1. Hannah Gilpin is the controller of Blakemore Auto Glass, Inc, a division of Eastern Glass and Window. Blakemore replaces and installs windshields. Her division has been under pressure to improve divisional operating income.
Cu
ently, divisions of Eastern Glass are allocated corporate overhead based on cost of goods sold. Jake Myers, the president of the division, has asked Gilpin to reclassify $50,000 of
installation labor, which is included in costs of goods sold, as administrative labor, which is not.
Doing so will save the division $20,000 in allocated corporate overhead. The labor costs in question involve installation labor provided by trainee employees. Myers argues, "the trainees are not as efficient as regular employees, so this is unfairly inflating our cost of goods sold. This is really a cost of training (admin labor), not part of cost of goods sold." Gilpin does not see a reason for reclassification of the costs other than to avoid overhead allocation costs.
· Describe Gilpin's ethical dilemma.
· What should Gilpin do if Myers gives her a direct order to reclassify the costs
2. There are at least three different purposes for which we measure product costs. There are (1) product costs, (2) determining the appropriate charge for a government contract, and (3) preparing financial for external reporting following GAAP. In the following table, indicate whether the respective type of cost would be included or excluded for the particular purpose. If you answer is not definitive (include or exclude), provide a short explanation of why.
Purpose
Type of Cost Product Mix Contract Financial Reporting
Direct Material
Direct Manufacturing Labo
Manufacturing Overhead
Distribution Costs
Product design costs
R&D Costs
Customer Service
3. Dynamic Docs prepares marketing plans for growing businesses. For 2020, budgeted revenues are $3,500,000 based on 700 marketing plans at an average per plan $5,000. The company would like to achieve a margin of safety percentage of at least 25%. The company's cu
ent fixed costs are $1,800,000 and variable costs average $2,000 per marketing plan. (Consider each of the following separately.)
· Calculate Dynamic Docs'
eakeven point and margin of safety in units.
· Which of following changes would help Dynamic Docs achieve its desired margin of safety?
· The average revenue per customer increases to $5,600.
· The planned number of marketing plans increases by 8%.
· Dynamic Docs purchases new software that results in a $48,000 increase to fixed costs but reduces variable costs by $300 per marketing plan.
4. Seaway Woodworking uses normal costing and allocates manufacturing overhead to jobs based on budgeted labor hour rate and actual direct labor hours. Under or over allocated overhead, if material, is written off to Costs of Goods Sold. During 2020, Seaway recorded the following:
Budgeted manufacturing OH costs $4,080,000
Budgeted direct labor hours 170,000
Actual manufacturing OH costs $4,261,000
Actual direct labor hours 178,000
· Compute the budgeted manufacturing OH rate.
· Prepare the summary journal entry to record the allocation of manufacturing OH.
· Compute the amount of over- or underallocated manufacturing OH. Is the amount significant enough wa
ant proration of overhead costs, or should Seaway write off the cost to cost of goods sold? Prepare the journal entry to adjust the OH.
5. The job costing system at Shirley's Custom Framing has five indirect cost pools (purchasing, material handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs: Job 215, and order of 16 intricate personalized frames, and Job 325, an order of six standard personalized fromes. The controller wants you to compare overhead allocation under the cu
ent simple job costing system and a newly designed activity based costing system. Total budgeted costs in each indirect cost pool and the budgeted quantity of each activity driver are as follows:
Budgeted OH Activity Driver Quantity of Activity Drive
Purchasing $25,000 Purchase orders 1,600
Material Handling 32,900 Material moves 4,700
Machine Maintenance 150,000 Machine Hours 10,000
Product Inspection 11,200 Inspections 1,600
Packaging 12,400 Units Produced 3,100
Information related to Job 215 and Job 325 follows. Job 215 incurs more batch level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 325.
Job 215 Job 325
Number of Purchases 26 5
Number of Material Moves 14 3
Machine Hours 20 80
Number of Inspections 12 5
Unit Produced 16 6
· Compute the total overhead allocated for each job under simple costing system, where overhead is allocated based on machine hours.
· Compute the total overhead allocated for each job under activity based costing using the appropriate activity drivers.
· Explain why Shirley's Custom Framing might favor ABC job costing over simple job costing, especially in the bidding process.