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Activity-Based Costing; Budgeted Operating Margin

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Activity-Based Costing; Budgeted Operating Margin

Stanley Cycle Company produces two subassemblies, JY-63 and RX-67, used in manufacturing motorcycles. The company is currently using an absorption costing system that applies overhead based on direct-labour hours. The budget for the current year ending December 31, 20x4 is as follows:

STANLEY CYCLE COMPANY
Budgeted Statement of Gross Margin for 20x4
JY-63 RX-67 Total
Sales in units. 5,000 5,000 10,000
Sales revenue $ 3,400,000 $ 4,400,000 $ 7,800,000
Cost of goods manufactured and sold:
Beginning finished-goods inventory. $ 480,000 $ 600,000 $ 1,080,000
Add: Direct material. 2,000,000 3,500,000 5,500,000
  Direct labour 370,370 185,186 555,556
  Applied manufacturing overhead* 1,088,050 544,026 1,632,076
Cost of goods available for sale. 3,938,420 4,829,212 8,767,632
Less: Ending finished-goods inventory. 480,000 600,000 1,080,000
Cost of goods sold. 3,458,420 4,229,212 7,687,632
Gross margin. $(58,420) $170,788 $112,368
* Applied on the basis of direct-labour hours:

Machining $ 849,056
Assembly 433,962
Material handling 113,208
Inspection 235,850
Total $1,632,076
Page 198
Jay Rexford, Stanley Cycle's president, has been reading about a new type of costing method called activity-based costing. Rexford is convinced that activity-based costing will cast a new light on future profits. As a result, Jack Canfield, the company's director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JY-63 and 5,000 units of RX-67.

Cost Pool Information for 20x4
Cost Pool Activity JY-63 RX-67
Direct labour Direct-labour hours (per product line) 10,000 5,000
Material handling Number of parts (per unit) 5 10
Inspection inspection hours (per product line) 5,000 7,500
Machining Machine hours (per product line) 15,000 30,000
Assembly Assembly hours (per product line) 6,000 5,500
In addition, the following information is projected for the next calendar year, 20x5:

JY-63 RX-67
Sales (in units) 5,100 4,900
Beginning inventory, finished goods (in units) 800 600
Ending inventory, finished goods (in units) 700 700
On January 1, 20x5, Rexford is planning to increase the prices of JY-63 to $710 and RX-67 to $910. Material costs are not expected to increase in 20x5, but direct labour will increase by 8 percent, and all manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process, the company does not have any beginning or ending work-in-process inventories.
Stanley Cycle Company has materials delivered to the production facility directly from the vendors. The raw-material inventory both at the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, first-out (FIFO) inventory method.
Required:
1. Explain how activity-based costing differs from traditional product-costing methods.
2. Using activity-based costing, calculate the total cost for 20x5 for the following activity cost pools: material handling, inspection, machining, and assembly. (For the total costs, round to the nearest dollar.) Then, calculate the pool rate per unit of the appropriate cost driver for each of the four activities.
3. Prepare a table showing for each product line the estimated 20x5 cost for each of the following cost elements: direct material, direct-labour, machining, assembly, material handling, and inspection. (Round to the nearest dollar.)
4. Prepare a budgeted statement showing the gross margin for Stanley Cycle Company for 20x5, using activity-based costing. The statement should show each product and a total for the company. Be sure to include detailed calculations for the cost of goods manufactured and sold. (Round each amount in the statement to the nearest dollar.)

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Solution Summary

Activity-based costing for budgeting operating margins are examined for Stanley Cycle Company.

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See Also This Related BrainMass Solution

Net Operating and General Financial Accounting
1. Which of the following is true regarding the contribution margin ratio of a single product company?
As fixed expenses decrease, the contribution margin ratio increases.
The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit.
The contribution margin ratio will decline as unit sales decline.
The contribution margin ratio equals the selling price per unit less the variable expense ratio.

Continued.....

1. Which of the following is true regarding the contribution margin ratio of a single product company?
As fixed expenses decrease, the contribution margin ratio increases.
The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit.
The contribution margin ratio will decline as unit sales decline.
The contribution margin ratio equals the selling price per unit less the variable expense ratio.

2. At the break-even point:
sales would be equal to contribution margin.
contribution margin would be equal to fixed expenses.
contribution margin would be equal to net operating income.
sales would be equal to fixed expenses.

3. Escareno Corporation has provided its contribution format income statement for June. The company produces and sells a single product. Sales (8,400 units) $764,400 Variable expenses 445,200 Contribution margin 319,200 Fixed expenses 250,900 Net operating income $ 68,300 If the company sells 8,200 units, its total contribution margin should be closest to:
$301,000
$311,600
$319,200
$66,674

4. Gayne Corporation's contribution margin ratio is 12% and its fixed monthly expenses are $84,000. If the company's sales for a month are $738,000, what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.
$565,440
$654,000
$88,560
$4,560

5. The principal difference between variable costing and absorption costing centers on:
whether variable manufacturing costs should be included as product costs.
whether fixed manufacturing costs should be included as product costs.
whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.
none of these.

