Book name- Account for decision making and control- Zimmerman

P 9-2: Allington Screen Plant

The Allington Screen Plant of Allington Windows manufactures new and replacement screens. The

plant produces more than 500 different screen sizes and offers four different aluminum frame colors.

Plant overhead is absorbed to each screen produced using the square inches of the screen as the

allocation base. (For example, a screen with dimensions 2 0 _37_2 width 38 _231_2 height has 781.581

square inches.) The single plantwide overhead rate, estimated before the year begins, is based on a

flexible budget (budgeted fixed overhead plus budgeted variable overhead) divided by budgeted volume.

Volume is measured in square inches of the screens produced. The following table summarizes

operations for the year:

Budgeted variable overhead (per sq. in.) $0.01

Actual overhead incurred $4,287,482

Budgeted fixed overhead $3,594,240

Overabsorbed overhead $797,759

Actual volume (sq. in.) 141,256,700

Required:

Calculate the budgeted volume amount (in screen square inches) Allington Screen Plant used in

computing the plantwide overhead rate for the year.

P 10-1: Federal Mixing

Federal Mixing (FM) is a division of Federal Chemicals, a large diversified chemical company.

FM provides mixing services for both outside customers and other Federal divisions. FM buys or

receives liquid chemicals and combines and packages them according to the customer's specifications.

FM computes its divisional net income on both a fully absorbed and variable costing basis. For

the year just ending, it reported

Net Income

Absorption costing $13,800,000

Variable costing 12,600,000

Difference $ 1,200,000

Overhead is assigned to products using machine hours.

There is no finished goods inventory at FM, only work-in-process (WIP) inventory. As soon as

a product is completed, it is shipped to the customer. The beginning inventory based on absorption

costing was valued at $6.3 million and contained 70,000 machine hours. The ending WIP inventory

based on absorption costing was valued at $9.9 million and contained 90,000 machine hours.

Required:

Write a short nontechnical note to senior management explaining why variable costing and

absorption costing net income amounts differ.

P 10-10: Medford Mug Company

The Medford Mug Company is an old-line maker of ceramic coffee mugs. It imprints company logos

and other sayings on mugs for both commercial and wholesale markets. The firm has the capacity to

produce 50 million mugs per year, but the recession has cut production and sales in the current year

to 15 million mugs. The accompanying table shows the operating statement for 2016.

470 Chapter 10

MEDFORD MUG COMPANY

Income Statement

Year Ending 2016 ($ in Millions)

Sales (15 million @ $2) $ 30.0

Less costs of goods sold

Variable cost (15 million @ $0.50) (7.5)

Fixed cost (20.0) (27.5)

Gross margin $ 2.5

Less selling and administration (4.0)

Operating profit $ (1.5)

At the end of 2016, there was no ending inventory of finished goods.

The board of directors is very concerned about the $1.5 million operating loss. It hires an outside

consultant who reports back that the firm suffers from two problems. First, the president of the

company receives a fixed salary, and because she owns no stock, she has very little incentive to

worry about company profits. The second problem is that the company has not aggressively marketed

its product and has not kept up with changing markets. The current president is 64, and the

board of directors makes her an offer to retire one year early so that they can hire a new president

to turn the firm around. The current president accepts the offer to retire, and the board immediately

hires a new president with a proven track record as a turnaround specialist.

The new president is hired with an employment contract that pays a fixed wage of $50,000 a

year plus 15 percent of the firm's operating profits (if any). Operating profits are calculated using

absorption costing. In 2017, the new president doubles the selling and administration budget to

$8 million (which includes the president's salary of $50,000). He designs a new line of "politically

correct" sayings to imprint on the mugs and expands inventory and the number of distributors handling

the mugs. Production is increased to 45 million mugs, and sales climb to 18 million mugs at

$2 each. Variable costs per mug remain at $.50 and fixed costs at $20 million in 2017.

At the end of 2017, the president meets with the board of directors and announces he has accepted

another job. He believes he has successfully gotten Medford Mug back on track and thanks the board

for giving him the opportunity. His new job is helping to turn around another struggling company.

Required:

a. Calculate the president's bonus for 2017.

b. Evaluate the performance of the new president in 2017. Did he do as good a job as the

numbers in part (a) suggest?