 5,000) + ($40,000 ÷ 5,000) + ($50,000 ÷ 5,000) + $20 = $60); (($60 × 1.5) + $70 + ($70 × 60%) = $202)] [((Repair-tech. wages ÷ Tot. Hrs.) + (Fringe bene. ÷ Tot. hrs.) + (OH ÷ Tot. hrs.) + Profit margin = Hrly. labor rate); ((Hrly. labor rate × No. hrs. worked) + Mat. cost + (Mat. cost × Mat. loading charge) = Tot. repair bill)]

DO IT! H.4 (a)

Minimum transfer price = Unit variable cost + Unit opportunity cost $2.80 = $2.80 ($3 – $0.20) + $0

[($3.00 - $0.20) + $0 = $2.80] [(UVC – Reduction in zipper cost/unit) + Opp. cost = Min. transfer price]

(b)

Minimum transfer price = Unit variable cost + Unit opportunity cost $7.80 = $2.80 ($3 – $0.20) + $5 ($8 – $3)

[($3.00 - $00.20) + ($8.00 - $3.00) = $7.80] [(UVC – Reduction in zipper cost/unit) + (Lost USP – UVC) = Min. unit transfer price] LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

H-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO EXERCISES EXERCISE H.1 (a)

The target cost formula is: Target unit cost = Market price – Desired profit. In this case, the market price is $20 and the desired profit is $8 (40% × $20). Therefore, the target cost is $12 ($20 – $8).

[$20 – ($20 × 40%) = $12] [Unit mkt. price– (Unit mkt. price × Markup %) = Target unit cost]

(b)

Target costing is particularly helpful when a company faces a competitive market. In this case, the price is affected by supply and demand, so no company in the industry can affect price. Therefore to earn a profit, companies must focus on controlling costs.

LO1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.2 The following formula may be used to determine return on investment Investment $8,000,000

× ×

ROI percentage = Return on investment 20% = $1,600,000

Return on investment per unit is then $16 ($1,600,000 ÷ 100,000) The target unit cost is therefore $74 computed as follows: Target unit cost = Unit market price – Desired unit profit $74 = $90 – $16 LO1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [$90 – (($8,000,000 × 20%) ÷ 100,000) = $74] [Unit mkt. price – ((Invest. × ROI %) ÷ Units sold) = Target unit cost]

EXERCISE H.3 (a)

(1) In this case the unit selling price would be $125 ($100 + [$100 × 25%]). The problem with the $125 is that it is unlikely that Leno will be able to sell any Performance suits at that price. Market research seems to indicate that it will sell for only $100. (2) One way that Leno might consider manufacturing the Performance swimsuit is if it has excess capacity and therefore manufacturing the Performance will not affect fixed costs. Thus, if the company can cover its variable costs, it might want to sell at the $100 level.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-9

EXERCISE H.3 (Continued) (b)

In this case, the amount would be the unit selling price of $100.

(c)

The highest acceptable cost would be the target unit cost. The target unit cost is $75 as shown below: Target unit cost = Unit market price – Desired unit profit $75 = $100 – $25

[$100 – $25 = $75] [Mkt. price – Desired profit = Target cost] LO1, 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.4 (a) Total unit cost: Per Unit Direct materials .......................................................................... $17 Direct labor................................................................................. 8 Variable manufacturing overhead ............................................ 11 Fixed manufacturing overhead ($300,000 ÷ 30,000) ................................................................ 10 Variable selling and administrative expenses ......................... 4 Fixed selling and administrative expenses ($150,000 ÷ 30,000) ................................................................ 5 $55 (b) Target selling price = $55 + (40% × $55) = $77 [($17 + $8 + $11 + $10 + $4 + $5) + ($55 x 40%) = $77] [(DM/unit + DL/unit + VOH/unit + FOH/unit + Var. S&A/unit + Fix. S&A/unit) + (Tot. unit cost × Markup %) = Target unit sell. price] LO2 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

H-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE H.5 (a) Total unit cost: Per Unit Direct materials ......................................................................... $ 7 Direct labor ................................................................................ 11 Variable manufacturing overhead ............................................ 15 Fixed manufacturing overhead ($3,000,000 ÷ 500,000) ........................................................... 6 Variable selling and administrative expenses ......................... 14 Fixed selling and administrative expenses ($1,500,000 ÷ 500,000) ........................................................... 3 $56 ($7 + $11 +$15 + $6 + $14 + $3 = $56) (DM/unit + DL/unit + VOH/unit + FOH/unit + Var. S&A/unit + Fix. S&A/unit = Tot. unit cost)

(b) Desired ROI per unit = (25% × $28,000,000) ÷ 500,000 = $14 [($28,000,000 × 25%) ÷ 500,000 = $14] [(Investment x Desired ROI %) ÷ Ann. no. of units = Desired ROI/unit]

25%

($14 ÷ $56 = 25%) (Desired ROI/unit ÷ Tot. unit cost = Markup %)

(d) Target unit selling price = $56 + ($56 × 25%) = $70 LO2 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.6 (a)

Total cost per session: Direct materials ................................................. Direct labor ........................................................ Variable overhead ............................................. Fixed overhead ($950,000 ÷ 1,000) ................... Variable selling & administrative expenses .... Fixed selling & administrative expenses ($500,000 ÷ 1,000) .......................................... Total cost per session ..............................

Per Session $ 20 400 50 950 40 500 $1,960

($20 + $400 + $50 + $950 + $40 + $500 = $1,960) (DM/session + DL/ session + VOH/ session + FOH/ session + Var. S&A/ session + Fix. S&A/ session = Tot. cost/ session)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-11

EXERCISE H.6 (Continued) (b)

Desired ROI per session = (20% × $2,352,000) ÷ 1,000 = $470.40

(c)

Mark-up percentage on total cost per session = $470.40 ÷ $1,960 = 24%

[(($2,352,000 × 20%) ÷ 1,000) ÷ $1,960 = 24%] [((Investment × Desired ROI %) ÷ Ann. no. of sessions) ÷ Tot. cost/session = Markup % on tot. cost/session]

(d)

Target price per session = $1,960 + ($1,960 × 24%) = $2,430.40

LO2 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.7 (a) Unit fixed manufacturing overhead Unit fixed selling and administrative expenses

(b) Desired ROI per unit

$1,500,000 = $500 per unit 3,000

$324,000 = 3,000

20% × $54,000,000 3,000

= $108 per unit

= $3,600 per unit

(c) Direct materials .......................................................................... Direct labor................................................................................. Variable manufacturing overhead ............................................ Fixed manufacturing overhead ................................................. Variable selling and administrative expenses ......................... Fixed selling and administrative expenses ............................. Total unit cost ............................................................................ Desired ROI per unit .................................................................. Target unit selling price ............................................................

Per Unit $ 380 290 72 500 55 108 1,405 3,600 $5,005

[($380 + $290 + $72 + ($1,500,000 ÷ 3,000) + $55 + ($324,000 ÷ 3,000) + (($54,000,000 × 20%) ÷ 3,000) = $5,005][(DM/unit + DL/unit + VOH/unit + FOH/unit + Var. S&A/unit + Fix. S&A/unit) + Desired ROI/unit = Target unit sell. price] LO2 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

H-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE H.8 (a) Total Cost Hourly labor rate for repairs Technician’s wages and benefits Overhead costs Office employee’s salary and benefits Other overhead

Per Hour Charge

Total ÷ Hours =

$228,000 ÷

7,600 =

$30

38,000 ÷ 15,200 ÷ $281,200 ÷

7,600 = 7,600 = 7,600 =

5 2 37 30 $67

Profit margin Rate charged per hour of labor

[($228,000 ÷ 7,600) + ($38,000 ÷ 7,600) + ($15,200 ÷ 7,600) + $30 = $67] [(Tech. wages & bene. ÷ Tot. hrs.) + (Off. emp. sal. & bene. ÷ Tot. hrs.) + (Other OH ÷ Tot. hrs.) + Profit margin = Labor rate/hr.]

(b)

Total Material Invoice Cost, Material Loading Parts and Loading Charges ÷ Materials = Percentage Overhead costs Parts manager’s salary and benefits Office employee’s salary and benefits Other overhead

$42,500 9,000 51,500 ÷ 24,000 ÷ $75,500 ÷

$400,000 $400,000 $400,000

Profit margin Material loading percentage

= = =

12.875% 6.000% 18.875% 20.000% 38.875%

[(($42,500 + $9,000) ÷ $400,000)+ ($24,000 ÷ $400,000) + 20.000% = 38.875%] [((Parts mgr. sal. & bene. + Off. emp. sal. & bene.) ÷ Tot. cost mat. & parts) + (Other OH ÷ Tot. cost mat. & parts) + Profit margin = Mat. loading %]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-13

EXERCISE H.8 (Continued) (c) Job: Pace Corporation—Rebuild spot welder Labor charges 40 hours @ $67 ........................................... Material charges Cost of parts and materials ........................ Material loading charge (38.875% × $2,000) ................................... Total price of labor and material ..........

$2,680.00 $2,000.00 777.50

2,777.50 $5,457.50

LO3 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.9 (a) Hourly labor rate for repairs Technician’s wages and benefits Overhead costs Office employee’s salary and benefits Other overhead

Total Cost

Total Per Hour ÷ Hours = Charge

$150,000

÷ 6,250 = $24.00

30,000 15,000 $195,000

÷ 6,250 = ÷ 6,250 = ÷ 6,250 =

Profit margin Rate charged per hour of labor

4.80 2.40 31.20 38.00 $69.20

[($150,000 ÷ 6,250) + ($30,000 ÷ 6,250) + ($15,000 ÷ 6,250) + $38.00 = $69.20] [(Tech. wages & bene. ÷ Tot. hrs.) + (Off. emp. sal. & bene. ÷ Tot. hrs.) + (Other OH ÷ Tot. hrs.) + Profit margin = Labor rate/hr.]

(b)

H-14

$34,000 15,000 49,000 ÷ 42,000 ÷ $91,000 ÷

$700,000 $700,000 $700,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

= =

7.00% 6.00% 13.00% 80.00% 93.00%

(For Instructor Use Only)

EXERCISE H.9 (Continued) [(($34,000 + $15,000) ÷ $700,000) + ($42,000 ÷ $700,000) + 80.00% = 93.00%] [((Parts mgr.’s sal. & bene. + Off. emp. sal. & bene.) ÷ Tot. cost parts & mat.) + (Other OH ÷ Tot. cost parts & mat.) + Profit margin = Mat. loading %]

(c) Job: Buil Builders Labor charges 80 hours @ $69.20 ................................ Material charges Cost of parts and materials.................. Material loading charge (93% × $40,000) ................................. Total price of labor and material ...

$ 5,536 $40,000 37,200

77,200 $82,736

LO3 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.10 (a)

Total Cost Hourly labor rate: Restorers’ wages and fringes Overhead costs: Administrative salaries & fringes Other overhead costs Total hourly cost

Total ÷ Hours

Hourly = Charge

$270,000 ÷

12,000 =

$22.50

54,000 ÷ 24,000 ÷ $348,000 ÷

12,000 = 12,000 = 12,000 =

4.50 2.00 $29.00

Profit margin = Hourly rate – total hourly cost = $70.00 – $29.00 = $41.00 [(($270,000 ÷ 12,000) + ($54,000 ÷ 12,000) + ($24,000 ÷ 12,000) = $29.00); ($70 – $29 = $41)] [((Restorer’s wages & fringes ÷ Tot. hrs.) + (Admin. sal. & fringes ÷ Tot. hrs.) + (Other OH costs ÷ Tot. hrs.) = Tot. hrly. cost); (Hrly. labor rate – Tot. hrly. cost = Profit margin)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-15

EXERCISE H.10 (Continued) (b) Material Loading Charges Overhead costs: Purchasing agent’s salary and fringes Administrative salaries and fringes Other overhead costs Total

Total Invoice Material Cost, Parts & Loading Materials = Percentage

$ 67,500 21,960 89,460 ÷

$1,260,000

7.10%

77,490 ÷ $166,950 ÷

$1,260,000 $1,260,000

= =

6.15% 13.25%

Material loading charge (with profit) Material loading charge (without profit) Profit margin on materials

83.25% 13.25% 70.00%

[((($67,500 + $21,960) ÷ $1,260,000) + ($77,490 ÷ $1,260,000) = 13.25%); (83.25% - 13.25% = 70.00%)] [((Purch. agent’s sal. & fringes + Admin. sal. & fringes) ÷ Tot. cost parts & mat.) + (Other OH costs ÷ Tot. cost parts & mat.) = Mat. loading chrg. without profit margin); (Mat. loading chrg. with profit margin – Mat. loading chrg. without profit margin = Profit margin on mat.)]

(c) Labor charges: 150 hours @ $70 Material charges: Cost of parts & materials Material loading charge ($60,000 × 83.25%) Total price of labor and materials

$ 10,500 $60,000 49,950

109,950 $120,450

LO3 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

H-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE H.11 (a)

The minimum unit transfer price is: Minimum transfer price = Variable cost + Opportunity cost Given that the Small Motor Division has excess capacity, the minimum unit transfer price is the variable cost of $11 per unit.

(b)

Given no excess capacity, the minimum unit transfer price is $35, which is its unit variable cost plus the lost unit contribution margin.

[$11 + ($35 - $11) = $35] (Unit VC + Unit opp. cost)

(c)

The level of capacity plays a significant role in determining the appropriate transfer price. If a division has no excess capacity, why should it sell its product below a unit selling price it can obtain in an outside market? Conversely, if it has excess capacity, as long as it receives more than its unit variable cost, it has a net gain.

LO4 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.12 (a) As indicated, FrameBody has excess capacity and therefore, should be willing to accept any price that equals or exceeds its unit variable cost. 1.

The per unit effect on Cycle Division is as follows:

Selling price Variable cost of goods sold Body frame $300 Other variable costs 900 Contribution margin

Present Situation $2,200 1,200 $1,000

Purchase from FrameBody $2,200 $280 900

1,180 $1,020

In this case, Cycle Division makes $20 ($1,020 – $1,000) more per cycle sold and therefore, if it sells 1,000 cycles, it makes an additional $20,000. [(Present: $2,200 – ($300 + $900) = $1,000); (Purchase: $2,200 – ($280 + $900) = $1,020); (Change in CM: ($1,020 - $1,000) × 1,000 = $20,000)] [(Present: USP – Unit body frame cost + Other Unit VC) = UCM); (Purchase: USP – (Unit body frame cost + Unit other VC) = UCM); (Change in CM: (Purch. UCM – Present UCM) × No. of cycles sold = Incr. in CM)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-17

EXERCISE H.12 (Continued) 2.

The effect on FrameBody is that it makes $10 on each frame sold as shown below: Selling price to Cycle Division Variable cost Unit contribution margin

$280 270 $ 10

Thus, the FrameBody Division gains $10,000 ($10 × 1,000). [($280 - $270) × 1,000 = $10,000] [(USP to Cycle Div. – UVC) × No. of cycles sold = Incr. in CM]

As a result, the overall income for Ayala increases $30,000 ($20,000 from Cycle Division and $10,000 from FrameBody).

(b) 1.

The answer would not change from (a)(1). Cycle Division would gain $20,000 if it purchased the frames from FrameBody.

However, FrameBody would incur a loss of $70,000 as computed below: Selling price to outside buyer Selling price to Cycle Division Lost contribution margin per cycle Number of cycles Lost contribution margin

350 280 $ 70 × 1,000 $70,000

[($350 - $280) × 1,000 = $70,000] [(USP to outside buyer – USP to cycle div.) × No. of cycles sold = Lost CM]

The effect on the overall income to Ayala is a net loss of $50,000 as shown below: Cycle Division gain Frame Body loss Overall loss

$20,000 (70,000) ($50,000)

[$20,000 - $70,000 = ($50,000)] [Cycle div. incr. CM – Frame body div. lost CM = Overall company loss] LO4 BT: AN Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

H-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE H.13 (a) The minimum transfer price that Benson should accept is: Minimum transfer price = ($37 – $3) + ($86 – $37) = $83 [($37 - $3) + ($86 - $37) = $83] [(Tot. UVC – Var. ship. cost saved) + (Outside USP – Outside UVC) = Min. transfer price]

(b) The lost unit contribution margin to the company is: Unit contribution margin lost by Benson [($86 – $37) – ($35 – $34)] ............................................................ Increased unit contribution margin to vehicle division ($80 – $35) ......................................................... Net loss in unit contribution margin ..............................................

$48 45 $ 3

Total lost contribution margin is $3 × 200,000 units = $600,000 [((($86 - $37) – ($35 - $34)) – ($80 - $35) = $3); ($3 × 200,000 = $600,000)] [(((USP to outside cust. – UVC) – (Transfer price to vehicle div. – UVC for sales to vehicle div)) – (USP to outside cust. – UVC for outside sales) = Lost UCM); (Lost UCM × No. units sold = Tot. lost CM)]]

(c) If management insists that it wants Benson to provide the stereo units, and Benson is operating at full capacity, then it must be willing to pay the minimum transfer price for those units. Otherwise it will be penalizing the managers of Benson by not giving them adequate credit for their contribution to the corporation’s contribution margin. LO4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.14 The minimum transfer price on this special order would be: Minimum transfer price = ($140 – $6) + ($50 – $29) = $155. Since the $160 price offered by the Bathtub Division exceeds this minimum price, the offer should probably be accepted. However, given that the division is operating at full capacity, it should give some consideration to the chance that it may anger existing customers if it has to turn away business. LO4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [($140 - $6) + ($50 - $29) = $155] [(External UVC – Var. sell. exp/unit saved) + (Outside USP – Outside UVC) = Min. transfer price/unit]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-19

EXERCISE H.15 (a) Minimum transfer price = ($130 – $8) + $0 = $122 [($130 - $8) + $0 = $122] [(Outside UVC – Admin. exp./unit saved) + Opp. cost = Min. transfer price/unit]

(b) Minimum transfer price = ($130 – $8) + ($160 – $130) = $152 [($130 - $8) + ($160 - $130) = $152] [(Outside UVC – Admin. exp./unit saved) + (Outside USP – Outside UVC) = Min. transfer price/unit]

(c) No. By forcing the Appraisal Department to accept the $150 per appraisal price, management is penalizing the Appraisal department. If the department was allowed to sell its services to outside customers, it could earn $30 ($160 – $130) in contribution margin per appraisal. Forcing them to sell their services internally would allow them to earn only $28 ($150 – $122) in unit contribution margin. A loss of $2 per appraisal or a total of $2,400 (1,200 × $2) would result. LO4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.16 (a) The minimum transfer price for Division B would be variable costs, which are $6 per unit ($7, variable cost – $1, variable selling expense). The maximum price would be the external price paid by Division A, which is $10 per unit. [(($7 - $1) + $0 = $6); (Max. = $10)] [((Outside UVC – Var. sell. exp./unit saved) + Opp. cost = Min. transfer price); (Max. unit transfer price = Current USP)]]

(b) Minimum transfer price = variable costs + opportunity cost Variable costs = $6 (as in (a)) Opportunity cost = (($7 – $5) × 15,000) ÷ 10,000 = $3 Therefore, the minimum transfer price should be $9 ($6 + $3) The maximum price would still be the external price paid by Division A, which is $10 per unit. [((($7 - $5) × 15,000) ÷ 10,000 = $3); ($6 + $3 = $9); (Max. = $10)] [(((USP new product – UVC new product) × No. units sold) ÷ No. of lamps) = Opp. cost/unit); (UVC + Opp. cost/unit = Min. transfer price/unit); (Max. unit transfer price = Current USP)]

H-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE H.16 (Continued) (c) Minimum transfer price = variable costs + opportunity cost Variable costs = $6.00 (as in (a)) Opportunity cost = (($12 – $7) × 5,000) ÷ 15,000 = $1.67 Therefore, the minimum transfer price should be $7.67 ($6 + $1.67) The maximum price would still be the external price paid by Division A, which is $10 per unit. LO4 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE H.17 (a) Sales Less: Costs Variable costs Transfer costs Total costs Contribution to income

Division A $1,500

Division B $2,400

Total Company $3,900

$1,100 0 $1,100 $ 400

$1,200 1,500 $2,700 $ (300)

$2,300 1,500 $3,800 $ 100

[(Div. A: $1,500 – $1,100 = $400); (Div. B: $2,400 – ($1,200 + $1,500) = ($300)); (Tot. co.: $3,900 – ($2,300 + $1,500) = $100)] [(Div. A: Sales – VC = Contrib. to inc.); (Div. B: Sales – (VC + Transfer costs) = Neg. contrib. to inc.); (Tot. co.: Sales – (VC + Transfer costs) = Contrib. to inc.)]

(b) Transfers should be made at unit variable cost plus unit opportunity cost, which in this case would equal the market price less any avoidable costs. In the current situation, it would appear that no transfers would be made unless Division B is willing to pay the market price. (c) (i)

Maintain price, no transfers (500 × $1,500) – (500 × $1,100) = $200,000

[(500 × $1,500) – (500 × $1,100) = $200,000] [(No. units sold ×USP) – (No. units sold × UVC) = Tot. CM]

(ii)

Cut price, no transfers (1,000 × $1,200) – (1,000 × $1,100) = $100,000

[(1,000 × $1,200) – (1,000 × $1,100) = $100,000] [(No. units sold × Reduced USP) – (No. units sold × UVC) = Tot. CM]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-21

EXERCISE H.17 (Continued) [((500 × $2,400) + (500 × $1,500)) – ((500 × $2,300) + (500 × $1,100)) = $250,000] [((No. units sold by Div. B × USP) + (No. units sold by Div. A × USP)) – ((No. units sold × Sum of Div. A & Div. B UVC) + (No. units sold × Div. A UVC)) = Tot. CM]

The firm is better off by maintaining the current market price for Division A’s product and transferring 500 units to Division B. A transfer price within the range of $1,100 to $1,200 would be needed to motivate both divisional managers to engage in the transfers. An optimal transfer price cannot be determined from the information given (even with full information, the best transfer price in the range may not be determinable). LO4 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

H-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO PROBLEMS PROBLEM H.1

(a) Direct materials .......................................................................... Direct labor................................................................................. Variable manufacturing overhead ............................................ Variable selling and administrative expenses ......................... Unit variable cost .......................................................................

Fixed manufacturing overhead Fixed selling and administrative expenses Unit fixed cost

$25 40 10 5 $80

Total Budgeted Cost Costs ÷ Volume = Per Unit $1,440,000 ÷ 80,000 = $18 960,000 ÷ $2,400,000 ÷

80,000 80,000

= =

Unit variable cost ....................................................................... Unit fixed cost ............................................................................ Total unit cost ............................................................................

12 $30 $ $

80 30 110

[($25 + $40 + $10 + $5 = $80); (($1,440,000 ÷ 80,000) + ($960,000 ÷ 80,000) = $30); ($80 + $30 = $110)] [(DM + DL + VOH + Var. S&A = Unit VC); ((Fix. OH ÷ Bud. vol.) + (Fix. S&A ÷ Bud. vol.) = Unit FC); (Unit VC + Unit FC = Tot. unit cost)]

(b) Total unit cost ............................................................................ Markup ........................................................................................ Desired ROI per unit ..................................................................

$ 110 × 40% $ 44

($110 × 40% = $44) (Tot. unit cost × Markup = Desired ROI/unit)

(c) Total unit cost ............................................................................ Desired ROI per unit .................................................................. Target unit selling price ............................................................

$110 44 $154

($110 + $44 = $154) (Tot. unit cost + Desired ROI/unit = Target unit sell. price)

(d) Unit variable cost ................ Unit fixed cost ..................... Total unit cost .....................

$ 80 40 $120

(same as above) ($1,440,000 + $960,000) ÷ 60,000

LO2 BT: AP Difficulty: Easy TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-23

PROBLEM H.2 (a) Direct materials ......................................................................... Direct labor ................................................................................ Variable manufacturing overhead ........................................... Variable selling and administrative expenses ........................ Unit variable cost ......................................................................

Fixed manufacturing overhead Fixed selling and administrative expenses Unit fixed cost

$ 50 26 20 19 $115

Total Budgeted Cost Costs ÷ Volume = Per Unit $ 600,000 ÷ 50,000 = $12 400,000 ÷ $1,000,000 ÷

50,000 50,000

= =

Unit variable cost ...................................................................... Unit fixed cost ........................................................................... Total unit cost ...........................................................................

8 $20 $115 20 $135

[($50 + $26 + $20 + $19 = $115); (($600,000 ÷ 50,000) + ($400,000 ÷ 50,000) = $20); ($115 + $20 = $135)] [(DM + DL + VOH + Var. S&A = Unit VC); ((Fix. OH ÷ Bud. vol.) + (Fix. S&A ÷ Bud. vol.) = Unit FC); (Unit VC + Unit FC = Tot. unit cost)]

Desired ROI per unit =

25% × $1,000,000 = $5 50,000

$5 = 3.70% $135 Total unit cost ........................................................................... Desired ROI per unit ................................................................. Target unit selling price............................................................ Markup percentage =

$135 5 $140

[((25% × $1,000,000) ÷ 50,000 = $5); ($5 ÷ $135 = 3.70%); ($135 + $5 = $140)] [((Desired ROI % × Investment) ÷ Bud. vol. = Desired ROI/unit); (Desired ROI/unit ÷ Tot. unit cost = Markup %); (Tot. unit cost + Desired ROI/unit = Target unit sell. price)]

(b) Unit variable cost ....................................................

