Please complete the following Professional Development exercises.

Read the following Ethics case. Discuss and analyze using the ETHICAL model

Paul is a 12 year old male diabetic. He maintains his personal digital assistant (PDA), hand-held device, that interfaces with his glucometer and provides information based on inputted data from him and his parents. This information is transmitted to his MD/hospital, school nurse, case manager (CM), and to the parents’ home computer. All in an attempt to better control his diabetes. You are his CM.

The PDA sends an update to you since Paul's blood glucose levels have been rising steadily for the last 5 days. The physician has left a message for you to contact this family and have them come in for an evaluation. You know that both of his parents work so you send an e-mail message to the parents' via their home computer asking them to bring Paul in for an assessment. Since you are in a hurry and will be seeing other patients when they return from work, you decide to add more information to the message than normal reviewing with them the importance of maintaining control over the diabetes and expressing your concern since Paul has not checked in with you lately. You tell them that you think he might be over-doing it since he is trying to play football. You ask how they are doing and if they are still attending their counseling sessions.

Paul's 4 year old sister, Lilah, sends your email out to all of the diabetic lists that both Paul and his parents belong. They interact with people on these lists regularly.

The parents are outraged that this information was sent everywhere. Imagine that you are the designated Privacy Officer in a healthcare institution.

Explain the following:

How would you feel in this situation?

What is the problem? (Clearly state the problem)

What ethical principles would guide you in this case?

What are the alternatives for solving this dilemma?

What are the consequences for each alternative generated?

In your opinion, what is the first choice from the alternatives and why?

Does your choice take into consideration all of the persons involved and the consequences to each of them?

If the worst case scenario would occur based on your choice, could you live with your decision?

Based on your choice, what is your plan of action?

What types of monitoring procedures would you develop?

What would you include in your sanctions for violations policy?

How would you address the following?

Tracking each point of access of the patient’s database including who entered the data

Nurses in your hospital have an access code that only gives them access to their Unit’s patients. A visitor accidentally comes to the wrong unit looking for a patient and asks the nurse to find out what unit the patient is on.

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $410 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

2018  

Costs incurred during the year $ 50

Estimated costs to complete as of December 31 $200

2019  Costs incurred during the year $ 150

Estimated costs to complete as of December 31 $50

2020 Costs incurred during the year $ 45

Estimated costs to complete  —

Required:

1. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion.

2. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time.

3. Suppose the estimated costs to complete at the end of 2019 are $200 million instead of $50 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.

Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time. (Enter your answers in millions. Loss amounts should be indicated with a minus sign.)

Suppose the estimated costs to complete at the end of 2019 are $200 million instead of $50 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.  (Enter your answers in millions. Use percentages as calculated and rounded in the table below to arrive at your final answer.)

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $260 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

Required:
1. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion.
2. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time.
3. Suppose the estimated costs to complete at the end of 2019 are $110 million instead of $60 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.

Required 1

Required 2

Required 3

Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion. (Enter your answers in millions. Loss amounts should be indicated with a minus sign. Use percentages as calculated and rounded in the table below to arrive at your final answer.)

2.

Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time. (Enter your answers in millions. Loss amounts should be indicated with a minus sign.)

3.

Suppose the estimated costs to complete at the end of 2019 are $110 million instead of $60 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method. (Enter your answers in millions. Use percentages as calculated and rounded in the table below to arrive at your final answer.)

We constantly seem to be pricing ourselves out of some markets and not charging enough in others. Our pricing policy is pretty simple: we mark up our full manufacturing cost by 50%. That means a computer that costs us $2,000 to manufacture will sell for $3,000. Until now I thought this was a workable approach, but now I’m not so sure.

Steve Works, CEO, Cortland Manufacturing, Inc. (CMI)

Steve’s Controller, Sally Nomer, had just told him that she believed the computers might be priced inappropriately. Steve continued:

When I was at Leland [School of Management] I focused most of my attention on operations and marketing, convinced that those were the keys to my successful career. Cost accounting was boring and not relevant. But now my accountant is telling me that I need to think about a new way to assign manufacturing overhead to products, and I don’t even know where to start! I never dreamed that some day my career would come to this. I wish I’d paid more attention to those classes so I could understand what is going on here. I’m lost.

BACKGROUND

CMI manufactures several different models of computers, distributed to retail outlets throughout the 50 states. The company is proud of the user-friendly computers it produces, in particular their graphics capability. CMI claims the superb graphics are what distinguish its products from competitors.

