Deck 1: Accounting for Decision Making and Control

Question 1

Cost-volume-profit of a Make/buy Decision
Elly Industries is a multiproduct company that currently manufactures 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have affixed monthly cost of $150,000 and a capacity to produce 84,000 units per month. If Elly were to buy Part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40 percent of its present amount. The variable production costs of Part MR24 are $11 per unit.
Required:
a. If Elly Industries continues to use 30,000 units of Part MR24 each month, it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier's unit price is less than how much?
b. If Elly Industries can obtain Part MR24 from an outside supplier at a unit purchase price of $12.875, what is the monthly usage at which it will be indifferent between purchasing and making Part MR24?
Source: CMA adapted

Answer 1

Cost-Volume-Profit of a Make/Buy Decision
a. Each month Elly incurs $150,000 of fixed cost to have capacity to produce 84,000 units. They are only using 30,000 units of that capacity now. If they outsource MR24, they will continue to incur 40% of the fixed costs, or $60,000. However, they save $90,000 ($150,000 - $60,000). Besides saving the fixed costs they save $330,000 of variable costs ($11 × 30,000) or a total cost savings of $420,000. To be indifferent between outsourcing and continuing to produce, the outside price must be $14 ($420,000 ÷ 30,000). An alternative way to solve the problem and get the same answer is: b. $12.875 + $12.875Q + $60,000 = $11Q + $150,000
$1.875Q = $90,000
Q = 48,000 units

Question 2

Choosing Performance Measures
Jen and Barry opened an ice cream shop in Eugene. It was a big success, so they decide to open a ice cream shops in many cities including Portland. They hire Dante to manage the shop in Portland. Jen and Barry are considering two different sets of performance measures for Dante. The first set would grade Dante based on the cleanliness of the restaurant and customer service. The second set would use accounting numbers including the profit of the shop in Portland.
What are the advantages and disadvantages of each set of performance measures?

Answer 2

Choosing Performance Measures
Cleanliness and customer service are important to the success of the ice cream shop. The advantage of using cleanliness and customer service as performance measures is to motivate managers to make the business appealing to customers. Customers will be more likely to return and frequent other outlets of the company. Another advantage of using cleanliness and customer service as performance measures is their controllability by the manager. The disadvantage of using cleanliness and customer service as performance measures is that managers may ignore the costs of providing customer service. Without some measure of cost or profit as part of the manager's performance measure, a manager will be less likely to make the appropriate cost/benefit trade-off.
The benefit of using profit as a performance measure is that profit tends to include all aspects of operating the business. To improve profit, the manager should also be motivated to improve customer service because profit will increase with satisfied customers. If revenues and costs are accurately measured, then managers will make the appropriate cost/benefit trade-offs if evaluated on profit. One disadvantage of using profit as a performance measure is that profit is not completely controllable by the manager. There are uncontrollable environmental factors, such as the economy of Portland, that affect profit. Also, revenues and costs may not be appropriately measured in the short-run. If costs used to calculate profit don't reflect the opportunity cost, the manager may be motivated to make inappropriate decisions, such as postponing maintenance.

Question 3

Cost, Volume, Profit Analysis
With the possibility of the US Congress relaxing restrictions on cutting old growth, a local lumber company is considering an expansion of its facilities. The company believes it can sell lumber for $0.18/board foot. A board foot is a measure of lumber. The tax rate for the company is 30 percent. The company has the following two opportunities:
• Build Factory A with annual fixed costs of $20 million and variable costs of $0.10/board foot. This factory has an annual capacity of 500 million board feet.
• Build Factory B with annual fixed costs of $10 million and variable costs of $0.12/board foot. This factory has an annual capacity of 300 million board feet.
Required:
a. What is the break-even point in board feet for Factory A?
b. If the company wants to generate an after tax profit of $2 million with Factory B, how many board feet would the company have to process and sell?
c. If demand for lumber is uncertain, which factory is riskier?
d. At what level of board feet would the after-tax profit of the two factories be the same?

Answer 3

Cost, Volume, Profit Analysis
a. Break-even point of Factory A = $20,000,000/($0.18 - $0.10) = 250,000,000 board-feet
b. To achieve an after-tax profit of $2,000,000:
[$10,000,000 + ($2,000,000/(1 - .3))]/($0.18 - $0.12) = 14,285,717 board-feet
c. Factory A has higher fixed costs, but lower variable costs per unit because of its larger capacity. If the demand for lumber is lower than expected, Factory A will have a more difficult time recovering its fixed costs. The break-even point for factory B is lower than the break-even point for factory
RRR

Question 4

Financing Charges and Net Present Value
The president of the company is not convinced that the interest expense should be excluded from the calculation of the net present value. He points out that, "Interest is a cash flow. You are supposed to discount cash flows. We borrowed money to completely finance this project. Why not discount interest expenditures?" The president is so convinced that he asks you, the controller, to calculate the net present value including the interest expense.
How can you adjust the net present value analysis to compensate for the inclusion of the interest expense?

Question 5

Fixed and Variable Costs
The university athletic department has been asked to host a professional basketball game at the campus sports center. The athletic director must estimate the opportunity cost of holding the event at the sports center. The only other event scheduled for the sports center that evening is a fencing match that would not have generated any additional costs or revenues. The fencing match can be held at the local high school, but the rental cost of the high school gym would be $200. The athletic director estimates that the professional basketball game will require 20 hours of labor to prepare the building. Clean-up depends on the number of spectators. The athletic director estimates the time of clean-up to be equal to 2 minutes per spectator. The labor would be hired especially for the basketball game and would cost $8 per hour. Utilities will be $500 greater if the basketball game is held at the sports center. All other costs would be covered by the professional basketball team.
Required:
a. What is the variable cost of having one more spectator?
b. What is the opportunity cost of allowing the professional basketball team to use the sports center if 10,000 spectators are expected?
c. What is the opportunity cost of allowing the professional basketball team to use the sports center if 12,000 spectators are expected?

Question 6

Monitoring Computer Use
Samson Company is an engineering firm. Many of the employees are engineers who are working individually on different projects. Most of the design work takes place on computers. The computers are connected by a network and employees can also "surf" the internet through their desk top computers.
The president is concerned about productivity among his engineers. He has acquired software that allows him to monitor each engineer's computer work. At anytime during the day, the president can observe on her screen exactly what the different engineers are working on. The engineers are quite unhappy with this monitoring process. They feel it is unethical for the president to be able to access what they are working on without their knowledge.
Describe the pros and cons of monitoring through observing the computer work of the engineers.

