Shady Lady sells window coverings to both commercial and residential customers

E4-5 Shady Lady sells window coverings to both commercial and residential customers. The following information relates to its budgeted operations for the current year.

Commercial Residential
Revenues $300,000 $480,000
Direct material costs 30,000 50,000
Direct labor costs 100,000 300,000
Overhead costs 50,000 180,000 150,000 500,000
Operating income (loss) $120,000 ($ 20,000)

The controller, Wanda Lewis, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex to install for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed:

Activity Cost Pools Estimated Overhead Cost Drivers
Scheduling and travel $90,000 Hours of travel
Setup time 70,000 Number of setups
Supervision 40,000 Direct labor cost
Expected Use of Cost Drivers per Product
Commercial Residential
Scheduling and travel 1,000 500
Setup time 450 250

Instructions:
a) Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line
b) Compute the operating income for the each product line, using the activity-based overhead rates
c) What do you believe Wanda Lewis should do?

Click here for the solution: Shady Lady sells window coverings to both commercial and residential customers

Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one-year warranty against manufacturer's defects

Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one-year warranty against manufacturer's defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate 2% of sales. Sales of the sprinklers in 2010 were $2,500,000. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product:

Accrued liability and expense
Warranty expense (2% x $2,500,000) 50,000
Estimated warranty liability 50,000

Actual expenditures (summary entry)
Estimated warranty liability 23,000
Cash, wages payable, parts and supplies, etc. 23,000

In late 2011, the company's claims experience was evaluated and it was determined that claims were far more than expected—3% of sales rather than 2%.

Required:
1. Assuming sales of the sprinklers in 2011 were $3,600,000 and warranty expenditures in 2011 totaled $88,000, prepare any journal entries related to the warranty.
2. Assuming sales of the sprinklers were discontinued after 2010, prepare any journal entry(s) in 2011 related to the warranty.

Click here for the solution: Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one-year warranty against manufacturer's defects

Commercial accounting and generally accepted accounting principles, generally prescribe the accrual basis

Commercial accounting and generally accepted accounting principles, generally prescribe the accrual basis of accounting over the cash basis. Describe both bases of accounting and explain the differences.

Click here for the solution: Commercial accounting and generally accepted accounting principles, generally prescribe the accrual basis

Maher Drapery Inc. specializes in making custom draperies for both commercial and residential customers

Job-Order costing in a manufacturing company

Maher Drapery Inc. specializes in making custom draperies for both commercial and residential customers.  It began business on August 1, 2004, by acquiring $40,000 cash through issuing common stock. In August 2004, Maher accepted drapery orders, Jobs 801 and 802, for two new commercial buildings. The company paid cash for the following costs related to the orders:

Job 801
Raw materials $ 7,360
Direct labor (512 hours at $20 per hour) 10,240

Job 802
Raw materials 5,200
Direct labor (340 hours at $20 per hour) 6,800

During the same month, Maher paid $14,400 for various indirect costs such as utilities, equipment leases, and factory-related insurance. The company estimated its annual manufacturing overhead cost would be $240,000 and expected to use 20,000 direct labor hours in its first year of operation. It planned to allocate overhead based on direct labor hours. On August 31, 2004, Maher completed Job 801 and collected the contract price of $28,000. Job 802 was still in process. Maher uses a just-in-time inventory management system. Consequently, it has no raw materials inventory. Raw materials purchases are recorded directly in the Work in Process Inventory account.

Required
a. Use a horizontal financial statements model as follows to record Maher’s accounting events for August 2004. The first event is shown as an example.

ASSETS = EQUITY

CASH + MANUF. OVERHEAD + WK IN PROGRESS + FINISH GOODS = COM.STK + RET.EARN. I REV. – EXP. = NET INC. I CASH FLOW I
$40,000 + N/A + N/A + N/A = $40,000 + N/A I N/A – N/A = N/A I $40,000 FA I

b. What was Maher’s ending inventory on August 31, 2004? Is this amount the actual or the estimated inventory cost?

c. When is it appropriate to use estimated inventory cost on a year-end balance sheet?


