Product costing: Manufacturing processes, cost terminology

Chapter 2

Product costing: Manufacturing processes, cost terminology

and cost flows Solutions 1.(LO2 and 5)

• Reducing inventory by such a significant amount may negatively

affect the company’s ability to deliver to its customers. The company will have to work closely with its suppliers to ensure a steady stream of inventory on a just-in-time basis so that customer needs can be filled quickly.

• The reduction will likely need to be accomplished by ‘consuming’

the inventory by shipping it to customers as it is ordered without simultaneously replacing the inventory in the company’s warehouse. It is possible that the company could arrange for some suppliers to accept returns of inventory, but this is not likely to be a successful approach with all suppliers.

• The total inventory is currently valued at $722 505. Assuming an

interest rate of just 3.5 per cent, the annual interest received on 80 per cent of this balance is $20 230.14.

• If Ken’s estimates are correct, there will be a decrease in sales of

$760 000 (20% of $3 800 000) and a decrease in gross profits of $228 000 (30% of $760 000).

• JIT is not for every company, but the techniques may work if the

company is committed to them. The primary challenge will be ensuring an orderly transition to a very low inventory. The company will have to work closely with suppliers and customers to ensure that products are available whenever needed. This will likely drive some costs higher because suppliers will almost certainly increase prices to cover the increased costs of more frequent shipments to Colt Kitchen. On the other hand, the company may feel that the price increases will be offset by the income earned on the free cash.ACCT Managerial Asia-Pacific Edition 1e Prabhu Sivabalan Roby Sawyers Steve Jackson Greg Jenkins (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

Sivabalan 1e ACCT Managerial Online Case Solutions 2.(LO3 and 5)

• Advertising expense is a period expense and should be included in

‘selling and administrative expenses’. By including the advertising in overhead, the company is able to increase product costs which become assets. Only when products are sold are their costs shown on the income statement as cost of goods sold. By including a portion of advertising expense in overhead, the company’s net income is higher in the short run than it would otherwise be.

• No, for the same reason as advertising expense is not validly part

of overhead. Management salaries are properly categorised as a period cost and should be included in ‘selling and administrative expense’.

• See the answer to A above. 2 / 4

Sivabalan 1e ACCT Managerial Online Case Solutions

Chapter 3

Cost behaviour

Solutions

1. (LO1, 2)

• Using the following regression statistics, the cost formula would be

$117 411.10 + $481.07 (# of passengers). Using the high-low method, the cost formula would be $161 771.80 + $323.22 (# of passengers). The variable cost per unit is ($326 615 –

$297 525)÷(510 – 420) = $323.22.

SUMMARY OUTPUT

Regression Statistics Multiple R 0.474867 R Square 0.225498 Adjusted R Square 0.148048 Standard Error 27149.41 Observations 12 ANOVA df SS MS F Regression 1 2.15E+09 2.15E+09 2.911528 Residual 10 7.37E+09 7.37E+08 Total 11 9.52E+09

Coefficients Standard Error t Stat P-value Intercept 117411.1 131217.5 0.894782 0.391932 X Variable 1 481.0749 281.9371 1.70632 0.118758

• The regression analysis indicates that the model is not a very good

predictor of total cruise costs. The R square of the regression model is only 0.225.

C. $117 411.10.

D. $481.07.

• The total cost of a cruise is likely a function of the length of the

cruise as well as the number of passengers. One way to capture that information is to calculate the number of passenger days for each cruise by multiplying the number of passengers by the number of days and using passenger days as the independent 3 / 4

Sivabalan 1e ACCT Managerial Online Case Solutions

variable. As you can see in the following regression analysis, the R square improves dramatically to 0.97. The new cost equation is $202 704.1 + $34.89 per passenger day. Fixed costs are over $200 000 per cruise, while variable costs are $34.89 per passenger per day.

SUMMARY OUTPUT

Regression Statistics Multiple R 0.986271 R Square 0.97273 Adjusted R Square 0.970003 Standard Error 5094.371 Observations 12

ANOVA df SS MS F Regression 1 9.26E+09 9.26E+09 356.7052 Residual 10 2.6E+08 25952620 Total 11 9.52E+09

Coefficients Standard Error t Stat P-value Intercept 202704.1 7463.986 27.15762 1.06E ‒ 10 X Variable 1 34.89324 1.847509 18.88664 3.75E ‒ 09

• Using the regression results from the previous solution (1E), the

total cost of a 10-day cruise with 525 passengers is estimated to be $385 876.60 [$202 704.10 + ($34.89 × 5250 passenger days)].

• (LO1, 2 and 3)

• The total cost equation using hours as the independent variable is

$36 180.42 + $10.21 per hour. The cost equation using orders as the independent variable is $21 595.15 + $10.95 per order.

• Using orders in the predictive model, Gail would estimate costs to

be $158 142 ($21 595.15 + $10.95(12 470 orders)). Using hours in the predictive model, Gail would estimate costs to be $158 700 [36 180.42 + $10.21(12 000 hours)].

C.(1) Gail’s objective is to determine the ‘best’ model.

(2) Gail’s options include basing the prediction on total hours, the number of orders or some other variable or combination

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