Quick Question on how to calculate cost of Goods manufactured. Only need Question 3f answered. I understand all the rest. The answer is $822,000 but I don't understand how he computed that

Sauder School of Business Practice Midterm Examination Busi/Comm 294 Name: ....................................................... Signature: ........................................................ Student number: ...................................... Time: 150 minutes Total Marks: 104 This examination booklet contains fourteen pages (including this page). Check to ensure this paper is complete. No programmable calculators are permitted. Please show all your calculations in an orderly format for part marks. Time management is crucial. Be sure to answer each question. No questions will be permitted during this examination. If you need to make an assumption, state it and continue. Read the questions carefully before making any assumptions. TURN YOUR CELL PHONES OFF AND PUT THEM AWAY (IN YOUR BAG OR COAT). CELL PHONES ARE NOT PERMITTED ON THE TABLE. 1 Question 1 (15 marks, suggested time 20 minutes) Cost Behavior Kobe Company's total overhead costs are presented below: Week First Second Third Fourth Fifth Sixth Assembly Hours 25,000 27,500 20,000 23,500 18,000 35,000 Total Overhead Costs $87,000 89,900 75,100 79,050 70,850 110,800 Assume that none of the above observations is an outlier. A breakdown of the third week's overhead cost is as follows: Cost Description Utilities Factory Rent Equipment Amortization Janitorial Services Amount $26,000 14,000 6,000 29,100 Kobe rents its factories on a monthly basis. The utilities are directly proportional with assembly time (production). The straight-line method is employed to amortize the equipment based on the estimated useful life. Janitorial services consist of one person on staff, plus supplies required for cleaning the equipment. Required: a. Calculate the janitorial service cost for week four. (6 marks) 2 b. i) What janitorial service cost would you expect to be incurred at an operating level of 22,500 assembly hours? (4 marks) ii) What will be the total overhead cost expected at 22,500 assembly hours? (3 marks) c. In week 7, there could be a strike which would significantly reduce the activity level to 8,000 assembly hours. Can you use all the available information to estimate the total overhead cost in case a strike occurred? Explain. (2 marks) 3 Question 2 (34 marks, suggested time 50 minutes) Cost-Volume-Profit Analysis Farmer Dell (Dell) has a very large pig and poultry farm in Langley and has been in business for many years. The following is a summary of some of the data for an average year of farming: Pigs 2,000 pigs $150 $25 $12 $8 $40,000 $3,000 Number of animals sold per year Average sales price per animal Total feed cost per animal, per year Purchase price per baby animal \"De-worming\" shot per animal, per year Butcher costs per year Rental of feeding machines per year Chickens 18,000 chickens $8 $1.10 $0.50 0 $3,500 $2,400 Dell is presently almost at capacity. There is capacity for 200 more pigs per year or 1,200 more chickens per year. A pig uses six times more space than a chicken. Based on the acreage (farm land), Dell has hired three workers who are each paid a salary of $32,000 per year. These workers clean the pig pens and chicken coups and are responsible for operating the feeding machines. The pigs take 24 months to raise from baby pigs to when they are ready to be sold. Prior to sale they are sent to the butcher (an independent contractor) who is located in the adjacent town. The butcher charges Dell by the animal. The chickens are sent to the butcher after a 12-month stay on the farm. There are no costs incurred in changing the configuration/volume of pig pens or chicken coups, although they are constrained in aggregate, as per above. The combined rent on the buildings and the land is $48,000 per year. Dell can return any feeding machines that he doesn't need. There is plenty of capacity on each feeding machine, however, the pigs don't like using the chickens' machines and the chickens don't like using the pigs' machines. The income tax rate is 35% PART ONE Required: a. Calculate the number of pigs required to be sold each year to break-even if Dell were to only raise pigs (i.e., no chickens). (10 marks) 4 b. Calculate the sales dollars needed per year if Dell wants to farm only chickens and earn an after-tax net income of $75,000. (6 marks) c. Calculate the breakeven point in total sales revenue for the year if Dell raises both pigs and chickens. Assume that the sales mix of the past will continue. (6 marks) 5 PART TWO An organic chicken feed is available that costs 25% more than the regular feed. Dell would also have to get an organic seller's license that costs $25,000 per year. If Dell uses the organic feed, he will be able to charge more for the \"organic chickens\". Dell is also hoping that selling \"organic chickens\" will increase the demand of organic chickens to 24,000 chickens per year. Required: a. If Dell uses the organic feed, how much will the sales price per organic chicken need to be for Dell to make the same contribution margin percent (ratio) per chicken as in PART ONE? (4 