Accounting principles 9e by kieso kimmel continuing waterways solutions

SOLUTION Chapter 19 Waterways Continuing Problem... b Waterways Corporation Cost of Goods Manufactured Schedule For the Month of November Direct materials Total raw materials available f

SOLUTION

Chapter 19 Waterways Continuing Problem

(b)

Waterways Corporation Cost of Goods Manufactured Schedule For the Month of November

Direct materials

Total raw materials available for use 223,400

Less: Raw materials inventory 11/30 52,700

Waterways Corporation Income Statement For the Month of November

Cost of goods sold

Waterways Corporation Balance Sheet (partial) November 30

Current assets

Inventories

Quantities

Units to be accounted for:

Work in process, Jan 1 (80% materials, 30% conversion) 24,000

Started into production 60,000

Costs in January* (a) $433,810 $434,502 $868,312

Unit costs [(a) / )b)] $6.11 $7.17 $13.28 Costs to be accounted for

*Additional computations to support production costs report data:

Materials cost - $168,360 + $265,450

Conversion costs - $67,564 + $16,892 + $289,468 + $60,578

Cost Reconciliation Schedule

Costs accounted for

Transferred out (58,000 X $13.28) $770,240 Work in process, Jan 31

Materials (13,000 x $6.11) 79,430

Conversion (2,600 x $7.17) 18,642 98,072

*(b) Equivalent Units FIFO Method

Equivalent Units Physical

Units Materials Conversion Units accounted for

Completed and transferred out

Work in process, January 1 (20% materials, 70% conversion) 24,000 4,800 16,800

Work in process, Jan 31 (50% materials, 10% conversion) 26,000 13,000 2,600

SOLUTION

Chapter 22 Waterways Continuing Problem

WCP22 (Note: All figures are rounded.)

(a)

(1) The contribution margin ratio is 30% ($883,920  $2,937,120):

Waterways Corporation Contribution Margin Income Statement for Water Control and Timer

For the Year

(2) Break-even point in units = 538,061 units

Unit CM $1.27 = 538,061 units (rounded)

Break-even point in dollars = $2,277,793

Margin of safety ratio = 22.45%

Margin of safety in dollars $659,327

(4) Waterways would have to sell an additional 15,794 units

10% increase in income = $ 20,058.20 $903,978.20

Current income +200,582.00 $1.27 = 711,794 units

Total projected income 220,640.20

(b) (1) If the average sales price per unit increased, the contribution margin ratio would drop by 2%

(from 27% to 25%) Net income, however, would increase by $101,650 ($762,806 − $661,156)

We would give strong consideration to mass-producing the sprinklers An increase in variable costs is less risky than an increase in fixed and such a decision can be reversed if it does not

result in the projected increase in sales

Waterways Corporation Sprinkler Units (current sales)

Variable expenses: Selling and administrative 2,661,352 9,524,864 19.37 73%

Fixed expenses: Selling and administrative 794,950 2,845,090

Waterways Corporation Sprinkler Units (increase price)

(2) If the average sales price did not increase, the contribution margin ratio would drop 3% (from 27% to 24%) Profit would decrease by $33,578 ($661,156 − $627,578) This definitely would not be in the best interest of the company

Waterways Corporation Sprinkler Units (no price change)

Unit selling price $ 12.00 $ 12.00 $ 12.00 $ 12.00

(b) Production budget

Waterways Corporation Production Budget For the first quarter of 2011

* 12,500 is 10% of April’s budgeted sales units

** 11,333 is 10% of January’s sales units

(c) Direct materials budget

Waterways Corporation Direct Materials Budget For the first quarter of 2011

First Quarter

* 12,625 is 5% of April’s budgeted materials need (125,000 units + 10% of May’s sales units (137,500) less March’s ending unit inventory (12,500)  2 lbs  5%) = (125,000 + (.10  137,500) − 12,500)  2  05

** Actual inventory

(d) Direct labor budget

Waterways Corporation Direct Labor Budget For the first quarter of 2011

First

Quarter

Direct labor time (hours per unit) 0.2 0.2 0.2 0.2

Direct labor cost per hour $ 8.00 $ 8.00 $ 8.00 $ 8.00

(e) Manufacturing overhead budget

Waterways Corporation Manufacturing Overhead Budget For the first quarter of 2011

First Quarter

Variable costs

(f) Selling and administrative expense budget

Waterways Corporation Selling and Administrative Expense Budget

For the first quarter of 2011

Variable expenses per unit $ 1.62 $ 1.62 $ 1.62 $ 1.62 Total variable S & A expense $ 183,599 $ 182,250 $ 189,001 $ 554,850 Fixed expenses:

(g) Collections from customers

Schedule of Expected Collections from Customers

(h) Payments for direct materials

Schedule of Expected Payments for Direct Materials

(i) Cash budget

Waterways Corporation Cash Budget For the first quarter of 2011

Add: Receipts

* Adjusted for depreciation

*Manufacturing Overhead ($97,776 - $16,800 = $80,976)

*Selling & Admin ($277,499 – 2500 = $274,999)

For the Month of March

Indirect materials($.06/unit a) $ 6,930 $ 6,990 $ 7,050 $ 7,110 $ 7,170 Indirect labor ($.10/unit b) 11,550 11,650 11,750 11,850 11,950

Unit costs are based on the static budget costs

For the Month of March

Difference Favorable

Insurance 1,200 1,200 0

(c)

Waterways Corporation Responsibility Report Manufacturing Overhead For the Month of March

Difference Favorable Unfavorable

* Standard price per pound :

Total Overhead Variance

($54,673 +$63,800) ($4.28 X 23,100 hours)

* Based on standard hours allowed for 115,500 units, 115,500 X 20hrs = 23,100 hours)

(h) The labor quantity variance is a concern Perhaps the labor is not as skilled as it should be The

actual price paid for labor suggests less skill, so it could take workers longer to complete each unit Or the materials may not meet the proper standard, causing the workers to take longer to complete a unit It could also mean the machinery being used is not working efficiently Yet another possibility is that the workers are not being properly supervised and are wasting time doing unproductive activities

The materials quantity variance could suggest that insufficient material is being used in the product (not in keeping with specs) making the product less durable

The large unfavorable overhead variance may be related to the unfavorable labor quantity variance Extra direct labor hours and inefficient use of machines may result in higher indirect labor costs, more repairs, or higher use of utilities

Cash Flow

8%

Discount Rate

Present Value

Cash Flow

8%

Discount Rate

Present Value

Both of these values are above the factors presented in the text table, so they are

above 15% and well over the required 8% discount rate

(b) Intangible benefits include faster completion of jobs due to the increased speed of the backhoes

The depth and width of the trenches will be more accurate Also, the new backhoes have considerably more comforts for the operator than the old backhoes

However, there would be time involved in training the operators to use the new backhoes There may also be some resistance from the operators to change from the machines in which they now feel competent in handling Because of the increased speed, these operators who are paid on an hourly basis may find their incomes decreased if the increased speed does not also result in increased jobs requiring the use of the backhoes

(c) The decision would be a difficult one to make There is little difference in the net present value,

although buying new backhoes is slightly higher All the other indicators suggest that keeping the old backhoes for another 8 years may be the best decision at this time However, buying new backhoes would decrease maintenance costs and the time spent on maintenance This may allow for additional jobs to be added to the schedule Depreciation would also increase, which would lower income—and therefore income taxes—without affecting actual cash flow Both decisions would yield a much higher than 8% return on the money invested Either decision could actually

be defended