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ACC 424 In Class Questions.pdf

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Department
Accounting
Course
ACCTG424
Professor
Trish Stringer
Semester
Fall

Description
In Class #1.1 Professional ethics and earnings management Day Corporation is a publishing company that produces trade magazines. The company’s stakeholders are awaiting the announcement of Day Corporation’s earnings for the fiscal year, which ends on December 31. Market analysts have predicted earnings to be around $1.34 per share. The CEO of Day Corporation expects earnings to be only $1.20 per share, and knows this will cause the price of the stock to drop. The CEO suggests the following ideas to various managers to try to increase reported earnings by the end of the fiscal year. a) Delay recording of cancelled subscriptions for December until January. b) Wait until the new fiscal year to update the software on office computers. c) Recognize unearned subscription revenue (cash received in advance for magazines that will be sent in the future) as revenue when received in the current month (just before fiscal year end) instead of booking as a liability. d) Delay recording purchases of office supplies on account until after year end. e) Book advertising revenues that relate to January in December. f) Wait until after fiscal year end to do building repairs. g) Switch from declining balance to straight line depreciation to reduce depreciation expense in the current year. Required 1 Why would Harvest Day Corporation’s CEO want to “manage” earnings? Required 2 Which of the items in a - g above are acceptable to Harvest Day’s controller? Which are unacceptable? Required 3 What should the controller do about the CEO’s suggestions? What should the controller do if the CEO refuses to change the suggestions? Page 1 of 56 In Class #2.1 Classification of costs, manufacturing sector The Car Company Inc. assembles two types of cars (Coras and Geos). A separate assembly line is used for each type of car. Required Classify each of the following cost items as a) Direct or Indirect (D or I) costs with respect to the type of car assembled (Coras or Geos.) b) Variable or Fixed (V or F) costs with respect to how the total costs of the plant change as the number of cars assembled changes. (If in doubt, select the cost type based on whether the total costs will change substantially if a large number of cars are assembled). Cost Items D or I V or F A. Cost of tires used on Geos B. Salary of public relations manager for The Car Company plant C. Annual awards dinner for Coras’ suppliers D. Salary of engineer who monitors design changes on Geos E. Freight costs of Coras engines shipped from Japan, to Edmonton F. Electricity costs for The Car Company plant (single bill covers entire plant) G. Wages paid to temporary assembly-line workers hired in periods of high production (paid on an hourly basis) H. Annual fire-insurance policy cost for The Car Company plant Page 2 of 56 In Class #2.2 Income statement and schedule of cost of goods manufactured The Powell Corporation has the following account balances (in millions): For Specific Date For Year 2013 Direct materials, January 1, 2013 $ 15 Purchases of direct materials $ 390 Work in process, January 1, 2013 10 Direct manufacturing labour 120 Finished goods, January 1, 2013 70 Amortization – plant building and equipment 96 Direct materials, December 31, 2013 20 Plant supervisory salaries 6 Work in process, December 31, 2013 5 Miscellaneous plant overhead 42 Finished goods, December 31, 2013 55 Revenues 1,140 Marketing, distribution, and customer-service costs 288 Plant supplies used 12 Plant utilities 36 Indirect manufacturing labour 60 Required 1 Prepare an income statement and a supporting schedule of cost of goods manufactured for the year ended December 31, 2013. Required 2 How would the answer to Required 1 be modified if you were asked for a schedule of cost of goods manufactured and sold instead of a schedule of cost of goods manufactured? Be specific. Required 3 Plant supervisory salaries are usually regarded as indirect costs. Under what conditions might some of these costs be regarded as direct costs? Give an example. Required 4 Suppose that both the direct materials used and the plant amortization were related to the manufacture of 1 million units of product.  What is the unit cost for the direct materials assigned to those units?  