MANAGERIAL (COST) ACCOUNTING

Transcription

1 MANAGERIAL (COST) ACCOUNTING EXERCISE BOOK ERASMUS WINTER SEMESTER 2014

2 Exercise 2.1 Consider the following company, Chip Making Systems, that manufactures computer chips. It incurs the following costs in manufacturing chips and in operating the company: 1. Plastic board used to mount the chips, 3.50/1 pc 2. Assembly worker pay 15,-/hour to attach chips to plastic board 3. Salary for factory maintenance workers who maintain factory equipment 4. Factory supervisor pay of 55,000 per year to supervise employees 5. Real estate taxed paid on the factory, 14, Real estate taxes paid on the company office, 6, Depreciation costs on machinery used by workers, 30, Salary paid to the chief financial officer, 95, Advertising costs of 7,800 paid to promote products 10. Salepersons commissions of 0,50 for each assembled chip sold. 11. Company could rent manufacturing plant to store medical records for six local hospitals instead of producing and assembling chips. Cost Period cost Product cost Unit cost classification Sunk cost Selling and Direct Indirect Administration Direct material (prime cost) Direct labour (prime and conversion) Factory overhead (conversion cost) Oportuni ty cost Exercise 2.2 Cost object: delivery service. Which category of cost do the following payments fall into? Indicate with a tick. Cost item By function By traceability By behaviour Product/ Period Direct Indirect Fixed Variable Service Purchase of office furniture Payment of factory rates Purchase of delivery van Tax and insurance for van Repairs to the the van Petrol for the van Decoration of office Extension to the garage

3 Exercise 2.3 Cost object: product. Classify the following items by function, by traceability and by behaviour. In each case give reason for your classification. Cost item By function By traceability By behaviour Product Period Direct Indirect Fixed Variable An extension of railway tracks in the factory area. Wages paid to machine operators. Installation costs of new production machine. Materials for extensions to foremen s offices in the factory. Rent paid for the factory. Payment for computer time to operate a new stores control system. Wages paid to own employees for building the foremen s offices. Exercise 2.4 Manufacturing sector. The XYZ Auto company assembles two types of cars: Sun and Moon. Separate assembly lines are used for each type of car. Required: Classify each of the following cost items as: a) Direct or indirect cost with respect to the type of car assembled (Sun or Moon). b) Variable or fixed cost with respect to how the total costs of the factory change as the number of cars assembled changes. Cost item By traceability By behaviour Direct Indirect Fixed Variable Cost of tires used on Moon Salary of public relations manager for the factory Annual awards dinner for Sun suppliers Salary of engineer who monitors design changes on Moon Freight costs of Sun engines shipped from Toyota, Japan, to our factory Electricity costs for factory Wages paid to temporary assembly-line workers hired in period of high production (paid on an hourly basis) Annual fire insurance policy cost for factory

4 Ex 3.1 Job costing (service application) McBain is a management consulting firm. Its job-costing has a single direct-cost category (consulting labour) and a single indirect-cost category pool (consulting support). Consulting support is allocated to individual jobs using actual consulting labour-hours worked on a job. It is currently examining the actual, normal, and extended normal costs of a 20XX strategy review job for Hogsbreath Cafe that required 70 actual hours of consulting labour. The internal cost expert decides to test your understanding of cost concepts. 1. Fill in the blanks for the Hogsbreath 20XX job: Actual costing Normal costing Extended normal costing Direct job costs $ ($55 x ) $ ($ x ) $ ($ x ) Indirect job costs $ 2660 ($ x ) $ 2800 ($ x 70) $ ($ x ) Total job costs $ $ $ Fill in the blanks for McBain for 20XX: Consulting labour compensation Budgeted amounts for 20XX Actual amounts for 20XX Consulting labour-hours hours Consulting support costs $

5 Ex 3.2 Job costing (service application) Black & Partners is public accounting partnership specializing in audit services. Its job-costing system has a single direct-costing category (professional labour) and a single indirect-cost pool (audit support, which contains all the costs in the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labour-hours. Black & Partners employs ten professionals who are involved in their auditing services. Budget for 20XX: Professional labour compensation Audit Support Department costs Professional labour-hours billed to clients hours Actual results for 20XX: Audit Support Department costs Professional labour-hours billed to clients hours Actual professional labour cost rate per hour Identify the direct-cost rate per professional labour-hour and the indirect-cost rate per professional labour-hour for 20XX under a) actual costing, b) normal costing, and c) extended normal costing. 2. The audit of the firm done in 20XX was budgeted to take 110 hour of professional labour time. The actual professional labour time on the audit was 120 hours. Compute the 20XX job cost using a) actual costing, b) normal costing, and c) extended normal costing. Explain any differences.

