Cost of Production Report: Average Cost Method

Sunrise Coffee Company roasts and packs coffee beans. The process begins in the Roasting Department. From the Roasting Department, the coffee beans are transferred to the Packing Department. The following is a partial work in process account of the Roasting Department at December 31:

Required:

Prepare a cost of production report, using the average cost method, and identify the missing amounts for Work in Process—Roasting Department. If required, round your cost per equivalent unit answer to the nearest cent.

Feedback

Explain the concept of cost of capital. How may cost of capital affect long-term financial decisions? Would a company prefer to have a high or low cost of capital? Why? What was the effect of cost of capital on long-term financial decisions for your company?

Cost of Production Report: Average Cost Method

Sunrise Coffee Company roasts and packs coffee beans. The process begins in the Roasting Department. From the Roasting Department, the coffee beans are transferred to the Packing Department. The following is a partial work in process account of the Roasting Department at December 31:

Required:

Prepare a cost of production report, using the average cost method, and identify the missing amounts for Work in Process—Roasting Department. If required, round your cost per equivalent unit answer to two decimal places.

Integrative Exercise
Cost System Choices, Budgeting, and Variance Analyses for Sacred Heart Hospital

The Two Cost Systems

Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two biggest nursing service lines—the Emergency Room (ER) and the Operating Room (OR). SHH's current cost system assigns total nursing costs to the ER and OR based on the number of patients serviced by each line. Total hospital annual nursing costs for these two lines are expected to equal $300,000. The table below shows expected patient volume for both lines.

Required:

1. Using the current cost system, calculate the hospital-wide rate based on number of patients.

$ per patient

2. Calculate the amount of nursing costs that the current cost system assigns to the ER and to the OR.

3. Using the results from Requirement 2, calculate the cost per OR nursing hour under the current cost system.
$ per OR hour

After discussion with several experienced nurses, Jack Bauer (SHH’s accountant) decided that assigning nursing costs to the two service lines based on the number of times that nurses must check patients’ vital signs might more closely match the underlying use of costly hospital resources. Therefore, for comparative purposes, Jack decided to develop a second cost system that assigns total nursing costs to the ER and OR based on the number of times nurses check patients’ vital signs. This system is referred to as the “vital-signs costing system.” The earlier table also shows data for vital signs checks for lines.

4. Using the vital-signs costing system, calculate the hospital-wide rate based on the number of vital signs checks.
$ per vital signs check

5. Calculate the amount of nursing costs that the vital-signs costing system assigns to the ER and to the OR.

6. Using the results from Requirement 5, calculate the cost per OR nursing hour under the vital-signs costing system.
$ per OR hour

Budgeting and Variance Analysis

In an effort to better plan for and control OR costs, SHH management asked Jack to calculate the flexible budget variance (i.e., flexible budget costs - actual costs) for OR nursing costs, including the price variance and efficiency variance. Given that Jack is interested in comparing the reported costs of both systems, he decided to prepare the requested OR variance analysis for both the current cost system and the vital-signs costing system. In addition, Jack chose to use each cost system’s estimate of the cost per OR nursing hour as the standard cost per OR nursing hour. Jack collected the following additional information for use in preparing the flexible budget variance for both systems:

Actual number of surgeries performed = 950
Standard number of nursing hours allowed for each OR surgery = 5
Actual number of OR nursing hours used = 5,000
Actual OR nursing costs = $190,000

Enter a favorable variance as a negative amount, and an unfavorable variance as a positive amount. If there is no variance, enter "0" and select "No variance" from the dropdown.

7. For the OR service line, use the information above and the cost per OR nursing hour under the current cost system to calculate the

a. flexible budget variance. (Hint: Use your answer to Requirement 3 as the standard cost per OR nursing hour for the current cost system.)
$

b. price variance.
$

c. efficiency variance.
$

8. For the OR service line, use the information above and the cost per OR nursing hour under the vital-signs costing system to calculate the

a. flexible budget variance. (Hint: Use your answer to Requirement 6 as the standard cost per OR nursing hour for the vital signs cost system.)
$

b. price variance.
$

c. efficiency variance.
$

Discussion of Reported Costs and Variances from the Two Systems

9. Consider SHH’s need to control its skyrocketing costs, Jack’s discussion with experienced nurses regarding their use of hospital resources, and the reported costs that you calculated from each cost system. Based on these considerations, which cost system (current or vitalsigns) should Jack choose? Briefly explain the reasoning behind your choice.

a. costing system should more accurately allocate costs to service lines because its cost allocation base.

b. uses only one cost driver and cost effective.

c. The more accurate system should generate a more accurate estimate of the cost per nursing hour, which affects the budgeting process, because the portion of costs allocated to each service line, ER.