$115 (same as (a))

Total Budgeted Cost Costs ÷ Volume = Per Unit $ 600,000 ÷ 40,000 = $15

Fixed manufacturing overhead Fixed selling and administrative expenses 400,000 ÷ Unit fixed cost $1,000,000 ÷

H-24

40,000 40,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

10 $25

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PROBLEM H.2 (Continued) Unit variable cost ....................................................................... Unit fixed cost ............................................................................ Total unit cost ............................................................................

$115 25 $140

[(($600,000 ÷ 40,000) + ($400,000 ÷ 40,000) = $25); ($115 + $25 = $140)] [((Fix. OH ÷ Bud. vol.) + (Fix. S&A ÷ Bud. vol.) = Unit FC); (Unit VC + Unit FC = Tot. unit cost)]

Desired ROI per unit =

25% × $1,000,000 = $6.25 40,000

Markup percentage =

$6.25 = 4.46% $140

Total unit cost ............................................................................ Desired ROI per unit .................................................................. Target unit selling price ............................................................

$140.00 6.25 $146.25

[((25% × $1,000,000) ÷ 40,000 = $6.25); ($6.25 ÷ $140 = 4.46%); ($140.00 + $6.25 = $146.25)] [((Desired ROI % × Investment) ÷ Bud. vol. = Desired ROI/unit); (Desired ROI/unit ÷ Tot. unit cost = Markup %); (Tot. unit cost + Desired ROI/unit = Target unit sell. price)] LO2 BT: AP Difficulty: Easy TOT: 30 min. AACSB: Analytic AICPA FC: IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-25

PROBLEM H.3

(a) Computation of time charge rate Total Cost Hourly labor rate for repairs Shop employees’ wages and benefits Overhead costs Office employee’s salary and benefits Other overhead Total Profit margin Rate charged per hour of labor

Total Per Hour ÷ Hours = Charge

$108,000 ÷ 5,000 =

$21.60

23,500 ÷ 5,000 = 26,000 ÷ 5,000 = $157,500 ÷ 5,000 =

4.70 5.20 31.50 10.00 $41.50

[($108,000 ÷ 5,000) + ($23,500 ÷ 5,000) + ($26,000 ÷ 5,000) + $10.00 = $41.50] [(Shop emp. wages & bene. ÷ Tot. hrs.) + (Off. emp. sal. & bene. ÷ Tot. hrs.) + (Other OH ÷ Tot. hrs.) + Profit margin = Labor rate/hr.]

(b) Computation of material loading charge Material Material Loading Total Invoice Cost, Loading Charges ÷ Parts and Materials = Percentage Overhead costs Parts manager’s salary and benefits Office employee’s salary and benefits Other overhead Total Profit margin Material loading percentage

$25,400 13,600 39,000 ÷ 16,000 ÷ $55,000 ÷

$100,000 100,000 100,000

= = =

39% 16% 55% 25% 80%

[(($25,400 + $13,600) ÷ $100,000) + ($16,000 ÷ $100,000) + 25% = 80%] [((Parts mgr.’s sal. & bene. + Off. emp. sal. & bene.) ÷ Tot. cost parts & mat.) + (Other OH ÷ Tot. cost parts & mat.) + Profit margin = Mat. loading %]

H-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM H.3 (Continued) (c) Price quotation for time and material SUTTON’S ELECTRONIC REPAIR SHOP Time and Material Price Quotation January 5, 2027 Job: Fix big screen TV set Labor charges: 4 hours × $41.50 ..................... Material charges Cost of parts and materials......................... Material loading charge (80% × $200) ........

$166 $200 160

Total price of labor and material.......................

360 $526

LO3 BT: AP Difficulty: Easy TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-27

PROBLEM H.4

(a) Assuming no available capacity, the printing operation’s variable cost is $0.004 per page and its opportunity cost is $0.006 ($0.01 – $0.004) per page. The minimum transfer price would be $0.01 ($0.004 + $0.006). Therefore, the printing operation would not accept the internal transfer price of $0.007. [$0.004 + ($0.01 - $0.004) = $0.01] [VC/page + (Price/page – VC/page) = Min. transfer price]

(b) Assuming that the printing operation has available capacity, the printing operation’s variable cost is $0.004 and its opportunity cost is $0. The minimum transfer price would be $0.004 ($0.004 + $0). Therefore, in this case, the printing operation should accept the offer to print internally. The $0.007 transfer price would provide a contribution margin of $0.003 ($0.007 – $0.004) per page. Depending on its bargaining strength, the printing operation might want to ask for a transfer price higher than $0.007, since the company is saving money at any price below the $0.009 price that the line pays to outside printers. ($0.004 + $0 = $0.004) (VC/page + Opp. Cost/page = Min. transfer price)

(c) The advantages of having all of the company’s printing done intern-ally include: (1) ensuring that the company’s quality expectations are met, (2) ensuring that all projects are completed on a timely basis, and (3) ensuring that jobs are scheduled in a manner consistent with the company’s priorities. The primary disadvantages of forcing the printing operation to print internal work when it doesn’t feel it is in its best interest are: (1) the division manager loses control over the division’s performance, resulting in a loss of morale, and (2) the profitability of the division, as well as the company as a whole, will decline. (d) The printing operation would lose: ($0.01 – $0.007) × 500 pages × 1,500 copies

= ($2,250)

Business Books would save: ($0.009 – $0.007) × 500 pages × 1,500 copies Overall loss to the company as a whole

= 1,500 = ($ 750)

[(Printing oper.: ($0.01 - $0.007) × 500 × 1,500 = ($2,250)) + (Bus. Books: ($0.009 - $0.007) × 500 × 1,500 = $1,500); (($2,250 + $1,500 = ($750))] [(Printing oper.: (Outside price/page – Transfer price/page) × No. of pages × No. of copies = Decr. in CM) + (Bus. Books: (Outside cost/page – Transfer price/page) × No. of pages × No. of copies = Incr. in CM); (Decr. in print. oper. CM + Incr. in bus. books CM = Overall decr. in CM to company)] LO4 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

H-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM H.5

(a) The minimum transfer price is based on the variable cost of units transferred internally, plus the opportunity cost of units sold externally. The variable cost of internal sales would be $10 ($14.50 – $4.50). The opportunity cost would be $8 ($22.50 – $14.50). Therefore, the minimum transfer price would be $18 ($10 + $8). Since the $21 transfer price offered by the Board Division exceeds this minimum transfer price, the Chip Division should sell the chip internally. Since it is already at capacity, it probably needs to consider the implications to its existing customers. (b) If the Chip Division rejects the offer, each division will suffer a loss of contribution margin, as well as the company as a whole. The amount of this loss is calculated as: Lost contribution margin by Board Division: Cost of buying externally, per chip Less: Cost of buying internally, per chip Increased cost, resulting in lower unit contribution margin Number of units purchased Total lost contribution margin

$22 21 1 × 40,000 $ 40,000

Lost contribution margin by Chip Division: Unit contribution margin on internal sales ($21 – $10) $11 Less: Unit contribution margin on external sales ($22.50 – $14.50) 8 Lost unit contribution margin 3 Number of units sold × 40,000 Total lost contribution margin

120,000

Overall lost contribution margin for the company

$160,000

[(Board div.: ($22 - $21) × 40,000 = $40,000); (Chip div.: ($11 - $8) × 40,000 = $120,000); ($40,000 + $120,000 = $160,000)] [(Board div.: External cost/chip – Internal cost/chip) × No. of chips = Lost CM); (Chip div.: (UCM on internal sales – UCM on external sales) × No. of units sold = Lost CM); (Lost CM board div. + Lost CM chip div. = Overall lost CM for company)] LO4 BT: AP Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-29

PROBLEM H.6

(a) Assuming no available capacity, and that in order to produce the 12,000 special pagers, 10,000 standard pagers would be foregone, the minimum unit variable cost would be ($50 + $30) or $80 and the unit opportunity cost would be: Total contribution margin on standard pagers ($95 – $50) × 10,000 = Number of special pagers 12,000

= $37.50

Therefore, the minimum transfer price would be $117.50 [($50 + $30) + $37.50). Since this is higher than the $105 transfer price being offered, the CD Division should reject the offer. (b) Assuming no available capacity, and that in order to produce the 12,000 special pagers, 16,000 standard pagers would be forgone, the minimum unit variable cost would be ($50 + $30) or $80 and the unit opportunity cost would be: Total contribution margin on standard pagers ($95 – $50) × 16,000 = Number of special pagers 12,000

= $60

Therefore, the minimum transfer price would be $140 [($50 + $30) + $60]. Since the $150 transfer price being offered exceeds the minimum transfer price of $140, the CD Division should accept the offer. [($50 + $30) + ((($95 - $50) × 16,000) ÷ 12,000) = $140] [(Std. pager VC/unit + Spec. pager VC/unit) + (((Std. pager USP – Std. pager VC/unit) × No. of std. pagers foregone) ÷ No. of spec. pagers) = Min. transfer price]

(c) Assuming that the CD Division has available capacity, variable cost would be $80 ($50 + $30) and the opportunity cost would be zero. Therefore, the minimum transfer price would be $80 ($80 + $0). Since the $100 transfer price being offered exceeds the $80 minimum transfer price, the offer should be accepted. LO4 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

H-30

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO DATA ANALYTICS IN ACTION The solutions for the Data Analytics in Action problems are available in Excel. See the file Solutions: Excel Templates in the Instructor Resources.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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H-31

APPENDIX G Cost-Volume-Profit Analysis: Additional Issues Learning Objectives 1. 2. 3. 4.

Apply basic CVP concepts. Explain the term sales mix and its effects on break-even sales. Determine sales mix when a company has limited resources. Indicate how operating leverage affects profitability.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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G-1

ANSWERS TO QUESTIONS 1.

CVP or cost-volume-profit analysis is the study of the effects of changes in costs and volume on a company’s profit.

LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

Managers use CVP analysis to make decisions involving break-even point, sales required to reach a target net income, margin of safety, the most profitable sales mix, allocation of limited resources, and operating leverage.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

Both types of income statements report the same amount of net income. But the format used to reach net income differs. A traditional income statement’s format consists of: Sales revenue – cost of goods sold = gross profit; Gross profit – selling and administrative expenses = net income. A CVP income statement’s format consists of: Sales revenue – variable expenses = contribution margin; Contribution margin – fixed expenses = net income.

LO1 BT: K Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

The CVP income statement isolates variable costs from fixed costs while the traditional income statement does not. The CVP format indicates contribution margin in total and frequently on a per unit basis as well. This format facilitates calculation of break-even point and target net income. It also highlights how changes in sales volume or cost structure affect net income.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

WHEAT COMPANY CVP Income Statement Sales ........................................................................................................ Variable costs ($500,000 × 0.75) + ($200,000 × 0.75) .............................. Contribution margin ..................................................................................

$900,000 525,000 $375,000

LO1 BT: AP Difficulty: Easy TOT: 3min. AACSB: Analytic AICPA FC: Reporting IMA: Decision Analysis

If the selling price is reduced but variable and fixed costs remain unchanged, the break-even point will increase because the contribution margin decreases.

LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

Sales mix is the relative percentage of each product sold when a company sells more than one product. It is used to calculate the weighted-average unit contribution margin, and changes the calculation of the break-even point because the fixed costs must be divided by the weightedaverage unit contribution margin. The sales mix is also used to calculate the weighted-average contribution margin ratio.

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

The 150,000-mile tire has a higher unit contribution margin, that is, each tire sold covers a larger amount of fixed costs. Therefore, if the sales mix shifts away from the 150,000-mile tire to the 50,000-mile tire, the company will have to sell more total tires in order to break-even.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

G-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

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Questions Appendix G (Continued) 9.

If a company has many products, the break-even point is calculated using sales information for divisions or product lines, rather than individual products. The weighted-average contribution margin ratio is computed by multiplying the sales mix percentage of each product line by the contribution margin ratio of each product line, and then summing the results. Total break-even sales in dollars is then calculated by dividing the company’s total fixed costs by the weighted-average contribution margin ratio. Finally, to determine the amount of sales generated by each product line at the break-even point, multiply the total break-even sales by the sales mix percentage of each product line.

LO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

10. Contribution margin per unit of limited resource is determined by dividing the unit contribution margin of the product by the number of units of the limited resource required to produce the product. LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

11. The theory of constraints is a specific approach used to identify and manage constraints to achieve the company’s goals. According to this theory, a company must continually identify its constraints and find ways to reduce or eliminate them, where appropriate. Examples of constraints would be production bottlenecks or poorly trained workers. LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

12. Cost structure refers to the relative proportion of fixed costs versus variable costs that a company incurs. Companies that rely heavily on fixed costs will have higher break-even points. LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

13. Operating leverage refers to the extent to which a company’s net income reacts to a given change in sales. A company can increase its operating leverage by increasing its reliance on fixed costs. LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

14. Typically, manual labor is considered a variable cost. Depreciation on factory equipment is a fixed cost. Therefore, if a company replaces manual labor with automated factory equipment it will increase fixed costs, its operating leverage, and its break-even point. LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

15. The degree of operating leverage provides a measure of a company’s earnings volatility and can be used to compare companies. It is calculated by dividing the contribution margin by net income at a particular level of sales. LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Decision Analysis

16. Pine’s degree of operating leverage of 8 versus Fir’s measure of 4 tells us that Pine will experience twice (8 ÷ 4) the increase (or decrease) in net income for a given increase (decrease) in sales as Fir. LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement FC IMA: Decision Analysis

Kimmel, Survey of Accounting, 3e, Solutions Manual

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G-3

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE G.1 1.

(a) (b)

$70 = ($250 – $180) 28% = ($70 ÷ $250)

($70 ÷ $250 = 28%) (UCM ÷ USP = CM ratio)

(c)

$300 = ($500 – $200)

($500 - $200 = $300) (USP – UCM = UVC)

(d)

40% = ($200 ÷ $500)

(e)

$1,100 = ($330 ÷ 30%)

($330 ÷ 30% = $1,100) (UCM ÷ CM ratio = USP)

(f)

$770 = ($1,100 – $330)

LO1 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

BRIEF EXERCISE G.2 HAMBY INC. CVP Income Statement For the Quarter Ended March 31, 2027 Sales ....................................................................... Variable expenses Cost of goods sold ........................................ Selling expenses ............................................ Administrative expenses ............................... Total variable expenses ......................... Contribution margin .............................................. Fixed expenses Cost of goods sold ........................................ Selling expenses ............................................ Administrative expenses ............................... Total fixed expenses .............................. Net income .............................................................

$2,000,000 $760,000 95,000 79,000 934,000 1,066,000 600,000 60,000 66,000 726,000 $ 340,000

LO1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting [$2,000,000 – ($760,000 + $95,000 + $79,000) – ($600,000 + $60,000 + $66,000) = $340,000] [Sales – (Var. CGS + Var. sell. exp. + Var. admin. exp.) – (Fix. CGS + Fix. sell. exp. + Fix. admin. exp.) = Net inc.]

G-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

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BRIEF EXERCISE G.3 Contribution margin ratio = [($250,000 – $150,000) ÷ $250,000] = 40% Required sales in dollars = $120,000 ÷ 40% = $300,000 LO1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision analysis [(($250,000 - $150,000) ÷ $250,000 = 40%); ($120,000 ÷ 40% = $300,000)] [((Rev. – VC) ÷ Rev. = CM ratio); (FC ÷ CM ratio = BEP in $)]

BRIEF EXERCISE G.4 (a) $400Q = $250Q + $210,000 $150Q = $210,000 Q = 1,400 units (b) Unit contribution margin $150, or ($400 – $250) X = $210,000 ÷ $150 X = 1,400 units [$210,000 ÷ ($400 - $250) = 1,400] [FC ÷ (USP – UVC) = BEP in units] LO1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

BRIEF EXERCISE G.5 X = 0.70X + $210,000 + $60,000 0.30X = $270,000 X = $900,000 LO1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(X - 0.70X) = ($210,000 + $60,000); X = $270,000 ÷ 0.30); (X = $900,000)] [(Sales – VC as % of sales) = (FC + Target net inc.); (Sales = (Fixed costs + Target net inc.) ÷ CM ratio); (X = Req. sales $)

BRIEF EXERCISE G.6 Margin of safety = $1,200,000 – $960,000 = $240,000 Margin of safety ratio = $240,000 ÷ $1,200,000 = 20% LO1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [($1,200,000 - $960,000) ÷ $1,200,000 = 20%] [(Act. sales – BEP sales) ÷ Act. sales = MOS ratio]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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G-5

BRIEF EXERCISE G.7

Model A12 B22 C124

Sales Mix Percentage 60% 15% 25%

Unit Contribution Margin $15 ($50 – $35) $30 ($100 – $70) $100 ($400 – $300)

Weighted-Average Unit Contribution Margin $ 9.00 4.50 25.00 $38.50

LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(A12: 60% × ($50 - $35)) + (B22: 15% × ($100 - $70)) + (C124: 25% × ($400 - $300)) = $38.50] [(A12: Sales mix % × (USP – UVC)) + (B22: Sales mix % × (USP – UVC)) + (C124: Sales mix % × (USP – UVC)) = Wtd.-ave. UCM]

BRIEF EXERCISE G.8 Total break-even = ($269,500 ÷ $38.50*) = 7,000 units *Computed in BE G.7 Sales Units Units of A12 = 0.60 × 7,000 = 4,200 Units of B22 = 0.15 × 7,000 = 1,050 Units of C124 = 0.25 × 7,000 = 1,750 7,000 LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [($269,500 ÷ $38.50 = 7,000); (A12: 7,000 × 0.60 = 4,200); (B22: 7,000 × 0.15 = 1,050); (C124: 7,000 × 0.25 = 1,750)] [(FC ÷ Wtd.-ave. UCM = BEP in units); (A12: BEP in units × Sales mix % = Unit sales at BEP); (B22: BEP in units × Sales mix % = Unit sales at BEP); (C124: BEP in units × Sales mix % = Unit sales at BEP);]

BRIEF EXERCISE G.9 (a)

Weighted-average contribution margin ratio = (0.30 × 0.20) + (0.50 × 0.30) + (0.20 × 0.45) = 0.30

[(B’day: 0.30 × 0.20) + (Std.: 0.50 × 0.30) + (Lrg.: 0.20 × 0 .45) = 0.30] [(B’day: Sales mix % × CM ratio) + (Std.: Sales mix % × CM ratio) + (Lrg.: Sales mix % × CM ratio) = Wtd.-ave. CM ratio]

(b)

Total break-even point in dollars = ($450,000 ÷ 0.30) = $1,500,000

Birthday $1,500,000 × 0.30 = $ 450,000 Standard tapered $1,500,000 × 0.50 = 750,000 Large scented $1,500,000 × 0.20 = 300,000 $1,500,000 LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

G-6

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BRIEF EXERCISE G.10 (a)

Sales Mix Bedroom Division $500,000 ÷ $1,250,000 = 0.40 Dining Room Division $750,000 ÷ $1,250,000 = 0.60

[(Bedrm.: $500,000 ÷ $1,250,000 = .40); (Dining Rm.: $750,000 ÷ $1,250,000 = .60)] [(Bedrm.: Div. sales ÷ Tot. sales = Sales mix %); (Dining Rm.: Div. sales ÷ Tot. sales = Sales mix %)]

(b)

Weighted-average contribution margin ratio

= $575,000 = 0.46 $1,250,000

OR Contribution Margin Ratio Bedroom Division($275,000 ÷ $500,000) = 0.55 Dining Room Division($300,000 ÷ $750,000) = 0.40 Weighted-average contribution margin ratio = (0.55 × 0.40) + (0.40 × 0.60) = 0.46 ($575,000 ÷ $1,250,000 = 0.46) (Tot. CM ÷ Tot. sales = Wtd.-ave. CM ratio) LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

BRIEF EXERCISE G.11

Unit contribution margin (a) Machine hours required (b) Contribution margin per unit of limited resource [(a) ÷ (b)]

Product A $10 2 $ 5

Product B $12 3 $ 4

LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(A: $10 ÷ 2 = $5); (B: $12 ÷ 3 = $4)] [(A: UCM ÷ MH/unit = CM/unit of lmtd. resource); (B: UCM ÷ MH/unit = CM/unit of lmtd. resource)]

BRIEF EXERCISE G.12

Unit contribution margin (a) Machine hours required (b) Contribution margin per unit of limited resource [(a) ÷ (b)]

Product 1 $ 42 0.15 $280

Kimmel, Survey of Accounting, 3e, Solutions Manual

Product 2 $ 32 0.10 $320

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G-7

BRIEF EXERCISE G.12 (Continued) Product 2 has a higher contribution margin per unit of limited resource, even though it has a unit lower contribution margin. Given that machine hours are limited to 2,000 per month, Sage Corporation should produce Product 2. LO3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(Prod. 1: $42 ÷ .15 = $280); (Prod. 2: ($32 ÷ .10 = $320)] [(Prod. 1: UCM ÷ MH/unit = CM/unit of lmtd. resource); (Prod. 2: UCM ÷ MH/unit = CM/unit of lmtd. resource)]

BRIEF EXERCISE G.13 Degree of operating leverage (old) = $200,000 ÷ $40,000 = 5.0 Degree of operating leverage (new) = $240,000 ÷ $40,000 = 6.0 If Sam’s sales change, the resulting change in net income will be 1.2 times (6 ÷ 5) higher or lower with the new machine than under the old system. LO4 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(Old: $200,000 ÷ $40,000 = 5); (New: $240,000 ÷ $40,000 = 6)] [(Old: CM ÷ Net inc. = DOL); (New: CM ÷ Net inc. = DOL)]

BRIEF EXERCISE G.14 Break-even point in dollars: Diggs Co. $75,000 ÷ ($120,000 ÷ $200,000) = $125,000

Doggs Co. $105,000 ÷ ($150,000 ÷ $200,000) = $140,000

Doggs Company’s cost structure relies much more heavily on fixed costs than that of Diggs Co. As result, Doggs has a higher contribution margin ratio of .75 ($150,000 ÷ $200,000) versus .60 ($120,000 ÷ $200,000), for Diggs Co. Doggs also has much higher fixed costs to cover. Its break-even point is therefore higher than that of Diggs Co. LO4 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(Diggs: $75,000 ÷ ($120,000 ÷ $200,000) = $125,000); (Doggs: $105,000 ÷ ($150,000 ÷ $200,000) = $140,000)] [(Diggs: FC ÷ CM ratio = BEP in $); (Doggs: FC ÷ CM ratio = BEP in $)]

G-8

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BRIEF EXERCISE G.15 Degree of operating leverage = Contribution margin ÷ Net income Montana Corp. 1.6 = Contribution margin ÷ $50,000 Contribution margin = $50,000 × 1.6 = $80,000 APK Co. 5.4 = Contribution margin ÷ $50,000 Contribution margin = $50,000 × 5.4 = $270,000 LO4 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [(Montana: $50,000 × 1.6 = $80,000); (APK: $50,000 × 5.4 = $270,000)] [(Montana: Net inc. × DOL = CM); (APK: Net inc. × DOL = CM)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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G-9

SOLUTIONS TO DO IT! EXERCISES DO IT! G.1 (a)

Break-even point in units is 7,500 units ($150,000 ÷ $20). Break-even point in sales dollars is $375,000 ($150,000 ÷ 0.40). The margin of safety in dollars is $75,000 ($450,000 – $375,000).

(b) Break-even point in units is 8,333 units (rounded) ($150,000 ÷ $18*). Break-even point in sales dollars is $400,000 ($150,000 ÷ 0.375**). The margin of safety in dollars is $118,400 ($518,400*** – $400,000). *$50 – (0.04 × $50) – $30 = $18. **$18 ÷ $48 = 0.375 ***9,000 + (0.20 × 9,000) = 10,800 units, 10,800 units × $48 = $518,400 [$50 – (0.04 × $50) - $30 = $18]; [USP – Decr. in USP – UVC = UCM] ($150,000 ÷ $18 = 8,333 (rounded)); (FC ÷ UCM = BEP in units) [$150,000 ÷ ($18 ÷ $48) = $400,000]; [FC ÷ CM ratio = BEP in $] [(9,000 + (0.20 × 9,000)) × $48 = $518,400]; [(Unit sales + Incr. in unit sales) × USP = Exp. sales $] ($518,400 - $400,000 = $118,400); (Exp. sales $ - BEP in $ = MOS in $)

The increase in the break-even point from $375,000 to $400,000 indicates that management should not implement the proposed change while the increase in the margin of safety from $75,000 to $118,400 indicates that management should implement the proposed change. Since the expected 20% increase in sales volume will result in a contribution margin of $194,400 (10,800 x $18) which is only $14,400 more than the current amount, management should be cautious before reducing unit prices. LO1 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic, Communication AICPA FC: Measurement IMA: Decision Analysis

DO IT! G.2 (a)

The sales mix percentages as a function of units sold is: Basic 750 ÷ 1,500 = 50%

Basic Plus 450 ÷ 1,500 = 30%

Premium 300 ÷ 1,500 = 20%

(b) The weighted-average unit contribution margin is: [0.50 × ($250 – $195)] + [0.3 × ($400 – $285)] + [0.20 × ($800 – $415)] = $139. [(Basic: 50% × ($250 - $195)) + (Basic Plus: 30% × ($400 - $285)) + (Premium: 20% × ($800 - $415)) = $139] [(Basic: Sales mix % × UCM) + (Basic Plus: Sales mix % × UCM) + (Premium: Sales mix % × UCM) = Wtd.-ave. UCM]

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DO IT! G.2 (Continued) (c)

The break-even point in units is: $180,700 ÷ $139 = 1,300 units.

