Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago

BYP 9-6 Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago. At the time, the company was reporting lagging profits, and Robert was brought in to "stir thing up." The company has three divisions, electronics, fiber optics, and plumbing supplies. Robert has no interest in plumbing supplies, and one of the first fixed costs away from the other two divisions to the plumbing division. This had the effect of causing the plumbing division to report losses during the last two years; in the past it had always reported low, but acceptable, net income. Robert felt that this reallocation would shine a favorable light on him in front of the board of directors because it meant that the electronics and fiber optics divisions would look like they were improving.

Given that these are "business of the future," he believed that the stock market would react favorably to these increase, while not penalizing the poor results of the plumbing division. Without this shift in the allocation of fixed costs, the profits of the electronics and fiber optics divisions would not have improved. But now the board of directors has suggested that the plumbing division be closed because it is reporting losses. This would mean that nearly 500 employees, many of whom have worked for Phelps their whole lives, would lose their jobs.

Instructions
(a) If a division is reporting losses, does that necessarily mean that it should be closed?
(b) Was the reallocation of fixed costs across division unethical?
(c)What should Robert do?

Click here for the solution: Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago

Software Solutions, Inc., was started by two young software engineers to market SpamBlocker

Problem A-6 The Economists’ Approach to Pricing; Absorption Costing Approach to Cost-Plus Pricing

Software Solutions, Inc., was started by two young software engineers to market SpamBlocker, a software application they had written that screens incoming e-mail messages and eliminates unsolicited mass mailings. Sales of the software have been good at 50,000 units a month, but the company has been losing money as shown below:

Sales (50,000 units _ $25 per unit) . . . . . . . . . $1,250,000
Variable cost (50,000 units _ $6 per unit) . . . . 300,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . 950,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . 960,000
Net operating income (loss) . . . . . . . . . . . . . . . $ (10,000)

The company’s only variable cost is the $6 fee it pays to another company to reproduce the software on floppy diskettes, print manuals, and package the result in an attractive box for sale to consumers. Monthly fixed selling and administrative expenses are $960,000. The company’s marketing manager has been arguing for some time that the software is priced too high. She estimates that every 5% decrease in price will yield an 8% increase in unit sales. The marketing manager would like your help in preparing a presentation to the company’s owners concerning the pricing issue.

Required:
1. To help the marketing manager prepare for her presentation, she has asked you to fill in the blanks in the following table. The selling prices in the table were computed by successively decreasing the selling price by 5%. The estimated unit sales were computed by successively increasing the unit sales by 8%. For example, $23.75 is 5% less than $25.00 and 54,000 units is 8% more than 50,000 units

Selling Price, Estimated Unit Sales, Sales, Variable Cost, Fixed Expenses, Net Operating Income
$25.00 50,000 $1,250,000 $300,000 $960,000 $(10,000)
$23.75 54,000 $1,282,500 $324,000 $960,000 $ (1,500)
$22.56 58,320 ? ? ? ?
$21.43 62,986 ? ? ? ?
$20.36 68,025 ? ? ? ?
$19.34 73,467 ? ? ? ?
$18.37 79,344 ? ? ? ?
$17.45 85,692 ? ? ? ?
$16.58 92,547 ? ? ? ?
$15.75 99,951 ? ? ? ?

2. Using the data from the table, construct a chart that shows the net operating income as a function of the selling price. Put the selling price on the X-axis and the net operating income on the Y-axis. Using the chart, determine the approximate selling price at which net operating income is maximized.

3. Compute the price elasticity of demand for the SpamBlocker software. Based on this calculation, what is the profit-maximizing price?

4. The owners have invested $2,000,000 in the company and feel that they should be earning at least 2% per month on these funds. If the absorption costing approach to pricing were used, what would be the target selling price based on the current sales of 50,000 units? What do you think would happen to the net operating income of the company if this price were charged?

5. If the owners of the company are dissatisfied with the net operating income and return on investment at the selling price you computed in (3) above, should they increase the selling price? Explain.

