Problem 11-15 Comprehensive Variance Analysis

Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant has been experiencing problems as shown by its June contribution format income statement below:

Janet Dumn, who has just been appointed general manager of the Westwood Plant, has been given instructions to “get things under control.” Upon reviewing the plant’s income statement, Ms. Dumn has concluded that the major problem lies in the variable cost of goods sold. She has been provided with the following standard per swimming pool:

During June the plant produced 15,000 pools and incurred the following costs:

Purchased 60,000 pounds of materials at a cost of $1.95 per pound.

Used 49,200 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

Worked 11,800 direct labor-hours at a cost of $7.00 per hour.

Incurred variable manufacturing overhead cost totalling $18,290 for the month. A total of 5,900 machine-hours we recorded.

It is the company’s policy to close all variances to cost goods sold on a monthly basis.

Required;

Compute the following variances for June:

Materials price and quantity variances.

Labor rate and efficiency variances.

Variable overhead rate and efficiency variances.

Summarize the variances that you computed in requirement 1 by showing the net overall favourable or unfavourable variance for the month. What impact did this figure have on the company’s income statement? Sow computations.

Pick out the two most significant variances that you compute that you computed in requirement 1. Explain to Ms. Dumn possible causes of these variances.

Let P_Sand P_Drepresent the prices charged for each standard golf bag and deluxe golf bag respectively. Assume that “S” and “D” are demands for standard and deluxe bags respectively.

S = 2250 – 15P_S                                                                                                                                                                    (8.1)

D = 1500 – 5P_D                                                                                                                                                                      (8.2)

Revenue generated from the sale of S number of standard bags is P_S*S. Cost per unit production is $70 and the cost for producing S number of standard bags is 70*S.

So the profit for producing and selling S number of standard bags = revenue – cost = P_SS – 70S                            (8.3)

By rearranging 8.1 we get                                  

15P_S= 2250 – S or

                                    P_S= 2250/15 – S/15 or

                                    P_S= 150 – S/15                                                                                                                                                                     (8.3a)

Substituting the value of P_Sfrom 8.3a in 8.3 we get the profit contribution of the standard bag:

                                    (150 –S/15)S – 70S = 150S – S²/15 – 70S = 80S – S²/15                                                                                 (8.4)

Revenue generated from the sale of D number of deluxe bags is P_D*D. Cost per unit production is $150 and the cost for producing D number of deluxe bags is 150*D.

So the profit for producing and selling D number of deluxe bags = revenue – cost = P_DD – 150D                           (8.4a)

By rearranging 8.2 we get                                  

5P_D= 1500 – D or

                                    P_D= 1500/5 – D/5 or

                                    P_D= 300 – D/5                                                                                                                                                                       (8.4b)

Substituting the value of P_Dfrom 8.4b in 8.4a we get the profit contribution of the deluxe bags:

                                    (300 -D/5)D – 150D = 300D – D²/5 – 150D = 150D – D²/5                                                                          (8.4c)

By adding 8.4 and 8.4c we get the total profit contribution for selling S standard bags and D deluxe bags.

                                    Total profit contribution = 80S –S²/15 + 150D – D²/5                                                                                 (8.5)

Homework assignment:

Reconstruct new objective function for 8.5 by changing “15P_S” to “8P_S” in 8.1, “5P_D” to “10P_D” in 8.2, cost per unit standard bagfrom 70 to 91 and cost per unit deluxe bag from 150 to 125. Keep other parameter values unchanged. Use up to 2 decimal points accuracy. Substitute the new expression for 8.5 in the excel solver workbook as explained in the class and solve for the optimal combination values for S and D..Instructor will not accept any homework late or submitted outside the class. Make sure you submit the results (just one page excel printout). Write/type your full name (first name first) in upper case, last 4 of your student ID, and, your new objective function expression (like equation 8.5 above) on the printout. Use S and D instead of b15 or c15 in the formulation. If you fail to follow the instructions, you will lose points.

Which of these accounts information are used for profit and loss summary and which information is used for balance sheets.

You are working for The Wellington Company on temporary assignment while one of the accountants is on family leave. You have been asked to review the company’s investment

The balance sheet caption used to report long-term investments in stocks not intended as a source of cash in the normal operations of the business.

journal entries and provide necessary information to the accountant preparing the financial statements.

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JOURNAL

The accountant preparing the financial statements has asked you to provide the fair value as of the end of the year for the investments. Present the information as it would be shown on the financial statements. Last year, The Wellington Company reported costs of $68,000 in trading investments and $82,000 in available-for-sale investments. Refer to the journal entries shown on The Wellington Company panel. Assume that all investments sold during this year were trading investments and that purchases during the year were new investments.