(d) The break-even units to produce for each product are: Basic: 1,300 units × 50% = 650 units Basic Plus 1,300 units × 30% = 390 units Premium: 1,300 units × 20% = 260 units 1,300 units [(Basic: 1,300 × 50% = 650) + (Basic Plus: 1,300 × 30% = 390) + (Premium: 1,300 × 20% = 260) = 1,300] [(Basic: Tot. BEP units × Sales mix % = Units at BEP) + (Basic Plus: Tot. BEP units × Sales mix % = Units at BEP) + (Premium: Tot. BEP units × Sales mix % = Units at BEP) = Tot. BEP units] LO2 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

DO IT! G.3 (a)

The Best binoculars have the highest unit contribution margin. Thus, ignoring any manufacturing constraints, it would appear that the company should shift toward production of more Best units.

(b) The contribution margin per unit of limited resource is calculated as:

Unit contribution margin Limited resource consumed per unit

Good Better Best $40 $150 $420 0.5 = $80 1.5 = $100 6 = $70

[(Good: $40 ÷ 0.5 = $80); (Better: $150 ÷ 1.5 = $100); (Best: $420 ÷ 6 = $70)] [(Good: UCM ÷ Hrs. per unit); (Better: UCM ÷ Hrs. per unit); (Best: UCM ÷ Hrs. per unit)]

(c)

The Better binoculars have the highest contribution margin per unit of limited resource, even though they do not have the highest unit contribution margin. Given the resource constraint, any additional capacity should be used to make Better binoculars.

LO3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

DO IT! G.4 (a) Old New

Contribution Margin $1,400,000 $2,300,000



Net Income

 

$400,000 $400,000

Degree of operating Leverage = 3.50 = 5.75 =

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G-11

DO IT! G.4 (Continued) (b) The degree of operating leverage measures the company’s sensitivity to changes in sales. By switching to a cost structure dominated by fixed costs, the company would significantly increase its operating leverage. As a result, with a percentage change in sales, its percentage change in net income would be 1.64 times as much (5.75 ÷ 3.5) under the new structure as it would under the old. LO4 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

G-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO EXERCISES EXERCISE G.1 (a)

Contribution margin per room = Contribution margin per room = Contribution margin ratio =

$60 – ($8 + $34) $18 $18 ÷ $60 = 30%

Fixed costs = $10,600 + $2,400 + $1,500 + $800 = $15,300 Break-even point in rooms = $15,300 ÷ $18 = 850 [($10,600 + $2,400 + $1,500 + $800) ÷ ($60 - $8 - $34) = 850] (FC ÷ UCM = BEP in rooms)

Break-even point in dollars

= =

850 rooms × $60 per room $51,000 per month

OR Fixed costs ÷ Contribution margin ratio = $15,300 ÷ 0.30 = $51,000 per month (b)

Margin of safety in dollars: Planned activity = 50 rooms per day × 30 days = 1,500 rooms per month Expected rental revenue = 1,500 rooms × $60 = $90,000 Margin of safety in dollars = $90,000 – $51,000 = $39,000

[(50 × 30 × $60) - $51,000 = $39,000] [(No. rooms per day × days per mo. × rent per night) – BEP in $ = MOS in $]

Margin of safety ratio:

$39,000 = 43.3% $90,000 (rounded)

LO1 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic, Communication AICPA FC: Measurement IMA: Decision Analysis

EXERCISE G.2 (a) Contribution margin in dollars: Sales = 4,000 × $30 =

$120,000 Variable costs = $120,000 × 75% = 90,000 Contribution margin $ 30,000

Unit contribution margin: Contribution margin ratio:

$30 – $22.50 ($30 × 75%) = $7.50. $7.50 ÷ $30 = 25%.

[(4,000 × $30) – ($120,000 × 75%) = $30,000]; [(Units sold × USP) – (Sales $ × VC as % of sales) = CM] [$30 – ($30 × 75%) = $7.50]; [USP – (USP × VC as % of sales) = UCM] ($7.50 ÷ $30 = 25%); (UCM ÷ USP = CM ratio)

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G-13

EXERCISE G.2 (Continued) (b) Break-even sales in dollars:

$16,800 = $67,200. 25%

Break-even sales in units:

$16,800 = 2,240. $7.50

$120,000 – $67,200 = $52,800. $52,800 ÷ $120,000 = 44%.

($120,000 - $67,500 = $52,800); (Act. sales $ - BEP in $ = MOS in $) ($52,800 ÷ $120,000 = 44%); (MOS in $ ÷ Act. sales $ = MOS ratio) LO1 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE G.3 Current selling price = $325,000 ÷ 5,000 units Current selling price = $65 1.

Increase selling price to $71.50 ($65 × 110%). Net income = $357,500* – $210,000 – $75,000 = $72,500. *($71.50 x 5,000)

($325,000 ÷ 5,000 = $65); (Tot. sales $ ÷ Units sold = Current USP) [(($65 × 110%) × 5,000) - $210,000 - $75,000 = $72,500]; [((Current USP × % incr.) × Units sold) – Tot. VC – Tot. FC = Net inc.]

Reduce variable costs to 58% of sales. Net income = $325,000 – $188,500** – $75,000 = $61,500. **($325,000 × 58%)

[$325,000 – ($325,000 × 58%) - $75,000 = $61,500] [Tot sales – (Tot. sales × Reduced VC % of sales) – FC = Net inc.]

Reduce fixed costs to $60,000 ($75,000 – $15,000). Net income = $325,000 – $210,000 – $60,000 = $55,000.

Alternative 1, increasing unit sales price, will produce the highest net income. LO1 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE G.4 (a) 1. Contribution margin ratio is:

$30,000 = 62.5% $48,000

Break-even point in dollars =

$20,250 = $32,400 62.5%

2. Contribution margin per flight

$30,000 400 flights

Break-even point in flights =

= $75

$20,250 = 270 flights $75

($30,000 ÷ $48,000 = 62.5%); (CM ÷ Sales = CM ratio) ($20,250 ÷ 62.5% = $32,400); (FC ÷ CM ratio = BEP in $) ($30,000 ÷ 400 = $75); (CM ÷ No. of flights = CM per flight) ($20,250 ÷ $75 = 270); (FC ÷ CM per flight = BEP in flights)

(b) At the break-even point fixed costs and contribution margin are equal. Therefore, the contribution margin at the break-even point would be $20,250. (c) Fare revenue ($108* × 500**) Variable costs ($18,000 × 125%) Contribution margin Fixed costs Net income

$54,000 22,500 31,500 20,250 $11,250

Yes, the fare decrease should be implemented because net income increases to $11,250 from $9,750. *$120 – (10% × $120) **400 + (25% × 400) [$120 – ($120 × 10%) = $108]; [Current price per flight – (current price per flight × % decr.) = Proposed price per flight] (400 + 100 = 500); (Current no. of flights + proposed incr. = Proposed no. of flights) [($108 × 500) – ($18,000 × 125%) - $20,250 = $11,250]; [(Proposed price per flight × proposed no. of flights) – (Current VC × Proposed % incr.) – FC = Proposed net inc.] LO1 BT: AP Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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G-15

EXERCISE G.5 (a)

CAREY COMPANY CVP Income Statement For the Year Ended December 31, 2027

Sales (60,000 × $25) ............................. Variable costs (60,000 × $15) ............... Contribution margin (60,000 × $10) ..... Fixed costs ........................................... Net income ............................................ (b)

Total $1,500,000 900,000 600,000 500,000 $ 100,000

Per Unit $25 15 $10

% of Sales 100% 60 40%

CAREY COMPANY CVP Income Statement For the Year Ended December 31, 2027

Sales [(60,000 × 105%) × $23.50*] ............... Variable costs (63,000 × $12.00**) .............. Contribution margin (63,000 × $11.50) ....... Fixed costs ($500,000 + $100,000) ............. Net income ...................................................

Total $1,480,500 756,000 724,500 600,000 $ 124,500

Per Unit $23.50 12.00 $11.50

% of Sales 100% 51 49%

*$25.00 – ($3.00 × 50%) = $23.50 **$15.00 – ($15.00 × 20%) = $12.00; or $15.00 – $3.00(given) = $12.00 [((60,000 × 105%) × ($25 – ($3 × 50%))) – (63,000 × ($15 – ($15 × 20%))) – ($500,000 + $100,000) = $124,500] [(Incr. units sold × reduced USP) – (Incr. units sold × reduced UVC) – Incr. FC = New net inc.] LO1 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE G.6

Lawnmowers Weed-trimmers Chainsaws

Sales Mix Percentage 20% 50% 30%

Unit contribution Margin $30 $20 $40

Weighted-Average Contribution Margin $ 6 10 12 $28

Total break-even sales in units = $4,200,000 ÷ $28 = 150,000 units

G-16

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EXERCISE G.6 (Continued)

Lawnmowers Weed-trimmers Chainsaws Total units

Sales Mix Percentage 20% × 50% × 30% ×

Total Break-even Sales in Units 150,000 = 150,000 = 150,000 =

Sales Units Needed Per Product 30,000 units 75,000 units 45,000 units 150,000 units

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [$4,200,000 ÷ ((20% × $30) + (50% × $20) + (30% × $40)) = 150,000]; (FC ÷ Wtd.-ave. CM = Tot. BEP units) [(20% × 150,000 = 30,000) + (50% × 150,000 = 75,000) + (30% × 150,000 = 45,000) = 150,000]; [(Lawnmowers sales mix % × Tot. BEP units = Lawnmowers at BEP) + (Weed-trimmers sales mix % × Tot. BEP units = Weedtrimmers at BEP) + (Chainsaws sales mix % × Tot. BEP units = Chainsaws at BEP) = Tot. BEP units]

EXERCISE G.7 (a)

Oil changes Brake repair

Sales Mix Percentage 70% 30%

Contribution Margin Ratio 20% 40%

Weighted-Average Contribution Margin Ratio 0.14 0.12 0.26

Total break-even sales in dollars = $15,600,000 ÷ 0.26 = $60,000,000

Oil changes Brake repair Total sales

Sales Mix Percentage 70% × 30% ×

Total Break-even Sales in Dollars $60,000,000 $60,000,000

= =

Sales Dollars Needed Per Product $42,000,000 18,000,000 $60,000,000

[$15,600,000 ÷ ((70% × 20%) + (30% × 40%)) = $60,000,000]; (FC ÷ Wtd.-ave. CM ratio = Tot. BEP $) [(70% × $60,000,000 = $42,000,000) + (30% × $60,000,000 = $18,000,000) = $60,000,000]; [(Oil changes sales mix % × Tot. BEP $ = Oil changes sales $ at BEP) + (Brake repair sales mix % × Tot. BEP $ = Brake repair $ at BEP) = Tot. BEP $]

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G-17

EXERCISE G.7 (Continued) (b) Sales to achieve target net income = ($78,000 + $52,000) ÷ .26 = $500,000

Oil changes Brake repair Total sales

Sales Mix Percentage 70% × 30% ×

Total Sales Needed $500,000 = $500,000 =

Sales Dollars Needed Per Product Per Service Outlet $350,000 150,000 $500,000

LO2 BT: AN Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE G.8 (a)

Mail pouches and small boxes Non-standard boxes

Sales Mix Percentage

Contribution Margin Ratio

Weighted-Average Contribution Margin Ratio

80%

20%

0.16

20%

70%

0.14 0.30

Total break-even sales in dollars = $12,000,000 ÷ 0.30 = $40,000,000 Total Breakeven Sales in Dollars

Sales Mix Percentage Mail pouches and small boxes Non-standard boxes Total sales

G-18

Sales Dollars Needed Per Product

80%

$40,000,000

$32,000,000

20%

$40,000,000

8,000,000 $40,000,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE G.8 (Continued) (b) Sales Mix Percentage

Contribution Margin Ratio

Weighted-Average Contribution Margin Ratio

40%

20%

0.08

60%

70%

0.42 0.50

Mail pouches and small boxes Non-standard boxes

Total break-even sales in dollars = $12,000,000 ÷ 0.50 = $24,000,000 Total Breakeven Sales in Dollars

Sales Mix Percentage Mail pouches and small boxes Non-standardized boxes Total sales

Sales Dollars Per Product

40%

$24,000,000

$ 9,600,000

60%

$24,000,000

14,400,000 $24,000,000

[$12,000,000 ÷ ((40% × 20%) + (60% × 70%)) = $24,000,000]; (FC ÷ Wtd.-ave. CM ratio = Tot. BEP $) [(40% × $24,000,000 = $9,600,000) + (60% × $24,000,000 = $14,400,000) = $24,000,000]; [(Mail pouches sales mix % × Tot. BEP $ = Mail pouches sales $ at BEP) + (Non-std. boxes sales mix % × Tot. BEP $ = Non-std. boxes sales $ at BEP) = Tot. BEP $] LO2 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE G.9 (a) Weighted-average unit contribution margin = ($40 × 0.35) + ($20 × 0.55) + ($60 × 0.10) = $31 Break-even point in units = $620,000 ÷ $31 = 20,000 [$620,000 ÷ (($40 × 0.35) + ($20 × 0.55) + ($60 × 0.10)) = 20,000] (FC ÷ Wtd.-ave. UCM = BEP units)

(b) Shoes (20,000 × 0.35) = 7,000 pairs of shoes Gloves (20,000 × 0.55) = 11,000 pairs of gloves Range-finders (20,000 × 0.10) = 2,000 range-finders

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G-19

EXERCISE G.9 (Continued) (c) Shoes: 7,000 × $40 = $280,000 Gloves: 11,000 × $20 = 220,000 Range-finders: 2,000 × $60 = 120,000 Total contribution margin 620,000 Fixed costs 620,000 Net income $ 0 [((7,000 × $40) + (11,000 ×$20) + (2,000 × $60)) - $620,000 = $0] [((Shoes units sold at BEP × UCM) + (Gloves units sold at BEP × UCM) + (Range-finders units sold at BEP × UCM)) – FC = Net inc.] LO2 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE G.10 (a) Sales mix percentage Tablet division: $600,000 ÷ ($600,000 + $400,000) = 0.60 MP3 Player division: $400,000 ÷ ($600,000 + $400,000) = 0.40 Contribution margin ratio: Tablet division: $180,000 ÷ $600,000 = 0.30 MP3 Player division:$140,000 ÷ $400,000 = 0.35 [($600,000 ÷ ($600,000 + $400,000) = .60); ($400,000 ÷ ($600,000 + $400,000) = .40)]; [(Tablet ÷ Tot. sales = Tablet sales mix %); (MP3 player sales ÷ Tot. sales = MP3 player sales mix %)] [($180,000 ÷ $600,000 = .30); ($140,000 ÷ $400,000 = .35)]; [Tablet CM ÷ Tablet sales = Tablet CM ratio); (MP3 player CM ÷ MP3 player sales = MP3 player CM ratio)]

(b)

Weighted-average contribution $320,000 = = 0.32 OR margin ratio $1,000,000 Weighted-average contribution margin ratio = (0.60 × 0.30) + (0.40 × 0.35) = 0.32

(c) Break-even point in dollars = $120,000 ÷ 0.32 = $375,000 (d) Sales dollars needed at break-even point for each division Tablet division: $375,000 × 0.60 = $225,000 MP3 Player division:$375,000 × 0.40 = $150,000 [($375,000 × .60 = $225,000); ($375,000 × .40 = $150,000)]; [(Tablet: BEP in $ × Tablet sales mix % = Tablet sales $ at BEP); (MP3 player: BEP in $ × MP3 player sales mix % = MP3 player sales $ at BEP)] LO2 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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EXERCISE G.11 (a)

Product B

A Unit contribution margin (a) Machine hours required (b) Contribution margin per unit of limited resource (a) ÷ (b)

6 2 $3.00

2 1 $2.00

C $

3 2 $1.50

[(A: $6 ÷ 2 = $3); (B: $2 ÷ 1 = $2); (C: $3 ÷ 2 = $1.50)] [(A: UCM ÷ MH/unit = CM/MH); (B: UCM ÷ MH/unit = CM/MH); (C: UCM ÷ MH/unit = CM/MH)]

(b) Product A should be manufactured because it results in the highest contribution margin per machine hour. (c) 1. Machine hours (a) (3,000 ÷ 3) Contribution margin per unit of limited resource (b) Total contribution margin [(a) × (b)]

Product A B 1,000 1,000 $3.00 $3,000

C 1,000

$ 2.00 $ 1.50 $2,000 $1,500

The total contribution margin = ($3,000 + $2,000 + $1,500) = $6,500. [(A: 1,000 × $3) + (B: 1,000 × $2) + (C: 1,000 × $1.50) = $6,500] [(A: MH × CM/MH) +(B: MH × CM/MH) + (C: MH × CM/MH) = Tot. CM]

2. Machine hours (a) Contribution margin per unit of limited resource (b) Total contribution margin [(a) x (b)]

Product A 3,000 $3.00 $9,000

(A: 3,000 × $3 = $9,000) (A: MH × CM/MH = Tot. CM) LO3 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE G.12 (a) Product D: $30 ÷ $10 = 3.0 hours per unit Product E: $80 ÷ $10 = 8.0 hours per unit Product F: $35 ÷ $10 = 3.5 hours per unit [(D: $30 ÷ $10 = 3.0); (E: $80 ÷ $10 = 8.0); ($35 ÷ $10 = 3.5)] [(D: DL cost ÷ DL hrly. rate = DLH/unit); (E: DL cost ÷ DL hrly. rate = DLH/unit); (F: DL cost ÷ DL hrly. rate = DLH/unit)]

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G-21

EXERCISE G.12 (Continued) (b) Selling price Variable costs Contribution margin Direct labor hours per unit Contribution margin per direct labor hour

D $ 200 125 75 ÷ 3.0

Product E $ 300 160 140 ÷ 8.0

F $ 250 180 70 ÷ 3.5

$25.00

$17.50

$20.00

[(D: ($200 - $125) ÷ 3 = $25); (E: ($300 - $160) ÷ 8 = $17.50); (F: ($250 - $180) ÷ 3.5 = $20)] [(D: (USP – UVC) ÷ DLH/unit = CM/DLH); (E: (USP – UVC) ÷ DLH/unit = CM/DLH); (F: (USP – UVC) ÷ DLH/unit = CM/DLH)]

(c) Product D should be produced because it generates the highest contribution margin per direct labor hour. Product D Total direct labor hours available 2,000 Contribution margin per direct labor hour × $25 Total contribution margin $50,000 LO3 BT: AN Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE G.13 (a) Selling price per unit Variable costs per unit Unit contribution margin (a) Machine hours required (b) Contribution margin per machine hour (a) ÷ (b)

Product Basic Deluxe $40 $52 22 24 $18 $28 0.5 0.8 $36

$35

[(Basic: ($40 - $22) ÷ .5 = $36); (Deluxe: ($52 - $24) ÷ .8 = $35)] [(Basic: (USP – UVC) ÷ MH/unit = CM/MH); (Deluxe: (USP – UVC) ÷ MH/unit = CM/MH)]

(b) The Basic product should be manufactured because it results in the higher contribution margin per machine hour. (c) 1. Machine hours allocated × Contribution margin per machine hour Contribution margin

Basic 500

Deluxe 500

Total 1,000

$36 $18,000

$35 $17,500

$35,500

[(Basic: 500 × $36) + (Deluxe: 500 × $35) = $35,500] [(Basic: MH alloc. × CM/MH) + (Deluxe: MH alloc. × CM/MH) = Tot. CM] G-22

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EXERCISE G.13 (Continued) 2. Machine hours allocated × Contribution margin per machine hour Contribution margin

Basic 1,000

Deluxe –0–

Total 1,000

$36 $36,000

$35 –0–

$36,000

(Basic: 1,000 × $36 = $36,000) (Basic: MH alloc. × CM/MH = Tot. CM) LO3 BT: AN Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

EXERCISE G.14 (a) Armstrong Contador

Contribution Margin $260,000 $450,000

÷ ÷ ÷

Net Income $100,000 $100,000

= = =

Degree of Operating Leverage 2.60 4.50

Interpretation: Contador has a higher degree of operating leverage. Its earnings would increase (decrease) by a greater amount than Armstrong if each experienced an equal increase (decrease) in sales. [(Armstrong: $260,000 ÷ $100,000 = 2.60); (Contador: $450,000 ÷ $100,000 = 4.50)] [(Armstrong: CM ÷ Net inc. = DOL); (Contador: CM ÷ Net inc. = DOL)]

(b) Sales Variable costs Contribution margin Fixed costs Net income

Armstrong Company $550,000** 264,000** 286,000** 160,000** $126,000**

Contador Company $550,000*** 55,000*** 495,000*** 350,000*** $145,000***

*$500,000 × 1.1 **$240,000 × 1.1 ***$ 50,000 × 1.1 [(Armstrong: ($500,000 × 1.1) – ($240,000 × 1.1) - $160,000 = $126,000); (Contador: $550,000 – ($50,000 × 1.1) - $350,000 = $145,000)] [(Armstrong: Incr. sales – Incr. VC – FC = Net inc.); (Contador: Incr. sales – Incr. VC – FC = Net inc.)]

(c) Each company experienced a $50,000 increase in sales. However, because of Contador’s higher operating leverage, it experienced a $45,000 ($145,000 – $100,000) increase in net income while Armstrong experienced only a $26,000 ($126,000 – $100,000) increase. This is what we would have expected, since Contador’s degree of operating leverage exceeds that of Armstrong. LO4 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis Copyright © 2022 John Wiley & Sons, Inc.

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G-23

EXERCISE G.15 (a)

Manual system Computerized system

Contribution Margin $300,000

÷ ÷

Net Income $200,000

= =

Degree of Operating Leverage 1.50

$900,000

$200,000

4.50

(b) The computerized system would produce profits that are 3.0 times (4.50 ÷ 1.50) as much as the manual system. With a $150,000 increase in sales, net income would increase $30,000 ($230,000 – $200,000) under the manual system and $90,000 ($290,000 – $200,000) under the computerized system. Manual System Computerized System Sales $1,650,000 $1,650,000 Variable costs 1,320,000* 660,000** Contribution margin 330,000 990,000 Fixed costs 100,000 700,000 Net income $ 230,000 $ 290,000 *($1,200,000 ÷ $1,500,000) × $1,650,000 **($600,000 ÷ $1,500,000) × $1,650,000 [(Manual: ($1,500,000 + $150,000) – (($1,200,000 ÷ $1,500,000) × $1,650,000) - $100,000 = $230,000); (Computerized: ($1,500,000 + $150,000) – (($600,000 ÷ $1,500,000) × $1,650,000) - $700,000 = $290,000)] [(Manual: Incr. sales – Incr. VC – FC = Net inc.); (Computerized: Incr. sales – Incr. VC – FC = Net inc.)]

(Actual Sales

–

Break-even Sales)

Actual Sales

Margin of Safety Ratio

($1,500,000

–

$500,000*)

$1,500,000

.67

($1,500,000

–

$1,166,667**)

$1,500,000

.22

Computerized system

*$100,000 ÷ ($300,000 ÷ $1,500,000) **$700,000 ÷ ($900,000 ÷ $1,500,000) The manual system could weather the greater decline in sales before reaching the break-even point. Under the manual system sales could drop 67% before suffering a loss, while sales under the computerized system could only decline by 22% before suffering a loss. [(Manual: ($1,500,000 - ($100,000 ÷ ($300,000 ÷ $1,500,000)) ÷ $1,500,000 = .67); (Computerized: ($1,500,000 – ($700,000 ÷ ($900,000 ÷ $1,500,000)) ÷ $1,500,000 = .22)] [(Manual: (Act. sales $ - BEP $) ÷ Act. sales $ = MOS ratio); (Computerized: (Act. sales $ - BEP $) ÷ Act. sales $ = MOS ratio)] LO4 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

G-24

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EXERCISE G.16 (a) Contribution Margin ÷ Traditional Yams $ 80,000 ÷ Auto-Yams $240,000 ÷

Net Income $50,000 $50,000

Degree of Operating = Leverage = 1.60 = 4.80

Auto-Yams, which relies more heavily on fixed costs, has the higher degree of operating leverage, 4.80 versus 1.60. That means for every dollar of increase (decrease) in sales, Auto-Yams will generate 3 (4.80 ÷ 1.60) times more (less) in contribution margin and net income. (b) % Change in Sales

Degree of Operating Leverage

15% decrease: Traditional Yams Auto-Yams

(15%) (15%)

× ×

1.60 4.80

= =

(24.0%) (72.0%)

10% increase: Traditional Yams Auto-Yams

10% 10%

× ×

1.60 4.80

= =

16.0% 48.0%

% Change in = Net Income

[(Traditional: (15%) × 1.60 = (24%)); (Auto: (15%) × 4.80 = (72%))]; [(Traditional: % decr. in sales × DOL = % decr. in net inc.); (Auto: % decr. in sales × DOL = % decr. in net inc.)] [(Traditional: 10% × 1.60 = 16%); (Auto: 10% × 4.80 = 48%)]; [(Traditional: % incr. in sales × DOL = % incr. in net inc.); (Auto: % incr. in sales × DOL = % incr. in net inc.)]

(c) There are several possible answers that could be given. For example, if the candied Yams business is fairly stable, Auto-Yams might be the choice, because it will generate the higher contribution margin and net income. If, however, sales swing widely from year to year, Traditional Yams might be chosen because they will provide the more stable contribution margin and net income. Finally, if the investment banker is a risk taker, she might choose Auto-Yams in spite of year to year sales swings. LO4 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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G-25

SOLUTIONS TO PROBLEMS PROBLEM G.1 (a) Sales were $2,000,000 and variable expenses were $1,200,000, which means contribution margin was $800,000 and the CM ratio was 0.40. Fixed expenses were $1,035,000. Therefore, the break-even point in dollars is: $1,035,000 = $2,587,500 0.40 [(($2,000,000 - $1,200,000) ÷ $2,000,000 = .40); ($1,035,000 ÷ .40 = $2,587,500)] [((Sales – VC) ÷ Sales = CM ratio); (FC ÷ CM ratio = BEP in $)]

(b) 1.

