ACCT 6060 Session 3 Discussion Solutions PDF

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chapter notes from horngrens managerial accounting...

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ACCT 6060 Session 3 Discussion Solutions 1)

Read the Ice Cream Stand case at the end of this assignment. Assume that there was one stand that sold 40,000 units in a year: 20,000 cones and 20,000 bars. a)

In the table below, classify each cost as either direct or indirect and as inventoriable and period.

Classifying costs as direct and indirect or inventoriable and period is challenging for this seemly simple example because the line between inventoriable (making the cones and delivering the bars) and period like selling and administration (taking the customer order and ringing up the sale) is vague and impossible to measure without extra effort that isn't warranted by the size of the operation. Thus, in my solution below, I classify some costs as both direct and indirect and both inventoriable and period. b)

Also, in the table below describe conceptually how you would calculate the per unit cost of an ice cream cone for each expense. You don't need to calculate the cost, just be prepared to explain how you would calculate the per unit amount for each of the stand's expenses for an ice cream cone.

I am asking for total per unit cost, not total per unit inventoriable costs. For GAAP accounting, which would focus on total inventoriable cost per unit, the period costs would not be allocated to the products and would be expensed in the period. However, the firm may want to calculate the full unit costs for pricing decisions.

1

Expense

Direct Indirect

Inventoriable Period

Calculation Method

Raw materials

Direct

Inventoriable

This unit cost of a cone is direct cost and, therefore, can be directly traced to each cone. Since the case states that all cones use the same amount of ice cream and all ice cream costs the same, the raw material costs for all cones will be the same. The only problem in this simplified case is that there is an estimate included for waste and spoilage and actual results may differ from the estimate.

Wages

Direct and Indirect

Inventoriable and Period

Theoretically, part of the wages and benefits are a direct, as I noted above. However, I seriously doubt it would be worth the time it would take to measure the time it would take to make and deliver cones and bars separately from the time it takes to deal with customers and ring up sales. The case indicates that it takes 50% more labor to sell a cone than to sell a bar. Therefore, we would need to allocate wages to cones and bars using a weighting formula that assigned 1.5 times as much of the labor costs to a cone as to a bar.

Utilities

Indirect

Inventoriable and Period

Theoretically, part of the part of the electricity that was used by the freezer would be an indirect inventoriable costs but measuring it would be impractical. In addition, since both bars and cones are stored in the freezer, this would be a joint cost between them, which makes it an indirect cost. Thus, I would have to find some basis for allocating it to cones and bars. Since I don't believe that cones versus bars would consume more electricity, dividing the total by the number of cones and bars would probably be the best method.

Accounting and tax preparation

Indirect

Period

This is a pure indirect period cost and I need to find an allocation basis. Since I believe that cones versus bars would consume this cost equally, dividing the total by the number of cones and bars would probably be the best method.

Freezer depreciation

Indirect

Inventoriable

The depreciation on the freezer would be an indirect inventoriable cost. Since bars and cones share the freezer, this is an indirect cost and I would probably allocate the costs equally between cones and bars

All other depreciation

Indirect

Inventoriable and Period

Part of the deprecation on the stand and other equipment would be inventoriable and part would be period. The depreciation on the cash register would be period but the depreciation on the stand, counters, and cabinets would be part period and part inventoriable. However, because of the difficulty of separating inventoriable use from period use, these would probably be considered all period.

Business license

Indirect

Period

This is a pure indirect period cost and I need to find an allocation basis. Since I believe that cones versus bars would consume this cost equally, dividing the total by the number of cones and bars would probably be the best method.

Miscellaneous

Indirect

Period

This is a pure indirect period cost and I need to find an allocation basis. Since I believe that cones versus bars would consume this cost equally, dividing the total by the number of cones and bars would probably be the best method.

2)

Summary on direct and indirect categories 

As complex as the above discussion above concerning classifying direct and indirect costs is, the basic concept is relatively simple but the application is difficult.



Direct costs are those that are directly associated with the production of a good and service and indirect are less directly associated with a good and service. These costs are associating with materials and labor that become a part of the product.



However, this simple definition is useless because it defines each concept in terms of itself (we call that tautological).



You also need to keep in mind that these costs are being classified within the context of calculating how much a unit of a good or service costs. In this case, the goal is full unit costs, not inventoriable unit costs.



Thus, a key distinguishing characteristic is whether the cost is shared by two different products. If so, it is a join cost and, therefore, indirect since it is shared. 3)

Would the method you used, as opposed to the results of your calculations, in your answer to 1 change if the Stand sold only 30,000 units? Why or why not?



No, the way you would calculate the unit costs is not dependent on changes in the volume of activity and so your answer to Question 1 would not change.



That is, the per unit costs would change, but the steps that you go through to calculated them wouldn't because those steps are determined by how easy it is to directly assign costs to units and not by how the cost per unit varies with volume. 4)



Classify each of the firm's costs as fixed, variable, or semi-variable. Consider how they would change for both one and two stands. Be prepared to explain why you classified each cost the way you did. Also, discuss what the relevant range is for determining the behavior of these costs and whether it would change if you opened a second stand.

For one stand (volume 40,000 or less units) the raw materials are variable, the utilities are semivariable, and the rest of the costs are fixed.

3

Cost

Fixed/Variable/Step/Semi-Variable

Raw materials (Ice cream, cones, and bars)

Variable – to more you make the more of these items you need so the vary directly with units produced

Utilities

Semi-variable – probably mostly fixed but will vary with units sold because of opening and closing the freezer and ringing up sales.

Labor

Fixed with new relevant range at 40,000 units and for second stand. Employees are paid by the hour, not units sold.