Click here for the solution: Software Solutions, Inc., was started by two young software engineers to market SpamBlocker

Suppose Daimler Chrysler is considering which of two emission testing devices to buy

B10. (Replacement cycles) Suppose Daimler Chrysler is considering which of two emission testing devices to buy. Machine A costs $100,000, has a five-year useful life, and has operating expenses of $40,000 per year. Machine B costs $36,000, has a six-year useful life, and has operating expenses of $62,000 per year. Both machines will have zero salvage value, revenues of $85,000 per year, and straight-line depreciation to a zero book value, and both will be replaced at the end of their lives. Daimler Chrysler’s tax rate is 35%.

a. Assume a 12% cost of capital for each machine. Which one should Daimler Chrysler buy?
b. Suppose instead that machine A requires a higher cost of capital, 15%, because it’s a riskier process. Machine B’s cost of capital is still 12%. Which machine should Daimler Chrysler buy?

Click here for the solution: Suppose Daimler Chrysler is considering which of two emission testing devices to buy

Presented on page 890 are two independent situations

Exercise 17-12 (E17-12) (Journal Entries for Fair Value and Equity Methods) Presented on page 890 are two independent situations.

Situation 1
Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18, 2007. On June 30, Martinez declared and paid a $75,000 cash dividend. On December 31, Martinez reported net income of $122,000 for the year. At December 31, the market price of Martinez Fashion was $15 per share. The securities are classified as available-for-sale.

Situation 2
Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2007. On June 15, Seles declared and paid a cash dividend of $36,000. On December 31, Seles reported a net income of $85,000 for the year.

Instructions
Prepare all necessary journal entries in 2007 for both situations.

Click here for the solution: Presented on page 890 are two independent situations

Harmony Audio Inc. manufactures two products: receivers and CD players

Harmony Audio Inc. manufactures two products: receivers and CD players. The factory overhead incurred is as follows

Indirect labor $210,000
Subassembly Dept 145,000
Final Assembly Dept 95,000
Total $450,000

The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:

Activity Activity Cost Activity Base
Setup $90,000 Number of setups
Quality control 120,000 Number of inspections
Total $210,000

The activity-base usage quantities and units produced for the two products are shown below.

# of # of Direct Labor Direct Labor Units
Setups Inspections Hours-- Hours-- produce
Subassembly Final Assembly

Receivers 200 1,000 600 400 5.000
CD players 40 250 400 600 5,000
Total 240 1250 1,000 1,000 10,000

1. Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is $250,000 and $200,000 for the Subassembly and Final Assembly departments, respectively.

Department Production department rate

Subassembly Dept $__________ per dlh
Final Assembly Dept $__________ per dlh

2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1).

Product Total factory overhead Factory overhead per unit

Receivers: $______________ $___________
Cd Player: $______________ $___________

3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments.

Activity Activity rate
Setup $____________ per setup
Quality Control $____________ per insp.
Subassembly Dept $____________ per dhl
Final Assembly Dept $____________ per dhl

4. Determine the total and per-unit cost assigned to each product under activity-based costing. Round the per unit amounts to the nearest whole cent.

Product Total Activity Cost Activity Cost per Unit

Receivers $___________ $_____________
CD Players $___________ $______________

5. Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate method and activity-based costing method. The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Click here for the solution: Harmony Audio Inc. manufactures two products: receivers and CD players

Presented below are two independent situations

E14-3 (Entries for Bond Transactions) Presented below are two independent situations.

1.) On January 1. 2008, Paul Simon Company issued $200,000 of 9%. 10-year bonds dated June 1 at par. Interest quarterly on April 1, July 1, October 1 and January 1.
2.) On January 1, 2008, Graceland Company issued $100,000 of 12%, 10-year bonds dated June 1 at par. Interest is payable semiannually on July 1 and January 1.

Instructions
For each of these two independent situations, prepare journal entries to record:
a.) The issuance of bonds
b.) The payment of interest on July 1
c.) The accrual of interest on December 31

Click here for the solution: Presented below are two independent situations

Douglas Manufacturing Company has two production departments: Cutting and Assembly

ACCT 560 Week 2 Assignment

E3-4 Douglas Manufacturing Company has two production departments: Cutting and Assembly. July 1 inventories are Raw Materials $4,200, Work in Process-Cutting $2,900, Work in Process-Assembly $10,600, and Finished Goods $31,000. During July, the following transactions occurred.
1. Purchased $62,500 of raw materials on account.
2. Incurred $56,000 of factory labor. (Credit Wages Payable.)
3. Incurred $70,000 of manufacturing overhead; $40,000 was paid and the remainder is unpaid.
4. Requisitioned materials for Cutting $15,700 and Assembly $8,900.
5. Used factory labor for Cutting $29,000 and Assembly $27,000.
6. Applied overhead at the rate of $15 per machine hour. Machine hours were Cutting 1,680 and Assembly 1,720.
7. Transferred goods costing $67,600 from the Cutting Department to the Assembly Department.
8. Transferred goods costing $134,900 from Assembly to Finished Goods.
9. Sold goods costing $150,000 for $200,000 on account.

