QUESTION 1 -
A company manufactures two products, P and R. P is the more complex of the two products, requiring more direct labor time and more machine time per unit than R.
Manufacturing overhead is currently assigned to the products on the basis of direct labor hours. The company has gathered some activity information and is interested in the differences between its present costing method and activity based costing. All overhead costs should be allocated to the products. The overhead cost pools and activity drivers are as follows;
ACTIVITY POOL OVERHEAD COSTS TOTAL DRIVER USAGE
Setup $256,000 3,200 setups
Material Purchasing $110,000 2,750 purchase orders
Machining/Fabricating $136,000 27,200 machine hours
TOTAL OVERHEAD COSTS $502,000
Other product information is as follows:
P R
Number of units produced 40,000 10,000
Direct labor hours 20,000 30,000
Setups 2,800 400
Purchase orders 680 2,070
Machine hours 19,200 8,000
A) Using the traditional method of allocating overhead based on direct labor hours, compute the total overhead costs of products P and R.
B) Using an activity based approach, compute the total overhead costs of products P and R. SHOW ALL OF YOUR CALCULATIONS.
C) Which method of allocation gives a better understanding of the costs of each product? Briefly explain your answer.
QUESTION 2 -
On October 1, 2016, the manager of a company's Southeast region received the annual e-mail from the budget office. It was time to prepare the 2017 budget. Included in the e-mail were instructions that the manager should estimate the revenues and expenses his region would report for 2017. Anything greater than a 5% deviation from last year's budget would need to be explained, though there was no indication that the budgeted numbers wouldn't be accepted.
A) Explain whether the company's budget process in top-down or bottom-up?
B) List two advantages and two disadvantages of using the approach that you selected.
QUESTION 3 -
A company has three different divisions: Olliepods, Polyspreen, and Monk Recreation. Given the following information, identify each segment as a cost center, a revenue center, a profit center, or an investment center:
1) The Olliepods division sells children's recreational shoes. The division's president is responsible for all short-run decisions on the manufacturing and sale of the shoes.
2) The Polyspreen division manufactures the main ingredient for the shoes produced by Olliepods. All Polyspreen output is transferred to the Olliepods divsion.
3) All long-run strategic decisions and investments for OlliePods and Polyspreen divisions are made by the staff at corporate headquarters.
4) Monk Recreation, which operates a regional chain of retail sporting goods stores, is the company's newest corporate acquisition. All decision making responsibility (both short-term and long-term) related to the sporting goods stores remains with those employees.
5) Monk Recreation has several sales territories from the Southeast to the Northwest. Managers of these territories are evaluated based on a comparison of current period sales against budgeted sales.
QUESTION 4 -
Caffeine Connections sells a variety of exotic teas and coffees through a national network. The company operates its own roasting division, which supplies roasted coffee beans to its own wholesale division as well as to other external customers. Even though the roasting division can roast 500,000 pounds of beans each month, current market demand is only 425,000 pounds, so that is the current level of production.
The wholesale division has designed a new promotional product for which it needs 50,000 pounds of roasted coffee beans. It can be purchased from an external supplier for $7 per pound. The roasting division can supply the beans to the wholesale division at a price of $8 per pound, which is the retail price to external customers. Variable costs for the roasting division amount to $4 per pound and fixed costs amount to $1.75 per pound.
A) Given the above information, should the roasting division sell the coffee beans to the wholesale division? if your answer is yes, what will be the expected transfer price? BE SURE TO INCLUDE A MAXIMUM AND MINIMUM PRICE. If your answer is no, explain why you would veto the transaction.
B) Explain whether your answer to part A would change if the roasting division were operating at 100% capacity.