Click here for the solution: Maher Drapery Inc. specializes in making custom draperies for both commercial and residential customers

Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces

Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces. Currently, the snail extraction line of products takes up approximately 50 percent of the company’s retail floor space. The CEO of Elliot’s wants to decide if the company should continue offering snail extraction tools or focus only on serving pieces. If the snail extraction tools are dropped, salaries and other direct fixed costs can be avoided and serving piece sales would increase by 13 percent. Allocated fixed costs are assigned based on relative sales.

Snail Extraction Serving
Tools Pieces Total
Sales $1,200,000 $800,000 $2,000,000
Less cost of goods sold 700,000 500,000 1,200,000
Contribution margin 500,000 300,000 800,000
Less direct fixed costs:
Salaries 175,000 175,000 350,000
Other 60,000 60,000 120,000
Less allocated fixed costs:
Rent 14,118 9,882 24,000
Insurance 3,529 2,471 6,000
Cleaning 4,117 2,883 7,000
Executive salary 76,470 53,530 130,000
Other 7,058 4,942 12,000
Total costs 340,292 308,708 649,000
Net income $159,708 ($ 8,708) $151,000

Prepare an incremental analysis in good form to determine the incremental effect on profit of discontinuing the snail extraction tool line.

Click here for the solution: Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces

Innova Corporation makes a commercial-grade cooking griddle

E8-4 Innova Corporation makes a commercial-grade cooking griddle. The following information is available for Innova Corporation’s anticipated annual volume of 30,000 units.

Per Unit Total
Direct materials $17
Direct labor $ 8

Variable manufacturing overhead $11
Fixed manufacturing overhead $360,000
Variable selling and administrative expenses $ 4
Fixed selling and administrative expenses $150,000
The company uses a 40% markup percentage on total cost

Instructions
(a) Compute the total cost per unit.
(b) Compute the target selling price.

Click here for the solution: Innova Corporation makes a commercial-grade cooking griddle

R&J Associates leased certain commercial real estate from T&C Associates, Inc., for a one-year period beginning May 1

R&J Associates leased certain commercial real estate from T&C Associates, Inc., for a one-year period beginning May 1. The lease required that T&C give R&J 10 days’ notice before canceling the lease. R&J operated the leased premises as a bar that featured seminude dancers but discontinued the business during the following March when it lost a necessary dance permit. In late March and early April, T&C noticed that the bar was not open and learned that R&J had lost its permit. R&J was behind on its rent at this time. Utility companies were seeking to shut off service to the premises because R&J was also behind on its utility bills. When T&C informed R&J that its monthly rent would be higher if it renewed the lease, R&J said it had no interest in renewing. For the above reasons, T&C took possession of the premises in April. T&C, however, did not give R&J the 10 days’ notice referred to in the lease. T&C leased the premises to a new tenant later that month. At approximately the same time, R&J demanded the return of certain personal property items it had left on the premises. T&C told R&J to contact the new tenant, adding that there should be no problem with the return of the items of personal property. R&J contacted the new tenant, who told R&J to submit a list of its personal property because other parties were also claiming rights to what had been left on the premises. R&J did not submit this list and did not contact T&C again about the personal property items. Later, R&J sued T&C for conversion of the personal property. Did R&J have a valid conversion claim?

Click here for the solution: R&J Associates leased certain commercial real estate from T&C Associates, Inc., for a one-year period beginning May 1

Horizon Telecom sold $300,000 worth of 120-day commercial paper for $298,000

E16–5 Horizon Telecom sold $300,000 worth of 120-day commercial paper for $298,000. What is the dollar amount of interest paid on the commercial paper? What is the effective 120-day rate on the paper?

