ACCT 2220 Group Discussion 2 Part I ABC Company uses two departments to make its products. Department I is a cutting department that is machine intensive and uses very few employees. Machines cut and form parts and then place the finished parts on a conveyor belt that carries them to Department II where they are assembled into finished goods. The assembly department is labor intensive and requires many workers to assemble parts into finished goods. The company’s manufacturing facility incurs two significant overhead costs: employee fringe benefits and utility costs. The annual costs of fringe benefits are $320,000 and utility costs are $248,000. The typical consumption patterns for the two departments are as follows.

Department I

Department II

Total

  Machine hours used

14,300      

5,700      

20,000   

  Direct labor hours used

6,700      

9,300      

16,000   

     The supervisor of each department receives a bonus based on how well the department controls costs. The company’s current policy requires using a single allocation base (machine hours or labor hours) to allocate the total overhead cost of $568,000.

Required:

a.

Assume that you are the supervisor of Department I. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected. 

b.

Assume that you are the supervisor of Department II. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected. 

c.

Assume that you are the plant manager and have the authority to change the company’s overhead allocation policy. Formulate an overhead allocation policy that would be fair to the supervisors of both Department I and Department II. Compute the overhead allocations for each department using your policy. 

Part II Gizmo Gadgets produces gadgets in three market categories, widget, wydot, and wingit. Gizmo Gadgets has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers.

  Category

Total Pooled Cost

Types of Costs

Cost Driver

  Unit

$

718,900

Indirect labor wages, supplies, depreciation,     machine maintenance

Machine hours

  Batch

694,100

Materials handling, inventory storage, labor for setups, packaging, labeling and shipping, scheduling

Number of production orders

  Product

210,400

Research and development

Time spent by research department

  Facility

416,000

Rent, utilities, maintenance, admin. salaries, security

Square footage

Additional data for each of the product lines follow.

Widget

Wydot

Wingit

Total

  Direct materials cost

$

35.40

/unit

$

24.90

/unit

$

30.10

/unit

—   

  Direct labor cost

$

14.50

/hour

$

14.50

/hour

$

17.70

/hour

—   

  Number of labor hours

5,600

12,400

2,600

20,600

  Number of machine hours

14,000

45,000

20,000

79,000

  Number of production orders

280

2,100

120

2,500

  Research and development time

14

%

17

%

69

%

100

%

  Number of units

16,000

42,000

15,000

73,000

  Square footage

20,000

48,000

12,000

80,000

Required:

a.

Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a company wide allocation base. Also determine the combined cost of all three product lines. 

b.

Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines. 

Part III ABC company has the opportunity to accept one of two jobs; it cannot accept both because they must be performed at the same time and ABC does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with each job follow.

  Cost Category

Job A

Job B

  Contract price

$

808,000

$

691,000

  Unit-level materials

244,800

225,150

  Unit-level labor

250,450

306,600

  Unit-level overhead

18,100

14,400

  Supervisor’s salary

115,670

115,670

  Rental equipment costs

25,800

28,400

  Depreciation on tools (zero market value)

20,900

20,900

  Allocated portion of companywide facility-sustaining costs

11,000

8,900

  Insurance cost for job

17,600

17,600

Required:

a-1.

Calculate the contribution to profit from Job A and Job B. 

a-2.

Assume that ABC has decided to accept one of the two jobs. Recommend which job to accept?

b-1.

Assume that Job A is no longer available. ABC’s choice is to accept or reject Job B alone. Calculate the contribution to profit from Job B. 

b-2.

Based on your answer to requirement b-1, recommend whether to accept or reject Job B.

Part IV Seymour Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Seymour produces a relatively small amount (14,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.70 each. If Seymour purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Seymour’s accountant constructed the following profitability analysis.

  Revenue (14,000 units × $14.0)

$

196,000

     Unit-level materials costs (14,000 units × $1.70)

(23,800

)

     Unit-level labor costs (14,000 units × $.60)

(8,400

)

     Unit-level overhead costs (14,000 × $.40)

(5,600

)

     Unit-level selling expenses (14,000 × $.20)

(2,800

)

  Contribution margin

155,400

     Skin cream production supervisor’s salary

(57,000

)

     Allocated portion of facility-level costs

(13,900

)

     Product-level advertising cost

(46,000

)

  Contribution to companywide income

$

38,500

Required:

a.

Calculate the total avoidable costs. 

b-1.

Calculate the total avoidable cost per unit. 

b-2.

Should Seymour continue to make the product or buy it from the supplier?

c-1.

Suppose that Seymour is able to increase sales by 10,000 units (sales will increase to 24,000 units). Calculate the total avoidable costs. 

c-2.

At this level of production, should Seymour make or buy the cream?

Part V XYZ Company the following cost of goods sold budget for April, May, June, and July.

April

May

June

July

  Budgeted cost of goods sold

$63,000

$73,000

$83,000

$89,000

     XYZ had a beginning inventory balance of $3,200 on April 1 and a beginning balance in accounts payable of $13,900. The company desires to maintain an ending inventory balance equal to 10 percent of the next period’s cost of goods sold. XYZ makes all purchases on account. The company pays 70 percent of accounts payable in the month of purchase and the remaining 30 percent in the month following purchase.

Required:

a.

Prepare an inventory purchases budget for April, May, and June. 

b.

Determine the amount of ending inventory XYZ will report on the end-of-quarter pro forma balance sheet. 

c.

Prepare a schedule of cash payments for inventory for April, May, and June. 

d.

Determine the balance in accounts payable XYZ will report on the end-of-quarter pro forma balance sheet.