Exercise 2-15 Plantwide and Departmental Predetermined Overhead Rates; Job Costs [LO2-1, LO2-2, LO2-3, LO2-4]

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

Delph Company uses a job-order costing system and has two manufacturing departments—Molding and Fabrication. The company provided the following estimates at the beginning of the year:

During the year, the company had no beginning or ending inventories and it started, completed, and sold only two jobs—Job D-70 and Job C-200. It provided the following information related to those two jobs:

Delph had no underapplied or overapplied manufacturing overhead during the year.

Exercise 2-15 Part 1

Required:

1. Assume Delph uses a plantwide predetermined overhead rate based on machine-hours.

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost assigned to Job D-70 and Job C-200.

Data concerning a recent period’s activity in the Assembly Department, the first processing department in a company that uses the FIFO method in its process costing, appear below:

A total of 26,100 units were completed and transferred to the next processing department during the period. Beginning work in process inventory consisted of 1,900 units and ending work in process inventory consisted of 1,700 units.

Required:

1. Compute the Assembly Department's cost of ending work in process inventory for materials, conversion, and in total for the period.

2. Compute the Assembly Department's cost of units transferred out to the next department for materials, conversion, and in total for the period.

Clonex Labs, Inc., uses the FIFO method in its process costing system. The following data are available for one department for October:

The department started 175,000 units into production during the month and transferred 192,000 completed units to the next department.

Required:

Compute the equivalent units of production for materials and conversion for October.

Exercise 2-15 Plantwide and Departmental Predetermined Overhead Rates; Job Costs [LO2-1, LO2-2, LO2-3, LO2-4]

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

Delph Company uses a job-order costing system and has two manufacturing departments—Molding and Fabrication. The company provided the following estimates at the beginning of the year:

During the year, the company had no beginning or ending inventories and it started, completed, and sold only two jobs—Job D-70 and Job C-200. It provided the following information related to those two jobs:

Delph had no underapplied or overapplied manufacturing overhead during the year.

Exercise 2-15 Part 1

Required:

1. Assume Delph uses a plantwide predetermined overhead rate based on machine-hours.

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost assigned to Job D-70 and Job C-200.

$2,609

$11,391

$7,611

$6,831

10. Suppose the development of new drought-resistant hybrid seed corn leads to a 50% increase in the average yield per acre without increasing the cost to the farmers who use the new technology. If the conditions in the corn industry are approximated by the price-taker model, which of the following will be likely to occur? (More than one answer is correct, list all correct answers) a. The market supply of corn will increase. b. The supply of soybeans (a close substitute for corn) will decrease. c. The price of corn will fall and the quantity demanded for corn will increase. d. The demand for corn will increase. e. The price of soybeans (a close substitute for corn) will decrease.

12. Assume that "PC Clone" computer makers are price takers operating in an increasing cost industry. If demand increases, initially the PC manufacturers will be able to make economic profits. What is likely to happen to these profits with the passage of time? (There is more than one correct answer). a. They will persist as long as the demand for personal computers is high. b. As computer makers compete for inputs (chips, disk drives, engineers, etc.), they will bid up input prices, which will increase costs and reduce their profitability. c. Once consumers know that the computer makers are earning profits, they will reduce their purchases, which will lead to a reduction in demand and a lower market price. d. New PC manufacturers will enter the industry over time, which will lead to an increase in supply and a reduction in computer prices until the profits are eliminated.

13. Which of the following statements is true when long-run equilibrium conditions are present in price-taker and competitive price-searcher markets? (Note for this problem, there is more than one correct answer). a. P= MC for price-taker, and P > MC for competitive price-searcher markets. b. P = MC in both price-taker and competitive price-searcher markets. c. P = ATC in both price-taker and competitive price-searcher markets, and at a point where ATC is at a minimum for price- taker markets but not at a minimum for price-searcher markets. d. Economic profits are zero for both price-taker and competitive price-searcher markets. e. Total Revenue = Total Cost for both competitive price-taker and price-searcher markets.

