• +44-190-022-0819 +44-190-022-0819
  • +1-248-268-9041 +1-248-268-9041
  • +61288800241 +61288800241

SEARCH SOLUTION

Search your solution from list of 1000+ questions

20-09-2018

Product Code:- Accounts-PH50

 

PART ONE: ALLOCATION OF INDIRECT COSTS (37 points)

WonderToys

WonderToys was a leading supplier of high-quality dolls to retail toy stores (see Exhibit 1 for operating results in October 2015). It had established a major presence in the market with its high-volume Geoffrey doll product line. The Geoffrey doll was designed to be a replica of an infant boy or girl clothed in a simply pajama outfit with movable acrylic eyelids and jointed, movable arms and legs.  Boy and girl versions of the doll were produced to almost identical specifications (using the same production process) with minor differences in the face and hair length.

Over time, WonderToys began also producing customized dolls for retailers under its “specialty-branded” product line. Doll bodies for the specialty-branded line were produced to the same specifications as the standard Geoffrey doll in terms of shape and size. However, the pajama outfit of this line was often more ornate than the simple pajama outfit of the standard Geoffrey doll. Thus, more specialized material cuts and hand assembly were required. Also, because of the customized nature of the specialty branded product, there was much more variety in eye color, hair color, and hair length for these dolls than there was for the standard Geoffrey doll.

Consider for example specialty-branded doll #200, a doll recently introduced and well received in the market.  Because each retailer required slight alterations to the doll’s clothing, specialty-branded doll #200 required a new setup and production run each time the clothing design was changed. Also, because the doll was fairly new, retailers were conservative in their ordering patterns; most ordered fewer units more frequently.

The same equipment and labor were used for all doll product lines, and production runs were scheduled to match customer shipping requirements. Products were packed and shipped as completed. The company operated a single plant.

Under the current cost accounting system, manufacturing overhead costs were allocated to Geoffrey dolls and specialty-branded dolls as a percentage of direct labor cost (see Exhibit 2).  Management was concerned with the drop in gross margin (from historical levels of 30% to less than 8%) for the Geoffrey doll revealed by the costing system and wondered whether it should have shifted more production toward specialty branded dolls.

Recently, an internal study of manufacturing overhead had proposed an alternative “activity-based” costing system, where manufacturing overhead was broken down into different pools and each portion allocated based on the cost driver that better reflected its consumption (see Exhibit 3 and Exhibit 4). The study had also collected some data about production in June 2015, the only month when the plant had operated near its practical capacity (Exhibit 5).

 

Exhibit 1 – WonderToys Operating Results (October 2015)

Sales

$786,000

Direct labor

$  72,000

Direct materials

$ 144,000

Manufacturing Overhead

$274,000

Selling, general and administrative

$254,000

Operating Income (pretax)

$42,000

 

Exhibit 2 – Product Profitability Analysis (October 2015)

 

Geoffrey Doll

Specialty Branded Doll # 200

Selling Price

$  21.00

$36.00

Direct labor cost

$ 3.00

$3.75

Direct material cost

$ 5.00

$6.00

Allocated Manufacturing Overhead

$11.42

$14.27

Total Manufacturing Cost per Unit

$19.42

$24.02

Profit Margin (%)

7.5%

33.3%

 

Exhibit 3 – Breakdown of Manufacturing Overhead and Cost Drivers (October 2015)

 

 

Cost Driver

Machine related

$  120,000

Machine Hours

Plant management

$ 36,000

Direct Labor $

Setup labor

$ 16,000

Number setups

Receiving and Production Control

$ 48,000

Number production runs

Packaging and Shipping

$ 54,000

Number shipments

Manufacturing Overhead

$274,000

 

 

Exhibit 4 – Monthly Production Statistics (October 2015)

 

Geoffrey Doll

Specialty Branded Doll # 200

Other specialty branded dolls

Total

Production (Units)

7,500

4,000

12,500

24,000

Machine Hours

3,750

1,200

6,250

11,200

Setups

10

100

50

160

Production Runs

10

100

50

160

Number of shipments

10

220

70

300

 

Exhibit 5 – Monthly Production Statistics (June 2015)

 

Geoffrey Doll

Specialty Branded Doll # 200

Other specialty branded dolls

Total

Production (Units)

