Prepare a quantitative comparison of the traditional and activity-based cost assignments.
ACC 601-70-H220
Extra Credit Case: (100 Points)
Specific Instructions:
1. Complete this assignment in good form. Submit a copy of your complete work via Moodle.
Part A: Variable and Absorption Costing Unit Product Costs and Income Statements
High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation:
Beginning inventory 0
Units produced 10,000
Units sold 8,000
Selling price per unit $ 75
Selling and administrative expenses:
Variable per unit $ 6
Fixed (per month) $ 200,000
Manufacturing costs:
Direct materials cost per unit $ 20
Direct labor cost per unit $ 8
Variable manufacturing overhead cost per unit $ 2
Fixed manufacturing overhead cost (per month) $ 100,000
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Management is anxious to assess the profitability of the new camp cot during the month of May.
Required:
1. Assume that the company uses absorption costing.
a. Determine the unit product cost.
b. Prepare an income statement for May.
2. Assume that the company uses variable costing.
a. Determine the unit product cost.
b. Prepare a contribution format income statement for May.
Part B: Comparing Traditional and Activity-Based Product Margins
Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown:
Hi-Tek Manufacturing Inc.
Income Statement
Sales $ 2,100,000
Cost of goods sold 1,600,000
Gross margin 500,000
Selling and administrative expenses 550,000
Net operating loss $ (50,000 )
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Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:
B300 T500 Total
Direct materials $ 436,300 $ 251,700 $ 688,000
Direct labor $ 200,000 $ 104,000 304,000
Manufacturing overhead 608,000
Cost of goods sold $ 1,600,000
________________________________________
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $50,000 and $100,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:
Manufacturing
Overhead Activity
Activity Cost Pool (and Activity Measure) B300 T500 Total
Machining (machine-hours) $ 213,500 90,000 62,500 152,500
Setups (setup hours) 157,500 75 300 375
Product-sustaining (number of products) 120,000 1 1 2
Other (organization-sustaining costs) 117,000 NA NA NA
Total manufacturing overhead cost $ 608,000
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Required:
1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.
2. Compute the product margins for B300 and T500 under the activity-based costing system.
3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.
Part C:Master Budget with Supporting Schedules
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.
The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):
January (actual) 20,000 June (budget) 50,000
February (actual) 26,000 July (budget) 30,000
March (actual) 40,000 August (budget) 28,000
April (budget) 65,000 September (budget) 25,000
May (budget) 100,000
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The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.
Suppliers are paid $4 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Variable:
Sales commissions 4 % of sales
Fixed:
Advertising $ 200,000
Rent $ 18,000
Salaries $ 106,000
Utilities $ 7,000
Insurance $ 3,000
Depreciation $ 14,000
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Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.
The company’s balance sheet as of March 31 is given below:
Assets
Cash $ 74,000
Accounts receivable ($26,000 February sales; $320,000 March sales) 346,000
Inventory 104,000
Prepaid insurance 21,000
Property and equipment (net) 950,000
Total assets $ 1,495,000
Liabilities and Stockholders’ Equity
Accounts payable $ 100,000
Dividends payable 15,000
Common stock 800,000
Retained earnings 580,000
Total liabilities and stockholders’ equity $ 1,495,000
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The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.
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