Frankline Airlines and Fanning Chicken Corporation

QUESTION 1 Solomon Electronics produces video games in three market categories: commercial, home, and miniature. Solomon has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers: Category Total Pooled Cost Unit $823,200 Batch 637,200 Product Facility 211,900 542,900 Types of Costs Indirect labor wages, supplies, factory utilities, machine maintenance Materials handling, inventory storage, labor for setups,packaging, labeling and shipping, scheduling Research and development Rent, general utilities, maintenance, facility depreciation, admin. salaries Additional data for each of the product lines follow: Commercial Home Miniature Direct materials $ 35.20/unit $ 23.20/unit $ 30.30/unit cost Direct labor $ 14.90/hour $ 14.90/hour $ 17.50/hour cost Number of labor 5,900 12,500 2,900 hours Number of 18,000 43,000 23,000 machine hours Number of production 200 2,000 600 orders Research and 13% 21% 66% development time Number of units 18,000 41,000 17,000 Square footage 18,000 48,000 23,000 Required Total — — 21,300 84,000 2,800 100% 76,000 89,000 Machin Number Time s Square a. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines. b. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines. (For all requirements, round intermediate calculations for allocation rates to 2 decimal places and all other calculations to the nearest whole dollar. Round “Cost per Unit” to 2 decimal places. Round your answers for “Total Cost” to the nearest whole dollar amount.) 2)Walton Academy is a profit-oriented education business. Walton provides remedial training for high school students who have fallen behind in their classroom studies. It charges its students $2,045 per course. During the previous year, Walton provided instruction for 1,000 students. The income statement for the company follows: Revenue Cost of instructors Overhead costs Net income $ 2,045,000 (1,394,000) $ (395,000) 256,000 The company president, Andria Rossi, indicated in a discussion with the accountant, Sam Trent, that she was extremely pleased with the growth in the area of computer-assisted instruction. She observed that this department served 200 students using only two part-time instructors. In contrast, the classroom-based instructional department required 32 instructors to teach 800 students. Ms. Rossi noted that the per-student cost of instruction was dramatically lower for the computer-assisted department. She based her conclusion on the following information: Walton pays its part-time instructors an average of $41,000 per year. The total cost of instruction and the cost per student are computed as follows: CHAPTER 6 Q1 Type of Instruction Number of instructors (a) Number of students (b) Total cost (c = a × $ $41,000) Cost per student (c ÷ $ b) ComputerAssisted Classroom 2 32 200 800 82,000 $1,312,000 410 $ 1,640 Assuming that overhead costs were distributed equally across the student population, Ms. Rossi concluded that the cost of instructors was the critical variable in the company’s capacity to generate profits. Based on her analysis, her strategic plan called for heavily increased use of computer-assisted instruction. Mr. Trent was not so sure that computer-assisted instruction should be stressed. After attending a seminar on activity-based costing (ABC), he believed that the allocation of overhead cost could be more closely traced to the different types of learning activities. To facilitate an activity-based analysis, he developed the following information about the costs associated with computer-assisted versus classroom instructional activities. He identified $312,000 of overhead costs that were directly traceable to computer-assisted activities, including the costs of computer hardware, software, and technical assistance. He believed the remaining $83,000 of overhead costs should be allocated to the two instructional activities based on the number of students enrolled in each program. Required a. Based on the preceding information, determine the total cost and the cost per student to provide courses through computer-assisted instruction versus classroom instruction. (Do not round intermediate calculations. Round “Cost per student” to 2 decimal places.) CHAPTER 4 1)Franklin Airlines is a small airline that occasionally carries overload shipments for the overnight delivery company Never-Fail, Inc. Never-Fail is a multimillion-dollar company started by Wes Never immediately after he failed to finish his first accounting course. The company’s motto is “We Never-Fail to Deliver Your Package on Time.” When Never-Fail has more freight than it can deliver, it pays Franklin to carry the excess. Franklin contracts with independent pilots to fly its planes on a per-trip basis. Franklin recently purchased an airplane that cost the company $4,845,000. The plane has an estimated useful life of 25,500,000 miles and a zero salvage value. During the first week in January, Franklin flew two trips. The first trip was a round trip flight from Chicago to San Francisco, for which Franklin paid $280 for the pilot and $230 for fuel. The second flight was a round trip from Chicago to New York. For this trip, it paid $230 for the pilot and $115 for fuel. The round trip between Chicago and San Francisco is approximately 4,600 miles and the round trip between Chicago and New York is 1,100 miles. Required a. Select if the costs mentioned below are direct or indirect. b. Determine the total cost of each 2) Franklin Manufacturing Company makes tents that it sells directly to camping enthusiasts through a mail-order marketing program. The company pays a quality control expert $98,050 per year to inspect completed tents before they are shipped to customers. Assume that the company completed 1,600 tents in January and 1,170 tents in February. For the entire year, the company expects to produce 18,500 tents. Required c. If the cost objective is to determine the cost per tent, is the expert’s salary a direct or an indirect cost? d. How much of the expert’s salary should be allocated to tents produced in January and February? 