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

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

In confirming accounts receivable on December 31, 2009, the author found 15 discrepancies between the customers' records

Auditing P 5-22 In confirming accounts receivable on December 31, 2009, the author found 15 discrepancies between the customers' records and the recorded amounts in the accounts receivable master file. A copy of all confirmations that had exceptions was turned over to the company controller investigate the reason for the difference. He, in turn, had the bookkeeper perform the analysis. The bookkeeper analyzed each exception., determined its cause, and prepared an elaborate spreadsheet explaining exceptions were caused by timing differences in the bookkeeper's report indicated that the exceptions were caused by timing differences in the clients' and customer's records. The auditor reviewed the spreadsheet and concluded that there were no material exceptions to accounts receivable.

Two years subsequent to the audit, it was determined that the bookkeeper had stolen thousands of dollars in the past 3 years by taking cash and overstating accounts receivable. In a lawsuit by the client against the CPA, an examination of the auditors December 31, 2009, accounts receivable working papers, which were subpoenaed by the court, indicated that one of the explanations in the bookkeeper's analysis of the exceptions was fictitious. The analysis stated the exception was caused by a sales allowance granted to the customer for defective merchandise the day before the end of the year. The difference was actually caused by the bookkeeper's theft.

Required:
a. What are the legal issues involved in this situation? What should the auditor use as a defense in the event that he is sued?
b. What was the CPA's deficiency in conducting the audit of accounts receivable?


Click here for the solution: In confirming accounts receivable on December 31, 2009, the author found 15 discrepancies between the customers' records

Goldenrod Warehouse distributes hardback books to retail stores and extends credit terms of 2/10, n/30 to all of its customers

P5-2A Goldenrod Warehouse distributes hardback books to retail stores and extends credit terms of 2/10, n/30 to all of its customers. During the month of June the following merchandising transactions occurred.

June 1 Purchased books on account for $960 (including freight) from Barnum Publishers, terms 2/10, n/30.
3 Sold books on account to the Flint Hills bookstore for $1,200 each. The cost of the merchandise sold was $720.
6 Received $60 credit for books returned to Barnum Publishers.
9 Paid Barnum Publishers in full.
15 Received payment in full from the Flint Hills bookstore.
17 Sold books on account to Town Crier Bookstore for $1,400. The cost of the merchandise sold was $840.
20 Purchased books on account for $720 from Good Book Publishers, terms 1/15, n/30.
24 Received payment in full from Town Crier Bookstore.
26 Paid Good Book Publishers in full.
28 Sold books on account to HomeTown Bookstore for $1,300. The cost of the merchandise sold was $780.
30 Granted HomeTown Bookstore $150 credit for books returned costing $90.

Instructions
Journalize the transactions for the month of June for Goldenrod Warehouse, using a perpetual inventory system.


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4-27 (Assigning marketing, distribution, and selling expenses to customers) Tetra Company’s cost system assigns marketing, distribution, and selling expenses to customers using a rate of 33% of sales revenue

4-27 (Assigning marketing, distribution, and selling expenses to customers) Tetra Company’s cost system assigns marketing, distribution, and selling expenses to customers using a rate of 33% of sales revenue. The new controller has discovered that Tetra’s customers differ greatly in their ordering patters and interaction with Tetra’s sales force. Because the controller believes Tetra’s cost system does not accurately assign marketing, distribution, and selling expenses to customers, she developed an activity-based costing system to assign these expenses to customers. She then identified the following marketing, distribution, and selling costs for two customers, Ashton and Brown: ASHTON BROWN Sales representative $9,000 $42,000 Service customers 15,000 110,000 Handle customer orders 1,000 12,000 Ship to customers 24,000 72,000 The following additional information is available: ASHTON BROWN Sales $430,000 $350,000 Cost of goods sold 220,000 155,000 a. Using the current cost system’s approach of assigning marketing, distribution, and selling expenses to customers using a rate of 33% of sales revenue, determines the operating profit associated with Ashton and with Brown. b. Using the activity-based costing information provided, determine the operating profit associated with Ashton and with Brown. c. Which of the two methods produced more accurate assignments of marketing, distribution, and selling expenses to customers? Explain.

Click here for the solution: 4-27 (Assigning marketing, distribution, and selling expenses to customers) Tetra Company’s cost system assigns marketing, distribution, and selling expenses to customers using a rate of 33% of sales revenue