8,000

5,000

13,000

26,000

Machine Hours

4,000

1,500

6,500

12,000

Setups

25

105

70

200

Production Runs

25

105

70

200

Number of shipments

10

220

70

300

 

 

QUESTIONS 1-6 ON WONDERTOYS CASE (26 points)

Question 1: Explain how the manufacturing overhead is allocated to the Specialty Branded doll #200 in the current cost system (in other words, how is $14.27 computed in Exhibit 2?) (2 points)

Question 2: Compute the profitability (i.e. profit margin %) of the Geoffrey doll and the specialty branded doll #200in October 2015under the proposed activity-based costing(ABC) system(Exhibits 3-5). (5 points)

Question 3:  What are the main reasons for the difference between the profitability under the ABC model (your answer to Q2 above) and the profitability under the current costing system (Exhibit 2)?(3 points)

Question 4:  In view of your answers to the questions above, what actions would you recommend that the company take to improve its profitability? (6 points) (List all possible actions)

Question 5: Look at the cost drivers in Exhibit 3. For Setup Labor, the suggested cost driver is the number of setups. The implicit assumption is that products requiring more setups are more responsible for the cost of Setup Labor and, thus, should be charged accordingly.

5a.Under what additional assumption will the number of setups be a good cost driver for the cost of Setup Labor? (2 points)

5b.How would you refine the system if that assumption is violated? (3 points)

Question 6:(5 points)WonderToys will soon start producing holiday reindeer dolls in his plant during July, August and September. For the purpose, the plant will expand its production capacity with a new machine, incurring additional overhead for $60,000 per year, with this additional capacity reserved for the production of the holiday doll. This additional capacity would sit idle from October to June.

  1. Would you include the additional overhead in one of the five cost pools in Exhibit 3 or create an additional cost pool? Explain the reason for your answer(2 points)

 

  1. Assume you decide to create an additional cost pool for this additional $60,000 of overhead. Assume machine hours are the appropriate cost driver. Between July and September, the actual level of machine hours is 1,000, versus a yearly practical capacity of 4,000 machine hours. You are deciding how to price this doll.  Which of these two figures (1,000 vs 4,000 machine hours) would you use as denominator to compute the overhead rate for this additional cost pool? Explain the reason for your answer(3 points)

 

QUESTION 7: CUSTOMER ORDER PROFITABILITY ANALYSIS

 

Question 7: Tanthal Inc splits its manufacturing overhead into two cost pools, one volume-related for stocked items and one where the cost driver is the number of non-stocked items. Also, it splits its SG&A expenses into two cost pools, one volume-related and one order-related (that is, where the cost driver is the number of orders).  Consider a product line whose products generate a 50% margin (after subtracting from prices the cost of volume-related manufacturing and volume-related SG&A expenses). Assume that the SG&A cost for handling an individual customer order is $1,500 and the manufacturing cost to handle a production order for a non-stocked item is $4,500. What minimum order size (in terms of revenues) should Tanthal request to its customers for orders on non-stocked items (i.e. what is the minimum order size for an order of non-stocked item to be profitable)? (3 points)

QUESTION 8: CHOICE OF COST POOLS 

Question 8:Verigram has been allocating manufacturing overhead ($1,000,000) to its two products using a single cost pool and using the number of machine hours as cost driver (the company operates at practical capacity). However, it is currently considering whether to split its single cost pool into two cost pools, capturing respectively the amount of overhead used in the electrical room ($700,000) and the amount used in the mechanical room ($300,000). Machine-hours is considered the appropriate cost driver for both cost pools. Based on the information below, would you recommend the split? Why or why not? Explain the rationale for your answer.(4 points)

 

Machine Hours Electrical Room

Machine Hours Mechanical Room

Product A

30,000

20,000

Product B

40,000

10,000

 

QUESTION 9: TIME-DRIVEN ACTIVITY-BASED COSTING  (4 points)

Question 9 (4 points): At Garber Co, the overhead cost of the customer service department in May is $600,000. Each employee in the customer service department performs three activities: processing customer orders, handling customer complaints and performing customer credit checks, with an estimated cost of, respectively, $450,000, $60,000 and $90,000 (based on surveys of the employees’ time allocations). In May, the employees process 8,000 customer orders, handle 400 customer complaints and perform 450 credit checks. On average, each customer order takes 0.75 hours, a customer complaint takes 3.5 hours and a credit check 3 hours.  The hours of employees’ useful work (practical capacity) in May are 10,000. Compute the activity cost driver rates under time-based ABCand estimate the unused capacity (in dollar terms)

PART TWO: VARIANCE ANALYSIS, PERFORMANCE EVALUATION AND INCENTIVE PLANS (53 points)

Triton Electronics

Triton Electronics, Inc. produced a wide range of electronic equipment, including signal sources, test equipment, communications systems, and various piece parts and subassemblies such as motors, generators, and probes.  Total annual sales were in excess of $8 billion.

