Case information Beginning of the year: January 1, 2020 The "Good-Crack Company (GCC) Inc., a baseball products manufacturer, recently hired you as a management accountant in its Bat division. GCC's Bat division produces two products, an entry-level bat made of Northern White Ash and a pro-series bat made of Rock Maple wood. The production process involves turning the wood (billets) on a lathe and then sanding and finishing work to complete each bat. The entry-level bat comes in a standard size/weight and finish. The pro-series bat requires additional attention to procurement, quality control, and sanding and finishing work. The pro-series bat is sold to professional players, who visit the production facilities to discuss technical details such as weight, balance and personalization. The pro-series line of bats was recently introduced and GCC has been selling as many of this product as it can produce. Further expansion of the pro-series bat is planned; however, production personnel are not too enthusiastic about this because of the manufacturing demands placed on them by this additional product. In response to demands for more relevant costing information your predecessor introduced an ABC system. Two key production activities, manufacturing operations and machine setups, were identified. Production costs related to these activities are now assigned to the two lines of bats based on the cost drivers of direct manufacturing labor and setup labor hours, respectively. The old product costing system allocated all manufacturing overhead based on direct manufacturing labor hours. Your predecessor argued for a move to ABC because production runs for the pro-series bat take longer to setup and allocating setup costs based on setup labor hours better represents resources consumed by the two bat lines. The bat division is growing in complexity and part of your job is to manage and explain the more advanced accounting information systems used within the division. Your first task is to review the bat division's existing costing and budgeting information. To your dismay you are told that the division's records are in disarray and the 2020 budget has not been compiled. Since you are short on time, you decide to use the information from the last year's (2019) records to do an initial examination of the division. These records include some budget estimates assembled before the start of 2019 and actual information for 2019. A. Budget information assembled at the start of 2019 Entry-level Bats Pro-series Bats Budgeted production 50,000 10,000 Number of bats per batch 100 20 Setup labor hours per batch 5 hours 8 hours Feet of lumber per bat 4 feet 4 feet Direct labor hours per bat 1 hr 2 hrs Manufacturing Operations Overhead Costs Variable costs Supplies Indirect manuf. Labor Power Maintenance Fixed costs Depreciation Supervision Power Maintenance $25,000 80,000 21,000 85,000 $211,000 35,000 100,000 82,000 60,000 $277,000 Machine Setup Overhead Costs Variable costs Supplies Indirect manuf. Labor Power Fixed costs Depreciation Supervision Power $40,000 80,000 60,000 $180,000 75,000 25,000 40,000 $140,000 B. Actual information for 2019 that can be traced directly to each product: Entry-level Bats Pro-series Bats Direct material cost (DM Used) $1,030,000 $266,000 Feet of lumber per bat (billets) 4 feet 4 feet Lumber in inventory (12/31/2019) 40,000 feet 10,000 feet Direct labor cost $849,750 $456,000 Direct labor hours per Bat 1.1 hour 2.4 hours Number of bats per batch 100 20 Number of batches 515 475 Setup labor hours per batch 5 8 Setup labor hours 2,575 3,800 Total sales commissions $240,000 $95,000 Units produced 51,500 9,500 Units sold 48,000 9,500 Bats in inventory (1/1/2019) 2,000 @ $42.44 each 0 Sales revenue $2,832,000 $1,282,500 C. Additionally, the Bat division had the following actual costs in 2019 that were not directly traced to either product: Actual Manufacturing Overhead Costs - 2019 Month Cost Setup-Hours Cost Jan Feb Mar 301 326 400 399 467 499 Apr May Jun Jul Direct Labor-Hours 5,472 5,022 5,422 6,573 7,054 8,231 9,753 8,744 7,320 6,311 4,977 4,571 79,450 $ 34,755 $ 31,658 $ 34,276 $ 41,889 $ 40,788 $ 44,987 $ 49,785 $ 51,265 $_46,387 $ 43,200 $_42,265 $ 35,745 $497,000 $ 21,959 $ 23,959 $ 22,424 $ 24,444 $ 24,888 $ 29,990 $ 34,321 $ 33,567 $ 34,833 $ 34,131 $ 38,484 $ 32,000 $355,000 556 540 820 725 645 697 6,375 Aug Sep Oct Nov Dec Total Actual Period Costs - 2019 Advertising expense Sales department salaries Selling and administration depreciation $240,000 210,000 35,000 D. Based on the information you have gathered you also make the following assumptions: Because of past financial trouble in the