Fargo Company manufactures products in batches of 100 units per batch. The company uses a standard cost system and prepares budgets that call for 500 of these batches per period. Fixed overhead is $60,000 per period. The standard costs per batch follow: Material (80 gallons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32 Labor (60 hours) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 Factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 Standard cost per batch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $764 During the period, 503 batches were manufactured, and the following costs were incurred: Materials used (40,743 gallons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,482.34 Labor (29,677 hours at $8.65 per hour) . . . . . . . . . . . . . . . . . . . . . . . . . . 256,706.05 Actual variable overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,080.00 Actual fixed overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,500.00 Required: Calculate the variances for materials, labor, and overhead. For overhead, use the two-variance method.
> Explain the concept of a cost/benefit decision and how it relates to job costing systems.
> What are the two main things that an activity-based costing system attempts to accomplish relative to direct and indirect costs?
> Explain how a budgeted income statement for a service business may be used for both planning and control purposes.
> What is the difference between the accounting treatment of overhead for a service business and for a manufacturer?
> Why is it important for professional labor hours to be budgeted with extreme care?
> The budget for the Baldwin Equipment, Inc. job in P9-1 consisted of the following amounts: Partners’ salary and overhead . . . . . . . . . . . . . $6,300 Associates’ salary and overhead . . . . . . . . . . . 9,175 Travel . . . . . . . . . . . . . . . .
> Manufacturing data for the months of January and February in the Mixing Department of Cappy Cleaning Products follow: All materials are added at the start of the process. Labor and factory overhead are added evenly throughout the process. No units were
> Shank and Verst, attorneys-at-law, provided legal representation to Baldwin Equipment, Inc., in a product liability suit. Twenty partner hours and 65 associate hours were worked in defending the company. The cost of each partner hour is $325, which inclu
> Dayton Dairies is a vertically integrated company that has dairy farms, processing plants, and retail ice cream stores. Dayton’s strategy is to maximize shareholder value by providing top-of the- line ice cream products that are high in butter fat and fo
> Mercury Athletics manufactures sporting goods that are then sold to retailers. It is a very competitive industry where quality and price are important to gain space on retailers’ shelves. Mercury’s strategy is to produce defect-free athletic equipment th
> Referring to P9-6, compare the results of the cost allocations to the Young Products and Doug’s Markets jobs under the simplified costing system and the activity-based costing system. Label each difference as undercosted or overcosted relative to the sim
> Boyer and Kubek, architects, have been using a simplified costing system in which all professional labor costs are included in a single direct cost category, professional labor; and all overhead costs are included in a single indirect cost pool, professi
> The partners of Mayweather and Pacquiao, a security services firm, decide to implement an activity-based costing system. They identify the following three cost pools and budgeted amounts for each for the coming year: fringe benefits, $400,000; technology
> Matthews and Thomas, the systems consultants, budgeted overhead and other expenses as follows for the year ended December 31, 2011: Overhead: Depreciation—equipment . . . . . . . . . . . . . . . $ 60,000 Depreciation—building . . . . . . . . . . . . .
> Matthews and Thomas, partners in a systems consulting firm, budgeted the following professional labor hours for the year ended December 31, 2011: Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 Associates . . . . . .
> Ed Hickey, the consultant introduced at the beginning of section two of the chapter has obtained the following data relative to the Kaufman and D’Esti consulting job: Assume that the Binghamton job will require 50 partner hours and 20
> One of the service businesses referred to in the chapter was the international accounting firm of PricewaterhouseCoopers (PwC). Go to the text Web site at www.cengage.com/accounting/vanderbeck and click on the link to PricewaterhouseCoopers’ Web site. T
> Boone Oil Company transports crude oil to its refinery where it is processed into main products gasoline, kerosene, and diesel fuel, and by-product base oil. The base oil is sold at the split-off point for $500,000 of annual revenue, and the joint proces
> Brown and Stetham, plumbers, successfully bid $30,000 for the plumbing work on a new luxury home. Total direct labor cost on the job was $9,500, other direct costs were $2,500, and overhead is charged to jobs at 150% of direct labor cost. 1. Compute the
> Hayes and Manolis have a professional service firm that has the following budgeted costs for the current year: Associates’ salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 Depreciation—equipment . . . .
