Apple Hilly Farms Ned Hilly was an investment banker and worked in San Francisco at a large bank. As retirement got closer his wife, Sally, and him decided to spend their retirement up in the Sierra Nevada foothills by buying an apple farm in Apple Hill. All their kids were grown and their youngest daughter, Nikki, was finishing an accounting degree at Sac State, whom they were hoping would help them out with the books once she was done. A few years go by and the farm life is bustling. They had a U-Pick your own apples at the farm which cut down costs of running the farm, though they ended up with more apples than they could sell that first year. The second year, Sally came up with the idea of opening a bakery on the farm. She was an excellent baker; she makes the best apple pie west of the Mississippi, at least her family thought so. The bakery was a success that year, more so than expected. Sally made homemade apple pies and caramel apples with her special caramel sauce. In the following year, they expanded bakery operations to include more staff and an extra space for baking. Ned wasn't too sure if the expansion was going to be profitable, he had an idea of the costs involved with apple pie and caramel apple production, but he couldn't pinpoint the details. Since Apple Hill is a seasonal business he wanted to know how well his business did in the peak season to ensure that it made enough to cover the costs in the off-season. Luckily, Nikki just graduated in May and she would be able to work with Ned to work out the details and come up with some possible advice and solutions to his questions. Nikki started by talking with her parents about some of the estimated sales and costs that they thought would incur for the month of September. Here are some of those estimates: Total Sales price (per unit) Expected sales units (for September) Apple Pies $22.00 6,000 Caramel Apples $8.00 9,000 15,000 Total $20,150.00 Expected Manufacturing costs: Fixed OH (per month) Direct labor (per unit) Direct materials (per unit) Variable OH (per unit) Apple Pies $16,500.00 $3.50 $2.50 $2.00 Caramel Apples $3,650.00 $2.10 $1.75 $0.75 Expected Marketing and admin costs: Fixed costs (per month) Variable costs (per unit) $5,750.00 $4,500.00 $1.25 $1,250.00 $0.25 Additionally, Sally informed her that the farm received a special order to sell their apple pies and caramel apples at the local county fair in September. Sally wanted to sell 3,250 pies and 4,250 caramel apples for a discounted price of $18.00 and $6.50, respectively. With, the amount of staff and the size of the bakery, Nikki determined that the maximum capacity for the bakery is 3,700 labor hours a month. At the current projected sale amounts she expects that they'll need 2,850 hours to meet their regular sales volume. After review of the salaries of all the staff, Nikki determined that the average hourly wage was $14.00. Ned was also concerned about how much it cost to keep apple pie inventory on hand at the end of the month, caramel apples should be sold within a couple days so no inventory is left at the end of the month. Since there is a limited shelf life for the apple pies, Ned and Sally try and keep the ending inventories in line with next month's expectations. They estimated that they'd have to start 7,000 apple pies in order to have 1,000 apple pies in-process at the end of the month and 500 finished pies. At the end of August there were 500 pies that were in-process and no finished pies. The variable costs associated with these inventories were as follows: Beginning WIP inventory September costs DM $1,400 $17,500 Conversion $3,350 $38,500 And the conversion cost for the in-process pies is 50% completed and 100% for direct materials. (Use the expected for September Apple Pie Sales for determining units started and units completed and transferred out) September was a success for the bakery! They were able to complete the special order and with some overtime baked a few more pies. Here were the results for the actual sales and costs at the end of the month. (The actuals as presented below are only to be use for Problem 6.) Caramel Apple Pies Apples Actual Sales price (per unit) $22.50 $7.00 Actual sales units 17,750 7,250 10,500 Actual variable manufacturing OH $81,625 Actual variable marketing and admin cost $15,125 Actual fixed manufacturing costs $18,000 Actual marketing and admin costs $5,000 Total Problems 1. For Apple Pies only, compute the variable manufacturing costs per unit, full unit cost per unit, variable cost per unit, full absorption cost per unit, prime cost per unit, conversion cost per unit, profit margin per unit, contribution margin per unit, and gross margin per unit 2. Calculate the total profit expected for September, compute the weighted average contribution margin, and compute the breakeven in units. 3. Calculate the labor hours needed for the special order, calculate the incremental profit/(loss) for the special order, calculate the capacity available for regular orders, compute the contribution margin per hour for regular orders, compute the contribution margin lost from regular sales orders, calculate the total contribution margin including the special order. 