I need to know how to solve and the answer of # 7 please help me

ACC-330 Spring 2015 Case Assignment - in Two Parts Part I is worth 5% and Part II is worth 10% towards your final grade (a total of 15%). Points will be awarded for content of your spreadsheet, quality and content of written work, and quality and presentation of the excel model. See Canvas for the grading template that will be used to grade the case. Submit one electronic copy of your spreadsheet and Word document per group via Canvas. Submission dates: Part 1 Friday, March 6 Part 2 Friday, April 17 Case information Beginning of the year: January 1, 2015 GSO Furniture, Inc. recently hired your team to head up its chair division. GSO Furniture's chair division produces two products, a plain pine chair and a customized cherry wood chair that has a finish and carvings chosen by the customer. Customized chairs are a recent innovation for the company and executives are encouraged by the projected sales growth for these chairs. Although the chair division was once the biggest contributor to GSO's success, recently performance has been challenged. It is your job to return the division to its former glory. In response to demands for more relevant costing information your predecessor introduced an ABC system. Two key production activities, 1) manufacturing operations and 2) machine setups, were identified. Production costs related to these activities are now assigned to the two lines of chairs based on the cost drivers of 1) machine-hours and 2) 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 custom chairs take longer to setup and allocating setup costs based on setup labor-hours better represents resources consumed by the two chair lines. The chair 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. Cost leadership had been the focus of GSO's strategy in recent years. This approach had been called into question with the rise of the custom chair, which commanded and achieved a premium price. Customers appeared to pay limited attention to price increases for the custom chair. However, it was a different matter with established customers for the plain chair. These customers were grumbling about GSO prices and threatening to defect to the competition, especially those producers who concentrated solely on the plain chair market. An added challenge for GSO was the internal disputes amongst production and marketing managers. Disputes circled around slow response to marketing demands for expedited complex rush orders on the one hand and disruptive, short production runs causing inefficiencies in manufacturing on the other. These disputes were diverting attention away from the traditional plain chair market. After carefully arranging your corner office, you ask your assistant for the division's budget for 2015. To your dismay you are told that the division's records are in disarray, and the budget can't be located. Since you are short on time, you decide to use the information from the last year's (2014) records to conduct an initial examination of the division. These records include some budget estimates assembled before the start of 2014, and actual information for the year 2014. 1 A. Budget information assembled at the start of 2014 Budgeted production Number of chairs per batch Setup labor-hours per batch Budgeted machine hours Budgeted direct manufacturing labor Budgeted feet of lumber per chair Plain chair 60,000 50 3 hours 60,000 hrs 120,000 hrs 20 ft Customized chair 12,000 10 5 hours 36,000 hrs 60,000 hrs 25 ft Budgeted Manufacturing Operations Overhead Costs Variable costs Supplies $40,000 Indirect manuf. Labor 85,000 Power 35,000 Maintenance 65,000 $225,000 Fixed costs Depreciation 85,000 Supervision 125,000 Power 90,000 Maintenance 80,000 $380,000 Budgeted Setup Overhead Costs Variable costs Supplies Indirect manuf. Labor Power Inspection costs Fixed costs Depreciation Supervision Power Engineering costs $65,000 35,000 45,000 60,000 $205,000 65,000 120,000 80,000 140,000 $405,000 B. Actual information for 2014 that can be traced directly to each product: Plain Chair Direct materials used cost Feet of lumber per chair Lumber in inventory (12/31/14) Direct labor cost Direct labor hours Direct labor hours per chair Machine hours used in total Setup labor hours Number of batches Chairs per batch Total sales commissions Units produced Units sold Chairs in inventory (01/01/14) Sales revenue $720,000 20 Feet 60,000 Feet $1,800,000 120,000 hours 2 hour 54,000 hours 3,600 setup lab hrs 1,200 50 $220,000 60,000 55,000 6,000@$48.50 each $3,575,000 Customized Chair $480,000 25 Feet 28,000 Feet $1,296,000 64,800 5.4 hours 37,200 hours 7,200 setup lab hrs 1,500 8 $96,000 12,000 12,000 0 $2,520,000 2 C. Additionally, the Chair division had the following actual costs in 2014 that were not directly traced to either product: Actual Manufacturing Overhead Costs - 2014 Month Machine-Hours Cost Jan 6,543 $ 48,994 Feb 6,205 $ 48,412 Mar 7,654 $ 54,900 Apr 6,545 $ 54,543 May 9,405 $ 55,900 Jun 7,554 $ 61,477 Jul 7,213 $ 57,221 Aug 6,588 $ 43,611 Sep 8,512 $ 53,778 Oct 7,443 $ 58,033 Nov 8,557 $ 51,321 Dec 7,889 $ 48,453 Total 90,108 $ 636,643 Actual Annual Period Costs - 2014 Advertising expense Sales department salaries Selling and administration depreciation Setup-Hours 1,248 1,147 1,096 873 723 652 648 738 943 980 1,064 1,135 11,247 Cost $ $ $ $ $ $ $ $ $ $ $ $ $ 61,923 57,087 58,423 54,265 52,158 50,982 49,113 54,789 56,864 59,023 57,321 56,453 668,401 180,000 200,000 80,000 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 2015 budget is as follows: o The budgeted input quantities for materials, labor and MOH (machine hours and setup labor hours) used in 2014 will also be used in the 2015 budget, except for budgeted DLHr/unit for the custom chair which is revised up to 5.4DLHrs/chair. o The cost of Pine and Cherry wood are expected to increase by 10% in 2015 over 2014 actual costs. o Budgeted labor rates in 2015 are expected to be the same as actual rates in 2014. o Calculate 2015 budgeted variable moh rates and total fixed moh from 2014 actual cost and activity data. Use the High-Low method to determine estimates for variable and fixed costs. Convert monthly estimates of fixed costs into annual costs. o Assume non-cash MOH item amounts remain unchanged from budgeted 2014 data. o Production and sales forecasts are within the relevant range. o Budgeted variable period costs per unit and fixed costs in total for 2015 are assumed to be the same as actual period costs in 2014. o A 2% increase in selling price for 2015 is expected for both the Plain model and the Customized model. 