Accounting for Decision Making Study Set 5

Business

Quiz 8 :

Cost Allocation: Practices

Quiz 8 :

Cost Allocation: Practices

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Vigdor Wood Products Vigdor processes cut trees into various wood products, veneers, lumber, wood chips, and so forth. Each of the products can be sold immediately upon processing the trees, or processed further and sold as a finished product. The following table lists the five products produced from each batch of trees, the tons of each product per batch, and the prices for the intermediate and finished products. The net cash outflow to convert each intermediate product into a finished product is $12 per ton. The net cash outflow to process one batch of trees into the five separate wood products is $800. img Required: a. Given that Vigdor processes batches of trees into the five wood products, which of the five wood products should be sold as intermediate products (i.e., not processed further), and which ones should be sold as finished products (i.e., processed further)? b. If Vigdor's cost to process trees into the five wood products is $800, should Vigdor process trees? c. Assuming that the quantities and prices in the preceding table do not change, how high can the $800 cost to process one batch rise before Vigdor stops processing trees into the five wood products? d. Assuming that the cost to process trees into the five wood products is $800, and given your decisions in part (a), calculate the profit per ton of each of the five wood products after allocating the $800 processing cost to the five wood products using: (1) Tons of wood products produced. (2) Net realizable value of wood products produced. e. Given the allocations of the $800 cost of processing trees in part (d), would you want to change any of your decisions in part (a), assuming your objective is to maximize the net cash flows for Vigdor? f. Describe how the allocation of the $800 cost of processing trees into the five wood products affected your decisions in parts (a) and (b).
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Joint cost
Joint costs are manufacturing costs incurred by the company where one single process leads to multiple products being manufactured. In this case since the product manufactured are more than one then the cost incurred in this process are known as joint costs and these costs are allocated to each of the product based on common allocation base.Formula to calculate allocation of joint cost allocation
img Sales value at split-off method for allocation joint costs
Under this method the joint costs incurred during the production at allocated based on the sales value of each of the product when the products split after the production process is complete.Net realisable value method
Under this method the joint costs incurred during the production would be allocated to each of the product based on the final sales price of the product in case they are processed further less any costs incurred in selling the product. This method is known as net realisable value method as cost allocated based on net realizable value of each of the products. Net realizable value is the sales value of the product less cost incurred in selling the product.
Physical measure method
Under this method the joint costs is allocated based on the quantity of units produced for each of the product at the split off point.
a.Calculate the products which should be processed further and which should not be processed further as shown below
img Thus, company should not further process product
img and
img as the revenue after processing is lower than under intermediate sales. All the other products can be processed further.
Following shows the working
img b. img The net cash flow after processing costs is positive
img and thus company should process the trees.
Following shows the working
img c.Company can process the product until the costs of further processing exceeds $914. If the costs are below $914 then further processing is recommended.d.1.
Calculate profit per ton by allocating joint costs using tons of products produced as shown below
img Following shows the working
img 2.
Calculate profit per ton by allocating joint costs using net realizable value as shown below
img Following shows the working
img e.The decision in part (a) would not change as the total net cash flow would remain same for company.
f.The allocation of joint costs would not impact decision made in (a) and (b). This is because this cause would incur even if one of the product is further processed and thus cause cash outflow.

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Murray Hill's Untimely Demise Murray Hill was preparing the monthly report that allocates the three service department's (A, B, and C) costs to the three operating divisions (D1, D2, and D3) when he choked to death on a stale double cream-filled donut. You must step in and complete his step-down allocations. The three service departments (A, B, and C) have costs (before any cost allocation) of: img The following table provides the percentage of utilization of each service department by the other service departments and the operating departments: img The step-down sequence is A, B, then C. Poor Murray allocated only A's costs before the donut did him in. His incomplete spreadsheet is: img Required: a. Do Murray proud and complete the incomplete spreadsheet. Like Murray, round all cost allocations to the nearest dollar. b. If the company wants the cost allocations to most accurately capture the opportunity cost of resources consumed by the operating divisions, how should the service departments be ordered in the step-down method?
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Overhead cost allocation
Overhead cost allocation is the process to share the cost of particular service between each department or job based on certain allocation base or criteria which is common to the services for which cost is incurred. This helps to divide the cost evenly between the departments and get a correct picture of the performance of each department. The indirect costs are not directly related to production and are known as overhead which could be administrative overhead or selling overhead. They could be fixed overhead or variable overhead. Company should proper allocation base to divide each cost.
