Chapter 6 Problem 6-12 Activity-Based Costing [LO 5]
The Divine Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake. It also makes 12 different kinds of cheesecake as well as many other types of bakery items. It has recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to its strawberry cheesecake and the ABC cost pools:
AND SO ON
Required
a. Calculate the overhead rate per unit of activity for each of the five cost pools.
b. Calculate the total overhead assigned to the production of the strawberry cheesecake.
c. Calculate the overhead cost per unit for the strawberry cheesecake. Round to three decimal places.
d. Calculate the total unit cost for the strawberry cheesecake. Round to three decimal places.
e. Suppose that the Divine Cheesecake Shoppe allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the overhead rate per direct labor dollar and the per unit overhead assigned to the strawberry cheesecake. Discuss the difference in cost allocations between the traditional method and the activity-based costing approach. Round to three decimal places.
Click here for the solution: The Divine Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake
Showing posts with label that. Show all posts
Showing posts with label that. Show all posts
Monday, April 18, 2016
TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry
CASE 13–30 Make or Buy; Utilization of a Constrained Resource [LO1, LO3, LO5]
TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,000 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding time, annual production is limited to 5,000 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums:
WVD Drums
Selling price per drum . . . . . . . . . . . . . . $149.00
Cost per drum:
Direct materials . . . . . . . . . . . . . . . . . $52.10
Direct labor ($18 per hour) . . . . . . . . 3.60
Manufacturing overhead . . . . . . . . . . 4.50
Selling and administrative expense. . 29.80 90.00
Margin per drum . . . . . . . . . . . . . . . . . . $ 59.00
AND SO ON
ALL 5 REQUIREMENTS ANSWERED.
Click here for the solution: TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry
TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,000 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding time, annual production is limited to 5,000 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums:
WVD Drums
Selling price per drum . . . . . . . . . . . . . . $149.00
Cost per drum:
Direct materials . . . . . . . . . . . . . . . . . $52.10
Direct labor ($18 per hour) . . . . . . . . 3.60
Manufacturing overhead . . . . . . . . . . 4.50
Selling and administrative expense. . 29.80 90.00
Margin per drum . . . . . . . . . . . . . . . . . . $ 59.00
AND SO ON
ALL 5 REQUIREMENTS ANSWERED.
Click here for the solution: TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry
Wednesday, April 13, 2016
Better Food Company recently acquired an olive oil processing company that has an annual capacity
Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows:
Direct materials per liter $1.00
Direct processing labor 0.50
Variable processing overhead 0.24
Fixed processing overhead 0.40
Total $2.14
Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter.
Question 1: Compute the operating income for the Olive Oil Division using a transfer price of $4 (5 points).
Question 2: Compute the operating income for the Olive Oil Division using a transfer price of $2.14 (5 points).
Question 3: What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation (5 points).
Click here for the solution: Better Food Company recently acquired an olive oil processing company that has an annual capacity
Direct materials per liter $1.00
Direct processing labor 0.50
Variable processing overhead 0.24
Fixed processing overhead 0.40
Total $2.14
Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter.
Question 1: Compute the operating income for the Olive Oil Division using a transfer price of $4 (5 points).
Question 2: Compute the operating income for the Olive Oil Division using a transfer price of $2.14 (5 points).
Question 3: What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation (5 points).
Click here for the solution: Better Food Company recently acquired an olive oil processing company that has an annual capacity
Tharp and Kostrivas is a law firm that is initiating an activity-based costing system
E4-16 Tharp and Kostrivas is a law firm that is initiating an activity-based costing system. Ben Tharp, the senior partner and strong supporter of ABC, has prepared the following list of activities performed by a typical attorney in a day at the firm. Classify each of the activities listed by Ben Tharp as value-added or non-value-added and defend your classification. How much was value-added and how much was non-value-added?
