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Cost Management Assignment #2 30% of Final Grade Chapters 6, 7 & 8 This Assignment has 6 Questions. Answer all questions using Microsoft Word. Very Important Instructions How to save and submit your completed assignment: 1. Put your answers in a separate word document. 2. Submit the answers only. I.E. Do not resubmit the question. 3. Submit answers in Micro Soft Word document. 4. For the true false and multiple choice questions, list in column format, the number of the question followed by the one best answer. No marks awarded for explanation or calculations for true and false or the multiple choice questions. 5. Completed assignment to be uploaded to the \"Assignment #1 Submission\" area posted under Week 5. Ensure that you upload the correct file as you only have one attempt to upload your assignment. The file uploaded will be the one that is graded. 6. Unreadable or unattached files are considered a non submission. Late assignments will not be accepted. File Naming: 1. Assign the file name in the following manner: Student last name, first Name Ass # 2. Also you must place you full name on the top of the word document 3. Note: There is a 10% deduction on each submission when these instructions are not followed. File Uploading Instructions 1. Open the Submit Assignment 1 icon and upload your completed assignment. 2. Use the Browse button at the bottom of the page to select your Word document for uploading 1 3. Click Upload Question #1 ACTIVITY-BASED COSTING (20 marks) Markham Inc. designs and builds custom windows for luxury homes. Most of the windows are custom made but occasionally the company does mass production on order. Its budgeted manufacturing overhead costs for the year 2006 are as follows: Overhead Cost Pools Purchasing Production (cutting, milling, finishing) Setting up machines Inspecting Utilities Total budget overhead costs Amount $ 180,000 400,000 135,000 160,000 300,000 $1,175,000 For the last three years, the company has been charging overhead to products on the basis of machine hours. For the year 2006, 100,000 machine hours are budgeted. Tommy Barry, owner-manager of Markham Inc. recently directed her accountant to implement the activity-based costing system she has repeatedly proposed. At Tommy's request, the accountant and production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools. Overhead Cost Pools Purchasing Production (cutting, milling, finishing) Setting up machines Inspecting Utilities Activity Cost Drivers Number of orders Direct labour hours Number of setups Number of inspections Square metres occupied Total Drivers 500 80,000 1,000 5,000 75,000 During this month, the company received an order for 50 window sets from a housing development contractor. The accountant prepares cost estimates for producing components for 50 window sets so Tommy can submit a contract price per window set to the contractor. The following data for the production of 50 window sets is accumulated: Direct materials $120,000 2 Direct labour Machine hours Direct labour hours Number of purchase orders Number of machine setups Number of inspections Number of square metres occupied $135,000 12,000 10,000 50 80 380 7,000 Instructions (a) Calculate the predetermined overhead rate using traditional costing with machine hours as the basis. (b) Calculate the manufacturing cost per window set under traditional costing. (c) Calculate the manufacturing cost per window set under the proposed activity-based costing. Question #2 ABC COST DRIVERS (10 marks) Ajax Corporation manufactures all-terrain vehicles (ATV) in its Ajax, Ontario plant. Instructions Identify an appropriate cost driver that may be used to assign each of the following costs to each line of ATVs. Cost drivers may be used more than once. Cost drivers are listed below. Cost Drivers Machine hours Number of parts Number of finished vehicles Engineering hours Square metreage Number of setups Number of employees/direct labour hours Number of tests Number of orders Cost Cost Driver 1. Assembling __________________________ 2. Engineering __________________________ 3. Machining __________________________ 4. Ordering and receiving __________________________ 5. Painting __________________________ 6. Machine setup __________________________ 7. Storing __________________________ 3 8. Supervising __________________________ 9. Packing and shipping __________________________ 10. Inspecting and testing __________________________ 4 Question #3 MULTIPLE CHOICE (20 marks) Instructions: Designate the best answer for each of the following questions. ___ 1. Looker Hats is planning to sell 600 felt hats, and 700 will be produced during June. Each hat requires metre of felt and hour of direct labour. Felt costs $3.00 per metre and employees of the company are paid $20 per hour. How much is the total amount of budgeted direct labour for June? a. $3,000 b. $48,000 c. $3,500 d. $2,400 ____ 2. Orr Corporation's manufacturing costs for August when production was 800 units appears below: Direct material $10 per unit Direct labour $4,800 Variable overhead 4,000 Factory amortization 3,000 Factory supervisory salaries 2,000 Other fixed factory costs 1,000 How much is the budgeted manufacturing cost for a month when 900 units are produced? a. $23,800 b. $18,900 c. $24,900 d. $25,650 ____ 3. Lewis Production is planning to sell 220 boxes of bricks and produce 200 boxes of bricks during May. Each box of bricks requires 20 kilograms of brick mix and a half hour of direct labour. Brick mix costs $5 per 100 kilograms and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 120% of direct labour costs. Lewis Production has 600 kilograms of brick mix in beginning inventory and wants to have 800 kilograms of brick mix in ending inventory. What is the total amount to be budgeted for manufacturing overhead for the month? a. $1,440 b. $2,880 c. $2,400 d. $1,200 ____ 4. Hargrow, Inc. makes and sells a single product, buckets. It takes 30 ounces of plastic to make one bucket. Budgeted production of buckets for the next three months is as follows: August 90,000 units, September 75,000 units, October 65,000 buckets. The company wants to maintain monthly ending inventories of plastic equal to 10% of the following month's production