Question 1: The Densain Water plant in Naples, Fl, bottles purified and flavored water in a variiety of sizes (20,36,48, and 64 ounces) for sale through vending machines and retail stores. Volumes is measured as bottle ounces. The plant's annual budgeted fixed manufacturing overhead amounts to $1.8 million, and variable manufacturing overhead is projected at $0,005 per bottled ounce. Projected volume in the Naples plant next year is 200 million onces. Actual volume for the year accumulated to 210 million ounces and the total manufacturing overhead incurred (both fixed and variable) was $2.85 million.
a. Calculate the Desian Naples plant overhead rate.
b. How much overhead was absorbed to products in the Naples plant?
c. Calculate the Densian Naples plant's over- or underabsorbed overhead.
d. Describe the effect on income when the over- or underabsorbed overhead calculated in (c) is written off to cost of goods sold.
Question 2: Mac Giver Brass is a brass planting firm with sales of $8 million and profits before taxes of $625,000. MacGiver has a loan outstanding at its local bank for working capital purposes. As the loan officer reviewing MacGiver's loan application, you are charged with making a recommendation as to whether the $608,000 loan should be renewed for anothoer year.
a. How should you evaluate MavGiver's annual report in light of this footnote? In particular, how does this footnote affect your recommendation regarding the loan?
b. In preparing for your meeting with MacGiver's president and chief financial officer, what questions do you want to ask regarding this footnote?
Question 3: Rick's Bags manufactures both golf bags and tennis totes. Fixed manufacturing overhead is budgeted to be $187,200, variable manufacturing overhead is budgeted to be $1.10 per direct labor hour, and fixed selling and administration cost are budgeted to be $346,000. Each golf bag is expected to use 2.5 direct labor hours and each tennis tote is expected to use 1.8 direct labor hours. Planned production consist of 12,000 golf bags and 18,000 tennis totes.
During the year, 34,060 direct labor hours are used to make golf bags and 16,250 direct labor hours are used to make tennis totes. Manufacturing overhead incurred during the year was $207,500.
Overhead is absorbed into products using actual direct labor hours.
a. Calculate the manufacturing overhead rate used to absorb overhead to golf bags and tennis totes.
b. A batch of tennis totes is produced in May. The batch uses 1,900 direct labor hours. How much overhead is charged to this batch of tennis totes?
c. Calculate the amount of over/underabsorbed overhead at the end of the year.
d. Describe in nontechnical terms what the over/underabsorbed overhead calculated in part (c) means.
Question 4: Kitchen Rite is considering outsourcing the production of a steel chassis that is used in a kitchen appliance. Two thousand chassis are produced per month. An outside vendor will supply an identical chassis for $9.90. The chassis is manufactured in two steps. A stamping press punches out the part from sheet metal, bends the sides, and cuts holes in it, all in one operation. Then a welding machine welds the corners. Both the welding and stamping machines are used to produce only this one chassis model. The following job order cost sheet summarizes the cost of producing a single chassis.
Cost per Unit
Steel plate $4.75
Direct labor:
Stamping ($20/hour) 1.60
Welding ($30/hour) 2.50
Overhead:
Stamping (depreciation) 3.60
Welding (leasing payment) 2.15
General plant 5.90
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$20.50
The stamping machine is old and has little economic value. A used equipment dealer is willing to remove the machine and haul it away at no cost. The stamping machine was purchased 13 years ago for $1,728,000. For both tax and reporting purposes, it is being depreciated using a 20-year life, straight-line method, and it has zero salvage value. The welding machine is leased for $4,300 per month, and the lease can be canceled at any time and the machine returned. However, an early termination penalty of $1,800 per month for the next 42 months must be paid.
General plant overhead consists primarily of the allocated cost of depreciation on the plant, property taxes, and fire insurance on the plant. Kitchen Rite currently has excess plant spaces. The manufacturing space freed up if the consists primarily. Kitchen Rite currently has excess plant space. The manufacturing space freed up if the chassis is outsourced has no other use.
Employees are unionized and have a clause in their contract that prevents the firm from firing them if their jobs are eliminated due to outsourcing. The employees working on the stamping machine will be placed on the indefinite furlough at 75 percent of their current pay. The employees operating the welding machine can be reassigned to other positions in the firm as job openings occur. Given the high demand for welders, these reassignments will occur within a few weeks of outsourcing the chassis.
Kitchen Rite has a tax loss for the current and the previous two years.
Required:
Should Kitchen Rite outsourse the chassis? Support your recommendation with a clear financial analysis of the facts.
Question 5: Hurst Mats manufactures custom replacement floor mats for automobiles. The floor mats are made of spun nylon on highly automated, expensive machinery. Hurst manufactures two mat styles: Plush and Deluxe. Hurst's unionized work force makes it difficult for Hurst to compete on price. So far it has been able to successfully compete on quality, innovation design, and delivery schedule. However, the leaders of Hurst's union are aggressive and are seeking additional work-related job guarantees. Hurst management would like to reduce its dependence on unionized labor.
Hurst's manufacturing process is overhead-driven; most of the overhead arises form the common machinery That produces the Plush and Deluxe floor mats. Nonunionized engineers and technicians maintain the equipment. Expensive lubricants and filters are required to operate the machines, which require large amounts of electricity and natural gas. Each mat style is produced in batches that consist of 10 mats per batch. Plush and Deluxe do not put differential demands on the equipment other than through the amount of the machine time required to produce each batch of mats.
Plush Deluxe
Machine minutes per batch of 10 mats 12 9
Direct labor per batch of 10 mats $4 $6
Direct material per batch of 10 mats $7 $5
Number of batches per year 14,000 9,000
Overhead is allocated to the two mat styles using a predetermined overhead rate estimated from a flexible budget at the beginning of the year. Fixed overhead is estimated to be $680,000, and variable overhead is estimated to be $1.50 per machine minute. Management is debating whether to use machine minutes or direct labor cost as the overhead allocation base to allocate overhead to the two mat styles.
Required:
a. Calculate two overhead rates. The first uses machine minutes as the allocation base, and the second overhead rate uses direct labor cost as the allocation base. Round both overhead rates to two decimals.
b. Calculate the total product cost per batch of Plush and Deluxe mats using the two overhead rates calculate in (a).
c. Discuss the advantages and disadvantages of using machine minutes or direct labor cost as the allocation base for assigning overhead to the mat styles.