Question;ACCTG 421 2013 Fall;Case (50 points);American Guitar Company manufactures two different high;quality acoustic guitars for retailers: beginner model and professional model. The;company has two service departments: the maintenance department and the power department;and two manufacturing departments: the construction department and the;finishing department. American Guitar chooses the reciprocal method to allocate;service department costs. It uses operation costing to assign direct materials;and conversion costs to its products, and absorption costing with normal costs;for external reporting purposes.;In the Construction Department, the wooden guitars are built;by highly skilled craftsmen and coated with several layers of lacquer. Then the;units are transferred to the Finishing Department, where the bridge of the;guitar is attached and the strings are installed. The guitars also are tuned;and inspected in the Finishing Department.;American Guitar estimates to have an annual practical capacity of 6000 guitars;(1500 units of professional model and 4500 units of beginner model). The;budgeted sales for 2013 are 1300 units professional model and 4300 units of;beginner model. The diagram below depicts the manufacturing process.;The following historical information has been collected from;American Guitar's accounting information systems;2009;2010;2011;2012;Annual sales;4146(B) & 1611(P);4456(B) & 1256(P);4668(B) & 1322(P);4075(B) & 1300(P);July sales;393(B) & 183(P);398(B) & 163(P);405(B) & 168(P);372(B) & 155(P);2012;Total Overhead ($);Total DLH of the two manufacturing departments;January;134,000;2,210;February;137,000;2,280;March;148,000;2,510;April;155,000;2,790;May;157,000;2,980;June;165,000;3,590;July;169,000;3,490;August;168,000;3,030;September;163,000;3,040;October;157,000;3,380;November;139,000;2,420;December;133,000;2,100;Total;1,825,000;33,820;American Guitar?s direct;and indirect MOH costs for the two service and two manufacturing departments in;2012;Power Department;Maintenance Department;Construction Department;Finishing;Department;Total Amount;Labor-hours;2022;2032;18950;14870;37,874;Kilowatt-hours;2,000;7,000;40,800;30,200;80,000;Maintenance hours;120;60;800;1,000;2,000;Direct fixed costs;$60,000;$36,000;$480,000;$432,000;$1,008,000;Direct variable costs;$58,000;$40,000;$346,800;$358,200;$803,000;Indirect fixed costs;$9,600;Indirect variable costs;$4,400;American Guitar does not expect significant changes in its manufacturing;costs in 2013.;At the end of June 2013, the balance in American Guitar?s;Materials Inventory account, which included 150 pounds of grade A veneered;wood, was $2,640, the balance in the finished-goods inventory, which was;valuated using the last-in, first-out (LIFO) method, consisted of 2 models, was;$16,600.;Quantity and Unit Cost;Beginner model;20 units @ $430 each;Professional model;10 units @ $800 each;The following pertains to the month of July.;There were no beginning;inventories in both manufacturing departments.American Guitar's;work-in-process inventory on July 31 consisted of two jobs: B0642 and;P0642. The ending WIP inventories at the finishing department for B0642;and P0642 have 10 EU and 6 EU respectively.Additions to and;requisitions from the materials inventory during the month of July;included the following.;Raw Materials;Purchased Parts;Additions;550 pounds of grade A veneered wood for $9,680;3300 pounds of grade B veneered wood for $41,580;100 set of premium bridges and strings for $1,840;400 set of regular bridges and strings for $6,560;Requisitions;Job B0639 (120 beginner units);936 pounds of grade B wood;125 regular sets;Job B0640 (100 beginner units);790 pounds of grade B wood;103 regular sets;Job B0641 (150 beginner units);1170 pounds of grade B wood;153 regular sets;Job B0642 (15 beginner units);118 pounds of grade B wood;10 regular sets;Job P0640 (30 professional units);240 pounds of grade A wood;31 premium sets;Job P0641 (35 professional units);273 pounds of grade A wood;32 premium sets;Job P0642 (10 professional units);82 pounds of grade A wood;6 premium sets;The average hourly rate;for the construction and finishing departments in July was $15 and $14;respectively. The total payroll taxes and fringe benefits rate for American;Guitar was 40% of wages paid. The July labor hours consisted of the;following;Account;Construction Department;Finishing Department;Job B0639 (120 beginner units);350;264;Job B0640 (100 beginner units);302;200;Job B0641 (150 beginner units);448;285;Job B0642 (15 beginner units);40;17;Job P0640 (30 professional units);150;144;Job P0641 (35 professional units);173;176;Job P0642 (10 professional units);52;22;372 beginner;models & 70 professional models were sold on account for $600 (beginner;model) & $960 (professional model) each. The finished-goods inventory;is valuated using LIFO method.;The actual direct;fixed costs for power department and maintenance department were $4,050;and $4,000 respectively. The actual direct variable costs for power;department and maintenance department were $17,084 and $9,280;respectively.;The actual;direct fixed costs for construction department and finishing department;were $40,100 and $35,800 respectively. The actual direct variable for;construction department and finishing department were $33,084.60 and $34,038.40;respectively.;Depreciation of;the general facility and equipment shared by both manufacturing departments;during July amounted to $12,000.;Rent paid in;cash for warehouse space used by the manufacturing departments during July;was $1,200. Utility costs incurred for the warehouse during July amounted;to $600. The invoices for these costs were received, but the bills were;not paid in July.;July property;taxes on the general facility were paid in cash, $2,400.;The insurance;cost covering factory operations for the month of July was $3,100. The;insurance policy had been prepaid.;The costs of;salaries and fringe benefits for sales and administrative personnel paid;in cash during July amounted to $8,000.;Depreciation on;administrative office equipment and space amounted to $4,000.;Other selling;and administrative expenses paid in cash during July amounted to $35,000.;The July 1;balances in selected accounts are as follows;Cash;$138,000;Accounts Receivable;21,000;Prepaid Insurance;5,000;Accumulated Depreciation: Facility & Equipment;102,000;Accounts Payable;13,000;Required;Part 1;Submit a hard copy of your work and email an Excel workbook;to support your calculations on or before the due date for questions 1 ? 7.;What is the;predetermined manufacturing overhead rate for external reporting purpose? Is;it the most appropriate rate for;managerial accounting? Why?Prepare the;journal entries to record the transactions in July using normal costing.Calculate the;overapplied or underapplied overhead for July. Use the proration method to;prepare a journal entry to close this balance.Prepare a;schedule of cost of goods manufactured for July.Prepare a;schedule of cost of goods sold for July.Prepare an income;statement for July.From the;perspective of long-run product pricing, do you recommend American Guitar;to keep its absorption costing with normal costs for pricing decision and;performance evaluation? Why?;Part 2;Submit a hard copy of your work and email an Excel workbook;to support your calculations on or before the due date for questions 1 ? 11.;Recently, American Guitar has faced intense competition from;oversea guitars manufacturers. Her competitors sell similar quality guitars;averaged 25% less. American Guitar considers implementing the standard costing;to improve cost control. After conducting task analysis in the manufacturing;departments, American Guitar establishes the following standards;1) Each finished guitar contains seven pounds;of veneered wood. In addition, one pound of wood is typically wasted in the manufacturing;process.;2) The veneered wood used in the beginner model;has a standard price of $12 per pound and the professional model has a standard;price of $18. The other parts needed to complete each beginner guitar;(professional guitar), such as the bridge and strings, cost $15 ($18) per;guitar.;3) The labor standards;for American Guitar's two manufacturing departments are as follows;Construction Department;Finishing Department;Beginner model (B);3 hours of direct labor at $18 per hour;2 hours of direct labor at $20 per hour;Professional model (P);4 hours of direct labor at $18 per hour;6 hours of direct labor at $20 per hour;Assuming American;Guitar implements the standard costing, and calculate the followings:-;Direct material and direct labor variances;-;variable manufacturing overhead variances for;both manufacturing departments in July.;-;fixed manufacturing overhead variances for both manufacturing;departments in July.;-;standard cost for the beginner model and the professional;model.;Prepare the;journal entries to record the transactions in July using the standard;costing.Prepare entries;to close all the variances using the proration method.Do you recommend;American Guitar to price its products based on its standard costs? Why?;Prepare a presentation to answer;the following questions;Do you recommend;American Guitar to keep its current cost-accounting system or to implement;the standard costing system? Why?Explain the;interpretation and possible interactions between the variances calculated;by the standard costing.Write a memo to;the company evaluating American Guitar?s July performance and indicate any;appropriate action for management to fine-tune its strategy.;Direct-material is;added at the beginning of manufacturing process in construction department.The direct-material and conversion costs are incurred uniformly;throughout the process in finishing department.;American Guitar;believes that overhead is affected by total monthly DLH of the two;manufacturing departments.; For amanufacturing department, direct costs refer only to overhead costs that are;directly traceable to the department.;Power department is;to provide electricity to maintenance, construction and finishing department.;Its service is measured by the kilowatt-hours. The kilowatt-hours provided by;the department for 2010 & 2011 were 84,200 & 88,000 respectively.;Maintenance;department is to maintain all the equipment in power, construction and;finishing department. Its service is measured by the maintenance hours. The;maintenance hours provided by the department for 2010 & 2011 were 2,150 and;2,240 respectively.; Direct-labor rates include employee benefits.
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