Consider Each Question Independently

Assignment 1

Question 1 (38 marks)

The Stylish Shoe Company operates a chain of shoe stores that sell ten different styles of ladies’ shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. Stylish is considering opening another store that is expected to have the revenue and cost relationship shown here.

Unit variable data (per pair of shoes) / $300.00 / Annual fixed costs
Selling price / Rent
Cost of shoes / $185.00 / Salaries
Sales commission / 15.00 / Advertising
Variable cost per unit / $200.00 / Other fixed costs

Total fixed costs

Required

Consider each question independently.

aCalculate the annual breakeven point in (i) units sold and (ii) revenues. (4 marks)

bIf 8,000 units are sold, determine the store’s operating income /

(loss).(8 marks)

cIf sales commissions are discontinued and fixed costs are raised by a total of $77,500, calculate the annual breakeven point in (i) units

sold and (ii) revenues.(4 marks)

dRefer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $10.00 per unit sold, calculate the annual breakeven point in (i) units sold and (ii) revenues? (4 marks)

$ 150,000 500,000

200,000

50,000

$900,000

12ACT B313 Management and Cost Accounting

eRefer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $10.00 per unit in excess of the breakeven point, calculate the store’s operating income if 12,000

units were sold.(6 marks)

fAs the owner, which sales compensation plan would you choose if the forecasted annual sales of the new store were at least 10,000 units? What do you think about the motivational aspect of your

chosen compensation plan?(6 marks)

gSuppose the target operating income is $34,500. How many units must be sold to reach the target operating income under (i) the original salary-plus-commissions plan and (ii) the higher-fixed-salaries-only plan? Which method would you prefer? Explain

briefly.(6 marks)

Question 2 (22 marks)

John Ting, Event Manager of Vision Music, schedules concerts for local bands and creates CDs and T-shirts to sell at each concert. Vision Music uses a normal-costing system with two direct-cost pools, labour and materials, and one indirect-cost pool, general overhead. General overhead is allocated to each concert based on 120% of the direct labour cost. The actual overhead equalled the allocated overhead as of March 20x7. The actual overhead in April was $19,800. All costs incurred during the planning stage for a concert and during the concert are gathered in a balance sheet account called ‘Concert in Progress (CIP)’.

When a concert is completed, the costs are transferred to an income statement account called ‘Cost of Completed Concerts (CCC)’. The following is cost information for April 20x7:

From beginning CIP / Incurred in April
Band
Materials / Labour / Materials / Labour
Irok / $5,700 / $7,500 / $1,100 / $2,000
Freke Out / 7,000 / 5,500 / 1,400 / 1,000
Bottom Rung / 2,500 / 4,750 / 3,100 / 2,500
Dish Towel / - / - / 5,400 / 4,500
Rail Ride / - / - / 2,250 / 2,500

As of April 1, there were three concerts in progress: Irok, Freke Out, and Bottom Rung. The concerts for Dish Towel and Rail Ride were started during April. The concerts for Freke Out and Dish Towel were completed during April.

Required

aCalculate CIP at the end of April.(3 marks)

bCalculate CCC for April.(3 marks)

cCalculate the ending balances in CIP and CCC if the under- or overallocated overhead amount is as follows:

i Written off to CCC

Assignment File13

iiProrated based on the ending balances (before proration) in CIP and CCC

iiiProrated based on the overhead allocated in April in the ending balances of CIP and CCC (before proration)

(12 marks)

dWhich method would you choose? Explain. Would your choice depend on whether overhead cost is underallocated or overallocated?

Explain.(4 marks)

Question 3 (20 marks)

Jacob Hong, the new plant manager of Vantage Manufacturing Plant

Number 5, has just reviewed a draft of his year-end financial statements. Hong receives a year-end bonus of 8% of the plant’s operating income before tax. The year-end income statement provided by the plant’s controller was disappointing to say the least. After reviewing the numbers, Hong demanded that his controller go back and ‘work the numbers’ again. Hong insisted that, if he didn’t see a better operating income number the next time round, he would be forced to look for a new controller.

Vantage Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All order expenses, including finished goods warehousing costs of $ 7,140,000, are classified as period expenses. Hong had suggested that warehousing costs be included as product costs because they are

‘definitely related to our product’. The company produced 210,000 units during the period and sold 190,000 units.

As the controller reworked the numbers, he discovered that if he included warehousing costs as product costs, he could improve operating income by $680,000. He was also sure these new numbers would make Hong happy.

Required

aShow numerically how operating income would improve by $680,000 just by classifying the preceding costs as product costs

instead of period expenses.(8 marks)

bIs Hong correct in his justification that these costs are ‘definitely

related to our product’?(4 marks)

cBy how much will Hong benefit personally if the controller makes

the adjustments in requirement (a)?(2 marks)

dSuggest the actions to be taken by the plant controller.(6 marks)

14ACT B313 Management and Cost Accounting

Question 4 (20 marks)

Modern Computer Limited is an IT consulting firm which helps commercial companies to instal a general accounting programme. It uses 90% cumulative average-time learning model as a basis for forecasting direct labour-hours for the coming jobs. The company’s information is as follows:

Programme purchase cost$5,000 per unit

Direct labour hour for the first job200 hours

Direct labour cost$50 per hour

Note: For a 90% learning curve, b = ln0.9/ln0.2 = -0.152004

Required

aCalculate the total costs for the first four jobs.(7 marks)

bWhat would be the total costs for the first four jobs if Modern

Computer changes to the use of the incremental unit-time learning

model?(7 marks)

cCompare the results of requirements (a) and (b). Why are they different? How would Modern Computer decide which model it

should use?(6 marks)

Question 5 (32 marks)

Bear Bear Limited manufactures toys for kids and began operations in 2016. For 2016, Bear Bear budgeted to produce and sell 2,000 units.

