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Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 20% each of the last three years. He has computed the cost and revenue estimates for each product as follows:

The company’s discount rate is 14%.

Required:

1. Calculate the payback period for each product.

2. Calculate the net present value for each product.

3. Calculate the internal rate of return for each product.

4. Calculate the project profitability index for each product.

5. Calculate the simple rate of return for each product.

6a. For each measure, identify whether Product A or Product B is preferred.

6b. Based on the simple rate of return, Lou Barlow would likely:

Business Description

A friend, Jay Green, is considering opening a cupcake store to sell gourmet cupcakes. Jay has asked you to help with formulating the projected numbers for the business and help analyze if the company will be successful. Using the skills you have developed in ACCT 551 Accounting for Managers, you will analyze the business to determine if you will recommend to Jay whether or not to enter into the business venture. Jay plans to launch the business on January 1, 2020. Following is the cost information provided by Jay:

Cost information:

• Jay plans to hire a baker that will charge $12 per dozen cupcakes.
• Jay has found a location near downtown that may be rented for $1,200 per month.
• Utilities are estimated to be $150 per month.
• Fixtures for the business will cost $8,400 (depreciation will be $1,200 per year for 7 years)
• Jay plans to open the store 7 days per week from 10:00 AM until 6:00 PM. Sales people will be paid $10.00 per hour.
• Business insurance will be purchased at a cost of $720 per year.
• Advertising costs are expected to be $2,400 per year.

Requirements:

Using separate tabs in a spreadsheet, provide your answers for the following.

1. Develop the annual cost formula in Y = a + bX format, i.e. Total Costs = Fixed Costs + (Variable Cost per Unit times number of units) (10 points).
2. You want to help Jay set a selling price for the cupcakes. Research who the competition is and at what price they are selling gourmet cupcakes (this will provide a base for a target price). Provide the detailed information for at least 3 competitors. Based on the projection of selling 24,000 cupcakes and an expectation of a 15% profit, what is the maximum cost allowable for all expenses? (10 points).
3. Develop a price using cost-based pricing assuming that Jay expects to sell 24,000 cupcakes the first year with a 15% profit (10 points).
4. If the selling price is $3.50 per cupcake, what is the contribution margin per cupcake and contribution margin ratio (10 points).
5. At a selling price of $3.50 per cupcake, how many cupcakes need to be sold in order to break-even? What is the break-even in sales dollars? (10 points).
6. Based on a selling price of $3.50 prepare a cost/volume/profit graph (Hint: this is explained in Module 16) (20 points).
7. Based on the expected production of 24,000 cupcakes, calculate an overhead rate per cupcake (10 points).
8. Prepare a cash budget for the company’s first year of operations based on sales of 24,000 cupcakes at a price of $3.50 per cupcake. Assume all sales are cash sales and that all costs and expenses are paid in cash. Rent, insurance, and advertising costs will be paid on a monthly basis. A minimum cash balance of $2,500 should be maintained (20 points).
9. Prepare the company’s forecasted income statement for the year ended on 12/31/2020 based on the sale of 24,000 cupcakes at $3.50 per cupcake (15 points).
10. Prepare a forecasted balance sheet as of December 31, 2020 based on the sale of 24,000 cupcakes at $3.50 per cupcake (15 points).
11. Prepare a forecasted statement of cash flows for the year ended December 31, 2020 based on the sale of 24,000 cupcakes at $3.50 per cupcake (15 points).
12. Describe a minimum of three variances that Jay could analyze to monitor the business (minimum 200 words). (15 points)
13. Provide and explain at least 1 financial metric and 3 nonfinancial metrics that Jay could utilize to monitor the business using a balanced scorecard approach. (15 points)
14. For capital investments, which capital budgeting model would you recommend to Jay? Why? (minimum 200 words) (10 points)

What is your recommendation to Jay regarding this business venture? Provide an explanation incorporating the results of the calculations performed (200-300 words) (15 points).

Jones Company has implemented a standard cost system for the company. The company has budgeted $63,000 for fixed mfg. overhead costs and plans on producing 4,500 units in the next year.   Some of the standard costs are given below:                                                                                               

                                                                                                           Standard

                                                                                                            Cost per

                                                                                                                Unit

                               Direct material, 4 lbs./unit X $2.60/lb. =       $10.40

                                Direct labor, 2 hours/unit X $9/hour     =         18.00

                                Fixed Mfg. overhead = 14.00

During the year, the company produced 4,800 units and incurred the following costs:

                                                Materials purchased and used in production 20,000 lbs. at $2.50/lb          $ 50,000

                                                Direct labor cost incurred, 10,000 hours at $8.60/hour                                 $ 86,000

                                                Fixed Mfg. Overhead cost incurred                                                                    $ 64,800

a) Prepare a comparison between budget & actual results in the following form:

                                                                                                   Flexible                     Actual

                                                                         Budgeted         Budget                     Results

Production Costs:                                         Cost/Unit       (           u)                   (            u)         Variances

            Direct Material

            Direct labor

            Fixed Mfg. Overhead

b) Part a) is done to judge the performance of the plant manager controlling production costs. How did he

      do?

c) Analyze material, labor & overhead variances for price & quantity factors to get a more complete story

     about what is going on in the plant.

d) Discuss the results that you got in part c) and are there any concerns?