6 EX 3.3 Job costing (service application) Martin Miller, the president of Tax Assist, is examining alternative ways to compute indirect-cost rates. He collects the following information from the budget for 20XX: Budgeted variable indirect costs: 10 per hour of professional labour time. Budgeted fixed indirect costs: per quarter. The budgeted billable professional labour-hours per quarter are January March April June July September October December hours hours 4000 hours 6000 hours Miller pays all tax professionals employed by Tax Assist on an hourly basis ( 30 per hour, including all fringe benefits). Tax Assist s job-costing system has a single indirect-cost category (professional labour at 30 per hour) and a single indirect-cost pool (office support that is allocated using professional labour-hours). Tax Assist charges clients 65 per professional labour-hour. 1) Compute budgeted indirect-cost rates per professional labour-hour using: a) Quarterly budgeted billable hours as the denominator. b) Annual budgeted billable hours as the denominator. 2) Compute the operating income for the following four customers using: a) Quarterly-based indirect-cost rate. b) An annual indirect-cost rate: i) Ruppert Hoch: 10 hours in February. ii) Kirsten Bauer: 6 hours in March and 4 hours in April. iii) Beata Thun: 4 hours in June and 6 hours in August. iv) Mark Schumacher: 5 hours in January, 2 hours in September, and 3 hours in November.

7 EX 3.4 Job costing (service application) Doherty & Company is an international consulting firm. Its 20XX annual budget includes the following for each category of professional labour: Category Average salary ($) Average fringe benefits ($) Billable time for clients (hours) Vacation and sick leave (hours) Professional development (hours) Unbilled time due to lack of demand Director Partner Associate assistant ) Compute the budgeted direct-cost rate for professional labour (salary and fringe benefits) per hour for a) directors, b) partners, c) associates, and d) assistants. Use budgeted billable time for clients as the denominator in these computations. 2) Repeat requirement 1. Use the sum of budgeted billable time, vacation and sick leave time, and professional development time as the denominator in these calculations. EX 3.5 (Job costing, engineering consulting firm) Built & Safe, an engineering consulting firm, specializes in analysing the structural causes of major building catastrophes. Its job-costing system in 20X1 had a single direct-cost category (professional labour) and a single indirect-cost pool (general support). The allocation base for indirect costs is professional labour-costs. Actual costs for 20X1 were: Direct costs: professional labour 10,000,000 Indirect costs: general support 19,000,000 Total costs 29,000,000 The following costs were included in the general support indirect-cost pool: Technical specialists costs 800,000

8 Telephone/fax machine 600,000 Computer time 3,700,000 Photocopying 400,000 Total costs 5,500,000 The firm s data-processing capabilities now make it feasible to trace these costs to individual jobs. The managing partner is considering whether more costs than just professional labour should be traced to each job as a direct cost. In this way, the firm would be better able to justify billings to clients. In late 20X1, arrangements were made to expand the number of direct-cost categories and to trace them to seven client engagements. Two of the case records showed the following: Client case ( ) Job A Job B Professional labour 20,000 20,000 Technical specialists costs 2,000 6,000 Telephone/fax machine 1,000 2,000 Computer time 2,000 4,000 Photocopying 1,000 2,000 Total costs 26,000 34,000 Required: 1. What was the actual indirect-cost rate per professional labour? 2. Assume that the 5.5 million of cost included in the 20X1 general support indirect-cost pool were reclassified as direct cost. The result is a system with five direct-cost categories. Compute the revised indirect cost rate as a percentage of: (a) professional labour costs, (b) total direct costs. 3. Compute the total costs of jobs A and B using: (a) the 20X1 costing system with a single direct cost category and single indirect-cost pool (professional labour-costs as the allocation base); (b) a costing system with five direct-cost categories and a single indirect-cost pool (professional labour-costs as the allocation base); (c) a costing system with five direct-cost categories and a single indirect-cost pool (total direct costs as the allocation base). 4. Assume that clients are billed at 120 % of total job costs (that is, a markup on cost of 20 %). Compute the billings in requirement 3 for jobs A and B for the (a), (b),and (c) costing systems.

