Assessment 1 Instructions: Using Cost Accounting Information for Decision Making

Complete a five-part assessment using the Assessment 1 Template. Prepare calculations, enter them into the template, and make decisions using statements for cost of goods manufactured (COGM), cost of goods sold (COGS), and cost-volume-profit analysis.

Introduction

Accounting information systems in large corporations consist of two major subsystems: a financial accounting system and a cost accounting system. One of the main distinctions between the two systems is the target audience for the information. Financial accounting information is primarily for external users of financial information, including investors, creditors, and government agencies.

Cost accounting information is used internally by managers for planning and controlling costs, continuous improvements, and decision making.

Managers must understand the relationship among revenues, costs, volume, and profit. It is the cost accounting department that supplies the data and analysis that support these managers. By understanding the types of decisions managers make and how they think about the issues of volume, pricing, and cost incursion, cost accountants can lessen managers’ concerns about the effects of their decisions on profits.

Before beginning this assessment, take time to review the following topics:

• Cost of goods manufactured.
• Cost of goods sold.
• Cost-volume-profit analysis.

Complete a five-part assessment in a supplied Excel template in which you prepare and make decisions based on statements for cost of goods manufactured (COGM), cost of goods sold (COGS), and cost-volume-profit analysis.

Preparation

Use the Assessment 1 Template [XLSX] to complete the following five parts. Each part is a different tab in the template.

• Part 1: In the template, review the T-Rex Company. Answer all three questions. Show all calculations and explain briefly.
• Part 2: In the template, review the accounting records for Joplin Products. Compute the different costs per unit. Show all calculations.
• Part 3: In the template, review the accounting records for Idaho Tool & Die. Prepare an income statement with a supporting cost of goods sold statement. Show all calculations.
• Part 4: In the template, review the scenario about Toronto Partners. Compute the volume of units and volume of sales outlined. Explain how a price increase would be required to increase profit. Show all calculations.
• Part 5: In the template, review the sales revenue and costs for Chase Corporation. Prepare a schedule computing Chase’s estimated operating profit from options A, B, and C for closing a plant. Show all calculations.

Submit the completed template for Assessment 1.

Instructions

Assessment 1 Part 1: Cost Data for Managerial Purposes

In the template, review the T-Rex Company scenario and production costs and compute the requested unit costs. Show all calculations.

Part 1 Scenario

T-Rex Company makes a variety of products. It is organized in two divisions, East and West. The managers for each division are paid, in part, based on the financial performance of their divisions. The West division normally sells to outside customers but occasionally sells to the East division. When it does, corporate policy states that the price must be cost plus 15 percent to ensure a fair return to the selling division. West received an order from East for 600 units. West’s planned output for the year had been 2,640 units before East’s order. West’s capacity is 3,300 units per year. The costs for producing those 2,640 units follow:

T-Rex Company Production CostsProduction Costs for 2,640 UnitsTotalPer Unit

Materials

$528,000

$200

Direct Labor

$253,440

$96

Other Costs Varying With Output

 $168,960

$64

Fixed Costs (Do Not Vary With Output)

$2,217,600

$840

Total Costs

$3,168,000

$1,200

Complete the following:

1. If you are the manager of the West division, what unit cost would you ask the East division to pay? Show calculations.
2. If you are the manager of the East division, what unit cost would you argue you should pay? Show calculations.
3. What unit cost would you recommend for a sale of units from the West division to the East division? Explain briefly.

Assessment 1 Part 2: Cost Concepts and Financial Statement

In the template, review the accounting records for Joplin Products. Compute the different costs per unit. Show all calculations.

Part 2 Scenario

Joplin Products produced and sold 990 units of the company’s only product in June. You have collected the following information from the accounting records:

Information on Joplin Products

Item

Value

Sales Price (Per Unit)

$492.80

Manufacturing Costs:

Fixed Overhead (Monthly)

$55,440.00

Direct Labor (Per Unit)

$38.50

Direct Materials (Per Unit)

$123.20

Variable Overhead (Per Unit)

$77.00

Marketing and Administrative Costs:

Fixed Costs (Monthly)

$74,250.00

Variable Costs (Per Unit)

$15.40

Complete the following:

1. Compute:
   • Variable manufacturing cost per unit.
   • Full cost per unit.
   • Variable cost per unit.
   • Full absorption cost per unit.
   • Prime cost per unit.
   • Conversion cost per unit.
   • Profit margin per unit.
   • Contribution margin per unit.
   • Gross margin per unit.
2. If the number of units produced increases from 990 to 1,320, which is within the relevant range, cost per unit will decrease (you can check this by redoing item [1] above). Therefore, we should recommend that Joplin Products increase its production to reduce its costs. Do you agree? Explain.

Assessment 1 Part 3: Preparing Statements for a Manufacturing Company

In the template, review the accounting records for Idaho Tool & Die. Prepare an income statement with a supporting cost of goods sold statement. Show all calculations.