division, all expenses must be paid in cash. No sales are made on account (all sales are cash sales). Information for the 2020 budget is as follows: o The budgeted unit input quantities for materials used in 2019 will also be used in the 2020 budget. For the entry-level bat the budgeted unit input quantities for labor and MOH (direct manufacturing labor- hours and machine setup labor hours) used in 2019 will also be used in the 2020 budget For the pro-series bat the budgeted unit input quantity for direct manufacturing labor will be 2.4 hours/unit. The budgeted unit input quantity for setup labor hours used in 2019 will also be used in the 2020 budget The cost of Ash and Maple are budgeted to increase by 10% in 2020 over 2019 actual costs. Budgeted labor rates in 2020 are expected to increase by 8% over actual rates in 2019. Calculate 2020 budgeted variable moh rates and total fixed moh from 2019 actual monthly cost and activity data. Use Regression Analysis to determine estimates for variable and monthly fixed costs. Convert monthly estimates of fixed costs into annual costs. Assume non-cash MOH item amounts remain unchanged from budgeted 2019 data. Production and sales forecasts are within the relevant range. Budgeted variable period costs per unit and fixed costs in total for 2020 are assumed to be the same as actual period costs in 2019. A 5% increase in selling price for 2020 is expected for both the entry-level and the pro-series bats. Normal costing is used. O O . There are two cost drivers for manufacturing overhead costs direct manufacturing labor-hours and setup labor-hours. Direct manufacturing labor-hours is the cost driver for the variable portion of manufacturing operations overhead. Direct manufacturing labor-hours is also used to allocate the fixed portion of manufacturing operations overhead. Setup labor-hours is the cost driver for the variable portion of machine setup overhead. Setup labor- hours is also used to allocate the fixed portion of machine setup overhead. Projected sales for the entry-level Bat are 52,000 in 2020, 51,000 in 2021, and 48,000 in 2022. Projected sales for the pro-series Bat are 10,400 in 2020, 11,000 in 2021, and 12,000 in 2022. Sales commission is paid as a rate per bat sold. 2020 input cost and quantity standards for direct materials, direct manufacturing labor and manufacturing overhead are the same as 2020 budgeted input costs and quantities. You require an ending inventory of entry-level Bats of 20% of next year's total sales needs. Pro-series bats are made to order and no inventory of finished goods is planned. You require an ending raw material inventory of 30% of next year's production needs (for both product lines). Assume a FIFO cost flow Assume no WIP inventory. Your beginning cash balance is $125,000 for 2020. The company requires a minimum cash balance of $100,000. 0 Requirements Requirements for the two parts of the case are listed below. Better answers will clearly present workings for calculations. Presenting calculations so that management can understand them is important. The quality of your spreadsheet will be graded create a model that can be easily updated and modified by using appropriate formulas and referencing. See Canvas for model design tips. Requirements for Part 1 Actual and Normal Costing, CVP analysis, and Activity-Based Costing 1. 2. 3. 4. 5. What were the budgeted indirect cost rates for the manufacturing operations activity and the machine setup activity in 2019? Was overhead over- or under-applied for the year? By how much? What was the unit product cost for the entry-level and pro-series Bats under normal costing? What was the Bat Division's operating income for 2019? Use normal costing and adjust for mis- applied MOH. Use the 2019 actual monthly MOH information to calculate annual estimates of cost behavior (fixed and variable components) for each MOH activity. These estimates will be used for the 2020 budget. Use the Regression function found under Data: Data Analysis in Excel. Place output on a separate sheet. For Setup Operations overhead activity, evaluate the selected cost driver and compare it to the alternative of Direct Labor Hours as the cost driver. Refer to Exhibit 10-18. i.e., run a regression for DLHrs as the cost driver for Setup Operations activity and compare the results according to the criteria in Ex 10-18. Calculate the break-even point in units (calculate the number of units of each product required), and the number of units of both products that must be sold to earn an operating income of $150,000. Use 2020 budgeted information - refer to section D bullet point 2 and your results from requirement 5. 6. 