Ch 22 Graded Practice - Sample problems for exam PDF

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Ch. 22 Graded Practice 1. Mervon Company has two operating departments: mixing and

bottling. Mixing has 350 employees and Bottling has 350 employees. Indirect factory costs include administrative costs of $178,000. Administrative costs are allocated to operating departments based on the number of workers. Determine the administrative costs allocated to each operating department. Department Mixing Bottling Total

Employees

% of total

350 350 700

50% 50% 100%

Admin. Exp. To allocate 178,000 178,000

Allocated Amount 89,000 89,000 178,000

2. A retailer pays $160,000 rent each year for its two-story building. The space in this building is occupied by five departments as specified here. Jewelry department 1,470 Cosmetics department 2,730 Housewares department1,722 Tools department 756 Shoes department 1,722

square square square square square

feet feet feet feet feet

of of of of of

first-floor space first-floor space second-floor space second-floor space second-floor space

The company allocates 70% of total rent expense to the first floor and 30% to the second floor, and then allocates rent expense for each floor to the departments occupying that floor on the basis of space occupied. Determine the rent expense to be allocated to each department.

First floor Second floor Totals First Floor Jewelry Dept. Cosmetics Dept. Totals Second Floor Housewares Dept. Tools Dept. Shoes Dept. Totals

Amount Allocated 160,000 160,000 Sq. Feet 1,470 2,730 4,200 Sq. Feet 1,722 756 1,722 4,200

% of total

Cost

70% 30% 100% % of Total 35% 65%

112,000 48,000 160,000 Cost 39,200 72,800 112,000 Cost 19,680 8,640 19,680

% of Total 41% 18% 41% 100%

3. Advertising department expenses of $60,100 and purchasing department expenses of $43,000 of Cozy Bookstore are allocated to operating departments on the basis of dollar sales and purchase orders, respectively. Information about the allocation bases for the three operating departments follows. Department Books Magazines Newspapers Total

Sales $163,800 97,500 128,700 $390,000

Purchase Orders 984 648 768 2,400

Complete the following table by allocating the expenses of the two service departments (advertising and purchasing) to the three operating departments.

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Advertising

Allocatio n Base

Percent of Allocation Base

Departmen t Books Magazines Newspaper Totals

Amount of sales 163,800 97,500 128,700 390,000

Purchasing

Allocatio n Base

Departmen t

Purchase orders

Num.

Den.

% of total

Books Magazines Newspaper Totals

984 648 768 2,400

984 648 768

2,400 2,400 2,400

41% 27% 32% 100

Num. 163,800 97,500 128,700

% of total 390,000 42% 390,000 25% 390,000 33% 100

Cost to be allocated

Allocate d Cost

60,100 60,100 60,100

25,242 15,025 19,833 60,100

Cost to be allocated

Allocate d Cost

43,000 43,000 43,000

17,630 11,610 13,760 43,000

Den.

Percent of Allocation Base

Cozy Bookstore Departmental Expense Allocation Spreadsheet Expense Advertisin Purchasing Books Magazines Newspapers Totals g 859,000 60,100 43,000 231,900 171,800 352,200

Total Department expenses Service Dept. Expenses Advertising Dept. Purchasing Dept. Total 859,000 Expenses Allocated

(60,100)

0

25,242

15,025

19,833

(43,000)

17,630

11,610

13,760

0

274,772

198,435

385,793

4. Jessica Porter works in both the jewelry department and the cosmetics department of a retail store. Porter assists customers in both departments and arranges and stocks merchandise in both departments. The store allocates Porter’s $11,900 annual wages between the two departments based on the time worked in the two departments. Jessica reported the following hours and activities spent in the two departments. Selling in jewelry department Arranging and stocking merchandise in jewelry department Selling in cosmetics department Arranging and stocking merchandise in cosmetics department Idle time spent waiting for a customer to enter one of the departments

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50.0 6.0 12.0 7.0

hours hours hours hours

4.0 hours

Allocate Jessica’s annual wages between the two departments.

Department

Jewelry Cosmetics Totals

Hours Worked

Percent of Hours Worked

56 19 75

Num.

Den.

56 19

75 75

% of Hours 75% 25%

Wages

Allocation

11,900 11,900

8,925 2,975 11,900

5. Woh Che Co. has four departments: materials, personnel, manufacturing, and packaging. In a recent month, the four departments incurred three shared indirect expenses. The amounts of these indirect expenses and the bases used to allocate them follow. Indirect Expense Supervision Utilities Insurance Total

Cost

Allocation Base

$ 84,100 Number of employees 66,000 Square feet occupied 30,500 Value of assets in use $180,600

Departmental data for the company’s recent reporting period follow. Department

Employees

Materials Personnel Manufacturing Packaging Total

40 8 64 48 160

Square Feet 31,000 15,500 77,500 31,000 155,000

Asset Values $ 7,600 2,280 50,160 15,960 $76,000

1. Use this information to allocate each of the three indirect expenses across the four departments. 2. Prepare a summary table that reports the indirect expenses assigned to each of the four departments.

