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ACC202 Week 2 E12-2 E12-4 E1208 E13-1 E13-4 E13-8 P12-16 P12-17 P13-23

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E12-2 Jeelani Construction Company is composed of two divisions: (1) Home Construction and 
2) Commercial Construction. The Home Construction Division is in the process of building 12 houses and the Commercial Construction Division is working on 3 projects. Cost items of the company follow.

Company president’s salary
Depreciation on crane used in commercial construction
Depreciation on home office building
Salary of corporate office manager
Wages of workers assigned to a specific construction project
Supplies used by the Commercial Construction Division
Labor on a particular house
Salary of the supervisor of commercial construction projects
Supplies, such as glue and nails, used by the Home Construction Division
Cost of building permits
Materials used in commercial construction projects
Depreciation on home building equipment (small tools such as hammers or saws)

Required
a. Identify each cost as being a direct or indirect cost assuming the cost objects are the individual
products (houses or projects).
b. Identify each cost as being a direct or indirect cost, assuming the cost objects are the two
divisions.
c. Identify each cost as being a direct or indirect cost assuming the cost object is Jeelani
Construction Company as a whole.

E12-4 Nevin Company makes three products in its factory: plastic cups, plastic tablecloths, and 
and plastic bottles. The expected overhead costs for the next fiscal year include the following:

Factory manager's salary  260,000
Factory utility cost  121,000
Factory supplies  56,000
Total overhead costs  437,000

Nevin uses machine hours as the cost driver to allocate overhead costs. Budgeted machine hours for the products are as follows:

Cups 420
Tablecloths 740
Bottles 1,140
Total machine hours2300

Required:
a. Allocate the budgeted overhead costs to the products.
b. Provide a possible explanation as to why Nevin chose machine hours, instead of labor hours, as the allocation base.

E12-8 Stevens Air is a large airline company that pays a customer relations representative 
$4,000 per month. The representative, who processed 1,000 customer complaints in January and 1,300 complaints in February, is expected to process 12,000 customer complaints during 2012.

Required:
a. Determine the total cost of processing customer complaints in January and in February
b. Explain why allocating the cost of the customer relations representative would or would not be relevant to the decision making.

E13-1 Leah Friend is trying to decide which of two different kinds of candy to sell in her retail 
candy store. One type is a name brand candy that will practically sell itself. The other candy is cheaper to purchase but does not carry an identifiable brand name. Ms. Friend believes that she will have to incur significant advertising costs to sell this candy. Several cost items for the two types of candy are as follows:

Cost per box  $6.00
Sales commissions per box  $1.00
Rent of display space  $1,500.00
Advertising  $3,000.00

Cost per box  $7.00
Sales commissions per box  $1.00
Rent of display space  $1,500.00
Advertising  $2,000.00

Required:
Identify each cost as being relevant or irrelevant to Ms. Friend’s decision and indicate whether it is fixed or variable relative to the number of boxes sold.

E13-4 Norman Concrete Company pours concrete slabs for single-family dwellings. 
Wayne Construction Company, which operates outside Norman’s normal sales territory, asks Norman to pour 40 slabs for Wayne’s new development of homes. Norman has the capacity to build 300 slabs and is presently working on 250 of them. Wayne is willing to pay only $2,500 per slab. Norman estimates the cost of a typical job to include unit-level materials, $1,000; unit-level labor, $600; and
an allocated portion of facility-level overhead, $700.

Required
Should Norman accept or reject the special order to pour 40 slabs for $2,500 each? Support your
answer with appropriate computations.

E13-8 Roaming Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Roaming produces
and sells only 6,000 bikes each year. Due to the low volume of activity, Roaming is unable
to obtain the economies of scale that larger producers achieve. For example, Roaming could buy
the handlebars for $35 each; they cost $38 each to make. The following is a detailed breakdown
of current production costs.

After seeing these figures, Roaming’s president remarked that it would be foolish for the company
to continue to produce the handlebars at $38 each when it can buy them for $35 each.
Item Unit Cost  Total 
 Materials   18  108,000
Labor   12  72,000
Overhead   3  18,000
Allocated facility-level costs   5  30,000
Total   38  228,000

Required

Do you agree with the president’s conclusion? Support your answer with appropriate computations

P12-16 Kirby Airlines is a small airline that occasionally carries overload shipments for the overnight delivery company Never-Fail Inc. Never-Fail is a multimillion-dollar company started by Jack. Never immediately after he failed to finish his first accounting course. The company’s motto is
“We Never-Fail to Deliver Your Package on Time.” When Never-Fail has more freight than it
can deliver, it pays Kirby to carry the excess. Kirby contracts with independent pilots to fly its
planes on a per trip basis. Kirby recently purchased an airplane that cost the company $5,500,000.
The plane has an estimated useful life of 25,000,000 miles and a zero salvage value. During the
first week in January, Kirby flew two trips. The first trip was a round trip flight from Chicago to
San Francisco, for which Kirby paid $350 for the pilot and $300 for fuel. The second flight was a
round trip from Chicago to New York. For this trip, it paid $300 for the pilot and $150 for fuel.
The round trip between Chicago and San Francisco is approximately 4,400 miles and the round
trip between Chicago and New York is 1,600 miles.

Required
a. Identify the direct and indirect costs that Kirby incurs for each trip.
b. Determine the total cost of each trip.
c. In addition to depreciation, identify three other indirect costs that may need to be allocated
to determine the cost of each trip.

P12-17 Hunt Manufacturing Company makes tents that it sells directly to camping enthusiasts through a mail-order marketing program. The company pays a quality control expert $72,000 per year to inspect completed tents before they are shipped to customers. Assume that the company completed
1,600 tents in January and 1,200 tents in February. For the entire year, the company
expects to produce 15,000 tents.

Required
a. Explain how changes in the cost driver (number of tents inspected) affect the total amount of
fixed inspection cost.
b. Explain how changes in the cost driver (number of tents inspected) affect the amount of
fixed inspection cost per unit.
c. If the cost objective is to determine the cost per tent, is the expert’s salary a direct or an indirect
cost?
d. How much of the expert’s salary should be allocated to tents produced in January and February?.

P13-23 Ellis Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,000 units. Ellis made 20,000 blankets during the prior accounting period. The cost of producing the blankets is summarized here

Materials cost ($25 per unit x 20,000)  500,000
Labor cost ($22 per unit x  20,000)  440,000
Manufacturing supplies ($2 x  20,000)  40,000
Batch-level costs (20 batches at $4,000 per batch)  80,000
Product-level costs  160,000
Facility-level costs  290,000
Total costs  1,510,000
Cost per unit = $1,510,000 / 20,000 = $75.50

Required
a. Kent Motels has offered to buy a batch of 500 blankets for $56 each. Ellis’s normal selling
price is $90 per unit. Based on the preceding quantitative data, should Ellis accept the special
order? Support your answer with appropriate computations.
b. Would your answer to Requirement a change if Kent offered to buy a batch of 1,000 blankets
for $56 per unit? Support your answer with appropriate computations.
c. Describe the qualitative factors that Ellis Quilting Company should consider before accepting
a special order to sell blankets to Kent Motels.

Week Two Exercises

Complete the following exercises from Chapters 12 & 13 and submit them to the instructor . Exercises: 12-2, 12-4, 12-8, 13-1, 13-4, 13-8.

Week Two Problems Complete the following problems from Chapters 12 & 13 and submit to the instructor Problems: 12-16, 12-17, 13-23.


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