3) Fanning Chicken Corporation processes and packages chicken for grocery stores. It purchases chickens from farmers and processes them into two different products: chicken drumsticks and chicken steak. From a standard batch of 15,000 pounds of raw chicken that costs $7,750, the company produces two parts: 2,800 pounds of drumsticks and 5,000 pounds of breast for a processing cost of $4,025. The chicken breast is further processed into 4,200 pounds of steak for a processing cost of $1,900. The market price of drumsticks per pound is $1.50 and the market price per pound of chicken steak is $3.90. If Fanning decided to sell chicken breast instead of chicken steak, the price per pound would be $2.30. Required 1. a-1. Allocate the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base. 2. a-2. Calculate the gross profit for each product. 3. a-3. If the drumsticks are producing a loss, should that product line be eliminated? 4. b-1. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base. 5. b-2. Calculate the gross profit for each product. 6. c-1. Should Martin further process chicken breasts into chicken steak? (Use the assumption made in requirement b-1). 7. c-2. How would the profit be affected by your answer in c-1? 4)Stuart Manufacturing Company uses two departments to make its products. Department I is a cutting department that is machine intensive and uses very few employees. Machines cut and form parts and then place the finished parts on a conveyor belt that carries them to Department II, where they are assembled into finished goods. The assembly department is labor intensive and requires many workers to assemble parts into finished goods. The company’s manufacturing facility incurs two significant overhead costs: employee fringe benefits and utility costs. The annual costs of fringe benefits are $308,000 and utility costs are $236,000. The typical consumption patterns for the two departments are as follows: Department I Machine hours used Direct labor hours used 14,600 6,400 Department Total II 5,400 20,000 9,600 16,000 The supervisor of each department receives a bonus based on how well the department controls costs. The company’s current policy requires using a single allocation base (machine hours or labor hours) to allocate the total overhead cost of $544,000. Required a. Assume that you are the supervisor of Department I. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected. b. Assume that you are the supervisor of Department II. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected. c. Assume that you are the plant manager and have the authority to change the company’s overhead allocation policy. Formulate an overhead allocation policy that would be fair to the supervisors of both Department I and Department II. Compute the overhead allocations for each department using your policy. 5) Rundle Information Services, Inc., has two service departments: human resources and billing. Rundle’s operating departments, organized according to the special industry each department serves, are health care, retail, and legal services. The billing department supports only the three operating departments, but the human resources department supports all operating departments and the billing department. Other relevant information follows. Human Resources Legal Services Billing Health Care Retail Number of 20 50 201 151 98 employees Annual $ 900,000 $1,910,000 $ 6,110,000 $4,910,000 $ 2,910,000 cost* Annual — — $10,100,000 $5,650,000 $ 4,250,000 revenue *This is the operating cost before allocating service department costs. Required a. Allocate service department costs to operating departments, assuming that Rundle adopts the step method. The company uses the number of employees as the base for allocating human resources department costs and department annual revenue as the base for allocating the billing department costs. b. Allocate service department costs to operating departments, assuming that Rundle adopts the direct method. The company uses the number of employees as the base for allocating the human resources department costs and department annual revenue as the base for allocating the billing department costs. c. Compute the total allocated cost of service centers for each operating department using each allocation method. CHAPTER 4 EXECISES 1) Benson Services Company has 69 employees, 22 of whom are assigned to Division A and 47 to Division B. Benson incurred $422,970 of fringe benefits cost during year 2. Required Determine the amount of the fringe benefits cost to be allocated to Division A and to Division B. 2) ernon Corporation expects to incur indirect overhead costs of $168,075 per month and direct manufacturing costs of $14 per unit. The expected production activity for the first four months of the year are as follows. January February March April Estimated production in units 4,800 8,300 4,900 6,900 Required a. Calculate a predetermined overhead rate based on the number of units of product expected to be made during the first four months of the year. b. Allocate overhead costs to each month using the overhead rate computed in Requirement a. c. Calculate the total cost per unit for each month using the overhead allocated in Requirement b. 3) Adams Manufacturing Company produced 2,700 units of inventory in January year 2. It expects to produce an additional 9,000 units during the remaining 11 months of the year. In other words, total production for year 2 is estimated to be 11,700 units. Direct materials and direct labor costs are $69 and $59 per unit, respectively. Adams expects to incur the following manufacturing overhead costs during the year 2 accounting period. Production supplies Supervisor salary Depreciation on equipment Utilities Rental fee on manufacturing facilities $ 5,700 179,000 135,000 27,000 232,450 Required a. Combine the individual overhead costs