CMI purchases raw materials in components and subassemblies made to its specifications from a very small group of highly reliable suppliers. It uses a single facility to house both manufacturing facility and administrative and sales offices. The factory workers operate three kinds of machines. Inspecting machines check the raw materials and test components and subassemblies to assure they are working to specifications. Soldering machines solder various components as necessary. Finally assembly machines put all the components and subassemblies together into finished computers. The processes can vary by computer model.

Depreciation, maintenance and repairs on the three types of machines account for about 40% of CMI’s overhead cost. The remainder of the overhead is made up of labor involved in receiving and handling the raw materials, adjusting and setting up machines for each new batch of computers, and inspecting and packing finished computers for shipping. Additional costs include insurance and depreciation on handling equipment, supplies, and utilities. The actual manufacturing effort (soldering, inspecting and assembly) is primarily automated, so CMI uses very little direct labor. The company also operates on a lean production model, so almost no inventories exist at the end of any period.

Most of the computers are sold in large orders to national electronic chains. However, the Cortland 2000 is not such a machine. It represents a recent effort by CMI to enter the scientific computing market. The quantity manufactured and sold of this machine is expected to be much lower than other models even when it gains its hoped-for market share. Fewer customers exist for this more sophisticated, powerful, high-priced machine. Nonetheless, Mr. Works has believed from the conception of this product that, when all manufacturing costs were considered, the Cortland 2000 would contribute a reasonable amount to CMI’s selling and administrative costs and profit. The name recognition it brought in its elite community should enhance sales of the more generally used computers.

FINANCIAL INFORMATION

CMI budgeted direct labor costs for 2010 at $60,000,000. Based on expected sales, the company estimated that raw material purchased and used would be $300,000,000. Manufacturing overhead was budgeted at $196,000,000. It is currently allocated to production on the basis of machine hours (MH). As mentioned above, computers are priced at full production cost plus a mark-up of 50%.

EXHIBIT 1 shows the expected direct manufacturing costs for two of the company’s computers. The Cortland 1000 is a very popular computer with a large production and sales volume. By contrast, the Cortland 2000, described above, is a state-of-the-art scientific computer with several special features. In particular, the Cortland 2000

a. Uses a new processing chip imported from Sweden.

b. Has special patented random access memory (RAM) that gives it extremely high input/output speed.

c. Is manufactured in very small batches to assure uniform quality from one computer to the next, to satisfy the users of the machines who have very high expectations for the performance of the machines they purchase.

Mr. Works’ concerns arose when Ms. Nomer told him that she thought the company’s traditional overhead allocation system was providing misleading cost information about the different types of products. She developed an analysis of the 2010 manufacturing overhead costs, shown in EXHIBIT 2. She classified the overhead costs described above into activities. She also gathered data, shown in EXHIBIT 3, for the 2010 production of the Cortland 1000 and the Cortland 2000. Mr. Works commented on the data:

I don’t know quite what to make of all this. Clearly I need some further explanation and analysis. I guess what I really need is some sense of what is the true manufacturing cost of each computer. I thought I knew that, but I didn’t really. Even though we cannot at this point change prices for 2010, we at least need to know if we’re covering full production cost on the Cortland 2000 and have something left to contribute to the company’s selling, general and administrative expenses. I thought this was so, but now … well, I’m not so sure. We’d better figure this out before we begin our budget cycle for 2011. Maybe I need to go back to school!

EXHIBIT 1

Direct Manufacturing Costs for ONE Computer

Cortland 1000

Cortland 2000

Direct Material

$1,000

$2,500

Direct Labor

$200

$400

EXHIBIT 2

Analysis of 2010 Budgeted Manufacturing Overhead Costs

Activity

Cost driver

Budgeted activity (for entire company)

Budgeted cost

Receive/handle raw material

Orders received

200 orders

$90,000,000

Adjust/set up machines

Number of setups

2,000 setups

$12,000,000

Inspect, pack, ship computers

Batches

500 batches

$60,000,000

Inspect raw materials

Inspection hours

200,000 insp. hr.

$10,000,000

Solder parts

Soldering hours

200,000 sdr. hr.

$12,000,000

Assemble computers

Assembly hours

100,000 assm. hr.

$12,000,000

Total overhead

$196,000,000

EXHIBIT 3

Production Data for Cortland 1000 and Cortland 2,000 Computers

Item

Measure

Cortland 1000

Cortland 2000

Budgeted production

Number of computers

20,000

5,000

Received order size*

Size of order

10,000

500

Batch size

Number of computers

5,000

100

Machine setups

Number of s/u per batch

5

6

Inspecting time (Raw mat.)