The effect of this alternative is to increase the selling price per unit to $31.25 ($25 × 125%). Total sales become $2,500,000 (80,000 × $31.25). Thus, contribution margin ratio changes to 52% [($2,500,000 – $1,200,000) ÷ $2,500,000]. The new break-even point is: $1,035,000 = $1,990,385 (rounded) 0.52

[(((80,000 × ($25 x 125%)) - $1,200,000) ÷ $2,500,000 = .52); ($1,035,000 ÷ .52 = $1,990,385 (rounded))] [((Units sold × Incr. USP) – VC) ÷ Incr. sales = CM ratio); (FC ÷ CM ratio = New BEP in $)]

The effects of this alternative are: (1) fixed costs decrease by $160,000, (2) variable costs increase by $100,000 ($2,000,000 × 5%), (3) total fixed costs become $875,000 ($1,035,000 – $160,000), and the contribution margin ratio becomes 0.35 [($2,000,000 – $1,200,000 – $100,000) ÷ $2,000,000]. The new break-even point is: $875,000 = $2,500,000 0.35

The effects of this alternative are: (1) variable and fixed cost of goods sold become $784,000 (($1,050,000 + $518,000) ÷ 2) each, (2) total variable costs become $934,000 ($784,000 + $92,000 + $58,000), (3) total fixed costs are $1,301,000 ($784,000 + $425,000 + $92,000) and the contribution margin ratio becomes 0.533 [($2,000,000 – $934,000) ÷ $2,000,000]. The new break-even point is: $1,301,000 = $2,440,901 (rounded) 0.533

[(($1,568,000 × .50) + $92,000 + $58,000 = $934,000); (($1,568,000 × .50) + $425,000 + $92,000 = $1,301,000); (($2,000,000 - $934,000) ÷ $2,000,000 = .533); ($1,301,000 ÷ .533 = $2,440,901 (rounded))] [(Var. CGS + Var. sell. exp. + Var. admin. sell. = Tot. VC); (Fix. CGS + Fix. sell. exp. + Fix. admin. exp. = Tot. FC); ((Sales – Tot. VC) ÷ Sales = CM ratio); (Tot. FC ÷ CM ratio = New BEP in $)]

Alternative 1 is the recommended course of action using break-even analysis because it has the lowest break-even point. LO1 BT: AN Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

G-26

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PROBLEM G.2

(a) (1) Sales

Current Year $1,500,000

Variable costs Direct materials Direct labor Manufacturing overhead ($350,000 × 0.70) Selling expenses ($250,000 × 0.40) Administrative expenses ($270,000 × 0.20) Total variable costs Contribution margin

511,000 290,000 245,000 100,000 54,000 1,200,000 $ 300,000

Sales

Current Year $1,500,000 × 1.1

Variable costs Direct materials Direct labor Manufacturing overhead Selling expenses Administrative expenses Total variable costs Contribution margin

511,000 290,000 245,000 100,000 54,000 1,200,000 $ 300,000

Projected Year $1,650,000

× 1.1 × 1.1 × 1.1 × 1.1 × 1.1 × 1.1 × 1.1

562,100 319,000 269,500 110,000 59,400 1,320,000 $ 330,000

[(Current yr.: $1,500,000 – ($511,000 + $290,000 + ($350,000 × .70) + ($250,000 x .40) + ($270,000 × .20)) = $300,000); (Projected yr.: $300,000 × 1.1 = $330,000) [(Current yr.: Sales – (DM + DL + Var. MOH + Var. sell. exp. + Var. admin. exp.) = CM); (Projected yr.: Current yr. CM x Projected incr. = CM)]

(2) Fixed Costs Current Year Manufacturing overhead ($350,000 × 0.30) $105,000 Selling expenses ($250,000 × 0.60) 150,000 Administrative expenses ($270,000 × 0.80) 216,000 Total fixed costs $471,000

Projected year $105,000 150,000 216,000 $471,000

[Current & projected yr.: ($350,000 × .30) + ($250,000 × .60) + ($270,000 × .80) = $471,000] [Current & projected yr.: Fix. MOH + Fix. sell. exp. + Fix. admin. exp. = Tot. FC]

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G-27

PROBLEM G.2 (Continued) (b) Unit selling price = $1,500,000 ÷ 100,000 = $15 Unit variable cost = $1,200,000 ÷ 100,000 = $12 Unit contribution margin = $15 – $12 = $3 Contribution margin ratio = $3 ÷ $15 = 0.20 Break-even point in units 157,000 units

= Fixed costs = $471,000

÷ ÷

Unit contribution margin $3.00

Break-even point in dollars $2,355,000

= Fixed costs = $471,000

÷ ÷

Contribution margin ratio 0.20

[(($1,500,000 ÷ 100,000) – ($1,200,000 ÷ 100,000) = $3); ($3 ÷ $15 = .20)]; [(USP – UVC = UCM); (UCM ÷ USP = CM ratio)] [($471,000 ÷ $3 = 157,000); ($471,000 ÷ .20 = $2,355,000)]; (FC ÷ UCM = BEP in units); (FC ÷ CM ratio = BEP in $)]

+ Target net income) ÷ Contribution margin ratio

$3,355,000 =

($471,000

$200,000)

(d) Margin of safety = (Expected sales ratio 29.8%

($3,355,000

0.20

– Break-even sales)

÷ Expected sales

–

$2,355,000)

$3,355,000

(e) (1) Current Year $1,500,000

Sales Variable costs Direct materials Direct labor ($290,000 – $104,000) Manufacturing overhead ($350,000 × 0.30) Selling expenses ($250,000 × 0.90) Administrative expenses ($270,000 × 0.20) Total variable costs Contribution margin

G-28

511,000 186,000 105,000 225,000 54,000 1,081,000 $ 419,000

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PROBLEM G.2 (Continued) Fixed cost Manufacturing overhead ($350,000 × 0.70) Selling expenses ($250,000 × 0.10) Administrative expenses ($270,000 × 0.80) Total fixed costs

$245,000 25,000 216,000 $486,000

(2) Contribution margin ratio = $419,000 ÷ $1,500,000 = 0.28 (rounded) (3) Break-even point in dollars = $486,000 ÷ 0.28 = $1,735,714 (rounded) The break-even point in dollars declined from $2,355,000 to $1,735,714. This means that overall the company’s risk has declined because it doesn’t have to generate as much in sales. The two changes actually had opposing effects on the break-even point. By changing to a more commission-based approach to compensate its sales staff the company reduced its fixed costs, and therefore reduced its break-even point. In contrast, the purchase of the new equipment increased the company’s fixed costs (by increasing its equipment depreciation) which would increase the break-even point. LO1 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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G-29

PROBLEM G.3 (a)

Appetizers Main entrees Desserts Beverages

Sales Mix Percentage 15% 50% 10% 25%

Total sales required to achieve target net income =

Appetizers Main entrees Desserts Beverages

× × × × ×

Contribution Margin Ratio 50% 25% 50% 80%

= = = = =

Weighted-Average Contribution Margin Ratio 0.075 0.125 0.050 0.200 0.450

( $1,053,000 + $117,000 ) ÷ 0.45 = $2,600,000

Sales Mix Percentage 15% 50% 10% 25%

× × × × ×

Total Sales Needed $2,600,000 $2,600,000 $2,600,000 $2,600,000

= = = = =

Sales from Each Product $ 390,000 1,300,000 260,000 650,000 $2,600,000

[(Appet.: 15% × 50%) + (Main ent.: 50% × 25%) + (Desserts: 10% × 50%) + (Bev.: 25% × 80%) = .450]; [(Appet.: Sales mix % × CM ratio) + (Main ent.: Sales mix % × CM ratio) + (Desserts: Sales mix % × CM ratio) + (Bev.: Sales mix % × CM ratio) = Wtd.-ave. CM ratio] [($1,053,000 + $117,000) ÷ .45 = $2,600,000]; [(FC + Target net inc.) ÷ Wtd.-ave. CM ratio = Tot. sales $ req.] [(Appet.: 15% × $2,600,000) + (Main ent.: 50% × $2,600,000) + (Desserts: 10% × $2,600,000) + (Bev.: 25% × $2,600,000) = $2,600,000]; [(Appet.: Sales mix % × Tot. sales $ req.) + (Main ent.: 50% × Tot. sales $ req.) + (Desserts: Sales mix % × Tot. sales $ req.) + (Bev.: Sales mix % × Tot. sales $ req.) = Tot. sales $ req.]

(b)

Appetizers Main entrees Desserts Beverages

Sales Mix Percentage 25% 25% 10% 40%

Total sales required to achieve target net income =

× × × × ×

Contribution Margin Ratio 50% 10% 50% 80%

= = = = =

Weighted-Average Contribution Margin Ratio 0.125 0.025 0.050 0.320 0.520

( $1,638,000* + $117,000) ÷ 0.52 = $ 3,375,000

*$1,053,000 + $585,000 G-30

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PROBLEM G.3 (Continued) Thus, sales would have to increase by $775,000 ($3,375,000 – $2,600,000) to achieve the target net income. This increase in sales is driven by the increase in fixed costs. The sales of each product line would be:

Appetizers Main entrees Desserts Beverages

Sales Mix Percentage 25% 25% 10% 40%

× × × × ×

Total Sales Needed $3,375,000 $3,375,000 $3,375,000 $3,375,000

= = = = =

Sales from Each Product $ 843,750 843,750 337,500 1,350,000 $3,375,000

(c)

Appetizers Main entrees Desserts Beverages

Sales Mix Percentage 15% 50% 10% 25%

× × × × ×

Contribution Margin Ratio 50% 10% 50% 80%

= = = = =

Weighted-Average Contribution Margin Ratio 0.075 0.050 0.050 0.200 0.375

The weighted-average contribution margin ratio computed in part (a) was 45%. With the contribution margin ratio on entrees falling to 10%, that average will now be 37.5% as shown previously. Applying this to the new fixed costs of $1,638,000 and target net income of $117,000 we get: Total sales required to achieve target net income

Appetizers Main entrees Desserts Beverages

($1,638,000 + $117,000) ÷ 0.375 = $ 4,680,000

Sales Mix Percentage 15% 50% 10% 25%

× × × × ×

Total Sales Needed $4,680,000 $4,680,000 $4,680,000 $4,680,000

= = = = =

Sales from Each Product $ 702,000 2,340,000 468,000 1,170,000 $4,680,000

Relative to parts (a) and (b), the total required sales for (c) would increase. It appears that the least risky approach would have been for Paul to switch to the new sales mix, but not to incur the additional fixed costs of expanding operations. If the switch in sales mix appears to be successful, then it may be appropriate for him to incur the additional fixed costs necessary for expansion of operations. Copyright © 2022 John Wiley & Sons, Inc.

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G-31

PROBLEM G.3 (Continued) [(Appet.: 15% × 50%) + (Main ent.: 50% × 10%) + (Desserts: 10% × 50%) + (Bev.: 25% × 80%) = .375]; [(Appet.: Sales mix % × CM ratio) + (Main ent.: Sales mix % × CM ratio) + (Desserts: Sales mix % × CM ratio) + (Bev.: Sales mix % × CM ratio) = Wtd.-ave. CM ratio] [($1,638,000 + $117,000) ÷ .375 = $4,680,000]; [(FC + Target net inc.) ÷ Wtd.-ave. CM ratio = Tot. sales $ req.] [(Appet.: 15% × $4,680,000) + (Main ent.: 50% × $4,680,000) + (Desserts: 10% × $4,680,000) + (Bev.: 25% × $4,680,000) = $4,680,000]; [(Appet.: Sales mix % × Tot. sales $ req.) + (Main ent.: 50% × Tot. sales $ req.) + (Desserts: Sales mix % × Tot. sales $ req.) + (Bev.: Sales mix % × Tot. sale $s req.) = Tot. sales $ req.] LO2 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

G-32

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PROBLEM G.4

(a) Selling price Less: Variable costs Unit contribution margin

Economy $30 16 $14

Product Standard $50 20 $30

Deluxe $100 46 $ 54

Ignoring the machine time constraint, the Deluxe product should be produced because it has the highest unit contribution margin. (b) Unit contribution margin (a) Machine hours required (b) Contribution margin per limited resource (a)/(b)

Economy $ 14 0.5

Product Standard $ 30 0.8

Deluxe $ 54 1.6

$28.00

$37.50

$33.75

[(Econ.: ($30 - $16) ÷ .5 = $28); (Std.: ($50 - $20) ÷ .8 = $37.50); (Deluxe: ($100 - $46) ÷ 1.6 = $33.75)] [(Econ.: UCM ÷ MH/unit = CM/MH); (Std.: UCM ÷ MH/unit = CM/MH); (Deluxe: UCM ÷ MH/unit = CM/MH)]

(c) If additional machine hours become available, the additional time should be used to produce the Standard product since it has the highest contribution margin per machine hour. LO3 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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G-33

PROBLEM G.5 (a) To determine the break-even point in dollars we must first calculate the contribution margin ratio for each company. Contribution Margin ÷

Sales

Blanc Company Noir Company

$220,000 $320,000

÷ ÷

$500,000 $500,000

= =

Blanc Company Noir Company

Fixed Costs $170,000 $270,000

÷ ÷ ÷

Contribution Margin Ratio 0.44 0.64

Blanc Company Noir Company

(Actual Sales ($500,000 ($500,000

– – –

Break-even Sales) $386,364) $421,875)

÷ ÷ ÷

Contribution Margin Ratio 0.44 0.64 Break-even Point = in Dollars = $386,364 = $421,875

Actual Sales $500,000 $500,000

= = =

Margin of Safety Ratio 0.227 0.156

[(Blanc: $220,000 ÷ $500,000 = .44); (Noir: $320,000 ÷ $500,000 = .64)]; [Blanc: CM ÷ Sales = CM ratio); (Noir: CM ÷ Sales = CM ratio)] [(Blanc: $170,000 ÷ .44 = $386,364); (Noir: $270,000 ÷ .64 = $421,875)]; [(Blanc: FC ÷ CM ratio = BEP in $); (Noir: FC ÷ CM ratio = BEP in $)] [(Blanc: ($500,000 - $386,364) ÷ $500,000 = .227); (Noir: ($500,000 - $421,875) ÷ $500,000 = .156)]; [(Blanc: (Act. sales $ - BEP in $) ÷ Act. sales $ = MOS ratio); (Noir: (Act. sales $ - BEP in $) ÷ Act. sales $ = MOS ratio)]

(b) Contribution Net Degree of Operating Margin ÷ Income = Leverage Blanc Company $220,000 ÷ $50,000 = 4.4 Noir Company $320,000 ÷ $50,000 = 6.4 Because Noir Company relies more heavily on fixed costs, it has a higher degree of operating leverage. This means that its net income will be more sensitive to changes in sales. For a given change in sales, the change in net income will be 1.45 (6.4 ÷ 4.4) times higher or lower for Noir Company than for Blanc Company. (c) Blanc Company Noir Company Sales $600,000* $600,000 Variable costs 336,000** 216,000*** Contribution margin 264,000 384,000 Fixed costs 170,000 270,000 Net income $ 94,000 $114,000 *$500,000 × 1.2 **$280,000 × 1.2 ***$180,000 × 1.2 G-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM G.5 (Continued) (d) Sales Variable costs Contribution margin Fixed costs Net income (Loss)

Blanc Company $400,000* 224,000** 176,000 170,000 $ 6,000

Noir Company $400,000 144,000*** 256,000 270,000 ($ 14,000)

*$500,000 × 0.80 **$280,000 × 0.80 ***$180,000 × 0.80 [(Blanc: ($500,000 × .80) – ($280,000 × .80) - $170,000 = $6,000); (Noir: ($500,000 × .80) – ($180,000 × .80) $270,000 = ($14,000))] [(Blanc: Decr. sales – Decr. VC – FC = Net inc.); (Noir: Decr. sales – Decr. VC – FC = Net loss)]

(e) In part (b) the degree of operating leverage of Noir Company was higher than that of Blanc Company, telling us that the net income of Noir Company was more sensitive to changes in sales than that of Blanc Company. In part (c) we see that a 20% increase in sales increased the net income of Noir Company by $64,000 ($114,000 – $50,000), while the net income of Blanc Company increased by only $44,000 ($94,000 – $50,000). However, in part (d) we see that a 20% decrease in sales resulted in a $64,000 ($50,000 + $14,000) decline in net income for Noir Company, while Blanc Company’s net income only declined by $44,000 ($50,000 – $6,000). The increased risk caused by higher operating leverage is also seen in part (a). Noir Company has a higher break-even point, and a lower margin of safety ratio than Blanc Company. Thus, while operating leverage can be very beneficial for a company that expects its sales to increase, it can also significantly increase a company’s risk. LO4 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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G-35

PROBLEM G.6

(a) Reformat the income statement to CVP format. All amounts are in $000s. Sales ........................................................ Variable costs ($31,500 + $13,500) ......... Contribution margin ................................ Less: Fixed costs ($8,610 + $10,260) .... Operating income....................................

$75,000 45,000 30,000 18,870 $11,130

Contribution margin ratio = $30,000 ÷ $75,000 = 40% Break-even point = $18,870 ÷ 40% = $47,175 [($75,000 – ($31,500 + $13,500) – ($8,610 + $10,260) = $11,130)]; [Sales – VC – FC = Oper. inc.] [($30,000 ÷ $75,000 = 40%); ($18,870 ÷ 40% = $47,175)] [(CM ÷ Sales = CM ratio); (FC ÷ CM ratio = BEP in $)]

(b) If a hired workforce replaces sales agents, commissions will be reduced to 8% of sales, or $6,000; but fixed costs will increase by $7,500. Sales ........................................................ Variable costs ($31,500 + $6,000) ........... Contribution margin ................................ Less: Fixed costs ($18,870* + $7,500) ... Operating income....................................

$75,000 37,500 37,500 26,370 $11,130

*($8,610 + $10,260) Contribution margin ratio = $37,500 ÷ $75,000 = 50% Break-even point = $26,370 ÷ 50% = $52,740 [($75,000 – ($31,500 + $6,000) – ($8,610 + $10,260 + $7,500) = $11,130)]; [Sales – VC – FC = Net inc.] [($37,500 ÷ $75,000 = 50%); ($26,370 ÷ 50% = $52,740)] [(CM ÷ Sales = CM ratio); (FC ÷ CM ratio = BEP in $)]

(c) Operating leverage = contribution margin ÷ operating income (1) Current situation: from part (a) $30,000 ÷ $11,130 = 2.70 (2) Proposed situation: from part (b) $37,500 ÷ $11,130 = 3.37

G-36

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PROBLEM G.6 (Continued) The calculations indicate that at a sales level of $75 million, a percentage change in sales and contribution margin will result in 2.70 times the percentage change in operating income if Bonita continues to use sales agents. If it chooses to employ its own sales staff, the change in operating income will be 3.37 times the percentage change in sales. The higher contribution margin per dollar of sales and higher fixed costs from Bonita employing its own sales staff gives it more operating leverage. This will result in greater benefits (increases in operating income) if revenues increase, but greater risks (decreases in operating income) if revenues decline. (d) The sales level at which operating incomes will be identical is when the cost of the network of agents (18% of sales) is exactly equal to the cost of paying employees 8% commission along with additional fixed costs of $7.5 million. None of the other costs is relevant, because they will not change between alternatives. Let the sales volume = S 18% × S = (8% × S) + $7,500,000 0.18S = .08S + $7,500,000 0.10S = $7,500,000 S = $75,000,000 LO1, 4 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis

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G-37

SOLUTIONS TO DATA ANALYTICS IN ACTION The solutions for the Data Analytics in Action problems are available in Excel. See the file Solutions: Excel Templates in the Instructor Resources.

G-38

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APPENDIX F Activity-Based Costing Learning Objectives 1. 2. 3. 4.

Discuss the difference between traditional costing and activity-based costing. Apply activity-based costing to a manufacturer. Explain the benefits and limitations of activity-based costing. Apply activity-based costing to service industries.

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F-1

ANSWERS TO QUESTIONS 1.

Direct labor is a valid basis for allocating overhead when: (a) direct labor constitutes a significant part of total product cost, and (b) there is a high correlation between direct labor and changes in the amount of overhead costs.

LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

The amount of direct labor in many industries has greatly decreased, due to advances in computerized systems, technological innovation, global competition and automation. Total overhead costs resulting from depreciation on expensive equipment and machinery, utilities, repairs, and maintenance have significantly increased along with a reduction of direct labor hours due to terminating hourly employees. Many companies now use machine hours as the basis on which to allocate overhead in an automated manufacturing environment.

LO1 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

In many automated manufacturing environments, machine hours is a more relevant basis on which to allocate overhead.

LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Under a traditional volume-based costing system where overhead cost is allocated on the basis of units of output, the high-volume product will undoubtedly absorb more overhead than the lowvolume product.

LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

The principal differences are: (1) Primary focus (2) Bases of allocation

Activity-Based Costing Activities performed in making products Multiple cost drivers

Traditional Costing Units of production Single unit-level base

LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Activity-based overhead rates are computed using the following formula: Estimated Overhead per Activity Estimated Use of Cost Drivers per Activity

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

The four steps involved in developing an ABC system are: 1. Identify and classify the major activities involved in the manufacture of specific products and allocate overhead to cost pools. 2. Identify the cost driver that has a strong correlation to the costs accumulated in each cost pool and estimate total annual cost driver usage. 3. Compute the activity-based overhead rate for each cost pool. 4. Assign overhead costs to products using the overhead rates determined for each cost pool and each product’s use of each cost driver.

LO1, 2 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

A value-added/non-value-added activity flowchart is based on a systematic analysis of all the activities (resource-consuming actions and transactions) performed to manufacture a product or render a service. The flowchart documents each activity and the time involved in each activity. The flow chart also documents management’s proposed reengineering of the manufacturing process.

LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

F-2

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Questions Appendix F (Continued) 9.

An activity cost pool is the overhead cost attributed to a distinct type of activity or related activities.

LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

10.

A cost driver is any factor or activity that has a direct cause-effect relationship with the resources consumed.

LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

11.

A cost driver is accurate and appropriate if it measures the actual consumption of the activity in manufacturing a product or rendering a service and the data relating to the cost driver is available and easily obtained.

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

12.

The formula for assigning activity cost pools to products is: Activity-based overhead rate X Expected or actual use of cost drivers per product

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

13.

The use of more cost pools results in more accurate product costing, enhanced control over overhead costs, and better management decisions.

LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Reporting & Control: Cost Management

14.

The limitations of ABC are: (a) increased costs that accompany multiple-activity cost pools and cost drivers and (b) some arbitrary allocations remain.

LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Cost Accounting

15.

ABC is the superior costing system when: (1) product lines differ greatly in volume and manufacturing complexity; (2) product lines are numerous, diverse, and require differing degrees of support services; (3) overhead costs constitute a significant portion of total costs; (4) the manufacturing process or the number of products has changed significantly; and (5) data from the existing system is being ignored or challenged by management.

LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

16.

Basic ABC has been enhanced by identifying activities as value-added and non-value-added.

LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

17.

Identifying non-value-added activities highlights for managers the activities that should be reduced or eliminated if they are not essential and they add no value to the product.

LO3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

18.

The overall objective of ABC in service firms is no different than for manufacturing companies; that is, improved costing of services rendered (by job, service, contract, or customer). The general approach to costing is the same—analyze operations, identify activities, assign overhead costs to activity cost pools, and identify and use cost drivers to assign the cost pools to the services.

LO4 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

19.

Greater accuracy in cost allocation is achieved by recognizing the four levels of activity. Some activities are affected (driven) by changes in the number of units produced, while other activities are affected only by changes in the number of batches or the number of products, and some, facility-level activities, are unaffected by changes in either units, batches, or products produced.

LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-3

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE F.1

(a)

Estimated annual overhead costs = Predetermined overhead rate Estimated annual operating activity $975,000 100,000

(b)

= $9.75 per direct labor hour

92,000 direct labor hours × $9.75 = $897,000 overhead applied

(92,000 × $9.75 = $897,000) (Act. DLH × Predet. OH rate = OH applied)

(c)

If the manufacturing process is complex, then multiple allocation bases for multiple cost pools can result in more accurate productcost computations. In such situations, managers need to consider an overhead cost allocation method that uses multiple bases.

