In this assignment, you will play the role of a senior analyst.

You work for Blackhawk Company, a lighting fixture manufacturer.

Upper management at Blackhawk is concerned with the traditional costing system it has relied on for the past few years. In particular, upper management is concerned about the accuracy of cost information and thus has ordered a “pilot” test of an activity-based costing approach.

You will receive an analysis prepared by your junior staff. Your task is to interpret the analysis, and communicate related implications and other considerations.

Note: Please read all of the provided information, including the required deliverables, before beginning the assignment.

Case Information

Use the information provided here to answer the questions.

Blackhawk Company manufactures and sells many different types of lighting fixtures.

Historically, indirect costs have been allocated to products based on direct labor dollars, via a traditional costing system. The overhead rate is pre-determined, based on budgeted volumes and budgeted direct labor.

For the upcoming year, Blackhawk compiled the following projected per-unit information for its deluxe model – one of many products that Blackhawk produces and sells.

Product Information (Traditional Costing System)

Selling price $900

Direct materials $250

Direct labor $120

Indirect costs $340

Profit per unit $190

The CFO has suggested that an activity-based costing system could be valuable to help facilitate strategic and operational decisions for the coming year. She ordered a pilot test of the activity-based costing system using the deluxe product.

Your staff obtained the following information to compute an activity-based version of the deluxe product’s cost.

Note: These totals are company-wide (i.e., not just for the deluxe model).

In addition, the following information is known for the deluxe model.

Number of units per batch = 125

Number of machine hours per unit = 10

Number of units per shipment = 1

Analysis

A junior staff member provided the following analysis.

Activity Pool Rates

Setups: $500,000 / 725 batches = $689.66 per batch

Machine time: $44,100,000 / 650,000 machine hrs = $67.85 per machine hr

Packing: $5,000,000 / 250,000 shipments = $20 per shipment

Using the activity pool rates and the estimated usage of each activity by the deluxe model, the junior analyst provided the following cost estimate on a per unit basis:

Setups: $689.66 per batch / (125 units per batch) = $5.52 per unit

Machine time: $67.85 per machine hour x 10 machine hours per unit = $678.50 per unit

Packing: $20 per shipment / (1 unit per shipment) = $20 per unit

Total per unit cost = $5.52 + $678.50 + $20 = 704.02

The analyst also provided the revised profit per unit information:

Selling price = $900

Revised costs (rounded) (per activity-based costing) = $704

Profit per unit = $900 - 704 = $196

The analyst noted that the per-unit cost, as well as the profit per unit were approximately equivalent across the two systems (i.e., the original/traditional system and the activity-based costing system).

Given this small difference, the analyst concluded that the original system is reasonably accurate, and that activity-based costing may not be worthwhile for Blackhawk Company.

Question 1:

Write a critique of the analysis and conclusion prepared by your analyst.

In particular, is the analyst’s conclusion (i.e., that activity-based costing is not worthwhile for Blackhawk Company) correct?

Question 2:

Prepare a memo to Blackhawk’s upper management regarding the advantages and disadvantages of activity-based costing.

Use an example scenario to communicate the advantages and disadvantages.

Pacific Ink had beginning work-in-process inventory of $802,560 on October 1. Of this amount, $335,200 was the cost of direct materials and $467,360 was the cost of conversion.The 59,000 units in the beginning inventory were 25 percent complete with respect to both direct materials and conversion costs.

During October, 124,000 units were transferred out and 41,000 remained in ending inventory.The units in ending inventory were 75 percent complete with respect to direct materials and 35 percent complete with respect to conversion costs. Costs incurred during the period amounted to $3,094,000 for direct materials and $3,893,400 for conversion.

a-1. Compute the cost of goods transferred out and the cost of ending inventory using the FIFO method. (Round intermediate calculations to 2 decimal places.)
COST OF GOODS TRANSFERRED OUT ????????
COST OF ENDING INVENTORY ????????????

Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $62 per unit.

Required:

1. Compute the company’s break-even point in unit sales.

2. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler’s personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.

Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company probably would have reported at least some profit for the quarter.

At this point, Ms. Tyler is manufacturing only one product—a swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

b. What is the company’s absorption costing net operating income (loss) for the quarter?

c. Reconcile the variable and absorption costing net operating income (loss) figures.

3. During the second quarter of operations, the company again produced 31,100 units but sold 34,100 units. (Assume no change in total fixed costs.)

a. What is the company’s variable costing net operating income (loss) for the second quarter?

b. What is the company’s absorption costing net operating income (loss) for the second quarter?

c. Reconcile the variable costing and absorption costing net operating incomes for the second quarter.

Chapter 7 - problem 18

Activity cost Pool                                         Activity Measure                       Total Activity

Removing asbestos ………………. Thousands of square feet              800 thousand square feet

Equipment and job steps…………. Number of jobs                              500 jobs

Working on nonroutine jobs………. Number of jobs nonroutine jobs    100 nonroutine jobs                   

Other organization-sustaining costs and idle capacity costs …………… None

Note The 100 nonrountine jobs are included in the total of 500 jobs. Both nonroutine jobs and routine jobs require estimating and steps.

