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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Farm Labs, Inc. provides mad cow disease testing for both state and federal governmental agricultural agencies

P11-5A Farm Labs, Inc. provides mad cow disease testing for both state and federal governmental agricultural agencies. Because the company's customers are governmental agencies, prices are strictly regulated. Therefore, Farm Labs must constantly monitor and control its testing costs. Shown below are the standard costs for a typical test.

Direct materials (2 test tubes @ $1.50 per tube) $3
Direct labor (1 hour @ $25 per hour) 25
Variable overhead (1 hour @ $5 per hour) 5
Fixed overhead (1 hour @ $10 per hour) 10
Total standard cost per test $43

The lab does not maintain an inventory of test tubes. Therefore, the tubes purchased each month are used that month. Actual activity for the month of November 2008, when 1,500 tests were conducted, resulted in the following:

Direct materials (3,050 test tubes) $ 4,270
Direct labor (1,600 hours) 36,800
Variable overhead 7,400
Fixed overhead 14,000

Monthly budgeted fixed overhead is $14,000. Revenues for the month were $75,000, and selling and administrative expenses were $4,000.

Instructions:
a) Compute the price and quantity variances for direct materials and direct labor.
b) Compute the total overhead variance.
c) Prepare an income statement for management.
d) Provide possible explanations for each unfavorable variance.

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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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Beige Corporation operates retail stores in both downtown (city) and Suburban (Mall) locations

1-18 Cost Data for Managerial Purposes

Beige Corporation operates retail stores in both downtown (city) and Suburban (Mall) locations. The company has two responsibility centers; the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Beige’s CEO is concern about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.

Beige Computers, City Division
Divisional Income Statement
For the Year Ending January 31

Sales revenue ………………………………………………………………. $12,900,000
Costs
Advertising – City Division ………………………………………… 525,000
Cost of goods sold ………………………………………………… 6,450,000
Divisional administrative salaries ……………………………… 870,000
Selling costs (sales commissions) ……………………………… 1,730,000
Rent …………………………………………………………………………. 2,215,000
Share of corporate administration ……………………….. 1,425,000
Total costs ……………………………………………………………. $13,215,000
Net loss before income tax benefit …………………… $(315,000)
Tax benefit at 40% rate …………………………………………… 126,200
Net loss …………………………………………………………….. $189,000

Required
What revenues and costs are probably differential for the decision to discontinue City division’s operations? What will be the effect on Beige’s profits if the division is eliminated?


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Bluma Co. uses a perpetual inventory system and both an accounts receivable and an accounts payable subsidiary ledger

Bluma Co. uses a perpetual inventory system and both an accounts receivable and an accounts payable subsidiary ledger. Balances related to both the general ledger and the subsidiary ledger for Bluma are indicated in the working papers. Presented below are a series of transactions for Bluma Co. for the month of January. Credit sales terms are 2/10, n/30. The cost of all merchandise sold was 60% of the sales price.