> Hi-End, Inc., a chain of gasoline service stations, has a strategy of charging premium prices for its gasoline by providing excellent service such as attendants to pump gas, clean restrooms, and free air for tire inflation. Its balanced scorecard perform
> From the following list of performance measures, label each one as Financial, Customer, Internal Business Processes, or Learning and Growth: Percentage of on-time deliveries Employee turnover ratio Revenue from new products Number of new customers Perc
> The partners of Harris and Whelan, attorneys-at-law, decide to implement an activity-based costing system for their firm. They identify the following three cost pools and budgeted amounts for each for the coming year: fringe benefits, $450,000; paralegal
> Jones and Wang, physicians, budgeted for the following revenue and expenses for the month of September: Depreciation—equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,850 Fringe benefits . . . . . . . . . . . . .
> Chiao and Piaker, CPAs, budgeted for the following professional labor hours for the coming year: partners, 1,500; managers, 5,000; and staff, 20,000. Budgeted billing rates are: partners, $250 per hour; managers, $120 per hour; and staff accountants, $80
> Is a favorable variance ‘‘good’’ and an unfavorable variance ‘‘bad’’? Explain.
> How do rate and efficiency variances relate to labor costs?
> How are standards for materials and labor costs determined?
> Chikin, Inc., specializes in chicken farming. Chickens are raised, packaged, and sold mostly to grocery chains. Chickens are accounted for in batches of 50,000. At the end of each growing period, the chickens are separated and sold by grades. Grades AA a
> How does a standard cost accounting system work, and why is it valuable to management?
> What is the significance of a volume variance?
> What is a volume variance?
> Why is it important to determine controllable variances?
> Is it possible that a variance of one type might be partially or fully offset by another variance? Explain.
> What might cause the following labor variances? a. An unfavorable labor rate variance. b. A favorable labor rate variance. c. An unfavorable labor efficiency variance. d. A favorable labor efficiency variance.
> What might cause the following materials variances? a. An unfavorable materials price variance. b. A favorable materials price variance. c. An unfavorable materials quantity variance. d. A favorable materials quantity variance.
> When a company uses a standard cost system, are the inventory accounts—Finished Goods, Work in Process, and Materials—valued at actual cost or standard cost?
> TBA Products Company manufactures a variety of products made of plastic and aluminum components. During the winter months, substantially all of the production capacity is devoted to the production of lawn sprinklers for the following spring and summer se
> Stylized Products, Inc., uses a standard cost system in accounting for the cost of production of its only product, Suave. The standards for the production of one unit of Suave follow: Direct materials: 10 feet of Class at $0.75 per foot and 3 feet of Chi
> Sinaloa Products Co. uses the process cost system. A record of the factory operations for the month of October follows: Production Summary Units Started in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500 Finished and t
> Prado Corporation manufactures and sells a single product. The company uses a standard cost system. The standard cost per unit of product follows: Materials—1 lb plastic@$3.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.00
> Accelerator, Inc., manufactures a fuel additive, Surge, that has a stable selling price of $44 per drum. The company has been producing and selling 80,000 drums per month. In connection with your examination of Accelerator’s financial s
> Folsom Fabricators, Inc., uses a standard cost system to account for its single product. The standards established for the product include the following: Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> Ichiro Inspections, Inc., specializes in determining whether a building or house’s drain pipes are properly tied into the city’s sewer system. The company pours colored chemical through the pipes and collects an inspection sample from each outlet, which
> Wausau Furniture Company uses a standard cost system in accounting for its production costs. The standard cost of a unit of furniture follows: The following flexible monthly overhead budget applies: Direct Labor Hours Estimated Overhead 5,200 $2
> Using the data provided, Calculate the overhead cost variances under the three-variance method. Standard Cost Sheet (Normal capacity-1,000 units) Mixing Blending Total Materials: I-2 lb @ $2 per Ib $ 4 Il-2 Ib @ $1 per Ib $ 2 $ 6 Labor. 2hr @ $5
> Tech-Elec Manufacturing Company estimates the following labor and overhead costs for the period: Variable overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44,200 Fixed overhead . . . . . . . . . . . . . . . . .
