cost accounting

| October 22, 2018

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Suffolk University
Sawyer Business School
Department of Accounting
& Taxation
ACCT
331
Mid-Term
Exam – Spring 2013

The
case for the Exam # 1 is Bally, Inc. and is contained below. Please read it
carefully, and please read all of the
pages on the exam before beginning to answer any of the questions. Then
answer the questions on the attached pages.
The exam is open
book. You may use whatever notes, books, and other materials you wish (exceptthose materials, including exam
responses, of other students taking the exam).

Please put your name and
I.D. Number in the space below:

Name___________________________________
I.D. Number____________________

You may do scratch work on separate pages and outline your answers on
separate pages – in fact, I encourage you to do so. Once you are ready to write
out your answer, please confine it to the
spaces indicated, and please write legibly and succinctly. Do
not use separate pages or exceed the allotted space.

Please also sign the statement below confirming that
you have completed the exam on your own without assistance:
I hereby state that I have completed the attached
midterm on my own without any assistance from classmates or other outsiders.
Signed______________________________________________________________________________

Bally, Inc.

We
have grown a lot and done well in the past three years. Most of our shoes are
hand made, using very little in the way of machines, and we charge a premium
price for them. Recently, however, we decided to diversify so we could compete
with the more automated manufactures. We purchased some specialized equipment
that we installed in our plant and that we use only for the machine-made shoes.
We use very little labor to make these kinds of shoes. However, the problem now
is that we don’t seem to know how much it costs us to make either kind of shoe.
It was easy when we produced only hand-made
shoes, but matters are now much more complicated. The problem seems to
be with overhead allocation.

The speaker was Joan Smith,
CEO of Bally, Inc. (BI). She was speaking at the senior manager’s weekly
meeting held at the North American headquarters of the corporation in
Lafayette, Indiana. BI had been manufacturing shoes in Italy for several
generations. Three years ago, after completing her M.B.A. in Business
Administration from a School in New England, her father, the company’s founder
and President had asked Ms. Smith, to initiate BI’s North America operations.
BI’s overhead costs
and some related information on shipments, batch sizes, and machine hours, are
shown in Exhibit 1. John McMann, BI’s CFO, commented on the nature of the
problem.

When we produced only hand made
shoes, we allocated all our manufacturing overhead (MOH) to them and there was
no problem. Our MOH is relatively high, since receiving and handling the
materials from each leather shipment takes a lot of time. Also, as part of
receiving and handling, we cut and prepare much of the leather before it enters
the manufacturing process, all of which we consider to be manufacturing
overhead.

The shift to machine-made shoes has
meant more than just some increased depreciation, which we consider to be
direct cost, since we use completely different machines for machine-made shoes
than for hand-made ones. In addition, however, all the machines need to be
repaired and maintained, which seems to be a function of the number of hours
that each machine is used. Our repair and maintenance crew works on all of the
machines, so we consider them to be part of manufacturing overhead.

Then there’s the set-up time for
the machines, which is related to the number of batches we run. The hand-made
shoes are stitched and formed individually, but then finished up on a machine
in batches. And, of course, all of the machine-made shoes are run in batches. A
batch is a group of shoes of the same size, and we have to set up the machines
to accommodate the particular size. Our set-up crew works on all of the
machines, so we consider them to be part of manufacturing overhead also.

In response to this, Ms.
Smith commented to John McMann:

Is this
diversification move good or not? First you tell me that machine-made shoes are
money makers, then you tell me we’re losing large sums of money on each pair of
them. Which is it?

Ms. Smith’s concern about costs arose because Mr. McMann had presented
her with some conflicting information. Initially, Mr. McMann had allocated
overhead to shoes on the basis of direct labor dollars, as shown in Exhibit 2.
Then, deciding that machine hours drove the use of much of the overhead, he had
used machine hours to allocate the overhead, as shown in Exhibit 3. Ms. Smith
commented:

With the first approach, I was
pleased. The machine-made shoes were showing a bigger margin percent than the
hand-made ones, which didn’t completely make sense to me, since the market for
machine-made shoes is much more competitive than the market for hand-made
shoes, but I thought that perhaps we were doing something better than our
competition. Then along comes the report using machine hours as the basis for
allocating overhead. Wow! The margin percent on our hand-made shoes is
terrific, but we are losing a bundle on the machine-made shoes.

On top of all this, John has told
me that, because we have so much fixed manufacturing overhead, we should be
using variable costing, and he’s put together a set of financial statements
using variable costing that shows we’re losing money [Exhibit 4]. This just
doesn’t make sense, although I suppose if the margins on the machine-made shoes
are as bad as they now seem to be, maybe it’s true. If that is the case,
though, why doesn’t the loss show up under the absorption costing process?