Cots for the Year

Wages and salaries ……………………………………………… $300,000

Disposal fees ……………………………………………………… 700,000

Equipment depreciation …………………………………………. 90,000

One-site suppliers ………………………………………………… 50,000

Office expenses …………………………………………………… 200,000

License and insurance ……………………………………………. 400,000

Total cost …………………………………………………………… 51,740,000

Distribution of Resource Consumption across Activities

                                                                      Estimating               Working on

                                             Removing         and job steps          Nonroutine jobs        

                                               Asbestos                                                                  other   Total

Wages and salaries                  50%                10%                    30%                     10%    100%

Disposal fees                            60%                 0%                     40%                      0%      100%

Equipment depreciation           40%                  5%                     20%                      35%    100%

One-site suppliers                   60%                 30%                   10%                       0%      100%

Office expenses                       10%                 35%                    25%                      30%    100%

License and insurance             30%                 0%                     50%                      20%     100%

Require

1. Using Exhibit 7-6 as a guide, perform the first-stage allocation of costs to the activity cost pools.
2. Using Exhibit 7-7 as a guide, compute the activity rates for the activity cost pools.
3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square feet of each of the following jobs according to the activity-based costing system.

1. A routine 1.000-square-foot asbestos removal job.
2. A routine 2.000-square-foot asbestos removal job
3. A nonroutine 2 000-square-foot asbestos removal job.

4. Given the results you obtained in (3) above, do you agree with the estimator that the company's present policy for bidding on jobs is adequate?

Cash Disbursement
Timber Company is in the process of preparing its budget for next year. Cost of goods sold has been estimated at 70 percent of sales. Lumber purchases and payments are to be made during the month preceding the month of sale. Wages are estimated at 15 percent of sales and are paid during the month of sale. Other operating costs amounting to 10 percent of sales are to be paid in the month following the month of sale. Additionally, a monthly lease payment of $14,000 is paid for computer services. Sales revenue is forecast as follows

Required
Prepare a schedule of cash disbursements for April, May, and June.
Do not use a negative sign with your answers.

LIFO Perpetual Inventory

The beginning inventory at Midnight Supplies and data on purchases and sales for a three-month period ending March 31 are as follows:

1. Record the inventory, purchases, and cost of goods sold data in a perpetual inventory record similar to the one illustrated in Exhibit 4, using the last-in, first-out method. Under LIFO, if units are in inventory at two different costs, enter the units with the HIGHER unit cost first in the Cost of Goods Sold Unit Cost column and LOWER unit cost first in the Inventory Unit Cost column. Round unit cost to two decimal places, if necessary.

Josh worked for the Johnson Boat Works Company as a maintenance welder for 15 years. At the beginning of each five years of employment, Josh signed a five-year work agreement with the company. Soon after Josh had signed a new five-year agreement, Josh was fired by the new owner of the company. At the time of his firing, Josh was making $25 an hour and his employer-paid benefit package, which included health care and other government mandated items, was worth about 20% of his wages. Although Josh started looking for a new similar job right away, it was eight months before he got a new job. The new job pays $22 per hour, but it is on a contract that pays no benefits other than his wages. On advice from his attorney he recently filed a wrongful discharge case against Johnson Boat Works.

Assume that the Johnson Boat Works Company is found liable for the firing of Josh. Also assume a 40-hour work week and a 52-week work year. Josh worked for 13 weeks during the first year at the new job. Assume that he continued to work at his new job for all of years two and three, and that during the fourth and fifth years, Josh lost his contract job and had to work a minimum wage job at $15,000 a year with employer paid benefits that amounted to 10% of his wages. Using only the information above, what is the total amount of damages suffered by Josh during the entire five-year contract period? [Provide one total dollar amount for the damages.]

Show clearly labeled and organized computations below. Do not adjust for present value.

On October 29, 2017, Lobo Co. began operations by purchasing razors for resale. Lobo uses the perpetual inventory method. The razors have a 90-day warranty that requires the company to replace any nonworking razor. When a razor is returned, the company discards it and mails a new one from Merchandise Inventory to the customer. The company's cost per new razor is $15 and its retail selling price is $80 in both 2017 and 2018. The manufacturer has advised the company to expect warranty costs to equal 6% of dollar sales. The following transactions and events occurred.

2017

2018

Problem 9-4A Part 1

1a. Prepare journal entries to record above transactions and adjustments for 2017.
1b. Prepare journal entries to record above transactions and adjustments for 2018.

2. How much warranty expense is reported for November 2017 and for December 2017?

3. How much warranty expense is reported for January 2018?

4. What is the balance of the Estimated Warranty Liability account as of December 31, 2017?
5. What is the balance of the Estimated Warranty Liability account as of January 31, 2018?

The cash account for American Medical Co. at April 30 indicated a balance of $13,140. The bank statement indicated a balance of $15,360 on April 30. Comparing the bank statement and the accompanying canceled checks and memos with the records revealed the following reconciling items:

A. Checks outstanding totaled $5,530.

B. A deposit of $5,760, representing receipts of April 30, had been made too late to appear on the bank statement.

C. The bank collected $3,000 on a $2,840 note, including interest of $160.

D. A check for $550 returned with the statement had been incorrectly recorded by American Medical Co. as $500. The check was for the payment of an obligation to Targhee Supply Co. for a purchase on account.

