1. (4-B4) Traditional and ABC Cost Accounting, Activity-Based Management Refer to the text discussion of Lopez Plastics Company on pages 154-158. Assume that the company has the traditional cost accounting system described in Exhibit 4-6. The top management team wants to reverse the pattern of quarterly losses. The company president, Angie Oaks, has emphasized the importance of the profit of improvement by linking future pay raises of the two product-line managers to their respective gross profit margins. She is concerned about the profitability of the pen casing product line, while pleased with the profitability of the cell phone casing line. She also believes that the unallocated costs of the company are too high compared to competitors. The office of controller, whose costs are included in the unallocated costs, is responsible for vendor relations and purchasing of direct materials. The controller and head of the engineering department present the following idea: We should use more standard parts in cell phone casings, which will dramatically reduce the purchasing department's work required for purchasing. I believe this should cut our office's costs by as much as $20,000 per quarter. Product engineering agrees that this idea is not only feasible but, if implemented, would substantially reduce the design work required for cell phone casings. Quality would also improve. The controller and marketing manager provided the following summary of actions and related effects: Action Related effects Reduce prices of cell phone The vice president of sales estimates that the improved quality of cell phone casings 25%. casings combined with the price reduction will yield a 100% increase in Use standard parts demand for cell phone casing per quarter. wherever possible in cell The use of fewer suppliers will reduce vendor-relations work by the purchasing phone casings. department. This will result in unallocated costs decreasing by $20,000. One of the two engineers can be let go at an annual cost savings of $80,000. Less of the plant and machinery will be used by production support so the allocation percentages will change from 75% and 25% to 80% and 20%. Much less engineer and CAD equipment costs will be needed for production support so these percentages will change from 80% and 20% to 50% and 50%. Processing time, measured in direct-labor hours, will increase by 500 hours due to expected 100% increase in sales and production of cell phone casings, but there is adequate capacity of labor and machine time. Direct-labor costs are fixed as are all of the indirect production costs. Quality of cell phone casings will improve due to reduced complexity of processing (1) Evaluate this idea using the traditional cost allocation system shown in Exhibit 4-6 on Page 156. What would be the predicted profitability for each product line and the company as a whole? What would be the most likely level of support for the controller's idea by the product managers of the pen casing product line and the cell phone casing product line? What would be the level of support by the president? (2) Assume that you have the ABC system described in Exhibit 4-7 on page 157 with the gross profit margins percentages as shown in the table on page 159. Often, managers with ABC system can anticipate more effects of improvement ideas because of their nderstanding of the operating system. In this case, although the total number of the parts used would not change, the idea would reduce the number of distinct parts for cell phone casing from 20 to 11. Evaluate the controller's idea using the ABC system described in Exhibit 4-7. What would be the predicted profitability for each product line and the company as a whole? What would be the most likely level of support for the controller's idea by the product managers of the pen casing product line and the cell phone casing product line? What would be the level of support by the president? (3) As vice president, you have expressed concern about the traditional cost-allocation system's product-cost accuracy and its ability to provide relevant information for operational control. Does the new ABC system satisfy your concerns? Explain. 2. (4-37) Confirm Your Understanding of the Classification of Manufacturing Classify each of the following as direct or indirect with respect to traceability to product and as variable or fixed with respect to whether the costs fluctuate in total as volume of production changes over wide rages. Explain your classifications. (1) The cost of components that are assembled into a final product (2) The cost of supplies consumed when maintenance is performed on machines (3) The wages of machine operators who work on only one product (4) The cost of training mechanics who service processing machinery 3. (4-39) Direct, Indirect, and Unallocated Costs Refer to the Lopez Plastics Company example on pages 154-158 and Exhibit 4-7. The following list gives various resources used by Lopez Plastics Company. Use the letters D, 1 and U to indicate how the cost of each resource cost would be classified with respect to products manufactured: D = direct, l= indirect, and U = unallocated. (1) Depreciation of the plant (2) Resin used to make pen casings (3) Salary of plant manager (4) Salaries of cost accountants (5) Depreciation on computers used by engineers to design cell phone casing (6) Salaries of engineers (7) Salaries of operating labor processing pen casing (8) Travel costs of purchasing agent while investigating potential new suppliers of resin 4. (4-45) Cost Accumulation and Allocation Zhao Manufacturing Company has two departments, machining and finishing. For a given period, the following costs were incurred by the company as a whole: direct material, $200,000; direct labor, $75,000; and indirect production, $80,000. The grand total was $355,000. The machining department incurred 70% of the direct-material costs, but only 33% of the direct labor costs. As is commonplace, indirect production costs incurred by each department were allocated to products in proportion to the direct-labor costs of products within the departments. Three products were produced. Product Sigma Chi Delta Total for the machining department Sigma Chi Delta Total added by finishing department Direct Material 40% 30% 30% 100% 3313% 3313% 3313% 100% Direct Labor 30% 30% 40% 100% 40% 40% 20% 100% The indirect production costs incurred by the machining and finishing departments and allocated to all products therein amounted to machining, $38,000 and finishing, $42,000. (1) Compute the total costs incurred by the machining department and added by the finishing department. (2) Compute the total costs of each product that would be shown as finished-goods inventory if all the products were transferred to finished stock on completion. (There were no beginning inventories.) 