Step down method
Step method is one of the method to allocate service department cost to the other department. In this method, the service cost of one department is allocated to another service department and other operating department in a sequential form. The allocation process begins with service department with having largest number of services provided to other service department or is based on the largest percentage of its own costs used by other service department.
a.In the given case we are first allocating water to service department and profit centers based on the gallons of water as allocation base.Step 1: We will begin with cost allocation of service department A
Step 2: The next allocation will be of cost allocation of service department B
Step 3: The last allocation will be of cost allocation of service department C
Formula to calculate percentage base to other departments
img Allocate the service department costs to operating department as shown below
img Following shows the working
img b.In order to accurately allocate the opportunity cost of resources the allocation should begin with service department which provides largest number of services provided to other service department or is based on the largest percentage of its own costs used by other service department.
In this case therefore allocation should begin with A which provides highest service to other department which would be followed by allocation of department C and b.

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Outback Opals Outback Opals mines and processes opals from its Australian opal mines. The process consists of removing large chunks of stones, carefully splitting the stones and removing the opals, and then cutting and polishing the stones. Finally, the opals are sorted and graded (I, II, and III). The Grade I opals are sent to Outback's U.S. subsidiary for sale in the United States. The Graded II opals are sold through Outback's Hong Kong subsidiary in Hong Kong, and the Grade III opals are sold in Australia. It costs 35,000 Australian dollars (A$) to mine, cut, polish, and sort a batch of opals. The following table summarizes the number of stones in each batch mined, the additional costs to package and sell each stone after it is polished and graded, the selling price of each grade of stone (in Australian dollars), and the income tax rates that apply to any income derived from stones sold in the country of final sale. img Required: a. Calculate the joint cost per stone of each grade of opal (I, II, and III) using the number of stones in each batch to allocate the A$35,000 joint mining, cutting, polishing, and sorting costs. (Round all decimals to four significant digits.) b. Calculate the joint cost per stone of each grade of opal (I, II, and III) using the net realizable value of each grade of stones (before taxes) to allocate the A$35,000 joint mining, cutting, polishing, and sorting costs. (Round all decimals to four significant digits.) c. Which method of allocating the joint cost of A$35,000 (number of stones or net realizable value) should Outback Opals use? Explain why.
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Process costing:
 
Process costing is a technique of costing in which the costs are directly traced to the manufacturing processes. Under this an average cost is calculated by allocating the total costs to the total production and then these average costs are assigned to individual units.
a.Compute the allocated joint costs per stones as shown in the table:
img Allocated joint cost is calculated by dividing the allocated costs with the number of stones.
The allocated costs is computed by allocating the total costs of production on the percentage daily production which is percentage of the number of stones produced in each batch.
The result of the above table is as follows:
img b.Compute the allocated joint costs per stone (before taxes) using Net realizable costs as shown below:
img The net realizable costs of the stone is computed by deducting the selling price minus the additional costs of the packaging. The net realizable value is computed by multiplying the number of stones with the net realizable after costs.
The cost is allocated on the percentage of net realizable value and then the allocated joint costs is apportioned on the number of stones.
The result of the above tables is as follows:
img c.The Net realizable value (NRV) is better method for allocation of the joint costs but don't look on the bigger perspective of allocation, when the company has to pay taxes also NRV method is better according to the decision making point of view.
The management may also like NRV as this don't distort the profitability of the product. This also don't consider the tax effects on the alternative cost allocations. The NRV method will result in larger tax than the number of stones method.Each stones or product of the entity is to be sold to different countries which will have different tax laws and NRV method become difficult to apply. So the allocation of stones is better in case where company want to do tax savings and NRV is better when the company requires the smooth decision making process.

