NNWOMA PRINTING COMPANY It was Monday morning, and Victor Poku, president of Nnwoma Printing Company, was considering whether to take on a job at what seemed to him to be a marginal price. A half hour earlier, Katharine Owusu, president of Owusu Associates, had called to say she needed 10,000 copies of an advertising brochure by Friday noon. She gave Poku the specifications and said there had been so many delays in getting the copy ready that her regular printer did not have the capacity that week. She said he had previously agreed to do the work for GH700, and Poku could have the job at the same price. She needed an answer within an hour. Poku's job estimator had converted the specifications to times for the main operations and produced the estimated cost shown in Exhibit 1. Material costs were computed and charged separately. Exhibits 2 and 3 show an abbreviated version of the annual budget plan and the overheated rate computation. Three people worked in the lithography department, in which copy was converted to plates for the press. Poku knew that in this week's job schedule were two big jobs to do regular customers who often prepared copy rather poorly, requiring the lithography people to spend extra time solving problems. Though he had done business with Owusu only twice in the previous year, each time the copy had been quite well prepared. Thus, as he saw it, the lithography department would probably have the capacity to handle Owusu's job, but the problems with the two big jobs could change that. As an unwritten policy, Poku did not like to ask the lithography people to work overtime unless a real emergency arose. If he took it, the job would run on one of the three smaller presses. Nnwoma also had a large press that was faster, had more capability, and was more complex to set up. On this Monday, the small presses were not fully schedule for the week. The other two departments (cut and bind, and package and ship) probably had capacity because it was easier to run them overtime if necessary. In a normal week, the presses would run three shifts around the clock for five days, the lithography department one shift, and the other departments one shift with occasional overtime. Poku noted that business had been reasonably good of late. However, this coming week showed higher than normal unused capacity on the small presses, though like this Owusu job, work for those presses often came in at the last minute. Exhibit 1 Department NNWOMA PRINTING COMPANY COST ESTIMATE FOR OWUSU JOB (in dollars expect for Direct Labor Hour) Direct Direct Supplies Overhead Overhead Total Labor Labor GHC Rate GHC GHC GHC Hours GHC 2 30 40 30 per 60 130 DLH 4 80 80 per 320 415 Lithography 2 Press 15 DLH Cut and Bind 4 60 20 20 per 80 160 DLH 1 Package and Ship 15 5 15 45 15 per DLH 11 185 90 475 750 90 Administration and Selling Total 840 Notes: Overhead related to plant operations and the overhead rate was in dollars per direct labor hour. The overhead rate was set at the beginning of each year and was based on the relationship between the budgeted overhead assigned to the department and the budgeted direct labor hours for the department. The largest items in the overhead cost pool were Employee benefits Depreciation on building and equipment Departmental supervision and plant administration Maintenance and engineering, including the computerized control on the large machine Utilities . Corporate administration and selling expense amounted to about 10 percent of sales. 2 2 Exhibit 2 NNWOMA PRINTING COMPANY POKU'S BUDGETED PLAN FOR THE YEAR GH$4,000,000 Sales Cost of Sales: Direct Labor Supplies Overhead Total Administration and Selling Total Expense Profit 700,000 400,000 2,200,000 GHC 3,300,000 GHC400,000 GH 3,700,000 GH 300,000 Exhibit 3 NNWOMA PRINTING COMPANY OVERHEAD RATE COMPUTATION Department Overhead Budget GHC Rate GHC Lithography Press Cut and Bind Package and Ship Total 180,000 1,920,000 80,000 30,000 Direct Labor Hours Budget 6000 24,000 4,000 2,000 30 per hour 80 per hour 20 per hour 15 per hour 2,210,000 PUDO CHEMICAL CORPORATION The Dudo Chemical Corporation produced a variety of industrial products, includine za wers. the beginning of each year, the company's controller estimated the unit cost of Sc for the strategies. In addition, the estimated cost for sc was used as a benchmark against which to compare the actual cost of production. The estimated direct cost per unit (omitting any manufacturing overhead allocation) of SC for the current year was follows: Raw material (10 pounds at $3.00/pound) $30.00 Direct Labor (0.5 hours at $12.00/hour) 6.00 Total direct cost per unit $36.00 Dudo Chemical also prepared monthly budgets for the production volume, sales volume, and non-manufacturing expenses. In general, management strove to achieve actual results similar to the budgeted amounts and tried to minimize the company's working capital investment by maintaining just-in-time inventory stock levels. Unfortunately, the market demand and sales price for SC were difficult to predict. In addition, the company's actual direct labor costs were somewhat erratic, primarily due to equipment problems and high employee turnover. Also, the cost of the raw material used to produce SC was significantly affected by unstable crude oil prices and variability in the quality of the available material. Due to the general instability of the environment in which the company produced and sold sc, it was not unusual for actual results to deviate from budgeted amounts. For example, the actual operating results for the most