At this point, I’m not sure what to
do. We’ve just begun producing machine-made shoes, and are making only a few
hundred pairs right now, but this problem could get much bigger if we increase
production. My sense is that we should get out of the machine-made shoe
business, and stick with the hand-made shoes. We were doing pretty well at that
before we began to diversify. It seems as though we’ve made a big mistake. Or
maybe it’s all in the accounting. I sure wish I had paid more attention in my Cost
Accounting course (ACCT 804) in college.

Exhibit
1. Manufacturing Overhead Statistics and Costs
Most Recent Accounting Period

Machine-Made Hand-Made Total
Manufacturing
Statistics
Number of pairs produced 400 1,000 1,400
Number of machine hours 800 200 1,000
Number of batches 5 35 40
Raw material shipments
received 2 18 20

Manufacturing
Overhead Costs
Machine maintenance $50,000
Machine set-up labor 115,000
Material handling 235,000
$400,000

Exhibit
2. Overhead Allocated with Direct Labor Dollars
Most Recent Accounting Period

Machine-Made Hand-Made Total
Direct Labor $5,000 $35,000 $40,000
Direct Materials 7,000 18,000 25,000
Machine Depreciation
(direct) 25,000 5,000
30,000
Manufacturing overhead 50,000 350,000 400,000
Cost of goods manufactured $87,000 $408,000
$495,000

Full cost per pair $217.50 $408.00
Price per pair $300.00 $500.00
Margin percent per pair 27.5% 18.4%

Exhibit
3. Overhead Allocated with Machine Hours
Most Recent Accounting Period

Machine-Made Hand-Made Total
Direct Labor $5,000 $35,000 $40,000
Direct Materials 7,000 18,000 25,000
Machine Depreciation
(direct) 25,000 5,000
30,000
Manufacturing overhead 320,000 80,000
400,000
Cost of goods manufactured $357,000 $138,000
$495,000

Full cost per pair $892.50 $138.00
Price per pair $300.00 $500.00
Margin percent per pair
-197.5% 72.4%

Exhibit
4. Comparative Income Statements
Most Recent Accounting Period

Absorption
Costing Variable Costing

Sales $530,000 $530,000
Cost of goods sold (COGS) 450,000
210,000
Gross margin 80,000 320,000
Overhead volume variance (15,000) 0
Overhead budget variance 2,800 2,800
Adjusted gross margin $ 67,800 $322,800
Less: Fixed manufacturing
overhead 0
270,000
Less: Selling, general &
admin. 58,000 58,000
Operating income $ 9,800 $ (5,200)

____________________________________________________________________________
Question
1. (6 points)Compute the allocation rate that was
used for the manufacturing overhead in Exhibits 2 and 3. Show your computations
in enough detail and with enough organization to make them easy to follow.
Exhibit 2

Exhibit 3

Question 2 (8 points)Using the rates
from Question 1, show the computations that were used for allocating
manufacturing overhead in Exhibit 2 and Exhibit 3. Show your computations in
enough detail and with enough organization to make them easy to follow.
Machine-made Hand-made
Exhibit 2

Exhibit 3

Question 3. (10 points) Assuming that all manufacturing overhead is
fixed and all units produced are sold, calculate the breakeven (in units and $)
for machine-made and hand-made shoes based
on Exhibit 2? Is this information useful for decision-making (one sentence
only)?
—————————————————————————————————————————————–
Machine-made shoes: Breakeven units:

Breakeven $:

—————————————————————————————————————————————–
Hand-made shoes: Breakeven units:

Breakeven $:

—————————————————————————————————————————————–
Question 4. (10 points) Using the same logic, calculate the breakeven
(in units and $) for machine-made and hand-made shoes based on Exhibit 3? Is this information useful for decision-making?
—————————————————————————————————————————————–
Machine-made shoes: Breakeven units:

Breakeven $:

—————————————————————————————————————————————–
Hand-made shoes: Breakeven units:

Breakeven $:

—————————————————————————————————————————————–

Question 5. (11 points) Using the same logic, calculate the breakeven
(in units and $) for Bally, Inc. based on
Exhibit 2? Is this information useful for decision-making?
———————————————————————————————————————————
Breakeven units:

Breakeven $:

Question 6. (15 points)use the
information in Exhibit 1 to identify the cost drivers and compute manufacturing
overhead rates for the machine maintenance, machine set up labor, and material
handling.
MOH Item Total Cost Cost Driver MOH
Rate

Machine maintenance

Machine set up labor

Material handling

Question 7. (20 points)Use the overhead
rates you computed in Question 6 to calculate the cost of goods manufactured
for a pair of machine-made shoes and a pair of hand-made shoes, and compute the
margin percentages for each. Explain your computations for MOH.

Machine-made Hand-made Explanation

Item

Cost of goods manufactured

Cost of goods manufactured per pair

Price per pair

Margin Percent

Question 8 (20 points) Ms. Smith has
asked you if they should get out of the machine-made shoe business. Please make
a recommendation and explain your rationale. (Remember to follow the format of the team memo you wrote earlier in the
semester).

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