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Comprehensive Problem; Second Production Department — Weighted- Average Method

PROBLEM 4-17 Comprehensive Problem; Second Production Department — Weighted- Average Method
Bohemian Links Inc. produces sausages in three production departments — Mixing, Casing and Curing, and Packaging. In the Mixing Department, meats are prepared and ground and then mixed with spices. The spiced meat mixture is then transferred to the Casing and Curing Department, where the mixture is force- fed into casings and then hung and cured in climate- controlled smoking chambers. In the Packaging Department, the cured sausages are sorted, packed, and labeled. The company uses the weighted- average method in its process costing system. Data for April for the Casing and Curing Department fellow:

Percent Complete

  Units            Mixing       Materials    Conversion

Work in process inventory, April 1

1

100%

60%

50%

Work in process inventory, April 30

1

100%

20%

10%

  Mixing       Materials     Conversion

Work in process inventory, April 1      …………….

$1,640

$26

$105

Cost added during April ………………………………….

$94,740

$8,402

$61,197

Mixing cost represents the costs of the spiced meat mixture transferred in from the Mixing Department. The spiced meat mixture is processed in the Casing and Curing Department in batches; each unit in the above table is a batch, and one batch of spiced meat mixture produces a set amount of sausages that are passed on to the Packaging Department. During April, 60 batches (i.e., units) were completed and transferred to the Packaging Department.

Required:

  1. Determine the equivalent units for April for mixing, materials, and conversion. Do not round off your computations.

  2. Compute the costs per equivalent unit for April for mixing, materials, and conversion.

  3. Determine the total cost of ending work in process inventory and the total cost of units transferred to the Packaging Department in April.

  4. Prepare a cost reconciliation report for the Casing and Curing Department for April.

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PROBLEM 4B-5Step – Down Method [L011]

Pleasant View Hospital has three service department — Food Services, Administrative Services, and X- ray Services. The costs of these departments are allocated by the step – down method, using the allocation bases and in the order show below:



Costs Incurred

Service Department

Base for Allocation

Food Services ……………………………..

Variable

Meals served

Fixed

Peak- period needs

Administrative Services ……………..

Variable

Files processed

Fixed

10% X-ray Services, 20% Outpatient Clinic,

30% OB Care, and 40% General Hospital

X-ray Services …………………………….

Variable

X-rays taken

Fixed

Peak- period needs



Food Services

Admin. Services

X-Ray Services

Outpatient Clinic

OB Care

General Hospital

Total

Variable Cost ………………………………………………….

$73,150

$6,800

$38,100

$11,700

$14,850

$53,400

$198,000

Fix Cost……………………………………………………………

48,000

33,040

59,520

26,958

99,738

344,744

612,000

Total Costs ……………………………………………………..

121,150

39,840

$97,620

38,658

$114,588

398,144

$810,000

Meals Served ……………………………………………..…..

1,000

500

7,000

30,000

38,500

Percent of peak- period Food Services needs ….

2%

1%

17%

80%

100%

Files processed ……………………………………………….

1500

3,000

900

12,000

17,400

X-ray taken ……………………………………………………..

1,200

350

8,400

9,950

Percent of peak- period Food Services needs …

13%

3%

84%

100%

All billing in the hospital is done through the Outpatient Clinic, OB Care, or General Hospital. The hospital’s administrator wants the costs of the three service departments allocated to these three billing centers.

Required:

Prepared the cost allocation desired by the hospital administrator. Include under each billing center the direct costs of the center as well as the costs allocated from the service departments. 

CASE 5-32 Cost Structure; Break- even Point; Target Profits [L04, L05, L06]

Marston Corporation manufactures disposable thermometers that are sold to hospitals through a network of independent sales agents located in the United States and Canada. These sales agents sell a variety of products to hospitals in addition to Marston’s disposable thermometer. The sales agents are currently paid an 18% commission on sales, and this commission rate was used when Marston’s management prepared the following budgeted absorption income statement for the upcoming year.

Marston Corporation

 Budget Income Statement

Sale

$30,000,000

Cost of goods sold:

    Variable

$17,400,000

    Fixed

2,800,000

20,200,000

Gross margin

9,800,000

Selling and administrative expenses:

    Commissions

5,400,000

    Fixed advertising expense

800,000

    Fixed Administrative expense

3,200,000

9,400,000

Net operating income

$400,000

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Since the completion of the above statement, Marston’s management has learned that the independent sales agents are demanding an increase in the commission rate 200% of sales for the upcoming year. This would be the third increase in commission rate to 20% of sales for the upcoming year. This would be the third increase in commissions demanded by the independent sales agents in five years. As a result, Marston’s management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents.

                Marston’s controller estimates that the company will have to hire eight salespeople to cover the current market area, and the total annual payroll cost of these employees will be about $700,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expense are expected to total about $400,000 for the year. The company will also have to hire a sales manager and support staff whose salaries whose salaries and fringe benefits will come to $200,000 per year. To make up for the promotions that the independent sales agents had been running on behalf of Marston, management believes that the company’s budget for fixed advertising expense should be increased be $500,000.

Required:

  1. Assuming sales of $30,000,000, construct a budget contribution format income statement for the upcoming year for each of the following alternatives:

a)      The independent sales agents’ commission rate remains unchanged at 18%.

b)      The independent sales agents’ commission rate remains unchanged at 18%.

c)       The company employs its own sales force.

  1. Calculate Marston Corporation’s break-even point in sales dollars for the upcoming year assuming the following:

a)      The independent sales agents’ commission rate remains unchanged at 18%.

b)      The independent sales agents’ commission rate increase to 20%.

c)       The company employs its own sales force.

  1. Refer to your answer to (1)(b) above. If the company employees its own sales force, what volume of sales would be necessary to generate the net operating income the company would realize if sales are $30,000,000 and the company continues to sell through agents (at a 20% commission rate)?

  2. Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 20% commission rate) or employs its own sales force.

  3. Prepare a graph on which you plot the profits for both of the following alternatives.

a)      The independent sales agents’ commission rate increase to 20%.

b)      The company employs its own sales force.

On the graph, use total sales revenue as the measure of activity.

  1. Write a memo to the president of Marston Corporation in which you make a recommendation as to whether the company should continue to use independent sales agents (at a 20% commission rate) or employ its own sales force. Fully explain the reasons for your recommendation in the memo.

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