3 Normal costing is used. There are two cost drivers for manufacturing overhead costs - machine-hours and machine setup laborhours. Machine-hours is the cost driver for the variable portion of manufacturing operations overhead. Machine-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 laborhours is also used to allocate the fixed portion of machine setup overhead. Projected sales for the plain chair are 62,500 in 2015, 58,000 in 2016, and 60,000 in 2017. Projected sales for the customized chair are 12,500 in 2015, 14,000 in 2016, and 15,000 in 2017. Sales commission is paid as a rate per chair sold. 2015 input cost and quantity standards for direct material, direct manufacturing labor and manufacturing overhead are the same as 2015 budgeted input costs and quantities. You require an ending inventory of plain chairs of 20% of next year's total sales needs. Customized chairs 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). Your beginning 2015 cash balance is $220,000. The company requires a minimum cash balance of $100,000. Assume a FIFO cost flow Assume no WIP inventory. Requirements Requirements for the two parts of the case are listed below. Better answers will clearly present workings for calculations and provide well written answers for discussion questions. 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. Relate discussion question answers to the case and where appropriate reference articles, textbooks, or your own experience. Present your own work, in your own words, and adequately reference your sources. Requirements for Part 1 - due Friday, March 6 Actual and Normal Costing, CVP analysis, and Activity-Based Costing 1. 2. 3. 4. 5. 6. 7. What were the 2014 budgeted indirect cost rates for the manufacturing operations activity and the machine setup activity? Was overhead over- or under-applied for the year? By how much? Use @IF statements to indicate under-/over-applied MOH. What was the unit product cost for the plain and customized Chairs under normal costing in 2014? What was the Chair Division's operating income for 2014? Use normal costing and adjust for misapplied MOH. Use the 2014 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 2015 budget. Use the High-Low method to separate variable and fixed costs. For this exercise use @VLOOKUP, @MAX, and @MIN excel functions. 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 $250,000. Use 2015 budgeted information - refer to section D bullet point 2 and your results from requirement 5. Discuss the activity-based costing (ABC) system designed and implemented by your predecessor. I. Evaluate the recently implemented ABC system at GSO Inc. in comparison to the old system, which allocated all MOH on the basis of direct manufacturing labor (calculate and compare product costs under both systems). II. Make recommendations to improve the system. If appropriate, provide examples of additional activities and cost drivers GSO could use. Justify your choices. III. Discuss activity-based management (ABM) and describe how it can be applied at GSO. 4 Requirements for Part 2 - due Friday, April 17 Budgeting, Variance Analysis, and Standard Costing/Variance Analysis. 8. Compute the sales budget, the production budget, the direct material usage and purchases budget, the direct labor budget, the manufacturing overhead budget, the ending inventories budget, the cost of goods sold budget, the selling and administration budget, the budgeted income statement, and the cash budget for 2015. Skip to the end of 2015. At the end of 2015 the following actual quantities and costs were recorded: A total of 59,000 plain chairs and 13,500 customized chairs were produced and sold in 2015 at average selling prices of $65.00 and $212.00, respectively. A total of 1,675,000 feet of Pine wood was purchased for the plain chairs at a cost of $1,088,750. A total of 400,000 feet of Cherry wood was purchased for the customized chairs at a cost of $720,000. 1,150,500 feet of lumber were used to produce the plain chairs, and 351,000 feet of lumber were used to create the customized chairs. 116,525 direct labor hours were traced to the plain chairs, and 74,250 direct labor hours were traced to the customized chairs. A total of $3,206,318.75 in wages was paid to the manufacturing workers (traced to plain $1,777,006.25 and customized $1,429,312.50 workers). Actual machine hours were 56,050 and 43,200 for the plain and customized chairs, respectively. Further, for manufacturing operations overhead actual fixed costs were $395,000, and actual variable costs were $237,680. For machine setup overhead costs, actual fixed costs were $415,000, and actual variable costs were $248,411. Plain chairs were produced in batches of 50 chairs and used 2.8 hours per batch. Customized chairs were produced in batches of 9 and used 5.5 hours per batch. 9. a. Calculate the direct material price variance, the direct material efficiency variance, the direct labor price variance, and the direct labor efficiency variance for each of the product lines separately. Also, for each overhead activity calculate the FMOH (spending and production volume) variances for the Chair division and the VMOH (spending and efficiency) variances for the two products. Which of the variances that you calculated should you investigate - and why? Provide possible reasons for the variances. b. 10. GSO's newly appointed CEO recently attended an IMA seminar and got concerned about the use of standard costing and variance analysis at GSO. She tells you that at the seminar the consultant stated that standard costing and variance analysis were outdated and irrelevant in advanced manufacturing environments, such as being developed at GSO. The CEO wants you to evaluate GSO's use of standard costing and variance analysis and to make recommendations about their continued use. In your report (about three pages) to the CEO address the following issues Define a standard costing system and describe how standards are set Discuss the main uses of standard costing and variance analysis Describe the advantages and criticisms/limitations of standard costing and variance analysis Use the variances calculated in requirement 8 above to illustrate your answers. 5