ACCTG 421 2013 Fall
Case (50 points)
American Guitar Company manufactures two different high
quality acoustic guitars for retailers: beginner model and professional model. The
company has two service departments: the maintenance department and the power department,
and two manufacturing departments: the construction department and the
finishing department. American Guitar chooses the reciprocal method to allocate
service department costs. It uses operation costing to assign direct materials
and conversion costs to its products, and absorption costing with normal costs
for external reporting purposes.
In the Construction Department, the wooden guitars are built
by highly skilled craftsmen and coated with several layers of lacquer. Then the
units are transferred to the Finishing Department, where the bridge of the
guitar is attached and the strings are installed. The guitars also are tuned
and inspected in the Finishing Department[1].
American Guitar estimates to have an annual practical capacity of 6000 guitars
(1500 units of professional model and 4500 units of beginner model). The
budgeted sales for 2013 are 1300 units professional model and 4300 units of
beginner model. The diagram below depicts the manufacturing process.
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The following historical information has been collected from
American Guitar’s accounting information systems:
2009
2010
2011
2012
Annual sales
4146(B) & 1611(P)
4456(B) & 1256(P)
4668(B) & 1322(P)
4075(B) & 1300(P)
July sales
393(B) & 183(P)
398(B) & 163(P)
405(B) & 168(P)
372(B) & 155(P)
2012
Total Overhead ($)
Total DLH of the two manufacturing departments[2]
January
134,000
2,210
February
137,000
2,280
March
148,000
2,510
April
155,000
2,790
May
157,000
2,980
June
165,000
3,590
July
169,000
3,490
August
168,000
3,030
September
163,000
3,040
October
157,000
3,380
November
139,000
2,420
December
133,000
2,100
Total
1,825,000
33,820
American Guitarâs direct[3]
and indirect MOH costs for the two service and two manufacturing departments in
2012:
Power Department[4]
Maintenance Department[5]
Construction Department
Finishing
Department
Total Amount
Labor-hours
2022
2032
18950
14870
37,874
Kilowatt-hours
2,000
7,000
40,800
30,200
80,000
Maintenance hours
120
60
800
1,000
2,000
Direct fixed costs
$60,000
$36,000
$480,000
$432,000
$1,008,000
Direct variable costs
$58,000
$40,000
$346,800
$358,200
$803,000
Indirect fixed costs
$9,600
Indirect variable costs
$4,400
American Guitar does not expect significant changes in its manufacturing
costs in 2013.
At the end of June 2013, the balance in American Guitarâs
Materials Inventory account, which included 150 pounds of grade A veneered
wood, was $2,640; the balance in the finished-goods inventory, which was
valuated using the last-in, first-out (LIFO) method, consisted of 2 models, was
$16,600.
Quantity and Unit Cost
Beginner model
20 units @ $430 each
Professional model
10 units @ $800 each
The following pertains to the month of July.
There were no beginning
inventories in both manufacturing departments.American Guitar’s
work-in-process inventory on July 31 consisted of two jobs: B0642 and
P0642. The ending WIP inventories at the finishing department for B0642
and P0642 have 10 EU and 6 EU respectively.Additions to and
requisitions from the materials inventory during the month of July
included the following.
Raw Materials
Purchased Parts
Additions
550 pounds of grade A veneered wood for $9,680
3300 pounds of grade B veneered wood for $41,580
100 set of premium bridges and strings for $1,840
400 set of regular bridges and strings for $6,560
Requisitions
Job B0639 (120 beginner units)
936 pounds of grade B wood
125 regular sets
Job B0640 (100 beginner units)
790 pounds of grade B wood
103 regular sets
Job B0641 (150 beginner units)
1170 pounds of grade B wood
153 regular sets
Job B0642 (15 beginner units)
118 pounds of grade B wood
10 regular sets
Job P0640 (30 professional units)
240 pounds of grade A wood
31 premium sets
Job P0641 (35 professional units)
273 pounds of grade A wood
32 premium sets
Job P0642 (10 professional units)
82 pounds of grade A wood
6 premium sets
The average hourly rate
for the construction and finishing departments in July was $15 and $14
respectively. The total payroll taxes and fringe benefits rate for American
Guitar was 40% of wages paid. The July labor hours consisted of the
following:
Account
Construction Department
Finishing Department
Job B0639 (120 beginner units)
350
264
Job B0640 (100 beginner units)
302
200
Job B0641 (150 beginner units)
448
285
Job B0642 (15 beginner units)
40
17
Job P0640 (30 professional units)
150
144
Job P0641 (35 professional units)
173
176
Job P0642 (10 professional units)
52
22
372 beginner
models & 70 professional models were sold on account for $600 (beginner
model) & $960 (professional model) each. The finished-goods inventory
is valuated using LIFO method.