Journalize the transactions.

Click here for the solution: Douglas Manufacturing Company has two production departments: Cutting and Assembly

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

Flint Tooling Company is considering replacing a machine that has been used in its factory for two years

PR 9-2A Flint Tooling Company is considering replacing a machine that has been used in its factory for two years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

OLD MACHINE
Cost of machine, eight year life $48,000
Annual depreciation (straight-line) 6,000
Annual manufacturing costs, excluding depreciation 14,500
Annual nonmanufacturing operating expenses 2,900
Annual revenue 29,600
Current estimated selling price of the machine 18,000

NEW MACHINE
Cost of the machine, six year life $58,500
Annual depreciation (straight-line) 9,750
Estimated annual manufacturing costs, exclusive of depreciation 5,200
Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Instructions
1.Prepare a differential analysis report as of May 22, 2010, comparing operations utilizing the new machine with operations using the present equipment. The analysis should indicate the differential income that would result over the six-year period if the new machine is acquired.
2.List other factors that should be considered before a final decision is reached.

Click here for the solution: Flint Tooling Company is considering replacing a machine that has been used in its factory for two years

The following data are accumulated by Eco-Labs, Inc. in evaluating two competing capital investment proposals

EX 10-1 The following data are accumulated by Eco-Labs, Inc. in evaluating two competing capital investment proposals:

Testing Equipment Vehicle
Amount of investment $80,000 $28,000
Useful life 6 years 8 years
Estimated residual value 0 0
Estimated total income over the useful life $13,200 $14,000

Determine the expected average rate of return for each proposal. Round to one decimal place.

Click here for the solution: The following data are accumulated by Eco-Labs, Inc. in evaluating two competing capital investment proposals

Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training

Integrating Case 16–5 Tax effects of accounting changes and error correction; six situations

Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.

a. A five-year casualty insurance policy was purchased at the beginning of 2009 for $35,000. The full amount was debited to insurance expense at the time.
b. On December 31, 2010, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.
c. The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2010.
d. At the end of 2010, the company failed to accrue $15,500 of sales commissions earned by employees during 2010. The expense was recorded when the commissions were paid in early 2011.
e. At the beginning of 2009, the company purchased a machine at a cost of $720,000. Its useful life was estimated to be 10 years with no salvage value. The machine has been depreciated by the double declining-balance method. Its carrying amount on December 31, 2010, was $460,800. On January 1, 2011, the company changed to the straight-line method.
f. Additional industrial robots were acquired at the beginning of 2008 and added to the company's assembly process. The $1,000,000 cost of the equipment was inadvertently recorded as repair expense. Robots have 10-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method for both financial reporting and income tax reporting.

Required:
For each situation:
1. Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change.
2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2011 related to the situation described. Any tax effects should be adjusted for through the deferred tax liability account.
3. Briefly describe any other steps that should be taken to appropriately report the situation.

Click here for the solution: Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training

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

The vice president of operations of Six Layer Computers Inc. is evaluating the performance of two divisions organized as investment centers

PR 24-5B The vice president of operations of Six Layer Computers Inc. is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

Network Equipment Division Personal Computing Division
Sales $1,400,000 $1,120,000
Cost of goods sold 845,000 690,000
Operating expenses 345,000 206,000
Invested assets 1,000,000 1,400,000

1. Prepare condensed divisional income statements for the year ended December 31, 2010, assuming that there were no service department charges. Enter all amounts as positive numbers.

2. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. Round investment turnover to one decimal place. Do not enter in the percent sign.

3. If management's minimum acceptable rate of return is 14%, determine the residual income for each division. If required, use the minus sign to indicate a negative.

4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3). The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Check: 2. Network Equipment Division ROI, 21%

Click here for the solution: The vice president of operations of Six Layer Computers Inc. is evaluating the performance of two divisions organized as investment centers

TLC Corp. is considering purchasing one of two new diagnostic machines

E12-3 TLC Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn't equipped to do. Estimates regarding each machine are provided below.

Machine A Machine B
Original cost $78,000 $190,000
Estimated life 8 years 8 years
Salvage value 0 0
Estimated annual cash inflows $20,000 $40,000
Estimated annual cash outflows $5,000 $9,000

Instructions
Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. Which machine should be purchased?


