Question;Problem 9-50The controller of Feinberg Company is gathering data to prepare the cash budget for July. Heplans to develop the budget from the following info:A. Of all sales, 40 percent are cash salesB. Of credit sales, 45% are collected within the month of sale. Half of the credit sales arecollected within the month receive a 2% cash discount (for accounts paid within 10days). 30% of credit sales are collected in the following month, remaining credit salesare collected the month thereafter. There are virtually no bad debts.C. Sals for the second two quarters of the year follow. (Note: the first 3 months are actualsales, and the last three months are estimated sales.Sales ($)April$450,000May580,000June900,000July1,140,000August1,200,000September1,134,000D. The company sells all that it produces each month. The cost of raw materials equals26% of each sales dollar. The company requires a month ending inventory of rawmaterials equal to the coming months production requirements. Of raw materialspurchases, 50% is paid for in the following month.E. Wages total $105,000/month and are paid in the month incurred.F. Budgeted monthly operating expenses total $376,000 of which $45,000 is depreciationand $6,000is expiration of prepaid insurance (the annual premium of $72,000 is paid onJanuary 1).G. Dividends of $130,000, declared on June 30 will be paid on July 15.H. Old equipment will be sold for $25,200 on July 4I.On July 13, new equipment will be purchased. For $173,000J. The company maintains a minimum cash balance of $20,000K. The cash balance on July 1 is $27,000Required: Prepare a cash budjet for July. Give a supporting schedule that details the cashcollections from sales.Problem 9-51Optima Company is a high-technology organization that produces a mass-storage system. Thedesign of Optimas system is unique and represents a breakthrough in the industry. The unitsOptima produces combine positive features of both compact and hard disks. The company iscompleting its fifth year of operations and is preparing to build its master budget for the comingyear (2012). The budget will detail each quarters activity and the activity for the year in total.The master budget will be based on the following information:a)Fourth quarter sales for 2011 are 55,000 unitsb)Unit sales by quarter for 2012 are projected as follows:First Quarter65,000Second QuarterThird QuarterFourth Quarter70,00075,00090,000The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all saleswithin the quarter in which they are realized, the other 15% are collected in the followingquarter. There are no bad debts.c)There is no beginning inventory of finished goods. Optima is planning the followingending finished goods inventories for each quarter:First QuarterSecond QuarterThird QuarterFourth Quarter13,000 units15,000 units20,000 units10,000 unitsd)Each mass-storage unit uses 5 hours of direct labor and three units of direct materials.Laborers are paid $10 per hour, and one unit of direct materials costs $80.e)There are 65,700 units of direct materials in beginning inventory as of January 1, 2008.At the end of each quarter, Optima plans to have 30% of direct materials needed for nextquarters unit sales. Optima will end the year with the same level of direct materials found inthis years beginning inventory.f)Optima buys direct materials on account. Half of the purchases are paid for in thequarter of acquisition, and the remaining half are paid for in the following quarter. Wages andsalaries are paid on the 15th & 30th of each month.g)Fixed overhead totals $1 million each quarter. Of this total, $350,000 representsdepreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixedoverhead rate is computed by dividing the years total fixed overhead by the years expectedactual units produced.h)Variable overhead is budgeted at $6 per direct labor hour. All variable overheadexpenses are paid for in the quarter incurred.i)Fixed selling and administrative expenses total $250,000 per quarter, including $50,000depreciationj)Variable selling and administrative expenses are budgeted at $10 per unit sold. Allselling and administrative expenses are paid for in the quarter incurred.k)The balance sheet as of December 31, 2007, is as follows:BALANCE SHEETDECEMBER 31, 2011Assets:EquityLiabilities and StockholdersCash$250,000Accounts Payable$7,248,000*Direct Materials inventory5,256,000Capital Stock27,000,000Accounts Receivable3,300,000Retained EarningsPlant and Equipment33,500,000Total Assets$42,306,000$42,306,0008,058,000Total Liabilities and S/E Equity*For purchases of direct materials onlyl) Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 million ofequipment will be purchased.Required:Prepare a master budget for Optima Company for each quarter of 2012 and for the year in total.The following component budgets must be included.1.Sales Budget2.Production Budget3.Direct materials purchases budget4.Direct labor budget5.Overhead budget6.Selling and administrative expenses budget7.Ending finished goods