Part 3 Scenario

The administrative offices and manufacturing plant of Idaho Tool & Die are in the same building. The following information (in $000s) appears in the accounting records for last year:

Accounting Records for Idaho Tool & DieItem

Value

Administrative Costs

$10,560

Building and Machine Depreciation (75% of this amount is for factory)

$5,940

Building Utilities (90% of this amount is for factory)

$8,250

Direct Labor

$5,544

Direct Materials Inventory, December 31

$84

Direct Materials Inventory, January 1

$72

Direct Materials Purchases

$24,090

Factory Supervision

$3,234

Finished Goods Inventory, December 31

$390

Finished Goods Inventory, January 1

$324

Indirect Factory Labor

$5,472

Indirect Materials and Supplies

$4,110

Marketing Costs

$5,226

Property Taxes on Building (80% of this amount is for factory)

$5,040

Sales Revenue

$85,602

Work-in-Process Inventory, December 31

$74

Work-in-Process Inventory, January 1

$192

Complete the following:

• Prepare an income statement with a supporting cost of goods sold statement.

Assessment 1 Part 4: CVP Analysis and Price Changes

In the template, review the Toronto Partners scenario. Compute the volume of units and volume of sales outlined. Explain how a price increase would be required to increase profits.

Part 4 Scenario

Toronto Partners is concerned about the possible effects of inflation on its operations. The company currently sells 66,000 units at $30 per unit. The variable production costs are $15 and fixed costs amount to $770,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming year. Of the $15 variable costs, 50 percent are from labor and 25 percent are from materials. Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 5 percent as a result of increased taxes and other fixed charges.

The company wishes to maintain the same level of profit in real dollar terms. To accomplish this, profits must increase by 6 percent over the year.

Complete the following:

1. Compute the volume in units and the dollar sales level necessary to maintain the current profit level, assuming that the maximum price increase is implemented.
2. Compute the volume of sales and the dollar sales level necessary to increase profits by 6 percent, assuming that the maximum price increase is implemented.
3. If the volume of sales were to remain at 66,000 units, what price increase would be required to reach the 6 percent profit increase?

Assessment 1 Part 5: Closing a Plant

In the template, review the sales revenue and costs for Chase Corporation. Prepare a schedule computing Chase’s estimated operating profit from options A, B, and C for closing a plant. Show all calculations.

Part 5 Scenario

You have been asked to help Chase Corporation’s management make certain decisions. Chase has its home office in Oklahoma and leases factory buildings in Arkansas, Kansas, and Colorado, all of which produce the same product. Chase’s management provided you a projection of operations for next year follow:

Chase Corporation’s Projection of OperationsItemTotalArkansasKansasColarado

Sales Revenue           

$968,000

$484,000 

$308,000

 $176,000

Fixed Costs:    

Factory

$242,000

$123,200

$61,600

$57,200

Administration

$77,000$46,200$24,200$6,600

Variable Costs

$319,000

$146,300

$93,500

$79,200

Allocated Home Office Costs

$110,000

$49,500

$38,500

$22,000

Total

$748,000

$365,200

$217,800

$165,000

Operating Profit

$220,000

$118,800

$90,2000

$11,000

• The sales price per unit is $5.

Due to the marginal results of operations of the Colorado factory, Chase has decided to cease its operations and sell that factory’s machinery and equipment by year end. Chase expects that the proceeds from the sale of these assets would equal all termination costs. Chase would like to continue serving most of its customers in that area if it is economically feasible and is considering one of the following three options:

• Option A: Expand the operations of the Kansas factory by using idle space. This move would result in the following changes in that factory’s operations:

Increase Over Kansas Factory’s Current Operations

Item

Percentage

Sales Revenue

50%

Fixed costs: Factory20%Administration10%

Under this proposal, variable costs would be $2 per unit sold.

• Option B: Enter into a long-term contract with a competitor that will serve that area’s customers. This competitor would pay Chase a royalty of $1 per unit based on an estimate of 30,000 units being sold.
• Option C: Close the Colorado factory and not expand the operations of the Kansas factory.
  • Total home office costs of $110,000 will remain the same under each situation.

Complete the following:

1. Prepare a schedule computing Chase’s estimated operating profit from each of the following options for Chase’s management:
   • Option A: Expansion of the Kansas factory.
   • Option B: Negotiation of the long-term contract on a royalty basis.
   • Option C: Shutdown of the Colorado operations with no expansion at other locations.
2. Determine the best option for Chase Corporation and explain your rationale.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

• Competency 1: Employ cost accounting information for decision making.
  • Determine the unit cost for multiple divisions.
  • Determine variable manufacturing cost per unit, full cost per unit and variable cost per unit.
  • Prepare an income statement with a supporting cost of goods sold statement.
  • Determine volume to maintain the current profit level.
  • Compute estimated operating profit for a shutdown.
• Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.