Mylabsplus test Week 2
Management Accounting and Corporate Decision Making (ECB2FIV)
Universiteit Utrecht
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Week 2 Question 1 Bruschi Associates is a recently formed law partnership. Ellery Hanley, the managing partner of Bruschi Associates, has just finished a tense phone call with Martin Offiah, president of Widnes Coal. Offiah strongly complained about the price Bruschi charged for some legal work done for Widnes Coal. Hanley also received a phone call from its only other client (St. Helen's Glass), which was very pleased with both the quality of the work and the price charged on its most recent job. Bruschi Associates operates at capacity and uses a cost-based approach to pricing (billing) each job. Currently it uses a simple costing system with a single direct-cost category (professional labor-hours) and a single indirect-cost pool (general support). Indirect costs are allocated to cases on the basis of professional labor-hours per case. The job files show the following: Widnes Coal St. Helen's Glass Professional labor 120 hours 100 hours Professional labor costs at Bruschi Associates are $80 an hour. Indirect costs are allocated to cases at $115 an hour. Total indirect costs in the most recent period were $25,300. Requirement 1. Why is it important for Bruschi Associates to understand the costs associated with individual jobs? Pricing decisions at Bruschi Associates are heavily influenced by reported cost numbers. Suppose Bruschi is bidding against another firm for a client with a job similar to that of Widnes Coal. If the costing system overstates the costs of these jobs, Bruschi may bid too high and fail to land the client. If the costing system understates the costs of these jobs, Bruschi may bid low, land the client, and then lose money in handling the case. Requirement 2. Compute the costs of the Widnes Coal and St. Helen's Glass jobs using Bruschi’s simple costing system. Begin by determining the formula used to calculate the direct costs for each job. Prof. labor Prof. labor hours for job × hourly rate = Direct costs of job Now determine the formula used to calculate the indirect costs for each job. Indirect cost rate per Indirect costs allocated to hour Prof. labor hours for job × = job Now compute the cost of the jobs using the simple costing system. Direct professional labor Indirect costs allocated Total Direct professional labor: Indirect costs allocated Question 2 Widnes Coal $9,600 $13,800 $23,400 St. Helen’s Glass $8,000 $11,500 $19,500 120*$80 120*$115 100*$80 100*$115 Ellsbury Associates is a recently formed law partnership. Ellsbury Associates operates at capacity and uses a cost-based approach to pricing (billing) each job. Currently it uses a simple costing system with a single direct-cost category (professional labor-hours) and a single indirect-cost pool (general support). Indirect costs are allocated to cases on the basis of professional labor-hours per case. The job files for two of Ellsbury’s clients, Widnes Coal and St. Helen's Glass, show the following: Ellery Hanley, the managing partner of Ellsbury Associates, asks his assistant to collect details on those costs included in the $25,300 indirect-cost pool that can be traced to each individual job. Hanley decides to calculate the costs of each job as if Ellsbury had used six direct cost-pools and a single indirect-cost pool. The single indirect-cost pool would have $7,700 of costs and would be allocated to each case using the professional labor-hours base. Requirement 1. Calculate the revised indirect-cost allocation rate per professional labor-hour for Ellsbury Associates when indirect costs are $7,700. A. Sensitivity analysis is the difference between the selling price and variable cost per unit. The advent of the electronic spreadsheet has greatly increased the ability to explore the effect of alternative assumptions at minimal cost. B. Sensitivity analysis is the "what-if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes. The advent of the electronic spreadsheet has greatly increased the ability to explore the effect of alternative assumptions but comes at a much higher cost to companies. C. Sensitivity analysis is the "what-if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes. The advent of the electronic spreadsheet has greatly increased the ability to explore the effect of alternative assumptions at minimal cost. D. Sensitivity analysis measures how much a company can charge for its products over and above the cost of acquiring or producing them. The