Activities Hours
Writing contracts and letters 1.0
Attending staff meetings 0.5
Taking depositions 1.0
Doing research 1.0
Traveling to/from court 1.0
Contemplating legal strategy 1.0
Eating lunch 1.0
Litigating a case in course 2.5
Entertaining a prospective client 2.0
Click here for the solution: Tharp and Kostrivas is a law firm that is initiating an activity-based costing system
Activities Hours
Writing contracts and letters 1.0
Attending staff meetings 0.5
Taking depositions 1.0
Doing research 1.0
Traveling to/from court 1.0
Contemplating legal strategy 1.0
Eating lunch 1.0
Litigating a case in course 2.5
Entertaining a prospective client 2.0
Click here for the solution: Tharp and Kostrivas is a law firm that is initiating an activity-based costing system
Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott
E16-30 (Stock-Appreciation Rights) Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott to receive cash for the difference between the market price of the stock and a pre-established price of $30 (also market price) on December 31, 2008, on 40,000 SARs. The date of grant is December 31, 2008, and the required employment (service) period is 4 years. President Scott exercises all of the SARs in 2014. The fair value of the SARs is estimated to be $6 per SAR on December 31, 2009; $9 on December 31, 2010; $15 on December 31, 2011; $8 on December 31, 2012; and $18 on December 31, 2013.
(a) Prepare a 5-year (2009–2013) schedule of compensation expense pertaining to the 40,000 SARs granted to President Scott.
(b) Prepare the journal entry for compensation expense in 2009, 2012, and 2013 relative to the 40,000 SARs.
Click here for the solution: Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott
(a) Prepare a 5-year (2009–2013) schedule of compensation expense pertaining to the 40,000 SARs granted to President Scott.
(b) Prepare the journal entry for compensation expense in 2009, 2012, and 2013 relative to the 40,000 SARs.
Click here for the solution: Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott
Wednesday, November 11, 2015
South Carolina Corporation has one temporary difference at the end of 2008 that will reverse and cause taxable amounts
E19-1 (One Temporary difference, Future Taxable Amounts, One Rate, No Beginning Deferred Taxes) South Carolina Corporation has one temporary difference at the end of 2008 that will reverse and cause taxable amounts of $55,000 in 2009, $60,000 in 2010, and $65,000 in 2011. South Carolina's pretax financial income for 2008 is $300,000 and the tax rate us 30% for all years. There are no deferred taxes at the beginning of 2008.
Instructions
a.) Compute taxable income and income taxes payable for 20008.
b.) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2008.
c.) Prepare the income tax expense section of the income statement for 2008, beginning with the line "Income before income taxes"
Click here for the solution: South Carolina Corporation has one temporary difference at the end of 2008 that will reverse and cause taxable amounts
Instructions
a.) Compute taxable income and income taxes payable for 20008.
b.) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2008.
c.) Prepare the income tax expense section of the income statement for 2008, beginning with the line "Income before income taxes"
Click here for the solution: South Carolina Corporation has one temporary difference at the end of 2008 that will reverse and cause taxable amounts
Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company
E21-3 (Lessee Entries; Capital Lease with Executory Costs) Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement.
1.) The agreement requires equal rental payments of $72,000 beginning on January 1, 2008.
2.) The fair value of the building on January 1, 2008 is $440,000
3.) The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. Kimberly Clark depreciates similar buildings on the straight line method.
4.) The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5.) Kimberly Clark's incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Kimberly Clark.
6.) The yearly rental payment includes $2,470.51 of executory costs related to taxes on property.
Instructions
Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record payments and expenses related to this lease for the years 2008 and 2009, Kimberly Clark's corporate year end is December 31.
Click here for the solution: Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company
1.) The agreement requires equal rental payments of $72,000 beginning on January 1, 2008.
2.) The fair value of the building on January 1, 2008 is $440,000
3.) The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. Kimberly Clark depreciates similar buildings on the straight line method.
4.) The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5.) Kimberly Clark's incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Kimberly Clark.
