EXAMPLE: 1

You are the Nutrition and Food Services Director and your Chief Financial Officer (CFO) has requested that you evaluate the inventory within the department. Specifically, the CFO wishes to know if the facility is effectively managing the inventory.  

To accomplish this task, you will evaluate the inventory turnover from the previous period. You have determined the following information:

Inventory value at the beginning of the period                      $47,000

Purchases made during the period:                                         $225,000

Inventory at the end of the period:                                         $67,999

Your Procurement Specialist has determined the value of inventory for each month of the period. Those figures are as follows:

                                                            Month #1 = $42,000               Month #4 = $48,353

                                                            Month #2 = $44,996               Month #5 = $45,921

Month #3 = $49,214               Month #6 = $46,555

To assist you in completing this question, you will need the following calculations:

A).

Inventory at beginning of period        $XXX

+ Purchases during the period            +XXX

Total value of available food              $XXX

-Inventory at end of period                 -XXX

Cost of goods sold during period       $XXX

B). Inventory turnover = Cost of goods sold/Average inventory value

What is your inventory turnover ratio?

What does a high inventory ratio indicate?

What does a low inventory ratio indicate?

How do you interpret your inventory ratio to your CFO?

EXAMPLE: 2

You are the Nutrition and Food Services Director and your Chief Financial Officer (CFO) has requested that you evaluate the inventory within the department. Specifically, the CFO wishes to know if the facility is effectively managing the inventory.  

To accomplish this task, you will evaluate the inventory turnover from the previous quarter. You have determined the following information:

Inventory value at the beginning of the quarter:                    $52,000

Purchases made during the quarter:                                       $193,000

Inventory at the end of the period:                                         $69,999

Your Procurement Specialist has determined the value of inventory for each month of the quarter. Those figures are as follows:

                                                            Month #1 = $56,001

                                                            Month #2 = $57,996

                                                            Month #3 = $58,214

To assist you in completing this question, you will need the following calculations:

A).

Inventory at beginning of period        $XXX

+ Purchases during the period            +XXX

Total value of available food              $XXX

-Inventory at end of period                 -XXX

Cost of goods sold during period       $XXX

B). Inventory turnover = Cost of goods sold/Average inventory value

What is your inventory turnover ratio?

What does a high inventory ratio indicate?

What does a low inventory ratio indicate?

How do you interpret your inventory ratio to your CFO?

BREAKEVEN POINT: Point at which profit is not being made and losses are not being incurred.

• Fixed costs: do not vary with changes in volume of sales.
• Variable costs: do vary directly with changes in sales.
• Semi-variable costs: include elements of both fixed and variable costs. Before completing a breakeven point, you need to divide the semi-variable costs into their fixed and variable components before you can complete the breakeven point analysis.

EXAMPLE #3

Your CFO has asked you to conduct a break-even analysis of your hospital cafeteria for the upcoming fiscal year.

To assist you in completing this question, you will need the following calculation:

Your costs for the upcoming fiscal year:

Insurance:                               $1,500.00 (fixed cost)

Salaries:                                  $594,259.00 (semi-variable cost—80% is variable)

Utilities:                                  $20,000.00 (semi-variable cost—60% is fixed.)

Food license:                           $2,300.00 (fixed cost)

Supplies:                                 $453,816.00 (variable cost)

Projected Sales:                      $1,253,743.00

What is the break-even point, in sales, for this cafeteria for the upcoming fiscal year?

Other important operating ratios to the Food Service Director:

• Occupancy percentage = # of beds/rooms occupied/# of beds/rooms available

• Average customer check = total sales/# of customer checks

• Food cost percentage = cost of food/sales

(goal is 30% or less)

• Meals per labor hour = total # of meals served/total labor hours to produce meals

(example on page 385 of textbook notes index of 3.5 for acute care facilities)

• Meals per FTEs = total # of meals served/total FTE to produce meals

• Labor minutes per meal = total labor minutes to produce the meals/total number of meals served

• Labor hours per meal = total labor hours to produce the meals/total number of meals served

BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows.

Required:

a. Allocate the cost of the service departments to the operating departments using the direct method.
b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.
c. Allocate the cost of the service departments to the operating departments using the reciprocal method.

• Required A

Allocate the cost of the service departments to the operating departments using the direct method. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

• Required B

Allocate the cost of the service departments to the operating departments using the step method. Start with Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

• Required C

Allocate the cost of the service departments to the operating departments using the reciprocal method. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your final answers to the nearest whole dollar amounts.)

During May, the department operated at 8,740 standard hours. The factory overhead costs incurred were indirect factory wages, $44,216; power and light, $27,696; indirect materials, $18,090; supervisory salaries, $20,400; depreciation of plant and equipment, $35,400; and insurance and property taxes, $15,600.

Prepare a factory overhead cost variance report for May. To be useful for cost control, the budgeted amounts should be based on 8,740 hours. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Enter all variances as positive amounts.

Prepare a factory overhead cost variance report for May. To be useful for cost control, the budgeted amounts should be based on 8,740 hours hours. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Enter all variances as positive amounts.