LO1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE F.2 Under ABC, overhead costs are shifted from the high-volume products to the low-volume products. This shift results in more accurate costing for two reasons: 1. Low-volume products often require more special handling, such as more machine setups and inspections, than high-volume products. Thus, the low-volume product frequently is responsible for more overhead costs per unit than is a high-volume product. 2. Assigning overhead using ABC will usually increase the cost per unit for low-volume products. Therefore, a traditional overhead allocation such as direct labor hours is usually a poor cost driver for assigning overhead costs to low-volume products. As a result, for Finney, one of the products (Product RX3) may have been low volume and therefore may have more overhead costs assigned to it under an ABC system. LO1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

F-4

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BRIEF EXERCISE F.3 An appropriate cost driver for each activity is: Activity Materials handling Machine setups Factory machine maintenance Factory supervision Quality control

Cost Driver Number of requisitions Number of setups Machine hours used Number of employees Number of inspections

LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE F.4 (a) (b) (c) (d) (e) (f) (g)

Number of parts or assemblies Number of setups Number of employees Number of inspections Number of purchase orders Machine hours Square footage occupied

LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE F.5 Machine setups Machining Inspections

$150,000 ÷ 2,500 = $60 per setup $375,000 ÷ 25,000 = $15 per machine hour $ 87,500 ÷ 1,750 = $50 per inspection

LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE F.6 Activity Cost Pool Sizing and cutting Stitching and trimming Wrapping and packing

Estimated Estimated Use of Overhead ÷ Cost Drivers per Activity = $4,000,000 1,440,000 336,000

160,000 machine hours 80,000 labor hours 32,000 finished units

Activity-Based Overhead Rates $25.00 per machine hour $18.00 per labor hour $10.50 per finished unit

LO2 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

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F-5

BRIEF EXERCISE F.7 Estimated Estimated Use of Overhead ÷ Cost Drivers per Activity =

Activity Cost Pool Ordering and receiving Food processing Packaging

84,000 480,000 1,760,000

× Use of Cost Drivers 7,000 orders 40,000 machine hours 25,000 labor hours

12,000 orders 60,000 machine hours 40,000 labor hours

Activity-Based Overhead Rates $7.00 per order $8.00 per machine hour $44.00 per labor hour

Activity-Based Overhead = Total Overhead Rates Assigned $7.00 $ 49,000 $8.00 320,000 $44.00 1,100,000 $ 1,469,000

LO2 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management [(7,000 × $7 = $49,000); (40,000 × $8 = $320,000); (25,000 × $44 = $1,100,000)] [(No. of orders × OH rate/order = Assigned OH); (No. of MH × OH rate/MH = Assigned OH); (No. of labor hrs. × OH rate/labor hr. = Assigned OH)]

BRIEF EXERCISE F.8 (a) (b) (c) (d) (e) (f)

Non-value-added Value-added Non-value-added Non-value-added Non-value-added Value-added

LO3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE F.9 Value-added Activities (a) Designing and drafting (c) On-site supervision (e) Consultation with client

F-6

Hours 3.0 2.0 1.5 6.5

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BRIEF EXERCISE F.9 (Continued) Non-value-added Activities (b) Staff meetings (d) Lunch (f) Entertaining a prospective client

Hours 1.0 1.0 2.0 4.0

LO3, 4 BT: AN Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

BRIEF EXERCISE F.10 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Unit- or Batch-level Unit-level Unit-level Batch- or unit-level Facility-level Batch- or product-level Batch- or product-level Unit-level Facility-level Batch-level

LO3, 4 BT: AN Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA:: Cost Management

BRIEF EXERCISE F.11 (a) (b) (c) (d) (e) (f) (g) (h)

Facility-level Unit-level Product-level Unit-level Batch-level Batch-level Product-level Facility-level

LO3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-7

BRIEF EXERCISE F.12 (a) Initial concept formation

(b)

$40,000 = $2,000 per project change 20

Design

$300,000 = $2 per square foot 150,000

Construction oversight

$100,000 = $1,000 per month 100

Initial concept formation—product-level Design—unit-level* Construction oversight—batch-level *Instructor’s note: This is an architect firm not a manufacturer. It makes sense that the cost of a building’s design will depend on the size of the building (square footage) and because each building is unique, the design would be a unit-level activity.

LO3, 4 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

F-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

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SOLUTIONS TO DO IT! EXERCISES DO IT! F.1 (a) True (b) False. Activity-based costing is an approach to allocating overhead to products. (c) False. In today’s increasingly automated environment, a single allocation base is never an appropriate basis for allocating costs to products. (d) True (e) True LO1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

DO IT! F.2 (a) Computations of activity-based overhead rates per cost driver: Activity Cost Pools Machine setup Machining Packing

Estimated Estimated Use of Cost Activity-Based Overhead Drivers per Activity Overhead Rates $ 16,000 40 setups $400 per setup 110,000 5,000 machine hours $ 22 per machine hr. 30,000 500 orders $ 60 per order $156,000

(b) Assignment of each activity’s overhead cost to products using ABC: BC113 Use of Cost Drivers Activity-Based Cost Assig per Produc Overhead Rates ned t Machine setup 25 $400 $10,000 Machining 1,000 $ 22 22,000 Packing 150 $ 60 9,000 Total assigned costs $41,000 Activity Cost Pools

AD908 Use of Cost Drivers per Product 15 4,000 350

Activity-Based Overhead Cost Assig Rates ned $400 $ 22 $ 60

6,000 88,000 21,000 $115,000

[(BC113: (25 × $400) + (1,000 × $22) + (150 × $60) = $41,000); (AD908: (15 × $400) + (4,000 × $22) + (350 × $60) = $115,000)] [(BC113: (No. of setups × OH rate/setup) + (No. of MH × OH rate/MH) + (No. of orders × OH rate/order) = Tot. assigned OH); (AD908: (No. of setups × OH rate/setup) + (No. of MH × OH rate/MH) + (No. of orders × OH rate/order) = Tot. assigned OH)]

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F-9

DO IT! F.2 (Continued) (c) Computation of overhead cost per unit: Total costs assigned (a) Total units produced (b) Overhead cost per unit (a) ÷ (b)

BC113 $41,000 3,000 $ 13.67

AD908 $115,000 1,500 $ 76.67

[(BC113: $41,000 ÷ 3,000 = $13.67); (AD908: $115,000 ÷ 1,500 = $76.67)] [(BC113: Tot. assigned OH ÷ Tot. units produced = OH/unit); (AD908: Tot. assigned OH ÷ Tot. units produced = OH/unit)]

(d) These computations show that the total overhead assigned to Product AD908 is more than two and a half times that assigned to BC113. On a per unit basis, the overhead assigned to AD908 is close to six times that assigned to each BC113. LO2 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

DO IT! F.3 (a) (b) (c) (d) (e) (f) (g) (h)

unit-level product-level facility-level batch-level unit-level batch-level facility-level unit-level

LO3 BT: C Difficulty: Easy TOT: 6 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

DO IT! F.4 (a) The activity based overhead rates would be:

Estimated Overhead Loading and unloading Travel Logistics

F-10

$ 90,000 $450,000 $ 75,000



Estimated Use of Cost Driver Per Activity 90,000 600,000 3,000

Activity-Based Overhead Rate $1.00 per piece $0.75 per mile $25.00 per hour

Kimmel, Survey of Accounting, 3e, Solutions Manual

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DO IT! F.4 (Continued) (b) The overhead applied to Job XZ3275 is: (150 × $1.00) + (200 ×$0.75) + (0.75 × $25) = $318.75 [(150 × $1.00) + (200 × $.75) + (.75 × $25) = $318.75] [(No. of pieces × OH rate/piece) + (No. of miles × OH rate/mi.) + (No. of hrs. × OH rate/hr.) = Tot. OH applied] LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA AC: Measurement Analysis and Interpretation IMA: Reporting & Control: Cost Accounting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-11

SOLUTIONS TO EXERCISES EXERCISE F.1 (a)

Estimated overhead = Predetermined overhead rate Estimated Direct labor costs $240,000 = 160% of direct labor cost $50,000 + $100,000

[$240,000 ÷ ($50,000 + $100,000) = 160%] [Est. OH ÷ (Std. DL costs + Custom DL costs) = Predet. OH rate as a % of DL cost]

(b) Activity cost pools Machining Machine setup

Cost drivers Machine hours Setups

Estimated overhead $140,000 100,000

Activity-based overhead rates Machining: Machine setup: $140,000 $100,000 = $70 per machine hour = $200 per setup 1,000 + 1,000 400 + 100 [(Mach.: $140,000 ÷ (1,000 + 1,000) = $70); (Mach. setup: $100,000 ÷ (400 + 100) = $200)] [(Mach.: Est. OH ÷ (Std. MH + Custom MH) = OH rate/MH); (Mach. setup: Est. OH ÷ (Custom setups + Std. setups) = OH rate/setup.)]

Standard $80,000 $80,000

Activity-based costing Machining: 1,000 × $70 1,000 × $70 Machine setup: 100 × $200 400 × $200

Custom $160,000 $160,000

$70,000 $70,000 20,000 $90,000

80,000 $150,000

LO1, 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management F-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE F.2 (a)

Traditional costing system

Sales Costs Operating income (b)

Product 540X

Product 137Y

Product 249S

$180,000 55,000 $125,000

$160,000 50,000 $110,000

$70,000 15,000 $55,000

Product 540X

Product 137Y

Product 249S

$180,000 50,000 $130,000

$160,000 35,000 $125,000

$70,000 35,000 $35,000

Activity-based costing system

Sales Costs Operating income (c) Product 540X:

($130,000 – $125,000) ÷ $125,000 = 4.00%

Product 137Y

($125,000 – $110,000) ÷ $110,000 = 13.64%

Product 249S

($35,000 – $55,000) ÷ $55,000 = (36.36%)

[(540X: ($130,000 - $125,000) ÷ $125,000 = 4.00%); (137Y: ($125,000 - $110,000) ÷ $110,000 = 13.64%); (249S: ($35,000 - $55,000) ÷ $55,000 = (36.36%))] [(540X: (ABC oper. inc. – Trad. oper. inc.) ÷ Trad. oper. inc. = % diff. in oper. inc.); (137Y: (ABC oper. inc. – Trad. oper. inc.) ÷ Trad. oper. inc. = % diff. in oper. inc.); 249S(ABC oper. inc. – Trad. oper. inc.) ÷ Trad. oper. inc. = % diff. in oper. inc.)]

(d) These costs are similar probably because the cost drivers are essentially the same; that is, they are based on a unit volume concept. LO1 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-13

EXERCISE F.3 (a)

Activity cost pools Cutting Design

Cost drivers Machine hours Number of setups

Activity-based overhead rates Cutting $360,000 = $1.80 per machine hour 200,000

Estimated overhead $360,000 585,000

Design $585,000 = $390 per setup 1,500 Wool

Activity-based costing Cutting 100,000 × $1.80 100,000 × $1.80 Design 1,000 × $390 500 × $390 Total cost assigned

Cotton

$180,000 $180,000 390,000 195,000 $375,000

$570,000

[(Wool: (100,000 × $1.80) + (1,000 × $390) = $570,000); (Cotton: (100,000 × $1.80) + (500 × $390) = $375,000)] [(Wool: (No. of MH × OH rate/MH) + (No. of setups × OH rate/setup = Tot. OH cost assigned); (Cotton: (No. of MH × OH rate/MH) + (No. of setups × OH rate/setup = Tot. OH cost assigned)]

(b) Estimated overhead $945,000 = = $2.10 per direct labor hour Estimated direct labors hours 450,000

Wool Traditional costing 225,000 × $2.10 225,000 × $2.10

Cotton

$472,500 $472,500

[(Wool: 225,000 × $2.10 = $472,500); (Cotton: (225,000 × $2.10 = $472,500)] [(Wool: No. of DLH × OH rate/DLH = Tot. OH cost assigned); (Cotton: No. of DLH × OH rate/DLH = Tot. OH cost assigned)]

The wool product line is assigned $97,500 ($570,000 – $472,500) more overhead cost when an activity-based costing system is used. As a result, the cotton product line is assigned $97,500 ($472,500 – $375,000) less. LO1, 2 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

F-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE F.4 (a) Direct labor hours for car wheels (40,000 × 1) = 40,000 Direct labor hours for truck wheels (10,000 × 3) = 30,000 Total direct labor hours 70,000 $770,000 (total estimated overhead) 70,000 (total estimated direct labor = $11 per direct labor hour. hours) Overhead assigned Car wheels Truck wheels Total overhead

(40,000 × $11) (30,000 × $11)

= $440,000 = 330,000 $770,000

[(Car: 40,000 × $11 = $440,000); (Truck: 30,000 × $11 = $330,000)] [(Car: No. of DLH × OH rate/DLH = Tot. OH cost assigned); (Truck: No. of DLH × OH rate/DLH = Tot. OH cost assigned)]

(b)

Estimated Use of Cost Drivers

Activity Estimated Cost Pool Overhead ÷ Setting up machines $220,000 1,000 setup Assembling 280,000 70,000 DLHs Inspection 270,000 1,200 inspections

(c)

Car Wheels Use of Cost Driver per Product

Activity Cost Pools Setting up machines 200 Assembling 40,000 Inspection 100 Total cost assigned

ABC Overhead Rate

$220/setup $ 4/DLH $225/inspection

Activity-Based Overhead Rates = $220 $ 4 $225

Kimmel, Survey of Accounting, 3e, Solutions Manual

Cost Assigned $ 44,000 160,000 22,500 $226,500

(For Instructor Use Only)

F-15

EXERCISE F.4 (Continued) (c)

Truck Wheels Use of Cost Activity-Based Driver Overhead Activity Cost Pools per Product × Rates = Setting up machines 800 $220 Assembling 30,000 $ 4 Inspection 1,100 $225 Total cost assigned

Cost Assigned $176,000 120,000 247,500 $543,500

[(Car: (200 × $220) + (40,000 × $4) + (100 × $225) = $226,500); (Truck: (800 × $220) + (30,000 × $4) + (1,100 × $225) = $543,500)] [(Car: (No. of mach. setups × OH rate/setup) + (No. of DLH ×OH rate/DLH) + (No. of inspect. × OH rate/inspect.) = Tot. OH cost assigned); (Truck: (No. of mach. setups × OH rate/setup) + (No. of DLH × OH rate/DLH) + (No. of inspect. × OH rate/inspect.) = Tot. OH cost assigned)]

(d)

Assuming that the cost drivers are a reasonable representation of what is occurring in the two product lines, it seems appropriate to switch to activity-based costing. By using this system, more accurate cost information is developed which should lead to better allocation of resources and pricing decisions in the future.

LO1, 2 BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

EXERCISE F.5 (a) Traditional costing: $260,000 ÷ 2,500 (800 + 1,700) hours = $104 per direct labor hour (1) One mobile safe: 800 hours × $104 = $83,200 $83,200 ÷ 200 = $416 each (2) One walk-in safe: 1,700 hours × $104 = $176,800 $176,800 ÷ 50 = $3,536 each [(Mobile: (800 × $104 = $83,200; $83,200 ÷ 200 = $416)); (Walk-in: (1,700 × $104 = $176,800; $176,800 ÷ 50 = $3,536))] [(Mobile: (No. of DLH × OH rate/DLH = OH cost allocated; OH cost allocated ÷ No. of safes = OH cost/safe)); (Walk-in: (No. of DLH × OH rate/DLH = OH cost allocated; OH cost allocated ÷ No. of safes = OH cost/safe))]

F-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE F.5 (Continued) (b) Activity-based costing: (1) Material handling costs $160,000 ÷ 500 (300 + 200) moves = $320 per move (a) One mobile safe: 300 moves × $320 = $96,000 $96,000 ÷ 200 = $480 each (b) One walk-in safe: 200 moves × $320 = $64,000 $64,000 ÷ 50 = $1,280 each [(Mobile: 300 × $320 = $96,000; $96,000 ÷ 200 = $480); (Walk-in: 200 x $320 = $64,000; $64,000 ÷ 50 = $1,280)] [(Mobile: No. of moves × OH rate/move = Mat. hand. cost assigned; Mat. hand. cost assigned ÷ No. of safes = Mat. hand. cost/safe); (Walk-in: No. of moves × OH rate/move = Mat. hand. cost assigned; Mat. hand. cost assigned ÷ No. of safes = Mat. hand. cost/safe)]

(2) Purchasing activity costs $100,000 ÷ 800 (450 + 350) orders = $125 per order (a) One mobile safe: 450 orders × $125 = $56,250 $56,250 ÷ 200 = $281.25 each (b) One walk-in safe: 350 orders × $125 = $43,750 $43,750 ÷ 50 = $875 each [(Mobile: 450 × $125 = $56,250; $56,250 ÷ 200 = $281.25); (Walk-in: 350 × $125 = $43,750; $43,750 ÷ 50 = $875)] [(Mobile: No. of orders × OH rate/order = Purch. act. cost assigned; Purch. act. cost assigned ÷ No. of safes = Purch. act. cost/safe); (Walk-in: No. of orders × OH rate/order = Purch. act. cost assigned; Purch. act. cost assigned ÷ No. of safes = Purch. act. cost/safe)]

Mobile safe Walk-in safe **$480 + $281.25 **$1,280 + $875

Traditional Costing $ 416 $3,536

Activity-Based Costing ** $761.25** $ 2,155**

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-17

EXERCISE F.6 Budgeted Costs

Activity Cost Pool

Cost Driver

Engineering design Engineering prototypes

Engineering

Engineering hours

Depreciation, machinery Electricity, machinery Machine maintenance wages

Machinery

Machine hours

Machine setup, indirect labor Machine setup, indirect materials

Machine setup

Number of setups

Inspections Tests

Quality control

Number of tests or inspections

Depreciation, factory Insurance, factory Property taxes on factory Factory heating Electricity, factory lighting

Factory costs

Square feet or Machine hours

LO2 BT: AN Difficulty: Easy TOT: 12 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

EXERCISE F.7 The following cost drivers might be used to assign overhead: 1. Gallons of chemicals 7. Number of bottles 2. Number of carts or labor hours 8. Number of bottles 3. Number of carts 9. Number of boxes 4. Gallons of juice 10. Number of shipments 5. Gallons of juice 11. Square feet 6. Gallons of wine or months of aging 12. Machine hours LO2 BT: AN Difficulty: Easy TOT: 15 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

F-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

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

Number of engineering change orders; hours of designing Number of orders processed Number of parts in stock Weight of material; number of boxes or cartons Employee turnover; number of employees hired Machine hours; direct labor hours Number of assembly workers; number of parts; direct labor hours Number of employees Book or market value of assets Cost of goods manufactured, direct labor hours; number of employees Machine hours; number of machines Gallons of paint; number of appliances

LO2 BT: AN Difficulty: Easy TOT: 12 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

EXERCISE F.9 (a) The overhead rates are: Activity Cost Pools

Estimated Use Estimated of Cost Drivers Activity-Based Overhead ÷ per Activity = Overhead Rates

Materials handling Machine setups Quality inspections

$40,000 21,500 33,000

1,000 500 600

$40 per requisition $43 per setup $55 per inspection

(b) The assignment of the overhead costs to products is as follows: Instruments Gauges Use of Cost Use of Cost Total Drivers per Cost Drivers per Cost Cost Cost Driver Product Assigned Product Assigned Assigned Requisitions ($40) 400 $16,000 600 $24,000 $40,000 Machine setups ($43) 200 8,600 300 12,900 21,500 Inspections ($55) 200 11,000 400 22,000 33,000 Total costs assigned (a) $35,600 $58,900 $94,500 Units produced (b) 50 300 Overhead cost per Unit (a) ÷ (b) $ 712 $ 196*

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-19

EXERCISE F.9 (Continued) *Rounded to nearest dollar [(Instruments: (400 × $40) + (200 × $43) + (200 × $55) = $35,600; $35,600 ÷ 50 = $712); (Gauges: (600 × $40) + (300 × $43) + (400 × $55) = $58,900; $58,900 ÷ 300 = $196)] [(Instruments: (No. of reqs. × OH rate./req.) + (No. of setups. × OH rate/setup) + (No. of inspect. × OH rate/inspect.) = Tot. OH costs assigned; Tot. OH costs assigned ÷ No. units made = OH cost/unit); (Gauges: (No. of reqs. × OH rate.req.) + (No. of setups. × OH rate/setup) + (No. of inspect. × OH rate/inspect.) = Tot. OH costs assigned; Tot. OH costs assigned ÷ No. units made = OH cost/unit)]

Student email address

To:

President Air United email address

Subject: Benefits of activity-based costing (ABC) Hi President’s name: ABC focuses on the activities performed in producing a product. Overhead costs are assigned to products based on cost drivers that measure the activities performed on the product. The primary benefit of ABC is more accurate and meaningful product costing. This improved cost data can lead to reduced costs as managers become more aware of the underlying causes of cost incurrence. Thus, control over costs is enhanced. The improved cost data should also lead to better management decisions. More accurate product costing should contribute to setting selling prices which will help achieve desired profitability levels. In addition, it should be helpful in deciding whether to make or buy a product part or component, and sometimes even whether to eliminate a product. Student’s name LO2, 3 BT: AP Difficulty: Easy TOT: 12 min AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

F-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE F.10 (a) (1) Traditional product costing system: $400,000 × 0.70 = $280,000 selling costs assigned in March to the “high intensity” product line. (2) Activity-based costing system:

Activity Cost Pools Sales commissions Advertising—TV Advertising—Internet Catalogs Cost of catalog sales Credit and collection Total assigned cost for March

ActivityBased Cost Drivers Overhead Overhead Cost Used × Rates = Assigned $900,000 250 2,000 60,000 9,000 $900,000

$0.05 $300 $10 $2.50 $1.00 $0.03

$ 45,000 75,000 20,000 150,000 9,000 27,000 $326,000

(b) As compared to ABC, traditional costing grossly under costs the selling costs assigned to the “high intensity” product line. The difference of $46,000 ($326,000 – $280,000) in the month of March is a 14.1% understatement. [($326,000 - $280,000 = $46,000); ($46,000 ÷ $326,000 = 14.1%)] [(Tot. assigned OH costs under ABC – Tot. assigned OH costs under traditional = Understated diff.); (Understated diff. ÷ Tot. assigned OH costs under ABC = Understated % diff.)] LO1, 2, 3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-21

EXERCISE F.11 (a) 1.

Traditional product costing system: Quality-control overhead costs assigned in June to the low-calorie breakfast line are $11,900 ($70,000 × .17).

Activity-based costing system: ActivityBased Cost Drivers Overhead Overhead Cost Used × Rate = Assigned

Activity Cost Pools Inspections of material received In-process inspections FDA certification Total assigned cost for June

6,000 10,000 420

$ 0.90 $ 0.33 $ 12.00

$ 5,400 3,300 5,040 $13,740

(b) As compared to ABC, the traditional costing system under costs the quality-control overhead cost assigned to the low-calorie breakfast line by $1,840 ($13,740 – $11,900) in the month of June. That is a 13.4% understatement. [($13,740 - $11,900 = $1,840); ($1,840 ÷ $13,740 = 13.4%)] [(Tot. assigned OH costs under ABC – Tot. assigned OH costs under traditional = Understated diff.); (Understated diff. ÷ Tot. assigned OH costs under ABC = Understated % diff.)] LO1, 2, 3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

EXERCISE F.12 Activity Cost Pools Engineering Machinery Machine setup Quality control Factory costs

Activity Level Product-level Unit-level Batch-level Depends on frequency. Could be unit, batch, or product-level Facility-level

LO3 BT: AN Difficulty: Easy TOT: 6 min. AACSB: None AICPA FC: Measurement IMA: Cost Management

F-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

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EXERCISE F.13 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Facility-level activity Product-level activity Batch-level activity Product-level activity Product-level activity Batch-level activity Facility-level activity Batch-level or unit-level activity Unit-level activity Unit-level activity

LO3 BT: AN Difficulty: Easy TOT: 6 min. AACSB: None AICPA FC: IMA: Cost Management

EXERCISE F.14 (a) Activity Cost Pools Estimated Overhead ÷ Scheduling and travel $85,000 Setup time $90,000 Supervision $60,000

Estimated use of Cost Drivers 1,250 hours 600 setups $400,000*

= ABC Overhead Rates $ 68.00 per hour $150.00 per setup $ 0.15 per dollar

*$100,000 + $300,000 Commercial Activity Cost Pools Scheduling and travel Setup time Supervision Total assigned costs

Use of Cost Drivers per Product 750 hours 350 setups $100,000

× ABC Overhead Rates = $ 68.00/hr. $150.00/setup $ 0.15/dollar

Cost Assigned $ 51,000 52,500 15,000 $118,500

Residential Activity Cost Pools Scheduling and travel Setup time Supervision Total assigned costs

Use of Cost Drivers per Product 500 hours 250 setups $300,000

ABC Overhead Rates = Cost Assigned $ 68.00/hr. $ 34,000 $150.00/setup 37,500 $ 0.15/dollar 45,000 $116,500

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-23

EXERCISE F.14 (Continued) [(Commercial: (750 × $68) + (350 × $150) + ($100,000 × $0.15) = $118,500); (Residential: (500 × $68) + (250 × $150) + ($300,000 × $0.15) = $116,500)] [(Commercial: (Hrs. of travel × OH rate/hr.) + (No. of setups × OH rate/setup) + (DL cost × OH rate/DL$) = Tot. assigned OH costs); (Residential: (Hrs. of travel × OH rate/hr.) + (No. of setups × OH rate/setup) + (DL cost × OH rate/DL$) = Tot. assigned OH costs)]

(b) Revenues Direct material costs Direct labor costs Overhead costs Operating income (loss)

Commercial $300,000 $ 30,000 100,000 118,500

248,500 $ 51,500

Residential $480,000 $ 50,000 300,000 116,500

466,500 $ 13,500

(c) Assuming that the cost drivers are a reasonable representation of what is being consumed by the two product lines, it seems appropriate to switch to activity-based costing. By using this system, more accurate cost information is developed which should lead to better allocations of resources, better profitability reporting, and more informative pricing decisions in the future. LO4 BT: AP Difficulty: Easy TOT: 20 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

EXERCISE F.15 The following activities might be identified at Snap Prints Company from your analysis of its operations and a discussion with the owner-manager, Terry Morton. 1. Hiring and training personnel 2. Purchasing supplies and materials 3. Selling, promoting, and marketing 4. Billing and collecting 5. Designing 6. Offset printing 7. Black-and-white copying 8. Color copying 9. Faxing 10. Collating 11. Cutting and folding 12. Maintenance and repairs 13. Delivery 14. Accounting LO4 BT: AP Difficulty: Moderate TOT: 12 min. AACSB: None AICPA FC: Measurement IMA: Cost Management F-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE F.16 Value-Added Activities Writing contracts and letters Taking depositions Doing research Contemplating legal strategy Litigating a case in court

Hours 1.5 1.0 1.0 1.0 2.5 7.0

Non-Value-Added Activities Attending staff meetings Traveling to/from court Eating lunch Entertaining a prospective client

Hours 0.5 1.0 1.0 1.5 4.0

Writing contracts is value-added; writing letters may be value-added if related to a specific case or it may be non-value-added if it is billing a client or collecting receivables. Research may be value-added if it is unique, related to a specific case, and is billable. Research may be non-value-added if it is something the attorney should already have known and is not billable to the client. LO3, 4 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-25

EXERCISE F.17 (a)

The predetermined overhead rate under traditional costing would be: $42,000  1,500 hours = $28/labor hour

(b)

The amount of overhead assigned to the average residential job would be: $28/labor hour × 0.5 labor hour = $14

(Residential: .5 hrs. × $28 = $14) (Residential: Ave. hrs. of labor × OH rate/hr. = OH allocated/residential job)

(c)

The activity-based overhead rates for each cost pool would be

Activity Cost Pools Plowing Snow throwing

(d)

Estimated Overhead

Estimated Use of Cost Drivers per Activity



 200,000 square yards  50,000 linear feet

$38,000 $ 4,000

Activity Based Overhead Rate = $0.19 per square yard = $0.08 per linear foot

The amount of overhead assigned to the average residential job under activity based costing would be:

Plowing Snow throwing

Use of Cost Driver Per Job

Activity Based Overhead Rate

Cost Assigned

20 60

× ×

$0.19 $0.08

= =

$3.80 4.80 $8.60

[Residential: (20 × $.19) + (60 × $.08) = $8.60] [Residential: (No. of sq. yds. × OH rate/sq. yd.) + (No. of linear ft. × OH rate/linear ft.) = OH assigned/residential job]

(e)

The amount of overhead assigned to the average residential job under traditional costing is $14, versus $8.60 under ABC. This means that too much overhead is being assigned to residential jobs, and too little to commercial jobs under traditional costing. This would make the residential jobs appear less profitable than they actually are, and would overstate the profitability of the commercial jobs.

