Chapter 15&16 Problems and Answers

Chapter 15 Problems

The Nature of Management Accounting

Problem 15-1Following is a management accounting report for the Anders Ford Company. Contrast this report with a financial accounting report according to the list of differences given in the text.

ANDERS FORD COMPANYService Department Report

November

Planned ActualDifference

*Number of jobs completed 400 366 (34)

Number of employee days 740 736 4

Expenses:

Employee Wages $ 22,000 $ 22,772 $(772)

Parts Used 16,000 12,574 3,426

Supplies used 5,000 4,824 176

Other Expenses 6,000 6, 624 (624)

Total Expenses 49,000 46,794 2,206

Revenue 60,000 54, 468 (5,532)

Profit $ 11, 000 $ 7,674 $ (3, 326)

*( ) = unfavorable

Problem 15-1

MA FAInformation Content

nonmonetary information (jobs & number of employees)

Monetary form

Time orientation

Has future (planned) information as well as past (actual)

Reports financial history

Necessity Optional Must be done

Report Entity

Focuses on a segment (service department)

Describes the organization as a whole

Information Precision

Less emphasis on precision (planned numbers are rounded)

Emphasis on precision

Users useful only as manager uses it

Relatively large groups and mostly unknown to managers

ANDERS FORD COMPANYService Department Report

November

Planned ActualDifferenc

e *

Number of jobs completed 400 366 (34)

Number of employee days 740 736 4

Expenses:

Employee Wages $ 22,000 $ 22,772

$(772)

Parts Used 16,000 12,574 3,426

Supplies used 5,000 4,824 176

Other Expenses 6,000 6, 624 (624)

Total Expenses 49,000 46,794 2,206

Revenue 60,000 54, 468 (5,532)

Profit $ 11, 000 $ 7,674 $ (3, 326)

Problem 15-2As controller of Patriot Steel, you have been asked to provide information to management that would be helpful in answering a variety of questions.

Required:

a. For each of the questions below, classify the needed information as being an example of either full cost accounting, differential accounting, or responsibility accounting.

(1) Should the company own and operate its own iron ore mines or buy the one from another firm?

(2) As a result of a new labor contract with the United Steel Workers Union, what will be the profit margin on a ton of steel at current prices?

(3) Is the supervisor of the maintenance shop doing a good job?

Differential accounting

Responsibility accounting

Full-cost accounting

Problem 15-2As controller of Patriot Steel, you have been asked to provide information to management that would be helpful in answering a variety of questions.

Required:(4) How much money does the company have invested in finished goods inventory?

(5) Should the company consider replacing its old open-hearth furnaces with news ones?

(6) Which district sales manager is doing the best job?

b. In addition to management accounting information, what other types of information might be useful in attempting to answer each of the above questions?




Nonquantitative, nonaccounting, operating, and financial accounting

Problem 15-3As controller of the city of Oakly Heights, you have been asked to provide information to the mayor and city council that would be helpful in answering a variety of questions.

Required:For each of the questions bellow, classify the needed information as an example of full cost accounting, differential accounting, or responsibility accounting.

(1)As a result of a recent wage increase for airport workers, what does it now cost to operate the municipal airport?

(2) Should the city continue to own and operate its own garbage trucks or contract with a private firm?

(3) What does it cost to prepare and mail annual tax notices to property owners?




Problem 15-3As controller of the city of Oakly Heights, you have been asked to provide information to the mayor and city council that would be helpful in answering a variety of questions.

Required:For each of the questions bellow, classify the needed information as an example of full cost accounting, differential accounting, or responsibility accounting.

(4) Is the new police chief doing a better job than the former one?

(5) Should the city close its jail and contract with the country for detention of prisoners?

(6) Which department head is doing the best job of staying within his or her budget?

b. In addition to management accounting information, what other types of information might be useful in attempting to answer each of the questions above?




Nonquantitative, nonaccounting, operating, and financial accounting.

