Reference no: EM13891007

Sunshine Co Ltd produces two types ofwindow frame, aluminum and wooden. The company's simple costing system has two direct cost categories (materials and labour)and one indirectcostpool. The simple costing system allocates indirect costs on the basis of machine hours.Recently, the owners of Sunshine have been concerned abouta decline inthe marketshare for aluminium, usually their biggest seller.Information related to Sunshine's production for the most recent year follows:

	Aluminium	Wooden
Units sold	3,200	1,800
Selling price	$125	$200
Direct material cost per unit	$30	$45
Direct manufacturing labor cost per hour	$16	$16
Direct manufacturing labour hours per unit	1.50	2.25
Production runs	40	85
Material moves	72	168
Machine setups	45	155
Machine hours	5,500	4,500
Number of inspections	250	150

The owners have heard of other companies in the industry that are now usingan activity-based costing system and are curious hogan ABC system would affect their product costing decisions. After analyzing the indirect cost pool for Sunshine, six activities were identified as generating indirect costs: production scheduling, material handling, machine setup, assembly, inspection, and marketing. Sunshine collected the following data related to the indirect costactivities:

Activity	ActivityCost	ActivityCostDriver
Production scheduling	$95,000	Production runs
Material handling	$45,000	Material moves
Machine setup	$25,000	Machine setups
Assembly	$60,000	Machine hours
Inspection	$8,000	Numberofinspections

Marketing costs were determined to be 3%of the sales revenue for each type of window.

Required:

a Calculate the cost of an aluminum window frame and a wooden window frame under the existing simple costing system. (8 marks)

b Calculate the cost of an aluminum window frame and a wooden window frame under an activity-based costing system. (14 marks)

c Compare the costs ofthe window frame in requirements (a) and (b).Explain why the simple and activity-based costing systems differ in the cost of an aluminum window frame and a wooden window frame. (6 marks)

d Advise how Sunshine Co. Ltd might use the new cost information from its activity-based costing system to address the declining market share for interior doors. (7 marks)

Question 2(25marks)

TingHo Company began operations in January 20x2. Allits costs are fixed; they do not vary with output.

TingHo Company is located in Science Parkand has its own hydroelectric plant supply power, light, and heat. The company manufactures a synthetic energybar from air and river water and sells its product at a price that is not expected to change. It has a small staff of employees, all paid fixed annual salaries. The output of the plant can be increased or decreased by adjusting few dials on a control panel.

The following budgeted and actual data are for the operations of TingHoCompany. TingHo uses budgeted production as the denominator level and writes off any production-volume variance to cost of goods sold.

	20x2	20x3
Sales	10,000 tons	10,000 tons
Production	20,000 tons	0 tons
Selling price	$25 perton	$25 perton
Costs (all fixed):
Manufacturing	$380,000	$380,000
Operating	$35,000	$35,000

Required:

a Prepare income statements with one column for20x2, one column for20x3, and one column forthe two years together, using(a)variable costing and (b)absorption costing assuming a denominator level of 10,000 tons. (18 marks)

b Determine the inventory costs that would be carried in the balance sheeton 31 December 20x2 and 20x3, under each method. 

c Assume that the performance of the top manager of the company is evaluated and rewarded largely on the basis of reported operating income. Which costing method would the manager prefer? Explain.

Question 3

WingFungLtd. is a manufacturer of photocopier with the same manufacturing process for its product. Every effort is made to ensure that each photocopier is identicaland meets the contractor's performances pecifications. The process-costing system at the plant has a single direct-costcategory(direct materials) and a single indirect -costcategory(conversion costs). All photocopiers pass through two departments: the Assembly Department and the Testing Department. Direct materials are added at the beginning of the process in Assembly. Conversion costs are added evenly during the Assembly Department's process. When the Assembly Department finishes work on each photocopier, it is immediately transferred to Testing.

WingFungLtd. uses the weighted-average method of process costing.Data for the Assembly Department for October20x4 are:

	Physical Units	Direct Materials	Conversion Costs
Workin process, 1 October(a)	40	$460,000	$120,000
Started during October 2010	160
Completed during October2010	180
Workin process, 31 October(b)	20
Total costs added during October 2010		$2,000,000	$935,000

(a) Degree of completion:directmaterials,?%;conversioncosts,60%

(b) Degreeof completion:directmaterials,?%;conversioncosts,70%

Required:

a Foreach costcategory, compute equivalent units in the Assembly Department. Show physical units in the first column of yours chedule.

b Foreach cost category, calculate cost per equivalent unit. 

c Summarize total Assembly Departmentcosts for October20x4, and assign total costs to units completed and transferred out and to units in ending workin process.

Question 4

Total Corporation is considering implementing a JIT production system.The new system would reduce current average inventory levels of

$2,000,000 by75 but would require a greater dependency on the company's core suppliers for on-time deliveries and high-quality inputs. The company's operations manager, John Chan, is opposed to the idea of a new JIT system. He is concerned that the new system will be too costly to manage, will result in too many stockouts, and will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The plant controller, Stephen Li, is in favourofthe new system, due to the likely cost savings. John wants Stephen to rework the numbers because he is concerned that top management will give more weight to financial factors and not give due consideration to non financial factors such as employee morale. In addition to the reduction in inventory described previously, Stephen has gathered the following formation for the upcoming year regarding the JIT system:

• Annual insurance and warehousing costs for inventory would be reduced by 60%of the current budgeted level of $350,000.
• Payroll expenses for current inventory management staff would be reduced by 15%of the budgeted total of $600,000.
• Additional annual costs for JIT system implementation and management, including personnel costs, would equal $220,000.
• The additional number of stockout under the new JIT system is estimated to be 5%of the total number of shipments annually. 10,000 shipments are budgeted for the upcoming year. Each stockout would result in an average additional cost of$250.
• Total's required rate of return on inventory investment is 10%per year.

Required:

a From a financial perspective, advise whether Total Corporation should adopt the new JITsystem. 

b Advise Stephen Li whether he should rework the numbers.

c Advise how Stephen Li could manage John Chan's concern.