14. Which of the following statements about price discrimination is correct (more than one answer is correct)? a. A price discriminating firm will want to charge a higher price to the consumer group with the more elastic demand. b. A firm can usually increase its profits by price discriminating rather than charging the same price to all customers. c. Some consumers will pay a higher price when a firm is a price discriminator than would be the case if all customers were charged the same price. d. Compared to a single-price strategy, a firm that engages in price discrimination usually produces and sells a larger output. e. For price discrimination to be successful, firms generally have to be able to prevent re-sale of their products and control resentment.

15. Which of the following is a true statement about the difference between a price-taker firm and a competitive price-searcher firm in the long run (more than one answer is correct)? a. Both will sell their products at a price equal to average total cost, but only the price-searcher will produce at minimum average total cost. b. Both will sell their products at a price equal to marginal cost, and only the competitive price searcher will produce at minimum average total cost. c. Only the price-taker will sell its product at a price equal to marginal cost. d. Only the competitive price searcher will sell its product at a price equal to marginal cost. e. Both will sell their products at a price equal to average total cost, but only the price-taker will produce at minimum average total cost.

16. In some industries where firms experience declining average total costs over the full range of output that consumers are willing to buy (more than one answer is correct): a. a larger firm will very likely have lower per-unit costs. b. many rival firms will tend to emerge from the competitive process. c. a single large firm will likely develop, and it will have cost advantages that may protect it from potential rivals. d. a single large firm will develop and it will buy out any smaller rival firms because the small firms can produce at a lower per-unit cost. e. smaller firms will likely have per-unit costs that are similar to large firms.

17. In sparsely populated areas of the western United States, physicians often have some local monopoly power since the nearest doctor may be a hundred miles (or more) away. Physicians confronting this circumstance may be able to practice price discrimination, for example, by charging richer families more than poorer ones for the same services. If one such physician is willing to stay in the area only if he or she can earn at least $150,000 per year, and if price discrimination permits him or her do so, then economic reasoning suggests that such price discrimination would most likely (more than one answer is correct): a. make residents of the area worse off with regard to the purchase of physician services. b. make residents of the area better off with regard to the purchase of physician services. c. increase the number of physicians practicing in such sparsely populated areas. d. increase the options available to both the rich and poor families in the community.

19. Given that the short-run cost and demand conditions shown above for a competitive price-searcher firm are representative for all firms in the industry, which statements accurately describe this firm and industry (more than one answer is correct)? a. The firm’s Price will exceed ATC and it will be able to make short-run economic profits. b. The firms will face competition from new entrants into the industry, causing this firm's demand to decline until zero economic profits are restored. c. The firms will face competition from new entrants into the industry, causing this firm's demand to increase until it earns positive economic profits. d. The firm will see some of its competitors exit from the industry, causing this firm's demand to increase until zero economic profits are restored. e. The firm’s Total Revenue (TR) will exceed its Total Costs (TC) in the short-run.

20. If the government grants a single firm the patent right (monopoly) for the production of a good, such as a new cancer drug, then compared to the competitive outcome for such a good: a. the price of the cancer drug will be higher, less of the cancer drug will be produced, and the firm will earn positive profits. b. the price of the cancer drug will be lower, less of the cancer drug will be produced, and the firm may be able to earn positive economic profits. c. the price of the cancer drug will be higher, more of the cancer drug will be produced, and the firm may be able to earn positive economic profits. d. the price of the cancer drug will be higher, less of the cancer drug will be produced, and the firm will earn zero economic profits. e. none of the above

21. Assuming that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency? (More than one answer is correct.) a. The output of the monopolist will be too small and the price too high, compared to ideal market efficiency. b. The output of the monopolist will be too large and the price too high, compared to ideal market efficiency. c. The output of the monopolist will be too small and the price too low, compared to ideal market efficiency. d. The monopolist’s price will be too high, but the impact of monopoly on output is indeterminate. e. The unregulated monopolist will be in a position to charge a price greater than its ATC of production in the long-run.

22. Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC) and that the market price is expected to rise at least to ATC in the near future. In the short run, a firm that is a price-taker would: a. immediately shut down and get out of the industry. b. continue to produce a quantity of output such that its marginal revenue equals marginal cost. c. shut down temporarily, in hopes of restarting in the near future. d. cut price and expand output in hopes of achieving economies of scale. e. None of the above.

23. Even though a cartel is often profitable for its members, cartel arrangements contain the seeds of their own disintegration because (more than one answer is correct): a. a price maintained above each cartel member's average variable cost provides each member with an incentive to offer secret price reductions to attract additional customers. b. the profits earned by cartel members will induce and attract new firms to enter the industry. c. cartel members will attempt to garner more of the total profit for themselves by cheating on their agreement with other members. d. cheating on cartel agreements by individual members may be difficult to detect and enforce. e. the demand for the products of cartels is inherently unstable relative to the demand for the products of non-cartel industries.

24. Suppose the airline industry is an oligopolistic market with significant barriers to entry. If this is true, we would expect that (more than one answer is correct): a. each airline will strategically set its own price and output by considering how other airlines might respond. b. if the number of airlines declined because of a series of mergers between major airlines, then collusive behavior in the industry leading to higher prices would be more likely. c. the airfares being charged will be greater than what would be charged in a competitive price-taker market with no entry barriers but less than what would be charged by a pure monopolist. d. the firms in the industry will not attempt to maximize profit.

26. People can travel within Washington, D.C., via the Metro subway system or by taxicabs. Suppose that taxi fares (prices) remain the same, while subway fares (prices) increase for the Metro system. How will the total revenue from subway and taxi travel be affected by the increase in subway fares? The total revenue (more than one answer is correct): a. from taxi fares will increase, and revenue from subway fares will increase, but only if demand for the subway is inelastic. b. from taxi fares will increase, and revenue from subway fares will increase, but only if demand is elastic. c. from subway fares will decrease, and revenue from taxi fares might either increase or decrease. d. from taxi fares will decrease, and revenue from subway fares might either increase or decrease. e. from taxi fares will increase, and revenue from subway fares might either increase or decrease.

27. Mexican Hut sells tacos and competes with its main rival Burger Queen, which sells hamburgers. If rising corn prices unexpectedly increase the cost of taco shells for Mexican Hut, which of the following statements are correct in the long run when market equilibrium is restored? (More than one answer is correct. Hint: Use graphs to help answer this question) a. The supply of Mexican Huts tacos will decrease, their price will increase; the demand for Burger Queen’s hamburgers will then increase, and their price will increase. b. The supply of Mexican Hut’s tacos will decrease, their price will increase and the quantity demanded for tacos will decrease. c. The supply of Mexican Hut’s tacos will decrease, while the quantity supplied of Burger Queen’s hamburgers will increase as the price of hamburgers increases; d. The price of tacos will rise and the quantity demanded for tacos will decrease; the price of hamburgers will increase as the supply of hamburgers increases; e. The price of burgers will rise, the demand for tacos will fall, and the quantity of tacos supplied will decrease.

29. If the price of sandals is fixed by law below the market-clearing price (Note: More than one answer is correct): a. a shortage of sandals will result. b. sandal inventories at shoe stores will be smaller than when the market price prevails. c. the quantity of sandals purchased will be less than the quantity purchased at the market price. d. the quantity of sandals supplied will be greater than the quantity supplied at the market price. e. the quantity of sandals demanded will be greater than the quantity supplied.

32. Economic analysis suggests that patent laws that can often be used to limit the entry of potential competitors into an industry (more than one answer is correct): a. redistribute income from consumers to business decision makers without affecting the allocation of resources. b. may be a source of business monopoly power, but they may also encourage innovation and the development of cost- reducing production techniques in the long run. c. encourage product development and the adoption of cost-reducing technologies in the short run but in the long run generally lead to business monopoly. d. help inventors at the expense of consumers in the short run. e. help consumers at the expense of inventors in the long run.