LO4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

F-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO PROBLEMS PROBLEM F.1

(a) Computation of unit costs—traditional costing. Products Manufacturing Costs

Home Model

Commercial Model

$18.50 19.00 * 24.68* $62.18

$26.50 19.00 * 24.68* $70.18

Direct materials Direct labor Overhead Total unit cost *$16.45 × 1.5 = $24.68

(b) Estimated Overhead ÷

Activity Cost Pool Receiving Forming Assembling Testing Painting Packing and shipping

80,400 150,500 412,300 51,000 52,580 837,500 $1,584,280

Estimated Use of Cost Drivers

Activity-Based Overhead Rate

335,000 Pounds 35,000 Machine hours 217,000 Parts 25,500 Tests 5,258 Gallons 335,000 Pounds

$ 0.24 per pound $ 4.30 per machine hour $ 1.90 per part $ 2.00 per test $10.00 per gallon $ 2.50 per pound

Activity Cost Pool

Receiving 215,000 Forming 27,000 Assembling 165,000 Testing 15,500 Painting 3,680 Packing and shipping 215,000 Total costs assigned (a) Units produced

$ 0.24 $ 4.30 $ 1.90 $ 2.00 $10.00 $ 2.50

51,600 116,100 313,500 31,000 36,800 537,500 $1,086,500

Commercial Model ActivityUse of Based Drivers by Overhead Cost Product × Rates = Assigned 120,000 8,000 52,000 10,000 1,578 120,000

$ 0.24 $ 4.30 $ 1.90 $ 2.00 $10.00 $ 2.50

$ 28,800 34,400 98,800 20,000 15,780 300,000 $497,780

54,000

(b)

Overhead cost per unit [(a) ÷ (b)]

20.12

10,200 $

48.80

[(Home: (215,000 ×$.24) + (27,000 × $4.30) + (165,000 × $1.90) + (15,500 × $2) + (3,680 × $10) + (215,000 × $2.50) = $1,086,500; $1,086,500 ÷ 54,000 = $20.12); (Commercial: (120,000 × $.24) + (8,000 × $4.30) + (52,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-27

PROBLEM F.1 (Continued) X $1.90) + (10,000 × $2) + (1,578 × $10) + (120,000 × $2.50) = $497,780; $497,780 ÷ 10,200 = $48.80)] [(Home: (No. of lbs. × OH rate/lb.) + (No. of MH × OH rate/MH) + (No. of parts × OH rate/part) + (No. of tests × OH rate/test) + (No. of ga. × OH rate/ga.) + (No. of lbs. × OH rate/lb.) = Tot. OH assigned; Tot. OH assigned ÷ No. units made = OH cost/unit); (Commercial: (No. of lbs. × OH rate/lb.) + (No. of MH × OH rate/MH) + (No. of parts x OH rate/part) + (No. of tests × OH rate/test) + (No. of ga. × OH rate/ga.) + (No. of lbs. × OH rate/lb.) = Tot. OH assigned; Tot. OH assigned ÷ No. units made = OH cost/unit)]

(d) ABC Manufacturing Costs Direct materials Direct labor Overhead Total cost per unit

Home Model $18.50 19.00 20.12 $57.62

Commercial Model $26.50 19.00 48.80 $94.30

(e)

Activity Receiving Forming Assembling Testing Painting Packing and shipping

Value- vs. Non-Value-Added Non-value-added Value-added Value-added Non-value-added Value-added Value-added

(f)

(1) Activity-based costing shows the commercial model absorbs nearly 21/2 ($48.80 ÷ $20.12) times as much overhead per unit as the home model. (2) The comparison of ABC and traditional costing shows that the proper amount of overhead assigned to the two products is not equal at $24.68 but rather $20.12 for the home model and $48.80 for the commercial model. Under traditional costing, the margin of error on the commercial model was almost 100%, an understatement of $24.12 on an assignment of $24.68. These distorted overhead assignments have likely led to overpricing the home model and underpricing the commercial model.

LO1, 2, 3 BT: AP Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

F-28

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM F.2

(a) The allocation of total manufacturing overhead using activity-based costing is as follows: Royale Cost Drivers Used

Overhead Rate Purchase orders @ $30 Machine setups @ $50 Machine hours @ $40 Inspections @ $25 Total assigned costs (a)

17,000 5,000 75,000 11,000

Majestic

Cost Assigned $ 510,000 250,000 3,000,000 275,000 $4,035,000

Units produced (b)

Cost Drivers Used 23,000 13,000 45,000 17,000

Cost Assigned

Total Overhead

$ 690,000 650,000 1,800,000 425,000 $3,565,000

$1,200,000 900,000 4,800,000 700,000 $7,600,000

25,000

Cost per unit (a) ÷ (b)

10,000

161.40

356.50

[(Royale: (17,000 × $30) + (5,000 × $50) + (75,000 × $40) + (11,000 × $25) = $4,035,000; $4,035,000 ÷ 25,000 = $161.40); (Majestic: (23,000 × $30) + (13,000 × $50) + (45,000 × $40) + (17,000 × $25) = $3,565,000; $3,565,000 ÷ 10,000 = $356.50)] [(Royale: (No. of P.O.s × OH rate/P.O.) + (No. of setups × OH rate/setup) + (No. of MH × OH rate/MH) + (No. of inspect. × OH rate/inspect.) = Tot. OH assigned costs; Tot. OH assigned costs ÷ No. units made = OH cost/unit); (Majestic: (No. of P.O.s × OH rate/P.O.) + (No. of setups × OH rate/setup) + (No. of MH × OH rate/MH) + (No. of inspect. × OH rate/inspect.) = Tot. OH assigned costs; Tot. OH assigned costs ÷ No. units made = OH cost/unit)]

(b) The cost per unit and gross profit of each model under ABC were: Direct materials Direct labor Manufacturing overhead Total cost per unit

Royale $ 700.00 120.00 161.40 $ 981.40

Majestic $ 420.00 100.00 356.50 $ 876.50

Sales price per unit Cost per unit Gross profit

$1,600.00 981.40 $ 618.60

$1,300.00 876.50 $ 423.50

(c) Management’s future plans for the two television models are not sound. Under ABC, the Royale model is $195.10 ($618.60 – $423.50) per unit more profitable than the Majestic model. If either product should be phased out, it is the Majestic. However, by applying ABC and activitybased management analysis, Schultz may determine how to reduce the costs of producing the Majestic model. LO2 BT: AP Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management Copyright © 2022 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-29

PROBLEM F.3

(a) Predetermined overhead rate using machine hours: $868,000 ÷ 100,000 hrs. = $8.68 per machine hour (b) Manufacturing cost per stairway under traditional costing: Direct materials ............................................................... Direct labor ...................................................................... Overhead (14,500 × $8.68) .............................................. Total cost of 250 stairs............................................

$ 103,600 112,000 125,860 $ 341,460

Cost per stairway ($341,460 ÷ 250) ................................

$1,365.84

[$103,600 + $112,000 + (14,500 × $8.68) = $341,460; $341,460 ÷ 250 = $1,365.84] [DM + DL + (No. of MH × OH rate/MH) = Tot. cost; Tot. cost ÷ No. of stairways = Tot. cost/stairway]

(c) Manufacturing cost per stairway under activity-based costing: Computation of Activity-Based Overhead Rates Activity Cost Pools Purchasing Handling materials Production Setting up machines Inspecting Inventory control Utilities

Estimated Estimated Use of Cost Overhead ÷ Drivers per Activity = $ 75,000 82,000 210,000 105,000 90,000 126,000 180,000 $868,000

600 Orders 8,000 Moves 100,000 D/L Hours 1,250 Setups 6,000 Inspections 168,000 Components 90,000 Sq. ft.

Activity-Based Overhead Rate $125 per order $10.25 per move $2.10 per D/L hour $84 per setup $15 per inspection $0.75 per component $2.00 per sq. ft.

Assignment of Overhead to Order of 250 Stairs

Activity Cost Pools

Use of Cost Drivers

Purchasing 60 Orders Handling materials 800 Moves Production 5,000 D/L Hours Setting up machines 100 Setups Inspecting 450 Inspections Inventory control 16,000 Components Utilities 8,000 Sq. ft. Total overhead assigned F-30

Activity-Based × Overhead Rates = Cost Assigned $125 $10.25 $2.10 $84 $15 $0.75 $2.00

Kimmel, Survey of Accounting, 3e, Solutions Manual

$ 7,500 8,200 10,500 8,400 6,750 12,000 16,000 $69,350 (For Instructor Use Only)

PROBLEM F.3 (Continued) [(60 × $125) + (800 × $10.25) + (5,000 × $2.10) + (100 × $84) + (450 × $15) + (16,000 × $.75) + (8,000 × $2) = $69,350] [(No. of P.O.s × OH rate/P.O.) + (No. of moves × OH rate/move) + (No. of DLHs × OH rate/DLH); (No. of setups × OH rate/setup) + (No. of inspect. × OH rate/inspect.) + (No. of components × OH rate/component) + (No. of sq. ft. × OH rate/sq. ft.) = Tot. OH assigned]

Total manufacturing cost per stairway under ABC: Direct materials ...................................................................... Direct labor............................................................................. Overhead ................................................................................ Total cost of 250 stairs ..................................................

$ 103,600 112,000 69,350 $ 284,950

Total cost per stairway ($284,950 ÷ 250) ..............................

$1,139.80

($103,600 + $112,000 + $69,350 = $284,950; $284,950 ÷ 250 = $1,139.80) (DM + DL + OH = Tot. cost; Tot. cost ÷ No. of stairways = Tot. cost/stairway)

(d) The difference between the traditional cost and the activity-based cost per unit, $1,365.84 versus $1,139.80, is not great in amount but $226.04 ($1,365.84 – $1,139.80) is 19.8% of the more correct ABC cost per unit. Activity-based costing is the preferable costing system for setting prices because the real costs are more accurately reflected, leading to more competitive pricing. The greater accuracy is a result of multiple, more relevant activity cost drivers under ABC than the single cost driver used with the traditional volume-based system. LO1, 2 BT: AN Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

F-31

PROBLEM F.4

(a) Computation of unit costs—traditional costing Overhead cost per direct labor hour is $1,241,660 ÷ (150,000 + 27,000) = $7.015 Products Manufacturing Costs Direct materials Direct labor Overhead

CoolDay $0.400 0.500 0.351* $1.251

LiteMist $1.200 0.900 0.631** $2.731

*$7.015 × .05 **$7.015 x.09 [(CoolDay: $0.400 + $0.500 + (.05 × $7.015) = $1.251); (LiteMist: $1.200 + $0.900 + (.09 × $7.015) = $2.731)] [(CoolDay: DM + DL + (DLHs × OH rate/DLH) = Tot. unit cost); (LiteMist: DM + DL + (DLHs × OH rate/DLH) = Tot. unit cost)]

(b) Activity Cost Pools Grape processing Aging Bottling and corking Labeling and boxing Maintain and inspect equipment

F-32

Estimated Estimated Use Overhead ÷ of Cost Drivers = $ 145,860 396,000 270,000 189,000

6,600 6,600,000 900,000 900,000

240,800 $1,241,660

800

Activity-Based Overhead Rates $22.10 per cart $ 0.06 per month $ 0.30 per bottle $ 0.21 per bottle $301 per inspection

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM F.4 (Continued) (c)

CoolDay ActivityUse of Based Cost Overhead Cost Drivers × Rates = Assigned 6,000 $22.10 $132,600 3,000,000 $ 0.06 180,000 600,000 $ 0.30 180,000 600,000 $ 0.21 126,000

Activity Cost Pools Grape processing Aging Bottling and corking Labeling and boxing Maintain and inspect equipment Overhead costs assigned (a) Liters produced

350

$301

LiteMist ActivityUse of Based Cost Overhead Cost Drivers × Rates = Assigned 600 $22.10 $ 13,260 3,600,000 $ 0.06 216,000 300,000 $ 0.30 90,000 300,000 $ 0.21 63,000

105,350 $723,950

450

$301

135,450 $517,710

3,000,000

300,000

$0.241

$1.726

(b)

Overhead cost per liter [(a) ÷ (b)]

[(CoolDay: (6,000 × $22.10) + (3,000,000 × $.06) + (600,000 × $.30) + (600,000 × $.21) + (350 × $301) = $723,950; $723,950 ÷ 3,000,000 = $.241); (LiteMist: (600 × $22.10) + (3,600,000 × $.06) + (300,000 × $.30) + (300,000 × $.21) + (450 × $301) = $517,710; $517,710 ÷ 300,000 = $1.726)] [(CoolDay: (No. of carts × OH rate/cart) + (No. of mos. × OH rate/mo.) + (No. of bottles × OH rate/bottle) + (No. of bottles × OH rate/bottle) + (No. of inspect. × OH rate/inspect.) = Tot. OH costs assigned; Tot. OH costs assigned ÷ No. of liters made = OH cost/liter); (LiteMist: (No. of carts × OH rate/cart) + (No. of mos. × OH rate/mo.) + (No. of bottles × OH rate/bottle) + (No. of bottles × OH rate/bottle) + (No. of inspect. × OH rate/inspect.) = Tot. OH costs assigned; Tot. OH costs assigned ÷ No. of liters made = OH cost/liter)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

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F-33

PROBLEM F.4 (Continued) (d)

Products CoolDay LiteMist $0.400 $1.200 0.500 0.900 0.241 1.726 $1.141 $3.826

Manufacturing Costs Direct materials Direct labor Overhead

(e) From:

Student email address

To:

Jack Eller email address

Subject:

Product costs using traditional approach versus ABC

Hi Jack: The memorandum covers the following points: a.

ABC assigns overhead costs as a function of each product’s use of cost drivers. Thus, ABC results in overhead assignment that more closely approximates each product’s generation of overhead costs.

Traditional approaches that assign costs as a function of volume tend to be biased toward assigning too much overhead to high volume, simple products, and too little to low volume, complex products. This is because the actual incurrence of overhead costs is rarely correlated with labor costs.

In the case of the Benton Corporation, the LiteMist product required the company to begin using more complex methods and equipment. Overhead costs increased substantially. When overhead costs were assigned using labor rates, too much overhead was assigned to the high volume CoolDay product. This reduced the apparent profitability of this product.

Student’s name LO1, 2 BT: AN Difficulty: Moderate TOT: 50 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management F-34

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM F.5

(a) Computation of assigned overhead under traditional costing (“direct labor dollars” appears in the first line of the schedule of overhead data): Predetermined overhead rate × direct labor dollars Overhead assigned to audit: Overhead assigned to tax:

0.40 × $1,100,000 = $440,000 0.40 × $700,000 = $280,000

[(Audit: $1,100,000 × .40 = $440,000); (Tax: $700,000 × .40 = $280,000)] [(Audit: (DL$ × OH rate/DL$ = OH assigned); (Tax: (DL$ × OH rate/DL$ = OH assigned)]

(b) (1) Computation of activity-based overhead rates: Activity Cost Pools Employee training Typing and secretarial Computing Facility rental Travel

Estimated Overhead ÷

Expected Use of Cost Drivers per Activity

$216,000 76,200 204,000 142,500 81,300 $720,000

$1,800,000 Direct labor dollars 2,500 Reports/forms 60,000 Minutes 40 Employees Direct

Activity-Based Overhead Rates

$0.12 per DL dollar $30.48 per report/form $3.40 per minute $3,562.50 per employee Direct

(2) Assignment of overhead to audit and tax services:

Activity Cost Pools Employee training Typing and secretarial Computing Facility rental Travel Overhead costs assigned

Audit

Tax

Use of ActivityCost Based Driver per × Overhead Cost Service Rate = Assigned

$1,100,000 800 27,000 22 56,000

$700,000 1,700 33,000 18 25,300

$0.12 $30.48 $3.40 $3,562.50 Direct

$132,000 24,384 91,800 78,375 56,000

$0.12 $30.48 $3.40 $3,562.50 Direct

$382,559

$ 84,000 51,816 112,200 64,125 25,300 $337,441

[(Audit: ($1,100,000 ×$.12) + (800 × $30.48) + (27,000 × $3.40) + (22 × $3,562.50) + $56,000 = $382,559); (Tax: ($700,000 × $.12) + (1,700 × $30.48) + (33,000 × $3.40) + (18 × $3,562.50) + $25,300 = $337,441)] [(Audit: (DL$ × OH rate/DL$) + (No. of reports × OH rate/report) + (No. of min. × OH rate/min.) + (No. of emp. × OH rate/emp.) + Travel = Tot. OH costs assigned); (Tax: (DL$ × OH rate/DL$) + (No. of reports × OH rate/report) + (No. of min. × OH rate/min.) + (No. of emp. × OH rate/emp.) + Travel = Tot. OH costs assigned)]

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

F-35

PROBLEM F.5 (Continued) (c) Overhead is assigned to the two service lines as follows:

Traditional costing ABC Difference

Audit $440,000 382,559 $ 57,441

Tax $280,000 337,441 $ 57,441

The $57,441 difference for audits is 13% lower under ABC, while the $57,441 difference for tax is 20.5% higher under ABC. Clearly, ABC should be used to determine the relative profitability of each service. LO1, 2, 3, 4 BT: AN Difficulty: Moderate TOT: 35 min. AACSB: Analytic AICPA FC: Measurement IMA: Cost Management

F-36

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

APPENDIX E Time Value of Money Learning Objectives 1. 2. 3. 4.

Compute interest and future values. Compute present values. Compute the present value in capital budgeting situations. Use technological tools to solve time value of money problems.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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E-1

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE E.1 (a) Interest = p × i × n Interest = $6,000 × .05 × 12 years Interest = $3,600 Accumulated amount = $6,000 + $3,600 = $9,600 (b) Future value factor for 12 periods at 5% is 1.79586 (from Table 1) Accumulated amount = $6,000 × 1.79586 = $10,775.16 LO 1 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.2

(1) Case A Case B

(a) 5% 6%

3 periods 8 periods

(2) Case A Case B

(b) 3% 8 periods 4% 12 periods

LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Knowledge AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.3 FV = p × FV of 1 factor = $9,600 × 1.60103 (12 periods at 4% from Table 1) = $15,369.89 LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

E-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE E.4 FV of an annuity of 1 = p × FV of an annuity factor = $78,000 × 13.18079 (10 periods at 6% from Table 2) = $1,028,101.62 LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.5 FV = (p × FV of 1 factor) + (p × FV of an annuity factor) = ($8,000 × 2.40662) + ($1,000 × 28.13238) = $19,252.96 + $28,132.38 = $47,385.34 [(p × FV of 1 factor) + (p × FV of an annuity factor) = FV] [($8,000 × 2.40662) + ($1,000 × 28.13238) = $47,385.34 LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.6 FV = p × FV of 1 factor = $35,000 × 1.46933 (5 periods at 8% from Table 1) = $51,426.55 LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.7

(1) Case A Case B Case C

(a) 12% 4% 5%

(b) 7 periods 22 periods 16 periods

(2) Case A Case B Case C

10% 10% 3%

20 periods 7 periods 10 periods

LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

Kimmel, Survey of Accounting, 3e, Solutions Manual

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E-3

BRIEF EXERCISE E.8 (a)

i = 10% ?

$25,000

Present value factor from Table 3 is .42410 (9 periods at 10%). Present value of $25,000 to be received in 9 years discounted at 10% is therefore $10,602.50 ($25,000 × .42410). (PV of an amount = Amount × PV of 1 factor) ($10,602.50 = $25,000 × .42410)

(b)

i = 9% ?

$25,000 $25,000 $25,000 $25,000 $25,000 $25,000

Present value factor from Table 4 is 4.48592 (6 periods at 9%). Present value of 6 payments of $25,000 each discounted at 9% is therefore $112,148.00 ($25,000 × 4.48592). (PV of an annuity = Annuity × PV of an annuity factor) ($112,148.00 = $25,000 × 4.48592) LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

E-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE E.9 i = 8% ?

$900,000

Present value factor from Table 3 is .63017 (6 periods at 8%). Present value of $900,000 to be received in 6 years discounted at 8% is therefore $567,153 ($900,000 × .63017). Messi Company should therefore invest $567,153 to have $900,000 in six years. (PV of an amount = Amount × PV of 1 factor) ($567,153.00 = $900,000 × .63017) LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.10 i = 6% ?

$450,000

Present value factor from Table 3 is .62741 (8 periods at 6%). Present value of $450,000 to be received in 8 years discounted at 6% is therefore $282,334.50 ($450,000 × .62741). Lloyd Company should invest $282,334.50 to have $450,000 in eight years. (PV of an amount = Amount × PV of 1 factor) ($282,334.50 = $450,000 × .62741) LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

Kimmel, Survey of Accounting, 3e, Solutions Manual

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E-5

BRIEF EXERCISE E.11 i = 8% ?

$40,000 $40,000 $40,000 $40,000

$40,000 $40,000

Present value factor from Table 4 is 8.55948. Present value of 15 payments of $40,000 each discounted at 8% is therefore $342,379.20 ($40,000 × 8.55948). Robben Company should pay $342,379.20 for this annuity contract. (PV of an annuity = Annuity × PV of an annuity factor) ($342,379.20 = $40,000 × 8.55948) LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.12 i = 5% ?

$80,000

Present value factor from Table 4 is 5.07569. Present value of 6 payments of $80,000 each discounted at 5% is therefore $406,055.20 ($80,000 × 5.07569). Kaehler Enterprises invested $406,055.20 to earn $80,000 per year for six years. (PV of an annuity = Annuity × PV of an annuity factor) ($406,055.20 = $80,000 × 5.07569) LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

E-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE E.13 i = 10% ?

$400,000

Diagram for Principal

i = 10% ?

$44,000 $44,000 $44,000 $44,000

$44,000 $44,000

Diagram for Interest

Present value of principal to be received at maturity: $400,000 × 0.38554 (PV of $1 due in 10 periods at 10% from Table 3) ............................................................ Present value of interest to be received annually over the term of the bonds: $44,000* × 6.14457 (PV of $1 due each period for 10 periods at 10% from Table 4) ........................................................................ Present value of bonds ...............................................................

$154,216*

270,361** $424,577**

*$400,000 × .11 **Rounded. [PV of bond = (Face value of bond × PV of 1 factor) + (Annual interest × PV of an annuity factor)] [$424,577 = ($400,000 × 0.38554) + ($44,000 × 6.14457)] LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

Kimmel, Survey of Accounting, 3e, Solutions Manual

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E-7

BRIEF EXERCISE E.14 The bonds will sell at a discount (for less than $400,000). This may be proven as follows: Present value of principal to be received at maturity: $400,000 × .32197 (PV of $1 due in 10 periods at 12% from Table 3) ............................................................ Present value of interest to be received annually over the term of the bonds: $44,000* × 5.65022 (PV of $1 due each period for 10 periods at 12% from Table 4) ........................................................................ Present value of bonds ...............................................................

$128,788*

248,610** $377,398**

*$400,000 × .11 **Rounded. [PV of bond = (Face value of bond × PV of 1 factor) + (Annual interest × PV of an annuity factor] [$377,398 = ($400,000 × .32197) + ($44,000 × 5.65022)] LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

E-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE E.15 i = 6% ?