recent month differed from the budgeted amounts as follows: Actual Budget Production volume, units 11,000 11,000 Sales volume, units 10,000 11,000 Sale price per unit $45.00 $46.00 Direct Labor Hours 5610 5,500 irect Labor Cost $66,759 $66,000 aw materials purchased, lbs 120,000 110,000 w material purchased, cost $384,000 $330,000 w materials used in production, lbs 115,500 110,000 4 4 Non manufacturing expenses $84,000 $80,000 Dudo Chemical's accounting policy was to use the actual raw material cost and the actual direct Labor cost in applying the LIFO inventory method as the basis for ending inventory valuation and cost of goods sold determination Work in process inventory was not a factor because it was negligible. Each month, the actual unit cost of SC was compared to the estimated cost to see if there was a difference. Significant differences were investigated by management as part of Dudo Chemical's continuous Improvement program. Based on what he had learned at a recent professional development conference, the company's controller thought the financial statements might be more managerially relevant if raw material inventory were kept at estimated costs and finished goods inventory were kept at estimated production costs. Cost of goods sold would be determined using estimated costs, and differences between actual and estimated costs would be treated as adjustments to the current month's income. The controller thought this new approach would facilitate the identification of any variances from plan, which could be broken down into the price and quantity impacts for both materials and labor. In his opinion, this new approach would enhance management's ability for take appropriate corrective actions. REQUIRED 1. Prepare an income statement for the most recent month using the company's actual costing system. Assume raw material and finished goods inventory were both zero at the beginning of the month. Calculate the ending inventory costs for raw materials and finished goods. 2. Prepare an income statement for the most recent month using the controller's "managerially relevant" approach. Calculate the ending inventory costs. Explain the differences in the two income statements and in the ending inventory balances. 3. A variation of the controller's "managerially relevant" approach would be to keep raw material inventory at actual cost, recognizing any differences between the actual and estimated cost only for the material used in production. Using this modified approach, prepare an income statement for the most recent month and calculate the ending inventory costs. Explain how this income statement and ending inventory balances differ from the other two approaches. As a manager, which of these three financial statement approaches would prefer? Why? NNWOMA PRINTING COMPANY It was Monday morning, and Victor Poku, president of Nnwoma Printing Company, was considering whether to take on a job at what seemed to him to be a marginal price. A half hour earlier, Katharine Owusu, president of Owusu Associates, had called to say she needed 10,000 copies of an advertising brochure by Friday noon. She gave Poku the specifications and said there had been so many delays in getting the copy ready that her regular printer did not have the capacity that week. She said he had previously agreed to do the work for GH700, and Poku could have the job at the same price. She needed an answer within an hour. Poku's job estimator had converted the specifications to times for the main operations and produced the estimated cost shown in Exhibit 1. Material costs were computed and charged separately. Exhibits 2 and 3 show an abbreviated version of the annual budget plan and the overheated rate computation. Three people worked in the lithography department, in which copy was converted to plates for the press. Poku knew that in this week's job schedule were two big jobs to do regular customers who often prepared copy rather poorly, requiring the lithography people to spend extra time solving problems. Though he had done business with Owusu only twice in the previous year, each time the copy had been quite well prepared. Thus, as he saw it, the lithography department would probably have the capacity to handle Owusu's job, but the problems with the two big jobs could change that. As an unwritten policy, Poku did not like to ask the lithography people to work overtime unless a real emergency arose. If he took it, the job would run on one of the three smaller presses. Nnwoma also had a large press that was faster, had more capability, and was more complex to set up. On this Monday, the small presses were not fully schedule for the week. The other two departments (cut and bind, and package and ship) probably had capacity because it was easier to run them overtime if necessary. In a normal week, the presses would run three shifts around the clock for five days, the lithography department one shift, and the other departments one shift with occasional overtime. Poku noted that business had been reasonably good of late. However, this coming week showed higher than normal unused capacity on the small presses, though like this Owusu job, work for those presses often came in at the last minute. Exhibit 1 Department NNWOMA PRINTING COMPANY COST ESTIMATE FOR OWUSU JOB (in dollars expect for Direct Labor Hour) Direct Direct Supplies Overhead Overhead Total Labor Labor GHC Rate GHC GHC GHC Hours GHC 2 30 40 30 per 60 130 DLH 4 80 80 per 320 415 Lithography 2 Press 15 DLH Cut and Bind 4 60 20 20 per 80 160 DLH 1 Package and Ship 15 5 15 45 15 per DLH 11 185 90 475 750 90 Administration and Selling Total 840 Notes: Overhead related to plant operations and the overhead rate was in dollars per direct labor hour. The overhead rate was set at the beginning of each year and was based on the relationship between the budgeted overhead assigned to the department and the budgeted direct labor hours for the department. The largest items in the overhead cost pool were Employee benefits Depreciation on building and equipment Departmental supervision and plant administration Maintenance and engineering, including the computerized control on the large machine Utilities . Corporate administration and selling expense amounted to about 10 percent of sales. 