advent of the electronic spreadsheet has greatly decreased the ability to explore the effect of alternative assumptions and is more expensive than previous methods. C Question 4 Which of the following statements is true? A. ABC systems provide benefit to manufacturing companies only. Merchandising companies carry only merchandising (finished goods) inventory and service companies generally carry no inventory at all, and therefore, an ABC system would not apply to these companies. B. ABC systems apply equally well to manufacturing and merchandising companies, but not to service companies. Service companies generally carry no inventory, and therefore, an ABC system would provide little, if any, benefit. C. ABC systems apply equally well to manufacturing and retail-oriented merchandising companies, but not to distribution-oriented merchandising companies, which carry only finished goods inventory, or to service companies, which do not carry inventory. D. ABC systems apply equally well to manufacturing, merchandising and service companies. D Question 5 What are the four levels of a cost hierarchy? A. 1. Direct materials 2. Direct labor 3. Direct manufacturing overhead 4. Indirect manufacturing overhead B. 1. Design costs 2. Manufacturing costs 3. Distribution costs 4. Customer service costs C. 1. Output unit-level costs 2. Batch-level costs 3. Product-sustaining costs or service-sustaining costs 4. Facility-sustaining costs D. 1. Direct costs 2. Indirect costs 3. Variable costs 4. Fixed costs C Question 6 The Superb Donut owns and operates six doughnut outlets in and around Kansas City. You are given the following corporate budget data for next year: manufacturing and nonmanufacturing costs. Hence, gross margin is a more useful concept than contribution margin in CVP analysis. B. Yes, gross margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs. Contribution margin calculations emphasize the distinction between fixed and variable costs. Hence, contribution margin is a more useful concept than gross margin in CVP analysis. C. No, gross margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs. Contribution margin calculations emphasize the distinction between fixed and variable costs. Hence, gross margin is a more useful concept than contribution margin in CVP analysis. D. Yes, gross margin calculations emphasize the distinction between fixed and variable costs. Contribution margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs. Hence, contribution margin is a more useful concept than gross margin in CVP analysis. B Question 8 The Museum of History is preparing for its annual appreciation dinner for contributing members. Last year, 500 members attended the dinner. Tickets for the dinner were $20 per attendee. The profit report for lastyear's dinner follows. This year the dinner committee does not want to lose money on the dinner. To help achieve its goal, the committee analyzed last year's costs. Of the $11,000 cost of the dinner, $6,000 were fixed costs and $5,000 were variable costs. Of the $3,000 cost of invitation and paperwork, $2,500 were fixed and $500 were variable. Requirement 1. Prepare last year's profit report using the contribution margin format. (Use parentheses or a minus sign when entering losses.) Ticket sales 10000 Variable cost of dinner 5000 Variable invitations and paperwork 500 5500 Contribution margin 4500 Fixed cost of dinner 6000 Fixed invitations and paperwork Profit (loss) 2500 8500 (4000) Requirement 2. The committee is considering expanding this year's dinner invitation list to include volunteer members (in addition to contributing members). If the committee expands the dinner invitation list, it expects attendance to double. Calculate the effect this will have on the profitability of the dinner assuming fixed costs will be the same as last year. If the museum expands the dinner invitation list the profit (loss) will be $500. 