Jean Sharpe
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Jean Sharpe decides to gather additional data to identify the cause of
Because labor-hours are still an important cost driver for overhead, Jean decides that she should use labor-hours to allocate the remaining $24,500.
CBI still plans to produce 1,000 cases each of Almond Dream, Krispy Krackle, and Creamy Crunch. Assume that CBI can sell all products it manufactures and that if it drops any products, it will use excess capacity to produce additional cases of the most profitable product. Overhead will remain $69,500 per month under all alternatives
Required
- Based on the additional data, determine the product cost and gross profit margin percentages of each product using the three allocation bases (labor-hours, machine-hours, and square feet) to determine the allocation assigned to each product.
- Would management recommend dropping any product based on the criterion of dropping products with less than 10 percent gross profit margin?
- Based on the recommendation you make in requirement ( b ), recalculate the allocations and profit margins to determine whether any of the remaining products should be dropped from the product line. If so, substantiate the profitability of remaining products.
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- Evans, Inc., has a unit-based costing system. Evanss Miami plant produces 10 different electronic products. The demand for each product is about the same. Although they differ in complexity, each product uses about the same labor time and materials. The plant has used direct labor hours for years to assign overhead to products. To help design engineers understand the assumed cost relationships, the Cost Accounting Department developed the following cost equation. (The equation describes the relationship between total manufacturing costs and direct labor hours; the equation is supported by a coefficient of determination of 60 percent.) Y=5,000,000+30X,whereX=directlaborhours The variable rate of 30 is broken down as follows: Because of competitive pressures, product engineering was given the charge to redesign products to reduce the total cost of manufacturing. Using the above cost relationships, product engineering adopted the strategy of redesigning to reduce direct labor content. As each design was completed, an engineering change order was cut, triggering a series of events such as design approval, vendor selection, bill of materials update, redrawing of schematic, test runs, changes in setup procedures, development of new inspection procedures, and so on. After one year of design changes, the normal volume of direct labor was reduced from 250,000 hours to 200,000 hours, with the same number of products being produced. Although each product differs in its labor content, the redesign efforts reduced the labor content for all products. On average, the labor content per unit of product dropped from 1.25 hours per unit to one hour per unit. Fixed overhead, however, increased from 5,000,000 to 6,600,000 per year. Suppose that a consultant was hired to explain the increase in fixed overhead costs. The consultants study revealed that the 30 per hour rate captured the unit-level variable costs; however, the cost behavior of other activities was quite different. For example, setting up equipment is a step-fixed cost, where each step is 2,000 setup hours, costing 90,000. The study also revealed that the cost of receiving goods is a function of the number of different components. This activity has a variable cost of 2,000 per component type and a fixed cost that follows a step-cost pattern. The step is defined by 20 components with a cost of 50,000 per step. Assume also that the consultant indicated that the design adopted by the engineers increased the demand for setups from 20,000 setup hours to 40,000 setup hours and the number of different components from 100 to 250. The demand for other non-unit-level activities remained unchanged. The consultant also recommended that management take a look at a rejected design for its products. This rejected design increased direct labor content from 250,000 hours to 260,000 hours, decreased the demand for setups from 20,000 hours to 10,000 hours, and decreased the demand for purchasing from 100 component types to 75 component types, while the demand for all other activities remained unchanged. Required: 1. Using normal volume, compute the manufacturing cost per labor hour before the year of design changes. What is the cost per unit of an average product? 2. Using normal volume after the one year of design changes, compute the manufacturing cost per hour. What is the cost per unit of an average product? 3. Before considering the consultants study, what do you think is the most likely explanation for the failure of the design changes to reduce manufacturing costs? Now use the information from the consultants study to explain the increase in the average cost per unit of product. What changes would you suggest to improve Evanss efforts to reduce costs? 4. Explain why the consultant recommended a second look at a rejected design. Provide computational support. What does this tell you about the strategic importance of cost management?Big Mikes, a large hardware store, has gathered data on its overhead activities and associated costs for the past 10 months. Nizam Sanjay, a member of the controllers department, believes that overhead activities and costs should be classified into groups that have the same driver. He has decided that unloading incoming goods, counting goods, and inspecting goods can be grouped together as a more general receiving activity, since these three activities are all driven by the number of receiving orders. The 10 months of data shown below have been gathered for the receiving activity. Required: 1. Prepare a scattergraph, plotting the receiving costs against the number of purchase orders. Use the vertical axis for costs and the horizontal axis for orders. 2. Select two points that make the best fit, and compute a cost formula for receiving costs. 3. Using the high-low method, prepare a cost formula for the receiving activity. 4. Using the method of least squares, prepare a cost formula for the receiving activity. What is the coefficient of determination?Box Springs. Inc., makes two sizes of box springs: queen and king. The direct material for the queen is $35 per unit and $55 is used in direct labor, while the direct material for the king is $55 per unit, and the labor cost is $70 per unit. Box Springs estimates it will make 4,300 queens and 3,000 kings in the next year. It estimates the overhead for each cost pool and cost driver activities as follows: How much does each unit cost to manufacture?
