6.3 Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration and financial services is patient services revenue, while the cost driver for facilities is space utilization.

a. What are the appropriate allocation rates?

b. Use an allocation table similar to Exhibit 6.7 to allocate the hospital’s overhead costs to the patient services departments.

Suppose that two polluting firms have marginal abatement costs given by the following equations:

MAC1 = 50 – 5e1 and MAC2 = 40 – 4e2

where e1 and e2 are the emission levels of each firm respectively. The regulator’s goal is to reduce total pollution from the two firms to 8 units.

a) Suppose that the regulator requires that each firm reduce their emissions to 4 units (i.e. they use a uniform standard). Compute each firm’s total abatement costs under this uniform standard and show graphically.

b) Find the cost effective allocation of the 8 units of emissions to the two firms. Compute each firm’s total abatement costs under the cost effective allocation and show graphically.

c) Now, compare the results between parts a) and b). Which allocation of emissions (uniform or cost effective) does each firm prefer and why? Which allocation does society prefer and why?

Suppose a firm’s ATC is at its lowest value when the firm produces 12,000 units of output. If the firm operates in a typical monopolistic competitive market, then this firm will likely produce 12,000 units of output in the long run. If this firm operates in a typical perfectly competitive market, then the firm will likely produce more than 12,000 units of output in the long run.

true or False

The efficient scale for any firm is the level of output at which the average-total-cost curve is tangent to the demand curve.

True or False

Question text

In the long run, when a firm's demand curve is tangent to its average total cost curve, the firm could be a monopolistic competitor but not a perfect competitor.

True or False

When a profit-maximizing firm in a monopolistic competitive market is in long-run equilibrium, the firm operates at excess capacity since an increase in production would reduce average total cost.

True or false

Budgeted Income Statement and Supporting Budgets

The budget director of Gold Medal Athletic Co., with the assistance of the controller, treasurer, production manager, and sales manager, has gathered the following data for use in developing the budgeted income statement for March:

Estimated sales for March:

Estimated inventories at March 1:

Desired inventories at March 31:

Direct materials used in production:

Anticipated cost of purchases and beginning and ending inventory of direct materials:

Direct labor requirements:

Estimated factory overhead costs for March:

Estimated operating expenses for March:

Estimated other income and expense for March:

Estimated tax rate: 30%

Required:

1. Prepare a sales budget for March. Enter all amounts as positive numbers.

2. Prepare a production budget for March. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

3. Prepare a direct materials purchases budget for March. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

4. Prepare a direct labor cost budget for March. Enter all amounts as positive numbers.

5. Prepare a factory overhead cost budget for March.

6. Prepare a cost of goods sold budget for March. Work in process at the beginning of March is estimated to be $15,300, and work in process at the end of March is desired to be $14,800. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

7. Prepare a selling and administrative expenses budget for March.

8. Prepare a budgeted income statement for March.

Suppose you are in the photocopying business, and are using labor (L) and capital (K), in the form of copy machines. You can hire workers for $150 a week and lease copy machines for $300 a week.

(a) Suppose your current total cost of production is $3,000. Use the information above to depict the isocost you are currently operating on, carefully labeling the relevant intercepts (put L on the x-axis and K on the y-axis).

(b) You are producing 10,000 copies a week, and your current input mix is 12 workers and 4 copy machines. With your technology, assume the Marginal Rate of Technical Substitution (MRTS) between copy machines and workers at this point is 0.25 . Label this point as A on your graph. Carefully explain why you are not minimizing costs (given your production level) in A and how you would change your input mix to achieve cost minimization. Show your reasoning using isoquants/isocosts, carefully labeling points and curves and in particular depicting the cost-minimizing point B. (Note that I am obviously not looking for numbers for this point, just a graphical representation.)

(c) Assume the total cost you incur when you produce with the optimal input mix B is $2,700. Find the intercepts of the relevant isocost. Suddenly, the wage you have to pay your workers doubles (!), while the rental rate of the machines is unchanged. Draw the new isocost for the same total cost (i.e. $2,700). If you 1 want to keep your total cost the same, what happens to the amount you produce, relative to part (b)? On the other hand, if you want to keep producing the same amount, what happens to your total cost? Show your answers graphically.

(d) Let's go back to a clean slate (and a clean graph!), before the change in (c). Suppose you are now able to produce the same amount of output (say 10,000 copies) using fewer inputs. How would you represent this positive technological change using isoquants? Label the relevant isoquants with "Old" and "New" technology. Graphically show how this implies you are now producing at a lower cost (Assume input prices don't change.)