2*$4,500 - $8,500 = $500 Question 9 Match the correct definition with each of the following terms: Term Definition Contribution margin difference between total revenues and total variable costs Contribution margin per unit difference between selling price and variable cost per unit Contribution margin percentage contribution margin per unit divided by selling price Question 10 Home Decor, Inc., is considering three possible countries for the sole manufacturing site of its newest area rug: France, Italy, and Spain. All area rugs are to be sold to retail outlets in the United States for $275 per unit. These retail outlets add their own markup when selling to final customers. Fixed costs and variable cost per unit (area rug) differ in the three countries. Another way to solve for the operating income or loss is: Contribution margin ( per unit x Units sold ) - Fixed costs Operating income = (loss) Compute the budgeted operating income or loss for Home Decor, Inc., in each country if the company produces and sells 65,000 area rugs in 2011. (Use parentheses or a minus sign when entering operatinglosses.) France: 65,000*$184 - $6,600,000 = $5,392,500 Italy: 65,000*$199 - $4,900,000 = $8,051,250 Spain: 65,000*174 - $12,200,000 = ($841,250) Italy has the lowest breakeven points since it has the lowest fixed costs and the lowest variable cost per unit. Therefore, at any given selling price Italy will always have the highest operating income. Spain's breakeven point is higher than the budgeted sales in 2011, therefore an operating loss is budgeted. Question 11 Foodmart Corp, an international retail giant, is considering implementing a new business to business (B2B) information system for processing merchandise orders. The current system costs Foodmart $2,500,000 per month and $50 per order. Foodmart has two options, a partially automated B2B and a fully automated B2B system. The partially automated B2B system will have a fixed cost of $10,000,000 per month and a variable cost of $40 per order. The fully automated B2B system has a fixed cost of $20,000,000 per month and $25 per order. Based on data from the last two years, Foodmart has determined the following distribution on monthly orders: Requirement 1 & 2. Prepare a table showing the cost of each plan for each quantity of monthly orders. What is the expected cost of each plan? Determine the monthly cost of each order level under the current plan, partially and fully automated and then compute the expected cost. Current plan Order level Probability Total expected costs of order 350 450 550 650 750 Total monthly costs 20.000 25.000 30.000 35.000 40.000 0,15 0,2 0,35 0,2 0,1 3.000 5.000 10.500 7.000 4.000 29.500 350 450 550 650 750 24.000 28.000 32.000 36.000 40.000 0,15 0,2 0,35 0,2 0,1 3.600 5.600 11.200 7.200 4.000 31.600 350 450 550 650 750 28.750 31.250 33.750 36.250 38.750 0,15 0,2 0,35 0,2 0,1 4.312 6.250 11.812 7.250 3.875 33.500 Total expected cost of plan Partially automated Total expected cost of plan Fully automated Total expected cost of plan Total cost of monthly orders Current Plan: $2,500,000 + $50 * number of orders Total cost of monthly orders Partially automated Plan: $10,000,000 + $40 * number of orders Total cost of monthly orders Fully automated Plan: $20,000,000 + $25 * number of orders Requirement 3. In addition to the information systems costs, what other factors should Foodmart consider before deciding to implement a new B2B system? (Select the best answer.) They should consider the impact the system has on its suppliers as well as aspects such as reliability, ease of use and maintainability. Question 12 The Wilmer Group (WG) provides tax advice to multinational firms. WG charges clients for (a) direct professional time (at an hourly rate) and (b) support services (at 30% of the direct professional costs billed). The three professionals in WG and their rates per professional hour are as follows: Total $14,209 Direct Professional costs Sun City Dominion = Hours per client Sun City Dominion*Billing rate per hour for that professional Support costs Sun City Dominion = 0* Direct Professional costs Direct Professional costs Dublin Enterprises = Hours per client Dublin Enterprises *Billing rate per hour for that professional Support costs Dublin Enterprises = 0* Direct Professional costs Requirement 2. Suppose support services were billed at $70 per professional labor-hour (instead of 30% of professional labor costs). How would this change affect the amounts WG billed to the two clients for May2011? Comment on the differences between the amounts billed in requirements 1 and 2. Determine the formula needed to calculate the total cost per professional for each client when WG allocates support costs at $70 per professional labor-hour. Direct professional Direct hrs. by Support cost per Cost per labor + ( professional x hour ) = professional Complete the table below to determine what WG would have billed to Sun City Dominion and Dublin Enterprises for May 2009 if support services were billed at $70 per professional labor-hour (instead of 30% of professional labor costs). Begin with Sun City Dominion. Sun City Max Wilmer Ann Brown Jeremy Alcott Total Max Wilmer Ann Brown Jeremy