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1. The controller of a small private college is complaining about the amount of work she is required to do at the beginning of each month. The president of the university requires the controller to submit a monthly report by the fifth day of the following month. The monthly report contains pages of financial data from operations. The controller was heard saying, "Why does the president need all this information? He probably doesn't read half of the report. He's an old English professor and probably doesn't know the difference between a cost and revenue.
a. What is the probable role of the monthly report?
b. What is the controller's responsibility with respect to a president who doesn't know much accounting?
2. Midstate University is trying to decide whether to allow 100 more students into the university. Tuition is $5000 per year. The controller has determined the following schedule of costs to educate students: Number of Students Total Costs 4000 $30,000,000 4100 30,300,000 4200 30,600,000 4300 30,900,000. The current enrollment is 4200 students. The president of the university has calculated the cost per student in the following manner:$30,600,000/4200 students = $7286 per student. The president was wondering why the university should accept more students if the tuition is only $5000.
a. What is wrong with the president's calculation?
b. What are the fixed and variable costs of operating the university?
3. A soft drink company has three bottling plants throughout the country. Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks. The parent company supplies each plant with the syrup. The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to regional grocery stores. The bottling plants are treated as costs centers. The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered. Each bottling plant uses the same equipment, but some produce more bottles of soft drinks because of different demand. The costs and output for each bottling plant are: A B C Units Produced 10,000,000 20,000,000 30,000,000Variable Costs $ 200,000 $450,000 $650,000 Fixed Costs $1,000,000 $1,000,000 $1,000,000.
a. Estimate the average cost per unit for each plant.
b. Why would the manager of plant A be unhappy with using the average cost as the performance measure?
c. What is an alternative performance measure that would make the manager of plant A happier?
d. Under what circumstances might the average cost be a better performance measure?
4. The Jung Corporation’s budget calls for the following production:
Quarter 1 45,000 units
Quarter 2 38,000 units
Quarter 3 34,000 units
Quarter 4 48,000 units.
Each unit of production requires three pounds of direct material. The company’s policy is to begin each quarter with an inventory of direct materials equal to 30 percent of that quarter’s direct material requirements.
Compute budgeted direct materials purchases for the third quarter.
5. The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance.
a. What is the application rate for the maintenance department?
b. What is the additional cost to the maintenance department of providing another hour of maintenance?
c. What problem exists if the managers of other departments can choose how much maintenance to be performed?
d. What problem exists if the other departments are allowed to go outside the organization to buy maintenance services?
6. Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSBs) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each unprocessed unit of MSB sells for $2 per unit and each unprocessed unit of CBL sells for $4 per unit. If the CBL is processed further at a cost of $200,000, it can be sold at $10 per unit but 10,000 units are unavoidably lost (with no discernible value). The MSB units can be coated with a preservative at a cost of $100,000 per production run and then sold for $3.50 each.
a. If no further work is done after the initial milling process, calculate the cost of CBL using physical quantities to allocate the joint cost.
b. If no further work is done after the initial milling process, calculate the cost of MSB using relative sales value to allocate the joint cost.
c. Should MSB and CBL be processed further or sold immediately after initial milling?
7. The Alphonse Company allocates fixed overhead costs by machine hours and variable overhead costs by direct labor hours. At the beginning of the year the company expects fixed overhead costs to be $600,000 and variable costs to be $800,000. The expected machine hours are 6,000 and the expected direct labor hours are 80,000. The actual fixed overhead costs are $700,000 and the actual variable overhead costs are $750,000. The actual machine hours during the year are 5,500 and the actual direct labor hours are 90,000.
a. How much overhead is allocated?
b. What is the over/under absorbed overhead?
8. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the direct costs of one unit of product. Quantity Price Cost Direct materials 8 pounds $1.80 per pound $14.40Direct labor 0.25 hour $8.00 per hour ___2.00_ $16.40During May, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for May were $42,000, 90 percent of which were for direct labor. Arrow manufactured 19,000 units of product during May using 142,500 pounds of direct material and 5,000 direct labor hours.
a. Calculate the direct materials price variance for May.
b. Calculate the direct materials quantity variance for May.
c. Calculate the direct labor wage rate variance for May.
d. Calculate the direct labor efficiency variance for May.
9. The Tippa Canoe Company makes fiberglass canoes. The fiberglass resin is initially molded to the shape of a canoe, then sanded and painted. Metal or wooden seats and frames are added for stability. The Tippa Canoe Company was started several years ago in the owner's garage. The owner, Jeff George, did a lot of the initial manual labor with the help of a few friends. The company has since expanded into a large warehouse and new employees have been hired. Because of the expansion, Jeff is no longer directly involved with production and is concerned about his ability to plan for and control the company. He is considering the implementation of a standard cost system.
a. Describe the procedures Jeff should use in setting standards for direct labor and direct materials.
b. Describe how Jeff could use standards for planning purposes.
c. Describe how Jeff could use standards for motivating employees and problems in using standards as performance measures.
d. Why are some of Jeff's friends who worked with from the beginning not very excited about a change to a standard cost system?
10. Derf Company applies overhead on the basis of direct labor hours. Two direct labor hours are required for each product unit. Planned production for the period was set at 9,000 units. Manufacturing overhead for the period is budgeted at $135,000, of which 20 percent is fixed. The 17,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $136,500.Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.