Hours / computer

1

2

Soldering time

Hours / computer

3

1

Assembly time

Hours / computer

1

1

* “Received order size” is the number of computers one order of raw materials will build. Thus, for example, (see above) the company receives 2 orders of raw materials for the Cortland 1,000. Calculation: 20,000 computers per year, divided by 10,000 computers each order will build = 2 orders per year.

REQUIRED:

Don’t try to begin answering questions until you have studied the case information carefully. Careless reading will result in careless errors! Just take a few extra minutes to understand it all.

1. Calculate the predetermined overhead rate the company is currently using. (Where should you look for the machine hours?)

2. Using the information from the exhibits and Q1, calculate the manufacturing cost of ONE Cortland 1000 and ONE Cortland 2000.

3. Calculate the selling price, under the current system, of ONE Cortland 1000 and ONE Cortland 2000.

4. Next, you are going to begin to analyze the ABC system. In order to do this, however, your study of Exhibits 2 and 3 should have told you that you are going to have to convert the information the company currently measures into the information you need for the ABC analysis. First, how many raw material orders did the company receive for each model?

5. How many batches of each model did the company pack and ship?

6. How many machine setups does Cortland do for each model?

7. Calculate a rate for each activity in Exhibit 2.

8. Use the rates calculated in Q7 to apply overhead to each product line: Cortland 1000 and 2000.

9. Calculate the overhead per computer for a Cortland 1000 and a Cortland 2000.

10. Calculate the manufacturing cost of ONE Cortland 1000 and ONE Cortland 2000 using ABC overhead allocation.

11. Show how the company would determine a selling price for each model under the ABC system.

12. Should Mr. Works adopt an ABC system for internal analysis? Your answer should address the question very specifically to this case – no generalities about ABC from the book. It should contain two points in favor of ABC, and two drawbacks that he should be aware of.  

13. Mr. Works is also concerned about future product development. They have several new models under development at this time. If an ABC system is used, list two characteristics of a new model that will make it more costly to manufacture.

We constantly seem to be pricing ourselves out of some markets and not charging enough in others. Our pricing policy is pretty simple: we mark up our full manufacturing cost by 50%. That means a computer that costs us $2,000 to manufacture will sell for $3,000. Until now I thought this was a workable approach, but now I’m not so sure.

Steve Works, CEO, Cortland Manufacturing, Inc. (CMI)

Steve’s Controller, Sally Nomer, had just told him that she believed the computers might be priced inappropriately. Steve continued:

When I was at Leland [School of Management] I focused most of my attention on operations and marketing, convinced that those were the keys to my successful career. Cost accounting was boring and not relevant. But now my accountant is telling me that I need to think about a new way to assign manufacturing overhead to products, and I don’t even know where to start! I never dreamed that some day my career would come to this. I wish I’d paid more attention to those classes so I could understand what is going on here. I’m lost.

BACKGROUND

CMI manufactures several different models of computers, distributed to retail outlets throughout the 50 states. The company is proud of the user-friendly computers it produces, in particular their graphics capability. CMI claims the superb graphics are what distinguish its products from competitors.

CMI purchases raw materials in components and subassemblies made to its specifications from a very small group of highly reliable suppliers. It uses a single facility to house both manufacturing facility and administrative and sales offices.   The factory workers operate three kinds of machines. Inspecting machines check the raw materials and test components and subassemblies to assure they are working to specifications. Soldering machines solder various components as necessary. Finally assembly machines put all the components and subassemblies together into finished computers. The processes can vary by computer model.

Depreciation, maintenance and repairs on the three types of machines account for about 40% of CMI’s overhead cost. The remainder of the overhead is made up of labor involved in receiving and handling the raw materials, adjusting and setting up machines for each new batch of computers, and inspecting and packing finished computers for shipping. Additional costs include insurance and depreciation on handling equipment, supplies, and utilities. The actual manufacturing effort (soldering, inspecting and assembly) is primarily automated, so CMI uses very little direct labor. The company also operates on a lean production model, so almost no inventories exist at the end of any period.

Most of the computers are sold in large orders to national electronic chains. However, the Cortland 2000 is not such a machine. It represents a recent effort by CMI to enter the scientific computing market. The quantity manufactured and sold of this machine is expected to be much lower than other models even when it gains its hoped-for market share. Fewer customers exist for this more sophisticated, powerful, high-priced machine. Nonetheless, Mr. Works has believed from the conception of this product that, when all manufacturing costs were considered, the Cortland 2000 would contribute a reasonable amount to CMI’s selling and administrative costs and profit. The name recognition it brought in its elite community should enhance sales of the more generally used computers.