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Sunder Toys Sunder manufactures hard rubber pet toys. The purple dog chewy has a variable cost of $3.00 per unit. It is produced on a machine that is leased. The three models of this machine have three different capacities. img There is no uncertainty (daily variation) with respect to the daily demand for purple dog chewies. For example, if the price is set at $14.18, 1,100 chewies will be sold every day with certainty. Required: a. Given all the data, how many purple dog chewies should Sunder produce and sell? (Show calculations, neatly labeled.) b. Suppose Sunder has the policy of not charging fixed costs to products whenever excess capacity exists. The manager of purple dog chewies receives a bonus based on the accounting profits from purple dog chewies. This manager has private knowledge of machine 366 Chapter 8 capacities, lease fees, and the demand for purple dog chewies, as well as the decision rights over how large a machine to lease. How big a machine will the manager lease and how many chewies will be produced and sold? (Show calculations, neatly labeled.) c. Comment on Sunder's policy of not charging fixed costs to products whenever excess capacity exists.
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WWWeb Marketing WWWeb Marketing is a decentralized firm specializing in designing and operating Internet marketing websites. The firm is four years old and has been growing rapidly, but it only shows a small profit. WWWeb has three profit centers: Design Division, Server Operations, and the Crawler Division. The Design Division devises Internet marketing strategies for external clients, including innovative websites and Web-based marketing strategies. Server Operations maintains the clients' websites on WWWeb's servers. The Crawler Division operates WWWeb's proprietary search engine that clients can use for Internet-based marketing research. In addition to these three profit centers, WWWeb has an IT group that maintains WWWeb's servers and telecommunication lines to the Internet. The IT group is a cost center. The current annual IT budget is $548,000 for personnel, hardware and software leases for the servers, and telecommunication costs. The cost of the IT group is not allocated back to the three divisions. The CEO of WWWeb argues that the IT group is a common (shared) resource and is essentially a fixed cost. Adding another client website or performing a Web search does not generate any additional IT cost to the firm because WWWeb's IT group has excess capacity. WWWeb's CEO argues, "Any charge for IT back to the divisions will cause the divisions to avoid using our IT resources. As long as we have unused capacity on our systems we should be encouraging our people to use that capacity." WWWeb currently uses about 80 percent of the capacity of its servers, routers, and fiber-optic high-speed lines to the Internet. The high-speed lines are the "pipes" through which all client server Web traffic flows. These high-speed lines are also used by WWWeb's e-mail traffic and the Crawler Divisions marketing research Web searches. Currently, the IT systems are performing well and WWWeb users experience few delays and minimal interference from other users. However, the three profit center managers are projecting growth in their businesses and expect to reach capacity on their servers and communication lines within the next 12 months. When this happens, the managers predict that they will experience significant service degradation. Jose Coronas, head of WWWeb's IT group, has called a meeting of the three division managers to discuss the terrific deals being offered by telecom companies and hardware providers. Given the current slump in the economy, WWWeb can roughly double the capacity of its servers and highspeed access lines and lock in these low rates for two years. The incremental cost of doubling the IT group's capacity is to raise its hardware lease costs and access line costs by 20 percent. IT currently spends $18,000 a month on hardware leases and access lines. If it were to double its existing capacity, the total monthly cost would rise to $21,600. Mr. Coronas believes his existing IT personnel can handle the additional server and line capacity. Coronas and the three division managers recommend that WWWeb acquire the additional capacity and lock in these attractive rates. Required: a. Analyze WWWeb's current policy of how the three divisions are charged for IT costs and whether WWWeb should acquire the additional capacity. b. Should WWWeb change its policy of how it charges IT costs to the divisions? If so, what changes would you recommend?
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Ferguson Metals Ferguson Metals is a decentralized mining, smelting, and metals company with three divisions: mining, lead, and copper. The mining division owns the ore mine that produces the lead and copper that occur in the vein. Mining removes the ore, crushes it, and smelts it to separate the metals from the crushed rock. It then sells the two products to the other two divisions: lead and copper. Each batch mined yields 50 tons of lead and 25 tons of copper. (One ton is 2,000 pounds.) The metals are transferred from mining to the lead and copper divisions at cost plus a small profit to give mining an incentive to produce. The current market price for copper is roughly $0.60 per pound; for lead it is $0.30 per pound. But these prices are for substantially purer copper and lead than the mining division has the ability to produce. Mining could sell its lead in the market at its current purity level for $0.17 per pound. Since the metal divisions are currently incurring the cost to refine the metals to the purity levels they require, management does not believe it is equitable to charge the divisions the current market prices for the unrefined metals. If the metals were transferred at market prices, the lead and copper divisions would be paying twice for the refining process, and the mining division would be rewarded for a level of purity it is not providing. Table 1 shows the mining division's income statement per batch. The variable mining and smelting costs per ton of lead and copper are based on the fixed yields of the two metals. Production last year at mining was 100 batches, and both the lead and copper divisions had no change in inventory levels. img The lead and copper divisions further process the two metals into industrial products. Because of increasing foreign competition, the lead division has been showing a negligible return on investment. Table 2 shows income statements for the two metal divisions for last year. All of the fixed costs in both the lead and copper divisions represent separable annual cash outflows to maintain current capacity. They are not common costs. Ferguson's top management has the opportunity to invest in what appears to be a highly profitable joint mining venture, which promises very high returns. Ferguson's share of the net present value of the venture is around $30 million, discounted at the firm's before-tax cost of capital of 12 percent. To finance this project, the company is considering divestiture of the lead division. A foreign company looking to gain a foothold in the U.S. market has offered $5 million for this division. While Ferguson's net investment in this division is $10 million, management reasons it can use the proceeds to undertake the joint venture. Required: Should management sell the lead division to the foreign company? Present an analysis supporting your conclusions.