6.) The yearly rental payment includes $2,470.51 of executory costs related to taxes on property.
Instructions
Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record payments and expenses related to this lease for the years 2008 and 2009, Kimberly Clark's corporate year end is December 31.
Click here for the solution: Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company
Tuesday, November 10, 2015
Peter M. Dell Co. purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time
E22-11 (Change in Estimate—Depreciation) Peter M. Dell Co. purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2008, it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.
Instructions
(a) Prepare the entry (if any) to correct the prior years’ depreciation.
(b) Prepare the entry to record depreciation for 2008.
Click here for the solution: Peter M. Dell Co. purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time
Instructions
(a) Prepare the entry (if any) to correct the prior years’ depreciation.
(b) Prepare the entry to record depreciation for 2008.
Click here for the solution: Peter M. Dell Co. purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time
Wednesday, October 14, 2015
Dewey and Cheatam is a law firm that is initiating an activity-based costing system
ACC 560 Week 3 Assignment
E4-16 Dewey and Cheatam is a law firm that is initiating an activity-based costing system. Jim Dewey, the senior partner and strong supporter of ABC, has prepared the following list of activities performed by a typical attorney in a day at the firm.
Classify each activity as either value-added or non-value-added.
Activity Hours
Writing contracts and letters 1.0
Attending staff meetings 0.5
Taking depositions 1.0
Doing research 1.0
Traveling to/from court 1.0
Contemplating legal strategy 1.0
Eating lunch 1.0
Litigating a case in court 2.5
Entertaining a prospective client 2.0
Instructions:
a) How much was value-added time
b) How much was non-value-added time
Click here for the solution: Dewey and Cheatam is a law firm that is initiating an activity-based costing system
E4-16 Dewey and Cheatam is a law firm that is initiating an activity-based costing system. Jim Dewey, the senior partner and strong supporter of ABC, has prepared the following list of activities performed by a typical attorney in a day at the firm.
Classify each activity as either value-added or non-value-added.
Activity Hours
Writing contracts and letters 1.0
Attending staff meetings 0.5
Taking depositions 1.0
Doing research 1.0
Traveling to/from court 1.0
Contemplating legal strategy 1.0
Eating lunch 1.0
Litigating a case in court 2.5
Entertaining a prospective client 2.0
Instructions:
a) How much was value-added time
b) How much was non-value-added time
Click here for the solution: Dewey and Cheatam is a law firm that is initiating an activity-based costing system
Hy and Lowe is a public firm that offers two primary services, auditing and tax return preparation
ACC 560 Week 3 Assignment
P4-5A Hy and Lowe is a public firm that offers two primary services, auditing and tax return preparation. A controversy has developed between the partners of the two service lines as to who is contributing the greater amount to the bottom line. The area of contention is the assignment of overhead. The tax partners argue for assigning overhead on the basis of 40% of direct labor dollars, while the audit partners argue for implementing activity-based costing. The partners agree to use next year's budgeted data for purposes of analysis and comparison. The following overhead data are collected to develop the comparison.
Activity Cost Pool Cost Driver Estimated Overhead Expected Use of Cost Drivers Expected Use of Cost Drivers per Service Audit Tax
Employee training Direct labor dollars $216,000 $1,800,000 $1,000,000 $800,000
Typing and secretarial Number of reports/forms 76,200 2,500 600 1,900
Computing Number of minutes 204,000 60,000 25,000 35,000
Facility rental Number of employees 142,500 40 22 18
Travel Per expense reports 81,300 Direct 56,000 25,300 $720,000
Instructions:
a. Using traditional product costing as proposed by the tax partners, compute the total overhead cost assigned to both services (audit and tax) of Hy and Lowe.
b. 1. Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).
2. Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers.
c. Classify each of the activities as a value-added activity or a non-value added activity.
d. Comment on the comparative overhead cost for the two services under both traditional costing and ABC.