Campbell Manufacturing Company uses two departments to make its products. Department I is a cutting department that is machine intensive and uses very few employees. Machines cut and form parts and then place the finished parts on a conveyor belt that carries them to Department II, where they are assembled into finished goods. The assembly department is labor intensive and requires many workers to assemble parts into finished goods. The company’s manufacturing facility incurs two significant overhead costs: employee fringe benefits and utility costs. The annual costs of fringe benefits are $264,000 and utility costs are $192,000. The typical consumption patterns for the two departments are as follows:

The supervisor of each department receives a bonus based on how well the department controls costs. The company’s current policy requires using a single allocation base (machine hours or labor hours) to allocate the total overhead cost of $456,000.

Required

1. Assume that you are the supervisor of Department I. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected.

2. Assume that you are the supervisor of Department II. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected.

3. Assume that you are the plant manager and have the authority to change the company’s overhead allocation policy. Formulate an overhead allocation policy that would be fair to the supervisors of both Department I and Department II. Compute the overhead allocations for each department using your policy.

4. 	Department Allocated Cost I II Total

5. 	Department Allocated Cost I II Total

6. 	Costs Department I Department II Fringe benefits Utility Total

7. 	Costs Department I Department II Fringe benefits Utility Total

A patent monopolist faces a demand curve: P=10-1/3 Q and total cost F+2Q+2/3 Q^2

Now assume that the patent monopolist splits production between two factories, and that F is zero.

          i. How much will each factory produce? What is the price? What is short run profit? What is the increase in short run profit from using 2 factories instead of one?

            ii. Draw a graph to illustrate this case. Carefully indicate on the graph the total surplus generated, and the increase in consumer and producer surplus from using 2 factories.

The Platter Valley factory of Bybee Industries manufactures field boots. The cost of each boot includes direct materials, direct labor, and manufacturing (factory) overhead. The firm traces all direct costs to products, and it assigns overhead cost to products based on direct labor hours.

The company budgeted $15,000 variable factory overhead cost and 2,500 direct labor hours to manufacture 5,000 pairs of boots in March.

The factory used 2,700 direct labor hours in March to manufacture 4,800 pairs of boots and spent $15,600 on variable overhead during the month

For March, the Platter Valley factory of Bybee Industries budgeted $90,000 for fixed factory overhead cost. Its practical capacity is 2,500 direct labor hours per month (to manufacture 5,000 pairs of boots)

The factory used 2,700 direct labor hours in March to manufacture 4,800 pairs of boots. The actual fixed overhead cost incurred for the month was $92,000.

The Platter Valley factory of Bybee Industries currently uses a four-variance analysis of the total factory overhead cost variance but is thinking of changing to a three-variance analysis.

Required:

1. Compute the total overhead spending variance, the (variable overhead) efficiency variance, and the production volume variance for March and indicate whether each variance is favorable (F) or unfavorable (U).

2. Prepare the appropriate journal entries at the end of March to record each of the following: (a) the total overhead spending variance, (b) the (variable overhead) efficiency variance, and (c) the production volume variance. Assume that all overhead costs are recorded in a single account called "Factory Overhead."

In February 2020, Sandhill Construction signed a contract and commenced construction on a parking garage. The total contract price was $90.8 million and was expected to be completed in July 2024 at a total estimated cost of $83.0 million. Payment by the customer was to be made in several stages, based on significant events and dates throughout the construction timeline. The customer was to have control over the parking garage and was able to make major changes to the project during the construction process. Sandhill’s year-end was September 30.

By the end of September, 2020, Sandhill had incurred $20,750,000 in costs and had invoiced $10,400,000 in progress billings. $7,600,000 of the progress billings had been collected.

By September 30, 2021, Sandhill had incurred $40,200,000 in total costs and had invoiced $45,500,000 in progress billings, including the progress billings in 2020. Of the total billings, $30,500,000 in total had been collected. Also, Sandhill reviewed its cost estimates on the project, and now believed the parking garage would cost $80.4 million in total to complete.

Prepare all journal entries required for the year ended September 30, 2020. Use Materials, Cash, Payables for costs incurred to date.

Prepare all journal entries required for the year ended September 30, 2021. Use Materials, Cash, Payables for costs incurred to date.