$75,000

Diagram for Principal

i = 6% ?

$3,000

Diagram for Interest

Present value of principal to be received at maturity: $75,000 × .70496 (PV of $1 due in 6 periods at 6% from Table 3) ............................................................. Present value of interest to be received annually over the term of the note: $3,000* × 4.91732 (PV of $1 due each period for 6 periods at 6% from Table 4) ................................................................. Present value of note received ..................................................

$52,872

14,752** $67,624**

*$75,000 × .04 **Rounded [PV of note = (PV of principal × PV of 1 factor) + (Annual interest × PV of an annuity factor)] [$67,623.96 = ($75,000 × .70496) + ($3,000 × 4.91732)] LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

Kimmel, Survey of Accounting, 3e, Solutions Manual

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E-9

BRIEF EXERCISE E.16 i = 8% ?

$2,500,000

Diagram for Principal

i = 8% ?

$150,000 $150,000$150,000$150,000

$150,000

Diagram for Interest

Present value of principal to be received at maturity: $2,500,000 × 0.54027 (PV of $1 due in 8 periods at 8% from Table 3) ............................................................. Present value of interest to be received annually over the term of the bonds: $150,000* × 5.74664 (PV of $1 due each period for 8 periods at 8% from Table 4) ....................................................................... Present value of bonds and cash proceeds .............................

$1,350,675

861,996 $2,212,671

*$2,500,000 × .06 [PV of bond = (Face value of bond × PV of 1 factor) + (Annual interest × PV of an annuity factor)] [$2,212,671 = ($2,500,000 × .54027) + ($150,000 × 5.74664)] LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

E-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE E.17 i = 5% ?

$48,850

Present value factor from Table 4 is 7.72173. Present value of 10 (5 × 2) payments of $48,850 each discounted at 5% (10% ÷ 2) is therefore $377,206.51 ($48,850 × 7.72173). Frazier Company should receive $377,206.51 from the issuance of the note. (PV of proceeds = Annual payment × PV of an annuity factor) ($377,206.51 = $48,850 × 7.72173) LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.18 i=? $4,765.50

$12,000

Present value= Future value × Present value of 1 factor $4,765.50= $12,000 × Present value of 1 factor Present value of 1 factor = $4,765.50 ÷ $12,000 = .39713 The present value factor .39713 for 12 periods approximates the value found in the 8% column (.39711) in Table 3. Colleen Mooney will receive an 8% return. (PV of 1 factor = Present value amount ÷ Future value amount) (.39713 = $4,765.50 ÷ $12,000) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

E-11

BRIEF EXERCISE E.19 i = 11% $36,125

$75,000

n=? Present value= Future value × Present value of 1 factor $36,125 = $75,000 × Present value of 1 factor Present value of 1 factor = $36,125 ÷ $75,000 = .48167 The present value factor .48167 approximates the .48166 at 11% found in the 7 periods row in Table 3. Tim Howard, therefore, must wait 7 years to receive $75,000. (PV of 1 factor = Present value amount ÷ Future value amount) (.48167 = $36,125 ÷ $75,000) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.20 i=? ?

$1,200 $1,200 $1,200 $1,200 $1,200 $1,200

$1,200 $1,200

$10,271.38

Present value = Future amount × Present value of an annuity factor $10,271.38 = $1,200 × Present value of an annuity factor Present value of an annuity factor = $10,271.38 ÷ $1,200 = 8.55948

The present value factor 8.55948 for 15 periods is found in the 8% column in Table 4. Joanne Quick will therefore earn a rate of return of 8%. (PV of an annuity factor = Present amount ÷ Annuity) (8.55948 = $10,271.38 ÷ $1,200) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance E-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE E.21 i = 9% $1,300 $1,300 $1,300 $1,300 $1,300 $1,300

$7,793.83 n=? Present value = Future amount × Present value of an annuity factor $7,793.83 = $1,300 × Present value of an annuity factor Present value of an annuity factor = $7,793.83 ÷ $1,300 = 5.99525

The present value factor 5.99525 at an interest rate of 9% is shown in the 9-year row in Table 4. Therefore, Kevin will receive 9 payments. (PV of an annuity factor = Present amount ÷ Annuity) (5.99525 = $7,793.83 ÷ $1,300) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

E-13

BRIEF EXERCISE E.22 i = 9% ?

$2,700 $2,700 $2,700 $2,700 $2,700 $2,700 $2,700

The present value factor at 9% from Table 4 is 5.03295. Present value of 7 payments of $2,700 each discounted at 9% is therefore $13,588.97 ($2,700 × 5.03295). Barney Googal should purchase the tire retreading machine because the present value of the future cash flows is greater than the purchase price of the retreading machine ($12,820). LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.23 ?

$25,000

i = 11% $30,000

$40,000

To determine the present value of the future cash flows, discount the future cash flows at 11%, using Table 3. Year 1 ($25,000 × .90090) = Year 2 ($30,000 × .81162) = Year 3 ($40,000 × .73119) = Present value of future cash flows

$22,522.50 24,348.60 29,247.60 $76,118.70

To achieve a minimum rate of return of 11%, Snyder Company should pay no more than $76,118.70. If Snyder pays less than $76,118.70, its rate of return will be greater than 11%. LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

E-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE E.24 Excel solution: Excel spreadsheet A

Function Arguments: Rate B

Nper

= 10

Annual interest rate

10.76%*

Pmt

= 0

Number of periods

= 18000

Payment

-C6

= -50000

Future value

$50,000

Type

Present value

$18,000

*Function string: Rate (C4, C5, C7, -C6)

= 0

Formula result = 10.76%*

Financial calculator solution: 10*

–18,000

50,000

I/YR.

PMT

10.76% *2037 – 2027 LO 4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

BRIEF EXERCISE E.25 Excel solution: Excel spreadsheet A

Function Arguments: Rate B

Nper

= 10

8.85%*

Pmt

-C5

= -6500

= 42000

$6,500

= 0

Type

= 0

Annual interest rate

Number of periods

Payment

Future value

Present value

$42,000

*Function string: Rate (C4, -C5, C7, C6)

Formula result = 8.85%*

Financial calculator solution: 10

42,000

–6,500

I/YR.

PMT

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

E-15

BRIEF EXERCISE E.26 Excel solution: Excel spreadsheet A 3

Function Arguments: Rate B

Nper

= 40

3.55%*

Pmt

-C5

= -8400

= 178000

$8,400

= 0

Type

= 0

Semi-annual interest rate

Number of periods

Payment

Future value

Present value

$178,000

*Function string: Rate (C4, -C5, C7, C6)

Formula result = 3.55%*

Financial calculator solution: 40a

178,000b

–8,400

I/YR.

PMT

3.55% (semiannual) a b

20 × 2 $198,000 – $20,000

Since this is a semi-annual rate, multiply by 2 to arrive at the annual rate 7.10%. LO 4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

E-16

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE E.27 (a) Excel solution: Excel spreadsheet A

Function Arguments: PV B

Rate

= 0.0735

Annual interest rate

7.35%

Nper

= 7

Number of periods

Pmt

-C5

= -16000

Payment

$16,000

= 0

Future value

Type

= 0

Present value

$85,186.34*

*Function string: PV (C3, C4, -C5, C6)

Formula result = $85,186.34*

(b) Excel spreadsheet A

Function Arguments: PV B

Rate

= 0.1065

Annual interest rate

10.65%

Nper

= 10

Number of periods

Pmt

-C5

= -16000

Payment

$16,000a

-C6

= -200000

Future value

$200,000b

Type

= 0

Present value

$168,323.64*

*Function string: PV (C3, C4, -C5, -C6)

Formula result = $168,323.64*

a$200,000 × .08 b200 × $1,000

Financial calculator solution: (a) Inputs: 7 7.35

16,000

PMT

–85,186.34

Answer: (b) Inputs:

10.65

16,000**

200,000*

PMT

–168,323.64

Answer: *200 × $1,000

**$200,000 ×.08

LO 4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

E-17

BRIEF EXERCISE E.28 (a) Excel solution: Excel spreadsheet A

Function Arguments: PMT B

Rate

= 0.0065

Annual interest rate

.65%a

Nper

= 96

Number of periods

-C7

= -42000

Payment

-$589.48*

= 0

Future value

Type

= 0

Present value

$42,000

*Function string: PMT (C3, C4, -C7, C6)

Formula result = ($589.48)*

a7.8% ÷ 12

(b) Excel spreadsheet A

Function Arguments: PMT B

Rate

= 0.0725

Annual interest rate

7.25%

Nper

= 5

Number of periods

= 8000

Payment

-$1,964.20*

= 0

Future value

Type

= 0

Present value

$8,000

*Function string: PMT (C3, C4, C7, C6)

Formula result = ($1,964.20)*

Financial calculator solution: (a) Note—set payments at 12 per year. Inputs: 96 0.65*

42,000

PMT

–589.48

Answer: * 7.8% / 12 = 0.65

(b) Note—set payments to 1 per year. Inputs: 5 7.25 N Answer:

8,000

PMT

–1,964.20

LO 4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

E-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE E.29 Excel Solution: Investment A Excel Spreadsheet A 2

Function Arguments:

Values

Inflow/Outflow

Description

Guess

($184,000)

Initial investment

$27,500

Year 1 cash flow

$27,500

Year 2 cash flow

$27,500

Year 3 cash flow

$27,500

Year 4 cash flow

$27,500

Year 5 cash flow

$27,500

Year 6 cash flow

$27,500

Year 7 cash flow

$27,500

Year 8 cash flow

$27,500

Year 9 cash flow

$27,500

Year 10 cash flow

$27,500

Year 11 cash flow

$48,500

Year 12 cash flow

11.06%*

Internal rate of return

B3:B15

IRR

= {-184,000; 27,500;…}

16 17

*Function string: IRR (B3:B15)

Formula result = 11.06%*

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

E-19

BRIEF EXERCISE E.29 (Continued) Investment B Excel Spreadsheet A 2

Function Arguments:

Values

Inflow/Outflow

Description

Guess

($234,000)

Initial investment

$32,800

Year 1 cash flow

$32,800

Year 2 cash flow

$32,800

Year 3 cash flow

$32,800

Year 4 cash flow

$32,800

Year 5 cash flow

$32,800

Year 6 cash flow

$32,800

Year 7 cash flow

$32,800

Year 8 cash flow

$32,800

Year 9 cash flow

$32,800

Year 10 cash flow

$32,800

Year 11 cash flow

$51,800

Year 12 cash flow

9.62%*

Internal rate of return

B3:B15

IRR

= {-234000; 32800;…}

16 17

*Function string: IRR (B3:B15)

Formula result = 9.62%*

Financial Calculator Solution: Investment A Inputs:

Answer:

–184,000

27,500

21,000

PMT

–234,000

32,800

19,000

PMT

11.06% Investment B Inputs: Answer:

12 N

? I 9.62%

LO 4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement IMA: Corporate Finance

E-20

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

APPENDIX D Double-Entry Accounting System Learning Objectives 1. 2. 3. 4.

Explain how accounts, debits, and credits are used to record business transactions. Indicate how a journal and ledger are used in the recording process. Prepare a trial balance. Prepare adjusting entries and an adjusted trial balance.

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-1

ANSWERS TO QUESTIONS 1.

An account consists of three parts: (a) the title, (b) the left or debit side, and (c) the right or credit side. Because the alignment of these parts resembles the letter T, it is referred to as a T account.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting IMA: Reporting

Disagree. The terms debit and credit are synonymous with left and right, respectively.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting IMA: Reporting

Barry is incorrect. The double-entry system merely records the dual (two-sided) effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once and must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits.

LO 1 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

Misty is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable.

LO 1 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

(a) Asset accounts are increased by debits and decreased by credits. (b) Liability accounts are decreased by debits and increased by credits. (c) The Common Stock account is decreased by debits and increased by credits.

LO 1 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

(a) (b) (c) (d) (e) (f) (g)

Accounts Receivable—debit balance. Cash—debit balance. Dividends—debit balance. Accounts Payable—credit balance. Service Revenue—credit balance. Salaries and Wages Expense—debit balance. Common Stock—credit balance.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting IMA: Reporting

(a) (b) (c) (d) (e)

Accounts Receivable—asset—debit balance. Accounts Payable—liability—credit balance. Equipment—asset—debit balance. Dividends—stockholders’ equity—debit balance. Supplies—asset—debit balance.

LO 1 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

(a) Debit Supplies and credit Accounts Payable. (b) Debit Cash and credit Notes Payable. (c) Debit Salaries and Wages Expense and credit Cash.

LO 1 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

D-2

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

APPENDIX D Questions (Continued) 9.

(a) (b) (c) (d) (e) (f)

Cash—both debit and credit entries. Accounts Receivable—both debit and credit entries. Dividends—debit entries only. Accounts Payable—both debit and credit entries. Salaries and Wages Expense—debit entries only. Service Revenue—credit entries only.

LO 1 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

10.

The basic steps in the recording process are: (1) Analyze each transaction in terms of its effect on the accounts. (2) Enter the transaction information in a journal. (3) Transfer the journal information to the appropriate accounts in the ledger.

LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting IMA: Reporting

11.

(a) The debit should be entered first. (b) The credit should be indented.

LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting IMA: Reporting

12.

(a) No, debits and credits should not be recorded directly in the ledger. (b) The advantages of using the journal are: (1) It discloses in one place the complete effect of a transaction. (2) It provides a chronological record of all transactions. (3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

LO 2 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

13.

(a) Cash ........................................................................................................ 12,000 Common Stock................................................................................. (Issued stock for cash) (b) Prepaid Insurance .................................................................................... Cash ................................................................................................ (Paid one-year insurance policy) (c)

12,000

800 800

Supplies................................................................................................... Accounts Payable ............................................................................ (Purchased supplies on account)

1,800

(d) Cash ........................................................................................................ Service Revenue .............................................................................. (Received cash for services rendered)

7,500

1,800

7,500

LO 2 BT: AP Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

14.

(a) The entire group of accounts maintained by a company, including all the asset, liability, and stockholders’ equity accounts, is referred to collectively as the ledger. (b) The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and identify their location in the ledger.

LO 2 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-3

APPENDIX D Questions (Continued) 15.

A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalized transactions have been posted. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements.

LO 3 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

16.

The proper sequence is as follows: (b) Accounting transaction occurs. (c) Information is entered in the journal. (a) Debits and credits are posted to the ledger. (e) Trial balance is prepared. (d) Financial statements are prepared.

LO 3 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting IMA: Reporting

17.

An asset is debited, and a revenue is credited.

LO 4 BT: C Diff: M TOT: 1 min. AACSB: None AICPA FC: Reporting IMA: Reporting

18.

An expense is debited, and a liability is credited.

LO 4 BT: C Diff: M TOT: 1 min. AACSB: None AICPA FC: Reporting IMA: Reporting

19.

(a) Salaries and Wages Payable. (b) Accumulated Depreciation. (c) Interest Expense.

(d) Supplies Expense. (e) Service Revenue. (f) Service Revenue.

LO 4 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Reporting IMA: Reporting

D-4

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE D.1

(a) (b) (c) (d) (e) (f)

Accounts Payable Advertising Expense Service Revenue Accounts Receivable Retained Earnings Dividends

Debit Effect Decrease Increase Decrease Increase Decrease Increase

Credit Effect Increase Decrease Increase Decrease Increase Decrease

Normal Balance Credit Debit Credit Debit Credit Debit

LO 1 BT: K Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting IMA: Reporting

BRIEF EXERCISE D.2

June 1 2 3 12

Account Debited Cash Equipment Rent Expense Accounts Receivable

Account Credited Common Stock Accounts Payable Cash Service Revenue

LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting IMA: Reporting

BRIEF EXERCISE D.3 June 1 2 3 12

Cash ..................................................................... Common Stock ............................................

5,000

Equipment ........................................................... Accounts Payable........................................

1,100

Rent Expense ...................................................... Cash .............................................................

740

Accounts Receivable .......................................... Service Revenue ..........................................

700

5,000 1,100 740 700

LO 2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-5

BRIEF EXERCISE D.4 The basic steps in the recording process are: 1.

Analyze each transaction. In this step, source documents are examined to determine the effects of the transaction on the accounts.

Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions.

Transfer journal information to ledger accounts. This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting IMA: Reporting

BRIEF EXERCISE D.5

5/12 5/15

5/5

Cash 1,600 2,000

Service Revenue 5/5 5/15

3,800 2,000

Accounts Receivable 3,800 5/12 1,600

LO 2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-6

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE D.6 PEETE COMPANY Trial Balance June 30, 2027 Cash ............................................................................ Accounts Receivable ................................................. Equipment .................................................................. Accounts Payable ...................................................... Common Stock ........................................................... Dividends .................................................................... Service Revenue ........................................................ Salaries and Wages Expense .................................... Rent Expense .............................................................

Debit $ 5,400 3,000 13,000

Credit

$ 1,000 18,000 1,200 8,600 4,000 1,000 $27,600

$27,600

(Tot. debit acct. bal. = Tot. credit acct. bal.) ($5,400 + $3,000 + $13,000 + $1,200 + $4,000 + $1,000 = $1,000 + $18,000 + $8,600) LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

BRIEF EXERCISE D.7 Dec. 31

Supplies Expense ............................................ Supplies ....................................................

Supplies 8,800 12/31 12/31 Bal. 1,100

7,700

12/31

7,700 7,700

Supplies Expense 7,700

LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-7

BRIEF EXERCISE D.8 Dec. 31

Depreciation Expense..................................... Accumulated Depreciation— Equipment ............................................

2,750 2,750

Accumulated Depreciation— Equipment 12/31 2,750

Depreciation Expense 12/31 2,750

Balance Sheet: Equipment ................................................................. Less: Accumulated depreciation—equipment.......

$22,000 2,750

$19,250

LO 4 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

BRIEF EXERCISE D.9 July 1 Dec. 31

Prepaid Insurance ........................................... Cash .........................................................

12,400

Insurance Expense ($12,400 × 6/24) .............. Prepaid Insurance ...................................

3,100

Prepaid Insurance 7/1 12,400 12/31 12/31 Bal. 9,300

3,100

12/31

12,400 3,100

Insurance Expense 3,100

LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-8

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE D.10 July 1 Dec. 31

Cash .................................................................. Unearned Service Revenue .....................

12,400

Unearned Service Revenue ............................. Service Revenue ($12,400 × 6/24) ...........

3,100

Unearned Service Revenue 12/31 3,100 7/1 12,400 12/31 Bal. 9,300

12,400 3,100

Service Revenue 12/31

3,100

LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

BRIEF EXERCISE D.11 (a) Dec. 31 (b) (c)

31 31

Interest Expense ...................................... Interest Payable ................................

300

Accounts Receivable ............................... Service Revenue ...............................

1,700

Salaries and Wages Expense .................. Salaries and Wages Payable ............

780

300 1,700 780

LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-9

SOLUTIONS TO EXERCISES EXERCISE D.1

Account Accounts payable Accounts receivable Common stock Depreciation expense Interest expense Interest income Inventories Prepaid expenses Property and equipment Revenues

(a) Normal Balance Debit or Credit Credit Debit Credit Debit Debit Credit Debit Debit Debit Credit

(b) Balance Sheet or Income Statement Balance sheet Balance sheet Balance sheet Income statement Income statement Income statement Balance sheet Balance sheet Balance sheet Income statement

LO 1 BT: K Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Reporting IMA: Reporting

D-10

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

Account Debited (b) (c) Specific Account Effect

(d) Normal Balance

(a) Basic Type

Account Credited (b) (c) Specific Account Effect

Kimmel, Survey of Accounting, 3e, Solutions Manual (For Instructor Use Only)

Transaction

(a) Basic Type

(d) Normal Balance

Asset

Cash

Increase

Debit

Stockholders’ Equity

Common Stock

Increase

Credit

Asset

Equipment

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Supplies

Increase

Debit

Liability

Accounts Payable

Increase

Credit

Asset

Accounts Receivable

Increase

Debit

Stockholders’ Equity

Service Revenue

Increase

Credit

Stockholders’ Equity

Advertising Expense

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Cash

Increase

Debit

Asset

Accounts Receivable

Decrease

Debit

Liability

Accounts Payable

Decrease

Credit

Asset

Cash

Decrease

Debit

Stockholders’ Equity

Dividends

Increase

Debit

Asset

Cash

Decrease

Debit

EXERCISE D.2

(a)

D-11

EXERCISE D.2 (Continued) (b) Trans. 1. 2. 3. 4. 5. 6. 7. 8.

General Journal Account Titles Cash ................................................................. Common Stock ........................................

Debit 15,000

Credit 15,000

Equipment ....................................................... Cash .........................................................

10,000

Supplies ........................................................... Accounts Payable ...................................

300

Accounts Receivable ...................................... Service Revenue......................................

3,700

Advertising Expense....................................... Cash .........................................................

200

Cash ................................................................. Accounts Receivable ..............................

1,100

Accounts Payable ........................................... Cash .........................................................

300

Dividends......................................................... Cash .........................................................

400

10,000 300 3,700 200 1,100 300 400

LO 1, 2 BT: AP Difficulty: Medium TOT: 15 AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-12

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE D.3

Date May 4 7 8 9 17 22 29

General Journal Account Titles Accounts Payable.......................................... Cash ........................................................

Debit 700

Credit 700

Accounts Receivable .................................... Service Revenue ....................................

6,800

Supplies ......................................................... Accounts Payable ..................................

850

Equipment ...................................................... Cash ........................................................

1,000

Salaries and Wages Expense ....................... Cash ........................................................

530

Maintenance and Repairs Expense .............. Accounts Payable ..................................

900

Prepaid Insurance ......................................... Cash ........................................................

1,200

6,800 850 1,000 530 900 1,200

LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-13

EXERCISE D.4

Date March 1 3 5 8

12 14 22 24 27 28 30

General Journal Account Titles Rent Expense ................................................. Cash ........................................................

Debit 1,200

Credit 1,200

Accounts Receivable ..................................... Service Revenue ....................................

140

Cash ................................................................ Service Revenue ....................................

Equipment ...................................................... Cash ........................................................ Accounts Payable ..................................

600

Cash ................................................................ Accounts Receivable .............................

140

Salaries and Wages Expense........................ Cash ........................................................

525

Utilities Expense ............................................ Cash ........................................................

Cash ................................................................ Notes Payable.........................................

1,500

Maintenance and Repairs Expense .............. Cash ........................................................

220

Accounts Payable .......................................... Cash ........................................................

520

Prepaid Insurance .......................................... Cash ........................................................

1,800

140 75 80 520 140 525 72 1,500 220 520 1,800

LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-14

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE D.5 Trans. 1. 2. 3. 4. 5. 6. 7.

8. 9. 10. 11. 12. 13. 14.

Account Titles Cash ................................................................. Common Stock ........................................

Debit 24,000

Cash ................................................................. Notes Payable..........................................

7,000

Equipment ....................................................... Cash .........................................................

11,000

Rent Expense .................................................. Cash .........................................................

1,200

Supplies........................................................... Cash .........................................................

1,450

Advertising Expense ...................................... Accounts Payable ...................................

600

Cash ................................................................. Accounts Receivable ...................................... Service Revenue .....................................

2,000 16,000

Dividends ........................................................ Cash .........................................................

400

Utilities Expense ............................................. Cash .........................................................

2,000

Accounts Payable ........................................... Cash .........................................................

600

Interest Expense ............................................. Cash .........................................................

Salaries and Wages Expense......................... Cash .........................................................

6,400

Cash ................................................................. Accounts Receivable ..............................

12,000

Income Tax Expense ...................................... Cash .........................................................

1,500

Credit 24,000 7,000 11,000 1,200 1,450 600

18,000 400 2,000 600 40 6,400 12,000 1,500

LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-15

EXERCISE D.6 (a) Date Apr. 1

D-16

General Journal Account Titles and Explanation Cash................................................................ Common Stock ....................................... (Issued stock for cash)

Debit 15,000

15,000

Supplies.......................................................... Accounts Payable .................................. (Purchased supplies on account)

5,200

Accounts Receivable ..................................... Service Revenue .................................... (Billed clients for services rendered)

3,400

Cash................................................................ Service Revenue .................................... (Received cash for revenue earned)

700

Salaries and Wages Expense........................ Cash ........................................................ (Paid salaries)

800

Accounts Payable .......................................... Cash ........................................................ (Paid creditors on account)

3,500

Cash................................................................ Accounts Receivable ............................. (Received cash from customers on account)

800

Cash................................................................ Unearned Service Revenue ................... (Received cash for future services)

900

Credit

5,200

3,400

700

800

3,500

800

Kimmel, Survey of Accounting, 3e, Solutions Manual

900

(For Instructor Use Only)

EXERCISE D.6 (Continued) (b)

SALVADOR’s GARDENING COMPANY, INC. Trial Balance April 30, 2027 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Accounts Payable .............................................. Unearned Service Revenue ............................... Common Stock .................................................. Service Revenue ................................................ Salaries and Wages Expense ............................

Debit $13,100 2,600 5,200

Credit

$ 1,700 900 15,000 4,100 800 $21,700

$21,700

(Cash + Accts. rec. + Supp. + Sal. & wages exp. = Accts. pay. + Unearn. svc. rev. + Com. stk. + Svc. rev.)) ($13,100 + $2,600 + $5,200 + $800 = $1,700 + $900 + $15,000 + $4,100) LO 2, 3 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-17

EXERCISE D.7 (a) Aug. 1 10 31 Bal.

Cash 8,000 Aug. 12 1,700 600 9,100

5,000 5,000

Common Stock Aug. 1 Bal.

