Reference no: EM131059613

Part 1:

Using ABC to Determine a

Bid Price

Spear Custom Furniture uses an activity-based cost accounting system to apply overhead to production. The company maintains four overhead cost pools. The four cost pools, and their budgeted amounts for the upcoming period, are as follows:

Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $40,000
Materials handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Set-ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 10,000
Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  45,000

Four cost drivers are used by Spear to allocate its overhead cost pools to production. The four cost drivers, and their budgeted total levels of activity for the upcoming period, are shown below:

Machine hours (to allocate maintenance costs) . . . . . . . . . . . .  . 600 hours
Material moves (to allocate materials handling costs) . . . . . . . . .  400 moves
Set-ups (to allocate set-up costs) . . . . . . . . . . . . . . . . . . . . . .100 set-ups
Number of inspections (to allocate quality control costs) . . . . . . . 300 inspections

The company has been asked by Cosmopolitan University to submit a bid for tables to be used in a new computer lab. The plant manager feels that obtaining this job would result in new business in future years. Estimates for the Cosmopolitan University project are as follows:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,000
Direct labor (500 hours) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$15,000
Number of machine hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Number of material moves . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Number of set-ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Number of inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

a. Estimate the total cost of manufacturing the tables for Cosmopolitan University.

b. Determine the company's bid price if bids are based upon the total estimated manufacturing cost of a particular project, plus 75 percent.

Part 2:

Process Costing through

Two Departments:

Department I

Accessory World makes floor mats for the automobile industry. Finished sets of mats must pass through two departments: Cutting and Coating. Large sheets of synthetic material are cut to size in the Cutting Department and then transferred to the Coating Department, where each set is sprayed with a chemical coating for improved durability. The following information pertains to May activity in the Cutting Department:

Cost data:

Total cost of beginning inventory on May 1 . . . . . . . . . . . . . $ 44,800
Direct materials costs incurred in May. . . . . . . . . . . . . . . . .  200,000
Conversion costs incurred in May . . . . . . . . . . . . . . . . . . . . 87,200

Physical units data:
Units in process, May 1 . . . . . . . . . . . . . . . . . . . . . . . . . .  8,000 sets
Units started in May . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50,000 sets
Units in process, May 31 . . . . . . . . . . . . . . . . . . . . . . . . .  10,000 sets

Percentage of completion data:

Direct materials, May 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%
Conversion, May 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  80
Direct materials, May 31. . . . . . . . . . . . . . . . . . . . . . . . . . . .  100%
Conversion, May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

a. Prepare a schedule showing: (1) the number of mat sets transferred from the Cutting Department to the Coating Department in May, and (2) the number of mat sets started and completed by the Cutting Department in May.

b. Compute the equivalent units of input resources for the Cutting Department in May.

c. Compute the cost per equivalent unit of input resource for the Cutting Department in May.

d. Prepare the summary journal entry required to transfer the cost of completed mat sets from the Cutting Department to the Coating

Department in May.

e. Compute the total cost assigned to the Cutting Department's ending inventory on May 31.

Part 3:

Process Costing through

Two Departments:

Department II

The following information pertains to May activity in Accessory World's Coating Department:

Cost data:

Total cost of beginning inventory on May 1 . . . . . . . . . . .  . $45,300
Direct materials costs incurred in May. . . . . . . . . . . . . . . . . 11,925
Conversion costs incurred in May . . . . . . . . . . . . . . . . . . .  84,525
Cut sets transferred in during May. . . . . . . . . . . . . . . . . . . . . . ?

Physical units data:

Units in process, May 1 . . . . . . . . . . . . . . . . . . . . . . . . . .  6,000 sets
Units started in May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .? sets
Units in process, May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 sets

Percentage of completion data:

Direct materials, May 1. . . . . . . . . . . . . . . . . . . . . . . . . . .. . 60%
Conversion, May 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Cut sets transferred in, May 1 . . . . . . . . . . . . . . . . . . . . . . . .?
Direct materials, May 31. . . . . . . . . . . . . . . . . . . . . . . . . . .  70%
Conversion, May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Cut sets transferred in, May 31 . . . . . . . . . . . . . . . . . . . . . . . ?

a. Compute how many cut mat sets were started in the Coating Department during May.

b. Prepare a schedule showing: (1) the number of mat sets transferred out of the Coating Department in May, and (2) the number of mat sets started and completed by the Coating Department in May.

c. Compute the equivalent units of input resources for the Coating Department in May.

d. Compute the cost per equivalent unit of input resource for the Coating Department in May.

e. Prepare the summary journal entry required to transfer the cost of finished mat sets from the Coating Department's Work in Process Inventory to the company's Finished Goods Inventory in May.

f. Compute the total cost assigned to the Coating Department's ending inventory in process on May 31.

Part 4:

Value-Chain Activities

Assume you have just been hired as the management accountant in charge of providing your firm's managers with product cost information.

Identify the activities you might undertake for the following four value chain components:

a. Research and development
b. Production
c. Marketing
d. Customer service

Part 5:

Identifying Value-Added
and Non-Value-Added
Activities

Castner Corporation is considering implementation of a JIT inventory system. The company's industrial engineer recently conducted a study to determine the average number of days spent in each activity of the production process. The following table summarizes her findings:

Production Activity Number of Days

Inspecting materials . . . . . . . . . . . . . . . . . . . . . . .. . . 3
Storing materials . . . . . . . . . . . . . . . . . . . . . . . . .  . . 17
Moving materials into production . . . . . . . . . . . . . . . . .  3
Setting up production equipment . . . . . . . . . . . . . . . . . .2
Cutting materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Bending materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Assembling finished products . . . . . . . . . . . . . . . . . . . . 9
Painting finished products . . . . . . . . . . . . . . . . . . . . . . 5

Instructions

a. Identify Castner's value-added production activities.

b. Identify Castner's non-value-added production activities.

c. Calculate Castner's total cycle time.

d. Determine Castner's manufacturing efficiency ratio.

e. Which of the above activities might be reduced or eliminated if Castner implemented a JIT system?

f. What ethical issues might be related to eliminating some of the non-value-added activities?