I need help with Task 2 and Exhibit 2. In Exhibit 2, I can't seem to get Direct Labor right either. Please help?
SOFTY PILLOWS Task 1: Classification of Costs and Cost Behavior A general ledger is a summary of what is spent for each type of expense. The budget general ledger is prepared by the accountant at the beginning of the year. The budget general ledger is the amount the company expects to spend for each category of expense for the year. 1 2. Exhibit 1 separates product and period costs. Manufacturing costs are product costs. Warehouse, selling and marketing and administrative are period costs. On Exhibit 1, classify all product costs according to the type of product cost. Make an X if the cost is direct material or direct labor in the corresponding column. For manufacturing overhead costs, put the amount in the correct variable or fixed column. A. B. C. D. E. F. G. 3. Utilities in the manufacturing area are related mostly to the use of the machines. Janitor service is paid for monthly at a set amount per month. The company trains all manufacturing employees 4 hours each month, regardless of the number of employees or the number of pillows produced. Computer costs for the manufacturing area do not change as units are produced. The cost represents the cost of the software and desktops running the inventory system. The company pays $200 per month per employee for health insurance coverage for employees. There are 3 manufacturing salary employees, which is considered fixed, and 25 direct labor employees budgeted, which is considered variable. On Exhibit 1, classify all period costs as variable or fixed. Put the amount in the appropriate column. Some costs may be mixed; however, the amount is not material enough to separate fixed and variable (with the exception of legal and professional, see below) and you must select the one that correlates most to how the cost behaves. Additional information related to all costs follows: A. B. C. D. Warehouse personnel work the same hours every week and utilities in the warehouse are incurred consistently from 6 a.m. to 7 p.m. regardless of how many pillows are produced or sold. The company expects it to cost $0.25 to ship each pillow. The plan for direct advertising is set at the beginning of the year and will not vary with sales. Each sales manager is paid $500 per month for home office reimbursement. Each sales manager has a travel budget of $2,000 per month and this does not vary as sales in units change. They are expected to visit sales representatives, current customers and new customers regardless of how many products are sold. E. Bad debt expense has not varied with total sales dollars in the past. It is an estimated amount given a certain number of customers will not pay. F. Office supplies and postage is for the invoices sent to customers. Each customer gets one invoice per month. The total number of customers has not varied significantly in the past few years. The company pays $200 per month per employee for health insurance coverage for administrative employees and sales managers. There are 8 administrative employees. G. H. I. J. 4. Depreciation: The company uses the straight line method for all depreciation expense. Machine maintenance is incurred when the machine breaks down from use. The more hours the machines run, the higher the maintenance cost. Accounting fees are paid to the bank for check clearing and other services and an outside company is paid to process payroll checks. The cost does not vary with the number of pillows sold. Consultants are paid for assistance in growing the business. This does not vary with sales. Executives are expected to entertain business associates and this amount does not vary with sales. Telephone/cell phones are for office phones and administrative employee cell phones under a set monthly plan with the service provider. Utilities at the administrative office are incurred from 6 am to 8 p.m. regardless of the volume of sales. General business insurance is paid for once a year for a full year's coverage. Administrative legal and professional fees is a mixed cost that includes a set monthly retainer fee plus an additional amount for each hour of service. In the past, hours