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ACC 604 Online Problem List

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Problem List – Videos and Lecture

Session One

1. IPX Packaging – attached


2. Cardinal Company – attached
3. Bidwell Company – attached
4. Candace Company – textbook, chapter 2

Session Two

1. A and S Bookstore – attached


2. Lowe Company – attached
3. Devoe Company – attached
4. Peluso Company – attached
5. Insurance Company – attached
6. Adrian Power – textbook, chapter 6, solution attached

Session Four

1. Montero Company – attached


2. Serranos Company – attached
3. Tenuto Company – attached
4. Milan Pasta – textbook, chapter 11

Session Five

1. Medical Instruments – textbook, chapter 12


2. Marian Health Care System – attached
3. Derf Company – attached

1
IPX Packaging

IPX is a specialized packaging company that packages other manufactures’ products. Other
manufacturers ship their products to IPX in bulk. IPX then packages the products using high-
speed state-of-the-art packaging machines and ships the packaged products to wholesalers. A
typical order involves packaging small toys in see-through plastic and cardboard containers.

IPX uses a flexible budget to forecast annual plantwide overhead, which is then allocated to jobs
based on machine hours. The annual flexible overhead budget is projected to be $6 million of
fixed costs and $120 per machine hour. The budgeted number of machine hours for the year is
20,000.

At the end of the year, 21,000 machine hours were used, and actual overhead incurred was $9.14
million.

Required:

a. Calculate the overhead rate set at the beginning of the year.

b. Calculate the amount of over/underabsorbed overhead for the year.

c. The company’s policy is to write off any over/underabsorbed overhead to cost of goods
sold. Will net income rise or fall this year when the over/underabsorbed overhead is
written off to cost of goods sold?

From Accounting for Decision Making and Control, 8th edition by Jerold L. Zimmerman.
Cardinal Company

2
Cardinal Company

Cardinal Company uses the proportional relationship between factory overhead and direct labor
costs to assign factory overhead to its inventories of goods in process and finished goods. The
company incurred the following costs during 20X2:

Direct materials used $637,500


Direct labor 1,440,000
Factory overhead applied 1,080,000

A. Determine the company's overhead rate, assuming that total estimated overhead costs
and total estimated labor costs were $1,125,000 and $1,500,000, respectively.

B. Under the assumption that the company's $57,000 ending goods in process inventory had
$18,000 of direct labor costs, determine the inventory's direct material costs.

C. Under the assumption that the company's $337,485 ending finished goods inventory had
$195,000 of direct material costs, determine the inventory's direct labor cost and its factory
overhead costs.

D. Under the assumption that actual factory overhead costs totaled $1,100,000, what was the
amount of over or under applied overhead?

3
Bidwell Company

Data for the Bidwell Company are as follows:

Sales (100,000 units) $1,000,000


Costs
Fixed Variable
Raw Materials $ 0 $300,000
Direct Labor 0 200,000
Factory Costs 100,000 150,000
Selling and
Administrative Costs 110,000 50,000
Total Costs $210,000 $700,000 910,000

Operating Income $ 90,000

Required:

A. Based on the preceding data, calculate break-even sales in units.


B. If fixed costs increase $31,500 with no other cost or revenue factors changing,
calculate the break-even sales in units.
C. Assume the original data from Part A. (Ignore Part B.) If Bidwell Company is
subject to an effective income tax rate of 40 percent, calculate the number of units
Bidwell would have to sell to earn an after-tax profit of $90,000.

Source: CMA adapted.

From Accounting for Decision Making and Control, 7th edition by Jerold L. Zimmerman.

4
A and S Bookstore

The following partially completed lower section of a departmental allocation spreadsheet is


being prepared for A and S Bookstore. At this stage it shows only the amounts of direct
expenses that have been incurred in the five departments:

Expense Expense Advertising Purchasing Book Dept. Magazine Newspaper


Account Dept. Dept. Dept. Dept.
Balance
Total $654,000 $22,000 $30,000 $425,000 $86,000 $91,000
Service dept.
expenses:
Advertising
Purchasing
Total expenses
allocated to
selling depts.