The company’s objective was to maximize shareholder value.  In some of its business areas, innovation through research and development was crucial to stay ahead of the competition.  In others, price competition made tight control over costs the key success factor.

The company was organized by product line.  Its 16 relatively autonomous divisions were managed as profit centers.  The division managers reported to one of four Business Group managers who, in turn, reported to the company’s CEO. Each Business Group was organized around a strategic theme, and divisions within each Business Group used some shared resources.

The performance evaluation and incentive plan had the following features:

  1. Bonuses would be determined by the performance of the entity for which each manager was responsible.  That is, division manager bonuses would be based 100 percent on division performance; Business Group manager bonuses would be based 100 percent on Business Group performance; and corporate manager bonuses would be based 100 percent on corporate performance.
  2. For bonus award purposes, actual performance would be compared with targets negotiated during the annual budgeting process. 
  3. Each division would be given an “economic value added” target equal to budgeted operating profit minus budgeted operating assets multiplied by 12 percent, which was estimated to be Triton’s weighted average cost of capital.  For example, a division with an operating profit budget of $100,000 and budgeted operating assets of $500,000 would be given an economic value added target of $100,000 – $60,000 ($500,000*12%) = $40,000.
  4. If an entity’s actual economic value added were exactly equal to its target, the manager would earn a bonus equal to 50 percent of salary.  Above the target, the bonus could increase up to 150 percent of salary, while below it would decrease to minimum of zero.

Exhibit 1Performance information for five of the sixteen divisions of Triton Electronics ($ in 000)

 

Budgeted

Actual

Division

Operating Profit

Operating Assets

Economic Value Added

Operating Profit

Operating Assets

Economic Value Added

 

 

 

 

 

 

 

A

$ 1,000

$ 8,000

$    40

$ 1,150

$ 7,000

$ 310

B

1,000

8,000

40

4,500

7,000

3,660

C

50

1,000

(70)

300

800

204

D

(700)

4,000

(1,180)

(300)

4,200

(804)

E

600

2,000

360

100

2,000

(140)

 

 

 

 

 

 

 

 

Exhibit 2Performance information on Division E (single-product division)

 

Per Unit (budgeted)

Budget

Actual

Variance

 

 

 

 

 

Sales

$ 50

$10,000,000

$9,090,000

$910,000 U

Cost of Goods Sold

 

 

 

 

                Raw Material

12

2,400,000

2,100,000

$300,000 F

                Direct Labor

5

1,000,000

950,000

$50,000 F

                Fixed Overhead

 

3,000,000

3,030,000

$30,000 U

Gross Margin

 

3,600,000

3,010,000

$590,000 U

Selling, Gen’l and Admin.

 

2,200,000

2,185,000

$15,000 F

Research & Development

                           

800,000

725,000

$75,000 F

Operating Income

 

$   600,000

$   100,000

$500,000 U

Contribution Per Unit

$ 28

 

 

 

 

 

 

 

 

Units Sold by Division E

 

200,000

190,000

 

Total Market for Product (units)

 

4,000,000

3,455,000

 

Average Industry Selling Price

 

$ 50.00

$ 46.00

 

Units of Raw Material Used in Manufacturing

 

200,000

185,833

 

 

 

 

 

 

U= Unfavorable Variance, F = Favorable Variance

                                  QUESTIONS 1-8 ON TRITON ELECTRONICS CASE

Note: Questions 1-7 refer to Division E(Exhibit 2). Recall that Division E produces a single product

Question 1: Decompose the revenue variance for Division E into price variance and quantity variance (for price variance, use the conventional formula used for Musimundo). Briefly explain how to interpret each variance – that is, clarify the sign of the variance (for example:  assume price variance is +50: I want you to say something like “since price was higher than expected, revenues were higher than expected by $50”)  (4 points)

