Skaros Stairs Co. of Moore designs and builds factory-made premium wooden stairs for homes (A+)

Skaros Stairs Co. of Moore designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2011 are as follows.

Overhead Cost Pools Amount

Purchasing $ 57,000

Handling materials 82,000

Production (cutting, milling, finishing) 210,000

Setting up machines 85,000

Inspecting 90,000

Inventory control (raw materials and finished goods) 126,000

Utilities 180,000

Total budget overhead costs $830,000

For the last 4 years, Skaros Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2011, 100,000 machine hours are budgeted.

Anthony Morse, owner-manager of Skaros Stairs Co., recently directed his accountant, Neal Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Anthony Morse\’s request, Neal and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Activity Cost Pools Cost Drivers Expected

Use of

Cost Drivers

Purchasing Number of orders 600

Handling materials Number of moves 8,000

Production (cutting, milling, finishing) Direct labor hours 100,000

Setting up machines Number of setups 1,250

Inspecting Number of inspections 6,000

Inventory control Number of components 168,000

(raw materials and finished goods)

Utilities Square feet occupied 90,000

David Hannon, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At David\’s request, Neal prepares cost estimates for producing components for 280 stairs so David can submit a contract price per stair to Community Builders. He accumulates the following data for the production of 280 stairways.

Direct materials $103,600

Direct labor $112,000

Machine hours 14,500

Direct labor hours 5,000

Number of purchase orders 60

Number of material moves 800

Number of machine setups 100

Number of inspections 450

Number of components 1 6,000

Number of square feet occupied 8,000

Requirement:

Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
What is the manufacturing cost per stairway under traditional costing?

What is the manufacturing cost per stairway under the proposed activity-based costing?

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Overton Electronics manufactures two large-screen television models (A+)

Overton Electronics manufactures two large-screen television models: the Royale which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2011 was as follows.

Traditional Costing Royale Majestic

Direct materials $700 $420

Direct labor ($20 per hour) 120 100

Manufacturing overhead ($38 per DLH) 228 190

Total per unit cost $1,048 $710

In 2011, Overton manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $38 per direct labor hour was determined by dividing total expected manufacturing overhead of $7,600,000 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was: Royale $552 or ($1,600 – $1,048), and Majestic $590 or ($1,300 – $710). Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model.

Before finalizing its decision, management asks Overton\’s controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2011.

Activity Cost Driver Estimated Overhead Expected Use Activity-Based Overhead Rate

of Cost Drivers

Purchasing Number of orders $1,200,000 40,000 $30/order

Machine setups Number of setups 900,000 18,000 50/setup

Machining Machine hours 4,800,000 120,000 40/hour

Quality control Number of inspections 700,000 28,000 25/inspection

The cost drivers used for each product were:

Cost Driver Royale Majestic Total

Purchase orders 15,000 25,000 40,000

Machine setups 5,000 13,000 18,000

Machine hours 75,000 45,000 120,000

Inspections 9,000 19,000 28,000

Requirement:

Assign the total 2011 manufacturing overhead costs to the two products using activity-based costing (ABC).
What was the cost per unit and gross profit of each model using ABC costing?

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FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers (A+)

FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home 1 model is a high-volume (54,000 units), half-gallon cylinder that holds 2½ pounds of multipurpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hrs × (54,000 + 10,200)]. Expected annual manufacturing overhead is $1,502,280. Thus, the predetermined overhead rate is $15.60 or ($1,502,280 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models.

The company\’s managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.

Activity Cost Cost Driver Estimated Expected Useof Expected Use

Pool Overhead Cost Drivers of Drivers by Product

Home Commercial

Receiving Pounds $70,350 335,000 215,000 120,000

Forming Machine 150,500 35,000 27,000 8,000

hours

Assembling Number 390,600 217,000 165,000 52,000 of parts

Testing Number 51,000 25,500 15,500 10,000

of tests

Painting Gallons 52,580 5,258 3,680 1,578

Packing Pounds 787,250 335,000 215,000 120,000 and shipping

$1,502,280

Requirement:

Under traditional product costing, compute the total unit cost of both products.
Under ABC, complete the schedule showing the computations of the activity-based overhead rates (per cost driver).
Complete the schedule assigning each activity\’s overhead cost pool to each product based on the use of cost drivers.
Compute the total cost per unit for each product under ABC

Classify each of the activities as a value-added activity or a non-value-added activity.

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Pop Corporation acquired a 70 percent interest in Stu Corporation (A+)

Pop Corporation acquired a 70 percent interest in Stu Corporation on January 1,201I\’ for $1,400,000, when Stu\’s stockholders\’ equity consisted of $1,000,000 capital stock and $600,000 retained earnings. On this date, the book value of Stu\’s assets and liabilities was equal to the fair value, except for inventories that were undervalued by $40,000 and sold in 2011, and plant assets that were undervalued by $160,000 and had a remaining useful life of eight years from January 1. Stu\’s net income and dividends for 2011 were $140,000 and $20,000, respectively.