inventory budget8.Cost of goods sold budget (assume that there is no change in work-in-processinventories)9.Cash budget10.Pro forma income statement (using absorption costing) (Note: ignore income taxes.)11.Pro forma balance sheet ignore income taxesProblem 10-41Tom Belford and Tony Sorrentino own a small business devoted to kitchen and bath graniteinstallations. Recently, building contractors have insisted on up-front bid prices for a houserather than the cost-plus system that Tom and Tony were used to. They worry because naturalflaws in the granite make it impossible to tell in advance exactly how much granite will be usedon a particular job. In addition, granite can be easily broken, meaning that Tom or Tony couldruin a slab and would need to start over with a new one. Sometimes the improperly cut piecescould be used for smaller installations, sometimes not. All their accounting is done by a localcertified public accounting firm headed by Charlene Davenport. Charlene listened to theirconcerns and suggested that it might be time to implement tighter controls by setting up astandard costing system. Charlene reviewed the invoices pertaining to a number of Tom andTonys previous jobs to determine the average amount of granite and glue needed per squarefoot. She then updated prices on both materials to reflect current conditions. The standards shedeveloped for one square foot of counter installed were as follows:Granite, per square foot $50.00Glue (10 oz. @ $0.15) 1.50Direct labor hours:Cutting labor (0.10 hr. @ $15) 1.50Installation labor (0.25 hr. @ $25) 6.25These standards assumed that one seamless counter requires one sink cut (the space intowhich the sink will fit) as well as cutting the counter to fit the space available. Charlene trackedthe actual costs incurred by Tom and Tony for granite installation for the next six months. Shefound that they completed 50 jobs with an average of 32 square feet of granite installed in eachone. The following information on actual amounts used and cost was gathered:Granite purchased and used (1,640 sq. ft.) $79,048Glue purchased and used (16,000 oz.) $ 2,560Actual hours cutting labor 180Actual hours installation labor 390The actual wage rate for cutting and installation labor remained unchanged from the standardrate.Required:1. Calculate the materials price variances and materials usage variances for granite and for gluefor the past six months.2. Calculate the labor rate variances and labor efficiency variances for cutting labor and forinstallation labor for the past six months.3. Would it be worthwhile for Charlene to establish standards for atypical jobs (e.g., those withmore than one sink cut or wider than normal)?Problem 10-43The maternity wing of the city hospital has two types of patients: normal and cesarean. Thestandard quantities of labor and materials per delivery for 2011 are:NormalCesareanDirectMaterials (lbs)Nursing Labor(hrs)9.0212.55The standard price paid per pound of direct materials is $10. The standard rate for labor is $16.Overhead is applied on the basis of direct labor hours. The variable overhead rate for maternityis $30/hour, and the fixed overhead rate is $40/hour.Actual operating data for 2011 are as follows:a. Deliveries produced: normal, 4,000, cesarean, 8,000b. Direct materials purchased & used: 200,000 pounds at $9.5035,000 for normalmaternity patients and $165,000 for the cesarean patients, no beginning or ending rawmaterials inventories.c. Nursing labor: 50,70010,200 for normal patients & 40,500 hours for the cesarean, totalcost of labor, $580,350.Required:1. Prepare a standard cost sheet showing the unit cost per delivery for each patient type.2. Compute the materials price and usage variances for each type of patient.3. Compute the labor rate & efficiency variances.4. Assume that you know only the total direct materials used for products and the totaldirect labor hours used for both products. Can you compute the total materials usage &labor efficiency variances? Explain5. Standard costing concepts have been applied in the healthcare industry. For example,diagnostic-related groups (DRGs) are used for prospective payment for Medicarepayments. Please find out the following:a. What is a DRGb. How are DRGs establishedc. How many DRGs are usedd. How the DRG concept relate to standard costing concepts. Can hospitals use DRGsto control their costs? Explain.Problem 10-44Buenolorl company produces a well-known cologne. The standard manufacturing cost of thecologne is described by the following standard cost sheet:Direct Materials:Liquids (4.5 oz @ $0.40)$1.80Bottles (1 @ $0.05)$0.05Direct Labor (0.2 @$15.00)Variable Overhead (0.2hr @ $5.00)Fixed overhead (0.2 hr.