7. Case information Beginning of the year: January 1, 2020 The "Good-Crack Company (GCC) Inc., a baseball products manufacturer, recently hired you as a management accountant in its Bat division. GCC's Bat division produces two products, an entry-level bat made of Northern White Ash and a pro-series bat made of Rock Maple wood. The production process involves turning the wood (billets) on a lathe and then sanding and finishing work to complete each bat. The entry-level bat comes in a standard size/weight and finish. The pro-series bat requires additional attention to procurement, quality control, and sanding and finishing work. The pro-series bat is sold to professional players, who visit the production facilities to discuss technical details such as weight, balance and personalization. The pro-series line of bats was recently introduced and GCC has been selling as many of this product as it can produce. Further expansion of the pro-series bat is planned; however, production personnel are not too enthusiastic about this because of the manufacturing demands placed on them by this additional product. In response to demands for more relevant costing information your predecessor introduced an ABC system. Two key production activities, manufacturing operations and machine setups, were identified. Production costs related to these activities are now assigned to the two lines of bats based on the cost drivers of direct manufacturing labor and setup labor hours, respectively. The old product costing system allocated all manufacturing overhead based on direct manufacturing labor hours. Your predecessor argued for a move to ABC because production runs for the pro-series bat take longer to setup and allocating setup costs based on setup labor hours better represents resources consumed by the two bat lines. The bat division is growing in complexity and part of your job is to manage and explain the more advanced accounting information systems used within the division. Your first task is to review the bat division's existing costing and budgeting information. To your dismay you are told that the division's records are in disarray and the 2020 budget has not been compiled. Since you are short on time, you decide to use the information from the last year's (2019) records to do an initial examination of the division. These records include some budget estimates assembled before the start of 2019 and actual information for 2019. A. Budget information assembled at the start of 2019 Entry-level Bats Pro-series Bats Budgeted production 50,000 10,000 Number of bats per batch 100 20 Setup labor hours per batch 5 hours 8 hours Feet of lumber per bat 4 feet 4 feet Direct labor hours per bat 1 hr 2 hrs Manufacturing Operations Overhead Costs Variable costs Supplies Indirect manuf. Labor Power Maintenance Fixed costs Depreciation Supervision Power Maintenance $25,000 80,000 21,000 85,000 $211,000 35,000 100,000 82,000 60,000 $277,000 Machine Setup Overhead Costs Variable costs Supplies Indirect manuf. Labor Power Fixed costs Depreciation Supervision Power $40,000 80,000 60,000 $180,000 75,000 25,000 40,000 $140,000 B. Actual information for 2019 that can be traced directly to each product: Entry-level Bats Pro-series Bats Direct material cost (DM Used) $1,030,000 $266,000 Feet of lumber per bat (billets) 4 feet 4 feet Lumber in inventory (12/31/2019) 40,000 feet 10,000 feet Direct labor cost $849,750 $456,000 Direct labor hours per Bat 1.1 hour 2.4 hours Number of bats per batch 100 20 Number of batches 515 475 Setup labor hours per batch 5 8 Setup labor hours 2,575 3,800 Total sales commissions $240,000 $95,000 Units produced 51,500 9,500 Units sold 48,000 9,500 Bats in inventory (1/1/2019) 2,000 @ $42.44 each 0 Sales revenue $2,832,000 $1,282,500 C. Additionally, the Bat division had the following actual costs in 2019 that were not directly traced to either product: Actual Manufacturing Overhead Costs - 2019 Month Cost Setup-Hours Cost Jan Feb Mar 301 326 400 399 467 499 Apr May Jun Jul Direct Labor-Hours 5,472 5,022 5,422 6,573 7,054 8,231 9,753 8,744 7,320 6,311 4,977 4,571 79,450 $ 34,755 $ 31,658 $ 34,276 $ 41,889 $ 40,788 $ 44,987 $ 49,785 $ 51,265 $_46,387 $ 43,200 $_42,265 $ 35,745 $497,000 $ 21,959 $ 23,959 $ 22,424 $ 24,444 $ 24,888 $ 29,990 $ 34,321 $ 33,567 $ 34,833 $ 34,131 $ 38,484 $ 32,000 $355,000 556 540 820 725 645 697 6,375 Aug Sep Oct Nov Dec Total Actual Period Costs - 2019 Advertising expense Sales department salaries Selling and administration depreciation $240,000 210,000 35,000 D. Based on the information you have gathered you also make the following assumptions: Because of past financial trouble in the