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ACCT 361- CCMA 511 MANAGEMENT ACCOUNTING FALL 2017 ASSIGNMENT 1 DUE THURSDAY OCTOBER 5 1. Franco Wood Working is an owner-operated business started in 1964, shortly after Franco Marzec arrived in Canada. The company started with just Franco producing railings and posts for stairways in residential buildings. The company has grown to three employees: Franco, his brother Joe, and one other person. The business has expanded beyond its original business and now also installs the materials in customer homes. Franco is able to generate all of his business through referrals; sales are all within the Greater Toronto Area. The company's sales volume averages $1 million each year, and profits vary between 5% and 20% of sales. Recently, many more producers have been opening similar businesses in the Toronto area. As a result of this increased competition, Franco is focusing on the company's customer bidding process; when a bid is lost, he reviews the bids with his potential customer to analyze the differences compared to his competitor. His goal is to improve successful outcomes of future bids. Franco is not confident with his company's accounting system and he believes it is leading to inaccurate bids. Currently, all expenses are simply deducted from revenues to arrive at operating income. No effort is made to distinguish among the costs related to manufacturing materials, managing customers, and administrative activities at the company. With the goal of improving the current situation, Franco reviewed the income statement for the previous year in great detail (see below). In his analysis, he noted that jobs were priced on the basis of machine hours, with an average price of $850 per machine hour. However, when it came to classifying and assigning costs, he decided that he needed some help. In particular, he is unsure of how to classify his own $90,000 salary. About one third of his time was spent on generating bids for potential contracts, one third was spent in general administrative matters, and the final third was spent supervising production staff. Franco Wood Working Income Statement For the Year Ended December 31, 2014 Sales (1,176 machine hours @ $850/hour) Less expenses: Utilities Machine operators Rent, finished product warehouse Accounting fees Office salaries Other direct labour Wood raw materials Supervisory salaries Depreciation, woodworking tools Delivery costs Showroom operation Total expenses Income before income taxes $999,600 $65,000 60,000 24,000 3,000 24,000 65,700 501,340 90,000 18,600 16,300 3,200 871,140 $128,460 Required: a. Classify the costs in the income statement into the following categories: (1) Production Costs, (2) Selling Costs, or (3) Administrative Costs. For production costs, identify them as either Direct Materials (DM), Direct Labour (DL), or Overhead (OH). Work in Process is not significant (most jobs are started and completed within a week). (6) b. Assume that a significant driver is machine hours. Identify the expenses that would likely be traced to jobs using this driver. Explain why you feel these costs are traceable using machine hours. What is the cost per machine hour for these traceable costs? (4) 2. It has been three years since Jan Dodge purchased land and a building and began her company, Neu Fruit Bars Ltd., in Neustadt, Ontario. The company produces only one product: a chocolate bar made with locally grown fruits such as raspberries, strawberries, currents, elderberries, and other seasonal harvests. The production plant is capable of producing 10,000 chocolate bars a month, if run at full capacity. Jan has been able to convince almost all of the small retailers in Grey County to sell the chocolate bars in their variety stores, resulting in sales of almost 7,000 bars a month. She has also been making an effort to expand into nearby Huron County. Earlier this month, September, Jan was very excited to receive an order from a retailer who wanted to place a one-time order for 3,000 bars in October for a two-week festival during that month. The retailer hoped to feature the chocolate bar at a booth they were planning to operate at the festival. This is a huge order for Neu Fruit Bars Ltd. However, Jan was not convinced that it would benefit the business, given that the price offered by the customer was considerably lower than the normal selling price. Jan was very concerned about making the correct decision about this special order and decided to ask Jill, her cost accountant, for an opinion on whether this order should be accepted at a price of $0.75 per bar compared to the usual $1.10 per bar for all other customers. Jill was excited to be consulted for input on this important decision and wanted to demonstrate the power of management accounting concepts to Jan. Jill looked at the cost data and prepared the following report. Variable costs: Cocoa Milk Sugar Berries Total variable costs Annual fixed costs: Production salary Property taxes production building Depreciation production equipment Insurance (production assets) Total fixed costs $ 0.35 0.08 0.05 0.14 $ 0.62 $ 14,400 2,400 12,000 4,800 $ 33,600 Jill presented the above information to Jan, explaining that the cost behaviour of the various cost inputs must be considered. That is, variable costs increase with each bar sold. Therefore, for each of the 3,000 bars produced as part of the special order the company must buy cocoa, milk, sugar, and berries. On the other hand, Jill insisted that the special order would not cause fixed costs to change. Specifically, the salaries of the production staff (the bars can be produced with the hours of a normal production