Consider cost theory.

a. Prove that marginal cost and average cost are equal where average cost is minimized.

b. Respecting the standard U-shaped long-run average cost curve, briefly provide two distinct explanations for the downward sloping part of the curve, and an explanation for the upward sloping part.

c. Suppose an electricity distribution firm purchases a number of metal poles for inventory at a price of ?? per pole. Sometime later, metal poles become obsolete in the industry in favour of fiberglass poles, and command a price of ?? per pole in the scrap metal market. By the time the firm switches to fiberglass poles, some of the metal poles previously purchased remain in the firm’s inventory. The price of a fiberglass pole is ??. Assume that 0 < ?? < ?? < ??. In terms of these variables, quantify the accounting and economic costs of each of the following activities:

i. Past purchase of a metal pole for inventory.

ii. Current purchase of a fiberglass pole for inventory.

iii. Keeping a fiberglass pole in inventory.

iv. Keeping a metal pole in inventory.

v. Selling an uninstalled metal pole for scrap. Briefly explain which of the quantified costs are sunk.

Consider cost theory.

a. Prove that marginal cost and average cost are equal where average cost is minimized.

b. Respecting the standard U-shaped long-run average cost curve, briefly provide two distinct explanations for the downward sloping part of the curve, and an explanation for the upward sloping part.

c. Suppose an electricity distribution firm purchases a number of metal poles for inventory at a price of ?? per pole. Sometime later, metal poles become obsolete in the industry in favour of fiberglass poles, and command a price of ?? per pole in the scrap metal market. By the time the firm switches to fiberglass poles, some of the metal poles previously purchased remain in the firm’s inventory. The price of a fiberglass pole is ??. Assume that 0 < ?? < ?? < ??. In terms of these variables, quantify the accounting and economic costs of each of the following activities:

i. Past purchase of a metal pole for inventory.

ii. Current purchase of a fiberglass pole for inventory.

iii. Keeping a fiberglass pole in inventory.

iv. Keeping a metal pole in inventory.

v. Selling an uninstalled metal pole for scrap. Briefly explain which of the quantified costs are sunk.

Briefly explain which of the quantified costs are sunk.

SallyMay, Inc., designs and manufactures T-shirts. It sells its T-shirts to brand name clothes retailers in lots of one dozen. SallyMay's May 2013 static budget and actual results for direct inputs are as follows:

Static Budget
Number of T-shirt lots (1 lot1 dozen) 400

Per Lot of T-shirts:
Direct materials 14 meters at $1.70 per meter$23.80
Direct manufacturing labor 1.6 hours at $8.10 per hour $12.96

Actual Results
Number of T-shirt lots sold 450

Total Direct Inputs:
Direct materials 6,840 meters at $1.95 per meter = $13,338
Direct manufacturing labor 675 hours at $8.20 per hour = $5,535

SallyMay has a policy of analyzing all input variances when they add up to more than 10% of the total cost of materials and labor in the flexible budget, and this is true in May 2013. The production manager discusses the sources of the variances: "A new type of material was purchased in May. This led to faster cutting and sewing, but the workers used more material than usual as they learned to work with it. For now, the standards are fine."

3.Calculate the direct materials and direct manufacturing labor price and efficiency variances in May 2013. What is the total flexible-budget variance for both inputs (direct materials and direct manufacturing labor) combined? What percentage is this variance of the total cost of direct materials and direct manufacturing labor in the flexible budget?

2.Sally King, the CEO, is concerned about the input variances. But she likes the quality and feel of the new material and agrees to use it for one more year. In May 2014, SallyMay again produces 450 lots of T-shirts. Relative to May 2013, 2% less direct material is used, direct material price is down 5%, and 2% less direct manufacturing labor is used. Labor price has remained the same as in May 2013. Calculate the direct materials and direct manufacturing labor price and efficiency variances in May 2014. What is the total flexible-budget variance for both inputs (direct materials and direct manufacturing labor) combined? What percentage is this variance of the total cost of direct materials and direct manufacturing labor in the flexible budget?