Supervision

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Allocation

Percentage of

Cost to

Allocated

expenses Department Materials Personnel Manufacturing Packaging Totals Utilities

Department

Base Number of Employees 40 8 64 48 160 Allocation Base

Materials

Square feet Occupied 31,000

Personnel

15,500

Manufacturing

77,500

Packaging Totals Insurance

31,000 155,000 Allocation Base

Department Materials Personnel Manufacturing Packaging

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7,600 2,280 50,160 15,960

Allocation Base Num.

% of total 40 160 25% 8 160 5% 64 160 40% 48 160 30% 100 % Percent of Allocation Base

be allocated

cost

84,100 84,100 84,100 84,100

21,025 4,205 33,640 25,230 84,100

Den.

Num.

Den.

31,00 0 15,50 0 77,50 0 31,00 0

155,00 0 155,00 0 155,00 0 155,00 0

% of total 20%

66,000

13,200

10%

66,000

6,600

50%

66,000

33,000

20%

66,000

13,200

100 % Percent of Allocation Base Num.

Den.

7,600 2,280 50,16 0 15,96

Cost to Allocated be Cost allocated

66,000 Cost to Allocated be Cost allocated

76,000 76,000 76,000

% of total 10% 3% 66%

30,500 30,500 30,500

3,050 915 20,130

76,000

21%

30,500

6,405

0 Totals

76,000

Materials Personnel Manufacturing Packaging Totals

Supervision 21,025 4,205 33,640 25,230

100 %

Utilities 13,200 6,600 33,000 13,200

Insurance 3,050 915 20,130 6,405

30,500

Total 37,275 11,720 86,770 44,835 180,600

6. Below are departmental income statements for a guitar manufacturer. The manufacturer is considering eliminating its electric guitar department since it has a net loss. The company classifies advertising, rent, and utilities expenses as indirect. WHOLESALE GUITARS Departmental Income Statements For Year Ended December 31, 2017 Acoustic Electric Sales $103,100 $84,600 Cost of goods sold 45,275 47,450 Gross profit 57,825 37,150 Operating expenses Advertising expense 5,015 4,330 Depreciation expense— 10,130 8,590 equipment Salaries expense 20,200 17,400 Supplies expense 1,960 1,720 Rent expense 7,075 5,980 Utilities expense 2,995 2,560 Total operating expenses 47,375 40,580 Net income (loss) $ 10,450 $(3,430)

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1. Prepare a departmental contribution report that shows each department’s contribution to overhead.

Wholesale Guitars Income statement showing departmental contribution to overhead For Year Ended December 31, 2017 Acoustic Dept. Electric Dept. Combined Sales 103,100 84,600 187,700 Cost of goods sold 45,275 47,450 92,725 Gross profit 57,825 37,150 94,975 Direct expense Depreciation expense 10,130 8,590 18,720 Salaries Expense 20,200 17,400 37,600 Supplies expense 1,960 1,720 3,680 Total Direct expenses 32,290 27,710 60,000 Departmental contributions 25,535 9,440 34,975 to overhead Indirect expenses Advertising expense 5,015 4,330 9,345 Rent expense 7,075 5,980 13,055 Utilities expense 2,995 2,560 5,555 27,955 7,020 net income (loss)

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7. Investment Center Net Income Cameras and camcorders $5,350,000 Phones and communications 2,093,000 Computers and accessories 1,100,000

Average Assets $ 23,600,000 16,100,000 13,600,000

Assume a target income of 13% of average invested assets. Required: Compute residual income for each division. (Enter losses with a minus sign.)

Target Income Average assets Target return Target income Residual Income Net Income Target Income Residual income (loss)

Cameras and Camcorders 23,600,000 13% 3.068,000 Cameras and Camcorders 5,350,000 3,068,000 2,282,000

Phones and Communications 16,100,000 13% 2,093,000 Phones and Communications 2,093,000 2,093,000 0

Computers and Accessories 13,600,000 13% 1,768,000 Computers and Accessories 1,100,000 1,768,000 (668,000)

8. The Windshield division of Fast Car Co. makes windshields for use in

Fast Car’s Assembly division. The Windshield division incurs variable

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costs of $244 per windshield and has capacity to make 600,000 windshields per year. The market price is $510 per windshield. The Windshield division incurs total fixed costs of $3,300,000 per year. Assume the Windshield division is operating at full capacity, what transfer price should be used on transfers between the Windshield and Assembly divisions?

Transfer price per windshield: 510

9. Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).

Investment Center Electronics Sporting goods

Sales

Income

$44,250,000 $3,363,000 24,660,000

2,466,000

Average Invested Assets $17,700,000 13,700,000

Exercise 22-10 Computing return on investment and residual income; investing decision LO A1 1. Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company? 2. Assume a target income level of 10% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company? 3. Assume the Electronics department is presented with a new investment opportunity that will yield a 14% return on investment. Should the new investment opportunity be accepted?

Choose Num. Income Electronics 3,363,000

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Return on Investment / Choose Den. / Average invested / 17,700,000

= Return on investment = = 19%

Sporting 2,466,000 / 13,700,000 Goods Which department is most efficient at using assets to generate returns for the company?

Investment Center Electronics Net Income 44,250,000 Target net income 17,700,000 Residual income 2.5 Which department is most efficient at using assets to generate returns for the company?

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= 18% Electronics

Sporting Goods 24,660,000 13,700,000 1.8 Electronics...