MANAGERIAL ACCOUNTING Spring 2004 Online Problem Set Chapters 5, 6 and 8 In lieu of a second exam, students will complete the following problem set. This activity has a total value of 75 points. Completed work (in a .doc, .rtf, or .xls file) must be submitted, by email, to Shawn Abbott no later than midnight on THURSDAY, 4/15/04. Students may use their books and notes, as needed. However, this activity calls for independent work. Do not consult with classmates or any other individuals in preparing this problem set. As accounting students, let’s go beyond discussing ethical behavior – let’s practice it. Each of the seven problems has a value of ten points. The short answer question is worth 5 points. 1. Dicker’s Department Store has four departments: men's, women's, children's, and electronics. The following information is provided: Men’s Women’s Children’s Electronics Floor space 15,000 sq. ft. 25,000 sq. ft. 8,000 sq. ft. 2,000 sq. ft. Sales $35,000 $75,000 $20,000 $12,000 The company's accountant needs to allocate the store's monthly rent of $15,000. Required. 1.) Compute the allocation rate that should be used to allocate the rent cost to the four departments. 2.) Compute the amount of rent that should be allocated to each of the four departments. 3.) Currently, the managers are paid a bonus based on sales. As you can see from the above table, the women's department manager will receive the largest bonus. Do you believe this bonus plan is fair to all four-department managers? Why or why not? 2. The management accountant at Flora & Fauna, Inc. provided the following estimated costs for producing 5,000 units of a specialty product manufactured by the firm: iet a i l r t s D cm rae 1, 0 0 $0 0 iet ao( hup n r r t D cl br 1 or eui) 5, 0 0 $0 0 n-ee upr os i l t t Utl v spo cs 1, 0 0 $0 0 a h v upr os t l l Bc-eespo cs t t , 0 0 $5 0 r u -ee upr os o t l t t P dcl v spo cs , 0 0 $3 0 a lt - v upr os c l l F iiyeespo cst t , 0 0 $7 0 The company believes that direct labor hours are the most appropriate cost driver for assigning overhead support costs to its product. Required. 1.) Compute the predetermined overhead rate for this company. 2.) Compute the specialty product's total estimated cost per unit. 3.) Determine the selling price for the product, assuming Flora & Fauna has targeted a gross margin of $8.00 for this specialty product. 3. Sugarland Brands packages single-sized servings of sugar and sugar substitute for fast food restaurants. The activities required to package sugar are fewer and less complex than for sugar substitute because the company manufactures sugar in house. The direct costs of producing the two products are as follows: u us g g te ar S Sbai r t Su t u im $ ra ee ci ttl Dr a 0 s . 0 1 0 $0 2 . i lr ra e Dto cb $0 . 0 2 0 $0 4 . Overhead is currently assigned to the two products on the basis of machine hours. The following information is provided regarding overhead costs: COST DRIVER DATA TRACEABLE COST SUGAR SUGAR ACTIVITY COSTS DRIVER LINE SUB LINE TOTAL Setup $ 75,000 Number of 50 100 150 setups Packing $125,000 Number of 10,000 15,000 25,000 machine hours Inspection $ 25,000 Number of batches 200 300 500 $225,000 Required. 1.) Compute the predetermined overhead rate under the current method of overhead cost allocation. How much total overhead cost will be assigned to each product under the current system? 2.) Compute the three activity rates that would be used in an activity-based system. How much total overhead cost will be assigned to each product under an ABC system? 3.) Assuming an ABC system to be more precise, by how much does the company's current costing system over or under cost the products? Be specific. 4. Firerock Tires produces a variety of auto and truck tires at its Dayton manufacturing plant. The plant is highly automated and uses an activity-based costing system to allocate overhead costs to its various product lines. The costs and cost drivers associated with four activity cost pools are given below: ACTIVITIES: UNIT- BATCH- PRODUCT- FACILITY- LEVEL LEVEL LEVEL LEVEL Cost $50,000 $20,000 $10,000 $120,000 Cost Driver 4,000 labor hrs 100 set ups % of use 24,000 units Production of 1,000 units of a small tractor tire required 400 labor hours, 2 setups, and consumed 30% of the product sustaining activities. Required. 1.) Instead of using ABC, suppose the company had used labor hours as a companywide allocation base. How much total overhead would have been allocated to the tractor tire? 2.) How much total overhead costs will be allocated to the tire under activity based costing? 3.) The tire is priced on a cost plus basis. What price will be quoted if the product is priced at 25% above cost? Compute the price under both the direct labor hours approach and under activity based costing. The direct manufacturing costs consist of direct material of $20 and direct labor of $30. 5. Bray Company produces a number of products, including a small American flag. The firm, which began operations at the beginning of the current year, uses a standard cost system. The standard costs for one American Flag are provided below: i c tr (5 . $ ) r ma . d 1 e Dt a il0y@0 $5 e 0 . .0 0 i c b( h 1 ) r lo r e @0 Dta r1. $.00 0 . 0 10 a l v e (h 1 ) r ee d r ia Vbor a 1. $ 0 1 h @ .0 0 .0 ie v a 1. 0 ) x or d r h Fd ee (h $ 0 @ .5 5 .0 12 0 $.0 The $0.50 fixed overhead rate is based on total budgeted fixed overhead costs of $17,000. There were no changes in any inventory account during the period. The company produced and sold 35,000 units at the following costs: Direct materials (18,000 yds.) $ 17,280 Direct labor (36,000 hrs.) 374,400 Variable factory overhead 34,500 Fixed factory overhead 15,000 Required. 1.) Compute and label as Favorable (F) or Unfavorable (UF) the following flexible budget variances: (a.) Direct materials price variance (b.) Direct materials quantity variance (c.) Direct labor rate variance (d.) Direct labor efficiency variance 6. The following standard cost card is provided for Product U4reA: Direct material (2 lbs. @ $5.00 per lb.) $10.00 Direct labor (1 hr @ $8.00 per hr.) 8.00 Variable overhead (1 hr. @ $3.00 per hr.) 3.00 Fixed overhead (1 hr.@ $2.00 per hr.) 2.00 Total standard cost per unit $23.00 The fixed overhead rate is based on total budgeted fixed overhead of $12,000. During the period, the company produced and sold 5,800 units at the following costs. Direct material 12,000 pounds @ $4.50 per pound Direct labor 5,750 hours @ $8.00 per hour Overhead $29,920 Required. 1.) Compute and label as Favorable (F) or Unfavorable (UF) the following flexible budget variances: (a.) Direct materials price variance (b.) Direct materials quantity variance (c.) Direct labor rate variance (d.) Direct labor efficiency variance 7. Amber Company estimates sales of 15,000 units for the upcoming period. At this sales volume its budgeted income is as follows: Per Unit Total Sales $60 $900,000 Less variable costs: Manufacturing costs 30 450,000 Selling and administrative costs 10 150,000 Contribution margin $20 $300,000 Less fixed costs: Manufacturing costs 75,000 Selling and administrative costs 125,000 Net income $100,000 During the period the company actually produced and sold only 14,000 units. Required. 1.) The manager now wants to evaluate the company's performance by comparing actual costs and revenues to those shown above but you have advised against it. Explain your reasoning. 2.) Prepare a flexible budget based on 14,000 units. 8. (Short Answer) Discuss some of the opportunities and obstacles inherent in the budgeting process.
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