9 Ex 4.1 Job costing (manufacturing application) Syner Construction assembles residential houses. It uses a job-costing system with two direct-cost categories (direct materials and direct labour) and one indirect cost pool (assembly support). Direct labour-hours is the allocation base for assembly support costs. In December 20X1, Syner budgets 20X2 assembly support costs to be and direct labour-hours to be At the end of 20X2, Syner is comparing the costs of the several jobs that were started and completed in 20X2. Laguna Model February June 20X2 Mission Model May October 20X2 Direct materials Direct labour Direct labour-hours Direct material and direct labour are paid for on a contract basis. The costs of each are known when direct materials are used or direct labour-hours are worked. The 20X2 actual assembly support costs were while the actual direct labour-hours were Compute the a) budgeted and b) actual indirect cost rate. (Why do they differ?) 2. What is the job cost of the Laguna Model and the Mission Model using a) normal costing, and b) actual costing? 3. Why might Syner Construction prefer normal costing over actual costing?

10 EX 4.2 Accounting for manufacturing overhead. Consider the following selected cost date for the Edinburgh Forging Company for 20XX. Budgeted mnf overhead 7,000,000 Budgeted machine-hours 200,000 Actual mnf overhead 6,800,000 Actual machine-hours 195,000 Edinburgh job-costing system has a single manufacturing overhead cost pool (allocated using a budgeted rate based on actual machine-hours). Any amount of under- or over-allocation is immediately written off to cost of goods sold. 1. Compute the budgeted manufacturing overhead rate. 2. Journalize the allocation of manufacturing overhead. 3. Compute the amount of under- or over-allocation of manufacturing overhead. Is the amount significant? Journalize the disposition of this amount on the basis of the ending balances in the relevant accounts.

11 Ex 4.3 ABC, product cost cross-subsidization. Idaho Potatoes processes potatoes into potato cuts at its highly automated Pocatello plant. For many years, it processed potatoes for only the retail consumer market where it had a superb reputation for quality. Recently, it started selling potato cuts to the institutional market that includes hospitals, cafeterias, and university dormitories. Its penetration into the institutional market has been slower than predicted. Idaho s existing costing system has a single direct-cost category (direct materials, which are the raw potatoes) and a single indirect-cost pool (production support). Support costs are allocated on the basis of pounds of potato cuts processed. Support costs include packaging material. The 20X1 total actual costs for producing 1,000,000 pounds of potato cuts (900,000 for the retail market and 100,000 for the institutional market) are: Direct material used $ 150,000 Production support $ 983,000 The existing costing system does not distinguish between potato cuts produced for the retail or the institutional markets. At the end of 20X1, Idaho unsuccessfully bid for a large institutional contract. Its bid was reported to be 30% above the winning bid. This came as a shock as Idaho included only a minimum profit margin on its bid. Moreover, the Pocatello plant was widely acknowledged as the most efficient in the industry. As part of its lost contract bid review process, Idaho decided to explore several ways of refining its costing system: 1. it identified that $ 188,000 of the $ 983,000 pertains to packaging material that could be traced to individual jobs ($ 180,000 for retail and $ 8,000 for institutional). These will now be classified as a direct material. The $ 150,000 of direct materials used, were classified as $ 135,000 for retail and $ 15,000 for institutional. 2. it used ABC-costing to examine how the two products (retail potato cuts and institutional potato cuts) used the support area differently. The finding was that three activity areas could be distinguished and that different usage occurred in two of these three areas. The indirect cost per pound of finished product at each activity area is as follows: Activity area Retail Potato Cuts ($) Institutional Potato Cuts ($) Cleaning Cutting Packaging There was no beginning or ending amount of any inventory (material, work in process, or finished goods).

