1) Absorption Income Statement The Intrepid Company had the following cost data for the year n. Beginning and ending inventories None Sales revenues $ 1,800 Direct materials used E 400 Direct labor (production workers) 330 Supplies (lubricants, etc.) 15 Utilities consumption (power, water) 45 Utilities (access to the power and water distribution networks) 12 Indirect labor (materials handling) 90 Indirect labor (monthly salaries of maintenance, cleaning, 40 security personnel) in the factory Depreciation on plant & equipment 200 Property taxes on plant 20 Supervisory salaries 50 Selling expenses (advertising, sales salaries) 240 Sales commissions 35 Shipping expenses for products sold 25 Wages for employees in processing orders 23 Administrative expenses (office salaries, depreciation on 121 office facilities, accounting fees) Required: Prepare an income statement using the absorption approach.2) Classification of costs, merchandising sector Crescendo Sri operates a large store in Milan. The store has both a film (video/DVDs) section and a musical (compact discs) section. Crescendo reports revenues for the film section separately from the musical section. Classify each of the following cost items as: al Direct or indirect (D or I) costs with respect to the film section. b) Variable or fixed (V or F) costs with respect to how the total costs of the film section change as the number of films sold changes. (If in doubt, select the cost type based on whether the total costs will change substantially if many films are sold.) You will have two answers (D or I; V or F) for each of the following items: A. Annual retainer fee paid to a film distributor B. Electricity costs of Crescendo store (single bill covers entire store) C. Costs of films purchased for sale to customers D. Subscription to Video-Nova magazine| E. Leasing of computer software used for financial budgeting at Crescendo store F. Cost of popcorn provided free to all customers of Crescendo G. Earthquake insurance policy for Crescendo store H. Freight-in costs of films purchased by Crescendo 3) Compare selling prices under two different allocation bases Middleton Recycling recycles newsprint, cardboard, and so forth, into recycled packaging materials. For the coming year, Middleton Recycling estimates total manufacturing overhead to be (360,000. Currently, the company uses direct labor hours (estimated to be 10,000 for next year) as allocation base to use for allocating manufacturing overhead. Middleton Recycling bids for jobs from customers using a 30%% markup over total manufacturing cost. After the new fiscal year began, Wisconsin Paper Supply asked Middleton recycling to bid for a job that will take 2,000 machine hours and 1,600 direct labor hours to produce. The direct labor cost for this job will be (12 per hour, and the direct materials will total (25,000. 1. Compute the total job cost and bid price if Middleton Recycling decided to use direct labor hours as the manufacturing overhead allocation base for the year. The company's managers are not sure if direct labor hours or machine hours (estimated to be 15,000 hours) is the best allocation base to use for allocating manufacturing overhead.2. Compute the total job cost and bid price if Middleton Recycling decided to use machine hours as the manufacturing overhead allocation base for the year. 3. In addition to the bid from Middleton Recycling, Wisconsin Paper Supply received a bid of (125,000 for this job from Sun Prairie Recycling (Middleton's competitor). What are the commercial implications for Middleton Recycling? 4) Use job costing at an advertising agency Adnet.com is an Internet advertising agency. The firm uses a job cost system in which each client is a different "job." Adnet.com traces direct labor, software licensing costs, and travel costs directly to each job (client). The company allocates indirect costs to jobs based on a indirect cost allocation rate computed as a percentage of direct labor costs. At the beginning of n, managing partner Ricky Buena prepared a budget: Direct labor hours (professional) 17,500 h Direct labor costs (professional) (1,750,000 Support staff salaries 305,000 Rent and utilities 95,000 Supplies 15,000 Lease payments on computer hardware 285,000 In January n, Adnet.com served several clients. Records for two clients appear here: GoVacation.com Port Armour Golf Resort Direct labor hours 460 32 Software licensing costs (1,490 280 Travel costs 9,000 0 1. Compute Adnet.com's indirect cost allocation rate for n. 2. Compute the total cost of each job. 3. If Adnet.com wants to earn profits equal to 20% of sales revenue, how much (what total fee) should it charge each of these two clients? 