Having a accounting system in place to generate reliable accounting information is imperative for any business. It allows the owner, and investors to know if the company is making profit, how much they are making, and what they need to do to increase the profit. Having the accounting information allows them to see where they are spending their money, and if they need to increase, or decrease spending in a certain category. It also shows them how much revenue they are making, and if they need to increase, or decrease the amount they are charging for their services, or products. Having accurate accounting records helps the owners to attract stockholders, and investors. This accuracy will help them retrieve loans from the bank to expand their business, or make improvements. The banks want to see if the company will be able to pay back the loans. Some of the things they will look at is, debt to income ratio, assets, and if the company is making a profit. Investors will want to know that the company will continuously be making a profit. The accounting records can be used as a guide to improve any business. Without these accurate records, owners will not know the financial status of their company.

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"Creditors and investors depend on financial account information in order to access the financial state of a company. This information is needed in order for external parties to make critical decisions as to their involvement with a company. Through tools such as balance sheets a more detailed report of the companies assets and liabilities can be discovered.

Accounting statements can be considered by past or present or both perspectives. A companies past may not be of interest to external parties if the present financial statements have momentum in a positive direction. On the opposite side of the spectrum there are other situations where the present financial status are showing negative findings but because of the past statements creditors and investors may believe a company can make a come back.

Financial Accounting information can be used to gauge the projected future of a company. Creditors may decide to get out of a deal and cut its loses if a companies future looks as if it may not be able to reach it's projected goals in order to meet creditors and investors expectation. If the companies past trends show a high probability of growth and profit, creditors may want to invest more funds to take advantage of the future growth.

Investors may look at a longer projected time period compared to creditors. Even though investors may be prepared to make longer commitments, the decision is based on calculated past financial records. Often the most important information that is the sum of financial account information is the bottom line question, which is what is the net worth of a company? Even though this is an important question, how a companies value is determined is shown by financial accountant information."

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The following were selected from among the transactions completed by Babcock Company during November of the current year:

Required:

Journalize the transactions.

Feedback

Journalize these transactions from the buyer's point of view. Using the perpetual inventory system, purchases of inventory on account are recorded by increasing both the merchandise inventory account and the accounts payable account. Recall that FOB shipping point freight is the buyer's cost, while FOB destination freight is the seller's expense. Often freight must be prepaid for the carrier to deliver.

Nov. 3: Calculate any trade discount before the purchase or sale amount is recorded.

Nov. 5: Using the perpetual inventory system, purchases of inventory on account are recorded by debiting the merchandise inventory account and crediting the accounts payable account. Freight expense added to the invoice increases the cost of the merchandise.

Nov. 6: A return of merchandise that had a trade discount is recorded without the trade discount. Using the perpetual inventory system, any discounts or returns are recorded directly by the buyer who debits Accounts Payable and credits Merchandise Inventory, basically reversing what was done in recording the purchase.

Nov. 13 and 15: Returns are not eligible for discounts. Since the invoice is paid within the discount period, the cash paid on account is the difference between the invoice and the discount.

Journalize these transactions from the seller's point of view. Keep in mind that the sales discounts are given on the outstanding balance of the sale transaction, except for any freight costs.

Nov. 4: Two entries are required for (1) the cash sale and (2) the cost of the merchandise sold and inventory decrease on the seller's records.

Nov. 14: Remember that credit card transactions are recorded as cash sales. Two entries are required: (1) the sale for cash and (2) the cost of the merchandise sold and inventory decrease on the seller's records.

Nov. 23: Since no discount is allowed, no discount is recorded. The cash paid is equal to the receivable on the seller's books.

Nov. 24: Two entries are required for: (1) the sale on account and (2) the cost of the merchandise sold and inventory decrease on the seller's records.

Nov. 28: Record the service fee as an expense.

Nov. 30: Customer Refunds Payable is debited while the credit is to Cash. A second entry increases Merchandise Inventory and credits Estimated Returns Inventory for the return cost.

Problem 8-50 Prepare a Production Cost Report and Adjust Inventory Balances: Weighted-Average Method (LO 8-3, 4) The records of Fremont Corporation’s initial and unaudited accounts show the following ending inventory balances, which must be adjusted to actual costs. Units Unaudited Costs Work-in-process inventory 215,000 $ 818,897 Finished goods inventory 26,000 366,250 As the auditor, you have learned the following information. Ending work-in-process inventory is 40 percent complete with respect to conversion costs. Materials are added at the beginning of the manufacturing process, and overhead is applied at the rate of 80 percent of the direct labor costs. There was no finished goods inventory at the start of the period. The following additional information is also available. Costs Units Direct Materials Direct Labor Beginning inventory (80% complete as to labor) 93,000 $ 435,600 $ 524,000 Units started 590,000 Current costs 1,750,000 2,246,000 Units completed and transferred to finished goods inventory 468,000 Required: a. Prepare a production cost report for Fremont using the weighted-average method. (Hint: You will need to calculate equivalent units for three categories: materials, labor, and overhead.) (Round "Cost per equivalent unit" to 2 decimal places.)

