MANAGERIAL ACCOUNTING
Spring 2004
Online Problem Set
Chapters 5, 6 and 8
In lieu of a second exam, students will complete the following problem set. This activity has a total value
of 75 points. Completed work (in a .doc, .rtf, or .xls file) must be submitted, by email, to Shawn Abbott no
later than midnight on THURSDAY, 4/15/04.
Students may use their books and notes, as needed. However, this activity calls for independent work.
Do not consult with classmates or any other individuals in preparing this problem set. As accounting
students, let’s go beyond discussing ethical behavior – let’s practice it.
Each of the seven problems has a value of ten points. The short answer question is worth 5 points.
1.
Dicker’s Department Store has four departments: men's, women's, children's, and electronics. The
following information is provided:
Men’s
Women’s
Children’s
Electronics
Floor space 15,000 sq. ft. 25,000 sq. ft.
8,000 sq. ft.
2,000 sq. ft.
Sales
$35,000
$75,000
$20,000
$12,000
The company's accountant needs to allocate the store's monthly rent of $15,000.
Required.
1.) Compute the allocation rate that should be used to allocate the rent cost to the four
departments.
2.) Compute the amount of rent that should be allocated to each of the four departments.
3.) Currently, the managers are paid a bonus based on sales. As you can see from the above table,
the women's department manager will receive the largest bonus. Do you believe this bonus plan is
fair to all four-department managers? Why or why not?
2.
The management accountant at Flora & Fauna, Inc. provided the following estimated costs for
producing 5,000 units of a specialty product manufactured by the firm:
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The company believes that direct labor hours are the most appropriate cost driver for assigning
overhead support costs to its product.
Required.
1.) Compute the predetermined overhead rate for this company.
2.) Compute the specialty product's total estimated cost per unit.
3.) Determine the selling price for the product, assuming Flora & Fauna has targeted a gross
margin of $8.00 for this specialty product.
3.
Sugarland Brands packages single-sized servings of sugar and sugar substitute for fast food
restaurants. The activities required to package sugar are fewer and less complex than for sugar
substitute because the company manufactures sugar in house. The direct costs of producing the
two products are as follows:
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Overhead is currently assigned to the two products on the basis of machine hours. The following
information is provided regarding overhead costs:
ACTIVITY
Setup
COST DRIVER DATA
SUGAR SUGAR
LINE SUB LINE TOTAL
50
100
150
TRACEABLE
COST
COSTS
DRIVER
$ 75,000 Number of
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Packing
$125,000 Number of
machine hours
Inspection
$ 25,000 Number of batches
$225,000
10,000
15,000
25,000
200
300
500
Required.
1.) Compute the predetermined overhead rate under the current method of overhead cost
allocation. How much total overhead cost will be assigned to each product under the current
system?
2.) Compute the three activity rates that would be used in an activity-based system. How much
total overhead cost will be assigned to each product under an ABC system?
3.) Assuming an ABC system to be more precise, by how much does the company's current
costing system over or under cost the products? Be specific.
4.
Firerock Tires produces a variety of auto and truck tires at its Dayton manufacturing plant. The
plant is highly automated and uses an activity-based costing system to allocate overhead costs to
its various product lines. The costs and cost drivers associated with four activity cost pools are
given below:
ACTIVITIES:
Cost
Cost Driver
UNITLEVEL
$50,000
BATCHLEVEL
$20,000
4,000 labor hrs 100 set ups
PRODUCT- FACILITYLEVEL
LEVEL
$10,000
$120,000
% of use
24,000 units
Production of 1,000 units of a small tractor tire required 400 labor hours, 2 setups, and consumed
30% of the product sustaining activities.
Required.
1.) Instead of using ABC, suppose the company had used labor hours as a companywide allocation
base. How much total overhead would have been allocated to the tractor tire?
2.) How much total overhead costs will be allocated to the tire under activity based costing?
3.) The tire is priced on a cost plus basis. What price will be quoted if the product is priced at 25%
above cost? Compute the price under both the direct labor hours approach and under activity based
costing. The direct manufacturing costs consist of direct material of $20 and direct labor of $30.
5.
Bray Company produces a number of products, including a small American flag. The firm, which
began operations at the beginning of the current year, uses a standard cost system. The standard
costs for one American Flag are provided below:
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The $0.50 fixed overhead rate is based on total budgeted fixed overhead costs of $17,000. There
were no changes in any inventory account during the period. The company produced and sold
35,000 units at the following costs:
Direct materials (18,000 yds.)
Direct labor (36,000 hrs.)
Variable factory overhead
Fixed factory overhead
$ 17,280
374,400
34,500
15,000
Required.
1.) Compute and label as Favorable (F) or Unfavorable (UF) the following flexible budget
variances:
(a.) Direct materials price variance
(b.) Direct materials quantity variance
(c.) Direct labor rate variance
(d.) Direct labor efficiency variance
6.
The following standard cost card is provided for Product U4reA:
Direct material (2 lbs. @ $5.00 per lb.)
Direct labor (1 hr @ $8.00 per hr.)
Variable overhead (1 hr. @ $3.00 per hr.)
Fixed overhead (1 hr.@ $2.00 per hr.)
Total standard cost per unit
$10.00
8.00
3.00
2.00
$23.00
The fixed overhead rate is based on total budgeted fixed overhead of $12,000. During the period,
the company produced and sold 5,800 units at the following costs.
Direct material 12,000 pounds @ $4.50 per pound
Direct labor 5,750 hours @ $8.00 per hour
Overhead $29,920
Required.
1.) Compute and label as Favorable (F) or Unfavorable (UF) the following flexible budget
variances:
(a.) Direct materials price variance
(b.) Direct materials quantity variance
(c.) Direct labor rate variance
(d.) Direct labor efficiency variance
7.
Amber Company estimates sales of 15,000 units for the upcoming period. At this sales volume its
budgeted income is as follows:
Sales
Less variable costs:
Manufacturing costs
Selling and administrative costs
Contribution margin
Less fixed costs:
Manufacturing costs
Selling and administrative costs
Net income
Per Unit
Total
$60
$900,000
30
10
$20
450,000
150,000
$300,000
75,000
125,000
$100,000
During the period the company actually produced and sold only 14,000 units.
Required.
1.) The manager now wants to evaluate the company's performance by comparing actual costs and
revenues to those shown above but you have advised against it. Explain your reasoning.
2.) Prepare a flexible budget based on 14,000 units.
8.
(Short Answer) Discuss some of the opportunities and obstacles inherent in the budgeting process.