12 1. Using the current costing system, what is the cost per pound of potato cuts produced by Idaho? 2. Using the refined costing system, what cost per pound of a) retail market potato cuts, and b) institutional market potato cuts? 3. Comment on the cost differences shown between the two costing systems in requirements 1 and 2. How might Idaho use the information in requirement 2 to make better decisions? Ex 4.4 ABC, activity area cost driver rates (continuation of Ex 4.3) The exercise 4.3 reports ABC data for the three activity areas (cleaning, cutting, and packaging) on a per output unit basis (per pound of potato cut). This format emphasizes product costing. An alternative approach that emphasizes the costs of individual processes (activities) is to identify: a) the costs at each activity area, and b) the rate per unit of the cost driver at each activity area. The following information pertains to a) and b): Cleaning activity area Idaho uses 1.2 million pounds of raw potatoes to yield 1 million pounds of potato cuts. No distinction is made as to the end product when cleaning potatoes. The cost driver is pounds of raw potatoes cleaned. Cutting activity area Idaho processes raw potatoes for the retail market independently of those processed for the institutional market. The production line produces a) 250 pounds of retail potato cuts per cutting-hour, and b) 400 pounds of institutional potato cuts per cuttinghour. The cost driver is cutting-hours on the production line. Packaging activity area Idaho packages potato cuts for the retail market independently of those packaged for the institutional market. The packaging line packages a) 25 pounds of retail potato cuts per packaging-hour, and b) 100 pounds of institutional potato cuts per packaging-hour. The cost driver is packaging-hours on the production line. 1. What are the total activity costs in the a) cleaning, b) cutting, and c) packaging activity areas? 2. What is the cost rate per unit of the cost driver in the a) cleaning, b) cutting, and c) packaging activity areas?

13 Ex 4.5 Activity-based job-costing system. The Denver Company manufactures and sells packaging machines. It recently used an activity-based approach to refine the job-costing system at its Denver plant. The resulting job-costing system has one direct-cost category (direct material) and four indirect manufacturing cost pools. The four indirect-cost pools and their allocation bases were chosen by a team of product designers, manufacturing personnel, and marketing personnel: Indirect mnf. cost pool Cost-allocation base Budgeted cost-allocation rate Material handling Component parts $ 8 per part Machining Machine-hours $ 68 per hour Assembly Assembly-line-hours $ 75 per hour Inspection Inspection-hours $ 104 per hour Cola Supreme recently purchased 50 can-packaging machines from the Denver Company. Each machine has direct materials costs of $ 3,000, requires 50 component parts, 12 machine-hours, 15 assembly-hours, and 4 inspection-hours. Denver s prior costing system had one direct-cost category (direct materials) and one indirect-cost category (manufacturing overhead, allocated using assembly-hours). 1. Present overview diagrams of the prior job-costing system and the refined activity-based jobcosting system. 2. Compute the unit manufacturing costs (using ABC) of each machine and the total manufacturing cost of the Cola Supreme job. 3. The activity-based job-costing system of Denver has only one manufacturing direct-cost category: direct materials. A competitor of the Denver Company has two direct-cost categories at its manufacturing plant: direct material and direct manufacturing labour. Why might Denver not have a direct manufacturing labour costs category in its job-costing system? Where are the manufacturing labour costs included in the Denver costing system? 4. What information might members of the team that refined the prior costing system find useful in the activity-based job-costing system?

14 Ex 4.6 Activity-based job-costing system. The English Design Company manufactures a variety of prestige boardroom chairs. Its job-costing system was designed using an activity-based approach. There are two direct-cost categories (direct materials and direct manufacturing labour) and three indirect-cost pools. These three cost pools represent three activity areas at the plant. Manufacturing activity area Budgeted costs Cost driver used as allocation Cost-allocation for 20X1 base rate ( ) Material handling 200,000 Parts 0.25 Cutting 2,160,000 Parts 2.50 Assembly 2,000,000 Direct mnf. labour-hours Two styles of chairs were produced in March, the executive chair and the chairman chair. Their quantities, direct material costs, and other data for March 20X1 are as follows: Units produced Direct material costs ( ) Number of Parts Direct mnf. labour-hours Executive chair 5, , ,000 7,500 Chairman chair ,000 3, The direct manufacturing labour rate is 20 per hour. Assume no beginning or ending inventory. 1. Compute the March 20X1 total manufacturing costs and unit costs of the executive chair and chairman chair. 2. Suppose that the upstream activities to manufacturing (R&D and design) and the downstream activities (marketing, distribution, and customer service) were analyzed. The unit costs in 20X1 were budgeted to be as follows: Upstream activities ( ) Downstream activities ( ) Executive chair Chairman chair Compute the full product costs per unit of each line of chairs. (full product costs = of the costs in all business function areas).