marks) b. Calculate the difference in the additional costs incurred (including any opportunity costs) between raising, and selling, 19,200 non-organic (regular) chickens vs. 24,000 organic chickens. (6 marks) 6 c. Identify and discuss two reasons why Dell should sell organic chickens. No calculations are required. (2 marks) Reason #1: Reason #2 7 Question 3 (22 marks; suggested time, 30 minutes) Job-Order Costing The Crafty Company uses a job order cost system and applies overhead at a predetermined rate of 200% of direct labour cost. Following are selected account balances for May, 2005: May 1 Materials (Direct & Indirect) Work-in-process Finished Goods Accounts Receivable Accounts Payable $50,000 $16,000 $70,000 $34,000 $18,000 May 31 $30,000 ? $92,000 $64,000 $32,000 Additional information for the month of May: 1. All sales are on account. 2. The accounts payable account is used for the purchase of materials only. 3. Cost of goods sold is two-thirds of gross sales. 4. There was one job in process on May 31. To date, $4,000 of direct materials and $10,000 of direct labour have been charged to this job. 5. Actual overhead costs incurred during May were: Indirect materials $50,000 Indirect labour $320,000 Depreciation $44,000 Insurance $3,000 Miscellaneous $47,000 6. Materials (direct and indirect) purchased on account cost $150,000. 7. Collection of accounts receivable totalled $1,170,000. Required 1. Compute the following amounts for May: a) Work-in-process, May 31 (5 marks) b) Direct Materials issued to production (2 marks) c) Payment of accounts payable (1 mark) d) Sales (1 mark) e) Cost of goods sold (4 marks) f) Cost of goods manufactured (1 mark) g) Direct labour (1 mark) h) Overhead applied (5 marks) i) Amount of over/under-applied overhead (2 marks) (Also indicate whether over/under-applied) Show your work. Use the T-Accounts below (if you need to). 8 9 Question 4 (33 marks, suggested time 54 minutes) Activity-Based Costing Dr. Knight operates the Midnight Cosmetic Surgery Center (MCSC) in Vancouver. Patients have always been charged the same rate for general care services each day regardless of the type of cosmetic surgery that they are receiving. The general care services that they incur are room services, food (meals) and nursing/postoperative care. MCSC also is required by the Ministry of Health to have continual quality inspections to ensure that the private health provider maintains that same impeccable standards as the provincial hospitals. In an effort to streamline the accounting process, Dr. Knight has had an activity analysis performed (by an analyst) on the services they provide. Patients incur room services regardless of the type of cosmetic surgery that they receive. Estimated Overhead Room services Post-surgery care Meals Quality care Nursing Total Cost $ 900,000 1,200,000 100,000 425,000 945,000 $ 3,570,000 There are only three cosmetic surgeries that MCSC performs: liposuction, nose jobs and face lifts. The amount of care and attention differs depending on the particulars of each of these operations. A review of all the surgeries for the previous year shows that there were 200 male surgeries and 800 female surgeries. Male patients stayed an average of 10 days at MCSC and female patients stayed an average of 5 days at MCSC. The analyst determined that 3,000 patient days were used by liposuction patients; the patient days used by liposuction patients was three times that of nose jobs and 50% more than face lifts. All patients receive the same meals each day. It was difficult to determine the exact number of nursing hours used for each type of surgery, but the analyst determined that approximately 40,000, 18,000, and 5,000 hours were spent on face lifts, liposuction, and nose jobs, respectively. Since nurses have to make follow-up phone calls to each patient and have to fill out Ministry of Health paper work, MCSC assumes that patients incur nursing services for a full 24 hours regardless of when they are admitted or discharged in a given day. Post-surgery care consists mostly of changing bandages and is performed by non-nursing staff. A total of 100,000 yards of bandages were used last year in post-surgery care. Of that amount 50% of the bandages were used on liposuction patients. Of the remaining bandage usage, face lifts accounted for 80%. The quality care personnel review the care that patients are receiving. In order to ensure appropriate service, MCSC is required, on an annual basis, to have an independent quality inspection for every 30 surgeries completed. For inspection purposes, the surgery count starts at zero at the beginning of each year. During the year there were 250 nose jobs, 400 liposuctions and 350 facelifts. For each type of surgery, assume that the number of male/female surgeries of each type (nose jobs, liposuctions, face lifts) was in the same proportion as male/female patient days. 10 Required PART 1 a) Assuming that MCSC uses nursing hours to allocate the overhead, compute the daily overhead rate using this basis of allocation. (3 marks) b) Using activity-based costing, calculate the daily overhead rate for a female patient for liposuctions. (16 marks) Overhead Female Liposuctions Total Room services Post-surgery care 