8,000 8,000

Service Revenue Aug. 10 25 Bal.

1,700 3,400 5,100

1,200

Accounts Receivable Aug. 25 3,400 Aug. 31 Bal. 2,800

Aug. 12 Bal.

Notes Payable Aug. 12 Bal.

600

Equipment 6,200 6,200

(b)

BAYLEE INC. Trial Balance August 31, 2027 Cash .................................................................... Accounts Receivable ......................................... Equipment .......................................................... Notes Payable .................................................... Common Stock ................................................... Service Revenue ................................................

Debit $ 9,100 2,800 6,200

$18,100

Credit

$ 5,000 8,000 5,100 $18,100

(Cash + Accts. rec. + Equip. = Notes pay. + Com. stk. + Svc. rev.) ($9,100 + $2,800 + $6,200 = $5,000 + $8,000 + $5,100) LO 2, 3 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-18

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE D.8 (a) Date Oct.

Account Titles Cash ............................................................... Common Stock.......................................

Debit 66,000

66,000

No entry

Rent Expense ................................................. Cash ........................................................

2,000

Equipment ...................................................... Cash ........................................................ Accounts Payable ..................................

18,000

Advertising Expense ..................................... Cash ........................................................

500

Maintenance and Repairs Expense .............. Accounts Payable ..................................

390

Accounts Receivable..................................... Service Revenue ....................................

3,200

Supplies ......................................................... Accounts Payable ..................................

410

Accounts Payable .......................................... Cash ........................................................

14,000

Utilities Expense ............................................ Cash ........................................................

148

Cash ............................................................... Accounts Receivable .............................

3,200

Salaries and Wages Expense ....................... Cash ........................................................

5,100

8 10 12 16 21 24 27 31

Kimmel, Survey of Accounting, 3e, Solutions Manual

Credit

2,000 4,000 14,000 500 390 3,200 410 14,000 148 3,200

(For Instructor Use Only)

5,100

D-19

EXERCISE D.8 (Continued) (b) 10/1 10/27

Bal.

Cash 66,000 10/4 3,200 10/7 10/8 10/21 10/24 10/31 43,452

2,000 4,000 500 14,000 148 5,100

Accounts Receivable 10/12 3,200 10/27 3,200

10/16 Bal.

Supplies 410 410

10/7 Bal.

Equipment 18,000 18,000

10/21

D-20

10/8 Bal.

3,200 3,200

Advertising Expense 500 500

Salaries and Wages Expense 10/31 5,100 Bal. 5,100 Maintenance & Repairs Expense 10/10 390 Bal. 390

Accounts Payable 14,000 10/7 14,000 10/10 390 10/16 410 Bal. 800 Common Stock 10/1 Bal.

Service Revenue 10/12 Bal.

10/4 Bal.

Rent Expense 2,000 2,000

10/24 Bal.

Utilities Expense 148 148

66,000 66,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE D.8 (Continued) (c)

BEYERS CORPORATION Trial Balance October 31, 2027 Cash .................................................................... Supplies .............................................................. Equipment .......................................................... Accounts Payable .............................................. Common Stock .................................................. Service Revenue ................................................ Advertising Expense ......................................... Salaries and Wages Expense ............................ Maintenance and Repairs Expense .................. Rent Expense ..................................................... Utilities Expense ................................................

Debit $43,452 410 18,000

Credit

$ 800 66,000 3,200 500 5,100 390 2,000 148 $70,000

$70,000

(Cash + Supp. + Equip. + Advert. exp. + Sal. & wages exp. + Maint. & repairs exp. + Rent exp. + Util. exp. = Accts. pay. + Com. stk. + Svc. rev.) ($43,452 + $410 + $18,000 + $500 + $5,100 + $390 + $2,000 + $148 = $800 + $66,000 + $3,200) LO 2, 3 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-21

EXERCISE D.9 (a)

RAPID DELIVERY SERVICE Trial Balance July 31, 2027 Debit Cash ($98,370 – Debit total without Cash $85,946) .......................................................... Accounts Receivable ......................................... Prepaid Insurance .............................................. Equipment .......................................................... Accounts Payable .............................................. Salaries and Wages Payable ............................. Notes Payable (due 2030) .................................. Common Stock .................................................. Retained Earnings ............................................. Dividends ........................................................... Service Revenue ................................................ Salaries and Wages Expense ............................ Maintenance and Repairs Expense .................. Insurance Expense ............................................

Credit

$12,424 13,400 2,200 59,360 $ 8,400 820 28,450 40,000 5,200 700 15,500 7,428 1,958 900 $98,370

$98,370

(Cash = Tot. credits – Tot. debits w/o cash) ($98,370 - $85,946)

D-22

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE D.9 (Continued) (b)

RAPID DELIVERY SERVICE Income Statement For the Month Ended July 31, 2027 Revenues Service revenue ................................................. Expenses Salaries and wages expense ............................ Maintenance and repairs expense ................... Insurance expense ............................................ Total expenses ............................................... Net income ............................................................

$15,500 $7,428 1,958 900 10,286 $ 5,214

(Net inc. = Rev. – Exp.); [$15,500 – ($7,428 + $1,958 + $900)]

RAPID DELIVERY SERVICE Retained Earnings Statement For the Month Ended July 31, 2027 Retained earnings, July 1 ..................................... Add: Net income ................................................. Less: Dividends ................................................... Retained earnings, July 31 ...................................

$ 5,200 5,214 10,414 700 $ 9,714

(End. ret. earn. = Beg. ret. earn. + Net inc. – Div.) ($5,200 + $5,214 - $700)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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D-23

EXERCISE D.9 (Continued) RAPID DELIVERY SERVICE Balance Sheet July 31, 2027 Assets Current assets Cash.................................................................... Accounts receivable .......................................... Prepaid insurance.............................................. Total current assets ....................................... Equipment ............................................................. Total assets ....................................................

$12,424 13,400 2,200 $28,024 59,360 $87,384

Liabilities and Stockholders’ Equity Current liabilities Accounts payable .............................................. Salaries and wages payable ............................. Total current liabilities ................................... Notes payable........................................................ Total liabilities ................................................ Stockholders’ equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity ............................. Total liabilities and stockholders’ equity .....

$ 8,400 820 $ 9,220 28,450 37,670 40,000 9,714 49,714 $87,384

[((Cash + Accts. rec. + Prepd. ins.) + Equip.) = ((Accts. pay. + Sal. & wages pay.) + Notes pay.) + (Com. stk. + Ret. earn.)] [(($12,424 + $13,400 + $2,200) + $59,360) = (($8,400 + $820) + $28,450) + ($40,000 + $9,714)] LO 3 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-24

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE D.10 Item

(1) Type of Adjustment

(2) Accounts Before Adjustment

(a)

Accrued Revenues

Assets Understated Revenues Understated

(b)

Prepaid Expenses

Assets Overstated Expenses Understated

(c)

Accrued Expenses

Expenses Understated Liabilities Understated

(d)

Unearned Revenues

Liabilities Overstated Revenues Understated

(e)

Accrued Expenses

Expenses Understated Liabilities Understated

(f)

Prepaid Expenses

Assets Overstated Expenses Understated

LO 2, 4 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-25

EXERCISE D.11 1.

2. 3. 4. 5.

Mar. 31

31 31 31 31

Depreciation Expense ($280 × 3) ......... Accumulated Depreciation— Equipment .........................................

840

Unearned Rent Revenue .............................. Rent Revenue ($12,400 × 1/2) ...............

6,200

Interest Expense ........................................... Interest Payable.....................................

400

Supplies Expense ......................................... Supplies ($3,000 – $850) .......................

2,150

Insurance Expense ($400 × 3) ...................... Prepaid Insurance .................................

1,200

840 6,200 400 2,150 1,200

LO 2, 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-26

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

EXERCISE D.12

Date July 31 31 31 31 31 31 31

Account Titles Debit Interest Receivable ($20,000  .06  1/12) ....... 100 Interest Revenue .......................................

Credit 100

Supplies Expense ($24,000 – $18,600) ............ 5,400 Supplies.....................................................

5,400

Rent Expense ($3,600  4) ............................... Prepaid Rent .............................................

900

Salaries and Wages Expense .......................... 3,100 Salaries and Wages Payable .................... Depreciation Expense ($6,000  12) ................ Accumulated Depreciation—Buildings ...

3,100

500 500

Unearned Service Revenue ............................. 4,700 Service Revenue .......................................

4,700

Maintenance and Repairs Expense ................. 2,300 Accounts Payable .....................................

2,300

LO 2, 4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-27

SOLUTIONS TO PROBLEMS PROBLEM D.1 Date Mar. 1

D-28

Account Titles and Explanation Cash................................................................ Common Stock ....................................... (Issued stock for cash)

Debit 50,000

Land ................................................................ Buildings ........................................................ Equipment ...................................................... Cash ........................................................ (Purchased Snead’s Golf Land)

23,000 9,000 6,000

Advertising Expense ..................................... Cash ........................................................ (Paid for advertising)

1,200

Prepaid Insurance.......................................... Cash ........................................................ (Paid for one-year insurance policy)

2,400

Equipment ...................................................... Accounts Payable .................................. (Purchased equipment on account)

5,500

Cash................................................................ Service Revenue .................................... (Received cash for revenue earned)

1,600

Cash (100 × $25) ............................................ Unearned Service Revenue ................... (Received cash for coupon books sold)

2,500

Dividends ....................................................... Cash ........................................................ (Payment of cash dividend)

500

Credit 50,000

38,000

1,200

2,400

5,500

1,600

Kimmel, Survey of Accounting, 3e, Solutions Manual

2,500

500

(For Instructor Use Only)

PROBLEM D.1 (Continued) Date Mar. 30

Account Titles and Explanation Salaries and Wages Expense ....................... Cash ........................................................ (Paid salaries expense)

Debit 800

Accounts Payable.......................................... Cash ........................................................ (Paid creditor on account)

5,500

Cash ............................................................... Service Revenue .................................... (Received cash for revenue earned)

900

Credit 800

5,500

900

LO 2 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-29

PROBLEM D.2 (a) Date Apr. 1

Debit 118,000 0

No entry—not a transaction.

Rent Expense ................................................... Cash .......................................................... (Paid monthly office rent)

900

Supplies ........................................................... Accounts Payable .................................... (Purchased supplies on account from Burmingham Company)

1,300

Accounts Receivable ...................................... Service Revenue ...................................... (Billed clients for services rendered)

1,900

Cash ................................................................. Unearned Service Revenue ..................... (Received cash advance for future service)

700

Cash ................................................................. Service Revenue ...................................... (Received cash for service performed)

2,800

Salaries and Wages Expense ......................... Cash .......................................................... (Paid monthly salary)

1,500

Accounts Payable............................................ Cash .......................................................... (Paid Burmingham Company on account)

300

D-30

Account Titles and Explanation Cash ................................................................. Common Stock......................................... (Issued shares of stock for cash)

Credit 18,000

900

1,300

1,900

700

2,800

Kimmel, Survey of Accounting, 3e, Solutions Manual

1,500

300

(For Instructor Use Only)

PROBLEM D.2 (Continued) (b) 4/1 4/11 4/20 Bal.

Cash 18,000 4/2 700 4/30 2,800 4/30 18,800

900 1,500 300

4/10 Bal.

Accounts Receivable 1,900 1,900

4/3 Bal.

Supplies 1,300 1,300

4/30

Accounts Payable 300 4/3 Bal.

Salaries and Wages Expense 4/30 1,500 Bal. 1,500

4/2 Bal.

Rent Expense 900 900

1,300 1,000

Unearned Service Revenue 4/11 700 Bal. 700 Common Stock 4/1 Bal.

18,000 18,000

Service Revenue 4/10 4/20 Bal.

1,900 2,800 4,700

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

D-31

PROBLEM D.2 (Continued) (c)

AYALA ARCHITECTS INC. Trial Balance April 30, 2027 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Accounts Payable .............................................. Unearned Service Revenue ............................... Common Stock ................................................... Service Revenue ................................................ Salaries and Wages Expense ............................ Rent Expense .....................................................

Debit $18,800 1,900 1,300

Credit

$ 1,000 700 18,000 4,700 1,500 900 $24,400

$24,400

(Cash + Accts. rec. + Supp. + Sal. & wages exp. + Rent exp. = Accts. pay. + Unearn. svc. rev. + Com. stk. + Svc. rev.) ($18,800 + $1,900 + $1,300 + $1,500 + $900 = $1,000 + $700 + $18,000 + $4,700) LO 2, 3 BT: AP Difficulty: Hard TOT: 35 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-32

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM D.3

(a) & (c) Cash 10/1 Bal. 19,200 10/15 10/5 1,300 10/20 10/17 600 10/29 10/31 Bal. 17,300

1,200 1,900 300 400

Retained Earnings 10/1 Bal. 11,000 Bal. 11,000

Accounts Receivable 10/1 Bal. 2,600 10/5 1,300 10/10 5,100 Bal. 6,400

10/1 Bal. Bal.

Supplies 2,100 2,100

10/1 Bal. Bal.

Equipment 8,000 8,000

10/20

Common Stock 10/1 Bal. 15,000 Bal. 15,000

Dividends 300 300

10/29 Bal.

Service Revenue 10/10 10/17 Bal.

5,100 600 5,700

Salaries and Wages Expense 10/15 1,200 Bal. 1,200

Accounts Payable 1,900 10/1 Bal. Bal.

4,800 2,900 10/31 Bal.

Utilities Expense 400 400

Unearned Service Revenue 10/1 Bal. 1,100 Bal. 1,100

Kimmel, Survey of Accounting, 3e, Solutions Manual

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D-33

PROBLEM D.3 (Continued) (b) Date Oct. 5

D-34

Account Titles and Explanation Cash................................................................ Accounts Receivable ............................. (Received collections from customers on account)

Debit 1,300

Accounts Receivable ..................................... Service Revenue .................................... (Billed customers for services performed)

5,100

Salaries and Wages Expense........................ Cash ........................................................ (Paid employee salaries)

1,200

Cash................................................................ Service Revenue .................................... (Performed services for customers)

600

Accounts Payable .......................................... Cash ........................................................ (Paid creditors on account)

1,900

Dividends ....................................................... Cash ........................................................ (Payment of cash dividend)

300

Utilities Expense ............................................ Cash ........................................................ (Paid utilities)

400

Credit 1,300

5,100

1,200

600

1,900

300

Kimmel, Survey of Accounting, 3e, Solutions Manual

400

(For Instructor Use Only)

PROBLEM D.3 (Continued) (d)

LACEY COMPANY Trial Balance October 31, 2027 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Equipment .......................................................... Accounts Payable .............................................. Unearned Service Revenue ............................... Common Stock .................................................. Retained Earnings ............................................. Dividends ........................................................... Service Revenue ................................................ Salaries and Wages Expense ............................ Utilities Expense ................................................

Debit $ 17,300 6,400 2,100 8,000

Credit

$ 2,900 1,100 15,000 11,000 300 5,700 1,200 400 $35,700

$35,700

(Cash + Accts. rec. + Supp. + Equip. + Div. + Sal. & wages exp. + Util. exp. = Accts. pay. + Unearn. svc. rev. + Com. stk. + Ret. earn. + Svc. rev.) ($17,300 + $6,400 + $2,100 + $8,000 + $300 + $1,200 + $400) = ($2,900 + $1,100 + $15,000 + $11,000 + $5,700) LO 2, 3 BT: AP Difficulty: Hard TOT: 45 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

Kimmel, Survey of Accounting, 3e, Solutions Manual

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D-35

PROBLEM D.4 (a) Date 2027 1.

June 30

Account Titles

Debit

Supplies Expense ................................... Supplies ($2,000 – $720) .................

1,280

Utilities Expense ..................................... Accounts Payable ...........................

180

Insurance Expense ................................. Prepaid Insurance ($2,880 ÷ 12 months) ...................

240

Unearned Service Revenue .................... Service Revenue..............................

4,100

Salaries and Wages Expense ................. Salaries and Wages Payable ..........

1,250

Depreciation Expense ............................ Accumulated Depreciation— Equipment....................................

250

Accounts Receivable .............................. Service Revenue..............................

3,900

Credit

1,280 180

240 4,100 1,250

250 3,900

(b)

6/30 Bal.

Cash 6,850

Accounts Receivable 6/30 Bal. 7,000 6/30 3,900 6/30 Bal. 10,900

D-36

6/30 Bal. 6/30 Bal.

Supplies 2,000 6/30 720

Prepaid Insurance 6/30 Bal. 2,880 6/30 6/30 Bal. 2,640

Kimmel, Survey of Accounting, 3e, Solutions Manual

1,280

240

(For Instructor Use Only)

PROBLEM D.4 (Continued) Equipment 6/30 Bal. 15,000

Rent Expense 6/30 Bal. 2,000

Accumulated Depreciation— Equipment 6/30 250 6/30 Bal. 250 Accounts Payable 6/30 Bal. 6/30 6/30

4,230 180 4,410

Salaries and Wages Payable 6/30 1,250 6/30 Bal. 1,250 Unearned Service Revenue 6/30 4,100 6/30 Bal. 5,200 6/30 Bal. 1,100

Depreciation Expense 6/30 250 6/30 Bal. 250 Insurance Expense 6/30 240 6/30 Bal. 240 Utilities Expense 6/30 180 6/30 Bal. 180 Supplies Expense 6/30 1,280 6/30 Bal. 1,280

Common Stock 6/30 Bal. 22,000 Service Revenue 6/30 Bal. 8,300 6/30 4,100 6/30 3,900 6/30 Bal. 16,300 Salaries and Wages Expense 6/30 Bal. 4,000 6/30 1,250 6/30 Bal. 5,250 Copyright © 2022 John Wiley & Sons, Inc.

Kimmel, Survey of Accounting, 3e, Solutions Manual

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D-37

PROBLEM D.4 (Continued) (c)

KUMAR CONSULTING Adjusted Trial Balance June 30, 2027 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Salaries and Wages Payable ............................. Unearned Service Revenue ............................... Common Stock ................................................... Service Revenue ................................................ Salaries and Wages Expense ............................ Rent Expense ..................................................... Depreciation Expense ........................................ Insurance Expense ............................................ Utilities Expense ................................................ Supplies Expense ..............................................

Debit $ 6,850 10,900 720 2,640 15,000

Credit

250 4,410 1,250 1,100 22,000 16,300

5,250 2,000 250 240 180 1,280 $45,310

$45,310

(Cash + Accts. rec. + Supp. + Prepd. ins. + Equip. + Sal. & wages exp. + Rent exp. + Depr. exp. + Ins. exp. + Util. exp. + Supp. exp. = Accum. depr.-equip. + Accts. pay. + Sal. & wages pay. + Unearn. svc. rev. + Com. stk. + Svc. rev.) ($6,850 + $10,900 + $720 + $2,640 + $15,000 + $5,250 + $2,000 + $250 + $240 + $180 + $1,280 = $250 + $4,410 + $1,250 + $1,100 + $22,000 + $16,300) LO 2, 4 BT: AP Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-38

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM D-5

(a), (c) & (e) Cash 11/1 Bal. 2,790 11/8 11/10 1,800 11/20 11/12 3,700 11/22 11/29 750 11/25 11/30 Bal. 3,840

1,220 2,500 480 1,000

Accounts Receivable 11/1 Bal. 2,910 11/10 1,800 11/27 900 11/30 Bal. 2,010 Supplies 11/1 Bal. 1,120 11/30 11/17 1,300 11/30 Bal. 1,100

1,320

Equipment 11/1 Bal. 10,000 11/15 3,600 11/30 Bal. 13,600

11/30

Unearned Service Revenue 500 11/1 Bal. 11/29 11/30 Bal.

400 750 650

Salaries and Wages Payable 11/8 620 11/1 Bal. 620 11/30 480 11/30 Bal. 480 Common Stock 11/1 Bal. 10,000 11/30 Bal. 10,000

Accumulated Depreciation— Equipment 11/1 Bal. 500 11/30 250 11/30 Bal. 750

11/20

Accounts Payable 2,500 11/1 Bal. 2,300 11/15 3,600 11/17 1,300 11/30 Bal. 4,700

Retained Earnings 11/1 Bal. 3,000 11/30 Bal. 3,000

Kimmel, Survey of Accounting, 3e, Solutions Manual

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D-39

PROBLEM D.5 (Continued) Service Revenue 11/12 3,700 11/27 900 11/30 500 11/30 Bal. 5,100 Depreciation Expense 11/30 250 11/30 Bal. 250

Salaries and Wages Expense 11/8 600 11/25 1,000 11/30 480 11/30 Bal. 2,080 Rent Expense 11/22 480 11/30 Bal. 480

Supplies Expense 11/30 1,320 11/30 Bal. 1,320

D-40

Kimmel, Survey of Accounting, 3e, Solutions Manual

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PROBLEM D.5 (Continued) (b) Date Nov. 8

10 12 15 17 20 22 25 27 29

General Journal Account Titles Salaries and Wages Payable .......................... Salaries and Wages Expense ......................... Cash .........................................................

Debit 620 600

1,220

Cash ................................................................. Accounts Receivable ..............................

1,800

Cash ................................................................. Service Revenue ......................................

3,700

Equipment ....................................................... Accounts Payable....................................

3,600

Supplies ........................................................... Accounts Payable....................................

1,300

Accounts Payable ........................................... Cash .........................................................

2,500

Rent Expense .................................................. Cash .........................................................

480

Salaries and Wages Expense ......................... Cash .........................................................

1,000

Accounts Receivable ...................................... Service Revenue ......................................

900

Cash ................................................................. Unearned Service Revenue ....................

750

Kimmel, Survey of Accounting, 3e, Solutions Manual

Credit

1,800 3,700 3,600 1,300 2,500 480 1,000 900

(For Instructor Use Only)

750

D-41

PROBLEM D.5 (Continued) (d) & (f)

SOHO EQUIPMENT REPAIR Trial Balances November 30, 2027

Cash ............................................ Accounts Receivable ................. Supplies ...................................... Equipment .................................. Accumulated Depreciation— Equipment Accounts Payable ...................... Unearned Service Revenue ....... Salaries and Wages Payable ..... Common Stock........................... Retained Earnings ..................... Service Revenue ........................ Depreciation Expense................ Supplies Expense ..................... Salaries and Wages Expense ... Rent Expense .............................

Before Adjustment Dr. Cr. $ 3,840 2,010 2,420 13,600 $

After Adjustment Dr. Cr. $ 3,840 2,010 1,100 13,600

500 4,700 1,150

10,000 3,000 4,600

750 4,700 650 480 10,000 3,000 5,100

250 1,320 1,600 2,080 480 480 $23,950 $23,950 $24,680 $24,680

(Trial bal. before adjust.: Tot. debit acct. bal. = Tot. credit acct. bal.); ($23,950 = $23,950) (Trial bal. after adjust.: Cash + Accts. rec. + Supp. + Equip. + Depr. exp. + Supp. exp. + Sal. & wages exp. + Rent exp. = Accum. depr.-equip. + Accts. pay. + Unearn. svc. rev. + Sal. & wages pay. + Com. stk. + Ret. earn. + Svc. rev.); ($3,840 + $2,010 + $1,100 + $13,600 + $250 + $1,320 + $2,080 + $480 = $750 + $4,700 + $650 + $480 + $10,000 + $3,000 + $5,100)

D-42

Kimmel, Survey of Accounting, 3e, Solutions Manual

(For Instructor Use Only)

PROBLEM D.5 (Continued) (e) Nov. 30 30

30 (g)

1. Supplies Expense ................................... Supplies ($2,420 – $1,100)...................... 2. Salaries and Wages Expense ........................ Salaries and Wages Payable ..................

1,320 1,320 480 480

3. Depreciation Expense .................................... Accumulated Depreciation-Equipment .

250

4. Unearned Service Revenue ........................... Service Revenue .....................................

500

250

500

$5,100 $2,080 1,320 480 250 4,130 $ 970

(Net inc. = Tot. rev. – Tot. exp.) [$5,100 – ($2,080 + $1,320 + $480 + $250)]

$3,000 970 $3,970

(End. ret. earn. = Beg. ret. earn. + Net inc.) ($3,900 + $970)

Kimmel, Survey of Accounting, 3e, Solutions Manual

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D-43

PROBLEM D.5 (Continued)

SOHO EQUIPMENT REPAIR Balance Sheet November 30, 2027 Assets Current assets Cash ................................................................... Accounts receivable ......................................... Supplies ............................................................. Total current assets ................................... Property, plant and equipment Equipment.......................................................... Less: Accumulated depreciation— equipment .............................................. Total assets ................................................

$ 3,840 2,010 1,100 $ 6,950 13,600 750

12,850 $19,800

Liabilities and Stockholders’ Equity Current liabilities Accounts payable.............................................. Unearned service revenue ................................ Salaries and wages payable ............................. Total current liabilities............................... Stockholders’ equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity ........................ Total liabilities and stockholders’ equity .......................................................

$ 4,700 650 480 $ 5,830 10,000 3,970 13,970 $19,800

[((Cash + Accts. rec. + Supp.) + (Equip. – Accum. depr.-equip.)) = ((Accts. pay. + Unearn. svc. rev. + Sal. & wages pay.) + (Com. stk. + Ret. earn.))] [(($3,840 + $2,010 + $1,100) + ($13,600 - $750)) = (($4,700 + $650 + $480) + ($10,000 + $3,970))] LO 2-4 BT: AP Difficulty: Hard TOT: 70 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

D-44

Kimmel, Survey of Accounting, 3e, Solutions Manual

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