Depreciation on stand and equipment

Fixed for one stand and new relevant range when a second stand is added. Depreciation won't vary with units sold.

Accounting and promotion

Fixed -won't vary with units sold.

Business license

Fixed – won't vary with units sold.

Miscellaneous

The case doesn't provide details of what is in miscellaneous, but it states you are to assume they are fixed.



There are two relevant ranges for each stand – 1 – 40,000 and 40,001 – 60,000.



If you opened a second stand, your relevant range would be a combination of the two stands and would depend on whether one or both of the stands operated with two employees or just one. 5)

Would the full unit costs of ice cream cones and bars change if the Stand sold only 30,000 units? Why or why not? Note this question in different from 2. above in that here I am asking if the amounts would change and in question 2. I asked if the method would change. I am not looking for specific numbers, just a general statement of why or why not the numbers would change.



Yes. No costs of producing the cones and bars, except for the raw materials, vary directly with the number of cones or bars sold.



Some of them don't vary at all if sales are below 40,000 units. Therefore, if the number of units sold declines, these costs would remain the same.



If the number of units declines but these costs don't, then the per-unit costs must increase because the same level of costs are being allocated to fewer units. 6)

A.

Torrance Technology Company (TTC) is developing a new touch-screen smartphone to compete in the cellular phone industry. The company will sell the phones at wholesale prices to cell phone companies, which will in turn sell them in retail stores to the final customer. TTC has undertaken the following activities in its value chain to bring its product to market: Perform market research on competing brands

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B.

Design a prototype of the TTC smartphone

C.

Market the new design to cell phone companies

D.

Manufacture the TTC smartphone

E.

Process orders from cell phone companies

F.

Deliver the TTC smartphones to the cell phone companies

G.

Provide online assistance to cell phone users for use of the TTC smartphone

H.

Make design changes to the smartphone based on customer feedback

During the process of product development, production, marketing, distribution, and customer service, TTC has kept track of the following cost drivers: 

Number of smartphones shipped by TTC



Number of design changes



Number of deliveries made to cell phone companies



Engineering hours spent on initial product design



Hours spent researching competing market brands



Customer-service hours



Number of smartphone orders processed



Machine hours required to run the production equipment a)

Identify each value-chain activity listed at the beginning of the exercise with one of the following value-chain categories:

a.

Design of products and processes

b.

Production

c.

Marketing

d.

Distribution

e.

Customer service

Value Chain Activity Perform market research on competing brands Design a prototype of the TTC smartphone Market the new design to cell phone companies Manufacture the TTC smartphone Process orders from cell phone companies Deliver the TTC smartphones to the cell phone companies Provide online assistance to cell phone users for use of the TTC smartphone Make design changes to the smartphone

Value Chain Category Design of products and processes Design of products and processes Marketing Production Distribution Distribution Customer service Design of products and processes 5

based on customer feedback b)

Use the list of preceding cost drivers to find one or more reasonable cost drivers for each of the activities in TTC’s value chain.

Value Chain Activity Activity Design of products and Perform market research on processes competing brands Design a prototype of the TTC smartphone Make design changes to the smartphone based on customer feedback Production Manufacture the TTC smartphones Marketing Market the new design to cell phone companies Distribution Process orders from cell phone companies Deliver the TTC smartphones to cell phone companies Customer Service Provide online assistance to cell phone users for use of the TTC smartphone 7)

Cost Driver Hours spent researching competing market brands Engineering hours spent on initial product design Number of design changes

Machine hours required to run the production equipment Number of smartphones shipped by TTC Number of smartphone orders processed Number of deliveries made to cell phone companies Customer service hours

National Training recently started a business providing training events for corporations. To better understand the profitability of the business, the owners asked you for an analysis of costs—what costs are fixed, what costs are variable, and so on, for each training session. You have the following cost information: Trainer: $11,000 per session Materials: $2,500 per session and $35 per attendee Catering Costs (subcontracted): Food: $75 per attendee Setup/cleanup: $25 per attendee Fixed fee: $5,000 per training session

National Training is pleased with the service they use for the catering and have allowed them to place brochures on each dinner table as a form of advertising. In exchange, the caterer gives National Training a $1,000 discount per session. Number of attendees

0

50

100

175

$17,500

$24,250

$31,000

$41,125

200

Total costs (fixed + variable)

6

$44,500

Costs per attendee (total costs number of attendees)

$485.00

$310.00



Fixed costs = $11,000 + $2,500 + $5,000 - $1,000 = $17,500



Variable costs per attendee = $35 + $75 + $25 = $135 a)



$235.00

$222.50

Suppose 100 persons attend the next event. What is National Training’s total net cost and the cost per attendee?

As shown in the table above, for 100 attendees the total cost will be $31,000, and the cost per attendee will be $310.00. b)

Suppose instead that 175 persons attend? What is National Training’s total net cost and the cost per attendee?

As shown in the table above, for 175 attendees the total cost will be $41,125, and the cost per attendee will be $235.00. c)

How should National Training charge customers for their services? Explain briefly.



National Training should charge customers based on the number of attendees.



As the number of attendees increase, national Training could offer price discounts because its fixed costs would be spread over a larger number of attendees.



The lower cost per attendee as the number of attendees increases allows National Training to offer price discounts and still earn a profit if the price discount is less than the cost savings from higher attendance.



Alternatively, National Training could charge a flat fee of $20,000 plus $150 per attendee.



This would provide a margin of $15.00 per guest plus a $2,500 markup on the fixed costs.



At 100 attendees, profit would be $4,000 ($2,500 on fixed costs + ($15.00 × 100 attendees)). At 175 attendees, profit would be $5,125 ($2,500 on fixed costs + ($15.00 × 175 attendees)).

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