1. Consider the following information: Q1 Q2 Q3 Beginning inventory (units) 0 300 300 Actual units produced 1,000 800 1,250 Budgeted units to be produced 1,000 1,000 1,000 Units sold 700 800 1,500 Manufacturing costs per unit produced $900 $900 $900 Marketing costs per unit sold $600 $600 $600 Fixed manufacturing costs $400,000 $400,000 $400,000 Fixed marketing costs $140,000 $140,000 $140,000 Selling price per unit $2,500 $2,500 $2,500 There are no price, efficiency, or spending variances, and any production-volume variance is directly written off to cost of goods in the quarter in which it occurs. a) Prepare income statements for Q1, Q2, and Q3 using variable costing and absorption costing. b) Explain the differences in operating income between the two costing systems for each quarter. 2. Consider the following information, prepared based on monthly production and sales of 20,000 units: Category Cost per Unit Direct materials $1.00 Direct manufacturing labor $1.20 Variable manufacturing overhead $0.80 Fixed manufacturing overhead $0.50 Variable marketing $1.50 Fixed marketing $0.90 In addition, the firm currently sells the product for $6 per unit. Consider each of these scenarios independent of each other. a) The company is currently producing 15,000 units per month. A potential customer has contacted the firm and offered to purchase 5,000 units this month only. The customer is willing to reimburse for all manufacturing costs plus a flat fee of $1,000. There would be no variable marketing costs incurred on the contract. Should the company accept the special order? Why or why not? b) Assume the same facts as in part a, except that the company is producing 20,000 units per month. Should the company accept the special order? Why or why not? c) The company is considering selling 1,000 units that are in danger of becoming obsolete. What is the minimum price it would be willing to take for the 1,000 units? d) Assume the company is producing and selling 240,000 units per year. It is considering an arrangement where an outside manufacturer would produce and ship the product directly to customers. Under this arrangement, variable marketing costs would decrease 20% per unit and fixed manufacturing costs would decrease 50%. Fixed marketing costs would not change. What is the maximum amount per unit the company would be willing to pay to the outside manufacturer? 3. A company purchases and processes 15,000 gallons of raw material at a cost of $30,000. From this process, it produces 600 pounds of JP1 and 900 pounds of JP2. JP1 can be sold for $21 per pound or processed further into 6,000 units of FP1 at a total cost of $12,750. FP1 has a selling price of $4 per unit. JP2 can be sold for $26 per pound or processed further into 10,200 units of FP2 at a total cost of $26,250. FP2 has a selling price of $5 per unit. Assume that the company sells only FP1 and FP2. In other words, it further processes both joint products. Also, assume there is no beginning or ending inventory. a) Allocate the joint costs to JP1 and JP2 using the physical measure method (based on pounds), sales value at split off method, the NRV method, and the constant gross margin percentage NRV method. b) Is it a good idea for the firm to further process the joint products? 4. The ABC Company manufactures widgets. It competes and plans to grow by selling high-quality widgets at low prices and by delivering them to customers quickly. There are many other companies in the industry producing similar widgets. ABC believes it needs to continuously improve its manufacturing and delivery processes and that having satisfied employees are both critical to its long-term success. a) Based on this information, what type of strategy to you believe ABC is pursuing? Be sure to back up your claim with specific evidence. b) List and justify four metrics that you believe ABC should include in its Balanced Scorecard. c) ABC calculates the following figures: 2011 operating income $1,850,000 2012 operating income $2,013,000 Growth component $85,000 Price-recovery component ($72,000) Productivity component $150,000 In addition, the market for widgets did not grow in 2012, input process did not change in 2012, and ABC reduced its selling price in 2012. Based on this information, do you believe ABC?s increase in operating income in 2012 is consistent with the strategy you identified in part a? 5. On January 1, the XYZ Company had 8,500 physical units in WIP. During January, it started an additional 35,000 units. At the end of January, 10,500 units remained in WIP. The units in WIP on January 1 were 100% complete with respect to direct materials and 20% complete with respect to conversion costs. The units in WIP on January 31 were 100% complete with respect to direct materials and 60% complete with respect to conversion costs. Conversion costs are incurred evenly throughout the process while direct materials are added at the beginning of the process. WIP on January 1 totaled $108,610, consisting of $63,100 in direct materials and $45,510 in conversion costs. During January, $284,900 in direct materials and $485,040 in conversion costs were added to production. a) Using the weighted-average method of process costing, assign total costs to units completed in January and to units in WIP as of January 31. b) Using the first-in, first-out (FIFO) method of process costing, assign total costs to units completed in January and to units in WIP as of January 31. 6. a) How does the accounting for normal spoilage and rework differ from the accounting for abnormal spoilage and rework? b) What is the theoretical rationale for accounting for normal spoilage and rework differently from abnormal spoilage and rework? Be specific. As a hint, think about how GAAP says we should calculate the cost of inventory. 7. A firm expects to sell 10,000 units of its product annually. It estimates that it costs $200 to place an order and that each unit costs $7 annually to carry in inventory. It takes 7 days to receive an order once it is placed, and the store is open 365 days per year. a) How many units should the firm order at a time if it wants to minimize the sum of ordering and carrying costs? b) How many orders will it place in a year? c) What will its average inventory level be during the year? d) What is its reorder point?

