Question

Evian Corporation is a private corporation formed for the purpose of providing

the products and the services needed to irrigate farms, parks, commercial projects,

and private homes. It has a centrally located factory in a U.S. city that manufactures the

products it markets to retail outlets across the nation. It also maintains a division that

provides installation and warranty servicing in six metropolitan areas.

The mission of Evian is to manufacture quality parts that can be used for effective

irrigation projects that also conserve water. By that effort, the company hopes to satisfy

its customers, provide rapid and responsible service, and serve the community and

the employees who represent them in each community.

The company has been growing rapidly, so management is considering new ideas to

help the company continue its growth and maintain the high quality of its products.

Evian was founded by Will Winkman who is the company president and chief

executive officer (CEO). Working with him from the company’s inception was Will’s brother,

Ben, whose sprinkler designs and ideas about the installation of proper systems have been

a major basis of the company’s success. Ben is the vice president who oversees all aspects

of design and production in the company. The factory itself is managed by Todd Senter who hires his line managers to supervise the factory employees. The factory makes all of the parts for the irrigation systems. The purchasing department is managed by Hector Hines.

The installation and training division is overseen by vice president Henry Writer, who

supervises the managers of the six local installation operations. Each of these local managers

hires his or her own local service people. These service employees are trained by the home

office under Henry Writer’s direction because of the uniqueness of the company’s products.

There is a small Human Resources department under the direction of Sally Fenton,

a vice president who handles the employee paperwork, though hiring is actually performed

by the separate departments. Sam Totter is the vice president who heads the sales

and marketing area; he oversees 10 well-trained salespeople.

The accounting and finance division of the company is headed by Abe Headman, who

is the chief financial officer (CFO) and a company vice president; he is a member of the

Institute of Management Accountants and holds a certificate in management accounting.

He has a small staff of Certified Public Accountants, including a controller and a treasurer,

and a staff of accounting input operators who maintain the financial records.

A partial list of Evian’s accounts and their balances for the month of November 2012 follows.

Accounts Receivable                                                                $ 245,000

Advertising Expenses                                                                   54,000

Cash                                                                                                250,000

Depreciation—Factory Equipment                                              16,800

Depreciation—Office Equipment                                                  2,400

Direct Labor                                                                                     42,000

Factory Supplies Used                                                                   16,800

Factory Utilities                                                                               10,200

Finished Goods Inventory, November 30                                                67,700

Finished Goods Inventory, October 31                                       72,500

Indirect Labor                                                                                 48,000

Office Supplies Expense                                                                 1,600

Other Administrative Expenses                                                  72,000

Prepaid Expenses                                                                          41,250

Raw Materials Inventory, November 30                                   52,600

Raw Materials Inventory, October 31                                      38,300

Raw Materials Purchases                                                           184,500

Rent—Factory Equipment                                                          47,000

Repairs—Factory Equipment                                                       4,500

Salaries for the office workers                                               325,500

Sales                                                                                         1,225,000

Sales Commissions                                                                      40,500

Work In Process Inventory October 31                                    52,700

Work In Process Inventory, November 30                              41,000

Instructions for part 1

(a) Based on the information given, construct an organizational chart of Evian

Corporation. (see illustration 1-2 in text)

(b) A list of accounts and their values are given above. From this information, prepare a cost of goods manufactured schedule, a cost of goods sold schedule, an income statement, and the current assets section of the balance sheet for Evian Corporation for the month of November 2012. (see illustrations in the text)

Part 2

Evian has two major public-park projects to provide with comprehensive

irrigation in one of its service locations this month. Job J57 and Job K52 involve 15 acres

of landscaped terrain which will require special-order sprinkler heads to meet the specifications

of the project. Using a job cost system to produce these parts, the following

events occurred during December 2012:

Raw materials were requisitioned from the company’s inventory on December 2 for

$4,995; on December 8 for $960; and on December 14 for $3,306. In each instance, two-

thirds (2/3) of these materials were for J57 and the rest for K52.