What is the unit cost for plant building and equipment amortization? Assume that yearly plant amortization is computed on a straight-line basis. Required 5 Assume that the historical, actual cost behaviour patterns for direct materials costs behave as a variable cost and amortization behaves as a fixed cost. Repeat the computations in Required 4, assuming that the costs are being predicted for the manufacture of 1.2 million units of product. How would the total costs be affected? Required 6 As a management accountant, explain concisely to the president why the unit costs differed in requirements 4 and 5. Page 3 of 56 In Class #4.1 Allocation of manufacturing overhead and disposition of over-applied or under-applied Nicole Limited is a company that produces machinery to custom order. Its job costing system (using normal costing) has two direct cost categories (direct materials and direct labour) and one indirect cost pool (manufacturing overhead, allocated using a budgeted rate based on direct labour costs). The budget for 2013 was: Direct labour $630,000 Manufacturing overhead $441,000 At the end of 2013, two jobs were incomplete: Job #17 (total direct labour costs were $15,000) and Job #18 (total direct labour costs were $48,000). Machine hours totalled 318 hours for Job #17 and 654 hours for Job #18. Direct materials issued to Job #17 amounted to $30,600. Direct materials for Job # 18 totalled $56,800. Total actual Manufacturing Overhead for the year was $406,200. Actual direct labour charges made to all jobs were $650,000, representing 25,000 direct labour-hours (DLHs). There were no beginning inventories. In addition to the ending work-in-process, the ending finished goods showed a balance of $204,500 (including a direct labour cost component of $60,000). Sales for 2013 totalled $3,124,000, cost of goods sold was $ 2,200,000 and marketing costs were $523,900. Nicole Limited prices jobs on a cost-plus basis. It currently uses a guideline of cost plus 40%. Required 1 Prepare a detailed schedule showing the ending balances in the inventories and cost of goods sold (before considering any under-applied or over-applied manufacturing overhead). Show also the manufacturing overhead allocated to these ending balances. Required 2 Compute the under-applied or over-applied manufacturing overhead for 2013. Required 3 Dispose of the under-applied or over-applied MOH computed in requirement 2 on the basis of: a. Proration Approach - The ending balances (before proration) of work-in-process, finished goods, and cost of goods sold. b. Adjusted Allocation Rate Approach - The allocated overhead amount (before proration) in the ending balances of work-in-process, finished goods, and cost of goods sold. c. Immediate write off to Cost of Goods Sold Required 4 What is the effect on operating income resulting from the proration in Required 3(a), (b) and (c)? (i.e. which prorations provide the highest and lowest operating income?) Required 5 Calculate the cost of Job #18 if Nicole Limited had used the adjusted allocation rate approach to dispose of under-applied or over-applied manufacturing overhead in 2013. Page 4 of 56 Page 5 of 56 4.1 In Class #5.1 Cost Hierarchy Classifications The following outlines a number of activities related to operations at Nordan Manufacturing Ltd: a) Engineers design new products b) Production workers set up machines c) Completed goods are inspected for quality assurance d) Direct materials are moved from inventory to the production line e) Raw materials are received from the supplier f) Regular equipment maintenance is performed g) The inventory management software is updated Required 1 Classify each of the preceding activities as unit level, batch level, product level or facility- sustaining. Explain your answers. Required 2 Identify a possibly appropriate cost driver for each of the activities listed. Classification CDorivers a Designing new products b Setting up machines c Qualiiyspection d Movinmgaterials e Receivirgwaterials f Performinggularaintenance g Updating inventory software Page 6 of 56 In Class #5.2 Special order, activity-based costing The Medal Maker Company manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 12,000 medals each month; current production and sales are 9,000 medals per month. The company normally charges $200 per medal. Cost information for the current activity level is as follows: Variable costs (vary with units produced): Direct materials $ 360,000 Dlaroutr 405,000 Variable costs (vary with number of batches): Setups, materials handling, and quality control 126,000* Fixed manufacturing costs 325,000 Fixed marketing costs 224,000 Total costs $1,440,000 *Costs of $126,000 are based on 180 batches at $700 per batch Medal Maker has just received a special one-time-only order for 2,500 medals at $168 per medal. Accepting the special order would not affect the company’s regular business. Medal Maker makes medals for its