11 Meals Quality Care Nursing c) Using your application rate calculations above, what would be the total amount of overhead costs during the year allocated to male patients for face lifts. (6 marks) Overhead Male Face lifts Total Room services 12 Post-surgery care Meals Quality Care Nursing d) Assume that the center has decided to close for the Easter break. Dr Knight has received a call from a Seattle tour group. In order to take advantage of the cheaper Canadian dollar, they have 45 people who would like to take a bus up to Vancouver and have a nose job performed. They would then return to Seattle later that same day. They would only require a room for the day of surgery and would not be eating any meals. The tour group will also bring its own post-surgery care group to provide care after the surgeries. MCSC will provide nursing staff for the day (one nurse will be required for every 4 patients). The have agreed to pay the MCSC 1.25 times the daily cost of care as well as the direct surgery costs. Dr. Knight will bring in additional surgeons in order to perform all of the surgeries in one day. Dr. Knight would like you to determine the overhead amount to charge the tour company. (8 marks) 13 14 SOLUTION to Busi/Comm 294 Practice Midterm Examination Question 1 (15 marks, suggested time 20 minutes) Cost Behavior Required: a) Calculate the actual janitorial service cost for week 4. (6 marks) After an analysis of various cost items which comprise Kobe Company's overhead costs, we find out that utilities and power are variable costs, rent and amortization are fixed costs, and janitorial services costs is a mixed cost. Using the week 3's data, we can calculate the unit costs per assembly hour for utilities are $1.30 per hr ($26,000 20,000 hrs). Cost Description Cost Behavior Rate variable 1.3 Utilities Rent Amortization Janitorial Services fixed fixed mixed Therefore, week 4's janitorial service cost is Total overhead Less: Utilities (1.3 x 23,500) Rent Amortization Janitorial Services $ 79,050 (given) 30,550 (calculated) 14,000 (given) 6,000 (given) $ 28,500 (total costs net of other costs) b) i) What janitorial service cost would you expect to be incurred at an operating level of 22,500 assembly hours? (4 marks) Either of the following two methods can be used to solve this question: First, using the high-low method to determine the variable and fixed components of janitorial service cost. High activity level: 35,000 hrs, and the janitorial cost = $45,300 ($110,800 - 1.3x35,000 - 14,000 - 6,000). Low activity level: 18,000 hrs, and the janitorial cost = $27,450 ($70,850 - 1.3x18,000 - 14,000 - 6,000) Variable component per assembly hour = (45,300 - 27,450) (35,000 - 18,000) = $1.05 per hour Fixed component = $45,300 - (35,000 hrs x $1.05) = $ 8,550 OR Fixed component = $27,450 - (18,000 hrs x $1.05) = $ 8,550 15 Therefore, the cost formula for the janitorial service cost is $8,550 + 1.05X. The janitorial service cost at 22,500 assembly hours will be: (1.05 x 22,500) + 8,550 = $32,175. ii) What will be the total overhead cost expected at 22,500 assembly hours? (3 marks) The cost formula for total overhead cost will be: 1.3X + 20,000 + 8,550 +1.05X = 2.35X + 28,550. Total OH cost at 22,500 assembly hours will be (2.35 x 22,500) + 28,550 = $81,425. Using the high-low method to determine the variable and fixed components of total overhead costs: High activity level: 35,000 hrs, and the total overhead cost = $110,800. Low activity level: 18,000 hrs, and the total overhead cost = $70,850. Variable component per assembly hour = (110,800-70,850)(35,000-18,000) = 2.35 per hr. Fixed component = $110,800 - (35,000 hrs x $2.35) = $ 28,550 OR Fixed component = $70,850 - (18,000 hrs x $2.35) = $ 28,550 Therefore, the cost formula for the total overhead cost is $28,550 + 2.35X. Thus, total OH cost at 22,500 assembly hours will be 28,550 + (2.35 x 22,500) = $81,425. c) In week 7, there will be a potential strike which could significantly reduce the activity level to 8,000 assembly hours. Can you use all the available information to estimate the total overhead cost under the strike? Why or why not? (2 marks) 8,000 assembly hours under the strike is outside of the relevant range of activities for Kobe Company. Therefore, the cost formula developed previously will be inappropriate for estimating the cost levels during the strike. Furthermore, the strike is an unusual situation for which prediction of total overhead cost, based on normal business operations, would not be appropriate. 16 Question 2 (34 marks, suggested time 50 minutes) Cost-Volume-Profit Analysis PART ONE Required: a. Calculate the number of pigs required to be sold each year to break-even if Dell were to only raise pigs (no chickens). (10 marks) Revenue $ 150.00 Variable costs per pig: Feed cost ( $50,000 2,000 pigs = $25 per pig x 2 years) 50.00 Purchase price of baby pig 12.00 De-worming (8 x 2 years) 16.00 Butcher ($40,000 2,000 pigs) 20.00 Variable costs 98.00 65.33% Contribution margin per pig $ 52.00 34.67% Fixed costs: Feeding machines Hired help Rent $3,000 96,000 48,000 $147,000 $3 x 32,000 Break-even number of pigs = 147,000 52.00 = $2,827 pigs NOTE: Since Dell \"...has been in business for many years\