Part 6 – Activity Based Cost

A company reports the following information about its indirect costs:

1.   Total indirect costs of $3,000,000 for the next year.
2.   There two products: Product A and Product B.
3.   Direct labour hours for Product A is 40,000 and Product B is 60,000
4.   The company’s accountant has suggested an alternative to the traditional allocation of indirect overhead based on direct labour hours. The accountant suggested the following:
a.   Indirect costs can be broken down into supervisory wages $500,000, machine set up $250,000, machinery operating costs including depreciation $1,250,000, engineering changes $500,000, quality inspection costs $250,000, shipping costs $250,0000.
b.   Activity drivers are supervisory wages (direct labour hours), machine set up (2,500 set up hours), machinery operating (12,500 machine hours), engineering changes (2,500 engineering hours), inspection (2,500 inspection hours), shipping (5,000 shipments)

Driver   Product A   Product B
DLH   40,000   60,000
Machine set up   750   1,750
Machine operating   3,500   9.000
Engineering changes   1,000   1,500
Inspections   500   2,000
Shipping Units   1,500   3,500

  
Questions:

A.   Under the traditional allocation method, what is the amount of indirect cost allocated to Product A and Product B?
____________________________________________________________
B.   Under the Activity Based Accounting (ACB) method, what is the amount of indirect cost allocated to Product A and Product B?
____________________________________________________________
C.   Would the ABC method add value to the company, Yes or No and Why or Why Not?
____________________________________________________________
D.   The accountant alternatively suggested a “standard costing system” for indirect costs. This would be a set / fixed amount for the year for each unit of Product A or Product B shipped. What is the standard cost per unit for Product A and Product B assuming a traditional cost allocation approach?
____________________________________________________________

Santana Rey expects second-quarter 2020 sales of Business Solutions’s line of computer furniture to be the same as the first quarter’s sales (reported below) without any changes in strategy. Monthly sales averaged 41 desk units (sales price of $1,260) and 21 chairs (sales price of $510).

* Reflects revenue and expense activity only related to the computer furniture segment.
† Revenue: (123 desks × $1,260) + (63 chairs × $510) = $154,980 + $32,130 = $187,110
‡ Cost of goods sold: (123 desks × $760) + (63 chairs × $260) + $30,300 = $140,160

Santana Rey believes that sales will increase each month for the next three months (April, 49 desks, 33 chairs; May, 53 desks, 36 chairs; June, 57 desks, 39 chairs) if selling prices are reduced to $1,160 for desks and $460 for chairs and advertising expenses are increased by 10% and remain at that level for all three months. The products’ variable cost will remain at $760 for desks and $260 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $10,100 and other fixed expenses will remain at $6,100 per month.

Required:
1. Prepare budgeted income statements for the computer furniture segment for each of the months of April, May, and June that show the expected results from implementing the proposed changes. Use a three-column format, with one column for each month.
2. Recommend whether Santana Rey should implement the proposed changes.

Katharine Rally is the vice president of operations for the XYZ Company. She oversees operations at a plant that manufactures components for hydraulic systems. Katharine is concerned about the plant’s present production capability. She has reduced the decision situation to three alternatives. The first alternative, which is fully automation, would result in significant changes in present operations. The second alternative, which is semi-automation, involves fewer changes in present operations. The third alternative is to make no changes (do nothing).

As a manager of the plant management team, you have been assigned the task of analyzing the alternatives and recommending a course of action. Based on the past data, Katharine is further convinced that the capital investment, annual revenue, useful lives, and salvage values can be considered random variables with the following specified probability distributions. She also asks you to develop a simulation of 50 sample points of AW values at a MARR 0f 20%/year. Interpret your results and indicate which alternative should be selected.

Use the Random Number Generation (RNG) Data Analysis Tool package of Microsoft Excel. The online help function explains how to initiate and use the RNG to generate random numbers from a variety of probability distributions: normal, uniform (continuous variable), binomial, Poisson, and discrete.

Statically show that one of the alternatives is more appropriate than the other one using hypothesis testing?