Question 7

Opportunity Costs
The First Church has been asked to operate a homeless shelter in part of the church. To operate a homeless shelter the church would have to hire a full time employee for $1,200/month to manage the shelter. In addition, the church would have to purchase $400 of supplies/month for the people using the shelter. The space that would be used by the shelter is rented for wedding parties. The church averages about 5 wedding parties a month that pay rent of $200 per party. Utilities are normally $1,000 per month. With the homeless shelter, the utilities will increase to $1,300 per month.
What is the opportunity cost to the church of operating a homeless shelter in the church?

Question 8

Cost, Volume, Profit Analysis
Kalifo Company manufactures a line of electric garden tools that are sold in general hardware stores. The company's controller, Sylvia Harlow, has just received the sales forecast for the coming year for Kalifo's three products: weeders, hedge clippers, and leaf blowers. Kalifo has experienced considerable variations in sales volumes and variable costs over the past two years, and Harlow believes the forecast should be carefully evaluated from a cost-volume-profit viewpoint. The preliminary budget information for 1996 is presented below. For 1996, Kalifo's fixed factory overhead is budgeted at $2 million, and the company's fixed selling and administrative expenses are forecast to be $600,000. Kalifo has a tax rate of 40 percent.
Required:
a. Determine Kalifo Co.'s budgeted net income for 1996.
b. Assuming that the sales mix remains as budgeted, determine how many units of each product Kalifo must sell in order to break even in 1996.
c. Determine the total dollar sales Kalifo must sell in 1996 in order to earn an after-tax net income of $450,000.
d. After preparing the original estimates, Kalifo determines that its variable manufacturing cost of leaf blowers will increase 20 percent and the variable selling cost of hedge clippers can be expected to increase $1 per unit. However, Kalifo has decided not to change the selling price of either product. In addition, Kalifo learns that its leaf blower is perceived as the best value on the market, and it can expect to sell three times as many leaf blowers as any other product. Under these circumstances, determine how many units of each product Kalifo will have to sell to break even in 1996.
e. Explain the limitations of cost-volume-profit analysis that Sylvia Harlow should consider when evaluating Kalifo's 1996 budget.

Question 9

Identifying the Opportunity Cost of Capital
Don Phelps recently started a dry cleaning business. He would like to expand the business and have a coin-operated laundry also. The expansion of the building and the washing and drying machines will cost $100,000. The bank will lend the business $100,000 at 12 percent interest rate. Don could get a 10 percent interest rate loan if he uses his personal house as collateral. The lower interest rate reflects the increased security of the loan to the bank, because the bank could take Don's home if he doesn't pay back the loan. Don currently can put money in the bank and receive 6 percent interest.
Required:
Provide arguments for using 12 percent, 10 percent, and 6 percent as the opportunity cost of capital for evaluating the investment.

Question 10

Choosing Performance Measures
The president of the Canby Insurance Company has just read an article on the balanced scorecard. A company has a balanced scorecard when there is a set of performance measures that reflect the diverse interests and goals of all the stakeholders (shareholders, customers, employees, and society) of the organization. Presently, Canby Insurance Company has only one performance measure for the top executives: profit. The board of directors claims that profit as the sole performance measure is sufficient. If customers are satisfied and employees are productive, then the company will be profitable. Any other performance measure will detract from the basic goal of making a profit.
Required:
Explain the costs and benefits of only having profit as a performance measure.

Question 11

Breakeven and Cost-Volume-Profit with Taxes
DisKing Company is a retailer for video disks. The projected after-tax net income for the current year is $120,000 based on a sales volume of 200,000 video disks. DisKing has been selling the disks at $16 each. The variable costs consist of the $10 unit purchase price of the disks and a handling cost of $2 per disk. DisKing's annual fixed costs are $600,000 and DisKing is subject to a 40 percent income tax rate.
Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent.
Required:
a. Calculate DisKing Company's break-even point for the current year in number of video disks.
b. Calculate the increased after-tax income for the current year from an increase of 10 percent in projected unit sales volume.
c. If the unit selling price remains at $16, calculate the volume of sales in dollars that DisKing Company must achieve in the coming year to maintain the same after-tax net income as projected for the current year.
Source: CMA adapted

Question 12

Opportunity Cost of Attracting Industry
The Itagi Computer Company From Japan is looking to build a factory for making CD-ROM's in the United States. The company is concerned about the safety and well-being of its employees and wants to locate in a community with good schools. The company also wants the factory to be profitable and is looking for subsidies from potential communities. Encouraging new business to create jobs for citizens is important for communities, especially communities with high unemployment.
Wellville has not been very well since the shoe factory left town. The city officials have been working on a deal with Itagi to get the company to locate in Wellville. Itagi officials have identified a 20 acre undeveloped site. The city has tentatively agreed to buy the site for $50,000 for Itagi and not require any payment of property taxes on the factory by Itagi for the first five years of operation. The property tax deal will save Itagi $3,000,000 in taxes over the five years. This deal was leaked to the local newspaper. The headlines the next day were: "Wellville Gives Away $3,000,000+ to Japanese Company".
Required:
a. Do the headlines accurately describe the deal with Itagi?
b. What are the relevant costs and benefits to the citizens of Wellville of making this deal?

Question 13

Annuity
Suppose the opportunity cost of capital is 10 percent and you have just won a $1 million lottery that entitles you to $100,000 at the end of each of the next ten years.
Required:
a. What is the minimum lump sum cash payment you would be willing to take now in lieu of the ten-year annuity?
b. What is the minimum lump sum you would be willing to accept at the end of the ten years in lieu of the annuity?
c. Suppose three years have passed and you have just received the third payment and you have seven left when the lottery promoters approach you with an offer to "settle-up for cash." What is the minimum you would accept (the end of year three)?
d. How would your answer to part (a) change if the first payment came immediately (at t = 0) and the remaining payments were at the beginning instead of at the end of each year?

Question 14

Linking Decision Rights and Knowledge
Professional football teams have both a coach and a general manager. The general manager is usually responsible for the general operations of the organization and maintains the decision rights for selecting personnel on the football team. The coach is responsible for the training of the football team and making decisions on game day. Many coaches have been unhappy with their relationship with the general manager and feel they should have more decision rights in choosing the players on the team. Some of the top coaches are now insisting on also being general managers.
What are the advantages and disadvantages of separating the duties of the coach and general manager with respect to selecting members of the football team?