Click here for the solution: Hy and Lowe is a public firm that offers two primary services, auditing and tax return preparation
P4-5A Hy and Lowe is a public firm that offers two primary services, auditing and tax return preparation. A controversy has developed between the partners of the two service lines as to who is contributing the greater amount to the bottom line. The area of contention is the assignment of overhead. The tax partners argue for assigning overhead on the basis of 40% of direct labor dollars, while the audit partners argue for implementing activity-based costing. The partners agree to use next year's budgeted data for purposes of analysis and comparison. The following overhead data are collected to develop the comparison.
Activity Cost Pool Cost Driver Estimated Overhead Expected Use of Cost Drivers Expected Use of Cost Drivers per Service Audit Tax
Employee training Direct labor dollars $216,000 $1,800,000 $1,000,000 $800,000
Typing and secretarial Number of reports/forms 76,200 2,500 600 1,900
Computing Number of minutes 204,000 60,000 25,000 35,000
Facility rental Number of employees 142,500 40 22 18
Travel Per expense reports 81,300 Direct 56,000 25,300 $720,000
Instructions:
a. Using traditional product costing as proposed by the tax partners, compute the total overhead cost assigned to both services (audit and tax) of Hy and Lowe.
b. 1. Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).
2. Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers.
c. Classify each of the activities as a value-added activity or a non-value added activity.
d. Comment on the comparative overhead cost for the two services under both traditional costing and ABC.
Click here for the solution: Hy and Lowe is a public firm that offers two primary services, auditing and tax return preparation
Tiger Golf Accessories sells golf shoes, gloves, and a laser-guided range-finder that measures distance
E6-9 Tiger Golf Accessories sells golf shoes, gloves, and a laser-guided range-finder that measures distance. Shown below are unit cost and sales data.
Pairs of Shoes Pairs of Gloves Range Finder
Unit sales price $100 $30 $250
Unit variable costs 60 10 200
Unit contribution margin $40 $20 $50
Sales mix 40% 50% 10%
Fixed costs are $620,000.
Instructions:
a. Compute the break-even point in units for the company.
b. Determine the number of units to be sold at the break-even point for each product line.
c. Verify that the mix of sales units determined in (b) will generate a zero net income.
Click here for the solution: Tiger Golf Accessories sells golf shoes, gloves, and a laser-guided range-finder that measures distance
Pairs of Shoes Pairs of Gloves Range Finder
Unit sales price $100 $30 $250
Unit variable costs 60 10 200
Unit contribution margin $40 $20 $50
Sales mix 40% 50% 10%
Fixed costs are $620,000.
Instructions:
a. Compute the break-even point in units for the company.
b. Determine the number of units to be sold at the break-even point for each product line.
c. Verify that the mix of sales units determined in (b) will generate a zero net income.
Click here for the solution: Tiger Golf Accessories sells golf shoes, gloves, and a laser-guided range-finder that measures distance
The Medical Center has a single operating room that is used by local physicians to perform surgical procedures
The Medical Center has a single operating room that is used by local physicians to perform surgical procedures. The cost of using the operating room is accumulated by each patient procedure and includes the direct materials costs (drugs and medical devices), physician surgical time, and operating room overhead. On November 1 of the current year, the annual operating room overhead is estimated to be:
Disposable supplies $150,000
Depreciation expense 27,000
Utilities 5,500
Nurse salaries 225,500
Technician wages 74,000
Total operating room overhead $492,000
The overhead costs will be assigned to procedures based on the number of surgical room hours. The Medical Center expects to use the operating room an average of eight hours per day, six days per week. In addition, the operating room will be shut down two weeks per year for general repairs.
a. Determine the predetermined operating room overhead rate for the year.
b. Gretchen Kelton had a 6 hour procedure on November 10. How much operating room overhead would be charged to her procedure, using the rate determined in part (a)?
c. During November, the operating room was used 192 hours. The actual overhead costs incurred for November were $38,500. Determine the overhead under-or over- applied for the period.