Problem 15-4FINEST NATIONAL BANK

Eastside Branch Office ReportOctober 1

Planned Actual DifferenceNumber of new accounts opened

225 180 (45)

Number of prospect calls made

113 84 (29)

Increase in deposit volume

$100,000 $80,000 $(20,000)

Increase in loan volume

$80,000 $90,000 $10,000

Expenses:Wages and salaries

$15,000 $12,800 $2,200

Utilities 1,450 1,420 30Rent on building 3,675 3,675 0Supplies 225 230 (5)Advertising 450 338 112Other expenses 75 76 (1) Total expenses:

20,875 18,539 2,336

Revenue from interest and service charges

20,500 20,000 (500)

Profit (loss) $(375) $1,461 $1,836

Following is a monthly report for a new branch office that the Finest National Bank recently opened in a rapidly developing section of the city. The branch manager is pleased that the report shows a $1,461 profit instead of the expected loss of $375. Required:What questions can be raised about the performance of the Eastside Branch and its manager based on information in the report?

*( ) = unfavorable

Problem 15-4FINEST NATIONAL BANK

Eastside Branch Office ReportOctober 1

Planned Actual DifferenceNumber of new accounts opened

225 180 (45)

Number of prospect calls made

113 84 (29)

Increase in deposit volume

$100,000 $80,000 $(20,000)

Increase in loan volume

$80,000 $90,000 $10,000

Expenses:Wages and salaries

$15,000 $12,800 $2,200

Utilities 1,450 1,420 30Rent on building

3,675 3,675 0

Supplies 225 230 (5)Advertising 450 338 112Other expenses 75 76 (1)Total expenses: 20,875 18,539 2,336Revenue from interest and service charges

20,500 20,000 (500)

Profit (loss) $(375) $1,461 $1,836

1. Why did the manager fail to make the planned number of prospect calls?

*( ) = unfavorable

2. Was this the reason for the failure to obtain the planned number of new accounts and increase in deposit volume?

3. Could the savings in advertising expense have contributed to the failure to achieve the planned growth in new accounts and deposit volume?

4. Was the $2,200 savings in wages and salaries the result of operating with one employee less than needed? If so, could this have helped prevent the manager from making the planned number of prospect calls?

5. Why was revenue lower than planned?Did the manager emphasize loans more than deposits?

Chapter 16 ProblemsThe Behavior of Costs

Problem 16-1The following graphs relate to the behavior of certain costs involved in the operation of a mechanical arts course offered by a local corporation in a program of adult education.Required:

a. Title each graph to show the type of cost it describes (fixed, variable, semivariable, etc.)

b. From the list of costs on the next page, select those that each graph describes.

Costs1. Cost of raw materials used by students.2. Depreciation of machinery and equipment used.3. Cost of blueprints and manuals. Extra copies must be acquired for every 6 students who enroll over the minimum number of 24.4. Utilities and maintenance. Utilities remain constant each month, but maintenance tends to vary with the usage of machinery and equipment.

Fixed cost

Variable cost

Semivariable cost

Semivariable cost

2. Depreciation of machinery and equipment used.

1. Cost of raw materials used by students.

4. Utilities and maintenance. Utilities remain constant each month, but maintenance tends to vary with the usage of machinery and equipment.

3. Cost of blueprints and manuals. Extra copies must be acquired for every 6 students who enroll over the minimum number of 24.

Problem 16-2Doyle's Candy Company is a wholesale distributor of candy. The company services groceries, convenience stores, drugstores in a large metropolitan area. Small but steady growth in sales has been achieved over the past few years while candy prices have been increasing. The company is formulating its plan for the coming fiscal year. Presented below are the data used to project the current year's after-tax net income of $264,960.

Manufacturers of candy have announced that they will increase prices of their products an average 15 percent in the coming year due to increases in raw materials (sugar, cocoa, peanuts, etc.) and labor costs. Doyle's Candy Company expects that all other costs will remain at the same rates or levels as the current year.

Problem 16-2Required:

a. What is Doyle's Candy Company's break-even point in boxes of candy for the current year?

Break-even volume = Fixed costs / Unit contribution= $1,056,000 / $9.60 - $5.76= $1,056,000 / $3.84 = 275,000 boxes

b. What selling price per box must Doyle's Candy Company charge to cover the 15 percent increase in variable production costs of candy and still maintain the current contribution margin percentage?

Current contribution margin percentage = $3.84 / $9.60 = 40%.

UR

UVCURCMP

Solving for UR (Selling Price):

CMP1

UVCUR

With a l5% increase in variable production costs (to $5.52, giving total UVC of $6.48), the selling price per box is:

80.10$60.

48.6$

40.1

48.6$UR

Problem 16-2c. What volume of sales in dollars must Doyle's Candy Company achieve in the coming year to maintain the same net income after taxes as projected for the current year if the selling price of candy remains at $9.60 per box and the variable production costs of candy increase 15 percent?