The unadjusted trial balance of Imagine Ltd., a private company following ASPE, at December 31, 2020 is as follows:

Additional information:

(a)

Prepare the year-end adjusting and correcting entries for December 31, 2020, using the information given. Record the adjusting entry for inventory using a Cost of Goods Sold account.

Cigarettes in Australia have long been subject to excise tax – a per cigarette tax levied on the suppliers of cigarettes. (The tax applies to all tobacco products, however for the purposes of this exam assume cigarette and tobacco consumption are the same thing). In 2016 the federal government announced that the excise tax rate for cigarettes would rise by 12.5% a year for the next 4 years. Over this period tax revenue collected from the sale of cigarettes has increased considerably. Legal cigarette consumption has fallen to an all-time low in Australia due to a combination of the tax on cigarettes, and public health initiatives such as plain packaging, health warnings and banning advertisements.
Part (a) Consider the following two policies aimed at reducing cigarette smoking:
(i) A tax on the suppliers of cigarettes, and (ii) The public health campaign initiatives.
Illustrate both of these policies separately using a fully labelled and explained demand and supply diagram for each of parts (i) and (ii). Do not use actual numbers; this is intended as a theoretical exercise.
Compare and contrast the impact on equilibrium price and quantity of cigarettes of each of these policies, explaining your answer with reference to the diagrams.
Consider the impact of each policy on government revenue. Explain your answer. Can the impact on government revenue be illustrated on either of your diagrams? If so, indicate and explain the area on the diagram/s that represents government revenue

Consider the following quotation:
“When a tax is levied on a good, a share of it is paid by both the consumer and producer. In the case of cigarettes however much more of the burden of the tax is paid by consumers, even though the tax is levied on the suppliers of cigarettes.”
Why might this be the case? In your answer explain both parts (sentences) of this statement.
If the price of a packet of cigarettes increased by 10%, and in light of your explanation of the quotation, would you expect the quantity of cigarettes consumed to increase or decrease, and by more or less than 10%? Explain your answer.
Part (c) Taxation of cigarettes is often justified on the grounds that cigarette smoking creates externalities. What is meant by the term “externalities” in this context? Give two examples of externalities created by cigarette smoking and explain how a tax on

cigarettes could potentially address both of these. Using a fully labelled and explained diagram explain how a tax can increase efficiency in the cigarette market. What size tax should be levied to maximise efficiency in this market? (Indicate the efficient tax size on your diagram – no actual number required).
Part (d) Is a tax on cigarettes a regressive tax or a progressive tax? Explain your answer, including a definition of both terms.
Part (e) Australia’s police forces and border forces have warned that rapid rises in the tax on cigarettes have had unintended consequences of encouraging illegal activity such as smuggling, with proceeds funding other criminal activities. Explain why this might be the case. In your answer refer to the role that elasticity of demand plays in making illegal activity more profitable. [

Pastina Company sells various types of pasta to grocery chains as private label brands. The company's reporting year-end is December 31. The unadjusted trial balance as of December 31, 2021, appears below.

Information necessary to prepare the year-end adjusting entries appears below.

1. Depreciation on the office equipment for the year is $11,700.
2. Employee salaries are paid twice a month, on the 22nd for salaries earned from the 1st through the 15th, and on the 7th of the following month for salaries earned from the 16th through the end of the month. Salaries earned from December 16 through December 31, 2021, were $1,650.
3. On October 1, 2021, Pastina borrowed $53,400 from a local bank and signed a note. The note requires interest to be paid annually on September 30 at 12%. The principal is due in 10 years.
4. On March 1, 2021, the company lent a supplier $23,400 and a note was signed requiring principal and interest at 8% to be paid on February 28, 2022.
5. On April 1, 2021, the company paid an insurance company $9,400 for a one-year fire insurance policy. The entire $9,400 was debited to prepaid insurance.
6. $980 of supplies remained on hand at December 31, 2021.
7. A customer paid Pastina $3,700 in December for 1,600 pounds of spaghetti to be delivered in January 2022. Pastina credited deferred sales revenue.
8. On December 1, 2021, $2,700 rent was paid to the owner of the building. The payment represented rent for December 2021 and January 2022 at $1,350 per month. The entire amount was debited to prepaid rent.

1. & 2. Post the unadjusted balances and adjusting entires into the appropriate t-accounts.

5. Prepare closing entries. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your final answers to nearest whole dollar.)

6. Prepare a post-closing trial balance. (Do not round intermediate calculations. Round your final answers to nearest whole dollar.)