> K-Rod Corporation uses a standard cost system and manufactures one product. The variable costs per product follow: Materials (4 parts) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 Labor (2 hours) .
> Metropolis Manufacturing Company manufactures a small electric motor that is a replacement part for the more popular gas furnaces. The standard cost card shows the product requirements as follows: Direct materials—2 lb @$4 per lb . . .
> Gold Giant Products, Inc., cans peas and uses an average cost system. For the month of November, the company showed the following: Each can contain 16 oz, or 1 lb, of peas. Required: 1. Calculate the cost of the completed production for November. 2. Sho
> Poway Shirts, Inc., manufactures men’s sport shirts for large stores. Folsom produces a single quality shirt in lots of a dozen according to each customer’s order and attaches the store’s label. The s
> The standard specifications for an electric motor manufactured by B&B Electric Corporation follow: Standard cost per unit: Materials (2 lb $5 per lb) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.00 Labor (4 hr $6 per h
> On May 1, Maximus Company began the manufacture of a new mechanical device known as Caesar. The company installed a standard cost system in accounting for manufacturing costs. The standard costs for a unit of Caesar follow: Raw materials (5 lb@$1 per lb)
> Suzy-Q Corporation has established the following standard cost per unit: Materials—5.5 lb@$2.20 per lb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.10 Labor—1.8 hr@$6.25 per hr . . . . . . . . . . . . . . . . . . . . . . . . .
> The standard cost summary for the most popular product of Phase-Five Products Company is shown as follows, together with production and cost data for the period. Standard Cost Summary Materials: 2 gallons of liquid lead@$2.00 . . . . . . . . . . . . . .
> Cost and production data for Biloxi Beverages, Inc., are presented as follows. Required: 1. Calculate net variances for materials, labor, and factory overhead. 2. a. Calculate specific materials and labor variances by department, using the diagram form
> This includes standards for such items as food, labor, and paper products. Given the level of sales volume achieved, the actual costs incurred are compared to the standard costs that should have been achieved for each cost item. Go to the text Web site a
> AACSB Processors, Inc., produces an average of 10,000 units each month. The factory standards are 20,000 hours of direct labor and 10,000 pounds of materials for this volume. The standard cost of direct labor is $9.00 per hour, and the standard cost of m
> Overhead Doors, Inc., manufactures garage doors for homes. The standard quantity of direct labor to manufacture a door is 4.5 hours. The standard hourly wage in this department is $12.50 per hour. During August, 6,100 doors were produced. The payroll rec
> D-List Calendar Company specializes in manufacturing calendars that depict obscure comedians. The company uses a standard cost system to control its costs. During one month of operations, the direct materials costs and the quantities of paper used showed
> Akron Manufacturing Company manufactures a cement sealing compound called Ultra-Seal. The process requires that the product pass through three departments. In Dept. 1, all materials are put into production at the beginning of the process; in Dept. 2, mat
> 1,000 units were started and finished. Case 1: All prices and quantities for the cost elements are standard, except for materials cost, which is $8.50 per pound. Case 2: All prices and quantities for the cost elements are standard, except that 1,900 pou
> Using the data shown, calculate the following overhead variances: Production for the month . . . . . . . . . . . . . . . . . . . . . . . . 9,000 units Direct labor hours used . . . . . . . . . . . . . . . . . . . . . . . . . . 18,500 hours Factory over
> Georgia Gasket Company budgets 8,000 direct labor hours for the year. The total overhead budget is expected to amount to $20,000. The standard cost for a unit of the company’s product estimates the variable overhead as follows: Variable factory overhead
> The overhead application rate for a company is $2.50 per unit, made up of $1.00 for fixed overhead and $1.50 for variable overhead. Normal capacity is 10,000 units. In one month, there was an unfavorable controllable variance of $200. Actual overhead for
> The normal capacity of a manufacturing plant is 30,000 direct labor hours or 20,000 units per month. Standard fixed costs are $6,000, and variable costs are $12,000. Data for two months follow: For each month, make a single journal entry to charge overh
> The standard capacity of a factory is 8,000 units per month. Cost and production data follow: Standard application rate for fixed overhead . . . . . . $0.50 per unit Standard application rate for variable overhead . . . $1.50 per unit Production—Mon
