Activity-Based Costing and Product Cost Distortion

Handbrain Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 4,000 direct labor hours. The total indirect labor is budgeted to be $462,400.

Time records from indirect labor employees revealed that they spent 40% of their time setting up production runs and 60% of their time supporting actual production.

The following information about cell phones and tablet PCs was determined from the corporate records:

Number of
SetupsDirect Labor
HoursUnits

Cell phones500 2,000 68,000

Tablet PCs1,100 2,000 68,000

Total1,600 4,000 136,000

If required, round your answers to the nearest cent.

a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base.

Cell phones$ per unit

Tablet PCs$ per unit

b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support.

Budgeted Activity CostActivity Rate

Setup$$per setup

Production support$$per direct labor hour

c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing.

Cell phones$ per unit

Tablet PCs$ per unit

d. Why are the per-unit allocated costs in (a) different from the per-unit activity cost assigned to the products in (c)?

The per-unit indirect labor costs in (a) are distorted because setup activity  is consumed by the products in a different ratio from the direct labor. The activity-based  costing method results in the product with the larger  number of setups receiving a larger portion of the setup activity cost. The single-rate system  allocates overhead only on the basis of direct labor hours. Since the direct labor hours are  equal for each product, the allocated indirect labor will also be  equal.

Feedback

a. Calculate:

Total Indirect Labor Costs ÷ Total Direct Labor Hours = Overhead Rate

Overhead Rate x Direct Labor Hours per Product = Indirect Labor Cost per Product; Indirect Labor Cost per Product ÷ Units = Indirect Labor Cost per Unit

b. Percentage of Time on Activity x Total Indirect Labor = Budgeted Activity Cost per Activity; Divide the Budgeted activity cost by activity base to obtain the activity rate.

c. Calculate for each product:

Activity-Base Usage for each Activity x Activity Rate from (b) = Activity Cost; Add both activity costs per product to obtain the total costs; Divide the total cost per product by the number of units to obtain activity cost per unit.

Activity-Based Costing and Product Cost Distortion

Handbrain Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 4,000 direct labor hours. The total indirect labor is budgeted to be $462,400.

Time records from indirect labor employees revealed that they spent 40% of their time setting up production runs and 60% of their time supporting actual production.

The following information about cell phones and tablet PCs was determined from the corporate records:

Number of
SetupsDirect Labor
HoursUnits

Cell phones500 2,000 68,000

Tablet PCs1,100 2,000 68,000

Total1,600 4,000 136,000

If required, round your answers to the nearest cent.

a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base.

Cell phones$ per unit

Tablet PCs$ per unit

b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support.

Budgeted Activity CostActivity Rate

Setup$$per setup

Production support$$per direct labor hour

c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing.

Cell phones$ per unit

Tablet PCs$ per unit

d. Why are the per-unit allocated costs in (a) different from the per-unit activity cost assigned to the products in (c)?

The per-unit indirect labor costs in (a) are distorted because setup activity  is consumed by the products in a different ratio from the direct labor. The activity-based  costing method results in the product with the larger  number of setups receiving a larger portion of the setup activity cost. The single-rate system  allocates overhead only on the basis of direct labor hours. Since the direct labor hours are  equal for each product, the allocated indirect labor will also be  equal.

Feedback

a. Calculate:

Total Indirect Labor Costs ÷ Total Direct Labor Hours = Overhead Rate

Overhead Rate x Direct Labor Hours per Product = Indirect Labor Cost per Product; Indirect Labor Cost per Product ÷ Units = Indirect Labor Cost per Unit

b. Percentage of Time on Activity x Total Indirect Labor = Budgeted Activity Cost per Activity; Divide the Budgeted activity cost by activity base to obtain the activity rate.

c. Calculate for each product:

Activity-Base Usage for each Activity x Activity Rate from (b) = Activity Cost; Add both activity costs per product to obtain the total costs; Divide the total cost per product by the number of units to obtain activity cost per unit.

Question 16

The cost of capital associated with an investment does not depend on the risk of that investment.

Select one:

True

False

Question 17

Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $350,000 on a net after-tax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?

