Klumper corporation is a diversified

W5 Assignment

Complete homework exercises in Word or Excel.

Chapter 6: Exercises 2, 3, 4, 5

Chapter 7: Exercises 2, 4, 8, 10 and case 29

EXERCISE 6–2 First Stage Allocation [LO6–2]

SecuriCorp operates a fleet of armored cars that make scheduled pickups and deliveries in the Los Angeles area. The company is implementing an activity-based costing system that has four activity cost pools: Travel, Pickup and Delivery, Customer Service, and Other. The activity measures are miles for the Travel cost pool, number of pickups and deliveries for the Pickup and Delivery cost pool, and number of customers for the Customer Service cost pool. The Other cost pool has no activity measure because it is an organization-sustaining activity. The following costs will be assigned using the activity-based costing system:

Driver and guard wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 720,000

Vehicle operating expense . . . . . . . . . . . . . . . . . . . . . . . . . .

280,000

Vehicle depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

120,000

Customer representative salaries and expenses . . . . . . . .

160,000

Office expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30,000

Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .

 320,000

Total cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,630,000

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The distribution of resource consumption across the activity cost pools is as follows:

Required:

Complete the first stage allocations of costs to activity cost pools as illustrated in Exhibit 6–6.

EXERCISE 6–3 Compute Activity Rates [LO6–3]

Green Thumb Gardening is a small gardening service that uses activity-based costing to estimate costs for pricing and other purposes. The proprietor of the company believes that costs are driven primarily by the size of customer lawns, the size of customer garden beds, the distance to travel to customers, and the number of customers. In addition, the costs of maintaining garden beds depends on whether the beds are low maintenance beds (mainly ordinary trees and shrubs) or high maintenance beds (mainly flowers and exotic plants). Accordingly, the company uses the five activity cost pools listed below:

Activity Cost Pool

Activity Measure

Caring for lawn. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Square feet of lawn

Caring for garden beds—low maintenance . . . . . . . . . . . . . .

Square feet of low maintenance beds

Caring for garden beds—high maintenance. . . . . . . . . . . . . .

Square feet of high maintenance beds

Travel to jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Miles

Customer billing and service . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of customers

The company has already completed its first stage allocations of costs and has summarized its annual costs and activity as follows:

Activity Cost Pool

Estimated Overhead Cost

Expected Activity

Caring for lawn. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$72,000

150,000 square feet of lawn

Caring for garden beds—low maintenance. . . . . . . . . . . . . .

$26,400

 20,000 square feet of low maintenance beds

Caring for garden beds—high maintenance. . . . . . . . . . . . .

$41,400

 15,000 square feet of high maintenance beds

Travel to jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

 $3,250

 12,500 miles

Customer billing and service . . . . . . . . . . . . . . . . . . . . . . . . . .

 $8,750

   25 customers

Required:

Compute the activity rate for each of the activity cost pools.

EXERCISE 6–4 Second-Stage Allocation [LO6–4]

Klumper Corporation is a diversified manufacturer of industrial goods. The company’s activity-based costing system contains the following six activity cost pools and activity rates:

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Activity Cost Pool

Activity Rates

Supporting direct labor. . . . . . . . . . . . . . . . . . . . . .

 $6.00 per direct labor-hour

Machine processing . . . . . . . . . . . . . . . . . . . . . . . .

 $4.00 per machine-hour

Machine setups . . . . . . . . . . . . . . . . . . . . . . . . . . .

 $50.00 per setup

Production orders. . . . . . . . . . . . . . . . . . . . . . . . .

 $90.00 per order

Shipments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

 $14.00 per shipment

Product sustaining . . . . . . . . . . . . . . . . . . . . . . . .

$840.00 per product

Activity data have been supplied for the following two products:

Total Expected Activity

K425

M67

Number of units produced per year. . . .

200

2,000

Direct labor-hours . . . . . . . . . . . . . . . . . .

 80

 500

Machine-hours. . . . . . . . . . . . . . . . . . . . .

100

1,500

Machine setups . . . . . . . . . . . . . . . . . . . .

 1

  4

Production orders. . . . . . . . . . . . . . . . . . .

 1

  4

Shipments. . . . . . . . . . . . . . . . . . . . . . . . .

 1

  10

Product sustaining . . . . . . . . . . . . . . . . . .

 1

  1

Required:

Determine the total overhead cost that would be assigned to each of the products listed above in the activity-based costing system.

EXERCISE 6–5 Product and Customer Profitability Analysis [LO6–4, LO6–5]

Thermal Rising, Inc., makes paragliders for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paragliders. Management has designed an activity-based costing system with the following activity cost pools and activity rates:

Activity Cost Pool

Activity Rate

Supporting direct labor. . . . . . . . . . . . . . .

 $26 per direct labor-hour

Order processing . . . . . . . . . . . . . . . . . . .

$284 per order

Custom design processing. . . . . . . . . . .

$186 per custom design

Customer service . . . . . . . . . . . . . . . . . .

$379 per customer

Management would like an analysis of the profitability of a particular customer, Big Sky Outfitters, which has ordered the following products over the last 12 months:

Standard Model

Custom Design

Number of gliders. . . . . . . . . . . . . . . . . . . . .

  20

   3

Number of orders . . . . . . . . . . . . . . . . . . . . .

   1

   3

Number of custom designs . . . . . . . . . . . . .

   0

   3

Direct labor-hours per glider. . . . . . . . . . . .

