Vulcan Molding produces molded rubber components. At the start of

Vulcan Molding produces molded rubber components. At the start of the year, the company estimated that it would incur $4,000,000 of direct labor cost and $9,000,000 of manufacturing overhead. Overhead is allocated to production on the basis of direct labor cost. Actual direct materials used during the year were $5,750,000, actual direct labor cost was $4,500,000, and actual overhead was $11,000,000. 

Required 

a. Calculate the overhead rate for the current year. 

b. Prepare the journal entry to record use of direct material. 

c. Prepare the journal entry to record direct labor. 

d. Prepare the journal entry to record manufacturing overhead applied to production. 

e. Prepare the journal entry to close the balance in manufacturing overhead to cost of goods sold.

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A. Calculate the expected full cost of the Surenex engagement,

a. Calculate the expected full cost of the Surenex engagement, including an allocation of overhead. 

b. What is the lowest amount that Connie can bill on this engagement without hurting company profit? 

c. In deciding on a price for the engagement, what should Connie consider in addition to the amount calculated in (b)?

YSL Marketing Research is a small firm located in Seattle, Washington. On behalf of its clients, the firm conducts focus group meetings, telephone and mail opinion surveys, and evaluations of marketing strategies. The firm has two partners and six nonpartner professionals. At the start of the year, the company estimated total professional compensation (for the three partners and six nonpartner professionals) to be $1,600,000. 

To evaluate the profitability of its engagements, the firm traces actual professional compensation to each engagement along with so-called direct charges. Direct charges consist of travel costs and costs of conducting surveys (e.g., paper and postage). In addition, each engagement receives an allocation of overhead based on professional compensation charges. Overhead consists of all support costs including rent, utilities, and depreciation of office equipment. At the start of the year, these costs were estimated to be $480,000. 

Recently, Connie Bachmann, a YSL partner, was asked to conduct a survey for Surenex, a new hightech company. Connie is excited about this opportunity since she expects that this hot small company will, in three to five years, become a hot big company with premium billing opportunities. At this point, however, Connie wants to quote a low fee since Surenex has cash-flow problems and is clearly unwilling to pay YSL’s normal rates. On most jobs, YSL’s fee is 1.5 times professional compensation. In addition, the company is reimbursed for all out-of-pocket costs related to travel and paper and postage costs for surveys. YSL is in high demand, and if it undertakes the Surenex job, it will have to turn down another potential client. 

Connie estimates that the Surenex engagement will require the following costs in addition to overhead support costs: 

Connie Bachmann (partner), 40 hours at a salary averaging $200 per hour = $8,000. 

Ambrose Bundy (professional staff), 100 hours at a salary of $60 per hour = $6,000. 

Direct charges for actual travel, mailing, and postage = $3,000. 

Total of above = $17,000. 

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Are the proposed actions of Ed and Robin ethical? What

Are the proposed actions of Ed and Robin ethical? What is the likely effect of their actions on shareholder value?

Brixton Surgical Devices, a public company with sales of over $900,000,000, is one of the world’s largest producers of surgical clamps, saws, screws, and stents. Its business involves production of both stock items and custom pieces for doctors at research hospitals. 

At the end of the third quarter of 2020, it became clear to Ed Walters, chief operating officer, and Robin Smith, chief financial officer, that the company would not make the aggressive annual earnings target specified by the board of directors. In consequence, Ed and Robin would not receive bonuses, which historically had averaged about 60 percent of their base compensation. The two devised the following strategy 

“Here’s what we’ll do,” suggested Ed. “We’ve never offered our customers a discount. Let’s change that right now. We’ll offer a 25 percent discount on all orders placed in October and November for delivery in December of 2020.” 

“That will certainly boost fourth-quarter sales,” said Robin. “But you know, it won’t really increase total sales. It’ll just transfer some sales from the first quarter of 2021 to the fourth quarter of 2020. Of course, 2020 is where we need earnings to hit our bonus target. Hey, I’ve got another idea. We can also jack up production of our stock items in the fourth quarter. With our high-priced production equipment, we’ve got a ton of overhead. But the more we produce, the more overhead we can bury in inventory. With lower unit costs and higher sales, profit will go way up. Let’s get going on execution. I’ve got to get the marketing people working on the promotion, and you’ve got to update the production schedule. This could end up being our best year ever in terms of bonuses!” 

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Terra Cotta Designs manufactures custom tiles. The following information relates

Terra Cotta Designs manufactures custom tiles. The following information relates to the fiscal year ending December 31, 2020: 

Beginning balance in Raw Material Inventory………………….$ 450,000 

Purchases of raw material………………………………………………1,500,000 

Ending balance in Raw Material Inventory…………………………200,000 

Beginning balance in Work in Process Inventory……………….650,000 

Ending balance in Work in Process Inventory……………………350,000 

Direct labor cost…………………………………………………………….2,500,000 

Manufacturing overhead applied……………………………………..650,000 

Beginning balance in Finished Goods Inventory……………….750,000 

Ending balance in Finished Goods Inventory……………………350,000 

Sales…………………………………………………………………………….7,000,000 

Selling expenses……………………………………………………………..500,000 

General and administrative expenses……………………………..850,000


Required 

a. Prepare a schedule of cost of goods manufactured. Assume that there are no indirect material costs. 

b. Prepare an income statement for fiscal 2020. Ignore income taxes.