Question 15

Transfer Prices
The Alpha Division of the Carlson Company manufactures product X at a variable cost of $40 per unit. Alpha Division's fixed costs, which are sunk, are $20 per unit. The market price of X is $70 per unit. Beta Division of Carlson Company uses product X to make Y. The variable costs to convert X to Y are $20 per unit and the fixed costs, which are sunk, are $10 per unit. The product Y sells for $80 per unit.
Required:
a. What transfer price of X causes divisional managers to make decentralized decisions that maximize Carlson Company's profit if each division is treated as a profit center?
b. Given the transfer price from part (a), what should the manager of the Beta Division do?
c. Suppose there is no market price for product X. What transfer price should be used for decentralized decision-making?
d. If there is no market for product X, is the operations of the Beta Division profitable?

Question 16

Accounting and Control
The controller of a small private college is complaining about the amount of work she is required to do at the beginning of each month. The president of the university requires the controller to submit a monthly report by the fifth day of the following month. The monthly report contains pages of financial data from operations. The controller was heard saying, "Why does the president need all this information? He probably doesn't read half of the report. He's an old English professor and probably doesn't know the difference between a cost and a revenue."
Required:
a. What is the probable role of the monthly report?
b. What is the controller's responsibility with respect to a president who doesn't know much accounting?

Question 17

Opportunity Cost of Purchase Discounts and Lost Sales
Winter Company is a medium-size manufacturer of disk drives that are sold to computer manufacturers. At the beginning of 2010, Winter began shipping a much-improved disk drive, Model W899. The W899 was an immediate success and accounted for $5 million in revenues for Winter in 2010.
While the W899 was in the development stage, Winter planned to price it at $130. In preliminary discussions with customers about the W899 design, no resistance was detected to suggestions that the price might be $130. The $130 price was considerably higher than the estimated variable cost of $70 per unit to produce the W899, and it would provide Winter with ample profits.
Shortly before setting the price of the W899, Winter discovered that a competitor was reading a product very similar to the W899 and was no more than 60 days behind Winter's own schedule. No information could be obtained on the competitor's planned price, although it had a reputation for aggressive pricing. Worried about the competitor, and unsure of the market size, Winter lowered the price of the W899 to $100. It maintained the price although, to Winter's surprise, the competitor announced a price of $130 for its product.
After reviewing the 2010 sales of the W899, Winter's management concluded that unit sales would have been the same if the product had been marketed at the original price of $130 each. Management has predicted that 2011 sales of the W899 would be either 85,000 units at $100 each or 60,000 units at $130 each. Winter has decided to raise the price of the disk drive to $130 effective immediately.
Having supported the higher price from the beginning, Sharon Daley, Winter's marketing director, believes that the opportunity cost of selling the W899 for $100 during 2010 should be reflected in the company's internal records and reports. In support of her recommendation, Daley explained that the company has booked these types of costs on other occasions when purchase discounts not taken for early payment have been recorded.
Required:
a. Define opportunity cost and explain why opportunity costs are not usually recorded.
b. Winter Company's management is considering Sharon Daley's recommendation to book the opportunity costs and have them reflected in its internal records and reports. If one were to record a nonzero opportunity cost, calculate the dollar amount of the opportunity cost that would be recorded by Winter Company for 2010 and explain how this cost might be reflected on its internal reports.
c. Explain the impact of Winter Company's selection of the $130 selling price for the W899 on 2011 operating income. Support your answer with appropriate calculations.
Source: CMA adapted

Question 18

Fixed, Variable, and Average Costs
Midstate University is trying to decide whether to allow 100 more students into the university. Tuition is $5000 per year. The controller has determined the following schedule of costs to educate students: The current enrollment is 4200 students. The president of the university has calculated the cost per student in the following manner: $30,600,000/4200 students = $7286 per student. The president was wondering why the university should accept more students if the tuition is only $5000.
Required:
a. What is wrong with the president's calculation?
b. What are the fixed and variable costs of operating the university?

Question 19

ROI and Residual Income
The following investment opportunities are available to an investment center manager: Required:
a. If the investment manager is currently making a return on investment of 16 percent, which project(s) would the manager want to pursue?
b. If the cost of capital is 10 percent and the annual earnings approximate cash flows excluding finance charges, which project(s) should be chosen?
c. Suppose only one project can be chosen and the annual earnings approximate cash flows excluding finance charges. Which project should be chosen?

Question 20

Cost, Volume, Profit Analysis
Leslie Mittelberg is considering the wholesaling of a leather handbag from Kenya. She must travel to Kenya to check on quality and transportation. The trip will cost $3000. The cost of the handbag is $10 and shipping to the United States can occur through the postal system for $2 per handbag or through a freight company which will ship a container that can hold up to a 1000 handbags at a cost of $1000. The freight company will charge $1000 even if less than 1000 handbags are shipped. Leslie will try to sell the handbags to retailers for $20. Assume there are no other costs and benefits.
Required:
a. What is the break-even point if shipping is through the postal system?
b. How many units must be sold if Leslie uses the freight company and she wants to have a profit of $1000?
c. At what output level would the two shipping methods yield the same profit?
d. Suppose a large discount store asks to buy an additional 1000 handbags beyond normal sales. Which shipping method should be used and what is the minimum sales price Leslie should consider in selling those 1000 handbags?

Question 21

Flexible Budgets
A chair manufacturer has established the following flexible budget for the month. Required:
a. What is the sales price per chair?
b. What is the expected profit if 1,600 chairs are made?

Question 22

Responsibility Centers
The Maple Way Golf Course is a private club that is owned by the members. It has the following managers and organizational structure:
Eric Olson: General manager responsible for all the operations of the golf course and other facilities (swimming pool, restaurant, golf shop).
Jennifer Jones: Manager of the golf course and responsible for its maintenance.
Edwin Moses: Manager of the restaurant.
Mabel Smith: Head golf professional and responsible for golf lessons, the golf shop, and reserving times for starting golfers on the course.
Wanda Itami: Manager of the swimming pool and family recreational activities.
Jake Reece: Manager of golf carts rented to golfers.
Describe each of the managers in terms of being responsible for a cost, profit, or investment center and possible performance measures for each manager.