- Sweet Dreams Bakery was started five years ago by Della Fontera who was known for her breads, sweet rolls, and personalized cakes. Della had kept her accounting system simple, believing that she had a good intuitive handle on costs. She had been using the following formula to describe her monthly overhead costs: Overhead cost = 7,800 + 7.50 (direct labor hours) For breads and sweet rolls that were available in the bakery case each day, she applied a standard pricing system. For special orders, however, Della needed her cost formula to help her come up with an estimated cost for the personalized cake or wedding cake. To that cost, she applied a markup percentage. Lately, however, the increase in the variety of orders and the elaborateness of the wedding cakes made her wonder if a more sophisticated view of costs would help her in planning, budgeting, and pricing. After some late-night discussions with her workers, Della determined that Sweet Dreams expansion into wedding cakes and gift baskets had made special orders a more complex operation. The various shapes of the wedding cake tiers had required Dellas investing in different- sized cake pans, as well as decorating tips for icing. The different icing patterns and elaborate designs took much more time for icing, as well. In addition, while a five-year-olds birthday cake just requires that the childs name and (possibly) the superheros name are spelled correctly, a wedding cake is a once-in-a-lifetime item that must achieve perfection. (Della hated to use the term bridezilla but.) Gift baskets required Della to stock baskets, cellophane, and bows. Then when an order came in, a worker had to stop baking to arrange the muffins and breads artfully in the basket, wrap it, and tie the bow. While it seemed simple enough, this took time and thought. Thus, the number of direct labor hours was still an important variable, but so were the number of wedding cakes and gift baskets. Della rummaged through her college textbooks and found information on regression. Then, with help from one of her computer savvy workers, she ran multiple regression tables for the past 24 months of data for Sweet Dreams for three independent variables: number of direct labor hours, the number of wedding cakes, and the number of gift baskets. The following printout was obtained: Required: 1. Write out the cost equation for Sweet Dreams monthly overhead cost. 2. Suppose that next month Sweet Dreams expects to have 550 direct labor hours, 35 wedding cakes, and 20 gift baskets. What is the expected overhead? (Round to the nearest dollar.) 3. What does R2 mean in this equation? Overall, what is your evaluation of the cost equation that was developed for the cost of overhead? Suppose that Sweet Dreams charges an extra 2.50 to prepare a gift basket. This charge is in addition to the price charged for the items (e.g., muffins) that the customer chooses to put into the basket. How might Della use the results of the regression equation to see whether or not the 2.50 charge is appropriate?Brees, Inc., a manufacturer of golf carts, has just received an offer from a supplier to provide 2,600 units of a component used in its main product. The component is a track assembly that is currently produced internally. The supplier has offered to sell the track assembly for 66 per unit. Brees is currently using a traditional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours. The estimated traditional full cost of producing the track assembly is as follows: Prior to making a decision, the companys CEO commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following: 3 setups1,160 each (The setups would be avoided, and total spending could be reduced by 1,160 per setup.) One half-time inspector is needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the track assembly operation is 12,300 and could be totally avoided if the part were purchased. Engineering work: 470 hours, 45/hour. (Although the work decreases by 470 hours, the engineer assigned to the track assembly line also spends time on other products, and there would be no reduction in his salary.) 75 fewer material moves at 30 per move. Required: 1. Ignore the special study, and determine whether the track assembly should be produced internally or purchased from the supplier. 2. Now, using the special study data, repeat the analysis. 3. Discuss the qualitative factors that would affect the decision, including strategic implications. 4. After reviewing the special study, the controller made the following remark: This study ignores the additional activity demands that purchasing would cause. For example, although the demand for inspecting the part on the production floor decreases, we may need to inspect the incoming parts in the receiving area. Will we actually save any inspection costs? Is the controller right?Jean Sharpe decides to gather additional data to identify the cause of overhead costs and figure out which products are most profitable. She notices that $30,000 of the overhead originated from the equipment used. She decides to incorporate machine-hours into the overhead allocation base to determine the effect on product profitability. Almond Dream requires 2 machine-hours per case, Krispy Krackle requires 7 hours per case, and Creamy Crunch requires 6 hours per case. Additionally, Jean notices that the $15,000 per month spent to rent 10,000 square feet of factory space accounts for almost 22 percent of the overhead. The assignment of square feet is 1,000 to Almond Dream, 4,000 to Krispy Krackle, and 5,000 to Creamy Crunch. Jean decides to incorporate this into the allocation base for the rental costs. Because labor-hours are still an important cost driver for overhead, Jean decides that she should use labor-hours to allocate the remaining $24,500. CBI still plans to produce 1,000…