existing customers in batch sizes of 50 medals (180 batches X 50 medals per batch = 9,000 medals). The special order requires Medal Plus to make the medals in batch sizes 100 medals (25 batches X 100 medals per batch = 2,500 medals). Required 1 Should Medal Plus accept this special order? Explain briefly. Required 2 Suppose plant capacity was only 10,000 medals (instead of 12,000 medals) each month. The special order must either be taken in full or rejected totally. Should Medal Plus accept the special order? Required 3 Refer to Required 1, assume that monthly capacity is 12,000 medals. Medal Plus is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $11 in the month in which the special order is being filled. They would argue that Medal Plus’s capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Medal Plus accept the special order under these conditions? Show all calculations. Page 7 of 56 5 o g P Equiv Unit  Example FIFO # units FromSWtarte,peningmpleted Cost CnossetocomWpIete Units transferrUnui: in endCgoWtIiosuprerEquriofleetperianPs:rrnitsstrledosodsfomislrang:erIPd:out In Class #17.1 FIFO method, equivalent units and unit costs, assigning costs Consider the following data for the Assembly Division of a satellite manufacturer: Physical Units Direct Conversion (satellites) Materials Costs Beginning work in process (May 1)* 8 $5,426,960 $1,001,440 Started in May 2012 55 Completed during May 2012 51 Ending work in process (May 31)+ 12 Costs added during May 2012 $35,420,000 $15,312,000 *Degree of completion: direct materials 90%; conversion costs 40% +Degree of completion: direct materials 60%; conversion costs 30% The Assembly Division uses the FIFO method of process costing. Required 1 Analyze the physical flow of actual units in the Assembly Division by calculating (stating) the beginning WIP, started and completed, units transferred out and ending WIP. Required 2 Compute equivalent units for direct materials and conversion costs. Show physical units in the first column of your schedule. Required 3 Calculate cost per equivalent unit for direct materials and conversion costs. Required 4 Summarize total costs to account for, and assign these costs to units completed and transferred out, and to units in ending work in process. Page 9 of 56 5 o e a P - WIP CC Equiv Unit - DM Equiv Unit 17.1 worksheet - # units FromS Wtate,dpeningmpleted Cost CnostseoicoW plete Units transferreUnit: in endCgoWtIiosuprerEqurioflentpetianPs:ferredontt:sttrldoCndscoofpstrid:ferred:out 5 o 1 a P Equiv Unit  Example WA # units UnitsUtratsfnrendoiuo:WtIiosuprerEoqutoafualcostrafostirfenaoiftrWedIo:t In Class #17.2 Weighted-average method, equivalent units and unit costs, assigning costs Consider the following data for the Assembly Division of a satellite manufacturer: Physical Units Direct Conversion (satellites) Materials Costs Beginning work in process (May 1)* 8 $5,426,960 $1,001,440 Started in May 2012 55 Completed during May 2012 51 Ending work in process (May 31)+ 12 Costs added during May 2012 $35,420,000 $15,312,000 *Degree of completion: direct materials 90%; conversion costs 40% +Degree of completion: direct materials 60%; conversion costs 30% The Assembly Division uses the weighted-average method of process costing. Required 1 Compute equivalent units for direct materials and conversion costs. Show physical units in the first column of your schedule. Required 2 Calculate cost per equivalent unit for direct materials and conversion costs. Required 3 Summarize total costs to account for, and assign these costs to units completed (and transferred out) and to units in ending work in process. Page 12 of 56 5 o 1 a P WIP CC Equiv Unit 17.2 DM Equiv Unit # units UnitsU taitsfnreddiCuoWtsiocsuprerEqsutoflaltUsntraosftrfrranoif:redIPu:t In Class #7.3 Transferred-in costs, weighed-average and FIFO Frito-Lay Inc. manufactures convenience foods, including potato chips and corn chips. Production of corn chips occurs in four departments: Cleaning, Mixing, Cooking, and Drying and Packaging. Consider the Drying and Packaging Department, where direct materials (packaging) is added at the end of the process. Conversion costs are added evenly during the process. Suppose the accounting records of a Frito-Lay plant provided the following information for corn chips in its Drying and Packaging Department during a weekly period (week 37): Physical Units Transferred-in Direct Conversion (cases) Costs Materials Costs Beginning work-in-process, week 37* 1,250 $29,000 $0 $9,060 Transferred in during week 37 from Cooking Department 5,000 Completed during week 37 5,250 Ending Work-in-process, week 37+ 1,000 Costs added during week 37 $96,000 $25,200 $38,400 *Degree of completion: transferred in costs, 100%; direct materials ?