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Mathematical Questions 7. Hi-Tek Manufacturing Inc. makes two types of industrial component partsthe B300 and the T500. An absorption costing income statement for the most recent period is shown below: Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss..... $2,100,000 1,600,000 500,000 550,000 $ (50,000) Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 units of T500 at a price of $40 per unit. The company's traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Addi- tional information relating to the company's two product lines is shown below: B300 T500 Total $436,300 $200,000 $251,700 $104,000 Direct materials Direct labor Manufacturing overhead Cost of goods sold $ 688,000 304,000 608,000 $1,600,000 The company has created an activity-based costing system to evaluate the profitability of its prod- ucts. Hi-Tek's ABC implementation team concluded that $50,000 and $100,000 of the company's advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company's manufacturing overhead to four activities as shown below: Activity Manufacturing Overhead B300 T500 Total Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours). Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost $213,500 157,500 120,000 117,000 $608,000 90,000 75 1 NA 62,500 300 1 NA 152,500 375 2 NA Required: 1. Using Exhibit 713 as a guide, compute the product margins for the B300 and T500 under the company's traditional costing system. 2. Using Exhibit 7-11 as a guide, compute the product margins for B300 and T500 under the activity-based costing system. 3. Using Exhibit 7-14 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assign- ments differ. 8. A Bangladeshi Company produces only two products: a major computer part and cell phones. The company uses a normal cost system and overhead costs are currently allocated using a plant-wide overhead rate based on direct labor hours. Outside cost consultants have recommended, however, that the company use activity-based costing to charge overhead to products. The company expects to produce 4,000 computer parts and 2,000 cell phones in 2020. Each computer part requires two direct labor hours to produce and each cell phone requires one-half hour to produce. The direct material and direct labor costs included in the two products are as follows: Item Direct Material (per unit) in Tk. Direct labour cost per unit in Tk. Computer Part 30 16 Cell Phone 17 4 Budgeted (Estimated) Total Factory Overhead Data For 2020: Estimated Volume Level 20 setups Activity Production Setups Material Handling Packaging and Shipping Total Factory Overhead Budgeted Overhead in Tk. 80,000 70,000 120,000 270,000 5,000 lbs. 6,000 boxes Based on an analysis of the three overhead activities, it was estimated that the two products would require these activities as follows in 2020 Cell Phone Total Computer Part 5 15 20 Activity Production Setups Material handling (lbs) Packaging and Shipping (boxes) 1000 4000 5000 4000 2000 6000 Required: 1. Calculate the cost of each product using traditional absorption costing method 2. Calculate the cost drivers for (a) setups, (b) material handling and (c) packaging and shipping. 3. Calculate the cost of each product using Activity based costing (ABC) method. 9. Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter. The company usually has to borrow money during this quarter to support peak sales of lawn care equipment, which occur during May. The following information has been assembled to assist in preparing a cash budget for the quarter: Budgeted monthly absorption costing income statements for April-July are: a. June April $600,000 420,000 180,000 May $900,000 630,000 270,000 $500,000 350,000 150,000 July $400,000 280,000 120,000 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expense Administrative expense* Total selling and administrative expenses Net operating income 79,000 45,000 124,000 $ 56,000 120,000 52,000 172,000 $ 98,000 62,000 41,000 103,000 $ 47,000 51,000 38,000 89,000 $ 31,000 *Includes $20,000 of depreciation each month. b. c. e. h. Sales are 20% for cash and 80% on account. Sales on account are collected over a three-month period with 10% collected in the month of sale; 70% collected in the first month following the month of sale; and the remaining 20% collected in the second month following the month of sale. February's sales totaled $200,000, and March's sales totaled $300,000. d. Inventory purchases are paid for within 15 days. Therefore, 50% of a month's inventory pur- chases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $126,000. Each month's ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $84,000. f. Dividends of $49,000 will be declared and paid in April. Land costing $16,000 will be purchased for cash in May. The cash balance at March 31 is $52,000; the company must maintain a cash balance of at least $40,000 at the end of each month. i. The company has an agreement with a local bank that allows the company to borrow in incre- ments of $1,000 at the beginning of each month, up to a total loan balance of $200,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: 1. Prepare a schedule of expected cash collections for April, May, and June, and for the quarter in total. 2. Prepare the following for merchandise inventory: A merchandise purchases budget for April, May, and June. A schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total. Prepare a cash budget for April, May, and June as well as in total for the quarter. a. b. 3. 10. Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $40,000, 90-day loan from its bank to help meet cash requirements during the quarter. Since Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled: On July 1, the beginning of the third quarter, the company will have a cash balance of $44,500. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account): a. b. May (actual) June (actual) July (budgeted) August (budgeted) September (budgeted) $250,000 $300,000 $400,000 $600,000 $320,000 Past experience shows that 25% of a month's sales are collected in the month of sale, 70% in the month following sale, and 3% in the second month following sale. The remainder is uncollectible. c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given below: July August Merchandise purchases Salaries and wages Advertising Rent payments Depreciation $240,000 $45,000 $130,000 $9,000 $10,000 $350,000 $50,000 $145,000 $9,000 $10,000 September $175,000 $40,000 $80,000 $9,000 $10,000 e. Merchandise purchases are paid in full during the month following purchase. Accounts pay- able for merchandise purchases on June 30, which will be paid during July, total $180,000. d. Equipment costing $10,000 will be purchased for cash during July. In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in September. Interest on the loan will total $1,200. Required: 1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. 2. Prepare a cash budget, by month and in total, for the third quarter. 3. If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned? Explain