1. Consider the following information: Beginning inventory (units) Actual units produced Budgeted units to be produced Units sold Manufacturing costs per unit produced Marketing costs per unit sold Fixed manufacturing costs Fixed marketing costs Selling price per unit Q1 0 1,000 1,000 700 $900 Q2 300 800 1,000 800 $900 Q3 300 1,250 1,000 1,500 $900 $600 $400,000 $140,000 $2,500 $600 $400,000 $140,000 $2,500 $600 $400,000 $140,000 $2,500 There are no price, efficiency, or spending variances, and any production-volume variance is directly written off to cost of goods in the quarter in which it occurs. a) Prepare income statements for Q1, Q2, and Q3 using variable costing and absorption costing. b) Explain the differences in operating income between the two costing systems for each quarter. 2. Consider the following information, prepared based on monthly production and sales of 20,000 units: Category Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Variable marketing Fixed marketing Cost per Unit $1.00 $1.20 $0.80 $0.50 $1.50 $0.90 In addition, the firm currently sells the product for $6 per unit. Consider each of these scenarios independent of each other. a) The company is currently producing 15,000 units per month. A potential customer has contacted the firm and offered to purchase 5,000 units this month only. The customer is willing to reimburse for all manufacturing costs plus a flat fee of $1,000. There would be no variable marketing costs incurred on the contract. Should the company accept the special order? Why or why not? b) Assume the same facts as in part a, except that the company is producing 20,000 units per month. Should the company accept the special order? Why or why not? c) The company is considering selling 1,000 units that are in danger of becoming obsolete. What is the minimum price it would be willing to take for the 1,000 units? d) Assume the company is producing and selling 240,000 units per year. It is considering an arrangement where an outside manufacturer would produce and ship the product directly to customers. Under this arrangement, variable marketing costs would decrease 20% per unit and fixed manufacturing costs would decrease 50%. Fixed marketing costs would not change. What is the maximum amount per unit the company would be willing to pay to the outside manufacturer? 3. A company purchases and processes 15,000 gallons of raw material at a cost of $30,000. From this process, it produces 600 pounds of JP1 and 900 pounds of JP2. JP1 can be sold for $21 per pound or processed further into 6,000 units of FP1 at a total cost of $12,750. FP1 has a selling price of $4 per unit. JP2 can be sold for $26 per pound or processed further into 10,200 units of FP2 at a total cost of $26,250. FP2 has a selling price of $5 per unit. Assume that the company sells only FP1 and FP2. In other words, it further processes both joint products. Also, assume there is no beginning or ending inventory. a) Allocate the joint costs to JP1 and JP2 using the physical measure method (based on pounds), sales value at split off method, the NRV method, and the constant gross margin percentage NRV method. b) Is it a good idea for the firm to further process the joint products? 4. The ABC Company manufactures widgets. It competes and plans to grow by selling high-quality widgets at low prices and by delivering them to customers quickly. There are many other companies in the industry producing similar widgets. ABC believes it needs to continuously improve its manufacturing and delivery processes and that having satisfied employees are both critical to its long-term success. a) Based on this information, what type of strategy to you believe ABC is pursuing? Be sure to back up your claim with specific evidence. b) List and justify four metrics that you believe ABC should include in its Balanced Scorecard. c) ABC calculates the following figures: 2011 operating income 2012 operating income Growth component Price-recovery component Productivity component $1,850,000 $2,013,000 $85,000 ($72,000) $150,000 In addition, the market for widgets did not grow in 2012, input process did not change in 2012, and ABC reduced its selling price in 2012. Based on this information, do you believe ABC's increase in operating income in 2012 is consistent with the strategy you identified in part a? 5. On January 1, the XYZ Company had 8,500 physical units in WIP. During January, it started an additional 35,000 units. At the end of January, 10,500 units remained in WIP. The units in WIP on January 1 were 100% complete with respect to direct materials and 20% complete with respect to conversion costs. The units in WIP on January 31 were 100% complete with respect to direct materials and 60% complete with respect to conversion costs. Conversion costs are incurred evenly throughout the process while direct materials are added at the beginning of the process. WIP on January 1 totaled $108,610, consisting of $63,100 in direct materials and $45,510 in conversion costs. During January, $284,900 in direct materials and $485,040 in conversion costs were added to production. a) Using the weighted-average method of process costing, assign total costs to units completed in January and to units in WIP as of January 31. b) Using the first-in, first-out (FIFO) method of process costing, assign total costs to units completed in January and to units in WIP as of January 31. 6. a) How does the accounting for normal spoilage and rework differ from the accounting for abnormal spoilage and rework? b) What is the theoretical rationale for accounting for normal spoilage and rework differently from abnormal spoilage and rework? Be specific. As a hint, think about how GAAP says we should calculate the cost of inventory. 7. A firm expects to sell 10,000 units of its product annually. It estimates that it costs $200 to place an order and that each unit costs $7 annually to carry in inventory. It takes 7 days to receive an order once it is placed, and the store is open 365 days per year. a) How many units should the firm order at a time if it wants to minimize the sum of ordering and carrying costs? b) How many orders will it place in a year? c) What will its average inventory level be during the year? d) What is its reorder point