Click here for the solution: The Medical Center has a single operating room that is used by local physicians to perform surgical procedures
Disposable supplies $150,000
Depreciation expense 27,000
Utilities 5,500
Nurse salaries 225,500
Technician wages 74,000
Total operating room overhead $492,000
The overhead costs will be assigned to procedures based on the number of surgical room hours. The Medical Center expects to use the operating room an average of eight hours per day, six days per week. In addition, the operating room will be shut down two weeks per year for general repairs.
a. Determine the predetermined operating room overhead rate for the year.
b. Gretchen Kelton had a 6 hour procedure on November 10. How much operating room overhead would be charged to her procedure, using the rate determined in part (a)?
c. During November, the operating room was used 192 hours. The actual overhead costs incurred for November were $38,500. Determine the overhead under-or over- applied for the period.
Click here for the solution: The Medical Center has a single operating room that is used by local physicians to perform surgical procedures
Eastern Manufacturing is involved with several situations that possibly involve contingencies
P 13-6 Various contingencies
Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2011 financial statements are issued on March 15, 2012.
a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2012, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.
b. In November 2010, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2012, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.
c. Eastern is the plaintiff in a $200 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $100 million.
d. At March 15, 2012, the Environmental Protection Agency is in the process of investigating possible soil contamination at various locations of several companies including Eastern. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $33 million is reasonably possible.
Required:
1. Determine the appropriate means of reporting each situation. Explain your reasoning.
2. Prepare any necessary journal entries and disclosure notes.
Click here for the solution: Eastern Manufacturing is involved with several situations that possibly involve contingencies
Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2011 financial statements are issued on March 15, 2012.
a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2012, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.
b. In November 2010, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2012, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.
c. Eastern is the plaintiff in a $200 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $100 million.
d. At March 15, 2012, the Environmental Protection Agency is in the process of investigating possible soil contamination at various locations of several companies including Eastern. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $33 million is reasonably possible.
Required:
1. Determine the appropriate means of reporting each situation. Explain your reasoning.
2. Prepare any necessary journal entries and disclosure notes.
Click here for the solution: Eastern Manufacturing is involved with several situations that possibly involve contingencies
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
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
Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division
P 12-7 Securities held-to-maturity, securities available for sale, and trading securities
Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities intending to earn profits on short-term differences in price. The following selected transactions relate to Amalgamated's investment activities during the last quarter of 2011 and the first month of 2012. The only securities held by Amalgamated at October 1 were $30 million of 10% bonds of Kansas Abstractors, Inc., purchased on May 1 at face value. The company's fiscal year ends on December 31.
2011
Oct. 18 Purchased 2 million preferred shares of Millwork Ventures Company for $58 million as a speculative investment to be sold under suitable circumstances.
31 Received semiannual interest of $1.5 million from the Kansas Abstractors bonds.
Nov. 1 Purchased 10% bonds of Holistic Entertainment Enterprises at their $18 million face value, to be held until they mature in 2018. Semiannual interest is payable April 30 and October 31.
1 Sold the Kansas Abstractors bonds for $28 million because rising interest rates are expected to cause their fair value to continue to fall.
Dec. 1 Purchased 12% bonds of Household Plastics Corporation at their $60 million face value, to be held until they mature in 2028. Semiannual interest rate is payable May 31 and November 30.
20 Purchased U.S. Treasury bonds for $5.6 million as trading securities, hoping to earn profits on short-term differences in prices.
21 Purchased 4 million common shares of NXS Corporation for $44 million as trading securities, hoping to earn profits on short-term differences in prices.
23 Sold the Treasury bonds for $5.7 million.
29 Received cash dividends of $3 million from the Millwork Ventures Company preferred shares.
31 Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market share of the Millwork Ventures Company preferred stock was up $27.50 per share and $11.50 per share for the NXS Corporation common. The fair values of the bond investments were $58.7 million for Household Plastics Corporation and $16.7 million for Holistic Entertainment Enterprises.