- Jean Sharpe decides to gather additional data to identify the cause of overhead costs and figure out which products are most profitable. She notices that $30,000 of the overhead originated from the equipment used. She decides to incorporate machine-hours into the overhead allocation base to determine the effect on product profitability. Almond Dream requires 2 machine-hours per case, Krispy Krackle requires 7 hours per case, and Creamy Crunch requires 6 hours per case. Additionally, Jean notices that the $15,000 per month spent to rent 10,000 square feet of factory space accounts for almost 22 percent of the overhead. The assignment of square feet is 1,000 to Almond Dream, 4,000 to Krispy Krackle, and 5,000 to Creamy Crunch. Jean decides to incorporate this into the allocation base for the rental costs. Because labor-hours are still an important cost driver for overhead, Jean decides that she should use labor-hours to allocate the remaining $24,500. CBI still plans to produce 1,000…Big Boomers makes custom clubs for golfers. Most of the work is done by hand and with small tools used by craftsmen. Customers are quoted a price in advance of their clubs being manufactured. To produce clubs at a profit, management must have a thorough understanding of product costs. Jeff Ranck, manager of the business, is using direct labor hours as the activity base for allocating overhead costs. He estimated the following amounts at the beginning of 2022: Estimated total overhead. .$190,000Estimated direct labor hou .16,000 hours The following information is available for job number 17, which was started and completed in February 2022: - Direct materials used$1200- Direct labor used$600(corresponding to 50 direct labor hours) Prepare journal entries to: a. Record all the manufacturing costs charged to job 17 . b. Record the completion of job 17. c. Record the cash sale of job 17 in its entirety at a selling price of13%of its manufacturing cost. Record in a separate entry the…Sarah was attempting to estimate a model for her small business's overhead costs. She is 99.9% sure that overhead costs are driven primarily by production, but she also knows that this cost isn't entirely variable. So she grabbed the last 8 months of production and overhead cost data, listed it out, and plotted it as follows. Month # of Units Produced 1 2 3 4 5 6 7 8 240 200 270 330 350 310 260 280 Overhead Cost $2,970 2,140 2,650 3,340 3,040 3,260 2,650 3,470
- SmokeCity, Inc., manufactures barbeque smokers. Based on past experience, SmokeCity has found that its total annual overhead costs can be represented by the following formula: Overhead cost = $520,475 + $1.49X, where X equals number of smokers. Last year, SmokeCity produced 19,100 smokers. Actual overhead costs for the year were as expected. Required: 1. What is the driver for the overhead activity? For questions 2-4, Enter the final answers rounded to the nearest dollar. 2. What is the total overhead cost incurred by SmokeCity last year? $fill in the blank 2 3. What is the total fixed overhead cost incurred by SmokeCity last year? $fill in the blank 3 4. What is the total variable overhead cost incurred by SmokeCity last year? $fill in the blank 4 For questions 5-7, round your answers to the nearest cent. Use those rounded figures in subsequent computations, if necessary. 5. What is the overhead cost per unit produced? $fill in the blank 5 per unit 6. What is the fixed overhead cost…Marvin's Kitchen Supply delivers restaurant supplies throughout the city. The firm adds 10 percent to the cost of the supplies to cover the delivery cost. The delivery fee is meant to cover the cost of delivery. A consultant has analyzed the delivery service using activity- based costing methods and identified four activities. Data on these activities follow. Activity Processing order Loading truck Delivering merchandise Processing invoice Total overhead Order value Number of orders Number of items Number of invoices Cost Driver Number of orders Number of items Number of orders Number of invoices Two of Marvin's customers are City Diner and Le Chien Chaud. Data for orders and deliveries to these two customers follow. City Diner Le Chien Chaud $75,000 $90,000 110 1,500 150 Required A Cost Driver Volume 52 600 12 Cost $ 75,000 150,000 90,000 72,000 $387,000 Required B City Diner Le Chien Chaud Driver Volume 5,000 orders 100,000 items Required: a. What would the delivery charge for each…Barbara, the manager of Metlock, is analyzing the company's MOH costs from last year. Metlock had always followed an actual costing system when determining the costs of its customizable telescopes. Barbara wondered if it would be better to switch to a normal costing system, as she had heard a number of people talking about that at an industry conference she attended the previous month. Since Metlock has a highly machine-intensive operation, machine hours are used as its MOH cost driver. Here are the costs and other MOH information Barbara is analyzing: Budgeted MOH cost Actual MOH cost Budgeted machine hours Actual machine hours $426,240 Actual MOH rate $ 419,040 Determine the actual MOH rate and the budgeted MOH rate Metlock would have used last year under actual costing and normal costing, respectively. (Round answers to 2 decimal places, e.g. 52.75.) Budgeted MOH rate $ 96,000 108,000 /machine hour /machine hour