ACTG 1P11 Lecture Notes - Subledger, Purchase Order, Production Schedule
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1.) On January 31, Village Bank had 500,000 shares of $3 parvalue common stock outstanding. On that date, the company declareda 10% stock dividend when the market price of the stock was $62 pershare. The immediate effect of this dividend upon Village Bankwas:
A.)A reduction in cash of $3,794,500. | |||||||||||||||||||||||||||||||||||||||||
B.) A reduction in retained earnings of $3,100,000. | |||||||||||||||||||||||||||||||||||||||||
C.) A reduction in retained earnings of $150,000. | |||||||||||||||||||||||||||||||||||||||||
| D.) A liability to the stockholders of $150,000. 2.) Mayfair Corporation has outstanding 70,000 shares of $1 parvalue common stock as well as 20,000 shares of 7%, $100 par valuecumulative preferred stock. At the beginning of the year, thebalance in retained earnings was $800,000, and one year's dividendswere in arrears. Net income for the current year is $580,000.Compute the balance in retained earnings at the end of the year ifMayfair Corporation pays a dividend of $3 per share on its commonstock this year.
3.) During the years 2009 through 2011, Powers, Inc., reportedthe following amounts of net income (dollars in thousands):
4.) Hines Cannery issued capital stock in 2009 for $700,000.During 2009 the company paid dividends of $250,000. What is theeffect of these events in Hines' statement of cash flows for2009?
6.) Which of the following is a characteristic of manufacturingoverhead in a job order cost system?
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7.) A job order cost system traces direct materials cost to aparticular job by means of:
A.) | Materials requisitions. |
B.) | A production budget. |
C.) | The Materials Inventory controlling account. |
D.) | A debit to the job cost sheet for the job. |
8.) Which of the following costing systems would always use jobcost sheets?
A.) | Job order costing. |
B.) | Process costing. |
C.) | Activity-based costing. |
D.) | All three systems. |
9.) Edwards Auto Body uses a job order cost system. Overhead isapplied to jobs on the basis of direct labor hours. During thecurrent period, Job No. 337 was charged $425 in direct materials,$475 in direct labor, and $190 in overhead. If direct labor costsan average of $16 per hour, the company's overhead application rateis:
A.) | $7.27 per direct labor hour. |
B.) | $6.40 per direct labor hour. |
C.) | $17.50 per direct labor hour. |
D.) | $40 per direct labor hour. |
10.) Marty's Metal Shop uses a job order cost system. It appliesoverhead to jobs at a rate of 175% of direct labor costs. Job No.2617 required $800 in direct labor costs. The job was initiallybudgeted to require $850 in direct labor costs. Overhead applied toJob No. 2617 during the period amounted to:
A.) | $850. |
B.) | $1,400. |
C.) | $1,275. |
D.) | Some other amount. |
11.) In a job cost system, the Work-in-Process Inventorycontrolling account may be reconciled to the total of the:
A.) | Employee time cards. |
B.) | Materials requisitions. |
C.) | Work-in-Process Inventory records for each department orprocess. |
D.) | Job cost sheets. |
12.) For the month of December, its first month of operations,the Radcliffe Corporation completed and transferred 800 units ofproduct costing $80,000 to produce to Finished Goods Inventory. IfRadcliffe sold 650 units during the same month, how much was costof goods sold for the same period?
A.) | $80,000. |
B.) | $8,000. |
C.) | $6,500. |
D.) | $65,000. |
13.) The computation of equivalent full units is generally notnecessary when:
A.) | Beginning work-in-process inventories are significantly largerthan ending work-in-process inventories. |
B.) | Beginning and ending work-in-process inventories differ onlyslightly. |
C.) | The number of units in ending work-in-process exceeds the numberof units completed and transferred to finished goods during theperiod. |
D.) | Per-unit costs become distorted as a result of not computingequivalent full units of production. |
14.) During July, the equivalent full units of direct materialsadded to the product worked on by Department A amounted to a totalof 90,000 applied as follows: beginning inventory, 20,000 units;units started and completed in July, 60,000 units; and endinginventory, 10,000 units. Assuming that the cost of direct materialsrequisitioned by the department in July was $135,000; the amount ofthe materials cost to be assigned to the ending inventory wouldbe:
A.) | $16,875. |
B.) | $54,000. |
C.) | $15,000. |
D.) | $18,000. |
Bushman Case
The Bushman Company is a publicly traded corporation that produces different types of digital control systems. My name is Alan Smith and I have worked for this company for the last ten years in the controllerâs office. I was both an accounting and finance major in university. The company currently produces 300 products and does not anticipate any new products coming out over the next three years. I have previously mentioned to my superiors that it is not appropriate for our firm to use a traditional accounting system (where overhead costs are allocated across products at a rate of 400% of direct labor costs) when different products require different amounts of indirect overhead resources. For example, under the traditional system all costs associated with testing of products for quality assurance purposes are part of overhead costs and therefore allocated across products based on direct labor costs. Yet, some of our products require as much as 5 hours of testing whereas some products require less than 1 minute of testing with no connection to direct labor costs. Given that traditional costing systems result in significant cost distortions when determining products costs and given that the firm now has revenues of over $700,000,000 a year, Bushman has decided to adopt activity based costing over the next year or two.
