ACTIVITY BASED COSTING

Gotham Accounting Firm provides tax and auditing services to a variety of clients. Attorneys keep track of the time they spend on each case, which is used to charge fees to clients at a rate of $300 per hour. A management advisor commented that activity-based costing might prove useful in evaluating the costs of its services, and the firm has decided to evaluate its fee structure by comparing ABC to its alternative cost allocations. The following data relate to a typical month at the firm. During a typical month the firm handles seven mediation cases and three litigation cases.

Required

COST VOLUME PROFIT

Texon Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit sales prices are product 1, $40; product 2, $30; and product 3, $14. The per unit variable costs to manufacture and sell these products are product 1, $30; product 2, $20; and product 3, $8. Their sales mix is reflected in a ratio of 6:3:5. Annual fixed costs shared by all three products are $200,000. One type of raw material has been used to manufacture products 1 and 2. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: product 1 by $10, and product 2, by $5. However, the new material requires new equipment, which will increase annual fixed costs by $50,000.

Required

VARIABLE COSTING

Navaroli Company began operations on January 5, 2014. Cost and sales information for its first two calendar years of operations are summarized below.

Required

1.      Prepare an income statement for the company for 2014 under absorption costing.

2.      Prepare an income statement for the company for 2014 under variable costing.

3.      Explain the source(s) of the difference in reported income for 2014 under the two costing methods.

4.      Prepare an income statement for the company for 2015 under absorption costing.

5.      Prepare an income statement for the company for 2015 under variable costing.

6.      Prepare a schedule to convert variable costing income to absorption costing income for the years 2014 and 2015.

MASTER BUDGETS

November Company’s management asks you to prepare its master budget using the following information. The budget is to cover the months of April, May, & June 2015

Additional Information

Sales for March total 10,000 units. Each month’s sales are expected to exceed the prior month’s results by 5%. The product’s selling price is $25 per unit.

Company policy calls for a given month’s ending inventory to equal 80% of the next month’s expected unit sales. The March 31 inventory is 8,400 units, with a value of $126,000 which complies with the policy. The purchase price is $15 per unit.

Sales representatives’ commissions are 12.5% of sales and are paid in the month of the sales. The sales manager’s monthly salary will be $3,500 in April and $4,000 per month thereafter.

Monthly general and administrative expenses include $8,000 administrative salaries, $5,000 depreciation, and 0.9% monthly interest on the long-term note payable.

The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of the sale). Beginning accounts receive is $175,000.

All merchandise purchases are on credit, and no payables arise from any other transactions. One month’s purchases are fully paid in the next month.  Beginning accounts payable is $156,000.

The minimum ending cash balance for all months is $50,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.  Beginning balance in short-term note is $12,000.

Dividends of $100,000 are to be declared and paid in May.

No cash payments for income taxes are to be made during the second calendar quarter. Income taxes will be assessed at 35% in the quarter.

Equipment purchases of $55,000 are scheduled for June.

Required:  Prepare the following budgets and other financial information as required:

1.      Sales budget, including budgeted sales for July.

2.      Purchases budget, the budgeted cost of goods sold for each month and quarter, and the cost of the June 30 budgeted inventory.

3.      Selling expense budget.

4.      General and administrative expense budget.

5.      Expected cash receipts from customers and the expected June 30 balance of accounts receivable.

6.      Expected cash payments for purchases and the expected June 30 balance of accounts payable.

7.      Cash budget.

8.      Budgeted income statement.

9.      Budgeted statement of retained earnings.

10.   Budgeted balance sheet.

Flexible Budgets

Pacific Company provides the following information about its budgeted and actual results for June 2015. Although the expected June volume was 25,000 units produced and sold, the company actually produced and sold 27,000 units as detailed here:

Required

PROCESS COSTING PROBLEM

Spectre Chemicals produces Canovic in a two department process.   Information on the two departments for March and April, 2016 are as follows:

March 2016:

Department 1:  The Company had beginning inventory of 6,000 units, 40% completed with a cost of $45,000.  During the month, the department transferred in 22,000 units of the direct materials with a cost of $10 per unit.  Ending inventory was 7,000 units, 30% completed. Direct labor is $310,500 and factory overhead is $103,500. 

Department 2:  The Company had beginning inventory of 5,000 units, 70% completed with a cost of $80,000.  During the month, direct labor was $175,000 and factory overhead was $87,500.  Ending inventory was 10,000 units, 50% completed.

April  2016: 

Department 1:    During the month, the department transferred in 20,000 units of the direct materials with a cost of $11 per unit.  Direct labor is $209,000 and factory overhead is $104,500.  Ending inventory is 10,000 units 60% completed.

Department 2:  During the month, direct labor is $175,000 and factory overhead is $87,500. The company had ending inventory of 5,000 units, 70% completed with a cost of $80,000. 

Required:

Compute the Equivalent Units of Production, Material costs, and Conversion costs for each department for March and April, 2014.

Complete the attached chart – one for each department and each month

Prepare a cost of production report for March and April 2014.

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