Required information

Problem 9-31 Production and Direct-Labor Budgets; Activity-Based Overhead Budget (LO 9-3, 9-4, 9-5, 9-6)

[The following information applies to the questions displayed below.]

Spiffy Shades Corporation manufactures artistic frames for sunglasses. Talia Demarest, controller, is responsible for preparing the company’s master budget. In compiling the budget data for 20x1, Demarest has learned that new automated production equipment will be installed on March 1. This will reduce the direct labor per frame from 1.0 hour to 0.75 hour.

Labor-related costs include pension contributions of $1.30 per hour, workers’ compensation insurance of $1.00 per hour, employee medical insurance of $4 per hour, and employer contributions to Social Security equal to 7.00 percent of direct-labor wages. The cost of employee benefits paid by the company on its employees is treated as a direct-labor cost. Spiffy Shades Corporation has a labor contract that calls for a wage increase to $15.00 per hour on April 1, 20x1. Management expects to have 16,200 frames on hand at December 31, 20x0, and has a policy of carrying an end-of-month inventory of 100 percent of the following month’s sales plus 40 percent of the second following month’s sales.

These and other data compiled by Demarest are summarized in the following table.

1. Prepare a production budget and a direct-labor budget for Spiffy Shades Corporation by month and for the first quarter of 20x1. (Round "Direct-labor hours per unit" to 2 decimal places.)

2. For each item used in the firm’s production budget and direct-labor budget, select the other components of the master budget (except for financial statement budgets) that also, directly or indirectly, would use these data. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

1. Sales data:

• Selling and administrative expense budgetunanswered
• Production-overhead budgetunanswered
• Direct-material budgetunanswered
• Cash budgetunanswered
• Cost-of-goods-sold budgetunanswered
• Sales budgetunanswered
• Cash disbursements budgetunanswered

2. Production data:

• Selling and administrative expense budgetunanswered
• Direct-material budgetunanswered
• Cost-of-goods-sold budgetunanswered
• Production-overhead budgetunanswered
• Cash budgetunanswered
• Cash disbursements budgetunanswered
• Sales budgetunanswered

3. Direct-labor-hour data:

• Selling and administrative expense budgetunanswered
• Production-overhead budgetunanswered
• Direct-material budgetunanswered
• Cash budgetunanswered
• Cost-of-goods-sold budgetunanswered
• Sales budgetunanswered
• Cash disbursements budgetunanswered

4. Direct-labor cost data:

• Selling and administrative expense budgetunanswered
• Production-overhead budgetunanswered
• Direct-material budgetunanswered
• Cash budgetunanswered
• Sales budgetunanswered
• Cost-of-goods-sold budgetunanswered
• Cash disbursements budget

3. Prepare a production overhead budget for each month and for the first quarter.

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.

Data concerning the pizzeria’s costs appear below:

In November, the pizzeria budgeted for 1,680 pizzas at an average selling price of $19 per pizza and for 180 deliveries.

Data concerning the pizzeria’s operations 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.

Pratt Company acquired all of Spider, Inc.’s outstanding shares on December 31, 2018, for $478,050 cash. Pratt will operate Spider as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Spider’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Spider has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair and book value differences as follows: Book Values Fair Values Computer software $ 49,500 $ 88,500 Equipment 55,500 36,400 Client contracts 0 105,000 In-process research and development 0 29,750 Notes payable (104,000 ) (112,850 ) At December 31, 2018, the following financial information is available for consolidation: Pratt Spider Cash $ 15,500 $ 19,200 Receivables 117,000 57,900 Inventory 165,000 103,900 Investment in Spider 478,050 0 Computer software 250,000 49,500 Buildings (net) 600,500 172,500 Equipment (net) 319,000 55,500 Client contracts 0 0 Goodwill 0 0 Total assets $ 1,945,050 $ 458,500 Accounts payable $ (96,300 ) $ (65,500 ) Notes payable (530,750 ) (104,000 ) Common stock (380,000 ) (100,000 ) Additional paid-in capital (170,000 ) (25,000 ) Retained earnings (768,000 ) (164,000 ) Total liabilities and equities $ (1,945,050 ) $ (458,500 ) Prepare a consolidated balance sheet for Pratt and Spider as of December 31, 2018.

