Variable Costing, Absorption Costing

During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,600 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,600 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2,700. This fixed overhead variance was closed to Cost of Goods Sold. There was no variable overhead variance. The results of the year’s operations are as follows (on an absorption-costing basis):

Required:

1. Calculate the cost of the firm’s ending inventory under absorption costing. Round unit cost to five decimal places. Round your final answer to the nearest dollar.
$

Feedback

Determine the number of units in ending inventory first. Calculate unit cost after determining unadjusted COGS (before adjustment for underapplied fixed overhead).

What is the cost of the ending inventory under variable costing? Round unit cost to five decimal places. Round your final answer to the nearest dollar.
$

Feedback

Take unit cost under absorption less fixed overhead amount per unit to get variable cost per unit for variable costing.

2. Prepare a variable-costing income statement. Round the unit cost to five decimal places, when required. Round your final answers to the nearest dollar. Use the rounded values in subsequent computations.

Feedback

Use a contribution margin format income statement that groups costs according to behavior (variable and fixed)

What is the difference between the two income figures?
$

1. Periodic Inventory by Three Methods

   Dymac Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the next 12 months, and the inventory count at December 31 are summarized as follows:

   			Purchases Invoices
   Model	Inventory, January 1		1st		2nd		3rd		Inventory Count, December 31
   A10	__		4 at	$ 40	4 at	$ 43	4 at	$ 46	5
   B15	8 at	$ 82	4 at	73	3 at	79	6 at	86	7
   E60	3 at	68	3 at	58	15 at	61	9 at	63	5
   G83	7 at	247	6 at	255	5 at	265	10 at	264	9
   J34	12 at	84	10 at	86	16 at	93	16 at	94	13
   M90	2 at	117	2 at	119	3 at	137	3 at	139	5
   Q70	5 at	155	4 at	165	4 at	170	7 at	175	8

   Required:

   1. Determine the cost of the inventory on December 31 by the The method of inventory based on the assumption that the cost of goods sold should be charged against revenue in the order in which costs were incurred.first-in, first-out method.

   If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase. If units are in inventory at two different costs, enter the units PURCHASED MOST RECENTLY first.

   Dymac Appliances Cost of the Inventory-FIFO Method December 31
   Model	Quantity		Unit Cost		Total Cost
   A10		$		$
   A10
   B15
   B15
   E60
   G83
   J34
   M90
   M90
   Q70
   Q70
   Total				$

   2. Determine the cost of the inventory on December 31 by the A method of inventory costing based on the assumption that the most recent inventory costs should be charged against revenue.last-in, first-out method.

   If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase. If units are in inventory at two different costs, enter the OLDEST units first.

   Dymac Appliances Cost of the Inventory-LIFO Method December 31
   Model	Quantity		Unit Cost		Total Cost
   A10		$		$
   A10
   B15
   E60
   E60
   G83
   G83
   J34
   J34
   M90
   M90
   M90
   Q70
   Q70
   Total				$

   3. Determine the cost of the inventory on December 31 by the A method of inventory costing in which the cost of the units sold and in ending inventory is a weighted average of the purchase costs.weighted average cost method.

   Dymac Appliances Cost of the Inventory-Weighted Average Method December 31
   Model	Quantity		Unit Cost		Total Cost
   A10		$		$
   B15
   E60
   G83
   J34
   M90
   Q70
   Total				$

   4a. Which inventory method would be preferred for income tax purposes in periods of rising prices?

     

   • FIFO method
   • LIFO method
   • Specific identification method
   • Weighted average method

   4b. Which inventory method would be preferred for income tax purposes in periods of declining prices?

     

   • FIFO method
   • LIFO method
   • Specific identification method
   • Weighted average method

Please give me the correct answer:

Lucy’s Music Emporium purchased $50 million in fixed assets in January and their accountant told them that they would have to depreciate the assets over 20 years (they use the same depreciation calculations for shareholder reporting and income tax purposes). In December they learned that their accountant did not have a college degree and fired him. They hired a new accountant with a college degree and she told them that they could depreciate the assets over 15 years. How would the new depreciation assumption affect the company's financial statements relative to the old assumption?