The company had no price, spending, or efficiency variances and writes off production- volume variance to cost of goods sold. Actual data for 2016 are given as follows:

Units produced / 1,900
Units sold / 1,800
Selling price / $200
Variable cost:
Manufacturing cost per unit produced
Direct materials / $5
Direct manufacturing labor / $8
Manufacturing overhead / $4
Marketing cost per unit sold / $10
Fixed costs:
Manufacturing costs / $100,000
Administrative costs / $80,000
Marketing costs / $50,000
Required
a / Prepare a 2016 income statement for Bear Bear Limited using
variable costing. / (11 marks)
b / Prepare a 2016 income statement for Bear Bear Limited using
absorption costing. / (11 marks)
c / Explain the differences in operating incomes obtained in
requirements (a) and (b). / (5 marks)

d, Bear Bear’s management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. What incentives will this bonus plan create for the supervisors?

What modifications could Bear Bear’s management make toimprove such a plan? Explain briefly. (5 marks)

Question 6 (28 marks)

Harry Super-Store (HS) operates at capacity and decides to apply ABC analysis to three product lines: food, home utensils and lifestyle products. It identifies four activities and their activity cost rates as follows:

Ordering$51 per purchase order

Delivery and receipt of merchandise$39 per delivery

Shelf-stocking$42 per hour

Customer support and assistance$0.22 per item sold

The revenues, cost of goods sold, store support costs, activities that account for the store support costs, and activity-area usage of the three product lines are as follows:

Food / Home utensils Lifestyle products
Financial data
Revenues / $59,500 / $66,000 / $51,000
Cost of goods sold / $36,000 / $48,000 / $34,000
Store support / $10,800 / $14,400 / $10,200
Activity-area usage (cost-allocation base)
Ordering (purchase orders) / 50 / 40 / 30
Delivery (deliveries) / 180 / 70 / 60
Shelf-stocking (hours) / 95 / 90 / 20
Customer support (items sold) / 13,500 / 17,500 / 8,000

Under its simple costing system, HS allocated support costs to products at the rate of 30% of cost of goods sold.

Required

cUse the simple costing system to prepare a product-line profitability

report for HS.(8 marks)

dUse the ABC system to prepare a product-line profitability report for

HS.(14 marks)

cWhat new insights does the ABC system in requirement (b) provide to HS managers? (6 marks)

Question 7 (20 marks)

Atlantis Handcraft is a manufacturer of picture frames for large retailers. Every picture frame passes through two departments: the assembly department and the finishing department. This problem focuses onthe assembly department. The process-costing system at Atlantis has

a single direct-cost category (direct materials) and a single indirect-cost category (conversion costs) . Direct materials are added when the assembly department process is 10% complete. Conversion costs are added evenly during the assembly department’s process.

Atlantis uses the weighted-average method of process costing. Consider the following data for the assembly department in April 20x7:

Physical unit / Direct / Conversion
(Frames) / materials / costs
Work in process, April 1a / 60 / $15,300 / $1,560
Started during April 20x7 / 510
Completed during April 20x7 / 450
Work in process, April 30b / 120
Total costs added during April 20x7 / $178,500 / $115,440

A degree of completion: direct materials, 100%; conversion costs, 40%

B degree of completion: direct materials, 100%; conversion costs, 15%.

Required

A Summarize the total assembly department costs for April 20x7, and assign them to units completed (and transferred out) and to units in

ending work in process.(16 marks)

bWhat issues should a manager focus on when reviewing the

equivalent units calculation?(4 marks)

Question 8 (20 marks)

Peterson Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, John Leung, is opposed

to the idea of a new JIT system. He is concerned that the new system

(a) will be too costly to manage; (b) will result in too many stock outs; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Susan Chow, is in favour of the new system, due to the likely result in cost savings. John wants Susan to revise her cost saving estimation because he is concerned that top management will give more weight to financial factors and not give due consideration

to nonfinancial factors such as employee morale. In addition to the reduction in inventory described previously, Susan has gathered the following information for the upcoming year regarding the JIT system:

Annual insurance and warehousing costs for inventory would be reduced by 60% of the current budgeted level of $350,000.

Payroll expenses for current inventory management staff would be reduced by 15% of the budgeted total of $600,000.

•

•

•

•

Additional annual costs for JIT system implementation and management, including personnel costs, would equal $220,000.

The additional number of stock outs under the new JIT system is estimated to be 5% of the total number of shipments annually. Ten thousand shipments are budgeted for the upcoming year. Each stock out would result in an average additional cost of $250.

Peterson’s required rate of return on inventory investments is 10% per year.

•

Required:

•

system? / (12 marks)
b / Is it ethical for Susan to revise her estimation? / (4 marks)
c / How should Susan manage John’s concerns? / (4 marks)

A From a financial perspective, should Peterson adopt the new JIT