Advertising expenses are allocated on the basis of sales, while purchasing expenses are allocated
on the basis of purchase orders. Complete the spreadsheet by allocating the two service
departments' expenses to the three selling departments. These amounts were known about the
allocation bases for the three selling departments:

Sales Purchase
Orders
Books $896,000 212
Magazines 288,000 156
Newspapers 416,000 132
Total $1,600,000 500

5
Lowe Company

Lowe Company is divided into four departments. Departments A and B are service departments
and Departments 1 and 2 are production departments. The services of the two service
departments are used by the other departments as follows:

Dept. A Dept. B Dept. 1 Dept. 2


Services of
Department A 50% 20% 30%
Department B 40% 60%
Direct costs incurred
by each department $60,000 $50,000 $70,000 $80,000

A. What dollar amount of Department A's costs should be charged to:

Department B _______________________

Department 1 _______________________

Department 2 _______________________

B. What dollar amount of Department B's costs should be charged to:

Department 1 _______________________

Department 2 _______________________

6
Devoe Company

Devoe Company currently manufactures a part at a cost of $2.70 per unit. This cost is based on a
normal production rate of 100,000 units per year. The variable costs are $1.74 per unit, fixed
costs related only to the part are $36,000 per year, and allocated fixed costs are $60,000 per year.
These allocated costs would continue whether the company makes or buys the part. Devoe is
considering buying the part from a supplier that has quoted a price of $2.50 per unit. This price
would be guaranteed for a three-year period.

Should the company continue to manufacture the part or should it purchase the part from the
outside supplier? Support your answer with an analysis.

7
Peluso Company

Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant capacity.


Peluso’s plant manager is considering manufacturing headlights, which are now being purchased
for $11 each (a price that is not expected to change in the near future). The Peluso plant has the
equipment and labor force required to manufacture the headlights. The design engineer
estimates that each headlight requires $4 of direct materials and $3 of direct labor. Peluso’s
plant overhead rate is 200 percent of direct labor dollars, and 40 percent of the overhead is fixed
cost. If Peluso Company manufactures the headlights, how much of a gain (loss) for each
headlight will result?

Source: CMA adapted.

From Accounting for Decision Making and Control, 5th edition by Jerold L. Zimmerman.

8
Insurance Company

An insurance company has the following profitability analysis of its services:

Life Insurance Auto Insurance Home Insurance


Revenues $5,000,000 $10,000,000 $3,000,000
Commissions (1,000,000) (2,000,000) (600,000)
Payments (3,000,000) (7,300,000) (2,000,000)
Fixed Costs (500,000) (500,000) (500,000)
Profit $500,000 $200,000 ($100,000)
======== ======== ===========

The fixed costs are distributed equally among the services and are not avoidable if one of the
services is dropped. What is the profitability of the remaining services if all services with losses
are dropped?

Eliminate Home:
Life Auto
Revenue $5,000,000 $10,000,000
Commissions (1,000,000) (2,000,000)
Payments (3,000,000) (7,300,000)
Fixed Costs _(750,000) _(750,000)
Profit $250,000 $(50,000)
======== ========

Eliminate Auto:

Life
Revenue $5,000,000
Commissions (1,000,000)
Payments (3,000,000)
Fixed Costs (1,500,000)
Profit $(500,000)

9
Adrian Power – Solution

Adrian Power
Flexible Budget for 15,400 Units
January

Var. Cost Flexible Actual


Per Unit Budget Costs Variance
Dir. Material $10 $154,000 $142,400 $11,600 F
Dir. Labor 16 246,400 259,800 13,400 U
Indir. Labor 1.50 23,100 27,900 4,800 U
Indir. Material .75 11,550 12,200 650 U
Maintenance .45 6,930 9,800 2,870 U
Supervision 24,700 28,000 3,300 U
Other 83,500 83,500 0
$550,180 $563,600 $13,420 U

10
Montero Company

Montero Company used job order costing to account for jobs produced during the year. A
predetermined overhead rate of 50% of the direct labor cost was set at the beginning of the year.
Costs allocated to the three jobs worked on during October were:

Job 306 Job 307 Job 308


Balances on September 30:
Direct materials $14,000 $18,000
Direct labor 18,000 16,000
Applied overhead 9,000 8,000
Cost during October:
Direct materials 100,000 170,000 $80,000
Direct labor 30,000 56,000 120,000
Applied overhead ? ? ?
Status on October 31 Finished Finished In
(sold) (unsold) Process

Job 306 was sold for $380,000 cash during October.

Required:

Determine the total cost assigned to each of the three jobs (including the balances from
September 30).

Solution:

Job 306 Job 307 Job 308


September Costs
Direct Materials $14,000 $18,000
Direct Labor 18,000 16,000
Applied Overhead 9,000 8,000

October Costs
Direct Materials $100,000 $170,000 $80,000
Direct Labor 30,000 56,000 120,000
Applied Overhead 15,000 28,000 60,000

Total $186,000 $296,000 $260,000

11
Serranos Company

The following describes the slicing department of the Serranos Company for July. The output of
the slicing department is sent to the canning department, which sends the finished goods to the
warehouse for shipping. A cost summary for the slicing department follows:

Beginning Work-in-Process costs for work


performed in June. (includes direct materials,
direct labor and applied overhead) $ 18,000

Costs incurred during July


Direct materials 124,000
Direct labor 39,000
Applied overhead (150% of direct labor costs) 58,500
Total costs incurred during July $221, 500

11, 600 units (1,600 units from Beginning WIP and 10,000 units started and completed during
July) were transferred to the canning department. 2,400 units remain in the slicing department at
the end of July. A calculation of equivalent units for work performed during July appears below:

Equivalent Units Equivalent Units


Units of production Direct Materials Labor and Overhead
Beginning WIP 1,600 800 1,200
Units started and
10,000 10,000 10,000
Completed
Ending WIP 2,400 1,600 1,800
Total 14,000 12,400 13,000

Determine the cost of the units transferred to the canning department during July.