3.Comment on the May 2014 results. Would you continue the "experiment" of using the new material?

If you could please show your work, thank you!

1.

The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers it uses in its budgeting and performance reports—the number of courses and the total number of students. For example, the school might run two courses in a month and have a total of 61 students enrolled in those two courses. Data concerning the company’s cost formulas appear below:

For example, administrative expenses should be $3,700 per month plus $42 per course plus $5 per student. The company’s sales should average $870 per student.

The company planned to run four courses with a total of 61 students; however, it actually ran four courses with a total of only 55 students. The actual operating results for September appear below:

Required:

Prepare a flexible budget performance report that shows both revenue and spending variances and activity variances for September. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers it uses in its budgeting and performance reports—the number of courses and the total number of students. For example, the school might run two courses in a month and have a total of 64 students enrolled in those two courses. Data concerning the company’s cost formulas appear below:

For example, administrative expenses should be $3,700 per month plus $42 per course plus $7 per student. The company’s sales should average $890 per student.

The company planned to run four courses with a total of 64 students; however, it actually ran four courses with a total of only 56 students. The actual operating results for September appear below:

Required:

Prepare a flexible budget performance report that shows both revenue and spending variances and activity variances for September. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Part A

Hardwood Limited has an activity-based costing system with three activity cost pools: Processing, Setting Up, and Other. Costs in the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the two products and the company's costs and activity-based costing system appear below:

Activity cost pools:

Processing                        $12,200

Setting up                         $25,100

Other                                $17,700

MHs                    Batches

Product Red           2,400                    700

Product Blue           17,600                    300

Total                       20,000                    1,000
                             

Product Red            Product Blue

Sales (total)                      $135,700                $98,000

Direct materials (total)       $61,700                  $31,000

Direct labour (total)            $52,200                  $45,800

Determine the product margins for each product using activity-based costing. Show your calculations.

Part B

At a recent staff meeting, Daniel Hamburg – the production manager – raised concerns that John Healy – the newly recruited management accountant – is not considering all manufacturing costs while calculating product costs under the activity-based costing system. While John was attempting to address Daniel’s concern during the meeting, Tang Chu – the CEO – stopped him as the meeting had to finish soon. However, Tang told John to prepare a report addressing Daniel’s concern, which needs to be submitted before the next meeting. Imagine yourself as John and prepare the report.  

[Maximum word limit: 240 words]          

The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers it uses in its budgeting and performance reports—the number of courses and the total number of students. For example, the school might run two courses in a month and have a total of 63 students enrolled in those two courses. Data concerning the company’s cost formulas appear below:

For example, administrative expenses should be $3,800 per month plus $40 per course plus $4 per student. The company’s sales should average $860 per student.

The company planned to run four courses with a total of 63 students; however, it actually ran four courses with a total of only 61 students. The actual operating results for September were as follows:

Required:

Prepare a flexible budget performance report that shows both revenue and spending variances and activity variances for September. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers it uses in its budgeting and performance reports—the number of courses and the total number of students. For example, the school might run two courses in a month and have a total of 63 students enrolled in those two courses. Data concerning the company’s cost formulas appear below: Fixed Cost per Month Cost per Course Cost per Student Instructor wages $ 2,940 Classroom supplies $ 270 Utilities $ 1,220 $ 55 Campus rent $ 4,800 Insurance $ 2,000 Administrative expenses $ 3,600 $ 42 $ 5 For example, administrative expenses should be $3,600 per month plus $42 per course plus $5 per student. The company’s sales should average $850 per student. The company planned to run four courses with a total of 63 students; however, it actually ran four courses with a total of only 57 students. The actual operating results for September appear below: Actual Revenue $ 50,650 Instructor wages $ 11,040 Classroom supplies $ 16,860 Utilities $ 1,850 Campus rent $ 4,800 Insurance $ 2,140 Administrative expenses $ 3,509 Required: Prepare a flexible budget performance report that shows both revenue and spending variances and activity variances for September. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)