division, all expenses must be paid in cash. No sales are made on account (all sales are cash sales). Information for the 2020 budget is as follows: o The budgeted unit input quantities for materials used in 2019 will also be used in the 2020 budget. For the entry-level bat the budgeted unit input quantities for labor and MOH (direct manufacturing labor- hours and machine setup labor hours) used in 2019 will also be used in the 2020 budget For the pro-series bat the budgeted unit input quantity for direct manufacturing labor will be 2.4 hours/unit. The budgeted unit input quantity for setup labor hours used in 2019 will also be used in the 2020 budget The cost of Ash and Maple are budgeted to increase by 10% in 2020 over 2019 actual costs. Budgeted labor rates in 2020 are expected to increase by 8% over actual rates in 2019. Calculate 2020 budgeted variable moh rates and total fixed moh from 2019 actual monthly cost and activity data. Use Regression Analysis to determine estimates for variable and monthly fixed costs. Convert monthly estimates of fixed costs into annual costs. Assume non-cash MOH item amounts remain unchanged from budgeted 2019 data. Production and sales forecasts are within the relevant range. Budgeted variable period costs per unit and fixed costs in total for 2020 are assumed to be the same as actual period costs in 2019. A 5% increase in selling price for 2020 is expected for both the entry-level and the pro-series bats. Normal costing is used. O O . There are two cost drivers for manufacturing overhead costs direct manufacturing labor-hours and setup labor-hours. Direct manufacturing labor-hours is the cost driver for the variable portion of manufacturing operations overhead. Direct manufacturing labor-hours is also used to allocate the fixed portion of manufacturing operations overhead. Setup labor-hours is the cost driver for the variable portion of machine setup overhead. Setup labor- hours is also used to allocate the fixed portion of machine setup overhead. Projected sales for the entry-level Bat are 52,000 in 2020, 51,000 in 2021, and 48,000 in 2022. Projected sales for the pro-series Bat are 10,400 in 2020, 11,000 in 2021, and 12,000 in 2022. Sales commission is paid as a rate per bat sold. 2020 input cost and quantity standards for direct materials, direct manufacturing labor and manufacturing overhead are the same as 2020 budgeted input costs and quantities. You require an ending inventory of entry-level Bats of 20% of next year's total sales needs. Pro-series bats are made to order and no inventory of finished goods is planned. You require an ending raw material inventory of 30% of next year's production needs (for both product lines). Assume a FIFO cost flow Assume no WIP inventory. Your beginning cash balance is $125,000 for 2020. The company requires a minimum cash balance of $100,000. 0 Requirements Requirements for the two parts of the case are listed below. Better answers will clearly present workings for calculations. Presenting calculations so that management can understand them is important. The quality of your spreadsheet will be graded create a model that can be easily updated and modified by using appropriate formulas and referencing. See Canvas for model design tips. Requirements for Part 1 Actual and Normal Costing, CVP analysis, and Activity-Based Costing 1. 2. 3. 4. 5. What were the budgeted indirect cost rates for the manufacturing operations activity and the machine setup activity in 2019? Was overhead over- or under-applied for the year? By how much? What was the unit product cost for the entry-level and pro-series Bats under normal costing? What was the Bat Division's operating income for 2019? Use normal costing and adjust for mis- applied MOH. Use the 2019 actual monthly MOH information to calculate annual estimates of cost behavior (fixed and variable components) for each MOH activity. These estimates will be used for the 2020 budget. Use the Regression function found under Data: Data Analysis in Excel. Place output on a separate sheet. For Setup Operations overhead activity, evaluate the selected cost driver and compare it to the alternative of Direct Labor Hours as the cost driver. Refer to Exhibit 10-18. i.e., run a regression for DLHrs as the cost driver for Setup Operations activity and compare the results according to the criteria in Ex 10-18. Calculate the break-even point in units (calculate the number of units of each product required), and the number of units of both products that must be sold to earn an operating income of $150,000. Use 2020 budgeted information - refer to section D bullet point 2 and your results from requirement 5. 6. 7