Separate-company balance sheet information for Pop and Stu Corporations at December 31, 2011, follows (in thousands):

Pop Stu

Cash $ 120 $40

Accounts receivable-customers 880 400

Accounts receivable from PoP – 20

Dividends receivable 14 -

Inventories 1,000 640

Land 200 300

Plant assets-net 1,400 700

Investment in Stu 1,442 -

$5,060 $2,100

Accounts payable-suppliers $ 600 160

Accounts payable to Stu 20 -

Dividends payable 80 20

Long-term debt 1,200 200

Capital stock 2,000 1,000

Retained earnings 1,156 720

$5,060 $2,100

Required:

Prepare consolidated balance sheet work papers for Pop Corporation and Subsidiary at December 31, 2011.

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Par Corporation acquired 70 percent of the outstanding common stock of Set Corporation on January 1, 2011, for $350,000 cash (A+)

Par Corporation acquired 70 percent of the outstanding common stock of Set Corporation on January 1, 2011, for $350,000 cash. Immediately after this acquisition the balance sheet information for the two companies was as follows (in thousands):

Set

Par Book Value Book Value Fair Value

Assets

Cash 70 40 40

Receivables-net 160 60 60

Inventories 140 60 100

Land 200 100 120

Buildings-net 220 140 180

Equipment-net 160 80 60

Investment in Set 350

Total assets 1300 480 560

Liabilitie s and Stockholders\’ Equity

Accounts payable 180 160 160

Other liabilities 20 100 80

Capital stock, $20 par 1000 200

Retained earnings 100 20

Total equities 1300 480

REQUIRED

1- Prepare a schedule to allocate the difference between the fair value of the investment in Set and the book value of the interest to identifiable and unidentifiable net assets.

2 Prepare a consolidated balance sheet for Par Corporation and Subsidiary at January 1, 2011.

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The management of Kuiper Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods (A+)

The management of Kuiper Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2012 the accounting records show these data.

Inventory, January 1 (10,000 units) $41,125

Cost of 141,000 units purchased 650,128

Selling price of 111,625 units sold 857,750

Operating expenses 141,000

Units purchased consisted of 41,125 units at $4.35 on May 10; 70,500 units at $4.58 on August 15; and 29,375 units at $5.05 on November 20. Income taxes are 28%.

a) Complete the comparative condensed income statements for 2012 under FIFO and LIFO below.

(1) Which cost flow method produces the more meaningful inventory amount for the balance sheet?

(2) Which inventory cost flow method produces the more meaningful net income?

(3) Which cost flow method is more likely to approximate the actual physical flow of goods?

(4) How much more cash will be available for management under LIFO than under FIFO?

(5) How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO?

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Remsen Company Inc. had a beginning inventory of 268 units of Product MLN at a cost of $11 per unit (A+)

Remsen Company Inc. had a beginning inventory of 268 units of Product MLN at a cost of $11 per unit. During the year, purchases were:

Feb. 20 938 units at $12 Aug. 12 536 units at $15

May 5 670 units at $13 Dec. 8 134 units at $16

Remsen Company uses a periodic inventory system. Sales totaled 1,876 units.

Requirement:

(a) Determine the cost of goods available for sale.

(b) Determine the ending inventory and the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost).

(c) Which cost flow method results in the lowest inventory amount for the balance sheet?

(d) Which cost flow method results in the lowest cost of goods sold for the income statement?

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Turner Distribution markets CDs of numerous performing artists (A+)

Turner Distribution markets CDs of numerous performing artists. At the beginning of March, Turner had in beginning inventory 3,600 CDs with a unit cost of $10. During March Turner made the following purchases of CDs.

March 5 2,880 @ $12 March 21 5,760 @ $14

March 13 7,920 @ $13 March 26 2,880 @ $16

During March 18,720 units were sold. Turner uses a periodic inventory system

Requirement:

(a) Determine the cost of goods available for sale.

(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost).

(c) Which cost flow method results in the highest inventory amount for the balance sheet?

(d) Which cost flow method results in the highest cost of goods sold for the income statement?

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Kuchin Company reports the following for the month of June (A+)

Kuchin Company reports the following for the month of June.

Date Explanation Units Unit Cost Total Cost

June 1 Inventory 231 $9 $2,079

June 12 Purchase 694 11 7,634

June 23 Purchase 926 13 12,038

June 30 Inventory 370

Calculate the cost of the ending inventory and the cost of goods sold for each cost flow assumption, using a perpetual inventory system. Assume a sale of 796 units occurred on June 15 for a selling price of $15 and a sale of 685 units on June 27 for $17.

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This information is available for SodaCo, Inc. for 2007, 2008, and 2009 (A+)

This information is available for SodaCo, Inc. for 2007, 2008, and 2009.

(in millions) 2007 2008 2009

Beginning inventory $1,640 $2,077 $2,207

Ending inventory 2,077 2,207 3,185

Cost of goods sold 12,791 13,905 14,978

Sales 31,086 34,485 38,058

Calculate the inventory turnover ratio, days in inventory, and gross profit rate for SodaCo., Inc. for 2007, 2008, and 2009.

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