Alternative

--------------------------------------------------------------------------------------------

Parameter                  A                                                         B                    

--------------------------------------------------------------------------------------------

Capital                         Normal                                    Normal

Investment                  Mean: $300,000                      Mean: $85,000           

                                    Std. dev.: $50,000                   Std. dev.: $500

Annual                         Normal                                    Normal                       

Revenue                      Mean: $150,000                      Mean: $85,000           

                                                Std. dev.: $10,000                   Std. dev.: $500

Useful live                   Discrete uniform                     Discrete uniform        

3 to 8 years with                     3 to 7 years with

equal probability                     equal probability        

Salvage Value             Uniform                                  Uniform         

                                                30,000 to $60,000                   $10,000 to $20000                 

Johnson Transformers Inc.

Following is the seven-year forecast for a new venture called Johnson Transformers: (all amounts in $000)

Beginning after year 2026 the annual growth in EBIT is expected to be 1.5%, a rate that is projected to be constant over Johnson Transformers remaining life as an enterprise.   Beginning in 2026 Johnson's Transformers capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2020 as year 1.

Assume a tax rate is 21% and a cost of capital of 7.75%

Question 1: Determine the NPV of Johnson Transformers Free Cash Flow for the years 2020 -2026. HINT: Remember to account for loss carry-forwards when determining income taxes. The answer to this question was determined in Excel. Your answer may deviate slightly depending upon differences in truncation and rounding. Answers below are in $000.

Answer: $2105

Calculate the fair market value (NPV) for Johnson Transformers. For this problem assume that the Net Present Value of Johnson Transformers free cash flow for the period 2020 - 2026 is $3000 (NOTE its not $3000 but make this assumption in case the answer you determined in the first question was incorrect. Assume no underlying changes to any of the data in the problem. DO NOT USE YOUR ANSWER FROM THE QUESTION ABOVE. All ANSWERS ARE IN $000

Part 1

Johnson Transformers Inc. Following is the seven-year forecast for a new venture called Johnson Transformers: (all amounts in $000) 2020 2021 2022 2023 2024 2025 2026 EBIT $(1000) $(900) $200 $1,200 $2,500 $3000 $3,050 Capital Expenditures $550 $350 $200 $175 $175 $160 $150 Changes in Working Capital $400 $300 $200 $100 $100 ($100) ($100) Depreciation $40 $80 $125 $150 $150 $150 $150 Beginning after year 2026 the annual growth in EBIT is expected to be 1.5%, a rate that is projected to be constant over Johnson Transformers remaining life as an enterprise. Beginning in 2026 Johnson's Transformers capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2020 as year 1. Assume a tax rate is 21% and a cost of capital of 7.75% Question 1: Determine the NPV of Johnson Transformers Free Cash Flow for the years 2020 -2026. HINT: Remember to account for loss carry-forwards when determining income taxes. The answer to this question was determined in Excel. Your answer may deviate slightly depending upon differences in truncation and rounding. Answers below are in $000.

Part 2

Calculate the fair market value (NPV) for Johnson Transformers. For this problem assume that the Net Present Value of Johnson Transformers free cash flow for the period 2020 - 2026 is $3000 (NOTE its not $3000 but make this assumption in case the answer you determined in the first question was incorrect. Assume no underlying changes to any of the data in the problem. DO NOT USE YOUR ANSWER FROM THE QUESTION ABOVE. All ANSWERS ARE IN $000

Family Medical Care (FMC) is a family medical practice with 8 physicians, a nursing staff of 10 to 12 nurses, and an administrative staff that varies from 6 to 9 personnel. Rajat Patel, the chief physician at FMC, is interested in studying the efficiency of the practice as a basis to set some benchmarks for further improvement, for rewarding his staff, and for comparing the efficiency of the FMC practice to other family medical practices. He is able to get comparable data for other practices from industry sources. So that the data are consistent with the industry sources, Patel has asked Marin & Associates, his accounting firm, to develop a set of productivity measures that would satisfy this requirement. Upon investigation, Joseph Marin finds that the measures to be used are the partial financial and operational productivity measures as defined in the chapter. The following information is for the last 2 years for the FMC practice:

Required:

1. Compute the partial financial productivity ratios for nursing and administrative support for the current and prior year.

