Waterway Continuous Problem WCP

WATERWAYS CONTINUING PROBLEM (WCP 1)

Question (a):

Based on the information given, construct an organizational chart of

Waterways Corporation.

Answer:

Question (b):

A list of accounts and their values are given above. From this information,

prepare a cost of goods manufactured schedule, an income statement, and

the current assets section of the balance sheet for Waterways Corporation for

the month of November 2012.

Answer:

(i) Cost of Goods Manufactured Schedule

Waterways CorporationCost of Good Manufacturing Schedule

For the Month Ended November 30, 2012

Work in Process, October 31 $ 52,700

Direct materials

Raw materials inventory, October 31 $ 38,000

Raw materials purchases 184,500

Total raw materials available for use 222,500

Less: Raw materials inventory, November 30 52,700

Direct materials use $ 169,800

Direct Labor 42,000

Manufacturing Overhead

Indirect labor 48,000

Factories supply used 16,800

Factory utilities 10,200

Depreciation - Factory equipment 16,800

Rent - Factory equipment 47,000

Repairs - Factory equipment 4,500

Total manufacturing overhead 143,300

Total manufacturing cost 355,100

Total cost of work in progress 407,800

Less: Work in process, November 30 42,000

Cost of goods manufactured $ 365,800

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(ii) Income Statement (with Cost of Goods Manufactured in Details)

Waterways Corporation

INCOME STATEMENT

FOR THE MONTH ENDED MARCH, 30

Sales 1,350,000

Sales Commissions (40,500)

1,309,50

0

Raw materials inventory, October 31 38,000

Raw materials purchases 184,500

Raw materials inventory, November 30 (52,700)

Total of Material 169,800

Direct labor 42,000

Indirect labor 48,000

Factories supply used 16,800

Factory utilities 10,200

Depreciation - Factory equipment 16,800

Rent - factory equipment 47,000

Repairs - factory equipment 4,500

Total manufacturing overhead 143,300

work in Process, October 31 52,700

Less: Work in Process, November 30 (42,000)

Total of WIP 10,700

Total Cost of Goods Manufactured 365,800

Finished goods inventory, October 31 72,550

Finished goods inventory, November 30 (68,800)

Total of finish goods 3,750

Cost of Goods Sold 365,800

Gross Profit 943,700

Advertising & Promotion 54,000

Depreciation - Office equipment 2,400

Office Supplies Expense 1,600

Other admin expense 7,200

Salaries 325,000

Operating cost 390,200

Net Profit 553,500

Current assets

-3-

Cash 260,000

Receivabes (net) 275,000

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Inventories

Finished goods 68,800

Work in process 42,000

Raw materials 52,700

163,500

Prepaid expenses 41,250

Total current assets 739,750

(iii) Current Asset Section of Balance Sheet

Waterways CorporationBalance Sheet

November 30, 2012

Current assets

Cash $ 260,000

Receivables (net) 275,000

Inventories

Finished goods 68,800

Work in process 42,000

Raw materials 52,700 163,500

Prepaid expenses 41,250

Total current assets $ 739,750

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Question (a)

For each of these cost pools, what would be the likely activity cost driver?

Answer

Cost Pools Cost Driver

Assembling Product assembled

Billing Number of bills sent out

Digging trenches Number of trenches dug

Janitorial Janitor hours

Machine maintenance Machine hours

Machine setups Number of setups

Molding Number of items molded

Packaging Number of item packaged

Payroll Number of employee on payroll

Plant supervision Supervisor hours

Product design Cost per design

Purchasing materials Number of purchase done

Selling Number of item sold

Testing Number of test done

Welding Items welded

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Question (b)

Using the following information, determine the overhead rates and the actual

cost assigned for each of the activity cost pools in a possible ABC system for

Waterways.

Answer

WATERWAYS CORPORATION

Activity Cost Pools

Cost Drivers

Estimated Overhead

(A)

Expected Use of Cost Drivers per

Activity

(B)

Actual Use of Drivers

(C)

Overhead Rates

[A ÷ B](D)

Actual Cost Assigned

[D x C]

Irrigation installation

Labor cost $1,998,432 12,960 12,941 $154.20 $1,995,502.20

Machining (all machine user)

Machine hours

$1,670,400 33,408,000 33,409,000 0.05 $1,670,450

Customer orders

Number of orders

30,636 2,553 2,520 12 30,240

Shipping None (direct)

N/A Traced directly

N/A N/A

Design Cost per design

$820 8 7 102.5 $717.50

Selling Number of sales calls

350,400 21,900 22,100 15 $353,600

Question (C)

How would you classify each of the following activities by level—unit level,

batch level, product level, or facility level?

