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?

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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?


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GAMMA produces over a hundred different types of residential water faucets as its Delta, Florida plant

GAMMA produces over a hundred different types of residential water faucets as its Delta, Florida plant. This plant uses activity–based costing to calculate product costs. The following table summarizes the plant's overhead for the year and the cost drivers

Used for each activity center:
Summary of plant Overhead and Activity Centers
Total cost
(millions Activity center of dollars)
Cost driver Amount of cost Activity cost per unit Driver of cost drive
Materials handling $20.8 Direct materials $130 million $ 0.16
Purchasing 13.8 part numbers 800 $17,250
Set-up labor 6.8 Batches 500 $13,600
Engineering 10.9 Number of products 125 $87,200
Occupancy 16.2 Direct labor $ 90 million $0.18
----------------
Total plant overhead $ 68.5
----------------

One faucet model GAMMA manufactures is Explorer .Its total product cost is as follows:
Direct labor $ 121,700
Direct materials 90,500
Materials handling $ 90,500 $ 0.16 14,480
Purchasing 9 17,250 155,250
Setup ; 8 13,600 108,800
Engineering 1 87,200 87, 200
Occupancy $121,70 0 $0.18 21,906
---------------------
Total cost $599,836

Number of units manufactured 12,500
---------------------
Product cost per unit $ 47.99
----------------------

Required Question:
Calculate the product cost per unit of the Explorer faucet using absorption costing where plant overhead is assigned to products using direct labor dollars.

Click here for the solution: GAMMA produces over a hundred different types of residential water faucets as its Delta, Florida plant

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