2012
Jan. 7 Sold the NXS Corporation common shares for $43 million.
Required:
Prepare the appropriate journal entry for each transaction or event.
Click here for the solution: Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division
Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities intending to earn profits on short-term differences in price. The following selected transactions relate to Amalgamated's investment activities during the last quarter of 2011 and the first month of 2012. The only securities held by Amalgamated at October 1 were $30 million of 10% bonds of Kansas Abstractors, Inc., purchased on May 1 at face value. The company's fiscal year ends on December 31.
2011
Oct. 18 Purchased 2 million preferred shares of Millwork Ventures Company for $58 million as a speculative investment to be sold under suitable circumstances.
31 Received semiannual interest of $1.5 million from the Kansas Abstractors bonds.
Nov. 1 Purchased 10% bonds of Holistic Entertainment Enterprises at their $18 million face value, to be held until they mature in 2018. Semiannual interest is payable April 30 and October 31.
1 Sold the Kansas Abstractors bonds for $28 million because rising interest rates are expected to cause their fair value to continue to fall.
Dec. 1 Purchased 12% bonds of Household Plastics Corporation at their $60 million face value, to be held until they mature in 2028. Semiannual interest rate is payable May 31 and November 30.
20 Purchased U.S. Treasury bonds for $5.6 million as trading securities, hoping to earn profits on short-term differences in prices.
21 Purchased 4 million common shares of NXS Corporation for $44 million as trading securities, hoping to earn profits on short-term differences in prices.
23 Sold the Treasury bonds for $5.7 million.
29 Received cash dividends of $3 million from the Millwork Ventures Company preferred shares.
31 Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market share of the Millwork Ventures Company preferred stock was up $27.50 per share and $11.50 per share for the NXS Corporation common. The fair values of the bond investments were $58.7 million for Household Plastics Corporation and $16.7 million for Holistic Entertainment Enterprises.
2012
Jan. 7 Sold the NXS Corporation common shares for $43 million.
Required:
Prepare the appropriate journal entry for each transaction or event.
Click here for the solution: Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division
Friday, October 9, 2015
Transactions that affect earnings do not necessarily affect cash
BE4-1 Transactions that affect earnings do not necessarily affect cash. Identify the effect, if any, that each of the following transactions would have upon cash and net income. The first transaction has been completed as an example.
Cash NetIncome
(a) Purchased $100 of supplies for cash. -$100 $0
(b) Recorded an adjusting entry to record use of $20 of the above supplies.
(c) Made sales of $1,300, all on account.
(d) Received $800 from customers in payment of their accounts.
(e) Purchased equipment for cash, $2,500.
(f) Recorded depreciation of building for period used, $600.
Click here for the solution: Transactions that affect earnings do not necessarily affect cash
Cash NetIncome
(a) Purchased $100 of supplies for cash. -$100 $0
(b) Recorded an adjusting entry to record use of $20 of the above supplies.
(c) Made sales of $1,300, all on account.
(d) Received $800 from customers in payment of their accounts.
(e) Purchased equipment for cash, $2,500.
(f) Recorded depreciation of building for period used, $600.
Click here for the solution: Transactions that affect earnings do not necessarily affect cash
Sunday, September 27, 2015
Howit Inc. operates a retail operation that purchases and sells snowmobiles, amongst other outdoor products
P5-6B Howit Inc. operates a retail operation that purchases and sells snowmobiles, amongst other outdoor products. The company purchases all merchandise inventory on credit and uses a periodic inventory system. The accounts payable account is used for recording inventory purchases only; all other current liabilities are accrued in separate accounts. You are provided with the following selected information for the fiscal years 2005 through 2008, inclusive.