Dominion Direct Professional costs $17,360 Support Costs $1,960 Amount Billed to Client $19,320 $1,140 $420 $1,560 $4,100 $2,870 $6,970 $27,850 Dublin Enterprises Direct Professional costs $2,480 Support Costs $280 Amount Billed to Client $2,760 $2,850 $1,050 $3,900 $5,600 $3,920 $9,520 Alcott Total $16,180 The computation for Direct professional costs stays the same. The computation for Support costs now becomes: $70*Hours per client Both clients use the same amount of professional labor time. Sun City Dominion uses a higher proportion of Wilmer's time, which is more costly. This attracts the highest support-services charge when allocated on the basis of direct professional labor costs. Requirement 3. How would you determine whether professional labor costs or professional labor-hours is the more appropriate allocation base for WG's support services? In order to determine whether professional labor costs or professional labor-hours is the more appropriate allocation base for support services, WG should gather more information by conducting interviews with personnel and analyzing tasks undertaken for certain clients Question 13 Select four decisions for which ABC information is useful. A. 1. Product-cost cross subsidization 2. Converting product-sustaining costs into unit-level costs 3. Identifying cost objects 4. Predicting gross profit B. 1. Pricing and product mix 2. Cost reduction and process improvement 3. Product design 4. Decisions for planning and managing activities C. 1. Allocating direct material costs 2. Allocating direct labor costs 3. Identifying direct manufacturing overhead cost pools 4. Identifying indirect manufacturing overhead cost pools D. 1. Identifying problems and uncertainties 2. Obtaining information 3. Making predictions about the future 4. Choosing among alternatives B Requirement 1. Using the simple costing system, what is the cost per pound of potato cuts produced by IP? (Round your answer to the nearest cent.) Using the simple costing sytem, the cost per pound of potato cuts produced by IP is $1 → $1,265,000/1,100,000 Direct materials (raw potatoes) related to Retail market 90,00% Institutional market 10,00% Pounds 1,170,000 130,000 Potato cuts 990,000 110,000 Requirement 2. Calculate the cost rate per unit of the cost driver in the (a) cleaning, (b) cutting, and (c) packaging activity areas. (Round costs per driver unit to the nearest cent.) Costs in Pool / Number of Driver Units = Costs per Driver Unit Cleaning 195000 / 1300000 = $0 Cutting 140800 / 3520 = $40 Packaging 306900 / 34100 = $9 Cutting and Packaging; number of driver units: Indirect costs generating support costs Cleaning 1,300,000 Cutting (pounds) 300 Cutting hours 3,300 (990,000/300) Packaging (pounds) 30 Packaging (hours) 33,000 (990,000/30) Total 500 220 (110,000/500) 100 1,100 (110,000/100) 1,300,000 800 3,520 65 34,100 Requirement 3. Suppose IP uses information from its activity cost rates to calculate costs incurred on retail potato cuts and institutional potato cuts. Using the ABC system, what is the cost per pound of (a) retail potato cuts and (b) institutional potato cuts? (Round costs per pound to the nearest cent.) Direct costs Direct materials Direct Packaging Indirect costs Cleaning Cutting Packaging Total costs Pounds produced Cost per pound Retail Institutional $399 $175 $44 $3 $175 ($0*1,170,000 ) $132 ($40*3,300) $297 ($9*33,000) $1.179,00 990 $1,19 $19 ($0*130,000) $8 ($40*220) $9 ($9*1,100) $85,00 110 $0,78 Requirement 4. Comment on the cost differences between the two costing systems in 1 and 3. How might IP use the information in requirement 3 to make better decisions? Assuming the ABC numbers are more accurate, potato cuts sold to the retail market are undercosted and potato cuts sold to the institutional market are overcosted. How might IP use the information in requirement 3 to make better decisions? A. Each activity area is now highlighted as a separate cost. Improvements in the efficiency of processes in these activity areas can be easily highlighted. B. With its revised product costing, IP could have bid much lower on the large institutional contract and still made a profit. C. Packaging-related costs constitute approximately 40% of total costs of the retail product line. Design efforts that reduce packaging costs can have a big impact on reducing total unit costs for retail. D. All of the above. D
Mylabsplus test Week 2
Vak: Management Accounting and Corporate Decision Making (ECB2FIV)
Universiteit: Universiteit Utrecht
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