of service varies directly with sales in units. The following information is available for each month. Compute the estimated fixed and variable portion of the cost of legal and professional fees for the year and budget the total fixed and total variable amount for legal and professional fees. Month January February March April May June 1 Average Number of Hours = 2 Variable cost per hour = High Dollars - Low Dollars High Hours - Low Hours 3 Total Cost - Variable Cost = Fixed Cost per Month Legal and Hours of Service Professional Fees $1,400 $2,800 $3,000 $2,400 $2,600 $3,400 6 13 14 11 12 16 72 12 = High $3,400 3,200 $200 $2,000 10 = Low $1,400 1,200 (Variable cost per hour * # hours) $200 4 Monthly Cost Formula = Fixed Cost + Estimated Variable Cost = Total Annual Cost $200 (VC per Hour * Average Hours) $200 2,400 $2,600 Total for Year (Monthly X 12 months) $2,400 Enter on Exhibit 1. 28,800 Enter on Exhibit 1. $31,200 SOFTY PILLOWS Exhibit 1: Budget General Ledger Sales: 4-1000 Sales - Pillows Manufacturing Costs: 5-1000 Cotton Cloth - Purchases 5-1020 Poly Fiber Fill - Purchases 5-1040 Plastic Bag - Purchases May-00 Indirect Materials (Thread & Supplies) May-00 Wages - Cutting Machine Operator May-10 Wages - Assembly Machine Operator May-20 Wages - Packing May-00 Depreciation - Manufacturing Equipment May-10 Machine Maintenance May-00 Utilities - Manufacturing May-50 Janitor Service - Manufacturing May-00 Plant Manager May-20 Production Supervisors May-60 Payroll Taxes - Manufacturing Salaries May-65 Payroll Taxes - Manufacturing Wages May-80 Health Insurance Manufacturing Employees May-00 Rent - Manufacturing May-20 Manufacturing Bldg. Property Tax & Insurance May-00 Training - Manufacturing Employees May-50 Computer Costs - Manufacturing Total Manufacturing Overhead Costs Budgeted Amount Sales Price per Total Budgeted in Units (Pillows) Unit (Pillow) Amount in Dollars 605,000 * Direct Materials (DM) Enter X if DM 878,850 992,000 68,200 22,300 310,434 465,000 111,600 42,000 18,000 68,500 26,000 90,000 102,000 16,320 75,398 67,200 48,000 6,800 12,000 20,000 592,218 Warehouse Expenses: 8-1000 Salaries - Purchasing, Receiving, Inventory 8-1050 Warehouse Payroll Tax & Health Insurance Aug-00 Depreciation - Equipment/Racks Aug-00 Rent - Warehouse Aug-50 Utilities - Warehouse Total Warehouse Expenses 141,000 21,585 18,000 20,000 12,000 Selling and Marketing Expenses: 6-1000 Shipping Jun-00 Direct Advertising Jun-10 Sales Manager Salaries Jun-20 Sales People Commissions (% of sales) Jun-30 Sales Manager Payroll Taxes Jun-40 Sales People Payroll Taxes Jun-00 Home Office Reimbursement Jun-00 Bad Debt Expense Jun-00 Sales Managers Travel Allowance Jun-00 Sales Managers Health Insurance Total Selling and Marketing Expenses 151,250 36,000 625,000 108,779 53,125 9,246 30,000 36,000 120,000 12,000 Administrative Expenses: 7-1010 Office Supplies/Postage 7-1020 Consulting 7-1030 Accounting Fees - Bank & Payroll 7-1040 Legal and Professional 7-1050 Meals & Entertainment 7-1070 Telephone/Cell Phones Jul-00 Executive Management Salaries Jul-10 Accounting Salaries Jul-20 Information System Salaries Jul-00 Human Resource Salaries Jul-20 Payroll Taxes - Administrative Jul-30 Health Insurance - Administrative Jul-40 Utilities - Administrative Office Jul-50 Rent - Administrative Office Jul-60 General Business Insurance Total Administrative Expenses 6,000 15,000 4,800 31,200 18,000 6,000 200,000 159,500 85,000 50,000 42,033 19,200 12,000 15,000 8,400 $8.99 Direct Labor (DL) Enter X if DL $5,438,950 = Variable MOH Enter amount Fixed MOH Enter amount X X X $22,300 X X X $42,000 18,000 68,500 26,000 90,000 102,000 16,320 75,398 60,000 $244,198 7,200 48,000 6,800 12,000 20,000 $370,320 0 $141,000 21,585 18,000 20,000 12,000 212,585 Check figures: MOH Variable = $244,198 and Fixed MOH = $370,320 Total MOH Costs = $614,518 Check figures: MOH Variable = $0 and MOH Fixed = $212,585 Total Warehouse Expenses = $212,585 $151,250 $36,000 625,000 108,779 53,125 9,246 $269,275 30,000 36,000 120,000 12,000 $912,125 Check figures: MOH Variable = $269,275 and MOH Fixed = $912,125 Total Selling and Marketing Expenses = $1,181,400 $28,800 $6,000 15,000 4,800 2,400 18,000 6,000 200,000 159,500 