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Berkman Financial Berkman Financial is a regional bank that offers a variety of financial services to both retail and commercial customers. Berkman uses the step-down allocation method to allocate four service departments' costs (S1, S2, S3, and S4) to the three strategic business units (SBUs). Services provided by service departments are measured in "service units." The following table summarizes the cost of each of the four service departments and the number of service units used by the other service departments and SBUs: img In other words, Service Department S2 used 43 service units provided by S1 and SBU2 used 40 service units of S1. Likewise, S1 used 17 service units of S4 and SBU1 used 63 units of S4. Required: a. What is the cost per service unit of S1, and what is the cost per service unit of S2 if S1 is the first service department and S2 is the second department in the step-down order? b. What is the cost per service unit of S1 and what is the cost per service unit of S2 if S2 is the first service department and S1 is the second department in the step-down order? c. Describe briefly why the costs per service unit of S1 and S2 vary depending on the stepdown allocation order. d. Should S1 come before S2 or vice versa in the step-down order? In other words, what factors should management consider in ordering the four departments in the step-down allocation method?
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Wyatt Oil Wyatt Oil owns a major oil refinery in Channelview, Texas. The refinery processes crude oil into valuable outputs in a two-stage process. First, it distills a barrel of crude oil at a variable cost of $2 per barrel into two types of outputs: light distillates (such as gasoline, jet fuel, diesel fuel, and kerosene) and heavy distillates. The light distillates are sold for $48 per barrel. The heavy distillates can either be sold for $30 per barrel or fed into a catalytic cracking unit ("cat cracker") at a variable cost of $3 per barrel to be converted into light distillates and sold, for $48 per barrel. The diagram in Figure 1 illustrates the refining process. Wyatt's Channelview refinery can distill 60 million barrels of oil per year and feed 30 million barrels of heavy distillate a year into the cat cracker. It can process either light, sweet crude from Texas (such as West Texas Intermediate) or heavy, sour crude from the Middle East (such as Kuwait Export), depending on the market prices of the two types of crude. More valuable products are distilled from a barrel of light, sweet crude than from a barrel of heavy, sour crude (see Figure 2). Light, sweet crude currently costs $34 per barrel and heavy, sour crude costs $30; however, the price img img differential is volatile, as noted in Figure 3. The output from 60 million barrels of West Texas Intermediate and 60 million barrels of Kuwait Export is shown in Table 1. The fixed and variable costs and capacities associated with distilling crude and cracking the heavy distillates are shown in Table 2. img Required: a. Allocate the projected $420 million accounting income of the Channelview refinery among its three activities-light distillates, processed heavy distillates, and sold heavy distillates-by allocating joint costs on the basis of (1) physical volume and (2) net realizable value. Compare the ratio of accounting profit to net realizable value of the three activities under both methods. b. Did Quillen make the right decision to switch from West Texas Intermediate to Kuwait Export when the price differential reached $3.50 per barrel? Assuming there are no switching costs, find the optimal decision rule as a function of the price differential. c. Would your decision rule be different if you were to expand the cracker capacity to 40 million barrels? Find the optimal switching rule if the refinery can crack 40 million barrels of heavy distillates each year. d. Assume the price differential between West Texas Intermediate crude and Kuwait Export crude remains the same at $4 per barrel. Should Quillen expand the refinery's cat cracking capacity? e. Now consider the possibility of changes in the price differential. Suppose that this year's price differential is $4, but next year's price differential could be anywhere between 75 percent and 125 percent of the current year differential (equally likely, so next year's price differential can be thought of as a random variable uniformly distributed on the interval [$3, $5]). Each succeeding year, the price differential follows the same pattern: between 75 percent and 125 percent of the prior year price differential. Should Quillen expand capacity? Why or why not?