@ $1.50Standard Cost per unit$3.00$1.00$0.30$6.15Management has decided to investigate only those variances that exceed the lesser of 10percent of the standard cost for each category or $20,000. During the past quarter, 250,000 4ounce bottles of cologne were produced. Descriptions of actual activity for the quarter follow:a. A total of 1.35 million ounces was purchased, mixed, & processed. Evaporation washigher than expected (no inventories of liquids are maintained). The price paid per ounceaveraged $0.42.b. Exactly 250,000 bottles were used. The price paid for each bottle was $0.048.c. Direct labor hours totaled 48,250 with a total cost of $733,000.Normal production volume for Buenolorl is 250,000 bottles per quarter. The standard overheadrates are computed by using normal volume. All overhead costs are incurred uniformlythroughout the year.Required:1. Calculate the upper & lower control limits for materials and labor.2. Compute the total materials variance, and break it into price & usage variances. Wouldthese variances be investigated?3. Compute the total labor variance, and break it into rate & efficiency variances. Wouldthese variances be investigated?Problem 11-37Chelsey Company is planning to produce 2,600,000 power drills for the coming year. Thecompany uses direct labor hours to assign overhead to products. Each drill require 0.6 standardhour of labor for completion. The total budgeted overhead was $1,981,200. The total fixedoverhead budgeted for the coming year is $1,326,000. Predetermined overhead rates arecalculated using expected production, measured in direct labor hours. Actual results for the yearare:Actual production (units) 2,560,000Actual direct labor hours (AH) 1,535,400Actual variable overhead $644,100Actual fixed overhead $1,330,000Required:1. Compute the applied fixed overhead2. Compute the fixed overhead spending & volume variances.3. Compute the applied variable overhead.4. Compute the variable overhead spending and efficiency variances.Problem 11-49Orchard Fresh Inc. purchases fruit from numerous growers and packs fruit boxes and fruitbaskets for sale. Orchard Fresh has developed the following flexible budget for overhead for thecoming year. Activity level is measured in direct labor hours.Activity level (hours)2,0002,5003,000VariableCosts:Maintenance$0.76$1,520$1,900$2,280Supplies$0.45$900$1,125$1,350Power$0.20$400$500$600Total VariableCosts$1.41$2,820$3,525$4,230Depreciation$4,800$4,800$4,800Salaries$24,500$24,500$24,500$29,300$29,300$29,300$32,120$32,825$33,530Fixed CostsTotal FixedCostsTotalOverheadCosts:Required:1. Prepare a flexible budget for May, using 200, 240, and 280 direct labor hours.2. The Cushing High School Parent-Teacher Organization ordered 200 gift baskets fromOrchard Fresh to be given to teachers and support staff as a thank you for a successfulschool year. These gift baskets must be ready by 5/31 and were not included in theoriginal production budget for May. Without preparing a new overhead budget, what isthe new total budgeted overhead for May for Orchard Fresh.Problem 11-51Carly Davis, production manager, was upset and puzzled by the latest performance report,which indicated that she was $100,000 over budget. She and her staff had worked hard to beatthe budget.Now she saw 3 items-direct labor, power, & setupswere over budget. The actual costs forthese 3 items were as follows:Direct labor $210,00Power $135, 000Setups $140,000Total 485,000Carly felt that the addl labor & power cost were due to the fact that her team produced moreunits than originally budgeted. Uncertainty in scheduling had led to more setups than planned.She asked Sean Carpenter, the controlle, why the performance report did not take the addlproduction into account. Sean assured Carly that he did adjust the report for increasedproduction & shower her the budget formulas he used to predict the cost for different levels ofactivity. The formulas were based on direct labor hours as follows:Direct labor = $10XPower Cost = $5, 000 + $4xSetup cost = $100,000Carly pointed out that power costs were unrelated to direct labor hours, but that they seemed tovary with machine hours instead. She also pointed out that setup costs were not fixed. Theyvaried with the number of setupswhich had increased due to scheduling changes. Theincrease in setups required her team to work overtime, adding to the costs. Each setup alsotook supplies that added significantly to overhead costs.Sean aggred that the formulas did not adequately take care of Carlys concerns. Heagreed to develop a new set of cost formulas based on better explanatory variables. After a fewdays, Sean shared the following cost formulas with Carly:Direct labor cost = $10X where X = direct labor hoursPower cost = $68,000 + 0.9Y where Y = machine hoursSetup cost = $98,000 + $400Z where Z = number of setupsThe actual measure of each activity driver is as followsDirect labor hours 20,000Machine hours 90,000Number of setups 110Required:1. Prepare a performance report for direct labor, power, & setups using the direct laborbased formulas2. Prepare a performance report for direct labor, power & setups using the multiple costdriver formulas that Sean developed.3. Of the 2 approaches which provides the more accurate picture of Carlys performance?Why?
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