% ; conversion costs 80% +Degree of completion: transferred in costs, ?%; direct materials ?%; conversion costs 40% Required 1 Using the weighted-average method, summarize the total Drying and Packaging department costs for week 37, and assign total costs to units completed (and transferred out) and to units in ending work in process. Required 2 Assume that the FIFO method is used for the Drying and Packaging department. Summarize the total Drying and Packaging department costs for week 37 and assign total costs to units completed and transferred out and to units in ending work in process using the FIFO method. Page 14 of 56 5 o 1 g P Unit CC Equiv Unit DM Equiv  worksheet Unit 17.3 FIFO TI Equiv # units FromS tarte,dpeningmpleted Cost inossetocgoW pIete Units transferred out:n endiCgostCiostprerEousnofunetperianPs:ferred out: UnitsttrtldsndCfusttsfredsnerredIP:t 5 o 1 a P Unit CC Equiv Unit DM Equiv  worksheet Unit TI Equiv 17.3 WA # units UnitsUtratsfnrenddiuo:WtIiosuprerEoqutTofualcostrafostirrtraosftrredIPu:t In Class #18.1 Normal and abnormal spoilage in units The following data, in physical units, describe a grinding process for January: Work in process, beginning 19,000 Started during current period 150,000 To account for 169,000 Spoiled units 12,000 Good units completed and transferred out 132,000 Work in process, ending 25,000 Accounted for 169,000 Inspection occurs at the 100% completion stage. Normal spoilage is 5% of the good units passing inspection. Required 1 Compute the normal and abnormal spoilage in units. Required 2 Assume that the equivalent-unit cost of a spoiled unit is $10. Compute the amount of potential savings if all spoilage were eliminated, assuming that all other costs would be unaffected. Comment on your answer. Page 17 of 56 In Class #18.2 Weighted-average method, spoilage Chipcity Inc. is a fast-growing manufacturer of computer chips. Direct materials are added at the start of the production process. Conversion costs are added evenly during the process. Some units of this product are spoiled as a result of defects not detectable before inspection of finished goods. Spoiled units are disposed of at zero net disposal value. Chipcity used the weighted- average method of process costing. Summary data for September 2013 are: Physical Units Direct Conversion (computer chips) Materials Costs Work in process, beginning inventory (Sept 1) 600 $96,00$15,300 Degree of completion of beginning WIP 100% 30% Started during September 2,550 Good units completed and transferred out during September 2,100 Work in process, ending inventory (Sept 30) 450 Degree of completion of ending WIP 100% Total costs added during September $567,230,400 Normal spoilage as a percentage of good units 15% Degree of completion of normal spoilage 100% 100% Degree of completion of abnormal spoilage 100% 100% Required 1 For each cost category, compute equivalent units. Show physical units in the first column of your schedule. Required 2 Summarize total costs to account for, calculate cost per equivalent unit for each cost category, and assign total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process. Required 3 Redo the question using the FIFO method of process costing. Page 18 of 56 5 o 1 g P Unit CC Equiv WIP Unit DM Equiv 18.2 worksheet TI Equiv Unit # units Unitsnrrnsfesreniagl:onsloitaerdiCferttiisttpIrEoqutoalrntisrpialtferretdofut:itsrapsofrred:out ost of endingnWorP:al spoilage In Class #18.3 Weighted-average method, inspection at 80% completion Alberta Manufacturing is a furniture manufacturer with two departments: Moulding and Finishing. The company uses the weighted-average method of process costing. In August, the following data were recorded for the Finishing department: Units of beginning work-in-process inventory 12,500 Percentage completion of beginning work-in-process units 25% Costs of direct materials in beginning work in process $ 0 Units started 87,500 Units completed 62,500 Units in ending inventory 25,000 Percentage completion of ending work-in-process units 95% Spoiled units 12,500 Total costs added during current period: Daireritals $819,000 lairecrt $794,500 Manufaco tveihead $770,000 Work in process, beginning: Transfercedt-sin $103,625 Conversion costs $ 52,500 Cost of units transferred in during current period $809,375 Conversion costs are added evenly during the process. Direct materials costs are added when production is 90% complete. The inspection point is at the 80% stage of production. Normal spoilage is 10% of all good units that pass inspection. Spoiled units are disposed of at zero net disposal value. Required For August, summarize