Question 23

Transfer Prices and Divisional Profit
A chair manufacturer has two divisions: framing and upholstering. The framing costs are $100 per chair and the upholstering costs are $200 per chair. The company makes 5,000 chairs each year, which are sold for $500.
Required:
a. What is the profit of each division if the transfer price is $150?
b. What is the profit of each division if the transfer price is $200?

Question 24

Job Cost Flows
The job cost sheet for 1,000 units of toy trucks is: All of the materials for the job were purchased on 4/10. The batch of 1,000 toy trucks is sold on 7/10.
What are the costs of this job order in the raw materials account, the work-in-process account, the finished goods account, and the cost of goods account on 4/30, 5/31, 6/30 and 7/31?

Question 25

Pro-Forma Financial Statements
The Gold Bay Hotel is in the process of developing a master budget and pro-forma financial statements for 1999. The beginning balance sheet for the fiscal year 1999 is estimated to be: During the year the hotel expects to rent 30,000 rooms. Rooms rent for an average of $90 per night. The hotel expects to sell 40,000 meals during the year at an average price of $20 per meal. The variable cost per room rented is $30 and the variable cost per meal is $8. The fixed costs not including depreciation is expected to be $2,000,000. Depreciation is expected to be $500,000. The hotel also expects to refurbish the kitchen at a cost of $200,000, which is capitalized (included in the facility account). Interest of the note payable is expected to be $50,000 and $100,000 of the note payable will be retired during the year. The ending accounts receivable amount is expected to be $40,000 and the ending accounts payable is expected to be $30,000.
Prepare pro-forma financial statements for the end of the year.

Question 26

Cost Allocation and Contingency Fees
A lawyer allocates overhead costs based on his hours working with different clients. The lawyer expects to have $200,000 in overhead during the year and expects to work on clients' cases 2,000 hours during the year. In addition he wants to pay himself $50 per hour for working with clients. The lawyer, however, does not bill all of his clients based on covering overhead costs and his own salary. Some clients pay her on contingency fees. If the lawyer works with a client on a contingency fee basis, the lawyer receives half of any settlement for his client. During the year the lawyer works 1,200 hours that are billable to clients. The remaining hours are worked on a contingency basis. The lawyer wins $300,000 in settlements for his clients of which he receives half. Actual overhead was $210,000,
What does the lawyer earn during the year after expenses?

Question 27

Top-down versus Bottom-up Budgets
Describe (a) the benefits of top-down budgeting and (b) the benefits of bottom-up budgeting.

Question 28

Prorating Over/Underabsorbed Overhead
A computer manufacturer has the following account balances at the end of the year. These accounts contain $500,000 of allocated overhead. Actual overhead, however, is $600,000.
What are the account balances after prorating the underabsorbed overhead?

Question 29

Fixed Costs and Allocated Costs
The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance.
Required:
a. What is the application rate for the maintenance department?
b. What is the additional cost to the maintenance department of providing another hour of maintenance?
c. What problem exists if the managers of other departments can choose how much maintenance to be performed?
d. What problem exists if the other departments are allowed to go outside the organization to buy maintenance services?

Question 30

Choosing Allocation Bases For Levying Taxes
The town of Seaside has decided to construct a new sea aquarium to attract tourist. The cost of the measure is to be paid by a special tax. although most of the townspeople believe the sea aquarium is a good idea, there is disagreement about how the tax should be levied.
Required:
Suggest three different methods of levying the tax and the advantages and disadvantages of each.

Question 31

Job Order Sheet
The Talbott Company has received an order (#324) for 100 widgets. On January 20 the shop supervisor requisitioned 100 units of part 503 at a cost of $5 per unit and 500 units part 456 at a cost of $3 per unit to begin work on the 100 widgets. On the same day 20 hours of direct labor at $20 per hour are used to work on the widgets. On January 21, 200 units of part 543 at $6 per unit are requisitioned and 10 hours of direct labor at $15 per hour are performed on the 100 units of widgets to complete the job. Overhead is allocated to the job based on $5 per direct labor hour.
Required:
Make a job order cost sheet for the 100 widgets.

Question 32

Budgeting Direct Materials
The Jung Corporation's budget calls for the following production: Each unit of production requires three pounds of direct material. The company's policy is to begin each quarter with an inventory of direct materials equal to 30 percent of that quarter's direct material requirements. Compute budgeted direct materials purchases for the third quarter.

Question 33

Transfer Pricing in the Presence of Divisional Interdependencies
Prior to 1997, PepsiCo, a major soft drink company, had a restaurant division consisting of Kentucky Fried Chicken, Taco Bell, and Pizza Hut. The only cola beverage these restaurants served was Pepsi. Assume that the major reason PepsiCo owned fast food restaurants is an attempt to increase its share of the cola market. Under this assumption, some Pizza Hut patrons who order a cola at the restaurant and are told they are drinking a Pepsi will switch and become Pepsi drinkers instead of Coke drinkers on other purchase occasions. However, studies have shown that some customers refuse to eat at restaurants unless they can get a Coke.
PepsiCo sells Pepsi Cola to non-PepsiCo restaurants at $0.53 per gallon. This is the market price of Pepsi-Cola. Pepsi-Cola's variable manufacturing cost is $0.09 per gallon and its total (fixed and variable) manufacturing cost is $0.22 per gallon. PepsiCo produces Pepsi-Cola in numerous plants located around the world. Plant capacity can be added in small increments (e.g., a half-million gallons per year). The cost of additional capacity is approximately equal to the fixed costs per gallon of $0.13.
Required:
What transfer price should be set for Pepsi transferred from the soft drink division of PepsiCo to a PepsiCo restaurant such as Taco Bell? Justify your answer.

Question 34

Transfer Pricing in Universities
The Eastern University Business School teaches some undergraduate business courses for students in the Eastern University College of Arts and Science (CAS). The 6,000 undergraduates generate 2,000 undergraduate student course enrollments in business courses per year. The B-school and CAS are treated as profit centers in that their budgets contain student tuition revenues as well as costs. The deans have discretion to set tuition and salaries and determine hiring as long as they operate with no deficit (revenues = expenses). Undergraduate tuition is $12,000 per year and each student takes eight courses per year. Average undergraduate financial aid amounts to 20% of gross tuition. The current transfer price rule is gross tuition per course less average financial aid.
This transfer price rule gives net tuition to the B-school as a revenue and deducts an equal amount from the CAS budget. The CAS dean argues that the current system is grossly unfair. CAS must provide costly services for undergraduates to maintain a top-rated undergraduate program. For example, career counseling, academic advising, sports programs, and the admissions office are costs that must be incurred if undergraduates are to enroll at Eastern. Therefore, the CAS dean argues, the average cost of these services per undergraduate student course enrollment should be deducted from the tuition transfer price. These undergraduate student services total $9.6 million per year.
Required:
a. Calculate the current revenue the B-school is receiving from undergraduate business courses. What will it be if the CAS dean's proposal is adopted?
b. Discuss the pros and cons of the CAS dean's proposal.
c. As special assistant to the B-school dean, prepare a response to the proposed tuition transfer pricing scheme.