Click here for the solution: TLC Corp. is considering purchasing one of two new diagnostic machines

Be You Apparel Inc. is considering two investment projects

Be You Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows:

Each project requires an investment of $480,000. A rate of 15% has been selected for the net present value analysis.

Present Value of $1 at Compound Interest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162

1. a. Compute the cash payback period for each project.
b. Compute the net present value. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.

2. Prepare a brief report advising management on the relative merits of each project. The input in the box below will not be graded, but may be reviewed and considered by your instructor.


Click here for the solution: Be You Apparel Inc. is considering two investment projects

Toyco, a retail toy chain, honors two bank credit cards and makes daily deposits of credit card sales in two credit card bank accounts

12-42 Toyco, a retail toy chain, honors two bank credit cards and makes daily deposits of credit card sales in two credit card bank accounts. (Bank A and Bank B). Each day, Toyco batches its credit card sales slips, bank deposit slips and authorized sales return documents and sends them to data processing for data entry. Each week detailed computer printouts of the general ledger credit card cash accounts are prepared. Credit card banks have been instructed to make an automatic weekly transfer of cash to Toyco's general bank account. The credit card banks charge back deposits that include sales to holders of stolen or expired cards.

The auditor examining Toyco financial statements has obtained copies of the detailed general ledger cash account printouts, a summary of the bank statements and the manually prepared bank reconciliations, all for the week of December 31, as shown here. (see attachment)

Required:
Review the December 31 bank reconciliation and the related information contained in the following schedules and describe what actions the auditor should take to obtain satisfaction for each item on the bank reconciliation. Assume that all amounts are material and that all computations are accurate. Organize your answer sheet as follows, using the code contained on the bank reconciliation:

Code Number Actions to Be Taken by the Auditor to Gain Satisfaction


Click here for the solution: Toyco, a retail toy chain, honors two bank credit cards and makes daily deposits of credit card sales in two credit card bank accounts

(a) What are long-term liabilities? Give two examples. (b) What is a bond?

(a) What are long-term liabilities? Give two examples.
(b) What is a bond?


Click here for the solution: (a) What are long-term liabilities? Give two examples. (b) What is a bond?

Mindy Feldkamp and her two colleagues, Oscar Lopez and Lori Melton, are personal trainers at an upscale health spa/resort in Tampa, Florida

pg 724-725

1. Mindy Feldkamp and her two colleagues, Oscar Lopez and Lori Melton, are personal trainers at an upscale health spa/resort in Tampa, Florida. They want to start a health club that specializes in health plans for people in the 50 + age range. The growing population in this age range and strong consumer interest in the health benefits of physical activity have convinced them they can profitably operate their own club. In addition to many other decisions, they need to determine what type of business organization they want. Oscar believes there are more advantages to the corporate form than a partnership, but he hasn't yet convinced Mindy and Lori. They have come to you, a small business consulting specialist, seeking information and advice regarding the choice of starting a partnership versus a corporation.

a) Prepare a memo (dated May 26, 2009) that describes the advantages and disadvantages of both partnerships and corporations. Advise Mindy, Oscar and Lori regarding which organizational form you believe would better serve their purposes. Make sure to include reasons supporting your advice.

AND SO ON

All Parts 1 to 5


Click here for the solution: Mindy Feldkamp and her two colleagues, Oscar Lopez and Lori Melton,

ACC 349 Week 3 Mendocino Corporation produces two grades of wine from grapes that it buys from California growers

ACC 349 Week 3 (Week Three)

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: ACC 349 Week 3 Mendocino Corporation produces two grades of wine from grapes that it buys from California growers

The following are two specific balance-related audit objectives in the audit of accounts payable

Auditing P 6-29 The following are two specific balance-related audit objectives in the audit of accounts payable. The list referred to is the list of accounts payable taken from the accounts payable master file. The total of the list equals the accounts payable balance on the general ledger.

1. All accounts payable included on the list represent amounts due to valid vendors.
2. There are no unrecorded accounts payable.

Required:
a. Explain the difference between these two specific balance-related audit objectives.
b. Which of these two specific balance-related audit objectives applies to the general balance-related audit objective of existence, and which one applies to completeness?
c. For the audit of accounts payable, which of these two specific balance-related audit objectives is usually be more important? Explain.


Click here for the solution: The following are two specific balance-related audit objectives in the audit of accounts payable