Journal entry worksheet

• Record the difference between the unaudited records and actual ending balances of Work-in-Process Inventory and Finished Goods Inventory.

Note: Enter debits before credits.

c. If the adjustment in requirement (b) is not made, will the company’s income and inventories be overstated or understated?

When considering organisational risk it is important to review the political, economic, social, legal, technological, and policy context. Comment on the influence/ impact each of those factors has on an organisation’s risk profile—the risk scope and context. (500–700 words)

. What was the motivation for FASB's revision of the goodwlll impairment test? A. Congressional mandate B. FASB's simplification initiative C. Concern over the cost and complexity of the current standard D. Both B and C

P.F Steel Industries Co. uses the step method for allocating the costs of its service departments to operating departments. The company has two support departments (Human Resource and Information Technology) and two operating departments (Hot Rolled Hollow Steel and Cold Rolled Hollow Steel).

P.F. Industries Co. decided to allocate Human Resource department costs based on the number of employees in each department and Information Technology costs based on the number of machine hours in each department.

Required:

a- Give a numerical example for the four departments as a given information.

b- Then based on your given information, use the step-down method to allocate support department costs.

Allocate cost:

Support department cost allocation—reciprocal services method

Davis Snowflake & Co. produces Christmas stockings in its Cutting and Sewing departments. The Maintenance and Security departments support the production of the stockings. Costs from the Maintenance Department are allocated based on machine hours, and costs from the Security Department are allocated based on asset value. Information about each department is provided in the following table:

Determine the total cost of each production department after allocating all support department costs to the production departments using the reciprocal services method.

The Fitzgerald Company maintains a checking account at the Bank of the North. The bank provides a bank statement along with canceled checks on the last day of each month. The October 31, 2018, bank statement included the following information:

The company’s general ledger cash (checking) account had a balance of $42,544 at the end of October. Deposits outstanding totaled $4,224, and all checks written by the company were processed by the bank except for those totaling $5,620. In addition, a check for $500 for the purchase of office furniture was incorrectly recorded by the company as a $50 disbursement. The bank correctly processed the check during October.

Required:
1. Prepare a bank reconciliation for the month of October.
2. Prepare the necessary journal entries at the end of October to adjust the general ledger cash account.

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 $20 and its retail selling price is $75 in both 2017 and 2018. The manufacturer has advised the company to expect warranty costs to equal 8% 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.

1a.

• Nov. 11: Record the sales revenue of 105 razors for $7,875 cash.

• Nov. 11: Record the cost of goods sold for 105 razors.

• Nov. 30: Record the estimated warranty expense at 8% of November sales.

• Dec. 09: Record the replacement of 15 razors that were returned under the warranty.

• Dec. 16: Record the sales revenue of 220 razors for $16,500 cash.

• Dec. 16: Record the cost of goods sold for 220 razors.

• Dec. 29: Record the replacement of 30 razors that were returned under the warranty.

• Dec 31: Record the estimated warranty expense at 8% of December sales.

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

• Jan. 05: Record the sales revenue of 150 razors for $11,250 cash.

• Jan. 05: Record the cost of goods sold for 150 razors.

• Jan. 17: Record the replacement of 50 razors that were returned under the warranty.

• Jan. 31: Record the adjusting entry for warranty expense for the month of January 2018.

You have just been hired by FAB Corporation, the manufacturer of a revolutionary new garage door opening device. The president has asked that you review the company’s costing system and “do what you can to help us get better control of our manufacturing overhead costs.” You find that the company has never used a flexible budget, and you suggest that preparing such a budget would be an excellent first step in overhead planning and control.

After much effort and analysis, you determined the following cost formulas and gathered the following actual cost data for March:

During March, the company worked 20,000 machine-hours and produced 14,000 units. The company had originally planned to work 22,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Milano Pizza is a small neighborhood pizzeria that has a small area for in-store dining as well as offering take-out and free home delivery services. The pizzeria’s owner has determined that the shop has two major cost drivers—the number of pizzas sold and the number of deliveries made.

The pizzeria’s cost formulas appear below:

In November, the pizzeria budgeted for 1,560 pizzas at an average selling price of $15 per pizza and for 220 deliveries.

Data concerning the pizzeria’s actual results in November appear below:

Required:

1. Complete the flexible budget performance report that shows both revenue and spending variances and activity variances for the pizzeria for November. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)