15 Ex 5.1 Process costing demonstration problem. Pennsylvania Company produces a product that passes through a molding process and then through and assembly process. Information related to its manufacturing activities for July follows: Raw Materials - Beginning inventory - Raw mat.purchased on credit - Direct mat. Molding - Direct mat. Assembly - Indirect mat. Used - Ending inventory Factory payroll - Direct labour Molding - Direct labour Assembly - Indirect labour used - Total payroll cost (paid cash) Factory overhead - Indirect material used - Indirect labour used - Other overhead costs - Total factory overhead incur. Factory overhead applied - Molding (150% of dir.labour) - Assembly (200% of dir.lab.) - Total fact.overhead applied 100, , ,000-88,600-51,400 =70,000 42,000 55,375 50,625 =148,000 51,400 50,625 71,725 =173,750 63, ,750 =173,750 Molding department Beginning work-in-process inventory - % completed-material - % completed-labour&overhead Units started and completed Ending work-in-process invent. (units) - % completed-material - % completed-labour&overhead Costs - Beginning work-in-process - Direct material added - Direct labour added - Overhead applied(150%of dir.lab.) - Total costs Assembly department - Beginning work-in-process - Ending work-in-process inv. Finished products - Beginning inventory - Cost transferred in from assembly - Cost of products sold - Ending inventory 5, % 60% 17,000 8, % 25% 53, ,000 42,000 63,000 =348, , ,325 96, , ,100 =168, Compute the equivalent units of production for the molding department for July and determine the cost per equivalent unit for direct materials, direct labour, and factory overhead. 2. Compute the cost of the units transferred from molding to assembly in July and the cost of the ending goods in process inventory for the molding department.

16 Ex 5.2 A tractor manufacturer began and completed 500 tractors during the period. In addition, another 50 tractors were worked o during the period and on average were 60% completed. There was no beginning work-in-process. Manufacturing costs during the period were 5,000, How many equivalent units of work were performed during the period? 2. What was the average cost of a tractor? Ex 5.3 A manufacturer of televisions had 1,000 units in beginning work-in-process that were 30% completed last year. This year the remaining 70% of the work on the 1,000 units was completed and 10,000 more units were started and completed. In addition, 500 more units were started this period but were only 60% completed. Manufacturing costs during the period were $2,000, What was the cost per equivalent unit during the period? Ex 5.4 During April, 20,000 units were transferred in from Department A at a cost of 39,000. Materials cost of 6,500 and conversion cost of 9,000 were added in Department B. On April 30, Department B had 5,000 units of work in process 60 % complete as to conversion cost. Materials are added in the beginning of the process in Department B. 1. Compute equivalent production for materials and conversion cost. 2. Calculate the cost per equivalent unit for conversion cost.

17 S = sales (Su = selling price per unit) q = quantity (e.g.outputs in pieces ) FC = fixed costs (FCu = per unit) BEP = break-even point VC = variable costs (VCu = per unit) CMu = contribution margin per unit TC = total costs (TCu = per unit) CMR = contribution margin ratio Exercise 6.1 a) Cottage industries Ltd makes baskets. The fixed costs of operating the workshop for a month total 500. Each basket requires materials that cost 2. Each basket takes one hour to make, and the business pays the basket makers 10 an hour. The basket makers are all on contracts such that if they do not work for any reason, they are not paid. The baskets are sold to a wholesaler for 14 each. 1. What is the BEP for basket making for the business? b) Company expects to sell 500 baskets a month. The business has the opportunity to rent a basket-making machine. Doing so would increase the total fixed costs of operating the workshop for a month to Using the machine would reduce the labour time to half an hour per basket. The basket makers would still be paid 10 an hour. 2. How much profit would the business make each month from selling baskets (i) assuming that the basket-making machine is not rented, and (ii) assuming that it is rented? 3. What is the BEP if the machine is rented? 4. What advice would you give Cottage Industries about renting the machine? c) Cottage Industries has spare capacity in that its basket makers have some spare time. An overseas retail chain has offered the business an order for 300 baskets at a price of 13 each. 5. Without considering any wider issues, should the business accept the order? (assume, that the business does not rent the machine).