85,000 50,000 42,033 19,200 12,000 15,000 8,400 $643,333 Total Period Costs $298,075 $1,768,043 MOH Variable = $298,075 and MOH Fixed = $1,768,043 Total Period Costs = $2,066,118 Total Indirect Costs: Variable and Fixed (excluding direct material and direct labor) $542,273 $2,138,363 MOH Variable = $542,273 and MOH Fixed = $2,138,363 Total Indirect Costs (Variable and Fixed) = $2,680,636 Compute using high-low method in Task 1 #4. $28,800 Check figures: MOH Variable = $28,800 and MOH Fixed = $643,333 Total Administration Expenses = $672,133 SOFTY PILLOWS Task 2: Determine the Cost to Make One Product To determine the cost to make one product, to complete the Budget Cost Sheet, and to compute the gross profit and gross profit percentage, follow the six (6) steps below. 1. 2. 3. Using the "Case Info for Tasks 1-6," first go to Exhibit 2 (Budget Cost Sheet) and complete the Direct Material and the Direct Labor parts of the cost sheet. Then come back here to Task 2 and complete #2 and #3 below. Determine the total "activity" used to allocate manufacturing overhead. The company has determined that machine hours used is what causes manufacturing overhead to be incurred. Pillows estimated to be manufactured for the year x Machine Hours for 1 Pillow (Cut + Assembly--not Packing) Total Estimated Activity (total machine hours for the year) x 620,000 (from Case Info 3rd paragraph from bottom) (from Exhibit 2 - Total Machine Hours under Direct Labor) Answer #4 4. Determine the variable and fixed predetermined manufacturing overhead rate per machine hour. Predetermined MOH rate = Total Estimated Manufacturing Overhead Dollars Total Estimated Machine Hours (activity) Variable rate per machine hour = Total estimated Variable MOH Dollars Divided by Total Estimated Machine Hours Variable MOH rate per machine hour (from Exhibit 1 - Total Manufacturing Overhead Costs from Variable column) (from previous Total Estimated Activity calculation in #2 above) Enter on Exhibit 2 for Variable MOH Rate per Machine Hour / Answer #5 Fixed rate per machine hour = Total estimated Fixed MOH Dollars Divided by Total Estimated Machine Hours Fixed MOH rate per machine hour (from Exhibit 1 - Total Manufacturing Overhead Costs from Fixed column) (from previous Total Estimated Activity calculation in #2 above) Enter on Exhibit 2 for Fixed MOH Rate per Machine Hour / Answer #6 5. Using the information in #3, go back to Exhibit 2 and complete the Manufacturing Overhead Costs part of the cost sheet. While there, determine the cost to make/manufacture 1 pillow. Then come back here to Task 2 and complete #5 below. 6. What is the expected gross profit for each pillow at the current estimated amount of units manufactured this year? 1 Pillow Sales Price - Total Product Cost = Gross Profit per Pillow (from Case Info 1st paragraph) (from Exhibit 2) Answer #10 Gross Profit Percentage (%) (Carry to 1 decimal.) Answer #11 Note: Gross Profit Percentage (%) = Gross Profit per Pillow/Sales Price per Pillow. SOFTY PILLOWS Note: Follow the steps in Task 2 to complete this Budget Cost Sheet (Exhibit 2). Exhibit 2: Budget Cost Sheet Direct Materials: Cotton Fabric Poly Fiber Fill Plastic Bag Total Direct Materials Quantity 0.75 * 20 * 1 * Cost for 1 1.89 = 0.08 = 0.11 = Total Cost 1.417500 1.600000 0.110000 (from Case Info page 1 for Tasks 1-6) (from Case Info page 1 for Tasks 1-6) (from Case Info page 1 for Tasks 1-6) $3.1275 Answer #1 Direct Labor: Cutting Machine Operator Assembly Machine Operators (2 operators) Packing Total Direct Labor Hours (includes all 3) Total Machine Hours (does not include Packing) Hours Required to Make 1 Pillow 0.03 0.025 0.02 0.08 0.055 Cost per Hour * * * Total Cost = = = (from Case Info page 1 for Tasks 1-6) (from Case Info page 1 for Tasks 1-6) (from Case Info page 1 for Tasks 1-6) Answer #3 Answer #2 Manufacturing Overhead Costs: Variable Fixed Total Manufacturing Overhead Costs Rate per Machine Hour (from Task 2) Total Machine Hours per Unit * * Total Cost = = Answer #7 Answer #8 Total Cost to Manufacture 1 Pillow Answer #9 (Rate from Task 2 and Total Machine Hours from Direct Labor calculation above) (Rate from Task 2 and Total Machine Hours from Direct Labor calculation above)