E. A check drawn for $50 had been erroneously charged by the bank as $500.

F. Bank service charges for April amounted to $50.

1)Prepare a Bank Reconciliation

2) Journalize the necessary entries (a.) that increase cash and (b.) that decrease cash. The accounts have not been closed. For a compound transaction, if an amount box does not require an entry, leave it blank.

3) If a balance sheet is prepared for American Medical Co. on April 30, what amount should be reported as cash?

Dividends

Keener Company has had 800 shares of 7%, $100 par preferred stock and 44,000 shares of $5 stated value common stock outstanding for the last 3 years. During that period, dividends paid totaled $4,600, $27,700, and $31,800 for each year, respectively.

Required:

Compute the amount of dividends that Keener must have paid to preferred shareholders and common shareholders in each of the 3 years, given the following 3 independent assumptions:
If an amount is zero, enter "0".

3. Preferred stock is fully participating and cumulative.

Job order cost accounting for a service company

The law firm of Furlan and Benson accumulates costs associated with individual cases, using a job order cost system. The following transactions occurred during July:

a. Provide the journal entries for each of these transactions.

b. How much office overhead is over- or underapplied? Enter your answer as a positive number.
$  

c. Determine the gross profit on the Obsidian case, assuming that over- or underapplied office overhead is closed monthly to cost of services.
$

Please match appropriate letters and number with definition.

A. Account Analysis B. Contribution Margin C. Contribution Margin ratio  D. Constraint   E. High-Low Method  F. Margin of safety  G. Profit Equation H. Relevant Range

I. Semi variable   J. Step Cost    K. "what if" analysis   L. Break even point M. Contribution margin per unit N. Contribution margin per unit of constraint O. Discretionary fixed cost

P. Fixed cost     Q. Mixed Cost   R. Operating leverage X. Regression analysis Y. Scatter graph Z. Variable Cost   0 Weighted average contribution margin per unit

____Where sales and total costs are equal

____The cost per unit varies inversely to changes in activity

____the total cost varies in direct proportion to changes in activity

____pertains to the relationship between fixed and variable costs

____Fixed costs that management can easily change in the short run

____contains both a fixed and a variable cost

____used in the denominator of the break even point when multiproduct exists

____unit contribution margin divided by amount of scarce resource per unit

____provides the most accurate cost equation of a mixed cost

____used to determine a mixed cost equation by visually fitting a line to sample data points.

____the difference between the sales and variable costs

____profit = SP (x) - VC (x) - FC

____another name for mixed cost

____the difference between actual sales and break-even sales

____a scarce resource

____a cost that is fixed within a range of activity but increases to higher level when the upper limit of the range is exceeded

____determining that will happen if a particular action is taken

____the span of activity for which estimates and predictions are likely to be accurate

____contribution margin divided by sales

used to estimate the fixed and variable components of a mixed cost based on only two data points

Texas Building Services provides cleaning services for a variety of clients. The company has two producing​ departments, residential and​ commercial, and two service​departments, personnel and administrative. The company has decided to allocate all service department costs to the producing​ departments' personnel on the basis of number of employees and administrative on the basis of direct department costs. The budget for 20X2 shows the​ following:

Requirement 1. Allocate service department costs using the direct method. ​(Use parentheses or a minus sign when decreasing departments by allocating costs. For amounts with a​ $0 balance, make sure to enter​ "0" in the appropriate​ cell.)

Requirement 2. Allocate service department costs using the​ step-down method. Personnel costs should be allocated first. ​(Use parentheses or a minus sign when decreasing departments by allocating costs. For amounts with a​ $0 balance, make sure to enter​ "0" in the appropriate​ cell.)

Requirement 3. Suppose the company prices by the hour in the residential department and by the square foot cleaned in commercial. Using the results of the​step-down allocations in number​ 2, (a) compute the cost of providing 1​ direct-labor hour of service in the residential department and​ (b) compute the cost of cleaning one square foot of space in the commercial department.

​(a) First determine the​ formula, then compute the cost of providing 1​ direct-labor hour of service in the residential department. ​(Round your answer to the nearest​ cent.)

​(b) Next, determine the​ formula, then compute the cost of cleaning one square foot of space in the commercial department. ​(Round your answer to the nearest​ cent.)

Requirement 4. For each type of cost assignment made in number 2 using the​ step-down method, indicate the assignment type using the framework for cost accounting system

Allocations from the personnel to the administrative departments are__________ allocations. Allocations from the administrative to the residential and commercial operating departments are allocations.

Classify each of the following items as an (O) operating activity, (I) investing activity, or (F) financing activity

____Purchase of a building

____issuance of capital stock

____receipt of interest revenue

____cash receipts from customers

____paid cash dividend to stockholders

____ paid inventory suppliers

____ collection of long term note

____ issuance of a long-term note payable

____ paid interest expense

____ purchased the stock of another company