6. When production exceeds sales, net operating income reported under variable costing generally will be:
greater than net operating
less than net operating income reported under absorption costing
equal to net operating income reported under absorption costing.
higher or lower because no generalization can be made.

7. Kray Inc., which produces a single product, has provided the following data for its most recent month of operations: Number of units produced 3,000 Variable costs per unit: Direct materials $91 Direct labor $13 Variable manufacturing overhead $7 Variable selling and administrative expense $6 Fixed costs: Fixed manufacturing overhead $237,000 Fixed selling and administrative expense $165,000 There were no beginning or ending inventories. The unit product cost under variable costing was:
$111
$190
$117
$110

8. Swifton Company produces a single product. Last year, the company had net operating income of $40,000 using variable costing. Beginning and ending inventories were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost was $3.00 per unit, what was the income using absorption costing?
$15,000
$25,000
$40,000
$55,000

9. Which terms would make the following sentence true? Manufacturing companies that benefit the most from activity-based costing are those where overhead costs are a _________ percentage of total product cost and where there is ___________ diversity among the various products that they produce.
low, little
low, considerable
high, little
high, considerable

10. Providing the power required to run production equipment is an example of a:
Unit-level activity.
Batch-level activity.
Product-level activity.
Organization-sustaining activity.

11.
Data concerning three of the activity cost pools of Salcido LLC, a legal firm, have been provided below:

Activity Cost Pools Total Cost Total Activity
Researching legal issues....... $20,480 640 research hours
Meeting with clients............. $1,182,239 7,253 meeting hours
Preparing documents........... $91,840 5,740 documents
The activity rate for the "meeting with clients" activity cost pool is closest to:

$95 per meeting hour
$61 per meeting hour
$163 per meeting hour
$1,182,239 per meeting hour

12. Gould Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products:
Activity Cost Pools Activity Rate
Setting up batches........................... $59.06 per batch
Processing customer orders............. $72.66 per customer order
Assembling products....................... $3.75 per assembly hour
Data concerning two products appear below:

Product K91B Product F65O
Number of batches.......................... 84 50
Number of customer orders............. 32 43
Number of assembly hours............... 483 890
How much overhead cost would be assigned to Product K91B using the activity-based costing system?

$9,097.41
$81,146.53
$4,961.04
$135.47

13. A basic idea underlying __________________ is that a manager should be held responsible only for those items that the manager can actually control to a significant extent.
participative budgeting
planning and control
responsibility accounting
the master budget

14. Which of the following statements is NOT correct concerning the Manufacturing Overhead Budget?
The Manufacturing Overhead Budget provides a schedule of all costs of production other than direct materials and labor costs.
The Manufacturing Overhead Budget shows only the variable portion of manufacturing overhead.
The Manufacturing Overhead Budget shows the expected cash disbursements for manufacturing overhead.
The Manufacturing Overhead Budget is prepared after the Sales Budget.

15.
Sioux Company is estimating the following sales for the first six months of next year:
January....... $250,000
February..... $220,000
March......... $240,000
April........... $300,000
May............ $360,000
Sales at Sioux are normally collected as 60% in the month of sale, 35% in the month following the sale, and the remaining 5% being uncollectible. Based on this information, how much cash should Sioux expect to collect during the month of April?
$250,800
$264,000
$290,700
$306,000

16. Costs which can be eliminated in whole or in part if a particular business segment is discontinued are called:
sunk costs.
opportunity costs.
avoidable costs.
irrelevant costs.

17. Kinsi Corporation manufactures five different products. All five of these products must pass through a stamping machine in its fabrication department. This machine is Kinsi's constrained resource. Kinsi would make the most profit if it produces the product that:
uses the lowest number of stamping machine hours.
generates the highest contribution margin per unit.
generates the highest contribution margin ratio.
generates the highest contribution margin per stamping machine hour.

18. Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of $50,000. If the lamps are reworked for $20,000, they could be sold for $35,000. Alternatively, the lamps could be sold for $8,000 for scrap. In a decision model analyzing these alternatives, the sunk cost would be:
$8,000
$15,000
$20,000
$50,000

19.
The management of Furrow Corporation is considering dropping product L07E. Data from the company's accounting system appear below:
Sales..................................... $830,000
Variable expenses.......................... $365,000
Fixed manufacturing expenses................... $291,000
Fixed selling and administrative expenses....... $166,000
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. What would be the effect on the company's overall net operating income if product L07E were dropped?
Overall net operating income would increase by $8,000.
Overall net operating income would decrease by $173,000.
Overall net operating income would decrease by $8,000.
Overall net operating income would increase by $173,000.

20.
Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether. Data from the company's accounting system appear below:
Sales......................................... $730,000
Variable expenses............................... $350,000
Fixed manufacturing expenses................... $234,000
Fixed selling and administrative expenses....... $161,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued. What would be the effect on the company's overall net operating income if product U23N were dropped?
Overall net operating income would increase by $15,000.
Overall net operating income would increase by $143,000.
Overall net operating income would decrease by $143,000.
Overall net operating income would decrease by $15,000.

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