Reference no: EM13501484
Part 1
Introduction
Albatross Packaging Corporation began producing cardboard boxes 40 years ago. Those boxes were a generic packaging made for a variety of different customers. Over the past 3 years, the company began making specialty made-to-order packaging. Currently, the company is producing approximately 15,000,000 units of the generic cardboard box in production runs of 500,000 units each. The specialty boxes are being produced in batches of 10,000 units to 125,000 units with all jobs manufactured per specifications provided by customers. Albatross Packaging Corporation accounts for the flows of the manufacturing costs for both the generic boxes and for the specialty boxes using a job order cost system.
Overhead application
Overhead is applied based on direct labor costs. At the beginning of the current year, the Corporation estimated that total overhead would be $6,225,000 and total direct labor costs to be $4,000,000. Actual overhead costs for the month of February were $350,000. Any under/over applied overhead is assumed to be immaterial and is applied to cost of goods sold
Jobs in Work in Process
At the beginning of February, the Corporation had two specialty jobs and one generic job in work in process. Six additional jobs were started during the month (5 specialty and 1 generic) and a total of 8 jobs were transferred to finished goods inventory. Information on the number of units in each job and the percentage of completion added during the months are presented in the Cost schedule presented below.
Cost Information
The unit cost information for February has been provided below. Apply the overhead to each job at the end of the month's activities.
Costs per unit
|
Material
|
Direct Labor
|
Generic
|
$0.15
|
$ 0.24
|
Specialty
|
$0.20
|
$0.40
|
Note that material costs are all added at the beginning of the process. Direct labor and overhead are assigned throughout the manufacturing process. Any jobs in WIP that are incomplete at the end of the period have the appropriate amount of overhead applied at the end of the accounting period.
The first and second Generic jobs and Jobs 18, 19, 20, 21, 22 and 23 were completed and transferred to finished goods by the end of the month. There were no beginning finished goods and no ending finished goods inventory for February.
By the end of the month, both Generic jobs and all of the specialty jobs had been sold and delivered. Each specialty job is priced to sell at $2.00 per unit. The generic units are sold at $1.25 each.
Costs in beginning WIP and incurred during current month:
Beginning
|
percent complete
|
Units
|
Materials
|
DL
|
OH
|
Generic
|
45%
|
500,000
|
75,000
|
54,000
|
84,038
|
Job 18
|
30%
|
12,500
|
2,500
|
1,500
|
2,334
|
Job 19
|
70%
|
25,000
|
5,000
|
7,000
|
10,894
|
|
|
|
|
|
|
Costs added:
|
|
|
|
|
|
Generic
|
55%
|
500,000
|
|
|
|
Job 18
|
70%
|
12,500
|
|
|
|
Job 19
|
30%
|
25,000
|
|
|
|
Generic
|
100%
|
500,000
|
|
|
|
Job 20
|
100%
|
20,000
|
|
|
|
Job 21
|
100%
|
10,000
|
|
|
|
Job 22
|
100%
|
15,000
|
|
|
|
Job 23
|
100%
|
35,000
|
|
|
|
Job 24
|
60%
|
75,000
|
|
|
|
Required:
1. Calculate the predetermined overhead rate for the current year and use this rate to apply overhead to the jobs that are worked during February. Compute the total amount of overhead applied during the month, indicate whether this overhead is under or over applied and then prepare the adjusting entry to move the over/under overhead to COGS.
2. Prepare job cost sheets showing the cost assigned to each job completed during the month. Cost sheets may be prepared as a schedule showing the detail to include the beginning balances of each job, the costs added during the period and the ending cost of each job.
3. Show also the ending balances for month for all of the inventory accounts and any other relevant accounts. This should include the inventory accounts, the overhead control account, and cost of goods sold. Be sure to include the beginning inventory values in each inventory account.
4. Prepare a schedule showing the total cost of each of the jobs finished during the month of February and a breakdown of the per unit cost for each job that was moved to the Finished Goods Inventory. In the detail, show the unit direct material, direct labor and manufacturing overhead applied.
Case: part 2
The management of Albatross Packaging Corporation is concerned about overhead cost allocations. The corporation has been using the plant-wide rate based on direct labor costs since it began operations. The CEO, J.J. Smith, has been hearing a lot about Activity Based Costing and is beginning to think the Corporation needs to adopt such a system. He has decided to hire you as a consultant to evaluate overall overhead allocation system and prepare recommendations.
He tells you that a number of problems have arisen in the past few months. Several large, potentially profitable jobs have been lost due to underbidding by the competition. There also seems to erosion in the market share of the generic cardboard boxes as competitors are beginning to undercut the company's current selling price.
In addition, some of the specialty jobs that have been won do not seem to improving the bottom line as much as anticipated. In total, profits in the past three years have been gradually eroding. Since prime costs are fairly standard and stable for the industry, he is beginning to suspect that the overhead costs are not being allocated in the proper manner and/or may be out of line with the competition.
The next part of your analysis concerns the use of activity based costing to assign the overhead to the jobs. Assume the following five cost pools exist in the Albatross Packaging Corp.
Overhead costs assigned to activity pools
|
|
Cost drivers
|
Activity
|
Pool rate
|
Maintenance
|
975,000.00
|
100,000.00
|
Machine hours
|
|
Material handling
|
650,000.00
|
2,600.00
|
material moves
|
|
Setups
|
3,250,000.00
|
236.00
|
number of setups
|
|
Inspections
|
750,000.00
|
10,000.00
|
Inspection hours
|
|
Other
|
600,000.00
|
15,000,000.00
|
Units produced
|
|
Total overhead costs
|
6,225,000.00
|
|
|
|
Each of the jobs completed use the number or amount of resources identified in the schedule below.