Question 35

Transfer Prices and Capacity
Jefferson Company has two divisions: Jefferson Bottles and Jefferson Juice. Jefferson Bottles makes glass containers, which it sells to Jefferson Juice and other companies. Jefferson Bottles has a capacity of 10 million bottles a year. Jefferson Juice currently has a capacity of 3 million bottles of juice per year. Jefferson Bottles has a fixed cost of $100,000 per year and a variable cost of $0.01/bottle. Jefferson Bottles can currently sell all of its output at $0.03/bottle.
Required:
a. What should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions will make appropriate decentralized planning decisions?
b. If Jefferson Bottles can only sell 5 million bottles to outside buyers, what should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions will make appropriate decentralized planning decisions?

Question 36

Estimating Production Costs
The Fancy Umbrella Company makes beach umbrellas. The production process requires 3 square meters of plastic sheeting and a metal pole. The plastic sheeting costs $0.50 per square meter and each metal pole costs $1.00. At the beginning of the month, the company has 5,000 square feet of plastic and 1,000 poles in raw materials inventory. The preferred raw material amount at the end of the month is 3,000 square feet of plastic sheeting and 600 poles. The company has 300 finished umbrellas in inventory at the beginning of the month and plans to have 200 finished umbrellas at the end of the month. Sales in the coming month are expected to be 5,000 umbrellas.
Required:
a. How many umbrellas must the company produce to meet demand and have sufficient ending inventory?
b. What is the cost of materials that must be purchased?

Question 37

Performance Measures for Cost Centers
A soft drink company has three bottling plants throughout the country. Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks. The parent company supplies each plant with the syrup. The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to regional grocery stores.
The bottling plants are treated as costs centers. The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered. Each bottling plant uses the same equipment, but some produce more bottles of soft drinks because of different demand. The costs and output for each bottling plant are: Required:
a. Estimate the average cost per unit for each plant.
b. Why would the manager of plant A be unhappy with using the average cost as the performance measure?
c. What is an alternative performance measure that would make the manager of plant A happier?
d. Under what circumstances might the average cost be a better performance measure?

Question 38

The Effect of Budgets on Organization
Describe how budgets and budgeting systems help solve the organization problem. Give examples.

Question 39

Over/Underabsorbed Overhead
The Alphonse Company allocates fixed overhead costs by machine hours and variable overhead costs by direct labor hours. At the beginning of the year the company expects fixed overhead costs to be $600,000 and variable costs to be $800,000. The expected machine hours are 6,000 and the expected direct labor hours are 80,000. The actual fixed overhead costs are $700,000 and the actual variable overhead costs are $750,000. The actual machine hours during the year are 5,500 and the actual direct labor hours are 90,000.
Required:
a. How much overhead is allocated?
b. What is the over/underabsorbed overhead?

Question 40

Different Types of Budgets
The Sticky Company makes a glue that is used to glue the layers of wood veneer together to make plywood. The process for making the glue has been used for many years and the customers are satisfied with the product. The Sticky Company has had very low turnover of personnel and the president and the managers have all been with the company for many years. Although the company appears very stable today, plywood prices are rising and the construction industry is beginning to switch to a cheaper product called chipboard. Chipboard uses a different glue than the glue made by the Sticky Company.
Given the present condition of Sticky Company, should the company use long-term budgets, line-item budgets, budget lapsing, flexible budgets, or zero-based budgeting?

Question 41

Productivity Measure With A Single Input and Output
An tax accountant is examining his productivity. In 1996 he did 300 tax returns in 1400 hours. In 1997 he did 250 tax returns in 1200 hours.
What was his percentage increase in productivity from 1996 to 1997?

Question 42

Overhead Variances
The following information is for the third quarter of this year: Required:
Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.

Question 43

Absorption Costing in a Bank
First Eastern Bank is a large, multibranch bank offering a wide variety of commercial and retail banking services. Eastern uses an absorption costing system to monitor the costs of various services and provide information for a variety of decisions.
One set of services is a retail loan operation providing residential mortgages, car loans, and student college loans. All loan applications are filed by the applicant at a branch bank, where the branch manager fills out the loan application. From there, the loan application is sent to the loan processing department, where the applicant's credit history is checked and a recommendation is made regarding loan approval based on the applicant's credit history and current financial situation. This recommendation is forwarded to the loan committee of senior lending officers, who review the file and make a final decision.
Thus, there are three stages to making a loan: application in a branch, the loan processing department, and the loan committee. Mr. and Mrs. Jones visit the West Street branch and file an application for a residential mortgage. The Jones's loan application is processed through the three stages.
• West Street Branch Bank. The branch manager spends one hour taking the application. The branch manager spends 1,000 hours per year of her total time taking loan applications and the remainder of her time providing other direct services to customers. Total overhead in the West Street Branch is budgeted to be $259,000, excluding the manager's salary, and is allocated to direct customer services using the branch manager's time spent providing direct customer services. The branch manager's annual salary is $42,600.
• Processing department. The processing department budgets its total overhead for the year to be $800,000, which is allocated to loans processed using direct labor hours. Budgeted direct labor hours for the year are 40,000 hours. Direct labor hours in the processing department cost $18 per hour. The Jones's loan requires five direct labor hours in the loan processing department.
• Loan committee. Ten senior bank executives are on the loan committee. The loan committee meets 52 times per year, every Wednesday, all day, to approve all loans. The average salary and benefits of each member of the loan committee are $104,000. The loan committee spends 15 minutes reviewing the Jones's loan application before approving it.
For costing purposes, all employees are assumed to work eight-hour days, five days per week, 52 weeks per year.
Required:
Calculate the total cost of taking the application, processing, and approving the Joneses' mortgage.