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Joint Products, Inc. Joint Products, Inc., produces two joint products, X and V, using a common input. These are produced in batches. The common input costs $8,000 per batch. To produce the final products (X and V), additional processing costs beyond the split-off point must be incurred. There are no beginning inventories. The accompanying data summarize the operations. img Required: a. Compute the full cost of the ending inventory using net realizable value to allocate joint cost. b. If the selling prices at the split-off point (before further processing) are $35 and $1 per pound of X and V, respectively, what should the firm do regarding further processing? Show calculations.
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Enzymes Two genetically engineered enzymes are produced simultaneously from a series of chemical and biological processes: Q enzyme and Y enzyme. The cost per batch of Q and Y enzymes is $200,000, resulting in 300 grams of Q and 200 grams of Y. Before Q and Y can be sold, they must be processed further at costs of $100 and $150 per gram, respectively. Each batch requires one month of processing time and only one batch per month is produced. The monthly demand for Q and Y depends on the price charged. The following table summarizes the various price-quantity combinations. img In the following analysis, the optimum price of Q is $900 per gram and the optimum price of Y is $750 per gram. img Required: a. Critically evaluate the analysis underlying the pricing decisions of $900 for Q and $750 for Y. b. What should management do if the cost per batch rises to $225,000?
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Carlos Sanguine Winery Carlos Sanguine, Inc., makes premium wines and table wines. Grapes are crushed and the free-flowing juice and the first-processing juice are made into premium wines. The second- and third-processing juices are made into table wines. Table 1 summarizes operations for the year, and Table 2 breaks down manufacturing overhead expenses into general winery costs and production facilities costs. Based on Tables 1 and 2, the accounting department prepared the report in Table 3. Management is concerned that the table wines have such a low margin. Some of the managers urge that these lines be dropped. Competition keeps the price down to $7 per case, which causes some managers to question how the competition could afford to sell the wine at this price. Before making a final decision, top management asked for an analysis of the fixed and variable costs by product line and their break-even points. When management saw Table 4, the president img Note: A greater quantity of juice is required per case of premium wine than per case of table wine because there is more shrinkage in the premium wines. †Each product has its own selling and distribution organization. Two-thirds of S D expenditures vary with cases produced; the remainder of the expenditures do not vary with output. img * General winery costs do not vary with the number of cases or the number of product lines and are allocated based on cases produced. †Premium and table wines have separate production facilities. One-fourth of each of their production facilities costs varies with cases produced. The remainder are fixed costs previously incurred to provide the production capacity. img img remarked, "Well, this is the final nail in the coffin. We'd have to almost triple our sales of table wines just to break even. But we don't have that kind of capacity. We'd have to buy new tanks, thereby driving up our fixed costs and break-even points. This looks like a vicious circle. By next month, I want a detailed set of plans on what it'll cost us to shut down our table wines." Table 5 summarizes the shutdown effects. Based on the facts presented in the case, what should management do?