The beginning inventory at Midnight Supplies and data on purchases and sales for a three-month period ending March 31, are as follows:

The beginning inventory of merchandise at Dunne Co. and data on purchases and sales for a three-month period ending June 30, 2016, are as follows:

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X

FIFO

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in

Exhibit 4

, using the first-in, first-out method.

Points:

Feedback

Check My Work

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X

Chart of Accounts

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Journal

2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account, and date your journal entry June 30. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 1

JOURNAL

Solution

Points:

Feedback

Check My Work

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X

Final Questions

3. Determine the gross profit from sales for the period.

Points:

Feedback

Check My Work

Explanation

4. Determine the ending inventory cost on June 30, 2016.

Points:

Feedback

Check My Work

Explanation

5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method

The method of inventory costing based on the assumption that the cost of merchandise sold is the cost of the most recent purchases.

to be higher or lower?

Higher

Lower

Derby Company produces baseball gloves and cricket gloves. It has two departments that process all products. During July, the beginning Work-in-Process in the Cutting department was half completed as to conversion, and fully complete as to direct materials. The beginning inventory included $40,000 for materials and $60,000 for conversion costs. Ending work-in-process inventory in the Cutting department was 40% complete. Direct materials are added at the beginning of the process.

Beginning Work-in-Process in the Finishing department was 80% complete as to conversion. Direct materials for Finishing the units are added near the end of the process and conversion costs are added evenly throughout. Beginning inventories included $28,000 for transferred-in costs and $32,000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments is in the table below:

Required:

1. Prepare a production cost worksheet, using WEIGHTED AVERAGE for the finishing department. Round to two decimal places in calculations

2. Prepare the journal entry to recognise COGM for the period transferred out of the Finishing Department.

3. Explain the effect on the asset account Finished Goods, in periods of rising prices if using a FIFO method of process costing versus WEIGHTED average method of process costing and there are ending inventories. (1 Mark) What is a benefit that

Western Trading Company is a sole proprietorship engaged in the grain brokerage business. On December 31, 20X0, the entire grain inventory of the company was stored in outside bonded warehouses. The company's procedure of pricing inventories in these warehouses includes comparing the actual cost of each commodity in inventory with the market price as reported for transactions on the commodity exchanges at December 31. A write-down is made on commodities in which cost is in excess of market. During the course of the 20X0 audit, the auditors verified the company's computations. In addition to this, they compared the book value of the inventory with market prices at February 15, 20X1, the last day of fieldwork. The auditors noted that the market prices of several of the commodities had declined sharply subsequent to year-end, until their market price was significantly below the commodities' book values.

The inventory was repriced by the auditors on the basis of the new market prices, and the book value of the inventory was found to be in excess of market value on February 15 by approximately $21,000. The auditors proposed that the inventories be written down by $17,000 to this new market value, net of gains on the subsequent sales. The management protested this suggestion, stating that in their opinion the market decline was only temporary and that prices would recover in the near future. They refused to allow the write-down to be made. Accordingly, the auditors qualified their audit opinion for a departure from generally accepted accounting principles.

Required:

1. Were the auditors justified in issuing a qualified opinion in this situation? Discuss fully, including alternative courses of action.
2. State your opinion as to the course of action that was appropriate in this situation.

Q-02 (MARKS: 15 )

After reviewing the financial statements section of Annual report dated Dec-31, 201 the following points regarding Statement of financial Position against which doubts are presented to you.

Inventory: The following items are included in Inventory

1. Goods held on consignment from another company
2. Short term investments in shares and bonds that will be resold in near future
3. Goods sold f.o.b destination that are in transit at Dec-31
4. Office supplies
5. Goods sent on consignment to another company

Investments:

1. Bonds that will mature in 5 years are purchased; the company has a strategy to hold them to collect the contractual cash flow on bonds for 5 years. (These bonds are reported at fair value).
2. Ordinary shares of a distributor are purchased to meet regulatory requirement for doing business in the distributor’s region, the investment will be held indefinitely. (Classified as trading).

Property Plant and Equipment

1. Interest cost during the construction of a building is not included in the cost of the building.
2. There is a recovery of impairment loss regarding equipment resulting in an amount in excess of the carrying value that would result had impairment would not occurred.
3. Gain on Revaluation of Land is disclosed in Income statement.

Receivables

The company has treated a tax refund as receivable the outcome of which is probable

Liabilities

Including in liabilities is a contingency regarding a litigation the outcome of which is possible but not probable.

           Required: You being Financial Analyst asked to Comment on each Note stated above, also give your suggestions for a right treatment if there is a wrong treatment.