Case 2-22 Plantwide versus Departmental Overhead Rates; Pricing [LO2-1, LO2-2, LO2-3, LO2-4]

“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $2,000. It seems we’re either too high to get the job or too low to make any money on half the jobs we bid.”

Teledex Company manufactures products to customers’ specifications and uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year:

Jobs require varying amounts of work in the three departments. The Koopers job, for example,
would have required manufacturing costs in the three departments as follows:

Required:

1. Using the company's plantwide approach:

a.Compute the plantwide predetermined rate for the current year.

b.Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job.

2. Suppose that instead of using a plantwide predetermined overhead rate, the company had used departmental predetermined overhead rates based on direct labor cost. Under these conditions:

a.Compute the predetermined overhead rate for each department for the current year.

b.Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job.

4. Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost (direct materials, direct labor, and applied overhead).

a.What was the company’s bid price on the Koopers job using a plantwide predetermined overhead rate?

b.What would the bid price have been if departmental predetermined overhead rates had been used to apply overhead cost?

Garrison 16e Rechecks 2017-08-08, 2018-08-21, 2018-08-31, 2018-09-04, 2018-09-27

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You are the manager of Coca-Cola and are facing the effect of a research (published in 2004) that reports that consuming high fructose corn syrup (HFCS) is associated with promoting obesity. Consider the number of news reports and the number of other research papers on this topic that have been published since 2004. This issue is relevant to you because HFCS is the sweetener used in soft drink manufacturing. Then, you are to:

1. Define the own price elasticity of demand.

2. Write out a log-linear demand equation for Coca-Cola that includes the appropriate demand shifters. Based on economic theory, attach the appropriate sign to the coefficient on each right hand side variable.

3. What is the effect of population on consumption of Coca-Cola?  

4. Given the number of news reports and other research papers that focus on the positive relation between HFCS and obesity, explain how this is represented by the demand equation for Coca-Cola.

5. Use economic theory to explain the meaning of the coefficient on each explanatory variable.

6. What would you do to offset the effect of the HFCS-obesity research on the demand for Coca-Cola? Based on economic theory explain your decision. Explain if your decision is working.

7. Would you increase or decrease price to boost Coke sales? Based on economic theory, explain your choice.

8. Based on economic theory, explain how Coke’s advertising would affect the demand for Pepsi.

9. Assume that consumers are worried about the positive relation between consumption of HFCS and obesity, so consumers may increase bottled water consumption. Explain the effect of this on the demand for Coca-Cola. Is the cross price elasticity of demand between Coca-Cola and bottled water negative of positive, explain?

10. Based on economic theory, explain why you would spend a lot of money on advertising Coca-Cola at the super bowl 2019.

1. Freddie’s Food Service uses QuickBooks Desktop. They do not track or sell inventory. They have regular customers that they want to invoice automatically on a weekly basis. They would like to review a Sales by Customer by Month report regularly. The company currently pays their vendors in QuickBooks Desktop using the online bill pay service, QuickBooks Bill Pay.

After converting to QuickBooks Online, which 3 setup and customization steps are appropriate for this client? (Select all that apply)

1. Customize reports
2. Turn off multicurrency
3. Rebuild data
4. Review recurring transactions
5. Set up initial quantity on hand and cost for each product
6. Set up and implement an online bill pay service

1.    List and explain at least two forces of the external environment (General or Industry) that are causing all companies --not just Volkswagen-- to become more sensitive to environmental issues.

2.    Before the scandal, what was Volkswagen's apparent position on the environment, and what did the company do to ensure that stakeholders (i.e., customers, employees, society) knew this position?

-List at least two ways in which VW communicated this stance to stakeholders

3.    Based on the industry forces, describe the nature of competition in the global automobile industry and explain the reasons for this rivalry.

To what extent do you think competition led to the Volkswagen scandal?

4.    Describe two (2) of Volkswagen's responses to the allegations.

What would be the correct closing entries for the following:

1. The notes payable balance relates to a bank loan obtained in 2018 that is payable in full on august 31,2023. the loan agreement specifies that Clarke pay interest annually on august 31 at a rate of 7.05%. Clarke's bookkeeper made the proper entry for the first interest payment.
2. On September 20,2019, Clarke paid $53,952 for ads to run evenly over a 10-month period, starting October 1,2019.
3. In November 2019, Clarke received $129,320 from a client as a deposit on a major new engagement. As of December 31, 2019, Clarke had completed $41,715 of these services.
4. Clarke operates 5 days a week, Mondays through Fridays. Employees are paid each Monday, for hours worked through the previous Friday. On Monday, December 30, 2019, the last pay day in 2019, Clarke paid its employees for hours worked during the week of December 23-27. The employees then worked their regular schedule through the end of the year. Clarke’s payroll averages $10,325 per day.
5. On June 1, 2019, Clarke signed a lease to rent additional building space. On that date, Clarke prepaid the first 18 months of rent totaling $59,202. The prepayment covers the period June 2019 through November 2020. Note – Contrary to the company’s normal practice, Clarke’s bookkeeper recorded the prepayment into the Rent Expense account. Give the adjusting entry needed when a company uses the expense approach to record a payment in advance.
6. Clarke performed $118,731 of engineering services for several clients in December 2019 that it has not yet billed, recorded or collected.
7. Clarke’s Office Supplies account at the beginning of 2019 had a balance of $14,320. In August, the company purchased an additional $25,095 of supplies. A physical count at year-end 2019 shows that $29,170 of the supplies remain on hand.
8. Clarke purchased its buildings in 2011 and its equipment in 2016. Clarke depreciates its fixed assets according to the straight-line method. For the buildings, it uses estimates of 40 years for the useful life and $180,000 for the salvage value. For the equipment, it uses estimates of 8 years for the useful life and $60,000 for the salvage value.
9. Clarke estimates that 8.77% of the 2019 year-end accounts receivable balance will not be collected.
10. The company’s income tax rate for the year is 25%. (Hint – The income tax rate is applied to the company’s income after all revenues and expenses have been considered except for the income tax charge.)

These are the adjusting entries:

The following transactions occurred during the year 1999:

1- March 1, lawyer Abdalaziz begins his own business as a real estate with a cash investment of 100,000$.

2- On March 2, $ 6000 was paid as a rent for the office. 3- On March 3, he purchased office equipment for3000$ cash.

4- On March 3, he purchased supplies for 500$ cash. 5- On march 10,$1500 was paid for advertising expenses

6- On March 20, he paid workers salaries s of $ 3,000 cash.

7- On March 1, Abdalaziz borrowed 10,000$ by signing 5%, one-year note on April1, 2000.

8- march 23, Purchased a one-year fire insurance policy for 30,000$.

9- On march 10, he withdrew $ 1000 in cash for personal use.

10- Onmarch 7, he performed a legal services for clients for $4000 cash

11- On march 20, received 1000$ cash advance from client.

12- On march 30, used office supply during the month $150

13- On marchr11, billed customers 1000$ for services performed.

14- On march 26, pay creditors $ 400 cash.

15- Utilities expense incurred but not paid on March 31, 1999.250$ .

16- 300$ of the balance in the unearned service revenue account remains unearned at the end of the year.

Prepare t-account and financial statmant and trial balance sheet

CASE TWO, J.J. HEVA COMPANY J.J. Heva Company is an American company that prepares its financial statements under US GAAP. In 2014, the company reported income of $5,000,000 wit stockholders’ equity of $40,000,000 on December 31, 2014. In anticipation of possible adoption of IFRS by the US companies, the management wishes to explore possible impacts of the conversion on the company’s financial statements. You are hired to prepare a reconciliation schedule to convert 2014 income as well as stockholders’ equity on December 31, 2014 from US GAAP basis to IFRS. The following information is provided by the company’s accounting department: 1) In 2012, the company’s pension plan was amended and consequently created a past service cost of $75,000. Half of the past service cost was attributable to already vested employees who had an average remaining service life of 15 years, and half of the past service cost was attributable to non-vested employees who, on average, had two more years until vesting. The company has no retired employees. 2) In 2014, the company entered into a contract to provide engineering services to a long term customer over a 12-month period. The fixed price is $300,000 and the company estimates with high degree of reliability that the project is 30 percent complete at the end of 2014. 3) The company publicly announced a restructuring plan in 2014 and created a valid expectation on the part of the employees to be terminated that the company will carry out the restructuring. The estimated cost of restructuring is $500,000. No legal obligation to restructure exists as of December 31, 2014. 4) Stock options were granted to key officers on January 1, 2014. The grant date fair value per option was $10, and a total of 9,000 options were granted. The options vest in equal installments over three years: one-third in 2013, one-third in 2014, and one-third in 2015. A straight line method is utilized to recognize compensation expense related to stock options. 5) On January 1, 2013, the company issued $10,000,000 of 5% bonds at par value that matures in five years on December 31, 2017. Costs incurred in issuing the bonds were $500,000. Interest is paid on bonds annually. Assume the effective interest rate is 6.193%. Make sure your reconciliation statement is accompanied by an adequate explanation and reference for every one of your adjustments. Ignore income taxes.