18 Exercise 6.2 The business provides three different services, the details of which are as follows: Service A B C Selling price per unit Variable cost per unit Contribution per unit Labour time per unit 5 hour 3 hours 6 hours Within reason, the market will take as many units of each service as can be provided, but the ability to provide the service is limited by the availability of labour, all of which need to be skilled. Fixed costs are not affected by the choice of service provided because all three services use the same facilities. 1. Which service is the most profitable? 2. Let assume, that the business has just 30 hours of labour time available. Which service is the most profitable now? Exercise 6.3 The business makes three different products, the details of which are as follows: Product A B C Selling price per unit ( ) Variable cost per unit ( ) Weekly demand (units) Machine time per unit (hours) Fixed costs are not affected by the choice of product because all three products use the same machine. Machine time is limited to 148 hours a week. 1. Which combination of products should be manufactured if the business is to produce the highest profit? 2. Going back to the result of 1 st requirement, what is the maximum price that the business concerned would logically be prepared to pay to have the remaining A machined by a subcontractor, assuming that no fixed or variable costs would be save as a result of not doing the machining in-house?

19 3. Would there be a different maximum if we were considering the C? Exercise 6.4 Smile Company needs a component for one of its products. It can subcontract production of the component to a subcontractor who will provide the components for 20 each. The business can produce the components internally for total variable costs of 15 per component. Smile comp. has spare capacity. 1. Should the component be subcontracted or produced internally? 2. Assume that Smile comp. has no spare capacity, so it can only produce the component internally by reducing its output of another of its products. While it is making each component, it will lose contributions of 12 from the other product. Should the component be subcontracted or produced internally? Exercise 6.5 Goodsports Ltd is a retail shop that operates through three departments, all in the same premises. The three departments occupy roughly equal-sized area of the premises. It would appear that if the general clothes department were to close, the business would be more profitable, by 9000 a year, assuming last year s performance to be a reasonable indication of future performance. The trading results for the year just finished showed the following. When the cost are analysed between those that are variable and those that are fixed, however, the contribution of each department can be deduced and the following results obtained: Total in thousands Sports equipment Sports clothes General clothes Sales Costs variable fixed contribution Profit /(Loss) 1. Should the department be closed?

20 Sold-hour rate = monthly budged / service-hours available Variable rate per hour = budgeted variable cost / capacity available (e.g. service-hour) Charged variable cost = actual services used (hours) x variable rate (a) Spending variance = actual cost - budgeted cost = actual cost - budgeted fixed cost - budgeted variable cost (b) Spending variance = actual variable cost - charged variable cost actual variable cost = actual total cost - fixed cost fixed rate = total fixed cost /normal capacity (maintenance hours, number of employees) (a) Idle capacity variance = budgeted allowance - applied (charged out) cost (b) Idle capacity variance = ( normal capacity - actual capacity) * fixed cost rate Exercise 7.1 Billing rates, variance analysis. Applegate Company uses predetermined departmental overhead rates to apply factory overhead. In computing these rates, every attempt is made to transfer service department costs to producing departments on the most equitable bases. Budgeted cost and other date for Applegate s two service departments, Maintenance and General Factory, are as follows: Maintenance General Factory Monthly fixed cost 7,500 30,000 Variable cost 8.50 per maintenance labour hour 20 per employee -prod.dpts.only Normal level of activity 15,000 maintenance hour monthly 1,000 producing dpt employees Actual total cost 132,000 48,000 Actual level of activity 14,000 maintenance hours 980 producing dpt employees Required: 1. Compute the charging or billing rates to be used to transfer estimated maintenance and general factory costs to other departments, together with a description of the method used. 2. Compute the spending and idle capacity variances for the service departments.