Testing product Product-level activitiesDesigning new products Product-level activitiesPackaging Unit-level activitiesMolding Unit-level activitiesAssembling Unit-level activitiesDepreciation Facility-level activitiesMachine maintenance Batch-level activitiesAdvertising Facility-level activities

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Equipment setups Batch-level activitiesElectricity required to run equipment

Facility-level activities

Requisitioning materials Product-level activities

Question (d-1)

The results of ABC can provide a more accurate picture of costs. Discuss the

value of Waterways using this system to determine overhead costs.

Answer

By implementing ABC costing, Waterways Corporation will gain primary

benefits includes:

Leads to more cost pools – cost are assigned more directly on the basis of the

cost drivers used t produced each product.

Leads to enhanced control over overhead cost – Waterways can trace many

overhead costs directly to activities – allowing some indirect costs to be

identified as direct costs. Thus managers will become more aware of their

responsibility to control the activities that generate those costs.

Lead to better management decisions – accurate product costing should

contribute to setting selling prices that can help achieve desired product

profitability levels. Furthermore, accurate cost data could be helpful in

deciding whether to make or to buy a product part or component, and

sometimes even whether to eliminate a product.

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Question (d-2)

How might using ABC affect decision making at Waterways?

Answer

Activity based costing has revolutionized product costing, planning, and

forecasting in the last decade. It is based on a philosophy of estimation that:

"it is better to be approximately right, than precisely wrong." In summary,

activity-based costing is a management decision-making tool. It provides

financial support data structured in a fashion fundamentally different from

accounting data provided in the general ledger. By associating cost to the

activity, a clear relationship can be established between sources of activity

demand and the related costs. This association can benefit the distributor in

determining where costs are being incurred, what is initiating the costs and

where to apply efforts to curb inflationary costs. This can be of particular value

in tracking new products or customers

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Question (Part 1 - a)

What are the consequences of Waterways agreeing to provide the 15,000

units to the Canadian company? Would this be a wise “special order” to

accept?

Answer

Reject Accept Net Income

Increase (Decrease)

Revenue : -$0- 15,000 x 2.60 39,000

Costs : -$0- 15,000 x $2.30 (34,500)

Net Income : -$0- 4,500 4,500

Waterways Corporation should accept the Special offer from Canadian

Company.

Question (Part 1 - b)

Should Waterways accept the special order from the irrigation company?

Answer

Reject Accept Net Income

Increase (Decrease)

Revenue : -$0- 2,000 x $3.10 6,200

Costs : -$0- 2,000 x $2.30 (4,600)

Net Income : -$0- 1,600 1,600

Waterways Corporation should accept the Special offer from irrigation

Company.

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Question (Part 1 - c)

What would be the consequences of accepting both special orders?

Answer

If Waterways Corporation accepts both offers from Canadian and irrigation

company, Waterways would be working overcapacity.

Question (Part 2 - a)

Without considering the possibility of making the timing unit, evaluate whether

Waterways should buy or continue to make the small fitting.

Answer

Make Buy Net Income

Increase (Decrease)

Variable Mfg. : $460,000 -$0- $460,000

Fix Mfg. : 9,200 9,200 0

Purchase Cost 0 377,200 (377,200)

Total Annual Cost : $469,200 $386,400 (82,800)

Therefore, Waterways Corporation should continue to make the small fitting.

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Question (Part 2 - b)

(1) What is Waterways’ opportunity cost if it chooses to buy the small fitting

and start manufacturing the timing unit?

Answer

Make Buy Net Income

Increase (Decrease)

Total Annual Cost : $469,200 $386,400 $828,000

Opportunity Cost : 6,330* 7,295** (965)

Total Cost : $469,200 $386,400 82,800

* Opportunity cost (Make) = 500 x $12.66

** Opportunity cost (Buy) = $2,345 + (500 x $9.90)

(2) Would it be wise for Waterways to buy the fitting and manufacture the

timing unit? Explain.

Answer

No, it wouldn’t be wise for Waterways Corporation to buy the fitting and

manufacture the timing unit. Waterways Corporation would make more profit

by making the timing unit rather than bought and made the fitting.

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Question (Part 3)

Given the information above, what are the consequences of Waterways

replacing the machine that is slowing down production because of

breakdowns?

Answer

Production of antiquated machine for 1 year : 260 days x 50 units = 13,000 units

Cost of production : 13,000 units x $6.50 = $84,500

Profit of produced goods per year : 13,000 ($8.50 - $6.50) = $26,000

Total profit in 2 years : $26,000 x 2 = $52,000

Consider Waterways Corporation replaces the machine.