total costs to account for, and assign these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process. Page 20 of 56 5 o e a P WIP CC Equiv Unit DM Equiv Unit 18.3 worksheet # units UnitsNtramsalrrorililsenonagiCosWtIiosuprerEqsutoflodiUntratraloflsdoobu:itstransforiagenuting WIP: 5 o 2 g P WIP CC Equiv Unit 18.3  worksheet DM Equiv Unit # units FromSW tate,opmnilgnopiatlspoilage Cost inostseoicomWpIete Units transferred out: Units in endiCgWtsiostuperdduurOgltntUpniitoIdP:red UnitsNstoteolalcilomefletis:transferred outIP: In Class #18.4 Spoilage and job costing Bamber Kitchens produces a variety of items in accordance with special job orders from hospitals, plant cafeterias, and university dormitories. An order for 2,500 cases of mixed vegetables costs $6.00 per case: direct materials $3.00; direct labour $2.00; and manufacturing overhead allocated $1.00. The manufacturing overhead rate includes a provision for normal spoilage. Consider each of the following requirements independently: Required 1 Assume that a labourer dropped 200 cases. Suppose that part of the 200 cases could be sold to a nearby pig farm for $200 cash.  Is this considered normal or abnormal spoilage?  How would the sale of these cases be dealt with (i.e. what would the journal entry be?)  What is the unit cost of the remaining 2,300 cases? Required 2 Refer to the original data. Tasters at the company reject 200 of the cases. The 200 cases are sold for $400 cash. Assume this rejection rate is considered normal. a) If the rejection is attributable to exacting specifications of this job how would the sale of these cases be dealt with (i.e. what would the journal entry be?) What is the unit cost of the remaining 2,300 cases? b) If the rejection is characteristic of the production process and is not attributable to this specific job how would the sale of these cases be dealt with (i.e. what would the journal entry be?) What is the unit cost of the remaining 2,300 cases? c) Comment on the difference, if any, in the unit cost of the remaining cases. Required 3 Refer to the original data. Tasters at the company reject 200 of the cases as they had insufficient salt. The 200 cases can be placed in a vat, salted and reprocessed into jars. This operation, which is considered normal, will cost $200. Assume this rejection rate is considered normal. a) If the additional cost was incurred because of the exacting specifications of this particular job, how would the $200 be dealt with (i.e. what would the journal entry be?) What is the unit cost of the 2,500 cases? b) If the additional cost occurs regularly because of difficulty in seasoning, how would the $200 be dealt with (i.e. what would the journal entry be?) What is the unit cost of the 2,500 cases? c) Comment on the difference, if any, in the unit cost of the cases. Page 23 of 56 In Class #18.5 For each of the following independent cases, determine the information requested. a. At the start of the period, 8,000 units were in the work in process inventory and 6,000 units were in the ending inventory. During the period, 19,000 units were transferred out to the next department. Materials and conversion costs are added evenly throughout the production process. FIFO costing is used. How many units were started this period? b. In the beginning inventory 4,100 units were 40 percent complete with respect to conversion costs. During the period, 3,500 units were started. In the ending inventory, 3,250 units were 20 percent complete with respect to conversion costs. How many units were transferred out? Weighted average costing is used. c. Beginning inventory amounted to 500 units. This period 2,250 units were started and completed. At the end of the period, the 1,500 units in inventory were 30 percent complete. Using FIFO costing, the equivalent production for the period was 2,800 units. What was the percentage of completion of the beginning inventory? d. The ending inventory included $8,700 for conversion costs. During the period, 4,200 equivalent units were required to complete the beginning inventory, and 6,000 units were started and completed. The ending inventory represented 1,000 equivalent units of work this period. FIFO costing is used. What were the total conversion costs incurred this period? Page 24 of 56 In Class #14.1 Single-rate versus dual-rate methods, support division The Ontario power plant that services all manufacturing departments of Ontario Engineering has a budget for the coming year. This budget has been expressed in the following monthly terms: Needed at Practical Average Expected Manufacturing Capacity Production Monthly Usage Department Level (kilowatt-hours) (kilowatt-hours) Mississauga 10,000 