4. Why does Adnet.com assign costs to jobs?5) Allocating indirect costs to measure product profitability DesMoines Implements is a supplier that produces components for three different markets: farm tractor parts, lawn mower parts, and hand tool parts. The statement of operating income for the most recent period is as follows: Total Sales E 1,010,000 Cost of goods sold Direct materials 400,000 Indirect manufacturing costs 94,000 494,000 (allocated based on machine hours) Gross profit 516,000 Selling and administrative expenses . Sales commissions 55,000 Distribution to warehouses (allocated 150,000 205,000 based on weight) Income before unallocated expenses 311,000 Unallocated expenses . Corporate salaries 11,000 Other general expenses 17,000 28,000 Operating income 283,000 Operating data used in the cost accounting system are as follows: Tractor parts Lawn mower parts Hand tool parts Purchase costs of parts (175,000 125,000 100,000 Machine hours 8,500 1,750 1,500 Weight of parts shipped to 100,000 400,000 250,000 distributors in kg Sales commissions per unit E5.00 0.80 0.20 Units assembled and sold 5,000 25,000 50,000 Selling price per unit (70.00 16.00 5.20 You have been asked to determine operating income (loss) for each product line.6) Full costing in manufacturing Dany Ltd. is an engineering business doing work for its customers to their particular requirements and specifications. It determines the full cost of each job taking a "job costing" approach, accounting for overheads on a departmental basis. It bases its prices to customers on this full cost figure. The business has two departments: a machining department, where each job starts, and a fitting department, which completes all of the jobs. Machining department overheads are charged to jobs on a machine hour basis and those of the fitting department on a direct labour hour basis. The budgeted information for next year is as follows: Direct materials: 120,000 6 (all applied to jobs in the machining department) Direct labour: 200,000 E (150,000 6 charged to the fitting department and 50,000 to the machining department. All direct workers are paid 10 { an hour.) Indirect labour: 50,000 6 (allocated to the departments in proportion to the direct labour costs) Heating and lighting: 25,000 6 (allocated to the departments in proportion of square meters. Both departments occupy 250 m? Machine power: 10,000 6 (all assigned t the machining department) Depreciation: 30,000 6 (all related to the machining department) Machine time: 20,000 hours (all worked in the machining department) Use this given model to answer to following questions: Indirect Costs: Total Machining Fitting department department Cost item 1 Cost item 2 Total indirect costs Total quantity of cost allocation base Cost allocation rate 1. Prepare a statement showing the budgeted overheads for next year, totals and details for the two departments. 2. Derive the appropriate rate for charging the overheads of each department to jobs (that is, a separate rate for each department). Dany Ltd. has been asked by a potential customer to specify the price that it will charge for a particular job that will, if the job goes ahead, be undertaken early next year. The job is expected to use direct materials costing Dany Ltd. 1,200 6, to need 50 hours of machining time, 10 hours of direct labour in the machining department and 20 hours of direct labour in the fitting department. Dany Ltd. charges a profit surplus of 20% to the full cost of jobs to determine the selling price. 3. Show workings to derive the proposed selling price for the job.7) Activity-Based Costing in an Electronics Company The cordless phone manufacturing division of a Dallas-based consumer electronics company uses activity-based costing. For simplicity, assume that its accountants have identified only the following three activities and related cost drivers for indirect production costs: Activity: Cost Driver: Materials handling Direct-materials cost Engineering Engineering change notices Power generation Kilowatt hours Three types of cell phones are produced: Slim, RAS, and Tex. Direct costs and cost-driver level for each product for a recent month are as follows: Slim RAS Tex Direct-materials cost $25,000 $ 50,000 $125,000 Direct-labor cost $ 4,000 $ 1,000 $ 3,000 Kilowatt hours 50,000 200,000 150,000 Engineering change notices 13 5 2 Indirect production cost for the month was: Materials handling $10,000 Engineering 20,000 Power 16,000 Total indirect production cost $46,000 1. Compute the indirect production cost allocated to each product with the ABC system. 2. Suppose all indirect production costs had been allocated to products in proportion to their direct- labor costs. Compute the indirect production costs allocated to each product. 3. In which product costs, those in requirement 1 or those in requirement 2, do you have the most confidence? Why?8) Quiz on the session For questions 1, 2 and 3, use the following information. Assume that Dell's Austin, Texas, plant allocates manufacturing overhead based on machine hours. Suppose Dell budgeted for year N, 10 million machine hours and the following costs (in millions): Indirect labor $15 Depreciation on plant 47 Machinery repair 15 Direct labour 75 Plant supplies and utilities 5 Plant property taxes and insurance 8 Advertising 35 Sales commissions 25 1. What is Dell's budgeted manufacturing overhead cost (in millions]? a. $90 b. $125 c. $150 d. $225 2. What is Dell's budgeted manufacturing overhead rate for year N? a. $9.00/machine hour b. $7.50/machine hour c. $0.13/machine hour d. $0.11/machine hour 3. How much manufacturing overhead would Dell allocate to a particular job for a customer that will require an estimated 120 machine hours? a. $850 b. $900 c. $1080 d. $2200 4. How does Dell's management use product cost information? a. to set prices of its products b. to decide which products to emphasize c. to identify ways to cut production costs d. all of the above 5. For Nissan, which is a direct cost with respect to the Xterra? a. depreciation on plant and equipment b. cost of vehicle engine c. salary of engineer who rearranges plant layout d. cost of customer hotline