FINANCIAL INFORMATION

CMI budgeted direct labor costs for 2010 at $60,000,000. Based on expected sales, the company estimated that raw material purchased and used would be $300,000,000. Manufacturing overhead was budgeted at $196,000,000. It is currently allocated to production on the basis of machine hours (MH). As mentioned above, computers are priced at full production cost plus a mark-up of 50%.

EXHIBIT 1 shows the expected direct manufacturing costs for two of the company’s computers. The Cortland 1000 is a very popular computer with a large production and sales volume. By contrast, the Cortland 2000, described above, is a state-of-the-art scientific computer with several special features. In particular, the Cortland 2000

Uses a new processing chip imported from Sweden.

Has special patented random access memory (RAM) that gives it extremely high input/output speed.

Is manufactured in very small batches to assure uniform quality from one computer to the next, to satisfy the users of the machines who have very high expectations for the performance of the machines they purchase.

Mr. Works’ concerns arose when Ms. Nomer told him that she thought the company’s traditional overhead allocation system was providing misleading cost information about the different types of products. She developed an analysis of the 2010 manufacturing overhead costs, shown in EXHIBIT 2. She classified the overhead costs described above into activities. She also gathered data, shown in EXHIBIT 3, for the 2010 production of the Cortland 1000 and the Cortland 2000. Mr. Works commented on the data:

I don’t know quite what to make of all this. Clearly I need some further explanation and analysis. I guess what I really need is some sense of what is the true manufacturing cost of each computer. I thought I knew that, but I didn’t really. Even though we cannot at this point change prices for 2010, we at least need to know if we’re covering full production cost on the Cortland 2000 and have something left to contribute to the company’s selling, general and administrative expenses. I thought this was so, but now … well, I’m not so sure. We’d better figure this out before we begin our budget cycle for 2011. Maybe I need to go back to school!

EXHIBIT 1

Direct Manufacturing Costs for ONE Computer

EXHIBIT 2

Analysis of 2010 Budgeted Manufacturing Overhead Costs

EXHIBIT 3

Production Data for Cortland 1000 and Cortland 2,000 Computers

* “Received order size” is the number of computers one order of raw materials will build. Thus, for example, (see above) the company receives 2 orders of raw materials for the Cortland 1,000. Calculation: 20,000 computers per year, divided by 10,000 computers each order will build = 2 orders per year.

REQUIRED:

Don’t try to begin answering questions until you have studied the case information carefully. Careless reading will result in careless errors! Just take a few extra minutes to understand it all.

Calculate the predetermined overhead rate the company is currently using. (Where should you look for the machine hours?)

Using the information from the exhibits and Q1, calculate the manufacturing cost of ONE Cortland 1000 and ONE Cortland 2000.

Calculate the selling price, under the current system, of ONE Cortland 1000 and ONE Cortland 2000.

Next, you are going to begin to analyze the ABC system. In order to do this, however, your study of Exhibits 2 and 3 should have told you that you are going to have to convert the information the company currently measures into the information you need for the ABC analysis. First, how many raw material orders did the company receive for each model?

How many batches of each model did the company pack and ship?

How many machine setups does Cortland do for each model?

Calculate a rate for each activity in Exhibit 2.

Use the rates calculated in Q7 to apply overhead to each product line: Cortland 1000 and 2000.

Calculate the overhead per computer for a Cortland 1000 and a Cortland 2000.

Calculate the manufacturing cost of ONE Cortland 1000 and ONE Cortland 2000 using ABC overhead allocation.

Show how the company would determine a selling price for each model under the ABC system.

Should Mr. Works adopt an ABC system for internal analysis? Your answer should address the question very specifically to this case – no generalities about ABC from the book. It should contain two points in favor of ABC, and two drawbacks that he should be aware of.

Mr. Works is also concerned about future product development. They have several new models under development at this time. If an ABC system is used, list two characteristics of a new model that will make it more costly to manufacture.