Question 44

Expected, Standard, and Actual Labor Hours
The Pizza Company makes two types of frozen pizzas: pepperoni and cheese. The Pizza Company allocates overhead to these two products based on the number of direct labor hours. The direct labor hours per unit for making a pepperoni pizza is 5 minutes or 1/12 of an hour. The direct labor hours per unit for making a cheese pizza is 4 minutes or 1/15 of an hour. At the start of the year the Pizza Company expected to make 12,000 pepperoni pizzas and 6,000 cheese pizzas. During the year, the Pizza Company actually made 9,000 pepperoni pizzas and 7,500 cheese pizzas. The time cards indicate that direct laborers worked for 1,300 hours. What are the total expected direct labor hours, standard direct labor hours, and actual direct labor hours?

Question 45

ABC and Average Cost in a Service Industry
For many years the Honey Lake Summer Camp had used the number of campers per week to estimate weekly costs. The summer camp is open for ten weeks during the summer with a different number of campers each week. July is busiest with June and the end of August least busy. Costs from the last week of summer camp in 1998 are used to estimate costs for 1999 for pricing purposes. The following costs occurred during the last week of 1998 and the costs of each cost category are expected to be the same for 1999: Cost per camper: $12,200/50 campers = $244/camper
The Honey Lake Summer Camp expects 75 campers during the second week of July.
Required:
a. What is the expected cost of that week using the average cost?
b. What is the expected cost of that week using ABC?

Question 46

Overhead Variances
Overhead is applied on the basis of direct labor hours. Three direct labor hours are required for each product unit. Planned production for the period was set at 8,000 units. Manufacturing overhead for the period is budgeted at $204,000, of which 30 percent is fixed. The 26,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $220,500.
Required:
Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.

Question 47

Describe ABC
Required:
a. What is activity-based costing and how does it differ from traditional absorption costing?
b. Describe the advantages and disadvantages of activity-based costing systems.

Question 48

Plantwide vs. Department Overhead Rates
Rose Bach has recently been hired as controller of Empco Inc., a sheet-metal manufacturer. Empco has been in the sheet-metal business for many years and is currently investigating ways to modernize its manufacturing process. At the first staff meeting Bach attended, Bob Kelley, chief engineer, presented a proposal for automating the drilling department. Kelley recommended that Empco purchase two robots that could replace the eight direct labor workers in the department. The cost savings outlined in Kelley's proposal include two elements. First, direct labor cost in the drilling department is eliminated. Second, manufacturing overhead cost in the department is reduced to zero because Empco charges manufacturing overhead on the basis of direct labor dollars using a plantwide rate.
The president of Empco felt that Kelley's explanation of the cost savings made no sense. Bach agreed and explained that as firms become more automated, they should rethink their manufacturing overhead systems. The president asked Bach to look into the matter and prepare a report for the next staff meeting.
To refresh her knowledge, Bach reviewed articles on manufacturing overhead allocation for an automated factory and discussed the matter with some of her peers. She also gathered the historical data presented below on the manufacturing overhead rates experienced by Empco over the years. Bach also wanted to have some departmental data to present at the meeting. Using Empco's accounting records, she was able to estimate the annual averages presented below for each manufacturing department in the 1990s. Required:
a. Disregarding the proposed use of robots in the drilling department, describe the shortcomings of Empco's current system for applying overhead.
b. Do you agree with Bob Kelley's statement that the manufacturing overhead cost in the drilling department will be reduced to zero if the automation proposal is implemented? Explain.
c. Recommend ways to improve Empco's method for applying overhead by describing how it should revise its overhead accounting system:
(i) in the cutting and grinding departments.
(ii) to accommodate the automation of the drilling department.
Source: CMA adapted.

Question 49

Basic Overhead Variances
Derf Company applies overhead on the basis of direct labor hours. Two direct labor hours are required for each product unit. Planned production for the period was set at 9,000 units. Manufacturing overhead for the period is budgeted at $135,000, of which 20 percent is fixed. The 17,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $136,500.
Required:
Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.

Question 50

Variable and Absorption Costing
Varilux manufactures a single product and sells it for $10 per unit. At the beginning of the year there were 1,000 units in inventory. Upon further investigation, you discover that units produced last year had $3.00 of fixed manufacturing cost and $2.00 of variable manufacturing cost. During the year Varilux produced 10,000 units of product. Each unit produced generated $3.00 of variable manufacturing cost. Total fixed manufacturing cost for the current year was $40,000. There were no inventories at the end of the year.
Required:
Prepare two income statements for the current year, one on a variable cost basis and the other on an absorption cost basis. Explain any difference between the two net income numbers and provide calculations supporting your explanation of the difference.

Question 51

Developing Standards
ColdKing Company is a small producer of fruit-flavored frozen desserts. For many years, ColdKing's products have had strong regional sales on the basis of brand recognition; however, other companies have begun marketing similar products in the area, and price competition has become increasingly important. John Wakefield, the company's controller, is planning to implement a standard cost system for ColdKing and has gathered considerable information from his co-workers on production and materials requirements for ColdKing's products. Wakefield believes that the use of standard costing will allow ColdKing to improve cost control and make better pricing decisions.
ColdKing's most popular product is raspberry sherbet. The sherbet is produced in 10-gallon batches, and each batch requires six quarts of good raspberries. The fresh raspberries are sorted by hand before entering the production process. Because of imperfections in the raspberries and normal spoilage, one quart of berries is discarded for every four quarts of acceptable berries. Three minutes is the standard direct labor time for sorting to obtain one quart of acceptable raspberries. The acceptable raspberries are then blended with the other ingredients; blending requires 12 minutes of direct labor time per batch. After blending, the sherbet is packaged in quart containers. Wakefield has gathered the following pricing information:
• ColdKing purchases raspberries at a cost of $0.80 per quart. All other ingredients cost a total of $4.50 per 10-gallon batch.
• Direct labor is paid at the rate of $9.00 per hour.
• The total cost of material and labor required to package the sherbet is $0.38 per quart.
Required:
a. Develop the standard cost for the direct cost components of a 10-gallon batch of raspberry sherbet. For each direct cost component of a batch of raspberry sherbet, the standard cost should identify the
(i) standard quantity.
(ii) standard rate.
(iii) standard cost per batch.
b. As part of the implementation of a standard cost system at ColdKing, John Wakefield plans to train those responsible for maintaining the standards in the use of variance analysis. Wakefield is particularly concerned with the causes of unfavorable variances.
(i) Discuss the possible causes of unfavorable materials price variances and identify the individual(s) who should be held responsible for them.
(ii) Discuss the possible causes of unfavorable labor efficiency variances and identify the individual(s) who should be held responsible for them.

