Assessment 1 Instructions: Using Cost Accounting Information for Decision Making

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Assement 1 Part 1

Assessment 1 Part 1: Cost Data for Managerial Purposes
Scenario
T-Rex Company makes a variety of products. It is organized in two divisions, East and West. The managers for each division are paid, in part, based on the financial performance of their divisions. The West Division normally sells to outside customers but, on occasion, also sells to the East Division. When it does, corporate policy states that the price must be cost plus 15 percent to ensure a “fair” return to the selling division. West received an order from East for 600 units. West’s planned output for the year had been 2,640 units before East’s order. West’s capacity is 3,300 units per year. The costs for producing those 2,640 units follow:
Production Costs for 2,640 Units	TOTAL	PER UNIT
Materials	$ 528,000.00	$ 200.00
Direct Labor Cost	$ 253,440.00	$ 96.00
Other Costs Varying with Output	$ 168,960.00	$ 64.00
Fixed Costs (do not vary with output)	$ 2,217,600.00	$ 840.00
Total Costs	$ 3,168,000.00	$ 1,200.00
This problem demonstrates the ambiguity in measuring “costs.” West Division’s controller included the “per unit” fixed costs, which were calculated for allocation purposes under normal production volume, when he or she calculated per unit cost of the additional production. The controller charged East Division on that basis, ignoring the differential costs as a basis for interdivision sales. Possible options available are as follows: A. Use the full per unit cost for normal production of 2,640 units. B. Use only differential costs as the cost basis. C. Use differential costs plus a share of fixed costs, based on actual production volume (with East’s order) of 3,300 units.
Costs
	A	B	C
Direct materials (variable)
Direct labor (variable)
Other variable costs
Fixed costs
Per unit cost
Cost plus 15%
Total price (600 units)
REQUIRED
a. If you are the manager of the West Division, what unit cost would you ask the East Division to pay? Show calculations.
b. If you are the manager of the East Division, what unit cost would you argue you should pay? Show calculations.
c. What unit cost would you recommend for a sale of units from the West Division to the East Division? Explain briefly.

Assessment 1 Part 2

Assessment 1 Part 2: Cost Concepts and Financial Statements (SOLUTION)

Scenario:
Joplin Products produced and sold 990 units of the company’s only product in June. You have collected the following information from the accounting records:
Sales price (per unit)	$ 492.80
Manufacturing Costs:	Joplin Products
Fixed overhead (for the month)	55,440.00
Direct labor (per unit)	38.50
Direct materials (per unit)	123.20
Variable overhead (per unit)	77.00
Marketing and administrative costs:
Fixed costs (for the month)	74,250.00
Variable costs (per unit)	15.40
REQUIRED
1. Compute the following:		Answers
a. Variable manufacturing cost per unit.
b. Full cost per unit.
e. Prime cost per unit.
f. Conversion cost.
g. Profit margin.
h. Contribution margin per unit.
i. Gross margin per unit.

2. If the number of units produced increases from 990 to 1,320, which is within the relevant range, cost per unit will decrease (you can check this by redoing requirement [a] above). Therefore, we should recommend that Joplin Products increase its production to reduce its costs. Do you agree? Explain.

Assessment 1 Part 3

Assessment 1 Part 3: Prepare Statements for a Manufacturing Company
Scenario:
The administrative offices and manufacturing plant of Idaho Tool & Die share the same building. The following information (in $000s) appears in the accounting records for last year:
Idaho Tool & Die Accounting Record
Administrative costs	$ 10,560
Building and machine depreciation (75% of this amount is for factory)	5,940
Building utilities (90% of this amount is for factory)	8,250
Direct labor	5,544
Direct materials inventory, December 31	84
Direct materials inventory, January 1	72
Direct materials purchases	24,090
Factory supervision	3,234
Finished goods inventory, December 31	390
Finished goods inventory, January 1	324
Indirect factory labor	5,472
Indirect materials and supplies	4,110
Marketing costs	5,226
Property taxes on building (80% of this amount is for factory)	5,040
Sales revenue	85,602
Work-in-process inventory, December 31	174
Work-in-process inventory, January 1	192
REQUIRED
Prepare an income statement with a supporting cost of goods sold statement.
Idaho Tool & Die Statement of Cost of Goods Sold For the Year Ended December 31
Beginning work in process, Jan. 1		$ 192
Manufacturing costs:
Direct materials:
Beginning inventory, Jan. 1
Add: Purchases
Direct materials available
Less ending inventory, Dec. 31
Direct materials used
Direct labor
Manufacturing overhead:
Indirect factory labor
Factory supervision
Indirect materials and supplies
Building utilities (90% of total)
Building & machine depreciation (75% of $5,940)
Property taxes—factory (80% of total)
Total manufacturing overhead
Total manufacturing costs		58,350
Total cost of work in process during the year		58,542
Less work in process, Dec. 31		174
Costs of goods manufactured during the year		58,368
Beginning finished goods, Jan. 1		324
Finished goods available for sale		58,692
Less ending finished goods, Dec. 31		390
Cost of goods sold		$ 58,302
Idaho Tool & Die Income Statement For the Year Ended December 31
Sales revenue
Less: Cost of goods sold (per statement)
Gross profit
Marketing and administrative costs:
Depreciation (25% of total)
Utilities (10% of total)
Property taxes (20% of total)
Administrative costs
Marketing costs
Total marketing and administrative costs
Operating profit