We constantly seem to be pricing ourselves out of some markets and not charging enough in others. Our pricing policy is pretty simple: we mark up our full manufacturing cost by 50%. That means a computer that costs us $2,000 to manufacture will sell for $3,000. Until now I thought this was a workable approach, but now I’m not so sure. Steve Works, CEO, Cortland Manufacturing, Inc. (CMI) Steve’s Controller, Sally Nomer, had just told him that she believed the computers might be priced inappropriately. Steve continued: When I was at Leland [School of Management] I focused most of my attention on operations and marketing, convinced that those were the keys to my successful career. Cost accounting was boring and not relevant. But now my accountant is telling me that I need to think about a new way to assign manufacturing overhead to products, and I don’t even know where to start! I never dreamed that some day my career would come to this. I wish I’d paid more attention to those classes so I could understand what is going on here. I’m lost. BACKGROUND CMI manufactures several different models of computers, distributed to retail outlets throughout the 50 states. The company is proud of the user-friendly computers it produces, in particular their graphics capability. CMI claims the superb graphics are what distinguish its products from competitors. CMI purchases raw materials in components and subassemblies made to its specifications from a very small group of highly reliable suppliers. It uses a single facility to house both manufacturing facility and administrative and sales offices. The factory workers operate three kinds of machines. Inspecting machines check the raw materials and test components and subassemblies to assure they are working to specifications. Soldering machines solder various components as necessary. Finally assembly machines put all the components and subassemblies together into finished computers. The processes can vary by computer model. Depreciation, maintenance and repairs on the three types of machines account for about 40% of CMI’s overhead cost. The remainder of the overhead is made up of labor involved in receiving and handling the raw materials, adjusting and setting up machines for each new batch of computers, and inspecting and packing finished computers for shipping. Additional costs include insurance and depreciation on handling equipment, supplies, and utilities. The actual manufacturing effort (soldering, inspecting and assembly) is primarily automated, so CMI uses very little direct labor. The company also operates on a lean production model, so almost no inventories exist at the end of any period. Most of the computers are sold in large orders to national electronic chains. However, the Cortland 2000 is not such a machine. It represents a recent effort by CMI to enter the scientific computing market. The quantity manufactured and sold of this machine is expected to be much lower than other models even when it gains its hoped-for market share. Fewer customers exist for this more sophisticated, powerful, high-priced machine. Nonetheless, Mr. Works has believed from the conception of this product that, when all manufacturing costs were considered, the Cortland 2000 would contribute a reasonable amount to CMI’s selling and administrative costs and profit. The name recognition it brought in its elite community should enhance sales of the more generally used computers. FINANCIAL INFORMATION CMI budgeted direct labor costs for 2010 at $60,000,000. Based on expected sales, the company estimated that raw material purchased and used would be $300,000,000. Manufacturing overhead was budgeted at $196,000,000. It is currently allocated to production on the basis of machine hours (MH). As mentioned above, computers are priced at full production cost plus a mark-up of 50%. EXHIBIT 1 shows the expected direct manufacturing costs for two of the company’s computers. The Cortland 1000 is a very popular computer with a large production and sales volume. By contrast, the Cortland 2000, described above, is a state-of-the-art scientific computer with several special features. In particular, the Cortland 2000 a. Uses a new processing chip imported from Sweden. b. Has special patented random access memory (RAM) that gives it extremely high input/output speed. c. Is manufactured in very small batches to assure uniform quality from one computer to the next, to satisfy the users of the machines who have very high expectations for the performance of the machines they purchase. Mr. Works’ concerns arose when Ms. Nomer told him that she thought the company’s traditional overhead allocation system was providing misleading cost information about the different types of products. She developed an analysis of the 2010 manufacturing overhead costs, shown in EXHIBIT 2. She classified the overhead costs described above into activities. She also gathered data, shown in EXHIBIT 3, for the 2010 production of the Cortland 1000 and the Cortland 2000. Mr. Works commented on the data: I don’t know quite what to make of all this. Clearly I need some further explanation and analysis. I guess what I really need is some sense of what is the true manufacturing cost of each computer. I thought I knew that, but I didn’t really. Even though we cannot at this point change prices for 2010, we at least need to know if we’re covering full production cost on the Cortland 2000 and have something left to contribute to the company’s selling, general and administrative expenses. I thought this was so, but now … well, I’m not so sure. We’d better figure this out before we begin our budget cycle for 2011. Maybe I need to go back to school! EXHIBIT 1 Direct Manufacturing Costs for ONE Computer Cortland 1000 Cortland 2000 Direct Material $1,000 $2,500 Direct Labor $200 $400 EXHIBIT 2 Analysis of 2010 Budgeted Manufacturing Overhead Costs Activity Cost driver Budgeted activity (for entire company) Budgeted cost Receive/handle raw material Orders received 200 orders $90,000,000 Adjust/set up machines Number of setups 2,000 setups $12,000,000 Inspect, pack, ship computers Batches 500 batches $60,000,000 Inspect raw materials Inspection hours 200,000 insp. hr. $10,000,000 Solder parts Soldering hours 200,000 sdr. hr. $12,000,000 Assemble computers Assembly hours 100,000 assm. hr. $12,000,000 Total overhead $196,000,000 EXHIBIT 3 Production Data for Cortland 1000 and Cortland 2,000 Computers Item Measure Cortland 1000 Cortland 2000 Budgeted production Number of computers 20,000 5,000 Received order size* Size of order 10,000 500 Batch size Number of computers 5,000 100 Machine setups Number of s/u per batch 5 6 Inspecting time (Raw mat.) Hours / computer 1 2 Soldering time Hours / computer 3 1 Assembly time Hours / computer 1 1 * “Received order size” is the number of computers one order of raw materials will build. Thus, for example, (see above) the company receives 2 orders of raw materials for the Cortland 1,000. Calculation: 20,000 computers per year, divided by 10,000 computers each order will build = 2 orders per year. REQUIRED: Don’t try to begin answering questions until you have studied the case information carefully. Careless reading will result in careless errors! Just take a few extra minutes to understand it all. 1. Calculate the predetermined overhead rate the company is currently using. (Where should you look for the machine hours?) 2. Using the information from the exhibits and Q1, calculate the manufacturing cost of ONE Cortland 1000 and ONE Cortland 2000. 3. Calculate the selling price, under the current system, of ONE Cortland 1000 and ONE Cortland 2000. 4. Next, you are going to begin to analyze the ABC system. In order to do this, however, your study of Exhibits 2 and 3 should have told you that you are going to have to convert the information the company currently measures into the information you need for the ABC analysis. First, how many raw material orders did the company receive for each model? 5. How many batches of each model did the company pack and ship? 6. How many machine setups does Cortland do for each model? 7. Calculate a rate for each activity in Exhibit 2. 8. Use the rates calculated in Q7 to apply overhead to each product line: Cortland 1000 and 2000. 9. Calculate the overhead per computer for a Cortland 1000 and a Cortland 2000. 10. Calculate the manufacturing cost of ONE Cortland 1000 and ONE Cortland 2000 using ABC overhead allocation. 11. Show how the company would determine a selling price for each model under the ABC system. 12. Should Mr. Works adopt an ABC system for internal analysis? Your answer should address the question very specifically to this case – no generalities about ABC from the book. It should contain two points in favor of ABC, and two drawbacks that he should be aware of. 13. Mr. Works is also concerned about future product development. They have several new models under development at this time. If an ABC system is used, list two characteristics of a new model that will make it more costly to manufacture.

