Cost Management Rigoberto Espinoza Jr.

Cost Management

Rigoberto Espinoza Jr.

Presented to:

Paulette Schirmer

Date: December 14, 2014

Cost Management, Chapter 5

Exercise 5.17 - Consider the following budgeted data for a client job of Bob Crachit’s accounting firm. The client wants a fixed price quotation.

Direct professional labor $20,000

Direct support labor $10,000

Fringe benefits for direct labor $13,000

Photocopying $2,000

Telephone calls $2,000

Computer Equipment $6000

Overhead is allocated at the rate of 100% of direct labor cost.

A. Prepare a schedule of the budgeted total costs for the client. Show subtotals for total direct labor costs and total costs as a basis for markup.

B. Assume that the partner’s policy is to quote a fixed fee of 10% above the total costs. What fee would be quoted?

C. Explain why the listed estimates for costs might not be similar to the actual costs for the job. What factors could affect the accuracy of these estimates? List as many factors as you can.

Exercise 6.55–Costs of workplace health and safety Britain’s Health & Safety Executive (HSE) is a national regulatory body overseeing workplace health and safety. In its 2007 performance report, HSE reported the following statistics:

· 241 workers were killed at work.

· 141,350 employees suffered serious injuries at work.

· 2.2 million people were suffering from an illness they believed was caused or made worse by their current or past work. 646,000 of these were new cases in the last 12 months.

· 36 million days were lost overall (1.5) days per worker), 30 million due to work-related ill health and 6 million due to workplace injury.

· £20 billion (approximately 2% of GDP) is the estimated annual cost to society of work-related accidents and ill health.

To promote improved health and safety, HSE provides strategic direction, investigates and enforces regulations, and works with employers and other groups to promote better workplace practices. HSE provides guidance for common sources of injury or illness, including the following.

· Slips, trips and falls

· Hazardous substances such as chemicals, dust, fumes, and bacteria

· Musculoskeletal disorders

· Noise

· Electricity

· Work equipment and machinery

· Maintenance and building work

· Workplace transport

· Fire and explosion

· Radiation

· Stress

SOURCE: HSE, Performance Report 2007 and An Introduction to Health and Safety, available at www.hse.gov.uk (accessed June 2, 2010).

	A.	Employers incur many costs because of health and safety issues, including: Lost worker time Employer-paid medical costs Training to replace workers who are ill or injured Record-keeping to comply with governmental regulation How would each of these costs be recognized in a process costing system?
	B.	Who is responsible for workplace health and safety? Discuss the responsibilities for each of the following groups: Governments Employers Managers Workers Customers
	C.	What goal should an individual company establish for workplace health and safety? Should the goal be to meet government regulations? Should the goal be to experience zero health and safety incidents? Or is some other goal appropriate? What values did you use to arrive at your answer?

Exercise 7.21 - ABC, ABM (CMA) Applewood Electronics manufactures two large-screen television models, the Monarch, which has been produced for five years and sells for $900, and the Regal, a new model that sells for $1,140. Applewood’s CEO, Harry Hazelwood, suggested that the company should concentrate its marketing resources on the Regal model and begin to phase out the Monarch model.

Applewood currently uses a traditional costing system. The following cost information has been used as a basis for pricing decisions over the past year.

Per-Unit Data	Monarch	Regal
Direct materials	$208	$584
Direct labor hours	1.5	3.5
Machine hours	8.0	4.0
Units produced	22,000	4,000

Direct labor cost is $12 per hour, and the machine usage cost is $18 per hour. Manufacturing overhead costs were estimated at $4,800,000 and were allocated on the basis of machine hours.

Martin Alecks, the new company controller, suggested that an activity-based costing analysis first be run to get a better picture of the true manufacturing cost. The following data were collected:

Activity Center	Cost Driver	Traceable Costs
Soldering	Number of solder joints	$ 942,000
Shipments	Number of shipments	860,000
Quality control	Number of inspections	1,240,000
Purchase orders	Number of orders	950,400
Machining	Machine hours	57,600
Machine setups	Number of setups	750,000
	Total traceable costs		$4,800,000
		Number of Events
Activity	Monarch	Regal	Total
Soldering	1,185,000	385,000	1,570,000
Shipments	16,200	3,800	20,000
Quality control	56,200	21,300	77,500
Purchase orders	80,100	109,980	190,080
Machining	176,000	16,000	192,000
Machine setups	16,000	14,000	30,000

Selling, general, and administrative expenses per unit sold are $265.00 for Monarch and $244.50 for Regal.

REQUIRED:

	A.	Calculate the manufacturing cost per unit for Monarch and Regal under:
		1. A traditional costing system
		2. The ABC system
	B.	Explain the differences in manufacturing cost per unit calculated in part (A).
	C.	Calculate the operating profit per unit for Monarch and Regal under:
		1. A traditional costing system
		2. The ABC system
	D.	Should Applewood concentrate its marketing efforts on Monarch or on Regal? Explain how the use of ABC affects your recommendation.

Exercise 8.25 - Step-down, direct, and reciprocal methods, accuracy of allocation (Appendix 8A) Software Plus Corporation produces flight and driving simulations and games for personal computers. The president has a complaint about the accounting for support department costs. He points to the following table describing the use of various support departments in the company and says, “According to this table, every department receives services from all the support departments. But I understand that only some of the support departments are bearing costs from the other support departments. Why is that?”

				Percent Use of Services
Support Department	Cost	Administratio	Maintenance	Information Systems	Games Manufacturing	Simulation Manufacturing
Administration	$40,000	0%	10%	50%	10%	30%
Maintenance	20,000	20	0	10	40	30
Information systems	50,000	35	5	0	40	20

REQUIRED:

A. What method has Software Plus Corporation been using to allocate support costs? Explain how you know.

B. Which method would ignore all interactions among support departments? Explain.

C. Which method would consider all interactions among support departments? Explain.

D. Allocate the support department costs to Games and Simulations using the step-down method. Explain how you decided which department’s costs to allocate first.

E. Allocate the support department costs using the direct method.

F. Allocate the support departments costs using the reciprocal method.

G. In your own words, explain how the step-down method improves upon the direct method.

H. In your own words, explain how the reciprocal method improves upon the step-down method.