The actual direct
fixed costs for power department and maintenance department were $4,050
and $4,000 respectively. The actual direct variable costs for power
department and maintenance department were $17,084 and $9,280
respectively.
The actual
direct fixed costs for construction department and finishing department
were $40,100 and $35,800 respectively. The actual direct variable for
construction department and finishing department were $33,084.60 and $34,038.40
respectively.
Depreciation of
the general facility and equipment shared by both manufacturing departments
during July amounted to $12,000.
Rent paid in
cash for warehouse space used by the manufacturing departments during July
was $1,200. Utility costs incurred for the warehouse during July amounted
to $600. The invoices for these costs were received, but the bills were
not paid in July.
July property
taxes on the general facility were paid in cash, $2,400.
The insurance
cost covering factory operations for the month of July was $3,100. The
insurance policy had been prepaid.
The costs of
salaries and fringe benefits for sales and administrative personnel paid
in cash during July amounted to $8,000.
Depreciation on
administrative office equipment and space amounted to $4,000.
Other selling
and administrative expenses paid in cash during July amounted to $35,000.
The July 1
balances in selected accounts are as follows:
Cash
$138,000
Accounts Receivable
21,000
Prepaid Insurance
5,000
Accumulated Depreciation: Facility & Equipment
102,000
Accounts Payable
13,000
Required:
Part 1
Submit a hard copy of your work and email an Excel workbook
to support your calculations on or before the due date for questions 1 â 7.
What is the
predetermined manufacturing overhead rate for external reporting purpose? Is
it the most appropriate rate for
managerial accounting? Why?Prepare the
journal entries to record the transactions in July using normal costing.Calculate the
overapplied or underapplied overhead for July. Use the proration method to
prepare a journal entry to close this balance.Prepare a
schedule of cost of goods manufactured for July.Prepare a
schedule of cost of goods sold for July.Prepare an income
statement for July.From the
perspective of long-run product pricing, do you recommend American Guitar
to keep its absorption costing with normal costs for pricing decision and
performance evaluation? Why?
Part 2
Submit a hard copy of your work and email an Excel workbook
to support your calculations on or before the due date for questions 1 â 11.
Recently, American Guitar has faced intense competition from
oversea guitars manufacturers. Her competitors sell similar quality guitars
averaged 25% less. American Guitar considers implementing the standard costing
to improve cost control. After conducting task analysis in the manufacturing
departments, American Guitar establishes the following standards:
1) Each finished guitar contains seven pounds
of veneered wood. In addition, one pound of wood is typically wasted in the manufacturing
process.
2) The veneered wood used in the beginner model
has a standard price of $12 per pound and the professional model has a standard
price of $18. The other parts needed to complete each beginner guitar
(professional guitar), such as the bridge and strings, cost $15 ($18) per
guitar.
3) The labor standards[6]
for American Guitar’s two manufacturing departments are as follows:
Construction Department
Finishing Department
Beginner model (B)
3 hours of direct labor at $18 per hour
2 hours of direct labor at $20 per hour
Professional model (P)
4 hours of direct labor at $18 per hour
6 hours of direct labor at $20 per hour
Assuming American
Guitar implements the standard costing, and calculate the followings:
–
Direct material and direct labor variances
–
variable manufacturing overhead variances for
both manufacturing departments in July.
–
fixed manufacturing overhead variances for both manufacturing
departments in July.
–
standard cost for the beginner model and the professional
model.
Prepare the
journal entries to record the transactions in July using the standard
costing.Prepare entries
to close all the variances using the proration method.Do you recommend
American Guitar to price its products based on its standard costs? Why?
Prepare a presentation to answer
the following questions:
Do you recommend
American Guitar to keep its current cost-accounting system or to implement
the standard costing system? Why?Explain the
interpretation and possible interactions between the variances calculated
by the standard costing.Write a memo to
the company evaluating American Guitarâs July performance and indicate any
appropriate action for management to fine-tune its strategy.
[1]Direct-material is
added at the beginning of manufacturing process in construction department.The direct-material and conversion costs are incurred uniformly
throughout the process in finishing department.
[2]American Guitar
believes that overhead is affected by total monthly DLH of the two
manufacturing departments.
[3] For amanufacturing department, direct costs refer only to overhead costs that are
directly traceable to the department.
[4]Power department is
to provide electricity to maintenance, construction and finishing department.
Its service is measured by the kilowatt-hours. The kilowatt-hours provided by
the department for 2010 & 2011 were 84,200 & 88,000 respectively.
[5]Maintenance
department is to maintain all the equipment in power, construction and
finishing department. Its service is measured by the maintenance hours. The
maintenance hours provided by the department for 2010 & 2011 were 2,150 and
2,240 respectively.
[6] Direct-labor rates include employee benefits.
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