2005 2006 2007 2008
Income Statement Data
Sales $96,850 $ (e) $82,220
Cost of goods sold (a) 25,140 25,990
Gross profit 69,640 61,540 (i)
Operating expenses 63,500 (f) 52,060
Net income $ (b) $4,570 $ (j)
Balance Sheet Data
Merchandise inventory $13,000 $ (c) $14,700 $ (k)
Account payable 5,800 6,500 4,600 (l)
Additional Information
Purchases of merchandise
Inventory on account $25,890 $ (g) $24,050
Cash payments to supplies (d) (h) 24,650
Instructions
(a) Calculate the missing accounts.
(b) Sales declined over the 3-year fiscal period, 2006-2008. Does that mean that profitability necessarily also declined? Explain, computing the gross profit rate and the profit margin ratio for each fiscal year to help support your answer. (Round to one decimal place.)
Click here for the solution: Howit Inc. operates a retail operation that purchases and sells snowmobiles, amongst other outdoor products
2005 2006 2007 2008
Income Statement Data
Sales $96,850 $ (e) $82,220
Cost of goods sold (a) 25,140 25,990
Gross profit 69,640 61,540 (i)
Operating expenses 63,500 (f) 52,060
Net income $ (b) $4,570 $ (j)
Balance Sheet Data
Merchandise inventory $13,000 $ (c) $14,700 $ (k)
Account payable 5,800 6,500 4,600 (l)
Additional Information
Purchases of merchandise
Inventory on account $25,890 $ (g) $24,050
Cash payments to supplies (d) (h) 24,650
Instructions
(a) Calculate the missing accounts.
(b) Sales declined over the 3-year fiscal period, 2006-2008. Does that mean that profitability necessarily also declined? Explain, computing the gross profit rate and the profit margin ratio for each fiscal year to help support your answer. (Round to one decimal place.)
Click here for the solution: Howit Inc. operates a retail operation that purchases and sells snowmobiles, amongst other outdoor products
Friday, September 25, 2015
Mendocino Corporation produces two grades of wine from grapes that it buys from California growers
Problem 4-4A (P4-4A) Assign overhead costs using traditional costing and ABC; compare results.
Mendocino Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs Mendocino also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line.
Tyler Silva, president and founder of Mendocino, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. It wasn't until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters.
Tyler has asked the accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.
CoolDay LiteMist
Direct materials per liter $0.40 $1.20
Direct labor cost per liter $0.25 $0.50
Direct labor hours per liter 0.05 0.09
Total direct labor hours 120,000 25,000
Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Expected Use of Cost Drivers per Product
CoolDay LiteMist
Grape processing Cart of grapes $ 145,860 6,600 6,000 600
Aging Total months 396,000 6,600,000 3,000,000 3,600,000
Bottling and corking Number of bottles 270,000 900,000 600,000 300,000
Labeling and boxing Number of bottles 189,000 900,000 600,000 300,000
Maintain and inspect equipment Number of inspections 240,800 800 350 450
$1,241,660
Instructions
Answer each of the following questions. (Round all calculations to three decimal places.)
A. Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products.
B. Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).
C. Prepare a schedule assigning each activity's overhead cost pool to each product, based on the use of cost drivers. Include a computation of overhead cost per liter.
D. Compute the total manufacturing cost per liter for both products under ABC.
E. Write a memo to Tyler Silva discussing the implications of your analysis for the company's plans. In this memo provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions.
Check: (a) Cost/liter—C.D. $1.078; (c) Cost/liter—C.D. $.241
Click here for the solution: Mendocino Corporation produces two grades of wine from grapes that it buys from California growers
Mendocino Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs Mendocino also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line.
Tyler Silva, president and founder of Mendocino, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. It wasn't until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters.
Tyler has asked the accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.