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Management Accounting Questions:

Grace Myer is the founder and CEO of Myer Sisters Apparel, a retailer of high?end women’s business apparel.  Earlier this year Grace opened her fourth retail store in Sydney’s Eastern Suburbs. While Grace has been pleased with the new store’s progress, she is concerned by the growing number of customer complaints and the low sales per square metre compared to some of her better?known competitors, such as Davie Laurie and HighChair Nine.  

When Grace had only one store that she individually owned and operated, she was able to control most of the details of the business. While she worked with a few employees, she always knew what they were doing. As the number of stores and the size of the stores increased, the number of employees also grew.  When Grace was running the one store, she rarely heard a customer complaint, and her sales per square metre were $500, compared to $400 today.  This concerned Grace greatly as her expansion plansfor Myer Sisters had to slow down because the stores were not producing the returns that she expected. T

he store managers were also complaining to Grace because of the high training costs of bringing on new employees. The turnover rate seemed to be very high and Grace could not understand why. She was paying one of the highest wages in the area to the sales clerks and store managers, yet they were leaving to work elsewhere. The customers were also complaining about the lack of helpfulness of the sales clerks. Even after extensive employee retraining, Grace was still hearing many complaints.  

Required:

1. Based on your understanding of the differences between intrinsic motivation and extrinsic motivation, discuss why paying good wages is not enough to elicit high performance in Myer Sisters.

2. Grace is considering implementing an alternative reward system for her staff: A “gain? sharing” plan, with a focus on generating sales revenue.  Specifically, 15% of any revenue in excess of the target sales level of $4 million per year will be placed in a “bonus pool” for distribution to allstores(last year’ssales were $3 million).  For example, if Myer Sisters as a group achieves total sales revenue of $4.5 million ($0.5 million more than the target level), then 15% of the additional $0.5 million in sales revenue will be distributed to employees.  All sales staff will receive a portion of the bonus pool, with store managers receiving a greater percentage compared to sales clerks.   Do you think this gain sharing plan is a good idea? Support your answer using

(a) Goal Setting Theory;

(b) Expectancy Theory and

(c) Agency Theory as appropriate (i.e., you do not need to refer to every part of every theory).

3. Based on your understanding of the various principles of incentive system/performance evaluation system design, make three suggestions as to how Myer Sisters’ performance measurement/incentive system could be improved.

Cigarettes in Australia have long been subject to excise tax – a per cigarette tax levied on the suppliers of cigarettes. (The tax applies to all tobacco products, however for the purposes of this exam assume cigarette and tobacco consumption are the same thing). In 2016 the federal government announced that the excise tax rate for cigarettes would rise by 12.5% a year for the next 4 years. Over this period tax revenue collected from the sale of cigarettes has increased considerably. Legal cigarette consumption has fallen to an all-time low in Australia due to a combination of the tax on cigarettes, and public health initiatives such as plain packaging, health warnings and banning advertisements.

Part (a) Consider the following two policies aimed at reducing cigarette smoking:

(i) A tax on the suppliers of cigarettes, and

(ii) The public health campaign initiatives.

Illustrate both of these policies separately using a fully labelled and explained demand and supply diagram for each of parts (i) and (ii). Do not use actual numbers; this is intended as a theoretical exercise.

Compare and contrast the impact on equilibrium price and quantity of cigarettes of each of these policies, explaining your answer with reference to the diagrams. Consider the impact of each policy on government revenue. Explain your answer.

Can the impact on government revenue be illustrated on either of your diagrams? If so, indicate and explain the area on the diagram/s that represents government revenue.

Part (b) Consider the following quotation:

“When a tax is levied on a good, a share of it is paid by both the consumer and producer. In the case of cigarettes, however much more of the burden of the tax is paid by consumers, even though the tax is levied on the suppliers of cigarettes.”

Why might this be the case? In your answer explain both parts (sentences) of this statement.

If the price of a packet of cigarettes increased by 10%, and in light of your explanation of the quotation, would you expect the quantity of cigarettes consumed to increase or decrease, and by more or less than 10%? Explain your answer.

Part (c) Taxation of cigarettes is often justified on the grounds that cigarette smoking creates externalities. What is meant by the term “externalities” in this context? Give two examples of externalities created by cigarette smoking and explain how a tax on cigarettes could potentially address both of these. Using a fully labelled and explained diagram explain how a tax can increase efficiency in the cigarette market. What size tax should be levied to maximise efficiency in this market? (Indicate the efficient tax size on your diagram – no actual number required).

Part (d) Is a tax on cigarettes a regressive tax or a progressive tax? Explain your answer, including a definition of both terms.

Part (e) Australia’s police forces and border forces have warned that rapid rises in the tax on cigarettes have had unintended consequences of encouraging illegal activity such as smuggling, with proceeds funding other criminal activities. Explain why this might be the case. In your answer refer to the role that elasticity of demand plays in making illegal activity more profitable