Activities used by each job
|
Generic
|
18
|
19
|
Generic 2
|
20
|
21
|
22
|
23
|
Maintenance
|
1800
|
230
|
375
|
1800
|
365
|
220
|
280
|
425
|
Material handling
|
10
|
4
|
6
|
10
|
4
|
6
|
4
|
4
|
Setups
|
1
|
1
|
1
|
1
|
1
|
1
|
1
|
1
|
Inspections
|
345
|
25
|
35
|
340
|
28
|
20
|
27
|
125
|
Other
|
500000
|
12500
|
25000
|
500000
|
20000
|
10000
|
15000
|
35000
|
Required
1. Prepare a schedule showing total cost per pool and the pool rates.
2. Prepare another schedule showing the total costs attached to each of the jobs above using the pool rates above to apply the overhead and the prime costs found in part 1. It is suggested that you first prepare a schedule to show the overhead costs assigned.
3. Prepare a final schedule comparing the total cost, unit costs broken down by material, labor and overhead for both ABC and for the traditional costing methods. (Pull the information from the costs computed in the first part and compare to the information calculated for the ABC costing method.)
4. Compare the income statements broken down by job using the plant wide rate and ABC. Compute the gross profit margin for each job as well as gross profit in total.
5. Prepare a chart comparing the costs assigned for overhead for the two methods evaluated in part 1 and part 2.
6. Discuss, in memo format, the impact on the costs and bids using the plant-wide rate and activity based costing. Include the recommendation for one of these two methods. Be sure to include proper rationale and at least one schedule or graph that you've prepared.
Case Part 3 spring 2012
As a continuing assignment with Albatross Packaging Corporation, you have been asked to provide additional assistance in developing an information system to improve the company's costing data... With the growth in the company over the past several years, the corporate management believes that the company needs to improve its accounting information system by adding variable costing and other appropriate methods to aid in short term decision making. One of the most important changes needed in a new accounting information system will be to training the accounting staff. None have had much experience with modern management accounting techniques.
Sales fluctuate seasonally. Inventory builds up in anticipation of the next sales cycle in not uncommon. However, after factoring out such seasonal fluctuations, inventory has grown steadily considerable over the past five years. The CEO is concerned that the company's financial statements are not presenting a true picture of the health of the company. Therefore, he would like to implement a variable costing system for internal decision making, but he is uncertain how to proceed and whether the advantages of the system will outweigh the costs of implementation. He has asked you for advice.
He has provided the following information related to the past two years.
Production capacity is 20,600,000 units. The following information concerns annual sales and manufacturing and period costs.
The past two years' sales and production
|
Year 1
|
year 2
|
Sales
|
14,500,000
|
14,500,000
|
Beg FG
|
850,000
|
1,200,000
|
End FG
|
1,200,000
|
1,500,000
|
Production
|
14,850,000
|
14,800,000
|
Budgeted unit manufacturing costs:
Variable costs
|
|
|
Direct materials
|
0.18
|
|
Direct labor
|
0.30
|
|
Variable overhead
|
0.15
|
|
Selling variable
|
0.07
|
|
Total variable costs
|
0.70
|
|
|
|
|
Fixed costs (manufacturing and selling/administration
|
Manufacturing
|
4,000,000
|
|
Selling
|
1,750,000
|
|
Administrative
|
3,250,000
|
|
Sales price per unit is $1.50. Assume beginning inventory for year 1 has the same per unit value as that calculated in year 1.
Required:
1. Prepare absorption costing income statements and variable costing income statements for the previous two years using the above information. Be sure to set up the data in a spreadsheet that will be useful for what-if analysis (see 2 below).
2. To illustrate the impact of inventory increases and decreases on income on the bottom line, assume that the following are the new inventory balances for the years 1995 and 1996: (two separate spreadsheet analysis required)
a. Rapidly Rising inventories
Year 1 Year 2
Beginning FG inventory 850,000 units 1,450,000 units
Ending FG inventory 1,450,000 units 2,300,000 units
Production ? ? ,
b. Rapidly Rising inventories
Year 1 Year 2
Beginning FG inventory 850,000 units 2,750,000 units
Ending FG inventory 2,750,000 units 6,850,000 units
Production ? ? ,
c. Declining inventories
Year 1 Year 2
Beginning FG inventory 850,000 units 400,000 units
Ending FG inventory 400,000 units 5,000 units
Production ? ?
3. As part of the consulting assignment, the company CEO asks that you prepare some basic what-if analyses for the coming year using CVP. Use year 1 (1a) financial data for all analysis unless otherwise stated. Work from the variable income statement.
Required: Assume each part is independent of the others in your analysis.
a. Calculate the breakeven point for the Company in units and in sales dollars.
b. Compute the margin of safety in units and in dollars.
c. If the company wishes to earn an after-tax income of $3,000,000, what is the break even in units? Assume that the corporate income tax rate is 40%.
d. The Company is considering the use of less expensive materials in the production. If this cost can be reduced by $0.05 per unit, what impact will this change have on net income?
e. Assume that in order to achieve the reduction of $0.05 in direct material costs, the company will need to invest an additional $500,000 annually in fixed manufacturing costs by purchasing new equipment. What is the impact on the operating income for the year? Should the company invest in the new equipment?
f. In a brief report, discuss with the CEO the advantage of the variable costing format for internal decision making. Use the information from the analysis to illustrate your discussion points. Also address the break even analysis that you performed and make recommendations where appropriate.