Select one:

a. The sales price of $350,000 less the book value of the improvements.

b. The present book value of $225,000.

c. The original $150,000 purchase price of the land itself.

d. The property should be valued at zero since it is a sunk cost.

e. The after-tax sales value of $350,000.

Question 18

Generally, bankruptcy costs have no impact on a firm’s decision to increase debt financing.

Select one:

True

False

Question 19

Watson's Automotive has a $400,000 bond issue outstanding that is selling at 85 percent of face value. Watson's also has 21,000 shares of common stock outstanding with a market price of $21 a share. What is the weight of the debt as it relates to the firm's weighted average cost of capital?

Select one:

a. 44 percent

b. 42 percent

c. 48 percent

d. 40 percent

e. 41 percent

Question 20

The market value of a firm that invests in projects providing a return less than its WACC should increase over time.

Select one:

True

False

Upon graduating from college, your parents host a graduation party in celebration for you at their house.

50 of your friends attend along with several family members. At the end of the party everyone is departing the house. As the last guests filter out the front door, you thank them for attending and close the door.

3 minutes later you hear a loud knock on the front door. You open the door and see that one of your trusted friends is standing there and is very upset. She tells you that after getting into her car she realized her $9,000 Rolex watch was missing. Immediately, you, your friend and your family members conduct a search of the house, front yard and your friend's pocketbook, coat pockets and vehicle to no avail - the watch cannot be located.

Questions:

1) Should you call the police?

2) Is this apparent loss covered by the parents' home owner's insurance?

3) If not, what insurance might cover this loss?

4) What should happen if your friend receives a replacement watch via an insurance claim then, 3 months later, your mother calls you to say she discovered the lost watch on the ground while pruning a front lawn plant?

1. What are some key intellectual property protections, if any, that CACI international possess? When do these protections (e.g., patents) expire? How does your company intend to recoup lost revenues due to any patent or other intellectual property protection expirations?
2. Find the Corruption Perceptions Index (CPI) score for two countries where CACI International does business, one country with a relatively high score and one country with a relatively low score. Search for news stories about corporate financial scandals in these two countries. Prepare a short summary of news stories about financial scandals in these countries. Briefly describe what you perceive are the risks of corruption, such as paying bribes, that your selected company might face in these countries.
3. Determine CACI international mode of entry into foreign markets. This should be based upon a serious analysis of your company’s risk-return tradeoff. In your opinion, has your company taken the right approach?
4. Does CACI international have an exit strategy? Recall that exit strategies are to be determined before entry into the foreign market, rather than after entry.

A newly issued bond pays its coupons once a year. Its coupon rate is 4%, its maturity is 10 years, and its yield to maturity is 7%.

a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Holding-period return             %

b. If you sell the bond after one year when its yield is 6%, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on capital gains income is 30%? The bond is subject to original-issue discount (OID) tax treatment. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

c. What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After-tax holding-period return             %

d. Find the realized compound yield before taxes for a two-year holding period, assuming that (i) you sell the bond after two years, (ii) the bond yield is 6% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2% interest rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Realized compound yield before taxes             %

e. Use the tax rates in part (b) to compute the after-tax two-year realized compound yield. Remember to take account of OID tax rules. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After-tax two-year realized compound yield             %

You are saving for the college education of your two children. They are two years apart in age; one will begin college 14 years from today and the other will begin 16 years from today. You estimate your children’s college expenses to be $38,000 per year per child, payable at the beginning of each school year. The appropriate interest rate is 6.8 percent. Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. Assume four years of college for each child. How much money must you deposit in an account each year to fund your children’s education?

please use linux or unix to complete

Diff command

The diff command displays differences between two files on a line-by-line basis. It displays the differences as instructions that you can use to edit one of the files ( using the vi editor) to make it the same as the other. When you use diff, it produces a series of lines containing Append (a), Delete (d), and Change (c) instructions. Each of these lines is followed by the lines from the file that you need to append, delete, or change. A less than symbol (<) precedes lines from file1. A greater than symbol (>) precedes lines from file2.

You will now need four files. These are telnos, telnos2, telnos3, telnos4. These files are all short files that contain names, departments, and telephone numbers. This is what they look like.