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Jason Rocks Jason Rocks is a small rock quarry that produces five different sizes of stones, from small crushed stones (#1 stones) to large (three-inch) rocks (#5 stones). The stones are first mined and sorted into the five grades. Once the stones are mined and sorted, they can be sold to a local distributor either washed or unwashed. Jason Rocks mines and sorts 500 tons of stone each day and is a price taker in the local stone market. The following table contains the percentage of each type of stone quarried img The daily cost of mining and sorting the stones is $75,000, which includes the salaries and benefits of the employees who quarry and sort the stones, the depreciation on the equipment used in the process, the royalty payments to owners of the quarry for the stone removed, and an allocation of the utilities, insurance, property taxes, and administrative costs of the entire quarry operation. Washing any of the five types of stone costs $8 per ton, and delivering the stone to the local distributor costs $7 per ton. Jason Rocks allocates the mining and sorting costs based on the tons of each type of stone produced. Jason Rocks does not have to sell all of the types of stones it produces. Any unsold stones are left in the quarry at no additional cost after they have been mined and sorted. The owners of Jason Rocks want to maximize the quarry's net cash flows. Required: a. For each of the five stone types, calculate the total cost of one ton of unwashed stones in inventory. b. For each of the five stone types, calculate the total cost of one ton of washed stones in inventory. c. What is the reported profit per ton of each type of unwashed stone that is sold? d. What is the reported profit per ton of each type of washed stone that is sold? e. Which of the five stone types should be sold as washed stones, and which stone types should be sold as unwashed stones? Which stone type(s) should not be sold? f. The owners of Jason Rocks learn that new environmental and safety regulations have been enacted that will raise its operating costs to $85,000 per day. The owners do not expect these regulations to affect the selling prices of the washed and unwashed stones, nor do they expect them to affect the costs of washing and delivering the stones. Given this new information, how do your answers in part (e) change?
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Upstate Growers Upstate Growers (Upstate) is a cooperative corporation owned by 12 large apple farmers in New York State. Upstate is responsible for managing all 12 apple orchards, picking and sorting the apples, and producing the final apple products. Apples are washed and sorted into three grades: "large un-bruised apples," "large bruised apples," or "small apples." These three apple grades/categories comprise the final products produced and sold by Upstate. Large un-bruised apples are sold in supermarkets as whole "eating apples" after they are wrapped, packed, and shipped. Large bruised apples are peeled, cored, sauced, cooked, bottled, packed, and shipped to retailers as applesauce. And, small apples are juiced, cooked, filtered, and bottled as apple juice that is sold to supermarkets. Large un-bruised apples also can be converted into either applesauce or apple juice. Large bruised apples also can be juiced and bottled as apple juice like small apples, but cannot be sold as whole "eating apples." All three types of apples can be sold as is at $11 per 100 pounds of whole apples for use as livestock feed without incurring any additional costs. All three types of apples (large bruised, large un-bruised, and small) are sorted into crates containing 100 pounds of apples. The cost of wrapping, packing, and shipping 100 pounds of large un-bruised apples is $12, which can be sold as whole apples for $31. The cost of peeling, coring, cooking, saucing, bottling, packing, and shipping 100 pounds of bruised large apples is $60, which can be sold as applesauce for $80. The cost of juicing, cooking, filtering, bottling, packing, and shipping 100 pounds of small apples is $28, which can be sold as apple juice for $34. Upstate harvested, washed, and sorted 4.6 million pounds of apples. The cost of operating the 12 orchards was $274,000, and the cost of picking, washing, and sorting the apples was $48,000. These 4.6 million pounds of apples yielded 9,300 (100-pound) crates of large un-bruised apples, 14,200 (100-pound) crates of large bruised apples, and 22,500 (100-pound) crates of small apples. The orchards' operating costs and the costs of picking, washing and sorting the apples are allocated to three apple categories based on apple weight. Required: a. Prepare a table that calculates the net profits of processing (1) a 100-pound crate of large un-bruised apples, (2) applesauce from a 100-pound crate of apples, and (3) apple juice from a 100-pound crate of apples after allocating the orchards' operating costs and the costs of picking, washing, and sorting the apples. b. Given the data in the problem, what should Upstate Growers do with each of the three sorted categories of apples harvested? In other words, to maximize firm value prepare a production plan for the large un-bruised apples (sell as whole "eating apples," whole apples to be used as livestock feed, applesauce, or apple juice), the large bruised apples (sell as whole apples to be used as livestock feed, applesauce, or apple juice), and the small apples (sell as whole apples to be used as livestock feed or apple juice)? Explain the logic underlying your production plan.