Problem 16-3: Mike Solid’s Pizzeria

Mike Solid started a pizzeria in 1999. For this purpose he rented a building for $1,800 per month. Two persons were hired to work full-time at the restaurant and six college students were hired to work 30 hours per week delivering pizza. An outside accountant was hired for tax and bookkeeping purposes at a cost of $900 per month. The necessary restaurant equipment and delivery cars were purchased with cash. Mr. Solid has noticed that expenses for utilities and supplies have been rather constant.

Mr. Solid increased his business between 1999 and 2001. Profits have more than doubled since 1999. Mr. Solid does not understand why his profits have increased faster than his volume.

A projected income statement for 2002 has been prepared by the accountant and is shown below:

Projected Income Statement

For the Year Ended Dec.31, 2002

Sales $308,000Cost of goods sold $92,400Wages and fringe benefits of restaurant help

26,650

Wages and fringe benefits of delivery persons

54,100

Rent 15,500Accounting Services 10,900Depreciation of delivery equipment

16,000

Depreciation of restaurant equipment

8,000

Utilities 7,165Supplies (soap, floor wax, etc.)

10,645 241,360

Income before taxes 66,640Income taxes 19,992Net Income $ 45,648Note: The average pizza sells for $8.50. Assume that Mr. Solid pays out 30 percent of his income in income taxes.


Required:

a. What is the break-even point in number of pizzas that must be sold?

Breakeven sales volume *$308,000 / $8.50 = 36,235 pizzas

Variable Cost / Pizza:$92,400 / 36,235 = $2.55.


b. What is the cash flow break-even point in number of pizzas that must be sold?

Cash fixed costs = total fixed costs – depreciation= $148,960 - ($16,000 + $8,000)= $148,960 - ($24,000) = $124,960

depreciation tax shield ($24,000 x 30%) = $7,200Therefore,

Net Cash Fixed Cost = $124,960 - ($7,200)= $117,760.

So,

Break-even volume = $117,760 ÷ $5.95 = 19,792 pizzas

Cash Breakeven Point = (fixed costs - depreciation) / contribution margin per unit


c. If Mr. Solid withdraws $14,400 for personal use, how much cash will be left from the 2002 income-producing activities?

Cash generated by operations= net income + noncash expenses= $46,648 + $24,000 = $70,648

$70,648 - $14,400 = $56,248


d. Mr. Solid would like an after-tax net income of $60,000, what volume must be reached in number of pizzas in order to obtain the desired income?The easiest way to approach this question is to treat the target pretax income as a fixed cost.

target pretax income = $60,000 70% = $85,713

dollar sales at target pretax income $85,713 + $148,960 fixed costs = $234,673

So required volume = (dollar sales at target pretax income) / (unit contribution margin)

= $234,673 / $5.95

= 39,441 pizzas.


e. Briefly explain to Mr. Solid why his profits have increased at a faster rate than his sales.

Most of the expenses are fixed. Therefore a large volume of sales is required before any profit is made. Once this point is reached (break-even), each sale contributes $5.95 to profits, a larger change in profits since profits begin at zero at this point while the $8.50 change in sales is a smaller proportion of sales because of the large amount of sales required to reach the break-even point.

$5.95 – Unit contribution margin (SC-VC)


For the Year Ended Dec.31, 2002Sales $308,000Cost of goods sold $92,400Wages and fringe benefits of restaurant help

26,650


54,100


16,000


8,000

Utilities 7,165Supplies (soap, floor wax, etc.) 10,645 241,360Income before taxes 66,640Income taxes 19,992Net Income $ 45,648Note: The average pizza sells for $8.50. Assume that Mr. Solid pays out 30 percent of his income in income taxes.


f. Briefly explain to Mr. Solid why his cash flow for 2002 will exceed his profits.

The cash flow from operations will exceed his profits because $24,000 of the expense (depreciation) is not a current cash-consuming cost.


For the Year Ended Dec.31, 2002Sales $308,000Cost of goods sold $92,400Wages and fringe benefits of restaurant help

26,650


54,100


16,000


8,000

Utilities 7,165Supplies (soap, floor wax, etc.) 10,645 241,360Income before taxes 66,640Income taxes 19,992Net Income $ 45,648

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Chapter 15&16 Problems and Answers