We constantly seem to be pricing ourselves out of some markets and not charging enough in others. Our pricing policy is pretty simple: we mark up our full manufacturing cost by 50%. That means a computer that costs us $2,000 to manufacture will sell for $3,000. Until now I thought this was a workable approach, but now I’m not so sure.

Steve Works, CEO, Cortland Manufacturing, Inc. (CMI)

Steve’s Controller, Sally Nomer, had just told him that she believed the computers might be priced inappropriately. Steve continued:

When I was at Leland [School of Management] I focused most of my attention on operations and marketing, convinced that those were the keys to my successful career. Cost accounting was boring and not relevant. But now my accountant is telling me that I need to think about a new way to assign manufacturing overhead to products, and I don’t even know where to start! I never dreamed that some day my career would come to this. I wish I’d paid more attention to those classes so I could understand what is going on here. I’m lost.

BACKGROUND

CMI manufactures several different models of computers, distributed to retail outlets throughout the 50 states. The company is proud of the user-friendly computers it produces, in particular their graphics capability. CMI claims the superb graphics are what distinguish its products from competitors.

CMI purchases raw materials in components and subassemblies made to its specifications from a very small group of highly reliable suppliers. It uses a single facility to house both manufacturing facility and administrative and sales offices.   The factory workers operate three kinds of machines. Inspecting machines check the raw materials and test components and subassemblies to assure they are working to specifications. Soldering machines solder various components as necessary. Finally assembly machines put all the components and subassemblies together into finished computers. The processes can vary by computer model.

Depreciation, maintenance and repairs on the three types of machines account for about 40% of CMI’s overhead cost. The remainder of the overhead is made up of labor involved in receiving and handling the raw materials, adjusting and setting up machines for each new batch of computers, and inspecting and packing finished computers for shipping. Additional costs include insurance and depreciation on handling equipment, supplies, and utilities. The actual manufacturing effort (soldering, inspecting and assembly) is primarily automated, so CMI uses very little direct labor. The company also operates on a lean production model, so almost no inventories exist at the end of any period.