2. Separate the change in the partial financial productivity ratio from the prior year to the current year into productivity changes, input price changes, and output changes.

(For all requirements, round your answers to 4 decimal places. Negative values should be indicated by a minus sign.)

Railback Battery Systems Following is the seven-year forecast for a new venture called Railback Battery Systems:

Part 1:

Beginning after year 2026 the annual growth in EBIT is expected to be 1.5%, a rate that is projected to be constant over Railback's life as an enterprise. Beginning in 2026 Railback's capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2020 as year 1. Assume a tax rate is 21% and a cost of capital of 7.75% Question: Determine the NPV of Railback Battery Systems Free Cash Flow for the years 2020 - 2026. HINT: Remember to account for loss carry-forwards when determining income taxes. The answer to this question was determined in Excel. Your answer may deviate slightly depending upon differences in truncation and rounding. Answers below are in $000.

Part 2:

Calculate the fair market value (NPV) for Railback Battery Systems. For this problem assume that the Net Present Value of Railback's free cash flow for the period 2020 - 2026 is $3000 (NOTE its not $3000 but make this assumption in case the answer you determined in the first question was incorrect. Assume no underlying changes to any of the data in the problem. DO NOT USE YOUR ANSWER FROM THE QUESTION ABOVE. All ANSWERS ARE IN $000

Prepare a pro forma income statement, balance sheet, and cash flow statement for Kiwi Fruit assuming a 10 percent increase in sales. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Input all amounts as thousands of dollars. Round earnings per share to 2 decimal places. Omit the "$" sign in your response.)

In re Yukos Oil Company Securities Litigation 2006 WL 3026024 (S.D.N.Y.)