Assessment 1 Part 4

Assessment 1 Part 4: CVP Analysis and Price Changes
Scenario:
Toronto Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 66,000 units for $30 per unit. The variable production costs are $15, and fixed costs amount to $770,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials’ costs to rise by 10 percent in the coming year. Of the $15 variable costs, 50 percent are from labor and 25 percent are from materials. Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 5 percent as a result of increased taxes and other miscellaneous fixed charges. The company wishes to maintain the same level of profit in real dollar terms. It is expected that to accomplish this objective, profits must increase by 6 percent during the year.
REQUIRED
Question 1
Compute the volume in units and the dollar sales level necessary to maintain the present profit level, assuming that the maximum price increase is implemented.
Labor	+	Materials	+	Overhead
					= $17.25
Question 2
Compute the volume of sales and the dollar sales level necessary to provide the 6 percent increase in profits, assuming that the maximum price increase is implemented.

Question 3
If the volume of sales were to remain at 66,000 units, what price increase would be required to attain the 6 percent increase in profits?

Assessment 1 Part 5

Assessment 1 Part 5: Closing a Plant
Scenario:
You have been asked to help Chase Corporation management make certain decisions. Chase has its home office in Oklahoma and leases factory buildings in Arkansas, Kansas, and Colorado, all of which produce the same product. Chase’s management provided you the following projection of operations for next year:
Chase Corporation Projections
	Total	Arkansas	Kansas	Colorado
	$968,000	$484,000	$308,000	$176,000
Sales revenue
Fixed costs:
Factory	$242,000	$123,200	$61,600	$57,200
Administration	77,000	46,200	24,200	6,600
Variable costs	319,000	146,300	93,500	79,200
Allocated home office costs	110,000	49,500	38,500	22,000
Total	$ 748,000.00	$ 365,200.00	$ 217,800.00	$ 165,000.00
Operating profit	$ 220,000.00	$ 118,800.00	$ 90,200	$ 11,000
The sales price per unit is $5.
Due to the marginal results of operations of the factory in Colorado, Chase has decided to cease operations and sell that factory’s machinery and equipment by year end. Chase expects that proceeds from the sale of these assets would equal all termination costs. Chase would like to continue serving most of its customers in that area if it is economically feasible and is considering one of the following three alternatives:
Option A:
Expand the operations of the Kansas factory by using idle space. This move would result in the following changes in that factory’s operations:
Increase over Kansas factory’s current operations
Sales revenue	50%
Fixed costs
Factory	20
Under this proposal, variable costs would be $2 per unit sold.
Option B:
Enter into a long-term contract with a competitor that will serve that area’s customers. This competitor would pay Chase a royalty of $1 per unit based on an estimate of 30,000 units being sold.
Option C:
Close the Colorado factory and not expand the operations of the Kansas factory. Total home office costs of $110,000 will remain the same under each situation.
REQUIRED
1. To assist the management of Chase Corporation, prepare a schedule computing Chase’s estimated operating profit from each of the following options:
Option A: Expansion of the Kansas factory.
Option B: Negotiation of the long-term contract on a royalty basis.
Option C: Shutdown of the Colorado operations with no expansion at other locations.
2. Determine the best option for Chase Corporation and explain your rationale.