8,000 Cambridge 20,000 9,000 Burlington 12,000 7,000 Brantford 8,000 6,000 Total 50,000 30,000 The expected monthly costs for operating the power plant during the budget year are $15,000: $6,000 variable and $9,000 fixed. Required 1 Assume that a single cost pool is used for the power plant costs. What budgeted amounts will be allocated to each manufacturing division if (a) the rate is calculated based on practical capacity and costs are allocated based on practical capacity and (b) the rate is calculated based on expected monthly usage and costs are allocated based on expected monthly usage? Required 2 Assume the dual-rate method is used with separate cost pools for the variable and fixed costs. Variable costs are allocated on the basis of expected monthly usage. Fixed costs are allocated on the basis of practical capacity. What budgeted amounts will be allocated to each manufacturing division? Why might you prefer the dual-rate method? Page 25 of 56 In Class #14.2 Support division cost allocation; direct, step-down, and reciprocal methods Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support divisions – Administrative Services (AS) and Information Systems (IS) – and two operating divisions – Government Consulting (Govt) and Corporate Consulting (Corp). For the first quarter of 2013, Phoenix’s cost records indicate the following: Support Operating AS ISGovC t.orp. Total Budgeted overhead costs before any interdepartment cost allocations $600,000 $2,400,000 $8,$24,208,0$012,452,000 Support work supplied by AS (budgeted head count) 25% 40% 35% 100% Support work supplied by IS (budgeted computer time) 10% 30% 60% 100% Required 1 Allocate the two support divisions` costs to the two operating divisions using the following methods: a. Direct method b. Step-down method (allocate AS first) c. Step-down method (allocate IS first) d. Reciprocal method using linear equations and then repeated iterations. Required 2 Compare and explain differences in the support division costs allocated to each operating division. Which method do you prefer? Why? Required 3 What approaches might be used to decide the sequence in which to allocate support divisions when using the step-down method? Page 26 of 56 In Class #14.3 Cost allocation to divisions Forber Bakery makes baked goods for grocery stores, and has three divisons: Bread, Cake , and Doughnuts. Each division is run and evaluated separately, but the main headquarters incurs costs that are indirect costs for the divisions. Costs incurred in the main headquarters are: Human resources (HR) costs $1,900,000 Accounting departments costs 1,400,000 Rent and amortization 1,200,000 Other 600,000 Total costs $5,100,000 The Forber upper management currently allocates this cost to the divisions equally. One of the division managers has done some research on activity-based costing and proposes the use of different allocation bases for the different costs-number of employees for HR costs, total revenues for accounting division costs, square metres of space for rent and amortization costs, and equal allocation among the divisions of “other” costs. Information about the three divisions follows: Bread CakeDoughnuts Total revenues $20,900,000 $4,500,000 $13,400,000 Direct costs 14,500,000 3,200,000 7,250,000 Segment margin $ 6,400,000 $1,300,000 $ 6,150,000 Number of employees 400 100 600 Square metres of space 10,000 4,000 6,000 Required 1 Allocate the indirect costs of Forber to each division equally. Calculate division operating income after allocation of headquarters costs. Required 2 Allocate headquarters costs to the individual divisions using the proposed allocation bases. Calculate the division operating income after allocation. Comment on the allocation bases used to allocate headquarters costs. Required 3 Which division manager do you think suggested this new allocation? Explain briefly. Which allocation do you think is “better”? Page 27 of 56 In Class #15.1 Usefulness of joint cost allocation Roundtree Chocolates manufactures and distributes chocolate products. It purchases cocoa beans and processes them into two intermediate products:  Chocolate powder liquor base  Milk chocolate liquor base These two intermediary products become separately identifiable at a single splitoff point. Every 500 kilograms of cocoa beans yields 20 four-litre contains of chocolate powder liquor base and 30 four-litre contains of milk chocolate liquor base. The chocolate powder liquor base is further processed into chocolate powder. Every 20 containers of chocolate powder liquor base yield 200 kilograms of chocolate powder. The milk chocolate liquor base is further processed into milk chocolate. Every 30 containers of