10. What does each of the calculated variances suggest to Jack regarding actions that he should or should not take with respect to investigating and improving each variance? Also, briefly explain why the variances differ between the two cost systems.

a. The overall current system’s OR flexible budget variance ($47,500) is very , suggesting that the subvariances (price variance and efficiency variance) should be calculated.

b. The current system’s OR price variance ($40,000) is very large and unfavorable, suggesting that the nursing hiring manager negotiated a price and that nursing hour pay cuts might be necessary.

c. The current system’s OR efficiency variance ($7,500) is , suggesting that the operating room manager used too many OR nursing hours for the actual number of surgeries performed.

d. The overall vital signs’ OR flexible budget variance is , and suggests that nothing needs to be investigated further.

e. The vital signs’ OR price variance ($10,000) is large and favorable, suggesting that the nursing hiring manager negotiated a good price.

f. The vital signs’ OR efficiency variance ($10,000) is , suggesting that the operating room manager used too many OR nursing hours for the actual number of surgeries performed. In addition, it would be unwise had Jack decided to end the variance analysis after seeing that the flexible budget variance was zero. Only after continuing on with the analysis to calculate the price and efficiency variances would Jack realize that the zero flexible budget variance was the result of two large offsetting variances, both of which likely require further investigation and attention.

g. Overall, the two cost systems produce reported costs of the two service lines, ER and OR. The current system assigns nursing costs equally because the ER and OR have the same number of patients. Alternately, the vital-signs system assigns as much of the nursing costs to the OR because the OR requires as many vital signs checks of its patients as the ER does of its patients. In addition, the two systems produce estimates of the cost incurred by the hospital per OR nursing hour. When used as the standard costs in the budgeting process, these reported costs, lead to very different flexible budget variances and price and efficiency variances for the OR service line. Therefore, the managerial accountant should be very careful when constructing a cost system and be sure that the chosen allocation bases are as accurate as possible to match the underlying resource consumption patterns of the business environment. Choosing different cost allocation bases usually will result in differences in reported service line costliness and various variances, which can have ramifications for numerous managers (e.g., purchasing managers responsible for price variances, production managers responsible for efficiency variances, other managers responsible for making service line mix decisions, etc.)

1. Weighted average cost of capital Suppose Enviro-tech is attempting to estimate its cost of capital (WACC). The company has 1,500,000 shares of stock outstanding that currently sells for $50 per share. In addition, the company has 25,000 bonds outstanding with 10 years left until maturity that pay a $1,000 par value and an annual coupon of 5.0%. Management believes these bonds would sell for 1,010.50 in today’s market. The company’s beta is 1.1, the risk-free rate is 2% and the market risk premium is 8%. The tax rate is 25%.

a. What is the total market value of the company's stock (MVE)

b. What is the total market value of the company's bonds (MVD)?

c. What is the total market value of the firm's financial contacts (total invested capital)?

d. Estimate the percentage of the company financed with debt (w_d

e. Estimate the percentage of the company financed with equity (w_s)

f. Estimate the firm's cost of debt (r_d)

g. Estimate the firm's cost of equity (r_s) using the CAPM.

h. Compute an estimate of the firm's weighted average cost of capital (WACC)

james inc. charges $2,800 for its hand-crafted guitars. The cost function that describes the total cost, C, as a function of the guitars crafted and sold, x, is:

C(x) = 2000x + 4x 2 + 30000

a) Formulate the profit function, P(x).

b) How many game boards must be crafted and sold in order to maximize the total profit?

c) What is the maximum profit?

d) How many game boards must be crafted and sold in order to break even?

Exercise 3-6 (Static) Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income Statement [LO3-3]

The following data from the just completed year are taken from the accounting records of Mason Company:

Required:

1. Prepare a schedule of cost of goods manufactured. Assume all raw materials used in production were direct materials.

2. Prepare a schedule of cost of goods sold. Assume that the company's underapplied or overapplied overhead is closed to Cost of Goods Sold.

3. Prepare an income statement.

What is cost effectiveness analysis? Why might we focus on cost effectiveness instead of efficiency?

What is the relationship between cost effectiveness and efficiency?

If an allocation of pollution control across firms is cost-effective – meaning that it is the least cost way of achieving the total level of pollution control done by the firms – what must be true of the allocation?

Why is an emissions tax cost (or cap-and-trade scheme) effective?

In general, why is a technology standard not cost effective? In general, why is a uniform emissions standard not cost effective? Could a uniform emissions standard ever be cost effective? Explain.

Why does tax provide stronger incentives for technological innovation and adoption than an emissions standard? Why does a CAT scheme provide slightly weaker incentives than a tax?

Is a technology standard a good way to promote technological innovation?

Would we ever want to subsidize R&D directly? Why?

If our goal is to constrain emissions, would it be better to use an emissions tax or a CAT scheme in a rapidly growing economy? What about in an economy with high inflation?

Compare the impact of an emissions tax and a CAT scheme in an economy experiencing rapid technological change which is bringing down the cost of abating emissions.

Identify one situation in which a command-and-control policy might be preferred to a market-based policy. Explain your answer.

What are pollution hotspots? Explain what the uniform mixing assumption is and why violations of that assumption can potentially be problematic for market-based policies. How can these policies be adjusted to mitigate this issue?

U.S. Sulfur Dioxide Trading Program

T/F. The U.S. Acid Rain Program (Title IV of the Clean Air Act Amendments of 1990) was successful at reducing pollution, but ultimately the costs of the program exceeded the benefits. The greatest benefits from the program came from reducing ecosystem acidification.

Relevant to Cost Accounting, briefly explain the following terms:

(a) Sunk cost

(b) Opportunity cost

(c) Relevant cost

1- What kind of effects do the cost estimation methods have on employee behavior? (HINTS: cost estimates are used to support budgetary allocations to various departments; cost estimates are used in bidding for contracts (e.g., cost-plus contracts); learning phenomenon).