Solution:

Per Unit Cost


Direct Materials 124,000/12,400 = $10.00
Direct Labor and Overhead (39,000 + 58,500)/13,000 = $ 7.50
$17.50

Cost of Units Transferred to Canning


Beginning Work-In-Progress Costs From June $ 18,000
Costs to Complete Beginning Work-In-Progress
Direct Materials 800 X 10 8,000
Direct Labor and Overhead 1,200 X 7.50 9,000
Costs of Units Started and Completed 10,000 X 17.50 175,000

Total 210,000

12
Tenuto Company

The Tenuto Company manufactures two products, hinges and fasteners, on the same production
line. Last month, the company experienced the following costs and results:

Hinges Fasteners Total


Direct materials $9,500 $21,600 $31,100
Direct labor 6,100 11,900 18,000
Overhead (300% of labor) 18,300 35,700 54,000
Total cost $33,900 $69,200 $103,100
====== ====== =======
Quantity produced 10,500 14,100
Average cost per unit $3.23 $4.91
===== =====

Several of the managers have approached the cost accounting department for help in
understanding activity-based costing. Their specific request is that ABC be applied to the
production results to see whether the average cost per unit is significantly changed. This
additional information is extracted from the production records for the month:

The overhead cost for supervision was $2,160. The cost driver for supervision is direct
labor cost.

The overhead cost for machinery depreciation was $28,840. The cost driver for this cost
is hours of use. The machinery was used 300 hours for hinges and 700 hours for
fasteners.

The overhead cost for preparing the line to manufacture products was $23,000. The line
was set up 31 times to produce different kinds of hinges and 94 times to produce different
kinds of fasteners.

Required

Use this information to:

A. Assign the overhead cost to the products using activity-based costing.

B. Determine the average cost per unit of the two products using direct materials, direct
labor and overhead allocated under ABC.

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Tenuto Solution

1. Supervision Activity Rate


2160 = $ .12/$1 DL
18,000
2. Machine Use Activity Rate
28,840 = $28.84/Machine hr
300+700
3. Line Set-Up Activity Rate
23,000 = $184/Set-up
31+94
Revised Costs:

Hinges Fasteners
DM 9500 21,600
DL 6100 11,900
O/H

Sup (.12)(6100) 732 1428 (.12)(11,900)


Mach (28.84)(300) 8,652 20,188 (28.84)(700)
Line (184)(31) 5,704 17,296 (184)(94)
Total 30,688 72,412
Units 10,500 14,100
Per Unit Cost 2.92 5.14
=== ===

14
Marian Health Care System

Marian Health Care is a large hospital system outside Chicago that offers both hospital
(inpatient) and clinic (outpatient) services. It has a centralized admissions office that admits and
registers clients, some of whom are seeking inpatient hospital services and others outpatient
services. Marian uses a standard cost system to control its labor costs. The standard labor time
to admit an inpatient is 15 minutes. Outpatient admissions have a standard labor time of 9
minutes. The standard wage rate for admissions agents is $14.50 per hour. During the last week,
the admissions office admitted 820 inpatients and 2,210 out-patients. Actual hours worked by
the admissions agents last week were 540 hours, and their total wages paid were $8,235.

Required:

a. Prepare a financial report that summarizes the operating performance (including the
efficiency) of the admissions office for last week.

b. Based on the financial report you prepared in (a), write a short memo summarizing your
findings and conclusions from this report.

From Accounting for Decision Making and Control, 8th edition by Jerold L. Zimmerman.

15
Derf Company

Derf Company uses a standard cost system and applies overhead on the basis of direct labor
hours. Two direct labor hours are required for each unit produced. Planned production for the
period is set at 9,000 units. Derf Company’s flexible overhead budget consists of $27,000 of
fixed costs and $6 of variable cost for every direct labor hour incurred. The 17,200 hours
worked during the period resulted in production of 8,500 units. Manufacturing overhead costs
incurred is $136,500. What is the amount of under/over applied overhead for the period?

Source: CMA adapted.

From Accounting for Decision Making and Control, 5th edition by Jerold L. Zimmerman.

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