Question 52

Developing Additional Variances for Performance Evaluation
Maidwell Company manufactures washers and dryers on a single assembly line in its main factory. The market has deteriorated over the last five years and competition has made cost control very important. Management has been concerned about the materials costs of both washers and dryers. There have been no model changes in the past two years, and economic conditions have allowed the company to negotiate price reductions for many key parts.
Maidwell uses a standard cost system in accounting for materials. Purchases are charged to inventory at a standard price, and purchase discounts are considered an administrative cost reduction. Production is charged at the standard price of the materials used. Thus, the price variance is isolated at time of purchase as the difference between gross contract price and standard price multiplied by the quantity purchased. When a substitute part is used in production, a price variance equal to the difference in the standard prices of the materials is recognized at the time of substitution. The quantity variance is the actual quantity used compared with the standard quantity allowed, with the difference multiplied by the standard price.
The materials variances for several of the parts Maidwell uses are unfavorable. Part #4121 is one item that has an unfavorable variance. Maidwell knows that some of these parts are defective and will fail. The failure is discovered during production. The normal defective rate is 5 percent of normal input. The original contract price of this part was $0.285 per unit; thus, Maidwell set the standard unit price at $0.285. The unit contract purchase price of Part #4121 was increased to $0.325 from the original $0.285 due to a parts specification change. Maidwell chose not to change the standard; it treated the increase in price as a price variance. In addition, the contract terms were changed from payment due in 30 days to a 4 percent discount if paid in 10 days or full payment due in 30 days. These new contractual terms were the consequence of negotiations resulting from changes in the economy.
Data regarding the use of Part #4121 during December are as follows. Maidwell's material variances related to Part #4121 for December were reported as follows: Bob Speck, the purchasing director, claims the unfavorable price variance is misleading. Speck says that his department has worked hard to obtain price concessions and purchase discounts from suppliers. In addition, Speck says engineering changes in several parts have increased their prices, even though the part identification has not changed. These price increases are not his department's responsibility. Speck declares that price variances no longer measure purchasing's performance.
Jim Buddle, the manufacturing manager, thinks the responsibility for the quantity variance should be shared. Buddle states that manufacturing cannot control quality associated with less expensive parts, substitutions of material to use up otherwise obsolete stock, or engineering changes that increase the quantity of materials used.
The accounting manager, Mike Kohl, suggests that the computation of variances be changed to identify variations from standard with the causes and functional areas responsible for the variances. Kohl recommends the following system of materials variances and the method of computation for each: Required:
a. Discuss the appropriateness of Maidwell Company's current method of variance analysis for materials and indicate whether the claims of Bob Speck and Jim Buddle are valid.
b. Compute the materials variances for Part #4121 for December using the system recommended by Mike Kohl.
c. Who would be responsible for each of the variances in Mike Kohl's system of variance analysis for materials?

Question 53

Standard Labor Variances
A CPA firm estimates that an audit will require the following work: The actual hours and costs were: Required:
Calculate the direct labor, wage rate, and labor efficiency variances for each type of auditor and interpret.

Question 54

Labor Variances
Hospital Software sells and installs computer software used by hospitals for patient admissions and billing. Every sale requires that Hospital Services modify its proprietary software for the specific demands of the client. Prior to each installation, Hospital Software estimates the number of hours of programming time each job will require and the cost of the programmers. Programmers record the amount of time they spend on each modification, and variance reports are prepared at the end of each installation.
For the Denver General Hospital account, Hospital Software estimates the following labor standards: After the job was completed, the following costs were reported: Required:
Calculate the labor efficiency and labor wage rate variances for the junior and senior programmers on the Denver General Hospital account.

Question 55

Incentives and Depreciation Methods
What conditions are likely to exist when operating managers are compensated based on accounting earnings and accelerated depreciation methods are used to compute overhead charges to operating departments?

Question 56

Different Overhead Allocation Bases
Set-Up Company produces blue things and gray things. Blue things are in much greater demand in the market and the firm sells 120,000 blue things a year. Set-Up Co. sells 6,000 gray things per year in small boutiques. Things have a short shelf life. They must be distributed, sold, and consumed within two months of manufacture.
Both things use the identical production process and production facilities. Direct labor is $0.50 per thing and direct material is $0.50 per thing. Things are produced in batches. Blue things are produced in batches of 600 units and gray things in batches of 30. Each batch of things goes through the thingamajig, which is the machine that converts raw inputs into things. Each batch requires engineers to reset the machine for the next batch, calibrate settings, and test the first 10 things for product quality and conformity to standards. Even if sequential batches of the same things are made, setups must be performed for each new batch. All the overhead costs are incurred in setups. Indirect labor, indirect materials, and supplies consumed during setup cost $360,000 per year. The only costs of producing things are direct labor, direct materials, and the overhead of setups. The company is currently allocating setup costs to things based on direct labor cost.
The firm has been selling blue things for $4 per unit and gray things for $6 per unit. But foreign competition for blue things is starting to put pressure on the $4 price. Some competitors are selling blue things for as low as $3 per unit. Management is considering putting more emphasis on selling gray things, whose margins are higher. On the other hand, management worries that the current system for allocating overhead costs is misrepresenting the costs of the two products because direct labor costs are not representative of the time spent by each product on the thingamajig. Management is considering allocating setup costs using machine hours on the thingamajig. A batch of gray things requires one hour of machine time and a batch of blue things requires 20 hours of machine time.
Required:
Analyze the present situation. Is there anything wrong with the costing system? If so, should management change to the proposed allocation base of machine hours?

Question 57

Establishing a Standard Cost System
The Tippa Canoe Company makes fiberglass canoes. The fiberglass resin is initially molded to the shape of a canoe, then sanded and painted. Metal or wooden seats and frames are added for stability. The Tippa Canoe Company was started several years ago in the owner's garage. The owner, Jeff George, did a lot of the initial manual labor with the help of a few friends. The company has since expanded into a large warehouse and new employees have been hired. Because of the expansion, Jeff is no longer directly involved with production and is concerned about his ability to plan for and control the company. He is considering the implementation of a standard cost system.
Required:
a. Describe the procedures Jeff should use in setting standards for direct labor and direct materials.
b. Describe how Jeff could use standards for planning purposes,
c. Describe how Jeff could use standards for motivating employees and problems in using standards as performance measures.
d. Why are some of Jeff's friends who worked with from the beginning not very excited about a change to a standard cost system?