21 Exercise 7.2 Sold-hour rates, variance analysis. A company s two service departments that show the following budgeted and actual cost and service-hours data: Service Center Monthly budget ( ) Service-Hours Available Actual monthly expenses ( ) Carpenter Shop 20,000 2,000 19,300 Electricians 30,000 2,500 28,400 The two service departments serve three producing departments that show the following budgeted and actual cost and service-hours data: Estimated service required Actual Services Used Carpenter Shop Electricians Carpenter Shop Electricians 1 st department 600 hrs 900 hrs 400 hrs 1,000 hrs 2 nd department 750 hrs 1,000 hrs 800 hrs 850 hrs 3 rd department 650 hrs 600 hrs 450 hrs 550 hrs Required: 1. Compute the sold-hour rates for the two service departments. 2. Compute the amounts charged to the producing departments for services rendered. 3. Compute the spending variances for the two service departments, assuming that 70% of the budgeted expense is fixed in Carpenter Shop and 80% in Electricians. Exercise 7.3 Billing rates, variance analysis. The management of Bale Company wishes to secure greater control over service departments and decides to create a billing rate for the Maintenance and Payroll departments. For September, the following predetermined and actual operating and cost data have been made available:

22 Maintenance department Predetermined data (beginning of the month): Normal level of maintenance hours per month 3,200 Average hourly rate for maintenance worker $8.70 Fixed cost per month Variable cost per labour hour Supervision $9,800 $ 0.50 Tools and supplies $2,300 $ 0.75 Other miscellaneous items $700 $ 0.05 Actual data (end of the month): Maintenance hours worked 3,355 Maintenance workers earnings $29,610 Other costs (supervision, etc.) $17,390 Payroll department Predetermined data (beginning of the month): Average number of employees in factory and office 1,200 Budgeted cost for department $12,000 plus $2 for each employee in factory and office Actual data (end of the month): Number of employees in factory and office 1,165 Total cost in the Payroll Department $14,875 Required: 1. Compute the billing rate for the two departments. 2. Compute the variances for the two departments for September.

23 Exercise 7.4 Readiness-to-serve and billing rates. During November, the actual expense of operating a power plant was 11,800, of which 5,000 was considered a fixed cost. The schedule of horsepower-hours for the producing and service departments is as follows: Producing departments Service departments A B X Y Needed at capacity production 10,000 20,000 12,000 8,000 Used during November 8,000 13,000 7,000 6,000 Required: 1. Compute the Euro amounts of the power plant expense to be allocated to each producing and service department. The fixed cost is assigned on the basis of the power plant s readiness to serve. 2. State reasons for allocating one service department s cost to other service departments as well as to producing departments. Exercise 7.5 Readiness-to-serve and billing rates, variance analysis. GreenMind Company operates its own power plant. Cost of energy is distributed to the producing departments by charging the fixed cost based on the readiness-to-serve capacity provided, and the variable cost on the basis of a predetermined rate multiplied by actual consumption. The rated readiness-to-serve capacity of the three departments, Cutting, Grinding, and Polishing, is , , and kwh per month. The following information relative to the producing departments and the power plant for April, May, and June is available: Consumption in Kilowatt-hours Actual Power Plant Costs Cutting Grinding Polishing Fixed Variable April ,000 21,800 May ,000 21,400 June ,000 23,000 The predetermined variable power cost rate is 0.22 per kwh. Required: 1. Separately identify the fixed and variable power cost charged to each department for each of the three months. 2. Compute the over- or under-distributed variable cost of the power plant to each of the three months.

24 Exercise 7.6 Overhead analysis, report to supervisor. The cost and operating data on April factory overhead for certain department are as it follows: Variable departmental overhead: Supplies Repairs and maintenance Indirect labour Power and light Heat Subtotal Fixed departmental overhead: Building expense Depreciation machinery Property tax and insurance Subtotal Budgeted factory overhead ($) Actual factory overhead ($) 2,000 1, ,000 3,600 1,200 1, ,400 7, , , ,600 3,660 TOTAL 12,000 11,060 Operating data: Normal capacity hours Factory overhead rate per hour Actual hours 8,000 hrs $1.50 6,400 hrs Required: 1. Prepare a variance analysis of the factory overhead for the department. 2. Prepare a departmental report for the supervisor, with explanations regarding the format used.