2 2 Exhibit 2 NNWOMA PRINTING COMPANY POKU'S BUDGETED PLAN FOR THE YEAR GH$4,000,000 Sales Cost of Sales: Direct Labor Supplies Overhead Total Administration and Selling Total Expense Profit 700,000 400,000 2,200,000 GHC 3,300,000 GHC400,000 GH 3,700,000 GH 300,000 Exhibit 3 NNWOMA PRINTING COMPANY OVERHEAD RATE COMPUTATION Department Overhead Budget GHC Rate GHC Lithography Press Cut and Bind Package and Ship Total 180,000 1,920,000 80,000 30,000 Direct Labor Hours Budget 6000 24,000 4,000 2,000 30 per hour 80 per hour 20 per hour 15 per hour 2,210,000 PUDO CHEMICAL CORPORATION The Dudo Chemical Corporation produced a variety of industrial products, includine za wers. the beginning of each year, the company's controller estimated the unit cost of Sc for the strategies. In addition, the estimated cost for sc was used as a benchmark against which to compare the actual cost of production. The estimated direct cost per unit (omitting any manufacturing overhead allocation) of SC for the current year was follows: Raw material (10 pounds at $3.00/pound) $30.00 Direct Labor (0.5 hours at $12.00/hour) 6.00 Total direct cost per unit $36.00 Dudo Chemical also prepared monthly budgets for the production volume, sales volume, and non-manufacturing expenses. In general, management strove to achieve actual results similar to the budgeted amounts and tried to minimize the company's working capital investment by maintaining just-in-time inventory stock levels. Unfortunately, the market demand and sales price for SC were difficult to predict. In addition, the company's actual direct labor costs were somewhat erratic, primarily due to equipment problems and high employee turnover. Also, the cost of the raw material used to produce SC was significantly affected by unstable crude oil prices and variability in the quality of the available material. Due to the general instability of the environment in which the company produced and sold sc, it was not unusual for actual results to deviate from budgeted amounts. For example, the actual operating results for the most recent month differed from the budgeted amounts as follows: Actual Budget Production volume, units 11,000 11,000 Sales volume, units 10,000 11,000 Sale price per unit $45.00 $46.00 Direct Labor Hours 5610 5,500 irect Labor Cost $66,759 $66,000 aw materials purchased, lbs 120,000 110,000 w material purchased, cost $384,000 $330,000 w materials used in production, lbs 115,500 110,000 4 4 Non manufacturing expenses $84,000 $80,000 Dudo Chemical's accounting policy was to use the actual raw material cost and the actual direct Labor cost in applying the LIFO inventory method as the basis for ending inventory valuation and cost of goods sold determination Work in process inventory was not a factor because it was negligible. Each month, the actual unit cost of SC was compared to the estimated cost to see if there was a difference. Significant differences were investigated by management as part of Dudo Chemical's continuous Improvement program. Based on what he had learned at a recent professional development conference, the company's controller thought the financial statements might be more managerially relevant if raw material inventory were kept at estimated costs and finished goods inventory were kept at estimated production costs. Cost of goods sold would be determined using estimated costs, and differences between actual and estimated costs would be treated as adjustments to the current month's income. The controller thought this new approach would facilitate the identification of any variances from plan, which could be broken down into the price and quantity impacts for both materials and labor. In his opinion, this new approach would enhance management's ability for take appropriate corrective actions. REQUIRED 1. Prepare an income statement for the most recent month using the company's actual costing system. Assume raw material and finished goods inventory were both zero at the beginning of the month. Calculate the ending inventory costs for raw materials and finished goods. 2. Prepare an income statement for the most recent month using the controller's "managerially relevant" approach. Calculate the ending inventory costs. Explain the differences in the two income statements and in the ending inventory balances. 3. A variation of the controller's "managerially relevant" approach would be to keep raw material inventory at actual cost, recognizing any differences between the actual and estimated cost only for the material used in production. Using this modified approach, prepare an income statement for the most recent month and calculate the ending inventory costs. Explain how this income statement and ending inventory balances differ from the other two approaches. As a manager, which of these three financial statement approaches would prefer? Why