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3-3. Price determination. Strabone, Inc., produces a single product which is sold to fabricators of electronic equipment. Since the company is relatively small, it does not utilize involved cost ac- counting techniques in determining inventory values. Direct materials and direct labor are iden- lified with specific lots of product. Factory overhead rates are not used; the company waits until the end of the accounting period for which statements are required and then assigns overhead to inventory and to cost of goods sold on a unit of production basis. During 19--, the company produced its regular year's output by December 15, at which time it planned to shut down for the last two weeks of the year, reopening after the new year. As of December 15, the following income statement, which included all 19--costs, was prepared: Strabone, Inc. Income Statement For the Year Ended December 31, 19-- $100,000 -0- Sales (20,000 units) Cost of goods sold: Inventory, January 1, 19-- Production costs for an output of 22,000 units: Direct materials Direct labor Factory overhead. Total Inventory, December 31, 19--(2,000 units) Gross profit...... Marketing and administrative expenses (all fixed). Income (before income tax). $13,500 30,500 35,200 $79.200 8,220 70,980 $ 29,020 10,000 $ 19,020 arts On December 18, 19--, a department of the United States government placed an order with the company for 4,000 units of product. The company accepted the order, which stipulated that delivery be made by December 31, 19 -- and that the company should be permitted to earn a gross profit on the order calculated at 20% of selling price. The company called back its produc- tion personnel and, by the end of the year, completed 2,000 units which, with the inventory, com- prised the government's total order. During this period, it expended additional costs as follows: direct materials, $1,300; direct labor, $2,800; and factory overhead, $800. In accordance with the terms of the order, the government was billed at a price of $4.85 per unit. The government auditor who reviewed the company's invoice complained that at this price the company would earn a profit of 32.4% on sales and that the unit sales price should be $4.10 in order to comply with the terms of the order. Tuch sold com PART COST ACCOUNTING - CONCEPTS AND OBJECTIVES 62 Required: (1) Calculations to show (a) the method used by the company to arrive at its price of $4.85 am (b) the method used by the government to reach a price of $4.10. (2) A critical evaluation of the two pricing methods. Cound acceptable accounting procedura be utilized to arrive at a third price for the order? Explain this third method and indica CASE Government contracts and CASB regulations. The Cost Accounting Standards Board issuu two standards that require (1) consistency in estimating, accumulating, and reporting costs (Star dard No. 401) and (2) consistency in allocating direct and indirect costs incurred for the same purpose (Standard No 402). Part 1. The Otani-Smith Company sells products in excess of $30 million a year to the United States Government. As a separate cost center of its parent company, the O-S Company must file: Disclosure Statement describing in detail the company's cost accounting system. On January 1, 19--, the company was awarded a firm fixed-price contract which called fu 1.000 units of product MAC. The performance period was one year and the total price of the contract was $8,058,000. When the government auditor analyzed the contract six months late inconsistencies were found between the company's methods of estimating direct labor costs and the method described in its disclosed accounting practices. In the proposal (Exhibit 1) which sulted in the contract, manufacturing labor was estimated as a total dollar amount which included significant, disparate elements or functions of manufacturing labor. Manufacturing labor was c culated by using a plant-wide labor rate multiplied by the estimated manufacturing hours. The auditor found that the company's cost accounting system, budget procedure, and reporting methods provided for the breakdown of manufacturing costs into functional levels, using the ind vidual worker or functional average labor rates. Exhibit 1 CONTRACT PROPOSAL RATES $5.45/hr. 180% Manufacturing labor (400 hours) Manufacturing overhead (based on direct labor dollars) Total General and administrative expenses Total cost Profit Contract price per unit Total contract price. 1,000 units ESTIMATES $ 2.180 3,924 $ 6.104 1.221 $ 7,325 733 $ 8,058 20% 10% $8,058.000 N Required: A new unit cost and total dollar difference due to the above stated inconsistency tween pricing and costing (1) Using the new rate of $5 10 for manufacturing labor, developed by the auditor, and (2) Revising all other factors stated incorrectly Part 2. In a second contract, the company prepared the proposal shown on page 63. in viewing the contract the auditor found that warranty costs were stated as direct costs in COSTS: CONCEPTS, USES, AND CLASSIFICATIONS CHAPTER 3 63 contract. When examining the manufacturing overhead and its 180% rate, the auditor discovered pool as indirect expenses. These costs were therefore subject to adjustment for double counting. Exhibit 2 CONTRACT PROPOSAL RATES $5.45/hr. 180% 7 Manufacturing labor Manufacturing overhead Materials. Other direct costs. Warranty Total General and administrative expenses Total cost.. Profit... Total contract price per unit.... Total contract price, 1.000 units ESTIMATES $ 2,180 3,924 4,800 976 700 $ 12,580 2,516 $ 15,096 1,510 $ 16,606 20% 2 10% $16.606,000 02 the et hd Te Sed CB The cing nor Required: A revised cost and price estimate by: (1) Computing a new manufacturing overhead charging rate, omitting the total warranty cost of $10,000 included in the $360,000 originally forecast for overhead, and assuming that the labor cost forecast was $200,000 ($360,000 - $200,000 = 180%). (2) Applying the new rate to the revision and calculating a new unit and total cost of the con- tract. (Based on an article