Click here for the solution: Horizon Telecom sold $300,000 worth of 120-day commercial paper for $298,000

ACC 561 EXCEL Application Exercise 12-59, Allocating Costs Using Direct and Step-Down Methods

ACC 561 EXCEL Application Exercise 12-59, Allocating Costs Using Direct and Step-Down Methods, on p. 584

Goal: Create an Excel spreadsheet to allocate costs using the direct method and the stepdown
method. Use the results to answer questions about your findings.
Scenario: Antonio Cleaning has asked you to help them determine the best method for
allocating costs from their service departments to their producing departments. Additional
background information for your spreadsheet appears in Fundamental Assignment Material
12-B2. Exhibit 12-4 on page 532 illustrates the types of calculations that are used for
allocating costs using the direct method and the step-down method.

When you have completed your spreadsheet, answer the following questions:
1. What are the total costs for the Residential department using the direct method?
What are the total costs for the Commercial department using the direct method?
2. What are the total costs for the Residential department using the step-down method?
3. What are the total costs for the Commercial department using the step-down method?
4. Which method would you recommend that Antonio Cleaning use to allocate their
service departments’ costs to their producing departments? Why?

Step-by-Step:
1. Open a new Excel spreadsheet.
2. In column A, create a bold-faced heading that contains the following:
Row 1: Chapter 12 Decision Guideline
Row 2: Dallas Cleaning
Row 3: Cost Allocations from Service Departments to Producing Departments
Row 4: Today’s Date
3. Merge and center the four heading rows across columns A through H.
4. In row 7, create the following bold-faced, center-justified column headings:
Column B: Personnel
Column C: Administrative
Column D: Residential
Column E: Commercial
Column F: Total Res/Comm
Column G: Total Admin/Res/Comm
Column H: Grand Total
5. Change the format of the column headings in row 7 to permit the titles to be displayed
on multiple lines within a single cell.
Alignment tab: Wrap Text: Checked
Note: Adjust column widths so that headings use only two lines.
Adjust row height to ensure that row is same height as adjusted headings.
6. In column A, create the following row headings:
Row 8: Direct Department Costs
Row 9: Number of Employees
Skip 2 rows
Note: Adjust the width of column A to 27.14.
7. In column A, create the following bold-faced, underlined row heading:
Row 12: Direct Method:
8. In column A, create the following row headings:
Row 13: Direct Department Costs
Row 14: Personnel Allocation
Row 15: Administrative Allocation
Row 16: Total Costs
Skip 2 rows
9. In column A, create the following bold-faced, underlined row heading:
Row 19: Step-down Method:
10. In column A, create the following row headings:
Row 20: Direct Department Costs
Row 21: Step 1—Personnel Allocation
Row 22: Step 2—Administrative Allocation
Row 23: Total Costs
11. Use data from Fundamental Assignment 12-B2 to enter the amounts in columns B
through E for rows 8, 9, 13, and 20.
12. Use the appropriate calculations to do the totals in row 8 for columns F and H.
Use the appropriate calculations to do the totals in row 9 for columns F and G.
13. Use the appropriate formulas to allocate the costs from the service departments to the
producing departments using each of the methods.
14. Use the appropriate calculations to do the totals in columns B through E and in column H,
rows 16 and 23.
15. Format amounts in columns B through H, rows 8, 13, 16, 20, and 23 as
Number tab: Category: Accounting
Decimal: 0
Symbol: $
16. Format the amount in columns B through E, rows 14, 15, 21, and 22 as
Number tab: Category: Accounting
Decimal: 0
Symbol: None
17. Change the format of the total costs amounts in columns B through E, rows 16 and 23,
to display a top border, using the default line style.
Border tab: Icon: Top Border
18. Change the format of the amounts in row 9, columns B through G to center justified

Click here for the solution: ACC 561 EXCEL Application Exercise 12-59, Allocating Costs Using Direct and Step-Down Methods