1. The firm's EBIT would increase.

2. The firm's cash position would increase, all else held equal.

3. The firm's reported earnings per share would increase.

4. The firm's reported net fixed assets would increase.

5. The firm's net liabilities would increase.

Which of the following statement is incorrect?

1. Most of the answers are correct.

2. Total net operating capital = NOWC + Operating long-term assets.

3. Cost of goods sold (COGS) are the revenues less any discounts or returns.

4. An S corporation is a small corporation which, under Subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization.

5. Accounts receivable arises when a firm sells its products to customers but does not demand immediate payment, and the customers then have obligations to make the payment at a later time, usually less than a year.

Which of the following statement is incorrect?

1. Most of the answers are correct.

2. A firm’s balance sheet is a statement of the firm’s financial position at a specific point in time.

3. Retained earnings is the portion of the firm’s earnings that have been saved rather than paid out as dividends.

4. Operating long-term liabilities are the liabilities that are a natural consequence of the firm’s operations, such as accounts payable and accruals and include notes payable or any other short-term debt that charges interest.

5. S corporations are businesses that have the limited-liability benefits of the corporate form of organization yet are taxed as partnerships or proprietorships.

Which of the following statement is incorrect?

1. A capital gain occurs when an asset is sold for less than its book value.

2. The income statement reports the results of operations over a period of time, and it shows earnings per share as its “bottom line.”

3. The LIFO (last-in, first-out) method assumes that the items most recently placed in inventory are the first ones used in production.

4. Most of the answers are correct.

5. On a typical balance sheet, cash, short-term investments, accounts receivable, and inventories are listed as current assets because those items are expected to converted into cash within a year.

Jessie's Bobcat Rentals' operations provided a negative net cash flow last year, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles?

1. The company sold some of its fixed assets.

2. The company retired a large amount of its long-term debt.

3. The company dramatically increased its capital expenditures.

4. The company repurchased some of its common stock.

5. The company had high depreciation expenses.

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

1. The company pays a dividend.

2. The company repurchases common stock.

3. The company gives customers more time to pay their bills.

4. The company issues new common stock.

5. The company purchases a new piece of equipment.

Which of the following statement is correct?

1. All the answers are incorrect.

2. The income statement begins with assets, which are the “things” the company owns.

3. Cost of goods sold (COGS) reflects the estimated costs of the assets that wear out in producing goods and services.

4. Gross income is defined as taxable income less a set of exemptions and deductions which are spelled out in the instructions to the tax forms individuals must file.

5. The fundamental value of a company to its investors depends on the present value of its expected future FCFs which are discounted at the company’s weighted average cost of capital (WACC).

Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?

1. The company would have to pay less taxes.

2. The company's net income would increase.

3. The company's taxable income would fall.

4. The company would have less common equity than before.

5. The company's interest expense would remain constant.

Direct Materials Purchases Budget

FlashKick Company manufactures and sells soccer balls for teams of children in elementary and high school. FlashKick’s best-selling lines are the practice ball line (durable soccer balls for training and practice) and the match ball line (high-performance soccer balls used in games). In the first four months of next year, FlashKick expects to sell the following:

Every practice ball requires 0.7 square yard of polyvinyl chloride panels, one bladder with valve (to fill with air), and 3 ounces of glue. FlashKick’s policy is that 20 percent of the following month’s production needs for raw materials be in ending inventory. Beginning inventory in January for all raw materials met this requirement.

Required:

Construct a direct materials purchases budget for each type of raw materials for the practice ball line for January and February of the coming year. If required, round your answers to the nearest cent.