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A. List examples of costs at the Riverside Hotel that

a. List examples of costs at the Riverside Hotel that are variable, fixed, and sunk. Provide an example of an opportunity cost. 

b. What is the source of conflict between labor and management? What changes would you recommend in the wording of the labor agreement?

Local 635 represents kitchen workers at hotels in several southern cities. Part of their labor agreement states that workers “shall receive one free meal per shift up to a cost of $15, with any cost over $15 being deducted from wages paid to said employee.” 

A labor dispute arose at the Riverside Hotel shortly after it was opened in June. Kitchen workers who ate dinner on the late shift found that their wages were reduced by $10 for each meal they consumed at the hotel during their dinner break. Josh Parker, a line cook, stated the widely held belief of the workers. “There’s no way these dinners cost the Riverside Hotel $15 to make, let alone $25. This is just another case of management trying to rip us off. Take last night. I had the prime rib dinner. The piece of meat cost about $7 and the salad less than $1. That’s only $8 in total. Really, there aren’t any other costs to speak of. The cook, well, he’s going to be working in the kitchen and getting paid for eight hours whether he makes my meal or not. This claim that my meal cost $25 is baloney!” 

Management of the Riverside Hotel sees the situation differently. Take the case of Josh’s dinner. In presenting the hotel’s case to a labor arbitration board, Sandy Ross, manager of the hotel, explained, “Look, that dinner goes for $40 on the menu so assigning a cost of $25 represents a very good value to the kitchen workers. The contention that the meal only costs $8 is nonsense. True, the meat costs $7 and the salad ingredients cost $1, but there’s also the labor costs related to preparing the meal and the numerous overhead costs, like the cost of the oven that the prime rib is cooked in. That oven cost more than $20,000. And there’s heat, light, power, etc. Each meal we prepare should be assigned part of these overhead costs. And don’t forget that when the worker finishes his or her meal, someone has to clean up. That costs money too. When you add up all of these items, a prime rib dinner easily adds up to $25!” 

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Webber Fabricating estimated the following annual hours and costs: Expected annual

Webber Fabricating estimated the following annual hours and costs: 

Expected annual direct labor hours………………20,000 

Expected annual direct labor cost…………….$ 625,000 

Expected machine hours………………………………20,000 

Expected material cost for the year………….$ 800,000 

Expected manufacturing overhead…………$1,000,000 

Required 

a. Calculate predetermined overhead allocation rates using each of the four possible allocation bases provided. 

b. Determine the cost of the following job (number 253) using each of the four overhead allocation rates: 

Job 253

Direct materials…………………………….$3,000 

Direct labor (150 hrs @ $25/hr)……..$3,750 

Machine hours used………………………….100

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At the start of November, Penco Refinery had Work in

At the start of November, Penco Refinery had Work in Process inventory consisting of 4,000 units that were 90 percent complete with respect to materials and 50 percent complete with respect to conversion costs. The cost of the units was $43,000 ($30,000 of material cost and $13,000 of labor and overhead). During November, the company started 44,000 units and incurred $397,950 of material cost and $394,880 of labor and overhead. The company completed 45,000 units during the month, and 3,000 units were in process at the end of November. The units in ending Work in Process were 85 percent complete with respect to materials and 45 percent complete with respect to conversion costs. 

Required 

a. Calculate the cost per equivalent unit for materials and conversion costs. Round to the nearest cent. 

b. Calculate the cost of items completed during November. 

c. Calculate the cost of ending Work in Process. Round to the nearest dollar.

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Magi-Clean produces an industrial cleaner in a continuous production process.

Magi-Clean produces an industrial cleaner in a continuous production process. Materials are added at the beginning of production. Conversion costs are assumed to be added evenly throughout the process. At the end of February, there were twenty 50-gallon containers, 80 percent complete as to labor and overhead. Ninety-five 50 gallon containers were completed during the month. Assume that direct materials cost per equivalent unit during February was $2,050, labor cost per equivalent unit was $800, and overhead per equivalent unit was $1,500. 

Required 

Determine the cost of the ending Work in Process inventory and the cost of items completed and transferred to Finished Goods inventory.

