2. Answer the following question based on the chart below:

If the good is selling for $8, the optimal amount for this firm to produce in the short run is? When would the firm shut-down in the short-run (i.e. at what price)? What if the price of the good was $5.50? What would the firm do if the price fell to $2? What about in the long-run?

Predetermined Overhead Rate, Application of Overhead to Jobs, Job Cost, Unit Cost

On August 1, Cairle Company’s work-in-process inventory consisted of three jobs with the following costs:

During August, four more jobs were started. Information on costs added to the seven jobs during the month is as follows:

Before the end of August, Jobs 70, 72, 73, and 75 were completed. On August 31, Jobs 72 and 75 were sold.

Required:

1. Calculate the predetermined overhead rate based on direct labor cost.
% of direct labor cost.

2. Calculate the ending balance for each job as of August 31.

3. Calculate the ending balance of Work in Process as of August 31.
$

4. Calculate the cost of goods sold for August.
$

5. Assuming that Cairle prices its jobs at cost plus 10 percent, calculate Cairle’s sales revenue for August.
$

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.)

Plan A, U, L

Question 23 (1 point)

Based on the information above, what are the NOPATs of Plan A and Plan U?

Question 23 options:

Question 24 (1 point)

Based on the information from the table, what are the ROIC of Plan A, and Plan U?

Question 24 options:

Question 25 (1 point)

Based on the information from the table, what do you expect the ROE of plan L versus plan U?

Question 25 options:

Question 26 (1 point)

Based on the information from the table, what can you conclude regarding the difference in total cashflow distribution between Plan U and Plan L?

Question 26 options:

Plan A, U, L

Based on the information above, what are the NOPATs of Plan A and Plan U?

Question 23 options:

Based on the information from the table, what are the ROIC of Plan A, and Plan U?

Question 24 options:

Based on the information from the table, what do you expect the ROE of plan L versus plan U?

Question 25 options:

Based on the information from the table, what can you conclude regarding the difference in total cashflow distribution between Plan U and Plan L?

Question 26 options:

Shell City considers 2 projects using the cost of capital of 12%. Project Sponge: cost $10,000, cash flows of $4,300; $5,200, and $4,700 in 3 years respectively. Project Whale: cost $14,000, cash flows of $5,600; $4,100; $6,500; and $5,300 in 4 years respectively. What is the equivalent ANPV of Project Sponge?

$811.26

$1,330.06

$450.68

$553.77

What is the equivalent ANPV of Project Whale?

$821.44

$610.52

$745.16

$418.90

Assume the following unit‑cost data are for a purely competitive producer:

1. At a product price of $32, will this firm produce in the short run? Why, or why not? If it does produce, what will be the profit‑maximizing or loss‑minimizing output? Explain. What economic profit or loss will the firm realize per unit of output.

Cost Behavior and Cost-Volume-Profit (CVP) Analysis are very important and useful concepts and tools used by management and other decision-makers. CVP analysis and one's understanding of cost behavior is helpful for business planning and controlling purposes.

Due to the temporary downturn in the economy, sales revenues have decreased by 50% to 60% for many restaurants and eateries, retails stores and service-oriented businesses (e.g., hair salons ) thus affecting profitability and the ability to continue business operations.  In order to survive the slowdown, businesses must make some adjustments or risk going out of business.

1. As a consultant, which of the Cost-Volume-Profit techniques and tools would you use to help these businesses make decisions? Assume the business is a restaurant. Briefly explain your choice(s).
2. In term of actions involving cost reduction or increasing revenues, briefly provide some recommendations for these businesses to help them stay profitable or at least minimize losses during this period? (Be specific).. Hint: Think about what some business have been doing to control their costs and generate other streams of revenues.

When calculating payback period, is training cost treated as initial investment cost or one time expense cash outflow? What formula is used to calculate payback period?