FACTS: Yukos is a Moscow-based joint-stock company whose shares trade on the Russian stock exchange. Yukos shares also trade indirectly on multiple European exchanges and over-thecounter in the United States. Allegedly, Khodorkovsky was part of a select group of Russian business leaders known as “oligarchs” who supported former Russian President Boris N. Yeltsin, but were politically opposed to current Russian President Vladimir V. Putin. The Tax Code of the Russian Federation prescribed a maximum income tax rate that incorporated two components: a tax payable to the federal budget and a tax payable to the budget of the taxpayer's local region. For example, in 2004, the statutory maximum rate was 24%, of which up to 6.5% could be collected by the federal government and up to 17.5% by regional governments. The Tax Code also prescribed a minimum rate for taxes payable to regional governments. In 2004, that rate was 13.5%. However, the regional governments could offer tax benefits to reduce or even eliminate the regional budget liability of certain categories of taxpayers. Because of this regional variance in the effective income tax rate, taxpayers in the metropolitan regions of the Russian Federation, such as Moscow, paid higher taxes than taxpayers in remote regions, or “ZATOs.” The complaint alleges that from 2000 through 2003, Yukos grossly underpaid its taxes to the Russian Federation by illegally taking advantage of the ZATOs' preferential tax treatment. According to the complaint, Yukos booked oil sales at “well below” market prices to seventeen trading companies, all of which were registered within ZATOs. Without taking physical possession, the trading companies sold the oil to customers at market prices and claimed the tax benefits of their ZATOs. However, the profits were “funneled ... back to Yukos and Yukos paid taxes only on the initial below-market sales while reaping substantial profits from the low-tax market-price sales. The complaint alleges that the regional trading companies received the benefits of ZATO registration illegitimately because “[n]o business was actually conducted by the sham companies in the ZATOs.” This Yukos tax strategy presented enormous risk because it violated Russian law and because the Russian Federation had prosecuted other companies that had acted similarly. Nonetheless, the risk was not disclosed in any of the Yuko’s filings with the SEC. Also, what was filed with the SEC was allegedly not prepared in conformity with U.S. GAAP or other standards of financial reporting. At a secret meeting with Khodorkovsky and other oligarchs in 2000, Putin promised not to investigate potential wrongdoing at their companies if the oligarchs refrained from opposing Putin. Nearly three years later, at another such meeting, Khodorkovsky allegedly voiced his opinion that high-level officials in Putin's government should be ousted. According to the plaintiffs, Putin reacted negatively and intimated to Khodorkovsky that the Russian Federation might investigate Yukos' methods of acquiring oil reserves. Despite Putin's warnings, Khodorkovsky publicly criticized Putin and financed opposition parties. On October 25, 2003, Russian Federation authorities arrested Khodorkovsky and charged him with fraud, embezzlement and evasion of personal income taxes. Days later, the Russian Government seized control of Khodorkovsky's 44% interest in Yukos as security against the approximately $1 billion he owed in taxes. Concurrently, the Tax Ministry revealed that it had been investigating Yukos' tax strategies. The Department of Information and Public Relations of the General Prosecutors Office then announced charges that accused Khodorkovsky and others of fraudulently operating an illegal scheme at Yukos to avoid tax liability through shell company transactions. On December 29, 2003, the Tax Ministry concluded its audit of Yukos for tax year 2000, issued a report that Yukos had illegally obtained the benefit of the ZATOs’ preferential tax treatment, and owed $3.4 billion to the Russian Federation in back taxes, interest, and penalties for tax year 2000. As a result, Yukos defaulted on a $1 billion loan from private lenders and the Russian Government confiscated Yukos' assets, including its main production facility and billions of dollars from its bank accounts. The price of Yukos securities “plummeted” in response to these events. Shareholders in Yukos (Plaintiffs) filed consolidated class actions against Khodorkovsky and others (defendants) on July 2, 2004. The U.S. plaintiffs had purchased Yukos securities between January 22, 2003, and October 25, 2003. They allege that Yukos, its outside auditor, and certain of its executives and controlling shareholders knowingly concealed the risk that the Russian Federation would take action against Yukos by failing to disclose: (1) that Yukos had employed an illegal tax evasion scheme since 2000; and (2) that Khodorkovsky's political activity exposed the Company to retribution from the current Russian government. The plaintiffs based their claims on the fraud provision, Section 10(b), of the Securities Exchange Act. ISSUE: Does the act of state doctrine prohibit the court from taking the case? DECISION: No. The court dismissed the case on other grounds, but found that the act of state doctrine did not prohibit the court from hearing the case. The case was not one that involved invalidating Russian actions; it was a case to decide whether the company should have been more transparent and forthcoming about the risk of its strategy as well as the political risk in Russia. Questions: 1. Describe how Yukos is alleged to have saved significant amounts in taxes. 2. Explain what act of the Russian Federation is in question. 3. What are the plaintiffs asking the court to decide? Does that decision require revisiting what the Russian Federation did, and why or why not?

One of the responsibilities often associated with management is the gathering of career-specific information on resources or professional development. Familiarity with professional sources shows you have interest in your field and invest time to stay current with developments and debates in your industry. Locker 6th ed Business communications..... sources relating to RN nursing.

For this assignment, you will identify credible sources related to your field. You will identify the sources using accurate APA format. Then, for each source, you will write two complete paragraphs that

1. Summarize the source;
2. Comment on the source’s benefits and currency.

For your sources, you should include at least one of each of the three following sources:

1. An academic or professional source from the Keiser e-library database. Avoid single articles, too. Try to identify a database or a journal relevant to your field.
2. A professional news in your field or a respected commercial site like The New York Times, The Wall Street Journal. An online magazine such as Forbes or Fortune might be appropriate, depending on your field.
3. An organizational site such as .org, .edu, and .gov site. Examples could include American Medical Association, the National Criminal Justice Association, the American Dairymen's Association, and so forth.

Clue: When using sources, you want to analyze the source of the data, the numbers, and what the words mean to those who may have been surveyed. For your Final e-Portfolio you will include these sources and an introductory paragraph (250 words minimum) on your skills in researching appropriate sources and vetting them for credibility and relevance to your field.