Ch 1 & 2 Problem Solutions

1. Ch 1 & 2 Problem Solutions

2. Pr. 1-31

3. The options…

4. A. Only the differential production costs. B. The total cost per monitor for normal production of 40k monitors. C. The total cost per monitor for production of 44k, excluding marketing costs. D. The total cost per monitor for production of 44k, including marketing costs.

5. Pr. 1-31, Authors’ conclusions… We believe the most justifiable options exclude marketing costs and reflect the actual production level of 44,000 monitors. These are Options A and C. (As stockholders in Alameda Instruments, we would prefer Option C.) Also, depending on the resolution of the term “cost,” we may want to consider whether the 20 percent markup in the next contract is sufficient.

6. Problem 1-31, Cost Data for Managerial Purposes • (20 Min.) Cost Data for Managerial Purposes: T-Comm. • This problem demonstrates the ambiguity in measuring “costs.” • South Division’s controller included the “per unit” fixed costs, which were calculated for allocation purposes under normal production volume, when he or she calculated the per unit cost of the additional production. The controller charged North Division on that basis, ignoring the differential costs as a basis for interdivision sales.

7. Possible options available are as follows: A. Use the full per unit cost for normal production of 2,400 units. B. Use only differential costs as the cost basis. C. Use differential costs plus a share of fixed costs, based on actual production volume (with North’s order) of 3,000 units.

8. Pr. 1-32 Cost options

9. Pr. 1-32 Conclusions Dr. Bailey’s comment: This is a transfer-pricing problem, concerning sales between segments of an organization. It will affect the profits reported in both divisions, and a good pricing system will encourage good decisions about insourcing/outsourcing. This is a complex topic, covered in Ch. 15. Authors’ conclusions: If fixed costs are not differential and South has no alternative uses of the excess capacity (between 3,000 units available capacity and 2,400 units used), then Option B is the most defensible. Options A and C overstate the differential cost of production which could inappropriately affect North Division’s decisions about buying internally or externally, or about pricing its product, among other decisions. (If option B is used and managers forget that there are fixed costs of production, then it is also possible that North Division’s pricing decision could be affected inappropriately.)

10. Pr. 1-33: Cost Data for Managerial Purposes: Campus Package Delivery

11. Pr. 1-33 Conclusions The decision to expand and offer the express service results in differential profits of $26,900, so it is profitable to expand. Note that only differential costs and revenues figured in the decision. The manager’s salary did not change, so it did not affect the decision. Managers need to consider whether the new service will have an effect on their current business (perhaps reducing demand).

12. Pr. 1-37: Cost Data for Managerial Purposes––Budgeting CB’s comment: Introduces the notion of a flexible budget (Ch. 13). If this budget represents what the costs should be at this level of activity, then the differences represent variances to be analyzed. The favorable variances are shown in parentheses; their credit values are favorable towards profit.

13. Pr. 1-37 Conclusions The three items that we would investigate would be (a) utilities; (b) chocolate; and, (c) eggs. These three have the largest difference between what we actually incurred and the budget. Even though we incurred less cost for the chocolate than expected, we would still investigate this to understand why. For example, if we are using a lower quality chocolate or less chocolate in the cookies than budgeted, this might eventually affect sales adversely.

14. Ch. 2, Selected Exercises 2-22, 2-23, 2-24, 2-25, 2-26, 2-28 Basic Concepts 2-30—Ethical Issues

15. 2-32: Prepare Statements for a Service Company: Chuck’s Brokerage Service

16. 2-34: Prepare Statements for a Service Company: Jupiter Consultants

17. 2-36: Prepare Statements for a Manufacturing Company: Todd Machining Company The best approach to solving this problem is to lay out the format of the Cost of Goods Sold Statement first, then fill in the amounts known. Next find the subtotals that are possible (e.g., Finished goods available for sale). Finally, solve for letters (a), (b), and (c) where (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c. ** Difference between total manufacturing costs and direct materials used.

18. Manufacturing Income Statement Broken into Schedules (Useful Formulas!)—Bailey’s added slide from Lecture on Ch. 2 Sales - CGS =Gross Margin -Period Costs =Operating Income This is the “other manufacturing costs” that make up the amount above the material cost. (a) Used to DM used • BIFG • + CGM • EIFG • CGS • BIWIP • +Mfg Cost • EIWIP • CGM DL + DMUSED + CC* Mfg Costs BIDM + PURCHDM - EIDM DMUSED (b) This formula was used to find CGM (all other values given) (c) Used to find Mfg Costs (all other values known) *Earlier version said OH, but any Direct Labor needs to be included, so Conversion Cost.

19. Pr. 2-39: Prepare Statements for a Merchandising Company: Angie’s Apparel.

20. Pr. 2-41: Cost Behavior for Forecasting: Lima Company The variable costs will be 25000/30000 = 5/6 of last month: The variable cost per unit is $63 at both 30,000 and at 25,000 units. Total variable costs at 30,000 units is $1,890,000 (= $510,000 + $1,120,000 + $120,000 + $140,000). Unit variable costs = $63 per unit = ($1,890,000 / 30,000 units) or ($1,575,000 / 25,000 units).

21. Pr. 2-46: Gross Margin and Contribution Margin Income Statements: Fremont Products