Jan. 3 Sell merchandise on account to B. Richey $3,100, invoice no. 510, and to J. Forbes $1,800, invoice no. 511.
5 Purchase merchandise from S. Vogel $5,000 and D. Lynch $2,200, terms n/30.
7 Receive checks from S. LaDew $4,000 and B. Garcia $2,000 after discount period has lapsed.
8 Pay freight on merchandise purchased $235.
9 Send checks to S. Hoyt for $9,000 less 2% cash discount, and to D. Omara for $11,000 less 1% cash discount.
9 Issue credit of $300 to J. Forbes for merchandise returned.
10 Summary daily cash sales total $15,500.
11 Sell merchandise on account to R. Dvorak $1,600, invoice no. 512, and to S. LaDew $900, invoice no. 513.
12 Pay rent of $1,000 for January.
13 Receive payment in full from B. Richey and J. Forbes less cash discounts.
15 Withdraw $800 cash by M. Bluma for personal use.
15 Post all entries to the subsidiary ledgers.
16 Purchase merchandise from D. Omara $18,000, terms 1/10, n/30; S. Hoyt $14,200, terms 2/10, n/30; and S. Vogel $1,500, terms n/30.
17 Pay $400 cash for office supplies.
18 Return $200 of merchandise to S. Hoyt and receive credit.
20 Summary daily cash sales total $20,100.
21 Issue $15,000 note, maturing in 90 days, to R. Moses in payment of balance due.
21 Receive payment in full from S. LaDew less cash discount.
22 Sell merchandise on account to B. Richey $2,700, invoice no. 514, and to R. Dvorak $1,300, invoice no. 515.
22 Post all entries to the subsidiary ledgers.
23 Send checks to D. Omara and S. Hoyt in full payment less cash discounts.
25 Sell merchandise on account to B. Garcia $3,500, invoice no. 516, and to J. Forbes $6,100, invoice no. 517.
27 Purchase merchandise from D. Omara $14,500, terms 1/10, n/30; D. Lynch $1,200, terms n/30; and S. Vogel $5,400, terms n/30.
27 Post all entries to the subsidiary ledgers.
28 Pay $200 cash for office supplies.
31 Summary daily cash sales total $21,300.
31 Pay sales salaries $4,300 and office salaries $3,800.

Instructions
(a) Record the January transactions in a sales journal, a single-column purchases journal, a cash receipts journal as shown on page 313, a cash payments journal as shown on page 318, and a two-column general journal.
(b) Post the journals to the general ledger.
(c) Prepare a trial balance at January 31, 2010, in the trial balance columns of the worksheet. Complete the worksheet using the following additional information.
1. Office supplies at January 31 total $900.
2. Insurance coverage expires on October 31, 2010.
3. Annual depreciation on the equipment is $1,500.
4. Interest of $50 has accrued on the note payable.
TB totals $202,900; Adj. T/B totals $203,075
(d) Prepare a multiple-step income statement and an owner's equity statement for January and a classified balance sheet at the end of January.
Net income $20,755; total assets $143,505
(e) Prepare and post adjusting and closing entries.
(f) Prepare a post-closing trial balance, and determine whether the subsidiary ledgers agree with the control accounts in the general ledger.
PCTB $145,130


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Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data

Auditing P 7-37

Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the use of complex models involving many relationships and elements of data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditors.

a. Describe the broad purposes of analytical procedures.
b. When are analytical procedures required during an audit Explain why auditors use analytical procedures extensively in all parts of the audit.
c. Describe the factors that influence the extent to which an auditor will use the results of analytical procedures to reduce detailed tests in meeting audit objectives.


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At Reyes Company, checks are not prenumbered because both the purchasing agent and the treasurer are authorized to issue checks

E7-5 At Reyes Company, checks are not prenumbered because both the purchasing agent and the treasurer are authorized to issue checks. Each signer has access to unissued checks kept in an unlocked file cabinet. The purchasing agent pays all bills pertaining to goods purchased for resale. Prior to payment, the purchasing agent determines that the goods have been received and verifies the mathematical accuracy of the vendor’s invoice. After payment, the invoice is filed by vendor and the purchasing agent records the payment in the cash disbursements journal. The treasurer pays all other bills following approval by authorized employees. After payment, the treasurer stamps all bills “paid,” files them by payment date, and records the checks in the cash disbursements journal. Reyes Company maintains one checking account that is reconciled by the treasurer.

Instructions
(a) List the weaknesses in internal control over cash disbursements.
(b) Identify improvements for correcting these weaknesses.


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Joanie Corp sells it products on both credit and cash basis

Joanie Corp sells it products on both credit and cash basis. Monthly sales are sold 10% for cash, 90% for credit. Credit sales are collected 40% in the month of sale and 60% the following month. Sales for the first quarter are as follows:

January $100,000
February $150,000
March $125,000

Compute cash collections for February.

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