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Advanced Micro Processors Advanced Micro Processors (AMP) has designed a new dual-core microprocessor, dubbed DUALxl. DUALxl microprocessors are produced on silicon wafers with 100 chips per wafer. Once fabricated, the wafer is cut into individual microprocessors (also called "chips"). Then each chip is mounted on a base encased in a protective epoxy coating and tested. Because of slight impurities in the silicon and other compounds used in producing the wafers, as well as small perturbations in the manufacturing equipment, 60 microprocessors meet the rigorous testing and can be sold as a DUALxl microprocessor. Thirty microprocessors have small defects that prevent them from being sold as DUALxl chips. But these microprocessors can be sold as MAXV microprocessors. Of the 100 chips, 10 are of no commercial value and are scrapped. Two hundred wafers are produced in each batch that costs $270,000. Each batch of 20,000 chips yields 12,000 DUALxl's and 6,000 MAXV's, and 2,000 chips are scrapped. The $270,000 batch cost is entirely variable. That is, producing one additional batch generates an "out-of-pocket" cash outflow of $270,000. The following table summarizes AMP's operations for the current year: img AMP sells the DUALxl chips for $120 and the MAXV chips for $25. The DUALxl and MAXV microprocessors are sold through separate selling and distribution channels that are separate organizations. Actual fixed selling and distribution costs were the same as budgeted total fixed selling and distribution costs ($360,000 and $120,000); the actual chip fabrication cost was the same as the budgeted chip fabrication cost ($270,000); and the actual variable selling costs were the same as the budgeted amounts ($55 and $8). There were no beginning inventories of DUALxl or MAXV microprocessors. Required: a. Prepare individual income statements for DUALxl and MAXV microprocessors for the current year. b. What are the inventory balances of DUALxl and MAXV microprocessors on AMP's balance sheet at the end of the current year? c. Analyze the relative profitability of the DUALxl and MAXV microprocessors based on their respective income statements prepared in part (a). What advice would you offer management?
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Metro Blood Bank Metro Blood Bank, a for-profit firm, collects whole blood from donors, tests it, and then separates it into two components: platelets and plasma. Three pints of whole blood yield two pints of platelets and one pint of plasma. The cost of collecting the three pints, testing them, and separating them is $300. The platelets are sold for $165 per pint. But before they are sold they must be packaged and labeled. The variable cost of this additional processing is $15 per pint. Plasma is sold for $115 per pint after incurring additional variable processing costs of $45 per pint. The selling prices of the platelets and plasma are set by competitive market forces. The prices of platelets and plasma quoted above are the current market prices, but they vary widely depending on supply and demand conditions. Metro Blood Bank ships its products nationwide to maximize profits. It has three operating divisions: blood collection and processing, platelets, and plasma. Collection and processing is a cost center, and platelets and plasma are profit centers. Neither platelets nor plasma has any commercial value without further processing. Required: a. Prepare two statements showing the profits per pint of platelets and plasma with collection and processing costs assigned using: (1) The number of pints of platelets and plasma produced from the whole blood. (2) The net realizable value of platelets and plasma. b. Discuss the advantages and disadvantages of each of the methods in part (a) for assigning collection and processing costs to the blood products.
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Rose Hospital Rose Hospital has two service departments (building services and food service) and three patient care units (intensive care, surgery, and general medicine). Building Services provides janitorial, maintenance, and engineering services, as well as space (utilities, depreciation, insurance, and taxes) to all departments and patient care units. Food Service provides meals to both patients and staff members. It operates a cafeteria and serves meals to patients in their rooms. Building services costs of $6 million are allocated based on square footage, and food service costs of $3 million are allocated based on number of meals served. The following two tables summarize the annual costs of the two service departments and the utilization of each service department by the other departments. Grade I Grade II Grade III img The following table summarizes the allocation of service department costs using the step-down method with Food Service as the first service department to be allocated: img Required: (Round all allocation rates and all dollar amounts to two decimal places.) a. Allocate the two service department costs to the three patient care units using the direct method of allocating service department costs. b. Same as part (a) except use the step-down allocation method with Building Services as the first service department allocated. c. Write a short, nontechnical memo to management explaining why the sum of the two service department costs allocated to each patient care unit in part (b) differs from the sum of the costs computed using the step-down method starting with Food Service.