Dividing Partnership Net Income

Required:

Steve Jack and Chelsy Stevens formed a partnership, dividing income as follows:

1. Annual salary allowance to Jack of $87,360.
2. Interest of 6% on each partner's capital balance on January 1.
3. Any remaining net income divided to Jack and Stevens, 1:2.

Jack and Stevens had $63,000 and $87,000, respectively, in their January 1 capital balances. Net income for the year was $156,000. How much is distributed to Jack and Stevens?

Note: Compute partnership share.
Jack: $
Stevens: $

Revaluing and Contributing Assets to a Partnership

Demarco Lee invested $28,000 in the Camden & Sayler partnership for ownership equity of $28,000. Prior to the investment, equipment was revalued to a market value of $294,000 from a book value of $249,000. Kevin Camden and Chloe Sayler share net income in a 1:3 ratio.

Required:

a. Provide the journal entry for the revaluation of equipment.

For a compound transaction, if an amount box does not require an entry, leave it blank.

b. Provide the journal entry to admit Lee.

Kipmar Company produces a molded briefcase that is distributed to luggage stores. The following operating data for the current year has been accumulated for planning purposes.

Kipmar can produce 1,500,000 cases a year. The projected net income for the coming year is expected to be $1,800,000. Kipmar is subject to a 40% income tax rate.

During the planning sessions, Kipmar’s managers have been reviewing costs and expenses. They estimate that the company’s variable cost of goods sold will increase 15% in the coming year and that fixed administrative expenses will increase by $150,000. All other costs and expenses are expected to remain the same.

What price would Kipmar need to charge for the briefcase in the coming year to maintain the current year’s contribution margin ratio?

The following transactions relate to Sunlight Mountain Inc. Prepare journal entries for each transaction. Prepare the equity section of the balance sheet at each year-end, December 31. Assume 2015 was Sunlight’s first year of operations.

1. Sunlight issued 1,000 shares of $1 par value common stock for $70 per share on January 1, 2015.

2. Sunlight issued 500 shares of no par value, $5, non-cumulative preferred stock for $50 per share on January 1, 2015.

3. Sunlight reported net income of $2,000 during 2015 and paid no dividends. Prepare the company’s equity section of the December 31, 2015, balance sheet.

Stockholders’ Equity:

Interim Quality Performance Reports

Good quality cost management requires that quality costs be reported and controlled (control having a cost reduction emphasis). Control enables managers to compare actual outcomes with standard outcomes to gauge performance and take any necessary corrective actions. The total quality management standard is the robust zero-defects standard. This standard requires that goods and services be produced that meet the targeted value of specified quality characteristics. Achieving zero defects typically requires years and so a variety of quality performance reports are used to measure the progress of a company’s quality improvement program. One such report is the interim standard report. This report measures progress by comparing this year’s quality costs to the budgeted quality costs for the year. The budgeted quality costs are a reduction in the prior year’s quality costs resulting from planned quality improvements.

Apply the Concepts

The actual quality costs are provided for Wilson Company for the years ended June 30, Year 1 and June 30, Year 2:

At the end of Year 1, management decided to increase its investment in control costs by 25 percent for each category’s items with the expectation that failure costs would decrease by 20 percent for each item of the failure categories. Sales were $12,800,000 for both Year 1 and Year 2.

1. Prepare the budgeted costs for Year 2, and prepare an interim quality performance report by completing the following table (round all budgeted amounts to the nearest dollar and percentages to two decimal places):

Simon Company's year-end balance sheets follow.

1. Express the balance sheets in common-size percents. (Do not round intermediate calculations and round your final percentage answers to 1 decimal place.)
2. Assuming annual sales have not changed in the last three years, is the change in accounts receivable as a percentage of total assets favorable or unfavorable?
3. Assuming annual sales have not changed in the last three years, is the change in merchandise inventory as a percentage of total assets favorable or unfavorable?

Beech Corporation is a merchandising company that is preparing a master budget for the third quarter of the calendar year. The company’s balance sheet as of June 30th is shown below:

Beech’s managers have made the following additional assumptions and estimates:

1. Estimated sales for July, August, September, and October will be $230,000, $250,000, $240,000, and $260,000, respectively.

2. All sales are on credit and all credit sales are collected. Each month’s credit sales are collected 45% in the month of sale and 55% in the month following the sale. All of the accounts receivable at June 30 will be collected in July.

