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Instructions 1. Save this MS Word document (template) to your computer as follows: If the current term is: Save the MS Word document (template) using the following file naming convention: Spring 1 MBA_C604_S8W1-15_Midcourse_YourLastName_YourFirstInitial Spring 2 MBA_C604_S8W2-15_Midcourse_YourLastName_YourFirstInitial Summer 1 MBA_C604_M8W1-15_Midcourse_YourLastName_YourFirstInitial Summer 2 MBA_C604_M8W2-15_Midcourse_YourLastName_YourFirstInitial Fall 1 MBA_C604_F8W1-15_Midcourse_YourLastName_YourFirstInitial Fall 2 MBA_C604_F8W2-15_Midcourse_YourLastName_YourFirstInitial Where \"15\" = 2015 2. The instructor will make this midcourse assessment available to the class on the day and in the manner indicated in the course syllabus. Not later than the due date and time indicated in the course syllabus, (i) complete the assessment according any further directions stated below and (ii) submit it in the manner (via the Course Mail tool or RegisNet email using INsite) set forth in the Facilitator Expectations posting. Four problems/questions comprise the midcourse assessment with maximum point values indicated below: Topic Maximum points possible Your points earned Estimated minutes required to complete 1 - CVP analysis and Contribution Margin method of presenting operating results 20 20 2 - Manufacturing overhead cost allocation for product cost determinations 25 25 3 - Financial reporting objective and definitions of financial statement elements 27 25 4 - Financial reporting assumptions, principles, and constraints; desired qualitative characteristic of accounting information (14 items, 2 points each) 28 20 100 90 Total Students must complete this assessment individually, not in collaboration with others. The course syllabus sets forth the university's academic integrity policy and the various sanctions that the university may impose on students for violations of that policy, including use of inappropriate sources of information on examinations. 1 Topic 1 (20 points) The board of directors of Midwest Manufacturing Company recently approved the company's budget and production plan for its coming fiscal year, 2015. Budgeted units of production equal budgeted unit sales for the company's single product. Using the information below, included in the budget and production plan: a. Compute the amount of required sales - number of units and dollars - necessary to achieve the company's budgeted net income for its fiscal year ended (FYE) December 31, 2015 b. Prepare the company's budgeted income statement for its FYE December 31, 2015 using the Variable Costing Method (Contribution Margin Format). Show all computations in good form and label properly all amounts presented. Budgeted amounts: Budgeted amounts: Per unit $350.00 Sales units ? Product selling price (SP) Sales dollars ? Variable manufacturing costs: Fixed costs: Direct materials (DM) $73.50 Manufacturing overhead (MOH) costs $5,250,000 Direct labor (DL) $61.25 Selling and administrative (S&A) costs $5,625,000 Manufacturing overhead (MOH) costs $82.50 Research and development (R&D) costs $3,750,000 Variable selling and admin. (S&A) costs Net income $6,000,000 Estimated combined effective tax rate $32.50 40.0% (i.e., 0.40) 2 a. Amount of required sales - number of units and dollars - necessary to achieve the company's budgeted net income for its fiscal year ended (FYE) December 31, 20X6: b. Prepare the company's budgeted income statement for its FYE December 31, 20X6 using the Variable Costing Method (Contribution Margin Format) Midwest Manufacturing Company Budgeted Income Statement Fiscal year ended December 31, 20X6 Units: Sales Per unit: Total: $ $ Variable expenses: Cost of goods sold $ $ Total variable expenses $ $ $ 3 Topic 2 (25 points) The board of directors of Jupiter Manufacturing Company recently approved the company's budget and production plan for its coming fiscal year (FY). The company manufactures two products - door latches and door hinges - from a single plant that comprises four activities - machine setup, fabrication, assembly, and plant administration. The company uses the same resources (including machinery and equipment, supervision and administrative services) to manufacture both products. Management uses the traditional approach to allocate manufacturing overhead (MOH) costs, based on direct labor hours (DLH) incurred in its two production departments, to determine the unit cost of each product. The company's budget includes the following MOH allocation and related computations: Per unit: Door latches Selling price (SP) Door hinges $23.75 $12.98 $ 6.20 $ 2.70 Direct labor (DL) 7.00 5.50 MOH (A) x (B) 3.87 2.58 $17.37 $10.78 Gross profit (GP) $ 6.38 $ 2.20 Gross margin (GM) GM = GP / SP (see Note 1 below) 26.9% 16.9% Budgeted total units of production for fiscal year (FY) 75,000 225,000 Budgeted batch size (units per batch) 300 1,500 (A) Direct labor hours (DLH) per unit 0.30 0.20 Product costs: Direct material (DM) Total (B) MOH cost per direct labor hour (DLH) (C) $12.90 (C) $12.90 (C) Budgeted FY total MOH cost, $870,000 / Budgeted FY total DLHs, 67,500 Note 1 - Management set the selling prices for its products to achieve gross margins of 25 percent on latches and 12.5 percent on hinges, based on its analysis of competitors' prices and the targeted return on equity capital set by the company's board. Management is considering adopting the Activity-based Costing (ABC) method to determine its product unit costs. a. Using the information included in the table below (taken from the company's budget and production plan) complete the table according to the ABC method to compute the per-unit MOH cost, total cost, gross profit, and gross margin of each product. b. Describe briefly the apparent effect that managers' use of the traditional MOH allocation method has had on its pricing decisions, compared to using the ABC method. The budget and production plan reflect normal levels of production resource availability and capacity utilization (i.e., activity resource consumption) for the company. 