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ACCT 386 - Week 5 - Homework 5

ACCT 386 - Week 5 - Homework 5
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ACCT 386 - Week 5 - Homework 5

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Question 1

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below:

Precision Manufacturing Inc.
Income Statement

  Sales

$

1,655,800  

  Cost of goods sold

 

1,220,966  

 



  Gross margin

 

434,834  

  Selling and administrative expenses

 

550,000  

 



  Net operating loss

$

(115,166) 

 






     PMI produced and sold 60,200 units of EX300 at a price of $19 per unit and 12,800 units of TX500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base.
Additional information relating to the company’s two product lines is shown below:

 

 EX300

TX500

Total

  Direct materials

$

400,800  

$

162,400  

$

563,200  

  Direct labor

$

120,200  

$

42,900  

 

163,100  

  Manufacturing overhead

 

 

 

 

 

494,666  

 

 

 

 

 



  Cost of goods sold

 

 

 

 

$

1,220,966  

 

 

 

 

 






     The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that $51,000 and $102,000 of the company’s advertising expenses could be directly traced to EX300 and TX500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

 

Manufacturing

Activity

  Activity Cost Pool (and Activity Measure)

Overhead

EX300

TX500

Total

  Machining (machine-hours)

 $

213,226     

91,000  

62,400  

153,400  

  Setups (setup hours)

 

120,540     

74  

220  

294  

  Product-sustaining (number of products)

 

100,600     

1  

1  

2  

  Other (organization-sustaining costs)

 

60,300     

NA  

NA  

NA  

 



 

 

 

  Total manufacturing overhead cost

$

494,666     

 

 

 

 





 

 

 


 

 

Question 2

Denny Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company’s estimator has been involved in a long-simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between routine work such as removal of asbestos insulation around heating pipes in older homes and nonroutine work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: “My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $6,000 per thousand square feet to determine the bid price. Since our average cost is only $3,000 per thousand square feet, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up. Besides, it is difficult to know what is routine or nonroutine until you actually start tearing things apart.”

     To shed light on this controversy, the company initiated an activity-based costing study of all of its costs. Data from the activity-based costing system follow:

 Activity Cost Pool               

Activity Measure     

Total Activity           

  Removing asbestos

Thousands of square feet

460

 thousand square  feet  

  Estimating and job setup

Number of jobs

240

 jobs*

  Working on nonroutine jobs

Number of nonroutine jobs  

26

 nonroutine jobs

  Other (organization-sustaining
     and idle capacity costs)

None

   Not applicable


* The total number of jobs includes nonroutine jobs as well as routine jobs. Nonroutine jobs as well as routine jobs require estimating and setup work.

  Costs for the Year

 

 

  Wages and salaries

$

196,000  

  Disposal fees

 

609,000  

  Equipment depreciation

 

23,000  

  On-site supplies

 

67,000  

  Office expenses

 

191,000  

  Licensing and insurance

 

367,000  

 



  Total cost

$

1,453,000  

 






 

Distribution of Resource Consumption Across Activities

 

Removing Asbestos

Estimating and Job Setup

Working on Nonroutine Jobs

Other

Total  

  Wages and salaries

33

%

10

%

28

%

29

%

100

%

  Disposal fees

73

%

0

%

27

%

 0

%

100

%

  Equipment depreciation

47

%

0

%

37

%

16

%

100

%

  On-site supplies

47

%

7

%

21

%

25

%

100

%

  Office expenses

11

%

32

%

25

%

32

%

100

%

  Licensing and insurance

50

%

0

%

37

%

13

%

100

%

 

 

 

Question 3

Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $23.95 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on more remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below:

  Activity Cost Pool               

Activity Measure    

Activity for the Year       

  Cleaning carpets

Square feet cleaned (00s)

9,500

 hundred square feet  

  Travel to jobs

Miles driven

387,000

 miles

  Job support

Number of jobs 

1,700

 jobs

  Other (organization-sustaining
    and idle capacity costs)

None

 Not applicable


     The total cost of operating the company for the year is $347,000, which includes the following costs:

 

 

 

  Wages

$

147,000   

  Cleaning supplies

 

25,000   

  Cleaning equipment depreciation

 

11,000   

  Vehicle expenses

 

33,000   

  Office expenses

 

59,000   

  President’s compensation

 

72,000   

 



  Total cost

$

347,000   

 






     Resource consumption is distributed across the activities as follows:

 

Distribution of Resource Consumption Across Activities  

 

Cleaning Carpets

Travel to Jobs

Job Support

Other

Total

  Wages

75

%

13

%

0

%

12

%

100

%

  Cleaning supplies

100

%

0

%

0

%

 0

%

100

%

  Cleaning equipment depreciation

72

%

0

%

0

%

28

%

100

%

  Vehicle expenses

0

%

79

%

0

%

21

%

100

%

  Office expenses

0

%

0

%

65

%

35

%

100

%

  President’s compensation

0

%

0

%

28

%

72

%

100

%


Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

 

Question 4

Calgon Products, a distributor of organic beverages, needs a cash budget for September. The following information is available:

a.

The cash balance at the beginning of September is $11,800.

b.

Actual sales for July and August and expected sales for September are as follows:

 

July

August

September

  Cash sales

$

5,200   

$

4,900   

$

7,500   

  Sales on account

 

20,000   

 

30,000   

 

37,000   

 







  Total sales

$

 25,200  

$

34,900   

$

44,500   

&nb