into a cost pool and calculate a predetermined overhead rate assuming the cost driver is number of units. b. Determine the cost of the 2,700 units of product made in January. c. 4) Walton Hats Corporation manufactures three different models of hats: Vogue, Beauty, and Glamour. Walton expects to incur $625,000 of overhead cost during the next fiscal year. Other budget information follows. Vogue Beauty Glamour Direct labor hours Machine hours 5,400 7,400 1,500 1,400 Total 12,200 25,000 2,100 5,000 Required a. Use direct labor hours as the cost driver to compute the allocation rate and the budgeted overhead cost for each product. b. Use machine hours as the cost driver to compute the allocation rate and the budgeted overhead cost for each product. c. 5) Rooney Company makes three products in its factory: plastic cups, plastic tablecloths, and plastic bottles. The expected overhead costs for the next fiscal year include the following. Factory manager’s salary $ 229,350 Factory utility cost 79,000 Factory supplies 20,000 Total overhead costs $ 328,350 Rooney uses machine hours as the cost driver to allocate overhead costs. Budgeted machine hours for the products are as follows. Cups Tablecloths Bottles Total machine hours 290 Hours 725 975 1,990 Required a. Allocate the budgeted overhead costs to the products 6) Stuart Manufacturing Co. expects to make 30,300 chairs during the year 1 accounting period. The company made 4,800 chairs in January. Materials and labor costs for January were $16,600 and $25,400, respectively. Stuart produced 2,200 chairs in February. Material and labor costs for February were $9,500 and $12,700, respectively. The company paid the $848,400 annual rental fee on its manufacturing facility on January 1, year 1. The rental fee is allocated based on the total estimated number of units to be produced during the year. Required Assuming that Stuart desires to sell its chairs for cost plus 25 percent of cost, what price should be charged for the chairs produced in January and February? (Round intermediate calculations and final answers to 2 decimal places.) 7) Benson Chemical Company makes three products, B7, K6, and X9, which are joint products from the same materials. In a standard batch of 386,300 pounds of raw materials, the company generates 73,200 pounds of B7, 166,700 pounds of K6, and 146,400 pounds of X9. A standard batch costs $2,317,800 to produce. The sales prices per pound are $5, $15, and $20 for B7, K6, and X9, respectively. Required a. Allocate the joint product cost among the three final products using weight as the allocation base. b. Allocate the joint product cost among the three final products using market value as the allocation base. 8) Gibson Corporation’s computer services department assists two operating departments in using the company’s information system effectively. The annual cost of computer services is $549,000. The production department employs 37 employees, and the sales department employs 24 employees. Gibson uses the number of employees as the cost driver for allocating the cost of computer services to operating departments. Required Allocate the cost of computer services to operating departments. EXERCISE 5 QUESTIONS 1) Stuart Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows: Activity Pools Cost Pool Total Cost Driver Repair and maintenance on assembly machine $ 95,200 Programming cost 100,800 Software inspections Product testing Total overhead cost 7,040 8,320 211,360 $ Number of produced Number of hours Number of Number of units programming inspections tests Expected activity for each product follows: Number of Units Decoder P Decoder Q Total Number of Programming Hours Number of Number Inspections of Tests 17,000 1,800 198 1,600 39,000 2,400 122 1,600 56,000 4,200 320 3,200 Required a. Compute the overhead rate for each activity pool. b. Determine the overhead cost allocated to each product. 2) Snowden Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows: Activity Pools Repair and maintenance on assembly machine Cost Pool Total $ 128,800 Programming cost 167,200 Software inspections Product testing Total overhead cost 26,000 30,000 352,000 Expected activity for each product follows: $ Cost Driver Number of units produced Number of programming hours Number of inspections Number of tests Number of Units Decoder P Decoder Q Total Number of Programming Hours Number of Number Inspections of Tests 16,800 2,100 494 1,400 39,200 1,700 156 1,100 56,000 3,800 650 2,500 Assume that before shifting to activity-based costing, Snowden Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two decoders follow: Direct Labor Hours Decoder P 6,600 Decoder Q 15,400 Total 22,000 Required a. Compute the amount of overhead cost allocated to each type of decoder when using direct labor hours as the allocation base. b. Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC. 3) Fanning Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing. The costs and cost drivers associated with the four overhead activity cost pools follow: Activities Unit Level Batch Level Product Level Facility Lev Cost $35,200 $20,090 $19,000 $272,000 Cost Percentage of 1,600 labor hrs. 49 setups 16,000 unit driver use Production of 770 sets of cutting shears, one of the company’s 20 products, took 280 labor hours and 9 setups and consumed 12 percent of the product-sustaining activities. Required a. Had the company used labor hours as a companywide allocation base, how much overhead would it have allocated to the cutting shears? b. How much overhead is allocated to the cutting shears using activity-based costing? c. Compute the overhead cost per unit for cutting shears first using activity-based costing and then using direct labor hours for allocation if 770 units are produced. If direct product costs are $140 and the product is priced at 30 percent above cost for what price would the product sell under each allocation system? 4 Zachary Manufacturing produces two keyboards, one for la …