Question 58

Product Profitability and Mix - Calculating Variable Overhead
Sportway Inc. is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. About 60 percent of Sportway's products are purchased from other companies and the remainder are manufactured by Sportway. The company has a plastics department that is currently manufacturing molded fishing tackle boxes. Sportway is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available workstations. Presented below are the selling price and costs associated with Sportway's tackle boxes. Because Sportway believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68 per box delivered to Sportway's facility.
Bart Johnson, Sportway's product manager, has suggested that the company could make better use of its plastics department by manufacturing skateboards. To support his position, Johnson has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Johnson believes that Sportway could expect to sell 17,500 skateboards annually at $45 per skateboard. Johnson's estimate of the costs to manufacture the skateboards follows. In the plastics department, Sportway uses direct labor hours as the application base for manufacturing overhead. Included in manufacturing overhead for the current year is $50,000 of factorywide, fixed manufacturing overhead that has been allocated to the plastics department. For each product that Sportway sells, regardless of whether the product has been purchased or is manufactured by Sportway, a portion of the selling and administrative cost is fixed at $6 per unit. Total selling and administrative costs for the purchased tackle boxes would be $10 per unit.
Required:
Prepare an analysis based on the data presented that will show which product or products Sportway Inc. should manufacture and/or purchase to maximize the company's profitability. Show the associated financial impact. Support your answer with appropriate calculations.

Question 59

Materials Quantity Variance: Solving for Actual Quantity
Todco planned to produce 3,000 units of its single product, Teragram, during November. The standard specifications for one unit of Teragram include six pounds of material at $0.30 per pound. Actual production in November was 3,100 units of Teragram. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120.
Required:
Based on these data, calculate how many pounds of material were used in the production of Teragram during November.

Question 60

Basic Price and Quantity Variances for Labor and Materials
Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the direct costs of one unit of product. During May, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for May were $42,000, 90 percent of which were for direct labor. Arrow manufactured 19,000 units of product during May using 142,500 pounds of direct material and 5,000 direct labor hours.
Required:
a. Calculate the direct materials price variance for May.
b. Calculate the direct materials quantity variance for May.
c. Calculate the direct labor wage rate variance for May.
d. Calculate the direct labor efficiency variance for May.

Question 61

Accounting for JIT
Vail operates a JIT plant assembling ceiling fans. The Sunset Model ceiling fam has a standard material cost of $28.40, a standard direct labor cost of $14.80, and overhead (fixed and variable) of $16.10. On Monday, a batch of 100 Sunset fans is completed. All of the materials for the 100 fans were on hand prior to Monday and had been previously recorded in the raw and in-process inventory account.
Required:
a. Describe the accounting entries that are made at the end of Monday to record the assembly of the batch of 100 Sunset fans.
b. In analyzing the financial statements of a firm using JIT and another firm in the same industry not using JIT, what differences would you expect to observe?

Question 62

An Inspection Decision With Quality Costs
A company is considering additional final inspection costs of $1 per unit before delivery to customers. The additional inspection should reduce the defective rate from 3 percent to 1 percent. If a defective unit is found, it is scrapped at no additional cost. The manufacturing costs before the final inspection are $200 per unit. The management believes that the external failure costs are $40 per defective unit.
Should the management incur the additional inspection costs?

Question 63

JIT and Stock-Out Costs
James Industries is considering a shift to JIT. The president feels that considerable costs can be saved by reducing inventory. The marketing manager is worried, however. She recognizes that the inventory holding costs such as storage and the opportunity cost of cash used to hold inventory are high and will be reduced if the company changes to JIT. But she is worried that the president has forgotten about stock-out costs. Stock-out costs occur when customers want to purchase an item, but the item is not immediately available so the customer goes elsewhere to make the purchase.
How should the company measure stock-out costs and what can be done to minimize stock-out costs?

Question 64

JIT Accounting
Warm Glo manufactures gas furnaces for residential use. It uses a standard cost system that isolates all variances at purchase so that all product costs are stated at standard cost. All variances are included as part of cost of goods sold. Overhead is allocated based on direct labor hours. Standard cost for the basic economy model furnace follows.
Warm Glo manufactures the basic economy furnace in a dedicated flow line using just-in-time production principles. All raw materials and purchased parts needed to assemble a complete furnace are delivered to the plant by 8:00 am of the day the furnace begins production. While each furnace requires eight direct labor hours, total throughput time for each furnace is two working days (16 hours). The difference between total throughput time and the eight direct labor hours is waiting time. Furnaces that are started in production one day are finished the next day. Four hours of direct labor are used the first day and four hours of direct labor are worked the second day. All production for the week is accumulated and shipped out to the distributor by train on Saturday.
Warm Glo maintains a finished-goods inventory account for basic economy furnaces that reflects the standard cost of furnaces not yet shipped out. Warm Glo uses a raw and in-process materials account (RIP) and JIT backflushing accounting. All accounts are updated at the end of each day for all production and transactions occurring that day. Conversion costs are charged directly to the finished goods inventory account as work is performed on furnaces. Through the end of Thursday of the current week the following table contains information about the plant's production of basic economy furnaces: Required:
a. What is the balance in the RIP account for the basic economy model at the end of Thursday?
b. What is the balance in the finished goods account (basic economy model) at the end of Thursday?

Question 65

JIT and the Role of Accounting
The president of Kelly Windows is an avid believer in JIT. Kelly Windows manufactures bay windows. The president wants no inventory or work-in-process on the floor at the end of each day. Windows are only manufactured after being ordered and throughput time is quick enough to complete most orders during the day of the order. The president is also trying to eliminate all non-value added activities. She considers accounting to be non-value added and would like to reduce accounting activities sharply if not completely.
As the controller, how can you defend the accounting activities performed by your department?

Question 66

Productivity Measures With Multiple Inputs and Outputs
A farmer grows two crops: lettuce and beans. The farmer uses three inputs: labor, seed, and fertilizer. The past prices and the quantities of each are given in the following tables: Required:
a. Calculate productivity measures for last year and this year using past prices.
b. Calculate the percentage change in productivity.