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WATERWAYS CONTINUING PROBLEM (WCP 1)
Question (a):
Based on the information given, construct an organizational chart of
Waterways Corporation.
Answer:
Question (b):
A list of accounts and their values are given above. From this information,
prepare a cost of goods manufactured schedule, an income statement, and
the current assets section of the balance sheet for Waterways Corporation for
the month of November 2012.
Answer:
(i) Cost of Goods Manufactured Schedule
Waterways CorporationCost of Good Manufacturing Schedule
For the Month Ended November 30, 2012
Work in Process, October 31 $ 52,700
Direct materials
Raw materials inventory, October 31 $ 38,000
Raw materials purchases 184,500
Total raw materials available for use 222,500
Less: Raw materials inventory, November 30 52,700
Direct materials use $ 169,800
Direct Labor 42,000
Manufacturing Overhead
Indirect labor 48,000
Factories supply used 16,800
Factory utilities 10,200
Depreciation - Factory equipment 16,800
Rent - Factory equipment 47,000
Repairs - Factory equipment 4,500
Total manufacturing overhead 143,300
Total manufacturing cost 355,100
Total cost of work in progress 407,800
Less: Work in process, November 30 42,000
Cost of goods manufactured $ 365,800
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(ii) Income Statement (with Cost of Goods Manufactured in Details)
Waterways Corporation
INCOME STATEMENT
FOR THE MONTH ENDED MARCH, 30
Sales 1,350,000
Sales Commissions (40,500)
1,309,50
0
Raw materials inventory, October 31 38,000
Raw materials purchases 184,500
Raw materials inventory, November 30 (52,700)
Total of Material 169,800
Direct labor 42,000
Indirect labor 48,000
Factories supply used 16,800
Factory utilities 10,200
Depreciation - Factory equipment 16,800
Rent - factory equipment 47,000
Repairs - factory equipment 4,500
Total manufacturing overhead 143,300
work in Process, October 31 52,700
Less: Work in Process, November 30 (42,000)
Total of WIP 10,700
Total Cost of Goods Manufactured 365,800
Finished goods inventory, October 31 72,550
Finished goods inventory, November 30 (68,800)
Total of finish goods 3,750
Cost of Goods Sold 365,800
Gross Profit 943,700
Advertising & Promotion 54,000
Depreciation - Office equipment 2,400
Office Supplies Expense 1,600
Other admin expense 7,200
Salaries 325,000
Operating cost 390,200
Net Profit 553,500
Current assets
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Cash 260,000
Receivabes (net) 275,000
-4-
Inventories
Finished goods 68,800
Work in process 42,000
Raw materials 52,700
163,500
Prepaid expenses 41,250
Total current assets 739,750
(iii) Current Asset Section of Balance Sheet
Waterways CorporationBalance Sheet
November 30, 2012
Current assets
Cash $ 260,000
Receivables (net) 275,000
Inventories
Finished goods 68,800
Work in process 42,000
Raw materials 52,700 163,500
Prepaid expenses 41,250
Total current assets $ 739,750
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WATERWAYS CONTINUING PROBLEM (WCP 4)
Question (a)
For each of these cost pools, what would be the likely activity cost driver?
Answer
Cost Pools Cost Driver
Assembling Product assembled
Billing Number of bills sent out
Digging trenches Number of trenches dug
Janitorial Janitor hours
Machine maintenance Machine hours
Machine setups Number of setups
Molding Number of items molded
Packaging Number of item packaged
Payroll Number of employee on payroll
Plant supervision Supervisor hours
Product design Cost per design
Purchasing materials Number of purchase done
Selling Number of item sold
Testing Number of test done
Welding Items welded
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Question (b)
Using the following information, determine the overhead rates and the actual
cost assigned for each of the activity cost pools in a possible ABC system for
Waterways.
Answer
WATERWAYS CORPORATION
Activity Cost Pools
Cost Drivers
Estimated Overhead
(A)
Expected Use of Cost Drivers per
Activity
(B)
Actual Use of Drivers
(C)
Overhead Rates
[A ÷ B](D)
Actual Cost Assigned
[D x C]
Irrigation installation
Labor cost $1,998,432 12,960 12,941 $154.20 $1,995,502.20
Machining (all machine user)
Machine hours
$1,670,400 33,408,000 33,409,000 0.05 $1,670,450
Customer orders
Number of orders
30,636 2,553 2,520 12 30,240
Shipping None (direct)
N/A Traced directly
N/A N/A
Design Cost per design
$820 8 7 102.5 $717.50
Selling Number of sales calls
350,400 21,900 22,100 15 $353,600
Question (C)
How would you classify each of the following activities by level—unit level,
batch level, product level, or facility level?