needs. On August 31st, 195,000 ounces of plastic were on hand. The cost of plastic is $0.03 per ounce. How much is the ending inventory of plastic to be reported on the company's balance sheet at September 30? a. $195,000 5 b. $5,850 c. $6,750 d. $7,500 ____ 5. Razmataz Company makes and sells umbrellas. The company is in the process of preparing its Selling and Administrative Expense Budget for the last half of the year. The following budget data are available: Item Sales commissions Shipping Advertising Amortization on office equipment Other operating expenses Variable Cost Per Unit Sold $0.60 $1.20 $0.30 Monthly Fixed Cost $3,000 $4,000 $0.35 $34,000 Expenses are paid in the month incurred. If the company has budgeted to sell 2,000 umbrellas in October, how much is the total budgeted variable selling and administrative expenses for October? a. $41,000 b. $4,600 c. $45,900 d. $4,900 ____ 6. Grant Company estimates its sales at 80,000 units in the first quarter and that sales will increase by 8,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. Theremainder is received in the quarter following sale. Cash collections for the third quarter are budgeted at a. $1,356,000. b. $1,968,000. c. $2,364,000. d. $2,736,000. ____ 7. At January 1, 2006, Jake, Inc. has beginning inventory of 3,000 surfboards. Jake estimates it will sell 14,000 units during the first quarter of 2006 with a 10% increase in sales each quarter. Jake's policy is to maintain an ending inventory equal to 20% of the next quarter's sales. Each surfboard costs $140 and is soldfor $200. How many units should Jake produce during the first quarter of 2006? a. 14,080 b. 14,000 c. 16,800 d. 14,200 6 ____ 8. Nunnally Manufacturing Company has furnished the following information which occurred during May: Accounts Payable balance at April 30 Purchases on account during May Cash payments for materials purchased in April Cash payments for materials purchased in May $ 29,000 150,000 29,000 135,000 The accounts payable account is used only for direct materials. How much will Nunnally report as accounts payable on the balance sheet at the end of May? a. $21,000 b. $103,000 c. $8,000 d. $15,000 ____ 9. Harrah Company provided the following information for the month of October: Beginning cash balance Cash receipts Cash disbursements $ 35,000 460,000 485,000 Harrah's policy is to keep a minimum end of the month cash balance of $30,000. How much will Harrah's need to borrow during October? a. b. c. d. ____10. $20,000 $25,000 $10,000 $0 Each production worker can produce 4 wooden chairs per hour. During the month of June, Chairs, Inc. has forecasted sales of 100,000 chairs. The beginning inventory was 10,000 chairs, and desired ending inventory is 2,500 chairs. How many hours of direct labour must be budgeted to meet production needs? a. 25,375 b. 25,000 c. 23,125 d. 24,625 7 Question #4 True or False (15 marks) 1. The usual starting point in budgeting is to make a forecast of cash receipts and cash disbursements. 2. Budgets are used for planning rather than for control of operations. 3. A continuous or perpetual budget is one that covers a 12-month period, but is constantly adding a new month onto the end of the 12-month period as the current month is completed. 4. Control involves developing objectives and preparing the various budgets to achieve those objectives. 5. One of the distinct advantages of a budget is that it can help to uncover potential bottlenecks before they occur. 6. The participative budget can be a very effective control device in an organization. 7. Sales forecasts are drawn up after the cash budget has been completed because it is only at that time that the funds available for marketing are known. 8. A production budget is to a manufacturing firm as a merchandise purchases budget is to a merchandising firm. 9. The direct materials to be purchased for a period can be obtained by subtracting the desired ending inventory of direct materials from the total direct materials needed for the period. 10. In companies that have "no lay-off" policies, the total direct labour cost for a budget period is computed by taking the total direct labour hours needed to make the budgeted output of completed units and multiplying them by the direct labour wage rate. 11. In the merchandise purchases budget, the required purchases (in units) for a period can be determined by subtracting the beginning merchandise inventory (in units) from the budgeted sales (in units). 12. The beginning cash balance is not included on the cash budget since the cash budget deals exclusively with cash flows rather than with balance sheet amounts. 13. When using the participative budget approach, it is generally best for top management to accept all budget estimates without question in order to minimize adverse behavioural responses from employees. 14. The effect of responsibility accounting is to personalize the accounting system. 15. Zero-based budgeting requires managers to justify all costs of programs as if these programs were being proposed for the first time. 8 Question #5 SALES AND PRODUCTION BUDGET (15 marks) Jennings Corporation manufactures two models of tires: XL and DL. Based on the following production and sales data for August 2006, prepare (a) a sales budget and (b) a production budget. Estimated inventory, August 1 Desired inventory, August 31 Expected sales in units Unit sales price Question #6 XL 350 375 7,500 $150 DL 150 125 5,200 $130 STANDARD COSTS (20 Marks) Lido Company's standard and actual costs per unit for the most recent period, during which 400 units were actually produced, are given below: Standard Materials: Standard: 2 metres at $1.50 per metre Actual: 2.1 metres at $1.60 per metre Direct Labour: Standard: 1.5 hrs at $6.00 per hr Actual: 1.4 hrs at $6.50 per hr Variable Overhead: Standard: 1.5 hrs at $3,40 per hr Actual 1.4 hrs at $3.10 per hr Total unit cost Actual $3.00 $3.36 9.00 9.10 5.10 $17.10 4.34 $16.80 Required: From the above information, compute the following variances. Show whether the variance is favourable (F) or unfavourable (U): a) Materials price variance b) Materials quantity variance c) Direct labour rate variance d) Direct labour efficiency variance e) Variable overhead spending variance f) Variable overhead efficiency variance 9