 26.35

 28.00

Selling price per glider . . . . . . . . . . . . . . . .

$1,850

$2,400

Direct materials cost per glider . . . . . . . . .

 $564

 $634

The company’s direct labor rate is $19.50 per hour.

Required:

Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters.

EXERCISE 7–2 Dropping or Retaining a Segment [LO 7–2]

The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.

Required:

1. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer.

2. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.

EXERCISE 7–4 Evaluating a Special Order [LO 7–4]

Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $189.95 and its unit product cost is $149.00 as shown below:

Direct materials. . . . . . . . . . . . . . . . . . . . . .

$ 84.00

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . .

45.00

Manufacturing overhead. . . . . . . . . . . . . . .

20.00

Unit product cost. . . . . . . . . . . . . . . . . . . . .

$149.00

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $4.00 of the overhead is variable with respect to the number of bracelets produced. The customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $2.00 per bracelet and would also require acquisition of a special tool costing $250 that would have no other use once the special order is completed. This order would have no effect on the company’s regular sales and the order could be fulfilled using the company’s existing capacity without affecting any other order.

Required:

What effect would accepting this order have on the company’s net operating income if a special price of $169.95 per bracelet is offered for this order? Should the special order be accepted at this price?

EXERCISE 7–8 Utilization of a Constrained Resource [LO 7–5, LO 7–6]

Barlow Company manufactures three products: A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow:

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Product

A

B

C

Selling price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$180

$270

$240

Variable expenses:

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24

72

32

Other variable expenses. . . . . . . . . . . . . . . . . . . . . .

102

90

148

Total variable expenses. . . . . . . . . . . . . . . . . . . . . . . .

126

162

180

Contribution margin. . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 54

$108

$ 60

Contribution margin ratio. . . . . . . . . . . . . . . . . . . . . . . .

30%

40%

25%

The same raw material is used in all three products. Barlow Company has only 5,000 pounds of raw material on hand and will not be able to obtain any more of it for several weeks due to a strike in its supplier’s plant. Management is trying to decide which product(s) to concentrate on next week in filling its backlog of orders. The material costs $8 per pound.

Required:

1. Compute the amount of contribution margin that will be obtained per pound of material used in each product.

2. Which orders would you recommend that the company work on next week—the orders for product A, product B, or product C? Show computations.

3. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials? Explain.

EXERCISE 7–10 Make or Buy a Component [LO 7–3]

For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $8.40 per unit purchase price:

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Per Unit

Total

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3.10

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.70

Supervision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.50

$60,000

Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.00

$40,000

Variable manufacturing overhead. . . . . . . . . . . . . . .

0.60

Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.30

$12,000

Total production cost. . . . . . . . . . . . . . . . . . . . . . . . .

$9.20

A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $80,000 per period. Depreciation is due to obsolescence rather than wear and tear.

Required:

Prepare computations showing how much profits will increase or decrease as a result of making the starters.

case 29

CASE 7–29 Sell or Process Further Decision [LO 7–7]

The Scottie Sweater Company produces sweaters under the “Scottie” label. The company buys raw wool and processes it into wool yarn from which the sweaters are woven. One spindle of wool yarn is required to produce one sweater. The costs and revenues associated with the sweaters are given below:

Per Sweater

Selling price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$30.00

Cost to manufacture:

Raw materials:

Buttons, thread, lining. . . . . . . . . . . . . . . . . .

$ 2.00

Wool yarn. . . . . . . . . . . . . . . . . . . . . . . . . . . .

16.00

Total raw materials. . . . . . . . . . . . . . . . . . . . . .

18.00

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.80

Manufacturing overhead. . . . . . . . . . . . . . . . .

8.70

32.50

Manufacturing profit (loss). . . . . . . . . . . . . . . . . .

$ (2.50)

Originally, all of the wool yarn was used to produce sweaters, but in recent years a market has developed for the wool yarn itself. The yarn is purchased by other companies for use in production of wool blankets and other wool products. Since the development of the market for the wool yarn, a continuing dispute has existed in the Scottie Sweater Company as to whether the yarn should be sold simply as yarn or processed into sweaters. Current cost and revenue data on the yarn are given below:

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Per Spindle of Yarn

Selling price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$20.00

Cost to manufacture:

Raw materials (raw wool). . . . . . . . . . . . . . . . . . . . . . .

$7.00

Direct labor. . . . . . . . . . . . .

3.60

Manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . . .

5.40

16.00

Manufacturing profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4.00

The market for sweaters is temporarily depressed, due to unusually warm weather in the western states where the sweaters are sold. This has made it necessary for the company to discount the selling price of the sweaters to $30 from the normal $40 price. Since the market for wool yarn has remained strong, the dispute has again surfaced over whether the yarn should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweaters should be discontinued; she is upset about having to sell sweaters at a $2.50 loss when the yarn could be sold for a $4.00 profit. However, the production superintendent does not want to close down a large portion of the factory. He argues that the company is in the sweater business, not the yarn business, and that the company should focus on its core strength.

All of the manufacturing overhead costs are fixed and would not be affected even if sweaters were discontinued. Manufacturing overhead is assigned to products on the basis of 150% of direct labor cost. Materials and direct labor costs are variable.

Required:

1. Would you recommend that the wool yarn be sold outright or processed into sweaters? Support your answer with appropriate computations and explain your reasoning.

2. What is the lowest price that the company should accept for a sweater? Support your answer with appropriate computations and explain your reasoning.