Testing product Product-level activitiesDesigning new products Product-level activitiesPackaging Unit-level activitiesMolding Unit-level activitiesAssembling Unit-level activitiesDepreciation Facility-level activitiesMachine maintenance Batch-level activitiesAdvertising Facility-level activities
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Equipment setups Batch-level activitiesElectricity required to run equipment
Facility-level activities
Requisitioning materials Product-level activities
Question (d-1)
The results of ABC can provide a more accurate picture of costs. Discuss the
value of Waterways using this system to determine overhead costs.
Answer
By implementing ABC costing, Waterways Corporation will gain primary
benefits includes:
Leads to more cost pools – cost are assigned more directly on the basis of the
cost drivers used t produced each product.
Leads to enhanced control over overhead cost – Waterways can trace many
overhead costs directly to activities – allowing some indirect costs to be
identified as direct costs. Thus managers will become more aware of their
responsibility to control the activities that generate those costs.
Lead to better management decisions – accurate product costing should
contribute to setting selling prices that can help achieve desired product
profitability levels. Furthermore, accurate cost data could be helpful in
deciding whether to make or to buy a product part or component, and
sometimes even whether to eliminate a product.
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Question (d-2)
How might using ABC affect decision making at Waterways?
Answer
Activity based costing has revolutionized product costing, planning, and
forecasting in the last decade. It is based on a philosophy of estimation that:
"it is better to be approximately right, than precisely wrong." In summary,
activity-based costing is a management decision-making tool. It provides
financial support data structured in a fashion fundamentally different from
accounting data provided in the general ledger. By associating cost to the
activity, a clear relationship can be established between sources of activity
demand and the related costs. This association can benefit the distributor in
determining where costs are being incurred, what is initiating the costs and
where to apply efforts to curb inflationary costs. This can be of particular value
in tracking new products or customers
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WATERWAYS CONTINUING PROBLEM (WCP 7)
Question (Part 1 - a)
What are the consequences of Waterways agreeing to provide the 15,000
units to the Canadian company? Would this be a wise “special order” to
accept?
Answer
Reject Accept Net Income
Increase (Decrease)
Revenue : -$0- 15,000 x 2.60 39,000
Costs : -$0- 15,000 x $2.30 (34,500)
Net Income : -$0- 4,500 4,500
Waterways Corporation should accept the Special offer from Canadian
Company.
Question (Part 1 - b)
Should Waterways accept the special order from the irrigation company?
Answer
Reject Accept Net Income
Increase (Decrease)
Revenue : -$0- 2,000 x $3.10 6,200
Costs : -$0- 2,000 x $2.30 (4,600)
Net Income : -$0- 1,600 1,600
Waterways Corporation should accept the Special offer from irrigation
Company.
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Question (Part 1 - c)
What would be the consequences of accepting both special orders?
Answer
If Waterways Corporation accepts both offers from Canadian and irrigation
company, Waterways would be working overcapacity.
Question (Part 2 - a)
Without considering the possibility of making the timing unit, evaluate whether
Waterways should buy or continue to make the small fitting.
Answer
Make Buy Net Income
Increase (Decrease)
Variable Mfg. : $460,000 -$0- $460,000
Fix Mfg. : 9,200 9,200 0
Purchase Cost 0 377,200 (377,200)
Total Annual Cost : $469,200 $386,400 (82,800)
Therefore, Waterways Corporation should continue to make the small fitting.
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Question (Part 2 - b)
(1) What is Waterways’ opportunity cost if it chooses to buy the small fitting
and start manufacturing the timing unit?
Answer
Make Buy Net Income
Increase (Decrease)
Total Annual Cost : $469,200 $386,400 $828,000
Opportunity Cost : 6,330* 7,295** (965)
Total Cost : $469,200 $386,400 82,800
* Opportunity cost (Make) = 500 x $12.66
** Opportunity cost (Buy) = $2,345 + (500 x $9.90)
(2) Would it be wise for Waterways to buy the fitting and manufacture the
timing unit? Explain.
Answer
No, it wouldn’t be wise for Waterways Corporation to buy the fitting and
manufacture the timing unit. Waterways Corporation would make more profit
by making the timing unit rather than bought and made the fitting.
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Question (Part 3)
Given the information above, what are the consequences of Waterways
replacing the machine that is slowing down production because of
breakdowns?
Answer
Production of antiquated machine for 1 year : 260 days x 50 units = 13,000 units
Cost of production : 13,000 units x $6.50 = $84,500
Profit of produced goods per year : 13,000 ($8.50 - $6.50) = $26,000
Total profit in 2 years : $26,000 x 2 = $52,000
Consider Waterways Corporation replaces the machine.
Production of antiquated machine for 1 year : 260 days x 100 units = 26,000 units
Cost of production : 26,000 units x $6.50 = $169,000
Profit of produced goods per year : 26,000 ($8.50 - $6.50) = $52,000
Total profit in 2 years : $52,000 x 2 = $104,000
In addition, the cost of the new machine mentioned is $55,000.