Most of the computers are sold in large orders to national electronic chains. However, the Cortland 2000 is not such a machine. It represents a recent effort by CMI to enter the scientific computing market. The quantity manufactured and sold of this machine is expected to be much lower than other models even when it gains its hoped-for market share. Fewer customers exist for this more sophisticated, powerful, high-priced machine. Nonetheless, Mr. Works has believed from the conception of this product that, when all manufacturing costs were considered, the Cortland 2000 would contribute a reasonable amount to CMI’s selling and administrative costs and profit. The name recognition it brought in its elite community should enhance sales of the more generally used computers.

FINANCIAL INFORMATION

CMI budgeted direct labor costs for 2010 at $60,000,000. Based on expected sales, the company estimated that raw material purchased and used would be $300,000,000. Manufacturing overhead was budgeted at $196,000,000. It is currently allocated to production on the basis of machine hours (MH). As mentioned above, computers are priced at full production cost plus a mark-up of 50%.

EXHIBIT 1 shows the expected direct manufacturing costs for two of the company’s computers. The Cortland 1000 is a very popular computer with a large production and sales volume. By contrast, the Cortland 2000, described above, is a state-of-the-art scientific computer with several special features. In particular, the Cortland 2000

Uses a new processing chip imported from Sweden.

Has special patented random access memory (RAM) that gives it extremely high input/output speed.

Is manufactured in very small batches to assure uniform quality from one computer to the next, to satisfy the users of the machines who have very high expectations for the performance of the machines they purchase.

Mr. Works’ concerns arose when Ms. Nomer told him that she thought the company’s traditional overhead allocation system was providing misleading cost information about the different types of products. She developed an analysis of the 2010 manufacturing overhead costs, shown in EXHIBIT 2. She classified the overhead costs described above into activities. She also gathered data, shown in EXHIBIT 3, for the 2010 production of the Cortland 1000 and the Cortland 2000. Mr. Works commented on the data:

I don’t know quite what to make of all this. Clearly I need some further explanation and analysis. I guess what I really need is some sense of what is the true manufacturing cost of each computer. I thought I knew that, but I didn’t really. Even though we cannot at this point change prices for 2010, we at least need to know if we’re covering full production cost on the Cortland 2000 and have something left to contribute to the company’s selling, general and administrative expenses. I thought this was so, but now … well, I’m not so sure. We’d better figure this out before we begin our budget cycle for 2011. Maybe I need to go back to school!

EXHIBIT 1

Direct Manufacturing Costs for ONE Computer

EXHIBIT 2

Analysis of 2010 Budgeted Manufacturing Overhead Costs

EXHIBIT 3

Production Data for Cortland 1000 and Cortland 2,000 Computers

* “Received order size” is the number of computers one order of raw materials will build. Thus, for example, (see above) the company receives 2 orders of raw materials for the Cortland 1,000. Calculation: 20,000 computers per year, divided by 10,000 computers each order will build = 2 orders per year.

REQUIRED:

Don’t try to begin answering questions until you have studied the case information carefully. Careless reading will result in careless errors! Just take a few extra minutes to understand it all.

Calculate the predetermined overhead rate the company is currently using. (Where should you look for the machine hours?)

Using the information from the exhibits and Q1, calculate the manufacturing cost of ONE Cortland 1000 and ONE Cortland 2000.

Calculate the selling price, under the current system, of ONE Cortland 1000 and ONE Cortland 2000.

Next, you are going to begin to analyze the ABC system. In order to do this, however, your study of Exhibits 2 and 3 should have told you that you are going to have to convert the information the company currently measures into the information you need for the ABC analysis. First, how many raw material orders did the company receive for each model?

How many batches of each model did the company pack and ship?

How many machine setups does Cortland do for each model?

Calculate a rate for each activity in Exhibit 2.

Use the rates calculated in Q7 to apply overhead to each product line: Cortland 1000 and 2000.

Calculate the overhead per computer for a Cortland 1000 and a Cortland 2000.

Calculate the manufacturing cost of ONE Cortland 1000 and ONE Cortland 2000 using ABC overhead allocation.

Show how the company would determine a selling price for each model under the ABC system.

Should Mr. Works adopt an ABC system for internal analysis? Your answer should address the question very specifically to this case – no generalities about ABC from the book. It should contain two points in favor of ABC, and two drawbacks that he should be aware of.

Mr. Works is also concerned about future product development. They have several new models under development at this time. If an ABC system is used, list two characteristics of a new model that will make it more costly to manufacture.

Alison and Chuck Renny began operations of their furniture repair shop (Lazy Sofa Furniture, Inc.) on January 1, 2017. The annual reporting period ends December 31. The trial balance on January 1, 2018, follows (amounts are rounded to thousands of dollars to simplify).