Garfield Company manufactures a popular brand of dog repellant known as DogGone It, which it sells in gallon-size bottles with a spray attachment. The majority of Garfield’s business comes from orders placed by homeowners who are trying to keep neighborhood dogs out of their yards. Garfield’s operating information for the first six months of the year follows:

Required:
3. Using the high-low method, calculate Garfield’s total fixed operating costs and variable operating cost per bottle. (Do not round your intermediate calculations. Round your variable cost per unit answer to 2 decimal places and fixed cost answer to the nearest whole number.)

Variable cost per unit: 8.83

fixed cost : 1420

4. Perform a least-squares regression analysis on Garfield’s data. (Use Microsoft Excel or a statistical package to find the coefficients using least-squares regression. Round your answers to 3 decimal places.)

coefficients

intercept:

X variable 1:

5. Determine how well this regression analysis explains the data. (Round you regression statistics to three decimal places and your percentage answer to the nearest whole number.)

6. Using the regression output, create a linear cost equation (y = a + bx) for estimating Garfield’s operating costs. (Round your answers to 3 decimal places.)

total cost = + (Number of bottles)

Exercise 2-11 Varying Plantwide Predetermined Overhead Rates [LO2-1, LO2-2, LO2-3]

Kingsport Containers Company makes a single product that is subject to wide seasonal variations in demand. The company uses a job-order costing system and computes plantwide predetermined overhead rates on a quarterly basis using the number of units to be produced as the allocation base. Its estimated costs, by quarter, for the coming year are given below:

Management finds the variation in quarterly unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead because it is the largest element of total manufacturing cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product.

Required:

1. Assuming the estimated variable manufacturing overhead cost per unit is $0.60, what must be the estimated total fixed manufacturing overhead cost per quarter?

2. Assuming the assumptions about cost behavior from the first three quarters hold constant, what is the estimated unit product cost for the fourth quarter?

3. What is causing the estimated unit product cost to fluctuate from one quarter to the next?

4. Assuming the company computes one predetermined overhead rate for the year rather than computing quarterly overhead rates, calculate the unit product cost for all units produced during the year.

Lansing, Inc., provided the following data for its two producing departments:

Machine hours are used to assign the overhead of the Molding Department, and direct labor hours are used to assign the overhead of the Polishing Department. There are 20,000 units of Form A produced and sold and 50,000 of Form B.

Required:

1. Calculate the overhead rates for each department.

2. Using departmental rates, assign overhead to the two products and calculate the overhead cost per unit. Round your answers to the nearest cent.

How does this compare with the plantwide rate unit cost, using direct labor hours?
Relative to the plantwide rate, the cost increased  for Form A and decreased  for Form B.

3. What if the machine hours in Molding were 1,200 for Form A and 3,800 for Form B and the direct labor hours used in Polishing were 5,000 and 15,000, respectively? Calculate the overhead cost per unit for each product using departmental rates. Round your answers to the nearest cent.

Compare with the plantwide rate unit costs calculated in Requirement 2. What can you conclude from this outcome?

Relative to the plantwide rate, the cost increased  for Form A and decreased  for Form B.

The Company makes plain jobs and fancy jobs. Each plain job requires $100 of direct materials, $150 of direct labor, and 4 machine hours. Each fancy job requires $200 of direct materials, $300 of direct labor, and 7 machine hours. The company has $450,000 of total overhead for the year. Currently, the company charges all of the overhead to jobs based on machine hours. During the year, there are 2,000 plain jobs and 1,000 fancy jobs. Using this simplified cost system, compute the total cost of one fancy job (DM + DL + OH). Do NOT put a dollar sign in your answer and round it to the nearest cent (in other words, 2 decimal places), if needed.

Refer to the previous question. Now the company is considering using an activity-based costing system. The overhead will be split into three cost pools. Pool 1 consists of machine setup costs of $90,000 and will be charged to jobs using the number of machine setups. During the year, there are 200 machine setups for plain jobs and 400 machine setups for fancy jobs. Compute the amount of machine setup cost that would be charged to EACH fancy job. I am not asking for total cost here, just the machine setup costs per fancy job. Again. do NOT put a dollar sign in your answer and round it to the nearest cent (2 decimal places) if needed.

Still looking at the Company from above, Cost Pool #2 is factory administrative costs and is charged to jobs using direct labor cost. There are $144,000 in this cost pool. Compute the amount of factory administrative cost that would be charged to EACH fancy job. Do NOT put a dollar sign in your answer and round to the nearest cent (2 decimal places) if needed.

Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $375 and has a total product cost of $300, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $360 next year. Laser Cast has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost reduction ideas:

Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $8 per unit.

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 40% of the factory overhead are related to running injection molding machines.

The direct labor rate is $25 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price is maintained. Round your final answer to two decimal places.
$

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

Target Costing

Laser Impressions, Inc., manufactures color laser printers. Model J20 presently sells for $175 and has a total product cost of $140, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $170 next year. Laser Impressions has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas:

Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $4 per unit.

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 45% of the factory overhead are related to running injection molding machines.

The direct labor rate is $13 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price are maintained. Round your final answer to two decimal places.
$

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $150 and has a total product cost of $120, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $140 next year. Laser Cast has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost reduction ideas:

Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $3 per unit.

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 40% of the factory overhead are related to running injection molding machines.

The direct labor rate is $8 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price is maintained. Round your final answer to two decimal places.
$

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

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