The Stearns Company uses a voucher system and records invoices at gross. Record the following transactions in the voucher register and/or check register as appropriate:

201X

• Dec. 1     Voucher no. 400 was prepared for the purchase of $4,500 worth of merchandise inventory from Rolo Company; terms 2/10, n/30.
• Dec. 2     Voucher no. 401 was prepared for freight-in that was to be paid to Langston Company, $340.
• Dec. 3     Office supplies were purchased from Mabra Company for $430; terms 2/10, n/30; voucher no. 402 was prepared.
• Dec. 8     Check no. 560 was issued in payment of voucher no. 400.
• Dec. 10 Purchased office equipment from Huer Company for $9,800; payment is to be in two equal installments. Voucher nos. 403 and 404 were prepared to cover these payments.
• Dec. 12 Check no. 561 was issued to pay voucher no. 403.
• Dec. 12 Check no. 562 was issued to pay voucher no. 401.
• Dec. 18 Purchased $7,000 of merchandise from Lou Corporation; terms 2/10, n/30; voucher no. 405 was prepared.
• Dec. 20 Purchased $3,100 of merchandise from Kote Company; terms 2/10, n/30; voucher no. 406 was prepared.
• Dec. 25 Check no. 563 was issued to pay voucher no. 405.
• Dec. 27 Returned $1,100 of merchandise bought from Kote Company; voucher no. 406 was canceled and voucher no. 407 was prepared.
• Dec. 29 Issued check no. 564 to pay voucher no. 407.

The Stokes Company uses a voucher system and records invoices at gross. Record the following transactions in the voucher register and/or check register as appropriate:

201X

Dec.           1     Voucher no. 300 was prepared for the purchase of $5,000 worth of merchandise inventory from Rodgers Company terms 2/10, n/30.

Dec.           2     Voucher no. 301 was prepared for freight-in that was to be paid to Labaro Company, $360.

Dec.           3     Office supplies were purchased from Mabin Company for $480; terms 2/10, n/30; voucher no. 302 was prepared.

Dec.           8     Check no. 610 was issued in payment of voucher no. 300.

Dec.         10     Purchased office equipment from Hanks Company for $9,400; payment is to be in two equal installments. Vouchers nos. 303 and 304 were prepared to cover these payments.

Dec.         12     Check no. 611 was issued to pay voucher no. 303.

Dec.         12     Check no. 612 was issued to pay voucher no. 301.

Dec.         18     Purchased $8,000 of merchandise from Lou Corporation terms 2/10, n/30; voucher no. 305 was prepared.

Dec.         20     Purchased $3,300 of merchandise from Ken Company; terms 2/10, n/30; voucher no. 306 was prepared.

Dec.         25     Check no. 613 was issued to pay voucher no. 305.

Dec.         27     Returned $800 of merchandise bought from Ken Company; voucher no. 306 was canceled and voucher no. 307 was prepared.

Dec.         29     Issued check no. 614 to pay voucher no. 307.

I am thinking about going into the hotel business through acquiring 12 hotels spread throughout the Rocky Mountain region. I have projected out the costs of hiring managers to run the hotels, as well as the other many costs of operating them. Based on this, I have a good handle on the cash flows the project will generate, and I now need to estimate the cost of equity I will use to discount these cash flows.

Unfortunately, I am out of time, and so I need you, my brilliant financial protege, to give me an estimate of a reasonable cost of equity for this project. Obviously, I don't have the 10 million needed to acquire the hotels myself and will need to attract additional equity financing from outside investors. So when I meet with these investors, I need a logical estimate and explanation for what the cost of equity is that they should be earning. So don't just give me a number, you have to tell me why you pick what you do.

Obviously, they could invest in many other hotel chains and management companies, many of which are publicly traded. So your best approach is to look at the cost of equity for these pure-plays (the ticker for Hilton is HLT, but I would rely on estimates from more than one company so look up their competitors) and make adjustments based on our situation. For instance, consider the following differences:

Are your pure-play firms more or less risky based on geographic dispersion relative to us?

Are your pure-play firms more or less risky based on easier access to additional capital?

Am I or these pure-plays more likely to achieve operating efficiency (higher profit margins) over the next four or five years?

There are certainly other considerations you might come up with that I am missing right now, so feel free to include them as well. But make adjustments to your estimates to fit my situation. Then write up your conclusions in a professional sounding report that is no longer than one page. Put any additional tables in an appendix.

(The 12 hotels are not relevant. They only give you the industry that you are researching. If you want to value a company, you have to figure out what companies in that same industry are selling for, or what kind of discount rate investors expect for firms in that industry. So you have to look at other firms in the same industry. So you will look up hotel firms, and calculate their cost of equity. And then you will make adjustments to their costs based on the subject firm with 12 hotels. So think about this logically. Would you rather invest in Hilton, with thousands of hotels, or this company with 12? Which is less risky? Which has more growth potential? These are the kinds of issues you would think about when estimating the cost of equity using the pure play approach. But no, this is not based on an actual firm, so there won't be stuff on the internet about it. )