Question 2: Focus on the quantity variance computed in Question 1. Decompose it in market size variance and market share variance.  Again, briefly explain how to interpret each variance (4 points)

Question 3: For each Cost of Goods Sold item separately, decompose its variance into unit cost variance and quantity variance (as usual, unit cost here means the cost for each unit of product sold)(6 points)

Question 4: Focus on the price variance computed in Question 1.  Try to explain the reasons for this price variance. To do so, you can formally “decompose” this price variance using variance analysis (coming up with a formula of your own) or you can derive similar insights using the information and data in the case (5 points)

Question 5: Focus on theunit cost variance of raw materialsyou just computed in question 3. Try to explain the reasons for this unit cost variance (4 points)

Question 6 (6 points): Based on your analysis in Questions 1-5 and information Exhibit 2, how would you assess the performance of the management of Division E? Be as specific as possible in identifying what they did well or not so well on each dimension and then clearly state your overall assessment of their performance.

Question 7 (4 points):  Based on the current bonus formula, it has been determined that the management of Division E will not receive any bonus because its EVA performance is well below target. As CEO of Triton, would you override the formula and pay a bonus? Or would you pay no bonus as implied by the formula?  Describe the pros and cons of each decision and state clearly your recommendation.

Question 8 (12 points): Based on the insights from the above analyses, information in the case and your learnings in class:

  1. identify the major shortcomings of Triton’s Electronics current performance evaluation system (be as specific as possible); (6 pts)
  2. suggest ways to improve the current performance evaluation system (6 pts)

(Please present your answers to (i) and (ii) separately)

Note: the next two questions DO NOT refer to the Triton’s case

Question 9 (4 points):TwoTake Technologies produces two products. The following are the data about budgeted and actual selling prices and quantities sold for each of its products in 2016.

Product 1

Actual

Budgeted

Price

$12

$16

Quantity (units sold)

150

50

 

Product 2

Actual

Budgeted

Price

$12

$8

Quantity (units sold)

50

50

 

Compute pure price variance and product mix variance for TwoTake Technologies (4 points).

Question 10 (4 points):Fab Technologies produces a single product. The following are the data about budgeted and actual selling prices and quantities sold for its product in 2016.

 

Actual

Budgeted

Price

$10

$8

Quantity (units sold)

100

80

 

Compute the joint variance.

Download Questions

Wonder Toys was a leading supplier of high-quality dolls to retail toy stores (see Exhibit 1 for operating results in October 2015). It had established a major presence in the market with its high-volume Geoffrey doll product line. The Geoffrey doll was designed to be a replica of an infant boy or girl clothed in a simply pajama outfit with movable acrylic eyelids and jointed, movable arms and legs.

Related Questions in (Accounting)

13-01-2018

Solution: The Journal of Helene Berr and Rue Ordener, Rue Labat 2 evidences that prove the difficulty and destructiveness that the people had to face in those four years. As mentioned by Berr (2009, p.23), in h ...

18-01-2018

Solution: Employee communication highlights the sharing of ideas and information. In this competitive business world, information exchange is essential among employees to develop team performance effectively. m ...

18-01-2018

Solution: As per Section 1 of the Thirteenth year plan describes about China’s two key objectives that will be accomplished if the National People’s Congress or the standing committee of this party passes t ...

18-01-2018

Solution: (Feldman 2005) reference information extraction to be one of the weightiest pre-processing method that escalates the text mining potential significantly. Pre-processing is an essential part in informa ...

18-01-2018

Solution: The pro forma income statement represents a trending statement that includes the probable net income value for the company considering the current growth and decline rates valid throughout the period ...

18-01-2018

Solution: Mode is defined as the value which occurs more frequently in the data set. The mode for non-business is 82 while for business is only 59. P value can be calculated from z table . As per z table p valu ...

18-01-2018

Solution: ABC assumes that there are different activities involved in different processes that cause costs andthe product, services, and customers are reasons for those activities. The UK customer segment is br ...

19-01-2018

Solution: Residual earnings valuation method is used to calculate the intrinsic value of the stock based on the expected residual income of the company in the coming years. The residual income is discounted bac ...