4 a. Activity Budgeted MOH cost (Note A) Activity cost driver (Driver type) Budgeted level or volume of cost driver MOH driver rate (dollars) Consumption of cost driver Door latches Hours Door hinges Cost Hours Cost Service depts.: Machine setup Plant admin. $156,000 Setup hrs (Batch) 1,560 4.8 $ 2.4 $ $ DLH in both prod. 270,000 depts. (Unit) $ 0.30 $ 0.20 $ Production depts.: Fabrication 150,000 Machine hrs (Unit) 15,000 $ 0.10 $ 0.05 $ Assembly 120,000 DLH (Unit) 30,000 $ 0.20 $ 0.10 $ Total $696,000 MOH costs: Total batch-related (above) $ $ Batch-related costs per unit $ $ Total unit-related costs (above) $ $ Total MOH cost per unit $ $ Selling price (SP) $ $ Direct material (DM) $ $ Direct labor (DL) $ $ MOH (from above) $ $ Total $ $ $ $ % % Divide: Budgeted batch size (units) Product costs: Gross profit (GP) Gross margin (GM) Note A: MOH costs include: Machine setup: Indirect labor of setup employees and supervision Plant administration: Indirect labor of plant manager; human resources and accounting employees; office equipment and supplies, telecommunications, and contract payroll services Fabrication: Primarily, costs of machinery and equipment (depreciation, rent, refurbishments, property taxes, and insurance) Assembly: Primarily, indirect supervisory labor of Assembly department production employees b. (Limit the length of your response to 100 words) Replace this text with your response. 5 Topics 3 and 4 (55 points) A. (27 points) Demonstrate your ability to explain the objective of financial reporting and to apply the definitions of financial statement elements to identify events and transactions that businesses recognize in their accounting information systems. Limit the length of your response to a maximum of 150 words. Spell-check and grammar-and-style-check your completed response using MS Word's tool for this purpose, being sure to correct any matters identified by these checking tools. Situation In 2014, Universal Company experienced the total loss of one of its assembly plants in the Midwest to a fire. The carrying amount (net book value) of the plant in the company's balance sheet at the date of the fire was $12 million (original cost of $32 million, less accumulated depreciation of $20 million). The company filed immediately a claim for recovery from the loss under its insurance policy. The policy provided an annual coverage limit of $28 million, and a per-occurrence deductible of $4 million. The insurance claim remained unsettled on the date Universal issued its 2014 financial statements, First, state whether the company should recognize in its 2014 financial statements a loss related to the fire, a recovery (gain) related to the insurance policy, or both. If so, indicate the amounts of such loss and/or recovery (gain). Then, provide your reasoning, by referring to the relevant: Definitions of financial statement elements, Basic principles of financial reporting, and the Desired qualitative characteristics of accounting information Each as discussed in the background paper, Financial Statement Concepts and Financial Reporting. Student's response Please provide your word count here Your response here (please do not modify the formatting, fonts, colors, and so forth in this document template) 6 Topics 3 and 4 (Continued) B. (28 points) Demonstrate your ability to identify the basic assumptions, principles, and desired qualitative characteristics of financial reporting and accounting information. Listed below are the accounting assumptions, principles, and qualitative characteristics contained in the FASB's Conceptual Framework for financial reporting. A Periodicity assumption E Full disclosure principle I Representational faithfulness B Monetary unit assumption F Revenue recognition principle J Comparability (incl. Consistency) C Going concern assumption G Historical cost principle K Relevance D Economic entity assumption H Matching principle L Materiality M Conservatism Provide the letter corresponding to the SINGLE, PRIMARY assumption, principle, or qualitative characteristic that corresponds with each of the following statements. 1. A company records in its financial statements (FS) the estimated costs of expected product warranty claims by customers at the same time it records the related sale. 2. A company presents its consolidated FS, even though its legal structure includes a non-operating parent (holding) company and legally separate subsidiary companies in 27 U.S. states and foreign countries. 3. A company relies on quoted market prices to determine the fair value of investments securities reported in its balance sheet, rather than employing valuation consultants for this purpose. 4. A company's FS describe its refinancing of maturing debt securities, which managers completed after the date of the balance sheet but before they issued the FS. 5. A company's FS provide a schedule of its lease and loan payment obligations for each of the five years following the balance sheet date. 6. A company's revenues derive from contracts with customers for the construction of municipal infrastructure requiring (on average) 3 years to complete, though it issues FS quarterly and annually. 7. A company records the receipt of cash in exchange for merchandise delivered to a customer as a deposit liability because the customer has the right to return the goods any time. 8. A company presents its recognized assets and liabilities in the balance sheet primarily at their historical costs, rather than their expected liquidation values. 9. A company's FS do not disclose a pending patent infringement lawsuit against the company because managers, in consultation with counsel, concluded the suit is frivolous and without merit. 10. A company recognizes a loss as a result performing a lower-of-cost-or-market analysis of existing inventory, but does not recognize appreciation in the market value of inventory as a result such analyses. 11. The amount of total assets reported in a company's balance sheet includes the depreciated cost of production facilities placed in service 17 years ago and goods manufactured within the past 6 months. 12. A company changes from the accelerated depreciation method to the straight-line depreciation method after reviewing FS of competitors, which disclose their use of the later method. 13. A company's accounting policies and FS presentation practices facilitate securities analysts' use of the FS in preparing fundamental analyses (intrinsic valuations) of the company's stock. 14. A company recognizes equipment in its FS at its acquisition cost, net of accumulated depreciation, even though this amount is less than the amount it could receive in a current sale of the equipment. 7