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ITI Technology ITI Technology designs and manufactures solid-state computer chips. In one of the production departments, employees fabricate a six-inch circular wafer by laying down successive layers of silicon and then etching the circuits into the layers. Each wafer contains 100 separate solid-state computer chips. After a wafer is manufactured, the 100 chips are cut out of the wafer, tested, mounted into protective covers, and attached to electrical leads. Then a final quality control test is performed. The initial testing process consists of successive stages of heating and cooling the chips and testing how they work. If 99 percent of a chip's circuits work properly after the testing, it is classified as a high-density (HD) chip. If between 75 percent and 99 percent of a chip's circuits work properly, it is classified as a low-density (LD) chip. If fewer than 75 percent of the circuits work, it is discarded. Twenty wafers are manufactured in a batch. On average, 50 percent of each batch are HD, 20 percent are LD, and 30 percent are discarded. HD chips are sold to defense contractors and LD chips to consumer electronics firms. Chips sold to defense contractors require different mountings, packaging, and distribution channels than chips sold to consumer electronics firms. HD chips sell for $30 each and LD chips sell for $16 each. Each batch of 20 wafers costs $29,100: $8,000 to produce, test, and sort, and $21,100 for mounting, attaching leads, and final inspection and distribution costs ($14,500 for HD chips and $6,600 for LD chips). The $29,100 total cost per batch consists of direct labor, direct materials, and variable overhead. The following report summarizes the operating data per batch: img The cost of scrap is charged to a plantwide overhead account, which is then allocated directly to the lines of business based on profits in each LOB. Required: a. Critically evaluate ITI's method of accounting for HD and LD chips. b. What suggestions would you offer ITI's management?
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Swedish Hospital Swedish Hospital uses a step-down method to allocate 25 indirect service department costs (information technology, laundry, security, records, food service, etc.) to the six direct patient care units (surgery, maternity, psychiatry, etc.). The Food Service (FS) department (patient and staff dining) currently is the third service department to be allocated in the step-down methodology. Swedish is revamping its step-down methodology and is considering moving FS from its 3rd place position to the 23rd position. Required: a. FS costs are allocated based on the number of meals served. Does the FS allocated cost per meal served increase or decrease if FS moves from its 3rd place position to the 23rd position in the step-down methodology? Also, describe exactly what causes the allocated cost per meal to increase or decrease. b. Describe the issues that Swedish management should consider before moving FS from its 3rd place position to the 23rd position in the step-down methodology.
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Mystic Herbals Mystic Herbals processes exotic plant materials into various fragrances and biological pastes used by perfume and cosmetic firms. One particular plant material, Xubonic root from the rain forest in Australia, is processed yielding four joint products: QV3, VX7, HM4, and LZ9. Each of these joint products can be sold as is after the joint production process or processed further. The following table describes the yield of each joint product from one batch, the selling prices of the intermediate and further processed products, and the costs of further processing each joint product. The joint cost of processing one batch of Xubonic root is $30,000. img Required: a. Allocate the $30,000 joint cost per batch to each of the joint products based on the number of ounces in each joint product. b. To maximize firm value, which of the joint products should be processed further and which should be sold without further processing? c. Based on your analysis in part (b) regarding the decisions to process further or not, should Mystic Herbals process batches of Xubonic root into the four joint products? Support your decision with a quantitative analysis and indicate how much profit or loss Mystic Herbals makes per batch. d. Suppose the joint cost of $30,000 is allocated using the net realizable value of each joint product. Calculate the profits (loss) per joint product after allocating the joint cost using net realizable value. e. Explain how the use of joint cost allocations enhances or harms the decision to process joint products.
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Polymtech Polymtech uses advanced laser technology to manufacture polymers for a variety of applications. One of their processes produces four separate polymers (N200, HV87, HMT45, and V989) in one batch containing 1,000 grams of final product. The proportion of each polymer produced in the batch is fixed by the chemistry of the process and cannot be altered. Each of the four polymers produced in the batch can either be sold as is or further processed and sold at a higher price. Each batch producing the four polymers costs $2090.00 per batch before further processing any of the four polymers. The following table summarizes the output per batch, the selling price per gram with and without further processing, and the cost of further processing. img Required: a. Which of the four polymers should be processed further and then sold, and which polymers should be sold immediately without further processing? b. Should Polymtech be producing batches of these four polymers? c. What is the maximum cost per batch (excluding any further processing costs) that Polymtech is willing to incur before Polymtech stops producing batches of these four polymers? Assume that all selling prices and further processing costs do not change. d. To analyze the relative profitability of the four polymers, allocate the batch production cost of $2,090 to each of the four polymers using the number of grams of each polymer produced in the batch as the allocation base. Which polymer is the most and which polymer is the least profitable after allocating the $2,090 batch cost? e. Based on your analysis in part (d), recommend actions that management can take to improve the profitability of producing batches of these four polymers.
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