Six time tickets were turned in for these two projects for a total amount of 18 hours

of work. All the workers were paid $16.50 per hour. The time tickets were dated December 3,

December 9, and December 15. On each of those days, 6 labor hours were spent on these

jobs, two-thirds (2/3) for J57 and the rest for K52.

The predetermined overhead rate is based on machine hours. The expected machine

hour use for the year is 2,112 hours, and the anticipated overhead costs are $842,688

for the year. The machine were used by workers on projects K52 and J57 on December 3, 9,

and 15. Six machine hours were used for project K52 (2 each day), and 8.5 machine hours

were used for project J57 (2.5 the first day and 3 each of the other days). Both of these

special orders were completed on December 15, producing 235 sprinkler heads for J57

and 145 sprinkler heads for K52.

Additional job order activities during this period of time included:

Dec. 1 Purchased raw materials from Durbin Supply Company on account for $53,200.

Dec. 2 Issued $42,000 of direct materials from the company’s inventory to jobs other than K52 and J57 and $3,000 of indirect materials.

Dec. 12 Paid Evian’s factory salaries and wages in the amount of $67,000.

Dec. 13 Paid the factory’s water bill of $3,000.

Dec. 18 Transferred $50,000 of costs from other completed jobs to finished goods.

Dec. 21 Paid the factory’s electric bill of $12,000 for factory.

Instructions for part 2

(a) Set up the job cost sheets for Job No. J57 and Job No. K52. Determine the total cost for each manufacturing special order for these jobs. (Round unit cost to nearest cent.)

(b) Journalize the activities from these job cost sheets in the general journal. Also journalize the other costs that occurred during this period of time.

(c) Assuming that Manufacturing Overhead has a credit balance of $3,400, determine whether overhead has been under/over applied and make the adjusting entry.

Part 3

Because most of the parts for its irrigation systems are standard, Evian handles

the majority of its manufacturing as a process cost system. There are multiple process

departments. Three of these departments are the Molding, Cutting, and Welding departments.

All items eventually end up in the Package department which prepares items for

sale in kits or individually.

The following information is available for the Molding department for January.

Work in process beginning: 22,000 units , Total costs in beginning work in process $252,854

Costs in work in process inventory:   Materials $168,020, Labor 67,564, Overhead 17,270

Units started into production in January 60,000

Units completed and transferred-out in January 58,000

Costs added to production: Materials $264,940, Labor 376,188, Overhead 60,578 =Total costs added into production in January $701,706

Work in process ending:

Units in process 24,000

Stage of completion for materials 100%

Stage of completion for labor and overhead 30%

Instructions for part 3

(a) Prepare a production cost report for Evian using the weighted-average method.

Part 4

Direct labor or machine hours may not be the appropriate cost driver for overhead

in all areas of manufacturing due to the complexities of many manufacturing

processes. Many companies use activity-based costing (ABC) which uses multiple drivers

(items that consume resources) rather than just one driver to apply overhead to their

activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship

in its applied overhead costs.

Evian looked into ABC as a method of costing because of the variety of items it

produces and the many different activities in which it is involved. The activities listed

below are a sample of possible cost pools for Evian.

Assembling

Payroll

Billing

Plant supervision

Digging trenches

Purchasing materials

Machine maintenance

Selling

Machine setups

Testing

Molding

Welding

Packaging

Instructions for part 4

(a) For each of these cost pools, what would be the likely activity cost driver?

(b) Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Evian.

EVIAN CORPORATION

Expected

Use of                              Actual

Estimated           Cost Drivers                             Use of

Activity Cost Pools                        Cost Drivers      Overhead           per Activity                              Drivers

Irrigation installation                    Labor cost         $1,999,500               12,900                                     12,941

Machining (all machine use)       Machine hours 1,670,400         33,408,000                              33,409,000

Customer orders                            # of orders               30,636                    2,553                                       2,520

Shipping                                          none (direct)                    N/A traced directly

Design                                              Cost per design             820                       10                                           7

Selling                                              Number of calls       372,300              21,900                                     22,100

(d) (1) The results of ABC can provide a more accurate picture of costs. Discuss the value of Evian using this system to determine overhead costs.

(2) How might using ABC affect decision making at Evian?

Answer 1

Part 1 (a & b)