> Marblehead Manufacturing, Inc., has two departments, Mixing and Blending. When goods are completed in Mixing, they are transferred to Blending and then to the finished goods storeroom. There was no beginning or ending work in process in either department
> Last year, Tri-Rivers Corporation adopted a standard cost system. Labor standards were set on the basis of time studies and prevailing wage rates. Materials standards were determined from materials specifications and the prices then in effect. On June 30
> Assume that during the month of April the production report of Austin Adhesives, Inc., in E8-10 revealed the following information: Units produced during the month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000 Direct labor hours for
> Handyman Helper, Inc., manufactures household products such as windows, light fixtures, ladders, and work tables. During the year it produced 10,000 Model 10X windows but only sold 5,000 units at $40 each. The remaining units cannot be sold through norma
> The normal capacity of Austin Adhesives, Inc., is 40,000 direct labor hours and 20,000 units per month. A finished unit requires 6 pounds of materials at an estimated cost of $2 per pound. The estimated cost of labor is $10.00 per hour. The plant estimat
> Janitorial Products, Inc., manufactures two products, brooms and mops, which are sold in two territories designated by the company as East Territory and West Territory. The following income statement prepared for the company shows the product line segmen
> Briefly define the terms proprietorship, partnership, and corporation.
> Under what circumstance the U.S. dollar and the Canadian dollar would be said to have achieved purchasing power parity?
> Banks like to make short-term, self-liquidating loans to businesses. Why?
> What are the pros and cons of commercial paper relative to bank loans for a company seeking shorter financing?
> What are compensating balances and why do banks require them from some customers? Under what circumstances would banks be most likely to impose compensating balances?
> Can a company have a default rate on its accounts receivable that is too low? Explain.
> Describe how society's interests can influence financial managers.
> What is the matching principle of working capital financing? What are the benefits of following this principle?
> What is the effect of stock (not cash) dividends and stock splits on the market price of common stock? Why do corporations declare stock splits and stock dividends?
> Do you believe an increased common stock cash dividend can send a signal to the common stockholders? If so, what signal might it send?
> Define the following terms that relate to a convertible bond: conversion ratio, conversion value, and straight bond value.
> What is the financial leverage effect and what causes it? What are the potential benefits and negative consequences of high financial leverage?
> What is the operating leverage effect and what causes it? What are the potential benefits and negative consequences of high operating leverage?
> If an optimal capital structure exists, what are the reasons why too little debt is as undesirable as is too much debt?
> What is an LBO? What are the risks for the equity investors and what are the potential rewards?
> Give two examples of types of companies that would be best able to handle high debt levels.
> Compare and contrast the book value and liquidation value per share for common stock. Is one method more reliable? Explain.
> How are financial trades made on an organized exchange?
> What is the relationship between a bond's market price and its promised yield to maturity? Explain.
> Explain the difference between the discounted free cash flow models as it is applied to the valuation of common equity and as it is applied to the valuation of complete businesses.
> Answer the following questions about the discounted free cash flow model illustrated in Figure 12-4: a. What are “free cash flows?” b. Explain the terminal value calculation at the end of the forecast period. Why is it necessary? c. Explain the term “pre
> How do opportunity costs affect the capital budgeting decision-making process?
> How and why does working capital affect the incremental cash flow estimation for a proposed large capital budgeting project? Explain.
> What are the advantages and disadvantages of the internal rate of return method?
> How do we calculate the payback period for a proposed capital budgeting project? What are the main criticisms of the payback method?
> Explain how using a risk-adjusted discount rate improves capital budgeting decision making compared to using a single discount rate for all projects?
> Why is the coefficient of variation a better risk measure to use than the standard deviation when evaluating the risk of capital budgeting projects?