Direct materials purchases budget for polyvinyl chloride panels:

Direct materials purchases budget for bladder and valve:

Direct materials purchases budget for glue:

This case continues following the new project of the WePROMOTE Company, that you and your partner own. WePROMOTE is in the promotional materials business. The project being considered is to manufacture a very unique case for smart phones. The case is very durable, attractive and fits virtually all models of smart phone. It will also have the logo of your client, a prominent, local company and is planned to be given away at public relations events by your client. As we know from prior cases involving this company, more and more details of the project become apparent and with more precision and certainty. The following are the final values to the data that you have been estimating up to this point: • You can borrow funds from your bank at 3%. • The cost to install the needed equipment will be $105,000 and this cost is incurred prior to any cash is received by the project. • The gross revenues from the project will be $25,000 for year 1, then $27,000 for years 2 and 3. Year 4 will be $28,000 and year 5 (the last year of the project) will be $23,000. • The expected annual cash outflows (current project costs) are estimated at being $13,000 for the first year, then $12,000 for years 2, 3, and 4. The final year costs will be $10,000. • Your tax rate is 30% and you plan to depreciate the equipment on a straight-line basis for the life of the equipment. • After 5 years the equipment will stop working and will have a residual (salvage) value of $5,000). • The discount rate you are assuming is now 7%. Requirements of the paper: • Perform the final NPV calculations and provide a narrative of how you calculated the computations and why.

• Then provide a summary conclusion on whether you should continue to pursue this business opportunity.

• Provide the final, accurate NPV calculations.

• A narrative on how the NPVs were calculated. The narrative should include how the data relating to depreciation and its tax consequences affect the cash flow of the project.

• Supporting narrative based on research of sources other than the textbook materials.

• Provide a conclusion on whether this business opportunity should be pursued.

Can Economic Growth Survive Population Decline?

The demographic transition is causing greying populations, shrinking labour forces, and overall population decreases in many nations. Can economic growth survive?

As you know from this chapter, Real GDP = hours of work × labour productivity. The number of hours of work depends heavily, however, on the size of the working-age population. If it begins to shrink, the number of hours of work almost always falls. In such cases, the only way real GDP can rise is if labour productivity increases faster than hours of work decreases. The world is about to see if that can happen in countries that have populations that are greying and shrinking.

The historical background has to do with the fact that as nations industrialize their economies shift from agriculture to industry. As that happens, fertility levels plummet because the shift to modern technology transforms children from being economically essential farm hands who can contribute to their families' incomes from a young age to expensive investment goods that require many years of costly schooling before they can support themselves.

As people react to this change, birthrates tend to fall quite dramatically. The key statistic is the total fertility rate that keeps track of the average number of births that women have during their lifetimes. To keep the population stable in modern societies, the total fertility rate must be about 2.1 births per woman per lifetime (= 1 child to replace mom, 1 child to replace dad, and 0.1 child to compensate for those people who never end up reproducing as adults).

Every rich industrial nation has now seen its total fertility rate drop below the replacement level of 2.1 births per woman per lifetime. In Japan and many Eastern European countries, the number has been so low for so long that there are no longer enough children being born each year to replace the old folks who are dying. As a result, their overall populations are shrinking.

Economists only expect that pattern to become more common and more rapid, so that by the year 2050 the majority of nations will have decreasing populations. But decades before a nation's overall population begins to decrease, it faces a situation in which the labour force shrinks while the elderly population swells.

That pattern is the result of each generation being smaller than the one before. As an example, the Baby Boom generation, born between 1946 and 1964, is much larger than the Baby Bust generation that followed it. So as the Boomers retire over the next two decades, there will be a lot of retirees as compared to working-age adults.

This trend can be quantified by the inverse dependency ratio, which is defined as the number of people of working age (ages 20 to 64) divided by the number of dependents (seniors over age 65 plus youths under age 20). In Canada, the inverse dependency ratio is set to fall from about 1.5 people of working age per dependent in 2010 to just 1.16 people of working age per dependent in 2050. That is extremely problematic because it implies that worker productivity will have to rise dramatically just to make up for the relative decline in the number of workers as compared to dependents. If productivity doesn't keep up with the fall in the inverse dependency ratio, living standards will have to decline because there will simply be too many nonworking consumers relative to working-age producers.

The place where this problem is likely to show up first is Social Security. In 2013, for the first time in Canadian history, the number of retirees outnumbered young people in the 15–24 age group. Statistics Canada projects that the working population will continue to drop while the number of seniors collecting pension is expected to rise. Clearly, worker productivity would have to increase to keep up with the decline in the number of workers relative to retirees.

