ACCT 2230 Chapter Notes - Chapter 2: Earnings Before Interest And Taxes, Variable Cost, Income Statement

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13 Nov 2014

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Materials that become an integral part of the finished product and can be physically and easily traced to it. Small items of material such as glue & nails that may become an integral part of a finished product but the costs of tracing them exceed the benefits. Factory labour costs that can be traced easily to individual units of product. Labour costs of: janitors, supervisors, material handlers, and other factory workers that cannot be conveniently traced directly to particular products. All costs associated with manufacturing except direct materials and direct labour. The extra hourly wage rate paid to workers who must work above their normal time requirements. All costs necessary to secure customer orders and get the finished product or service to the customer. All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing, marketing, or selling. All costs that are involved in the purchase or manufacture of goods.

Related Questions

In this case, management needs assistance in evaluating andclassifying costs identified within Glaser Health Products in orderto implement an activity-based costing system. Please addressQuestions 1 through 6 at the end of the case. Based on the casequestions, you are required to provide a two to four double-spacedwritten report providing management with the necessary guidance inimplementing an activity-based costing system. The written reportshould be properly formatted according to APA guidelines anddemonstrate research and critical thinking skills. Explanations andrecommendations should be supported by at least 3 scholarly sourcesfrom the Ashford Library or other external sources, excluding thetextbook.

For Questions 1 through 3, create a chart to classify andidentify a cost driver for each of the costs provided in the text.The chart should be included as an appendix to the written report.Explanations of the classifications and identifications within thechart should be included within the written report, supported byreferences to the appendix.

Questions 4 through 6 should be addressed in fully developedexplanations/instructions as part of your written report. Thewritten analysis should be supported by at least three scholarlysources, excluding the textbook.

CASE 5A -- GLASER HEALTH PRODUCTâ:

Glaser Health Products of Ranier Falls, Georgia, is organizedfunctionally into three divisions: Operations, Sales, andAdministrative. Purchasing, receiving, materials and productioncontrol, manufacturing, factory personnel, inventory stores, andshipping activities are under the control of the vice-president foroperations, George Gottlieb. Advertising, market research, andsales are the responsibility of the vicepresident for sales, JakeBogan. Accounting, budgeting, the firm's computer center, andgeneral office management are delegated to the corporate controller(Administrative), Charlie Kaplan. The following cost categories arefound in the company as a whole:

(a) Depreciation on factory equipment.

(b) Depreciation on office equipment.

(d) Advertising manager's salary.

(e) Assembly foreman's salary.

(f) Salespersons' salaries.

(g) Salespersons' travel expenses.

(h) Supplies for the Machining Department.

(i) Advertising supplies used.

(j) Electricity for the Assembly Department.

(k) Lost materials (scrap) in a MachiningDepartment.

(l) Direct labor in the Assembly Department.

(m) Supplies for the sales office.

(n) Sales commissions.

(o) Packing supplies.

(p) Cost of hiring new employees.

(q) Payroll fringe benefits for workers in theShipping Department.

(r) Supplies for Production Scheduling.

(s) Cost of repairing parts improperly manufacturedin the Machining Department.

(t) Paint for the Assembly Department.

(u) Heat, light, and power for the factory.

(v) Leasing of computer equipment for the AccountingDepartment.

Required:

1. Identify each of the costs with the appropriate division:Operations, Sales, Administrative.

2. Identify each of the costs with one of thefollowing: (a) Unit-levelactivities. (c) Product-levelactivities. (b) Batch-levelactivities. (d) Facility-level activities. Organize theseclassifications by division: Operations, Sales, Administrative.

3. Specify an appropriate cost driver for tracing costsassociated with the various levels of activities to the next costobjective or products, whichever is appropriate.

4. Glaser Health Products is interested in using activity-basedcosting to identify as many costs as possible with the products.These costs will be used for planning and control decisions ratherthan for inventory valuation. The controller decided that alloperation costs will be related to products but only those salesand administrative costs that are classified as unit-level,batch-level, or product-level costs
should be related to products. Using preliminary stage costdrivers, explain how individual items of costs will be traced toactivity groupings.

5. Using primary stage cost drivers, show how the costs shouldbe related to products.

6. Explain why it is necessary to use preliminary stage andprimary stage cost drivers.

champagnebat418

Factor Co. can produce a unit of product for the following costs:


Direct material	$	8
Direct labor		24
Overhead		40
Total costs per unit	$	72

An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to:

Multiple Choice

Buy since the relevant cost to make it is $32.

Buy since the relevant cost to make it is $56.

Buy since the relevant cost to make it is $48.

Make since the relevant cost to make it is $32.

Make since the relevant cost to make it is $48.

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesalerâs name and would not affect Bluebirdâs sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental revenue will be:

Multiple Choice

$11,250.

$7,500.

$33,750.

$45,000.

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What should the company do?

Multiple Choice

Since both alternatives produce a loss, store the units in hopes of a better price later.

Rebuild the units.

It does not matter because both alternatives have the same result.

Sell the units as scrap.

Throw the units away.

Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,000. Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

Multiple Choice

$18,000 decrease

$52,000 increase

$76,000 increase

$22,000 increase

Derby Inc. manufactures a product which contains a small part. The company has always purchased this motor from a supplier for $125 each. Derby recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the motor instead of buying it. The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost.


Direct material	$	38
Direct labor		50
Overhead (fixed and variable)		75
Total	$	163

The required volume of output to produce the motors will not require any incremental fixed overhead. Incremental variable overhead cost is $21 per motor. What is the effect on income if Derby decides to make the motors?

Multiple Choice

Income will decrease by $23 per unit.

Income will decrease by $16 per unit.

Income will increase by $16 per unit.

Income will increase by $23 per unit.

Income will increase by $39 per unit.

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. Chang should:

Multiple Choice

Sell the units as they are because repairing them will cause their total cost to exceed their selling price.

Correct the defects and sell the units at the regular price.

Sell the units to the salvage company for $5 per unit.

Throw the units away.

Sell 1,000 units to the salvage company and repair the remainder.

Multiple Choice

$33,750.

$38,750.

$7,500.

$45,000.

$11,250.

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The incremental revenue of processing Green Health further into Premium Green and Green Deluxe would be:

Multiple Choice

$96,000.

$ 2,000.

$ 8,000.

$ 6,000.

$98,000.

The Mad Hatter Company owns a machine that manufactures two types of chimney caps. Production time is .20 hours for cap A and .40 hours for cap B. The machine's capacity is 2,000 hours per year. Both products are sold to a single customer who has agreed to buy all of the company's output up to a maximum of 1,000 units of cap A and 6,000 units of cap B. Selling prices and variable costs per unit are shown below. Based on this information, what is the Mad Hatter's most profitable sales mix?

	Cap A		Cap B
Selling price per unit	$	80	$	60
Variable costs per unit		53		42

Multiple Choice

1,000 units of cap A and 4,500 units of cap B.

10,000 units of cap A.

1,000 units of cap A and 6,000 units of cap B.

5,000 units of cap B.

1,000 units of cap A and 5,000 units of cap B.

Multiple Choice

$3.00 per unit.

$(0.60) per unit.

$7.00 per unit.

$0.60 per unit.

$(3.00) per unit.

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ACCT 2230 Chapter Notes - Chapter 2: Earnings Before Interest And Taxes, Variable Cost, Income Statement

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