milk chocolate liquor base yields 340 kilograms of milk chocolate. The following is an overview of the manufacturing operations at Roundtree Chocolates: Joint Costs Sepa rable Costs Chocolate Processing Chocolate Powder Liquor Powder Base Cocoa Beans Processing Milk Chocolate Processing Milk Chocolate Liquor base Splitoff Point Production and sales data for August 2013 are as follows:  Cocoa beans processed, 5,000 kilograms  Costs of processing cocoa beans to splitoff point (including purchase of beans) = $12,000 Production Sales Unit Selling Price Chocolate powder 2,000 kilograms 2,000 kilograms $4.80 per kilogram Milk chocolate 3,400 kilograms 3,400 kilograms $6.00 per kilogram The August 2013 separable costs of processing chocolate powder liquor base into chocolate powder are $5,100. The August 2013 separable costs of processing milk chocolate liquor base into milk chocolate are $10,500. Roundtree fully processes both of its intermediate products into chocolate powder or milk chocolate. There is an active market for these intermediate products. In August 2013, Roundtree could have sold the chocolate powder liquor base for $25.20 a container and milk chocolate liquor base for $3120 a container. Page 28 of 56 Required 1 Calculate how the joint costs of $12,000 would be allocated between chocolate powder liquor base and milk chocolate liquor base under each of the following methods: (a) sales value at splitoff, (b) physical measure (containers), (c) estimated NRV, and (d) constant gross margin percentage NRV. Required 2 What are the gross margin percentage of chocolate powder and milk chocolate under each methods (a), (b), (c), and (d) in requirement 1? Required 3 Could Roundtree Chocolates have increased its operating income by a change in its decision to fully process both of its intermediate products? Page 29 of 56 In Class #15.2 Estimated net realizable value method, byproducts, govern ance The Princess Corporation grows, processes, packages, and sells three joint apple products: (a) sliced apples that are used in frozen pies, (b) applesauce, and (c) apple juice. The skin of the apple, processed as animal feed, is treated as a byproduct. Princess uses the estimated NRV method to allocate costs of the joint process to its joint products. The byproduct is inventoried at its selling price when produced; the net realizable value of the byproduct is used to reduce the joint production costs before the splitoff point. Details of Princess’s production process are presented here:  The apples are washed and the skin is removed in the Cutting Department. The apples are then cored and trimmed for slicing. The three joint products and the by-products are recognizable after processing in the Cutting Department. Each product is then transferred to a separate department for final processing.  The trimmed apples are forwarded to the Slicing Department, where they are sliced and frozen. Any juice generated during the slicing operation is frozen with the slices.  The pieces of apple trimmed from the fruit are processed into applesauce in the Crushing Department. The juice generated during this operation is used in the applesauce.  The core and any surplus apple pieces generated from the Cutting Department are pulverized into a liquid in the Juicing Department. There is a loss equal to 8% of the weight of the good output produced in this department.  The outside skin is chopped into animal feed and packaged in the Feed Department. It can be kept in cold storage until needed. A total of 270,000 kilograms of apples entered the Cutting Department during November. The following schedule shows the costs incurred in each department, the proportion by weight transferred to the four final processing departments, and the selling prices of each end product. Processing Data and Costs, November 2013 Proportion of Selling Price per Transferred to Kilogram of Final Departments Costs Incurred Department Product Cutting $ 72,000 Slicing 13,536 33% $0.96 Crushing 10,260 30% 0.66 Juicing 3,600 27% 0.48 Feed 840 10% 0.12 Total $100,231600% $2.22 The Princess Corporation classifies animal feed as a byproduct. The byproduct is inventoried at its selling price when produced; the net realizable value of the product is used to reduce the joint production costs before the splitoff point. Before 2013, Princess classified both apple juice and animal feed as byproducts. These byproducts were not recognized in the accounting system until sold. Revenues from their sale were treated as a revenue item at the time of sale. Page 30 of 56 The Princess Corporation uses a “management by objectives” basis to compensate its ma
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