Therefore, the net profit is $104,000 - $55,000 = $49,000.
Hence, due to the replacement, the profit will decrease by $3,000
and the cost of production will increased by $84,500 due to the
machine replacement. The conclusion is, replacing the old machine
to the new proposed machine is not a brilliant idea.
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WATERWAYS CONTINUING PROBLEM (WCP 8)
Question (a)
Compute the rate per hour of labor. (Round to two decimal places).
Answer
Labor Rate Per Hour = Time charges ÷ Budgeted Hours
… $353,950 ÷ $5,750 = $61.56
Question (b)
Compute the material loading charge. (Round to two decimal places).
Answer
Material Loading (%) =
Material Loading Charge for 2013 ÷ Estimated Material in 2012 x 100
…$125,000 ÷ $640,000 x 100 = 19.53%
Material Loading Charge = $640,000 x (19.53% + 16%)
…Material Loading Charge = $640,000 x 35.58% = $227,712
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Question (c)
Waterways has received a request for a bid to do a parkway for the city. The
irrigation manager estimates that it will take about a month to complete the
project and require 480 hours of labor and $80,000 of materials. Compute the
total estimated bid for the parkway project
Answer
Labor (480 x ($61.56 +$14) = $36,268.80
Parts = $640,000
Material Loading Charge = $227,712
Total Bill = $903,980.80
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WATERWAYS CONTINUING PROBLEM (WCP 10)
Question (a)
Prepare a flexible overhead budget based on the following amounts
produced.
(1) 115,500 units
(2) 116,500 units
(3) 117,500 units
(4) 118,500 units
(5) 119,500 units
Answer
WATERWAYS CORPORATIONFelxible Budget (Manufacturing Overhead)
For the Month of March 2012
Production in Units 115,500 116,500 117,500 118,500 119,500
Costs:
Variable Factory Overhead
Indirect Materials $ 5,775 $ 5,825 $ 5,875 $ 5,925 $ 5,975
Indirect Labor $ 13,860 $ 13,980 $ 14,100 $ 14,220 $ 14,340
Utilities $ 11,550 $ 11,650 $ 11,750 $ 11,850 $ 11,950
Other $ 8,085 $ 8,155 $ 8,225 $ 8,295 $ 8,365
Total Variable Costs $ 39,270 $ 39,610 $ 39,950 $ 40,290 $ 40,630
Fixed Factory Overhead
Salaries $ 42,000 $ 42,000 $ 42,000 $ 42,000 $ 42,000
Depreciation $ 16,800 $ 16,800 $ 16,800 $ 16,800 $ 16,800
Property taxes $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000
Insurance $ 1,200 $ 1,200 $ 1,200 $ 1,200 $ 1,200
Janitorial $ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500
total Fixed Costs $ 64,500 $ 64,500 $ 64,500 $ 64,500 $ 64,500
Total Costs $ 103,770 $ 104,110 $ 104,450 $ 104,790 $ 105,130
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Question (b)
Prepare a flexible budget report showing the differences (favorable and
unfavorable) in manufacturing overhead costs for the month of March.
Answer
WATERWAYS CORPORATION
Flexible Budget Performance Report
(Manufacturing Overhead)
For the Month of March 2012
Planning Budget
Activity Variance
Flexible Budget
Spending
Actual Result
Production in units 117,
500 118,5
00 118,
500
Costs:
Variable Factory Overhead
Indirect Materials 5,
875 50
U
5,925
15 F
5,910
Indirect Labor 14,
100 120
U
14,220
25 F
14,195
Utilities 11,
750 100
U
11,850
30 F
11,880
Other 8,
225 70
U
8,295
20 U
8,275
Total Variable Costs 39,
950 340
U
40,290
90 F
40,260
Fixed Factory Overhead
Salaries 42,
000 - 42,0
00 - 42,
000
Deppreciation 16,
800 - 16,8
00 - 16,
800
Property taxes 3,
000 - 3,0
00 - 3,
000
Insurance 1,
200 - 1,2
00 - 1,
200
Janitorial 1,
500 - 1,5
00 - 1,
500
Total Fixed Costs 64,
500
- 64,5
00 - 64,
500
Total Costs 104,
450 34
0 U
104,790
340 F
104,790
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Question (c)
Prepare a responsibility report for the manufacturing overhead for March,
assuming only variable costs are controllable.
Answer
WATERWAYS CORPORATION
(Manufacturing Overhead Responsibility Report)
For the Month of March 2012
Planning Budget
Actual Difference U/F
Indirect Materials 5,925 5,910 15 F
Indirect Labor 14,220 14,195 25 F
Utilities 11,850 11,880 (30) U
Maintenance 8,295 8,275 20 F
Total Controllable Costs 40,290
40,260 30 F
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