3. Each month’s ending inventory must equal 20% of the cost of next month’s sales. The cost of goods sold is 70% of sales. The company pays for 30% of its merchandise purchases in the month of the purchase and the remaining 70% in the month following the purchase. All of the accounts payable at June 30 will be paid in July.

4. Monthly selling and administrative expenses are always $42,000. Each month $7,000 of this total amount is depreciation expense and the remaining $35,000 relates to expenses that are paid in the month they are incurred.

5. The company does not plan to borrow money or pay or declare dividends during the quarter ended September 30. The company does not plan to issue any common stock or repurchase its own stock during the quarter ended September 30.

Required:

1. Prepare a schedule of expected cash collections for July, August, and September. Also compute total cash collections for the quarter ended September 30.

2-a. Prepare a merchandise purchases budget for July, August, and September. Also compute total merchandise purchases for the quarter ended September 30.

2-b. Prepare a schedule of expected cash disbursements for merchandise purchases for July, August, and September. Also compute total cash disbursements for merchandise purchases for the quarter ended September 30.

3. Prepare an income statement for the quarter ended September 30.

4. Prepare a balance sheet as of September 30.

In the preparation of fund financial statements, why the notes to financial statements are interesting?

Blackburn Inc. uses Otavalo Manufacturing and Piura Company to buy two precision machined parts used in the manufacture of its permanent-magnet motors: Part #625 and Part #827. Consider two activities: testing parts and reordering parts. After the two parts are inserted, testing is done to ensure that the two parts work as intended. Reordering occurs because one or both of the parts have failed the test and it is necessary to replenish part inventories. Activity cost information and other data needed for supplier costing are as follows:

I. Activity Costs Caused by Suppliers (testing failures and reordering as a result)

II. Supplier Data

Required:

Determine the cost of each supplier by using ABC. Round unit costs to two decimal places.

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

* $3 per unit variable; $251,000 fixed each year.

The company’s $39 unit product cost is computed as follows:

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the first two years of operations are:

Required:

1. Using variable costing, what is the unit product cost for both years?

2. What is the variable costing net operating income in Year 1 and in Year 2?

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Stoll Co.’s long-term available-for-sale portfolio at December 31, 2016, consists of the following. Available-for-Sale Securities Cost Fair Value 70,000 shares of Company A common stock $ 1,046,600 $ 915,000 42,000 shares of Company B common stock 352,750 342,000 41,000 shares of Company C common stock 1,385,000 1,332,875 Stoll enters into the following long-term investment transactions during year 2017. Jan. 29 Sold 21,000 shares of Company B common stock for $175,375 less a brokerage fee of $3,200. Apr. 17 Purchased 22,000 shares of Company W common stock for $480,000 plus a brokerage fee of $3,800. The shares represent a 30% ownership in Company W. July 6 Purchased 15,000 shares of Company X common stock for $261,625 plus a brokerage fee of $3,800. The shares represent a 10% ownership in Company X. Aug. 22 Purchased 100,000 shares of Company Y common stock for $660,000 plus a brokerage fee of $8,600. The shares represent a 51% ownership in Company Y. Nov. 13 Purchased 19,000 shares of Company Z common stock for $525,300 plus a brokerage fee of $6,600. The shares represent a 5% ownership in Company Z. Dec. 9 Sold 70,000 shares of Company A common stock for $1,031,000 less a brokerage fee of $4,100. The fair values of its investments at December 31, 2017, are: B, $171,250; C, $1,229,125; W, $391,000; X, $244,750; Y, $1,071,000; and Z, 566,100. Required: 1. Determine the amount Stoll should report on its December 31, 2017, balance sheet for its long-term investments in available-for-sale securities. 2. Prepare any necessary December 31, 2017, adjusting entry to record the fair value adjustment for the long-term investments in available-for-sale securities.

Listed below are the transactions of Kenneth Clark, D.D.S., for the month of September.

Record depreciation using a 5-year life on the equipment, the straight-line method, and no salvage value.

1. Enter the transactions shown above in appropriate general ledger accounts (use T-accounts).

2. Prepare a trial balance.

3. Prepare an income statement.

4. Prepare a retained earnings statement.

5. Prepare an unclassified balance sheet.

6. Close the ledger.

7. Prepare a post-closing trial balance.