To make it easier to copy you can use the * (wildcard) to copy these files. Type in the command:

                cp /tmp/csc3321/telnos* .  

Remember the . (period) means current directory and will copy all of the telnos files at one time and assign them the names that they have in the instructor's file

In order to see how diff works, type in:

                diff telnos telnos2

What was the result?
________________________________________________________________________________________________________________________________________________________________________________________________________________________

The difference between these two files (telnos and telnos2) is that the 4th line in telnos is missing from telnos2. The first line that diff displays (4d3) indicates that you need to delete the 4th line from file telnos to make the two files match. The 4 is the line number and the (d) is delete. The line number to the left of each of the a,c, or d instructions always pertains to file1. Numbers to the right of the instructions apply to file2. The diff command assumes that you are going to change file1 to file2. The next line that diff displays starts with a less than (<) symbol indicating that this line of text is from file1. Next type in:

                diff telnos telnos3

What was the result?__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

In this case, the second line has the (>) greater than sign which means that the extra line is in file2. The a means you must append a line to the file telnos after line 2 to make it match telnos3. Append means to add on to the end. Next is an example of the change feature. Type in the following command:

                diff telnos telnos4

What was the result? __________________________________________________________

What lines do you need to change in order to make the two files alike? ________________________________________________________________________________________________________________________________________________

Notice that the three hyphens indicate the end of the text in the first file that needs to be changed and the start of the second file that needs to be changed. Next, copy telnos to telnos5. What command did you use to do this? ________________________________________________________________________

Next, type in:

                diff telnos5 telnos2

What was the answer that you received? _________________________________________________________________________________________________________________________________________________________________________________________________________________

Use the vi editor to change telnos5 to match the file telnos2. Then check to see if they are now alike.

What command did you use? _________________________________________________________

What was the result? __________________________________________________

What is the output of the diff command when the files match?
_______________________________________________________________________________

When the two files are alike, there is no response. Unfortunately, Unix is not always user-friendly.

Uniq Command

The uniq command displays a file, removing all but one copy of successive repeated lines. If the file has been sorted, uniq ensures that no two lines that it displays are the same. Sort telnos and telnos3 and then send them to a new file called tel2. Type in the following:

                sort telnos telnos3 > tel2

Next look at the file, tel2. What does it contain?___________________________________________________________________________________________________________________________________________________________________________________________________

Next issue the command:

                uniq tel2

What was the result?__________________________________________________________________________________________________________________________________________________________________________________________________________________

The uniq command has three options. These are:

-c   Causes uniq to precede each line with the number of occurrences of the line in the input file

-d   Displays only lines that are repeated

-u   Displays only lines that are not repeated

Issue the command:

                uniq -u tel2

What was the result?__________________________________________________________________________________________________________________________________________________________________________________________________________________

Next, issue the command:

                uniq -d tel2

What was the result?__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Grep Command

The grep command searches one or more files for a specified pattern. Normally each matching line is copied to the standard output. Two options that can be used with grep are:

                -i             ignore case of alphabetic characters
                -n             precede each line printed by its relative line number in the input file

Use the line numbers in the output of grep to answer the questions in the following sections. Issue the command:
               grep -n H telnos

What was printed? ________________________________________________________________________________________________________________________________________________________________________________________________________________________

Issue the command:
              grep -ni m telnos

What was printed this time?___________________________________________________________________________________________________________________________________________________________________________________________________________________

1. Jacobs & Johnson, an accounting firm, employs 15 accountants, of whom 9 are CPAs. If a delegation of 3 accountants is randomly selected from the firm to attend a conference, what is the probability that 3 CPAs will be selected? (Round your answer to three decimal places.)'

2. Among 500 freshmen pursuing a business degree at a university, 301 are enrolled in an economics course, 220 are enrolled in a mathematics course, and 130 are enrolled in both an economics and a mathematics course. What is the probability that a freshman selected at random from this group is enrolled in each of the following? (Enter your answers to three decimal places.)

(a) an economics and/or a mathematics course

(b) exactly one of these two courses

(c) neither an economics course nor a mathematics course