4. Prepare the journal entries as given on the excel workbook. 5. Using the Weighted-Average method create the Production Cost Report for Apple Pies only, to include computing the total Apple Pies to be accounted for, computing the total Apple Pie costs to be accounted for, and calculating any necessary adjustments. 6. Create a Budget Analysis Report for the month of September, to include creating a Master Budget, and calculating the variance analyses between Actuals versus the Flexible Budget and versus the Master Budget. Note those variances as either being Favorable (F) or Unfavorable (U). Problem Analysis 1. What costs are excluded from the Gross Margin calculation? Why would we exclude these costs? 2. What does the mix of the weighted-average contribution margin tell us about the impact to profits of each product? 3. Should Apple Hilly Farms complete the Special Order? Explain your answer by using pricing terms from the textbook. 4. Was manufacturing overhead under or over applied? What does over or under applied overhead mean? 5. Why would Apple Hilly Farms use standard costing since actual costing gives the actual cost? Why would they not want to wait until the actual costs are known? 6. Explain the variances calculated for Apple Hilly Farms. Why was September a good or bad month for them? D C C 48 X fx B F F G H D E Apple Hilly Farms Journal Entries CR. a. Purchased $45,280 of materials on account. Account Material Inventory Accounts Payable DR. 45,280 45,280 3 CR. 2,100 CR. b. Issued $2,100 of supplies in materials inventory into production department. 0 Account DR. 11 Manufacturing Overhead 2,100 12 Raw material inventory 13 74 c. Paid for materials purchased in (a) 15 Account DR. 16 Accounts Payable 45,280 17 Cash 18 19 d. Issued $35,700 in direct materials to the production department. 20 Account DR. 21 Work-in-process-direct materials 35,700 22 Materials Inventory 23 45,280 CR. 35,700 Annon li Conchbold for burollaves to be paid 24 e. Incurred wage costs of $63,000 of which $13,500 was withheld for payroll taxes, to be paid 25 next month. 26 Account DR. CR. 27 Payroll 63,000 28 Cash 49,500 29 Payroll taxes payable 13,500 30 31 f. Analyzed the Payroll Expense account and determined that 60% represented direct labor, 32 30% indirect labor, and 10% adminstrative and marketing costs. For this entry you will need to 33 compute the amounts to be debited. 34 Account DR. CR. 35 Work-in-process 37.800 36 Manufacturing Overhead 18,900 37 Administrative and marketing expenses 6,300 38 63,000 39 40 g. Applied overhead on the basis of 175% of direct labor costs. For this entry you will need to 41 compute the amounts to be debited and credited. 42 Account DR. CR. 43 Work-in-process overhead 66,150 44 Applied manufacturing overhead 66,150 45 46 h. Paid for utilities, power, equipment maintenance, and other miscellaneous items for the 47 bakery totalling $29,400 48 Account DR. CR. 49 Manufacturing overhead 29,400 50 Cash 29,400 51 Preview Layout Views Workbook Views Show Zoom 48 X B C D E E F G CR. ei. Recognized depreciation of $14,150 on the bakery property, plant and equipment. 3 Account DR. Maufacturing Overhead 14,150 Accumlated Depreciation Property, plant & egy 14,150 Bj. Book the over/under for manufacturing overhead to COGS. For this entry you will need to compute the amounts to be debited and credited. Account DR. 1 CR. 3 3 Production Cost Report a. Compute total Apple Pie units to be accounted for Equivalent Units Flow of production units: Physical Units Materials Conversion Units to be accounted for Beginning WIP inventory Units started in September Total units to be accounted for Units to be accounted for Total transferred out Units in Ending WIP inventory Total units to be accounted for b. Compute total Apple Pie costs to be accounted for 3 5 5 2 3 3 Total Costs Materials Conversion Costs to be accounted for. Costs in beginning WIP inventory Current period costs Total costs to be accounted for Costs per equivalent unit Materials Conversion 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 -9 20 Costs accounted for Costs assigned to units transferred out Materials Conversion Total costs of units transferred out Costs assigned to ending WIP inventory Materials Conversion Total costs of ending WIP inventory Total costs to be accounted for Prob 1 Prob 2 Prob 3 Prob 4 Prob 5 Prob 6 Analysis Type here to search O A E F G H Budget Analysis a. Prepare Master Budget for September Master Budget 5 . Sales volume (in units) . 1 1 Sales revenue Vanable costs Manufacturing Marketing and admin Contribution margin Fixed costs Manufacturing Marketing and admin Operating profit b. Calculate Variance Analysis between Actual vs. Flexible Budget vs. Master Budget 5 3 Cost variances FI U Sales price variances FI U Sales activity variance Flexible Budget Actual FI U Master Budget Sales volume Sales revenue Variable costs Manufacturing Marketing and admin Contribution margin Fixed costs Manufacturing Marketing and admin Operating profit Prob 1 Prob 2 Prob 3 Prob 4 Prob 5 Prob 6 Analysis +