shift), property taxes, depreciation, and insurance would be unchanged regardless of whether the order is accepted. Jan thanked Jill for the information and explanations, but felt even more confused about whether this order was a good deal for the company. Required: a) Do you agree with the explanations provided by Jill? What advice would you provide Jan about the special order? (11) b) Are there other nonfinancial considerations that Jan should weigh in her decision? (4) 3. Rusty Redlow has always independently managed his personal investment portfolio. After a 25year career as a chemical engineer with a large chemical company, Rusty retired and on January 1, 2014, opened an investment advisory business incorporated as R&R Financial Planning LLC. Rusty was eager to share his knowledge and investing experience with people in similar positions to himself; that is, those who have recently retired. Also, Rusty has discovered there is an unmet need for financial-planning advice for people living in rural areas. Through his parents, Rusty has learned that there are many seniors who cannot, or prefer not to, drive to larger cities for financial-planning help. Therefore, unlike other financial-planning firms, Rusty drives to his sometimes-remote rural clients who can be many kilometres from his home. The first year of operations of Rusty's company was very successful, and he quickly built his client list to 35 (which is the maximum he plans to serve). However, despite this success, his firm lost several thousand dollars last year. Prior to offering his services, Rusty had investigated client fee structures of several other firms. He discovered that some firms charge clients based on a percent of the amount of client investment dollars under management, some combine a fixed annual fee with a smaller percent of client investment amounts, and others charge an hourly fee. Rusty decided to charge clients a fixed fee for the first year. Because of an operating loss in 2014, however, Rusty is looking for help to analyze his financial results and is seeking advice on how much to charge clients in 2015. In his first year of operations, he found some clients require very little time while others call frequently and demand visits and monthly hard copies of statements. (Many older clients do not have Internet or email access and prefer face-to-face meetings.) Therefore, Rusty is considering a fee structure not currently being used in the industry; specifically, he would like to charge an annual fixed fee combined with a variable portion based on time spent on each client account (information he has carefully tracked during the first year). He believes this would better reflect the cost to service the various clients. Because most clients are in rural areas, on average, more than 90% of Randy's time is spent driving to and from the client. The firm employs an assistant to help with administrative responsibilities, and this person works 20 hours per week out of Rusty's home office. Rusty also contracted with another local person to help once a month with the preparation and mailing of a monthly investment news and portfolio update. The following sets out the operating results of R&R Financial Planning for 2014. Cost categories: Jan Financial planner salary (Rusty Redlow) Assistant salary (extra quarter-end help) Internet subscription Bloomberg monthly data feed Depreciation (office equipment) Depreciation (car) Car - road side assist., Mtce and Gas Supplies Insurance Portfolio information and mailing Utilities Total Hours with clients (includes driving time) Feb Mar Apr May Jun Jul Aug Sep Oct Nov $4,50 0 $4,50 0 $4,50 0 $4,50 0 $4,50 0 $4,50 0 $4,50 0 $4,50 0 $4,50 0 $4,50 0 $4,50 0 $4,50 0 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 950 135 220 80 380 308 644 102 36 145 190 505 102 29 120 185 500 102 14 110 210 551 102 22 125 170 514 102 18 112 55 440 102 8 92 59 475 102 13 104 120 500 102 12 111 155 500 102 14 119 214 540 102 29 131 168 500 102 12 110 168 480 102 15 116 $7,50 0 $7,21 1 $7,17 6 $7,27 5 $7,18 1 $6,96 2 $7,01 8 $7,11 0 $7,15 5 $7,28 1 $7,15 7 $7,14 6 254 148 142 149 109 19 21 55 85 151 105 110 Required: a. Determine the independent variable and use the 2014 data above to determine which costs are variable (V), mixed (M), or fixed (F). (3) b. Use the high-low method to separate fixed costs per month and the variable costs. (6) c. Recommend a fee structure for Rusty, assuming his goal is to break even (including Rusty's annual salary). The fee should include a fixed cost per client based on the stated maximum of 35 clients and a variable portion. (3) d. If Rusty were to record odometer readings when visiting clients, could this data be used to improve the variable charge rate? Would this change the classification of any of the cost categories? (3) 4. Snowmobile Inc. manufactures two colours of snowmobiles: White and Black. Marketing believes that it can sell between 12,000 and 18,000 of either product during the upcoming year. Due to the overall economic slowdown, the company is preparing to produce only one model for next year. The following information has been provided by the accounting department: Selling price Variable costs White $2,250 1,350 Black $2,550 1,350 For next year, fixed costs will total $9,450,000 if White is produced and $11,640,000 if Black is produced. Plant capacity allows up to 107,800 direct manufacturing hours. White takes 9.8 hours to produce and Black requires 11 hours. The company is subject to a 30 percent income tax rate. Required: Dec Which model should Snowmobile Inc. produce, assuming the marketing manager believes annual demand of either model will exceed production capacity? Why