Unit 8 Study Exercises

Question 8.1

(Total: 18 marks)

T2 Manufacturing Ltd. manufactures electrical parts. Data for two of the company's customers is as follows:

	Customer 1	Customer 2
Revenues at list price	$592,500	$102,000
Units sold	75,000	10,000
Unit list price	$7.90	$10.20
Cost of goods per unit	$5.10	$6.25
Sales discounts	$11,850	$1,020
Customer-specific costs
Order-taking	$13,600	$1,500
Product-handling	$14,100	$1,350
Delivery	$9,400	$1,290

Required:

1. Prepare a comparative income statement in gross margin format with one column for each customer; present customer-specific costs as period expenses.

Question 8.2

(Total: 12 marks)

Rocky Volcano Chocolate operates two stores, one in Edmonton and another in St. John's. The following income statements were prepared for the most recent year:

	Edmonton	St. John's
Net sales	$3,780,000	$960,000
Variable costs:
Cost of goods sold	1,512,000	528,000
Sales commission	189,000	48,000
Utilities	17,200	15,300
Contribution margin	$2,061,800	$368,700
Fixed costs:
Annual building lease	84,000	39,000
Salaries	380,000	180,000
Allocated corporate overhead	750,000	250,000
Amortization of store equipment & leasehold improvements	60,000	30,000
Operating income (loss)	$787,800	$(130,300)

The store equipment and leasehold improvements have no market value. The building leases can be cancelled without penalty.

Required:

1. Calculate the dollar value of sales required for each store to break-even assuming that all of the fixed costs are to be covered?
2. Should management close the St. John's store? Assume that corporate overhead would be reduced by $100,000 if the St. John's store is closed.

Question 8.3

(Total: 18 marks)

APL manufactures athletic clothing, including shoes. Because of strict production specifications, the manufacturing department often has spoiled items. If the spoiled items are less than or equal to 5 percent of a job's total then the items are treated as normal spoilage. During March job #101 for 100 pairs of shoes had 7 spoiled items. The spoiled items were detected immediately before they were packaged. The marketing manager believes the spoiled items can be sold for $20 each. They had a cost at point of detection of $75 each. These costs included $25 for direct manufacturing labour, $45 for direct materials, and $5 for factory overhead.

Required:

1. Make the necessary journal entry, or entries, to record the spoiled units. If the spoilage is normal it is assigned to an overhead control account. Assume the spoiled units can be sold for $20 each.
2. Make the necessary journal entry, or entries, to record the rework cost. If the spoilage is normal it is assigned to an overhead control account. Assume the spoiled units can be reworked for $20 each: direct materials $5; labor $12; manufacturing overhead $3.

Question 8.4

(Total: 20 marks)

Pepper Potts Pottery manufactures ceramic products. All direct materials are included at the inception of the production process. For March, there was no beginning inventory in the processing plant. Direct materials totaled $155,000 for the month. Work-in-process records revealed that 2,500 tons were started in March and that 1,500 tons were finished; 500 tons were spoiled as expected. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete.

Required:

Determine the following:

1. What are the costs assigned to completed units when spoilage units are recognized and when they are not recognized in the cost per equivalent unit?
2. What are the costs transferred out if spoilage units are recognized and if they are ignored?
3. What are the amounts allocated to the work-in-process ending inventory when spoilage units are recognized and when spoilage units are ignored?

Question 8.5

(Total: 32 marks)

Downward Dog Yoga is a manufacturer of yoga apparel. It produces all of its products in one department. The information for the current month is as follows:

Beginning work-in-process	20,000 units
Units started	40,000 units
Units completed	50,000 units
Ending work-in-process	8,000 units
Spoilage	2,000 units

Beginning work-in-process direct materials	$12,000
Beginning work-in-process conversion	$4,000
Direct materials added during month	$60,000
Direct manufacturing labour during month	$20,000

Beginning work-in-process was half complete as to conversion. Direct materials are added at the beginning of the process. Factory overhead is applied at a rate equal to 50 percent of direct manufacturing labour. Ending work-in-process was 60 percent complete. All spoilage is normal and is detected at end of the process.

Required:

1. Prepare a production cost worksheet assuming that spoilage is recognized and the weighted-average method is used.