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Michael Bordellet is the owner/pilot of Bordellet Air Service. The

Michael Bordellet is the owner/pilot of Bordellet Air Service. The company flies a daily round trip from Seattle’s Lake Union to a resort in Canada. In 2020, the company reported an annual income before taxes of $120,403, although that included a deduction of $70,000, reflecting Michael’s salary: 

Revenue of $561,600 reflects six round trips per week for 52 weeks with an average of five passengers paying $360 each per round trip (6 × 52 × 5 × $360 = $561,600). The flight to the resort is 400 miles one way. With 312 round trips (6 per week × 52 weeks), that amounts to 249,600 miles. The plane averages 7 miles per gallon. 

Required 

(Round all monetary calculations to the nearest cent and all trips to the nearest whole trip.) 

a. How many round trips is Michael currently flying, and how many round trips are needed to break even? 

b. How many round trips are needed so that Michael can draw a salary of $110,000 and still not show a loss? 

c. What is the average before-tax profit of a round trip flight in 2020? 

d. What is the incremental profit associated with adding a round-trip flight?

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A. Mr. Krog is not convinced by Peter’s analysis and

a. Mr. Krog is not convinced by Peter’s analysis and has turned to you, an outside consultant, to provide a preliminary estimate of lost profit. Using the limited information contained in the financial statements for 2019 and 2020, estimate lost profits.  

STEP 1. Determine the level of fixed and variable costs in 2019 as a function of sales. You can use account analysis, the high-low method, or regression if you are familiar with that technique. If you use account analysis, assume that cost of goods sold and selling expense are variable costs and administrative expense is a fixed cost. 

STEP 2. Predict what sales would have been in 2020 if there was no fire. Using this level of sales and the fixed and variable cost information from Step 1, estimate what profit would have been in 2020. 

STEP 3. The difference between actual profit in 2020 and the amount estimated in Step 2 is lost profit. 

b. Based on your preliminary analysis, do you recommend that Mr. Krog aggressively pursue a substantial claim for lost profit? 

c. What is the fundamental flaw in Peter Newell’s analysis?

John Krog is president, chairman of the board, production supervisor, and majority shareholder of Krog’s Metalfab, Inc. He formed the company in 1991 to manufacture custom-built aluminum storm windows for sale to contractors in the greater Chicago area. Since that time the company has experienced tremendous growth and currently operates two plants: one in Chicago, the main production facility, and a smaller plant in Moline, Illinois. The company now produces a wide variety of metal windows, framing materials, ladders, and other products related to the construction industry. Recently the company developed a new line of bronze-finished storm windows, and initial buyer reaction has been quite favorable. The company’s future seemed bright, but on January 3, 2020, a light fixture overheated causing a fire that virtually destroyed the entire Chicago plant. Three days later, Krog had moved 50 percent of his Chicago workforce to the Moline plant. Workers were housed in hotels, paid overtime wages, and provided with bus transportation home on weekends. Still, the company could not meet delivery schedules because of reduced operating capacity, and total business began to decline. At the end of 2020, Krog felt that the worst was over. A new plant had been leased in Chicago, and the company was almost back to normal. 

Finally, Krog could turn his attention to a matter of considerable importance: settlement with the insurance company. The company’s policy stipulated that the building and equipment loss be calculated at replacement cost. This settlement had been fairly straightforward, and the proceeds had aided the rapid rebuilding of the company. A valued feature of the insurance policy was “lost profit” coverage. This coverage was to “compensate the company for profits lost due to reduced operating capacity related to fire or flood damage.” The period of “lost profit” was limited to 12 months. Interpreting the exact nature of this coverage proved to be difficult. The insurance company agreed to reimburse Krog for the overtime premium, transportation, and housing costs related to operating out of the Moline plant. These expenses obviously minimized the damages related to the 12 months of lost or reduced profits. But was the company entitled to any additional compensation? 

Krog got out the latest edition of Construction Today. According to this respected trade journal, sales of products similar to products produced by Krog’s Metalfab had increased by seven percent during 2020. Krog felt that were it not for the fire, his company could also have increased sales by this percentage. Income statement information is available for 2019 (the year prior to the fire) and 2020 (the year during which the company sustained “lost profit”). The expenses in 2020 include excess operating costs of $250,000. Krog has documentation supporting these items, which include overtime costs, hotel costs, meals, and such related to operating out of Moline. The insurance company is quite willing to pay for these costs since they reduced potential lost profit. The chief accountant at Krog, Peter Newell, has estimated lost profit to be only $34,184. Thus, he does not feel that it’s worthwhile spending a lot of company resources trying to collect more than the $250,000. Peter arrived at his calculation as follows: 

Sales in 2019…………………………………………………………..$5,091,094 

Predicted sales in 2020, assuming a 7% increase……..$5,447,471 

Actual sales in 2020…………………………………………………..3,857,499 

(A) Lost sales…………………………………………………………….1,589,972 

(B) Profit in 2019 as a percentage of 2019 sales ($109,495 ÷ 5,091,094)………………………………………………………………………(.0215)

Lost profit (A × B)…………………………………………………………$ 34,184 

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