Cost accounting unit 6
After reading information on cost drivers and quality improvement in Chapter 10 of the Fundamentals of Cost Accounting text, complete the following exercise and problem. In the exercise you will apply your knowledge of assigning cost drivers to activities, and in the problem you will determine whether new material should be used to improve manufacturing quality.
Complete the following problems:
Exercise 10-27, “Driver Identification,” page 403.
Problem 10-65, “Quality Improvement,” page 414.
10-27. Driver Identification
Below are various activities for a commercial loan company.
Required
Suggest a feasible cost driver base for each of the following, and explain why each selected cost driver base is feasible.
a. Sales callsnew commercial customers.
b. Commercial loan negotiation.
c. Commercial loan review.
d. Customer file maintenance.
e. Community involvement.
f. Employee relations.
g. Commercial loan customer service.
h. Consumer loan customer service.
i. Consumer loan review.
j. Sales callsexisting commercial customers.
k. Advertising particular products.
l. Consumer deposit/withdrawal processing.
m. Commercial deposit/withdrawal processing.
10-65. Quality Improvement
(
LO 10-7
)
Metallic, Inc., produces metal gates in two processes: bending, in which metal is bent to the correct shape, and welding, in which the bent metal pieces are welded into gates. The bending process has a capacity of 10,000 units per year; welding has a capacity of 14,000 units per year. Demand is strong. At a sales price of $500 per unit, the company can sell whatever output it can produce.
Metallic can start only 10,000 units into production in the Bending Department because of capacity constraints. At present, 1,500 units are found to be defective in the Bending Department each year. Defective units are not detected until the end of production in the Bending Department. At that point, the 1,500 defective units are scrapped. Unit costs in the Bending Department for both good and defective units equal $250 per unit, including an allocation of the total fixed manufacturing costs of $750,000 per year to units.
Direct materials (variable)
$125
Direct manufacturing, setup, and materials handling labor (variable)
50
Depreciation, rent, and other overhead (fixed)
75
Total unit cost
$250
The fixed cost of $75 per unit is the allocation of total fixed costs of the Bending Department to each unit, whether good or defective. (The total fixed costs are the same whether the units produced in the Bending Department are good or defective.)
The good units from the Bending Department are sent to the Welding Department. Variable manufacturing costs in the Welding Department are $75 per unit and fixed manufacturing costs are $500,000 per year. There is no scrap in the Welding Department. Therefore, the companys total sales quantity equals the Bending Departments good output. The company incurs no other variable costs.
The companys designers have discovered that, by using a new type of direct material, the company could reduce scrap in the Bending Department from 1,500 units to 500 units. Using the new material would increase the direct materials costs to $180 per unit in the Bending Department for all 10,000 units. Recall that only 10,000 units can be started each year.
Required
a. Should Metallic use the new material and improve quality? Assume that inspection and testing costs of $120,000 per year will be reduced by $20,000 with the new materials. Fixed costs in the Bending Department will remain the same whether 8,500 or 9,500 units are produced.
b. What other nonfinancial and qualitative factors should management of Metallic consider in making the decision?
After reading information on service department and joint cost allocation in Chapter 11 of the Fundamentals of Cost Accounting text, complete the following problems. The problems will help you apply your knowledge of allocation methods and the realizable value of joint products.
Complete the following problems:
Problem 11-49, “Comparison of Allocation Methods,” page 452.
Problem 11-61, “Net Realizable Value of Joint Products,” page 457.
11-49. Comparison of Allocation Methods
BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows:
Administration
Accounting
Domestic
International
Employees
25
45
180
Transactions
25,000
20,000
80,000
Department direct costs
$360,000
$144,000
$936,000
$3,600,000
Required
a. Allocate the cost of the service departments to the operating departments using the direct method.
b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.
c. Allocate the cost of the service departments to the operating departments using the reciprocal method.
d. Comment on the results.
11-61. Net Realizable Value of Joint Products
Davenport Company buys Alpha-11 for $6 a gallon. At the end of distilling in Department A, Alpha-11 splits off into three products: Beta-1, Beta-2, and Beta-3. Davenport sells Beta-1 at the split-off point, with no further processing; it processes Beta-2 and Beta-3 further before they can be sold. Beta-2 is fused in Department B, and Beta-3 is solidified in Department C. Following is a summary of costs and other related data for the year ended November 30.
Department
(1) Distilling
(2) Fusing
(3) Solidifying
Cost of Alpha-11
$720,000
0
0
Direct labor
180,000
$337,500
$487,500
Manufacturing overhead
150,000
157,500
405,000
Products
Beta-1
Beta-2
Beta-3
Gallons sold
180,000
360,000
540,000
Gallons on hand at year-end
120,000
0
180,000
Sales
$225,000
$720,000
$1,063,125
Davenport had no beginning inventories on hand at December 1 and no Alpha-11 on hand at the end of the year on November 30. All gallons on hand on November 30 were complete as to processing. Davenport uses the net realizable value method to allocate joint costs.
Required
Compute the following:
a. The net realizable value of Beta-1 for the year ended November 30.
b. The joint costs for the year ended November 30 to be allocated.
c. The cost of Beta-2 sold for the year ended November 30.
d. The value of the ending inventory for Beta-1.