Production of antiquated machine for 1 year : 260 days x 100 units = 26,000 units

Cost of production : 26,000 units x $6.50 = $169,000

Profit of produced goods per year : 26,000 ($8.50 - $6.50) = $52,000

Total profit in 2 years : $52,000 x 2 = $104,000

In addition, the cost of the new machine mentioned is $55,000.

Therefore, the net profit is $104,000 - $55,000 = $49,000.

Hence, due to the replacement, the profit will decrease by $3,000

and the cost of production will increased by $84,500 due to the

machine replacement. The conclusion is, replacing the old machine

to the new proposed machine is not a brilliant idea.

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Question (a)

Compute the rate per hour of labor. (Round to two decimal places).

Answer

Labor Rate Per Hour = Time charges ÷ Budgeted Hours

… $353,950 ÷ $5,750 = $61.56

Question (b)

Compute the material loading charge. (Round to two decimal places).

Answer

Material Loading (%) =

Material Loading Charge for 2013 ÷ Estimated Material in 2012 x 100

…$125,000 ÷ $640,000 x 100 = 19.53%

Material Loading Charge = $640,000 x (19.53% + 16%)

…Material Loading Charge = $640,000 x 35.58% = $227,712

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Question (c)

Waterways has received a request for a bid to do a parkway for the city. The

irrigation manager estimates that it will take about a month to complete the

project and require 480 hours of labor and $80,000 of materials. Compute the

total estimated bid for the parkway project

Answer

Labor (480 x ($61.56 +$14) = $36,268.80

Parts = $640,000

Material Loading Charge = $227,712

Total Bill = $903,980.80

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Question (a)

Prepare a flexible overhead budget based on the following amounts

produced.

(1) 115,500 units

(2) 116,500 units

(3) 117,500 units

(4) 118,500 units

(5) 119,500 units

Answer

WATERWAYS CORPORATIONFelxible Budget (Manufacturing Overhead)

For the Month of March 2012

Production in Units 115,500 116,500 117,500 118,500 119,500

Costs:

Variable Factory Overhead

Indirect Materials $ 5,775 $ 5,825 $ 5,875 $ 5,925 $ 5,975

Indirect Labor $ 13,860 $ 13,980 $ 14,100 $ 14,220 $ 14,340

Utilities $ 11,550 $ 11,650 $ 11,750 $ 11,850 $ 11,950

Other $ 8,085 $ 8,155 $ 8,225 $ 8,295 $ 8,365

Total Variable Costs $ 39,270 $ 39,610 $ 39,950 $ 40,290 $ 40,630

Fixed Factory Overhead

Salaries $ 42,000 $ 42,000 $ 42,000 $ 42,000 $ 42,000

Depreciation $ 16,800 $ 16,800 $ 16,800 $ 16,800 $ 16,800

Property taxes $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000

Insurance $ 1,200 $ 1,200 $ 1,200 $ 1,200 $ 1,200

Janitorial $ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500

total Fixed Costs $ 64,500 $ 64,500 $ 64,500 $ 64,500 $ 64,500

Total Costs $ 103,770 $ 104,110 $ 104,450 $ 104,790 $ 105,130

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Question (b)

Prepare a flexible budget report showing the differences (favorable and

unfavorable) in manufacturing overhead costs for the month of March.

Answer


Flexible Budget Performance Report

(Manufacturing Overhead)


Planning Budget

Activity Variance

Flexible Budget

Spending

Actual Result

Production in units 117,

500 118,5

00 118,

500

Costs:

Variable Factory Overhead

Indirect Materials 5,

875 50

U

5,925

15 F

5,910

Indirect Labor 14,

100 120

U

14,220

25 F

14,195

Utilities 11,

750 100

U

11,850

30 F

11,880

Other 8,

225 70

U

8,295

20 U

8,275

Total Variable Costs 39,

950 340

U

40,290

90 F

40,260

Fixed Factory Overhead

Salaries 42,

000 - 42,0

00 - 42,

000

Deppreciation 16,

800 - 16,8

00 - 16,

800

Property taxes 3,

000 - 3,0

00 - 3,

000

Insurance 1,

200 - 1,2

00 - 1,

200

Janitorial 1,

500 - 1,5

00 - 1,

500

Total Fixed Costs 64,

500

- 64,5

00 - 64,

500

Total Costs 104,

450 34

0 U

104,790

340 F

104,790

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Question (c)

Prepare a responsibility report for the manufacturing overhead for March,

assuming only variable costs are controllable.

Answer


(Manufacturing Overhead Responsibility Report)


Planning Budget

Actual Difference U/F

Indirect Materials 5,925 5,910 15 F

Indirect Labor 14,220 14,195 25 F

Utilities 11,850 11,880 (30) U

Maintenance 8,295 8,275 20 F

Total Controllable Costs 40,290

40,260 30 F

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Waterway Continuous Problem WCP

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