Bushmanâs management has hired Deloitte Consulting to help us implement activity based costing. I will be acting as the liaison between our firm and Deloitte. As part of the initial implementation phase, I have asked Deloitte to derive the costs and product margins associated with two of our products, delta and vega, so that these costs and product margins could be compared with the costs and product margins under our current traditional accounting system. I picked these products since Bushman management believe they have very different demands on indirect overhead resources. Further, delta is sold in large quantities whereas vega is sold in small quantities and traditional accounting systems can cause large cost distortions in different directions for products sold in large and small quantities.
Current information from our existing system on a per unit basis is shown in Exhibit 1.
Exhibit 1
| delta | vega | |
| Direct material | $10 | $10 |
| Direct labor hours | 1 | 1 |
| Direct labor wage rate per hour | $20 | $20 |
| Sales price per unit | $160 | $170 |
My staff has identified for Deloitte five activity cost pools. Information on those cost pools and the related activity measures are provided in Exhibit 2.
Exhibit 2
| Activity cost pool | Total costs | Activity measure | Activity level |
| Equipment setups | $20,000,000 | number of setups | 50,000 |
| Purchase orders | $15,000,000 | number of purchase orders | 300,000 |
| Machining | $90,000,000 | number of machine hours | 2,000,000 |
| Testing | $13,300,000 | number of testing hours | 700,000 |
| Packaging | $24,000,000 | number of containers | 2,000,000 |
Although fixed costs are lumped in with variable costs across the five different cost pools, I am aware that machining related costs consists almost exclusively of depreciation costs. Hence, with respect to all questions asked in this case, machining costs will be treated as entirely fixed with respect to machine hours. Each machine is used in the production of multiple product lines. The resale value of machines is only affected by the passage of time and not by how much they are used in a given year.
In all questions asked in this case, the firm will assume that costs associated with equipment setups, purchase orders, testing, and packaging are variable with respect to their respective activity measures. Currently, we believe our assumptions on cost behavior patterns are quite reasonable.
All products are produced in batches, where the size of a batch differs across products. For example, if we produce 80 units of a product in batch sizes of 40, then the product will be produced in two batches. An equipment setup must be performed before producing each batch of a product. Hence, in the example above, two equipment setups would be performed. Units of product are packaged in containers and sent to distributors.
Production volumes are set equal to sales volumes since the company only produces products that they have orders for. Consequently, the firm never has a beginning or ending work in process inventory, and it does not have a beginning or ending finished goods inventory.
Further information on our two products is provided in Exhibit 3
Exhibit 3
| delta | vega | |
| annual sales and production in units | 800,000 | 12,000 |
| number of units per batch | 200 | 150 |
| number of purchase orders | 400 | 100 |
| number of machine hours per unit | 0.2 | 3 |
| total number of testing hours | 7,000 | 21,000 |
| total number of containers | 5,000 | 2,000 |
REQUIRED:
1. (20 Points) Prepare an income statement for delta and an income statement for vega using the traditional accounting system where overhead is applied at a rate of 400% of direct labor costs. (For simplicity, there are no SG&A expenses for the firm.) The income statements should be prepared on a total basis and then show the average net operating income per unit using the following template for guidance:
delta vega
Sales $$$ $$$
Direct materials $$$ $$$
Direct labor $$$ $$$
Manufacturing overhead $$$ $$$
Total Costs $$$ $$$
Net operating income $$$ $$$
Average net operating income
per unit $$$ $$$
2. (20 Points) Calculate the five activity rates under activity based costing.
3. (35 Points) Prepare an income statement for delta and an income statement for vega using activity based costing. (For simplicity, there are no SG&A expenses for the firm.) The income statements should be prepared on a total basis and then show the average net operating income per unit using the following template for guidance:
delta vega
Sales $$$ $$$
Direct materials $$$ $$$
Direct labor $$$ $$$
Equipment Setups $$$ $$$
Purchase orders $$$ $$$
Machining $$$ $$$
Testing $$$ $$$
Packaging $$$ $$$
Total Costs $$$ $$$
Net operating income $$$ $$$
Average net operating income
per unit $$$ $$$
4. (10 Points) Assume next year that the activity rates remain the same as you calculated in question (2). Assume that the demand for delta is expected to increase significantly. Consequently, the firm expects to produce more batches of delta next year than this year and the firm plans to produce in batch sizes of 500 rather than 200. Calculate what the equipment setup cost per unit of delta will be next year if it can be calculated. If it cannot be calculated, then explain in words why the equipment setup cost per unit of delta cannot be determined in the absence of more information. Excluding your quantitative analysis if any, your explanation should not be more than 1/3 page double spaced with a 12 font size. Your grade will be lowered for poor writing (e.g., grammar).
5. (15 Points) Question 5 is independent of question 4. Next year, because of an expected increase in product demand, machine hours are expected to increase from 2,000,000 to 2,500,000. The company will not need any new machinery since the current machinery is highly underutilized. Also, the number of purchase orders will increase from 300,000 to 360,000. Assume that these new levels of operations are within the firmâs relevant range. Calculate what the activity rate for the cost pool of machining would be next year if it can be calculated. Also, calculate what the activity rate for the cost pool of purchase order would be next year if it can be calculated. If one or both rates cannot be calculated, then explain in words why the calculations cannot be determined in the absence of more information. Excluding any quantitative analysis, your explanation should not be more than 1/3 page double spaced with 12 font. Your grade will be lowered for poor writing (e.g., grammar).