CoolDay LiteMist
Direct materials per liter $0.40 $1.20
Direct labor cost per liter $0.25 $0.50
Direct labor hours per liter 0.05 0.09
Total direct labor hours 120,000 25,000
Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Expected Use of Cost Drivers per Product
CoolDay LiteMist
Grape processing Cart of grapes $ 145,860 6,600 6,000 600
Aging Total months 396,000 6,600,000 3,000,000 3,600,000
Bottling and corking Number of bottles 270,000 900,000 600,000 300,000
Labeling and boxing Number of bottles 189,000 900,000 600,000 300,000
Maintain and inspect equipment Number of inspections 240,800 800 350 450
$1,241,660
Instructions
Answer each of the following questions. (Round all calculations to three decimal places.)
A. Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products.
B. Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).
C. Prepare a schedule assigning each activity's overhead cost pool to each product, based on the use of cost drivers. Include a computation of overhead cost per liter.
D. Compute the total manufacturing cost per liter for both products under ABC.
E. Write a memo to Tyler Silva discussing the implications of your analysis for the company's plans. In this memo provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions.
Check: (a) Cost/liter—C.D. $1.078; (c) Cost/liter—C.D. $.241
Click here for the solution: Mendocino Corporation produces two grades of wine from grapes that it buys from California growers
Presented below are some business transactions that occurred during 2008 for Vicki Prowitz Company
E7-2 Presented below are some business transactions that occurred during 2008 for Vicki Prowitz Company.
(a) Merchandise inventory with a cost of $208,000 is reported at its market value of $260,000.The following entry was made.
Merchandise Inventory 52,000
Gain 52,000
(b) Equipment worth $62,000 was acquired at a cost of $41,000 from a company that had water damage in a flood.The following entry was made.
Equipment 62,000
Cash 41,000
Gain on Purchase of Equipment 21,000
(c) The president of Vicki Prowitz Company, Mark Nabke, purchased a truck for personal use and charged it to his expense account.The following entry was made.
Travel Expense 18,000
Cash 18,000
(d) An electric pencil sharpener costing $50 is being depreciated over 5 years. The following entry was made.
Depreciation Expense—Pencil Sharpener 10
Accumulated Depreciation—Pencil Sharpener 10
Instructions
In each of the situations above, identify the assumption, principle, or constraint that has been violated, if any. Discuss the appropriateness of the journal entries, and give the correct journal entry, if necessary.
Click here for the solution: Presented below are some business transactions that occurred during 2008 for Vicki Prowitz Company
(a) Merchandise inventory with a cost of $208,000 is reported at its market value of $260,000.The following entry was made.
Merchandise Inventory 52,000
Gain 52,000
(b) Equipment worth $62,000 was acquired at a cost of $41,000 from a company that had water damage in a flood.The following entry was made.
Equipment 62,000
Cash 41,000
Gain on Purchase of Equipment 21,000
(c) The president of Vicki Prowitz Company, Mark Nabke, purchased a truck for personal use and charged it to his expense account.The following entry was made.
Travel Expense 18,000
Cash 18,000
(d) An electric pencil sharpener costing $50 is being depreciated over 5 years. The following entry was made.
Depreciation Expense—Pencil Sharpener 10
Accumulated Depreciation—Pencil Sharpener 10
Instructions
In each of the situations above, identify the assumption, principle, or constraint that has been violated, if any. Discuss the appropriateness of the journal entries, and give the correct journal entry, if necessary.
Click here for the solution: Presented below are some business transactions that occurred during 2008 for Vicki Prowitz Company
Sunday, September 20, 2015
The following gives the number of accidents that occurred on Florida State Highway 101 during the last 4 months
Problem 4.25 The following gives the number of accidents that occurred on Florida State Highway 101 during the last 4 months:
Month Number of Accidents
January 30
February 40
March 60
April 90
Forecast the number of accidents that will occur in May, using least squares regression to derive a trend equation.
Click here for the solution: The following gives the number of accidents that occurred on Florida State Highway 101 during the last 4 months
Month Number of Accidents
January 30
February 40
March 60
April 90
Forecast the number of accidents that will occur in May, using least squares regression to derive a trend equation.
Click here for the solution: The following gives the number of accidents that occurred on Florida State Highway 101 during the last 4 months
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