Transactions during 2018 (summarized in thousands of dollars) follow:

1. Borrowed $16 cash on July 1, 2018, signing a six-month note payable.
2. Purchased equipment for $23 cash on July 2.
3. Issued additional shares of common stock on July 3 for $5.
4. Purchased additional equipment on August 4, $3 cash.
5. Purchased, on account, supplies on September 5 for future use, $10.
6. On December 6, recorded revenues in the amount of $60, including $9 on credit and $51 received in cash.
7. Paid salaries and wages expenses on December 7, $24.
8. Collected accounts receivable on December 8, $8.
9. Paid accounts payable on December 9, $11.
10. Received a $4 deposit on December 10 for work to start January 15, 2019.

Data for adjusting journal entries on December 31:

11. Amortization for 2018, $4.
12. Supplies of $4 were counted on December 31, 2018.
13. Depreciation for 2018, $2.
14. Accrued interest on notes payable of $5.
15. Wages earned but not yet paid, $3.
16. Income tax for 2018 was $4 and will be paid in 2019.

8. Post the closing entry from requirement 7 and prepare a post-closing trial balance. (Enter your answers in thousands of dollars.)

Alison and Chuck Renny began operations of their furniture repair shop (Lazy Sofa Furniture, Inc.) on January 1, 2017. The annual reporting period ends December 31. The trial balance on January 1, 2018, follows (amounts are rounded to thousands of dollars to simplify).

Transactions during 2018 (summarized in thousands of dollars) follow:

1. Borrowed $16 cash on July 1, 2018, signing a six-month note payable.
2. Purchased equipment for $23 cash on July 2.
3. Issued additional shares of common stock on July 3 for $5.
4. Purchased additional equipment on August 4, $3 cash.
5. Purchased, on account, supplies on September 5 for future use, $10.
6. On December 6, recorded revenues in the amount of $60, including $9 on credit and $51 received in cash.
7. Paid salaries and wages expenses on December 7, $24.
8. Collected accounts receivable on December 8, $8.
9. Paid accounts payable on December 9, $11.
10. Received a $4 deposit on December 10 for work to start January 15, 2019.

Data for adjusting journal entries on December 31:

11. Amortization for 2018, $4.
12. Supplies of $4 were counted on December 31, 2018.
13. Depreciation for 2018, $2.
14. Accrued interest on notes payable of $5.
15. Wages earned but not yet paid, $3.
16. Income tax for 2018 was $4 and will be paid in 2019.

5. Post the adjusting entries from requirement 4 and prepare an adjusted trial balance. (Enter your answers in thousands of dollars.)

Auditing the Revenue Process

You have been assigned to the first audit of the Black Clover company for the year ending March 31, 2019. Accounts receivable were confirmed on December 31, 2018, and at that date, the receivables consisted of approximately 200 accounts with balances totaling $956,750. Fifty of these accounts, with balances totaling $650,725, were selected for confirmation. All but 10 of the confirmation requests have been returned; 24 were returned without any exceptions, 6 had minor differences that have been cleared satisfactorily, and 10 confirmations had the following information and comments:

1. We are sorry, but we cannot answer your request for confirmation of our account as the Kingdom Company uses an accounts payable voucher system and can only confirm individual invoices.
2. The balance of $1,050 was paid on December 28, 2018.
3. The balance of $7,750 was paid on January 5, 2019.
4. The balance of $2,975 was paid on December 13, 2018.
5. We do not owe you anything on December 31, 2018, as the goods, represented by your invoice date December 30, 2018, number 25050, in the amount of $11,550, were received on January 5, 2019, on FOB destination terms.
6. An advance payment of $2,500 made by us in November 2018 should cover the two invoices totaling $1,350 shown on the statement attached.
7. This confirmation was returned as undeliverable by the post office.
8. We are contesting the propriety of this $12,525 charge. We think the charge is excessive.
9. We do not owe this balance as our agreement with the company allows us to return any unsold goods without penalty. Amount okay. As the goods have been shipped to us on consignment, we will remit payment upon selling the goods.
10. Your credit memo dated December 5, 2018, in the amount of $440 cancels the balance above.

Required

1. Indicate which of these confirmation responses likely represent timing differences
2. Which of the 10 confirmation repossess likely represents a misstatement? Explain why the response indicates a misstatement.
3. For each of the 10 confirmation responses, indicate the procedures you would perform to determine whether the exception is a misstatement or has been appropriately recorded by the client.