Economists are uncertain about whether such large productivity increases will be forthcoming. The problem is that consumption competes with investment. A society with a larger fraction of dependents is a society that is likely to devote an increasingly high fraction of total output toward consumption rather than investment. If so, productivity growth may slow considerably.

Another possible problem is that, historically, most transformative new technologies and businesses have been created by energetic young people under the age of 40. With each generation getting smaller, there will be fewer people in that age range and thus, possibly, less innovation and slower productivity growth.

Other economists are more hopeful, however. They view old people as consumers and demanders. As their numbers swell, inventors may simply switch from inventing products for young people to inventing products for old people. If so, productivity growth and living standards could keep on rising at the rates we have come to expect. Moreover, Canada brings in about 250,000 new immigrants each year, which at least partially offsets the lower birth rate.

Question:

Would you expect a country with a total fertility rate of 2.7 to have a growing or a shrinking population over the long run?   

What about a country with a total fertility rate of 1.2?

In 20 years, will Canada have more or fewer workers per retiree than it does today? What are the factors that will determine the size and structure of Canadian population? What is meant by a falling inverse dependency ratio? Why does a falling inverse dependency ratio make it harder for real GDP to continue growing? Suggest some solutions to overcome this problem?                                                                                                                 

Casting Crown Construction entered into the following transactions during a recent year:

Required:
1-a. Analyze the accounting equation effects. (Enter any decreases to accounts with a minus sign.)

1-b. Prepare the journal entries for each of the transactions. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. For the tangible and intangible assets acquired in the preceding transactions, determine the amount of depreciation and amortization that Casting Crown Construction should report for the quarter that ended March 31. The equipment is depreciated using the double-declining-balance method with a useful life of five years and $44,000 residual value.

3. Prepare a journal entry to record the depreciation and amortization calculated in requirement 2. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

4. Not available in Connect.

PLY is a large consulting company that specializes in systems analysis and design. The company has over 2,000 employees and first-quarter revenues reached $15 million. The company prides itself on maintaining an 85 percent success rate for all project implementations. The primary reason attributed to the unusually high project success rate is the company’s ability to define accurate, complete, and high-quality business requirements.

You are interested in implementing a new payroll system. The current payroll process is manual and takes three employees two days each month to complete. You have chosen to outsource the entire procurement, customization, and installation of the new payroll system to PLY. The first thing you need to do is define the initial business requirements so PLY can begin work.

PROJECT FOCUS:

• Review the testimony of three cafe employees who have detailed the current payroll process along with their wish list for the new system (MaryJaneKittredge.doc, JoanTahoe.doc, TedWhitaker.doc).
• Review the Characteristics of Good Business Requirements document (BusinessRequirements. doc) that highlights several techniques you can use to develop solid business requirements.
• After careful analysis, create a report detailing the business requirements for the new system. Be sure to list any assumptions, issues, or questions in your document.

The performance report compares data from Remember When’s Inc. static master budget with the actual costs of its Watch Division for the year ended December 31.

Remember When, Inc.

Performance Report-Watch Division

For the Year Ended December 31

* Budgeted costs are based on an output of 17,500 units.

† Actual output was 19,100 units.

Actual costs exceeded budgeted costs by $5,539, or 7.4 percent. On the face of it, most managers would consider such a cost overrun significant. But was there really a cost overrun? The budgeted amounts are based on sales of 17,500 units at $8 each; however, actual sales was 19,100 units for a total sales of $143,250. “Remember When, Inc. uses a Just In Time inventory system and thus does not have any beginning or ending inventory. Output are units sold.

Required:

Construct a flexible budged performance report and explain activity (volume), revenue, and spending variances.

Check Figures: Activity (Volume) Variance – Revenue 12,800F, Variable Costs 5,936U,

Net Income 6,864F

                        Revenue Variance – 9,550U

Spending Variance – Total Variable Costs 97F,

                             - Total Fixed Costs 300F

Activity (volume) generated $6,864 additional profit, but the revenue variance was unfavorable by $9,550. Fixed and variable costs were close to flexible budge amounts, so income is down overall due to poor revenue management