in Management Accounting) 3-3. Price determination. Strabone, Inc., produces a single product which is sold to fabricators of electronic equipment. Since the company is relatively small, it does not utilize involved cost ac- counting techniques in determining inventory values. Direct materials and direct labor are iden- lified with specific lots of product. Factory overhead rates are not used; the company waits until the end of the accounting period for which statements are required and then assigns overhead to inventory and to cost of goods sold on a unit of production basis. During 19--, the company produced its regular year's output by December 15, at which time it planned to shut down for the last two weeks of the year, reopening after the new year. As of December 15, the following income statement, which included all 19--costs, was prepared: Strabone, Inc. Income Statement For the Year Ended December 31, 19-- $100,000 -0- Sales (20,000 units) Cost of goods sold: Inventory, January 1, 19-- Production costs for an output of 22,000 units: Direct materials Direct labor Factory overhead. Total Inventory, December 31, 19--(2,000 units) Gross profit...... Marketing and administrative expenses (all fixed). Income (before income tax). $13,500 30,500 35,200 $79.200 8,220 70,980 $ 29,020 10,000 $ 19,020 arts On December 18, 19--, a department of the United States government placed an order with the company for 4,000 units of product. The company accepted the order, which stipulated that delivery be made by December 31, 19 -- and that the company should be permitted to earn a gross profit on the order calculated at 20% of selling price. The company called back its produc- tion personnel and, by the end of the year, completed 2,000 units which, with the inventory, com- prised the government's total order. During this period, it expended additional costs as follows: direct materials, $1,300; direct labor, $2,800; and factory overhead, $800. In accordance with the terms of the order, the government was billed at a price of $4.85 per unit. The government auditor who reviewed the company's invoice complained that at this price the company would earn a profit of 32.4% on sales and that the unit sales price should be $4.10 in order to comply with the terms of the order. Tuch sold com PART COST ACCOUNTING - CONCEPTS AND OBJECTIVES 62 Required: (1) Calculations to show (a) the method used by the company to arrive at its price of $4.85 am (b) the method used by the government to reach a price of $4.10. (2) A critical evaluation of the two pricing methods. Cound acceptable accounting procedura be utilized to arrive at a third price for the order? Explain this third method and indica CASE Government contracts and CASB regulations. The Cost Accounting Standards Board issuu two standards that require (1) consistency in estimating, accumulating, and reporting costs (Star dard No. 401) and (2) consistency in allocating direct and indirect costs incurred for the same purpose (Standard No 402). Part 1. The Otani-Smith Company sells products in excess of $30 million a year to the United States Government. As a separate cost center of its parent company, the O-S Company must file: Disclosure Statement describing in detail the company's cost accounting system. On January 1, 19--, the company was awarded a firm fixed-price contract which called fu 1.000 units of product MAC. The performance period was one year and the total price of the contract was $8,058,000. When the government auditor analyzed the contract six months late inconsistencies were found between the company's methods of estimating direct labor costs and the method described in its disclosed accounting practices. In the proposal (Exhibit 1) which sulted in the contract, manufacturing labor was estimated as a total dollar amount which included significant, disparate elements or functions of manufacturing labor. Manufacturing labor was c culated by using a plant-wide labor rate multiplied by the estimated manufacturing hours. The auditor found that the company's cost accounting system, budget procedure, and reporting methods provided for the breakdown of manufacturing costs into functional levels, using the ind vidual worker or functional average labor rates. Exhibit 1 CONTRACT PROPOSAL RATES $5.45/hr. 180% Manufacturing labor (400 hours) Manufacturing overhead (based on direct labor dollars) Total General and administrative expenses Total cost Profit Contract price per unit Total contract price. 1,000 units ESTIMATES $ 2.180 3,924 $ 6.104 1.221 $ 7,325 733 $ 8,058 20% 10% $8,058.000 N Required: A new unit cost and total dollar difference due to the above stated inconsistency tween pricing and costing (1) Using the new rate of $5 10 for manufacturing labor, developed by the auditor, and (2) Revising all other factors stated incorrectly Part 2. In a second contract, the company prepared the proposal shown on page 63. in viewing the contract the auditor found that warranty costs were stated as direct costs in COSTS: CONCEPTS, USES, AND CLASSIFICATIONS CHAPTER 3 63 contract. When examining the manufacturing overhead and its 180% rate, the auditor discovered pool as indirect expenses. These costs were therefore subject to adjustment for double counting. Exhibit 2 CONTRACT PROPOSAL RATES $5.45/hr. 180% 7 Manufacturing labor Manufacturing overhead Materials. Other direct costs. Warranty Total General and administrative expenses Total cost.. Profit... Total contract price per unit.... Total contract price, 1.000 units ESTIMATES $ 2,180 3,924 4,800 976 700 $ 12,580 2,516 $ 15,096 1,510 $ 16,606 20% 2 10% $16.606,000 02 the et hd Te Sed CB The cing nor Required: A revised cost and price estimate by: (1) Computing a new manufacturing overhead charging rate, omitting the total warranty cost of $10,000 included in the $360,000 originally forecast for overhead, and assuming that the labor cost forecast was $200,000 ($360,000 - $200,000 = 180%). (2) Applying the new rate to the revision and calculating a new unit and total cost of the con- tract. (Based on an article in Management Accounting)