1. (4-B4) Traditional and ABC Cost Accounting, Activity-Based Management Refer to the text discussion of Lopez Plastics Company on pages 154-158. Assume that the company has the traditional cost accounting system described in Exhibit 4-6. The top management team wants to reverse the pattern of quarterly losses. The company president, Angie Oaks, has emphasized the importance of the profit of improvement by linking future pay raises of the two product-line managers to their respective gross profit margins. She is concerned about the profitability of the pen casing product line, while pleased with the profitability of the cell phone casing line. She also believes that the unallocated costs of the company are too high compared to competitors. The office of controller, whose costs are included in the unallocated costs, is responsible for vendor relations and purchasing of direct materials. The controller and head of the engineering department present the following idea: We should use more standard parts in cell phone casings, which will dramatically reduce the purchasing department's work required for purchasing. I believe this should cut our office's costs by as much as $20,000 per quarter. Product engineering agrees that this idea is not only feasible but, if implemented, would substantially reduce the design work required for cell phone casings. Quality would also improve. The controller and marketing manager provided the following summary of actions and related effects: Action Related effects Reduce prices of cell phone The vice president of sales estimates that the improved quality of cell phone casings 25%. casings combined with the price reduction will yield a 100% increase in Use standard parts demand for cell phone casing per quarter. wherever possible in cell The use of fewer suppliers will reduce vendor-relations work by the purchasing phone casings. department. This will result in unallocated costs decreasing by $20,000. One of the two engineers can be let go at an annual cost savings of $80,000. Less of the plant and machinery will be used by production support so the allocation percentages will change from 75% and 25% to 80% and 20%. Much less engineer and CAD equipment costs will be needed for production support so these percentages will change from 80% and 20% to 50% and 50%. Processing time, measured in direct-labor hours, will increase by 500 hours due to expected 100% increase in sales and production of cell phone casings, but there is adequate capacity of labor and machine time. Direct-labor costs are fixed as are all of the indirect production costs. Quality of cell phone casings will improve due to reduced complexity of processing (1) Evaluate this idea using the traditional cost allocation system shown in Exhibit 4-6 on Page 156. What would be the predicted profitability for each product line and the company as a whole? What would be the most likely level of support for the controller's idea by the product managers of the pen casing product line and the cell phone casing product line? What would be the level of support by the president? (2) Assume that you have the ABC system described in Exhibit 4-7 on page 157 with the gross profit margins percentages as shown in the table on page 159. Often, managers with ABC system can anticipate more effects of improvement ideas because of their nderstanding of the operating system. In this case, although the total number of the parts used would not change, the idea would reduce the number of distinct parts for cell phone casing from 20 to 11. Evaluate the controller's idea using the ABC system described in Exhibit 4-7. What would be the predicted profitability for each product line and the company as a whole? What would be the most likely level of support for the controller's idea by the product managers of the pen casing product line and the cell phone casing product line? What would be the level of support by the president? (3) As vice president, you have expressed concern about the traditional cost-allocation system's product-cost accuracy and its ability to provide relevant information for operational control. Does the new ABC system satisfy your concerns? Explain. 2. (4-37) Confirm Your Understanding of the Classification of Manufacturing Classify each of the following as direct or indirect with respect to traceability to product and as variable or fixed with respect to whether the costs fluctuate in total as volume of production changes over wide rages. Explain your classifications. (1) The cost of components that are assembled into a final product (2) The cost of supplies consumed when maintenance is performed on machines (3) The wages of machine operators who work on only one product (4) The cost of training mechanics who service processing machinery 3. (4-39) Direct, Indirect, and Unallocated Costs Refer to the Lopez Plastics Company example on pages 154-158 and Exhibit 4-7. The following list gives various resources used by Lopez Plastics Company. Use the letters D, 1 and U to indicate how the cost of each resource cost would be classified with respect to products manufactured: D = direct, l= indirect, and U = unallocated. (1) Depreciation of the plant (2) Resin used to make pen casings (3) Salary of plant manager (4) Salaries of cost accountants (5) Depreciation on computers used by engineers to design cell phone casing (6) Salaries of engineers (7) Salaries of operating labor processing pen casing (8) Travel costs of purchasing agent while investigating potential new suppliers of resin 4. (4-45) Cost Accumulation and Allocation Zhao Manufacturing Company has two departments, machining and finishing. For a given period, the following costs were incurred by the company as a whole: direct material, $200,000; direct labor, $75,000; and indirect production, $80,000. The grand total was $355,000. The machining department incurred 70% of the direct-material costs, but only 33% of the direct labor costs. As is commonplace, indirect production costs incurred by each department were allocated to products in proportion to the direct-labor costs of products within the departments. Three products were produced. Product Sigma Chi Delta Total for the machining department Sigma Chi Delta Total added by finishing department Direct Material 40% 30% 30% 100% 3313% 3313% 3313% 100% Direct Labor 30% 30% 40% 100% 40% 40% 20% 100% The indirect production costs incurred by the machining and finishing departments and allocated to all products therein amounted to machining, $38,000 and finishing, $42,000. (1) Compute the total costs incurred by the machining department and added by the finishing department. (2) Compute the total costs of each product that would be shown as finished-goods inventory if all the products were transferred to finished stock on completion. (There were no beginning inventories.)