MODULE 1 -

The Hardin Tools Company is a large manufacturing company which makes five different products. Each of these products is processed through three departments: Machining, Assembly and Finishing.

A year ago, the company made a decision to automate the production processes in Machining and Finishing. It was not possible to automate the work in Assembly because there are no robots currently available to carry out the specialized assembly operations; hence, this work is still done manually. Prior to the automation in Machining and Finishing, all the operations were performed manually. Several years ago, the company instituted a cost accounting system that allocates factory overhead to product lines in terms of a plant wide rate which is based on direct labor costs. This method of applying overhead was justified on the ground of its simplicity and that direct labor was an important factor of production throughout the plant. Even though the company automated some of its production a year ago, each department still utilized direct labor. Because of this, it was the judgment of management that the original costing system, which is presently in use, is still adequate. The manager of cost accounting at Hardin Tools has prepared the following income statement for the past year (See Table 1).

The president of Hardin Tools was surprised that Product C has the highest sales revenue and yet is unprofitable. His reaction was natural- Product profitability is all important. What difference does it make if a product has high sales, if it cannot turn a profit? Others on the management team agreed. In fact, one of the members proposed that production of product C be curtailed as soon as possible. Another member pointed out that the company should not act in haste, but should get some advice from outside sources. The final conclusion of these deliberations was to consult a Management Advisory Services organization for some expert opinions.

The company decided to engage the firm of McNair and Olds (M&O). You work for this firm and are assigned to the Hardin Tools consulting project. Your task is to analyze the company environment, the company records of last year and any other data you regard as pertinent in order to make recommendations to the Hardin Tools Company on behalf of M&O. After examining the company records from last year, you discovered the following: For each product beginning and ending inventories were essentially the same. See Table 2 for some product costs for last year.

Since both Machining and Finishing departments were automated last year and that now direct labor is a small-scale item in both of these departments, you decide that it is reasonable to assume machine hours is a more appropriate driver of factory overhead costs than direct labor. Because Assembly is not automated, you believe that direct labor hours would be a proper cost driver of factory overhead in this department. Table 3 summarizes your views on allocation bases and the corresponding data that you have available at this time.

After reflecting on cost allocation methods, you choose to employ the step-down method of liquidating the direct overhead costs of Factory Support and Materials Movement. Since the Factory Support department does not use any services from the Materials Movement department, you decide to allocate Factory Support costs first in the step-down method. The breakdown of total factory overhead for last year is as follows:

Total costs

Cost classification:           Indirect labor              1,000,000

 Fringes                           450,000

 Depreciation                    900,000

Utilities                             150,000

Supplies                           220,000

MIS services                     200,000

Totals:                                                             2,920,000

It is your conclusion that the company's method for allocating selling and administrative expense is appropriate as is. Based on the above judgments about cost allocation, you decide to redo the income statement for last year and then submit it to the management of Hardin Tools for their consideration and discussion. Besides this, on behalf of your firm (M&O), you feel that it is proper to prepare a memo to the president of Hardin Tools explaining the rationale (in non-technical terms) of your newly prepared income statement together with an interpretation of the results of that statement. Your memo should also include comparative cost data (comparing the old income statement data with that of the new) with appropriate interpretations.

Required:

(a) Verify the accuracy of the income statement for last year that was prepared by the manager of cost accounting at Hardin Tools.

(b) Use the step-down method to allocate last years' overhead costs of the service (support) work centers to the production work centers.

(c) Prepare a new income statement for last years' data based on your newly chosen factory overhead cost drivers. Use the same format for this income statement as was used by the manager of cost accounting at Hardin Tools.

(d) Prepare a memo to Mr. Henry Choi, president of Hardin Tools, which summarizes the essential differences in your version of last year's income statement as was used by the manager of cost accounting. Also, include in the memo appropriate interpretations of the results of your version of the income statement.

MODULE 2 -

It is now the second week in January. You submitted a new income statement for last year to the management of Hardin Tools and apparently they were very pleased with the work you did for them. Having reviewed your income statement and your interpretations, management decided to do an immediate analysis of Product C (which you claimed was unprofitable last year).

Upon checking some of the data that the Marketing Department had assembled last year and other information from various industry sources, management was led to believe that Product C would sell as well as it did last year at a much higher price if it were made of a different material. This material would cost more than the material presently used in Product C, but it would be much more reliable and have up to three times the useful life. The few other firms in the industry sell Product C made of this different material at an average price of $220.00.

The management of Hardin Tools found a supplier of this different material for Product C who would be willing to provide an amount needed; this would make the unit material cost of new Product C to be 40.00. The company could make this new Product C by using exactly the same conversion process as old Product C. The inventory on hand of old Product C is negligible.

The marketing manager, a conservative person indeed, believes that even with the new material in Product C, sales of this product will be about the same as last year. It was his recommendation that Hardin Tools set the price of new Product C at the industry average of $220.00. Management decided to use this sales price and to purchase the new material from the supplier indicated above. Management believes that all other sales, cost and production data for the current year will be essentially the same as last year.

Hardin Tools has retained the services of M&O. You have been given the task of preparing a pro forma income statement for Hardin Tools for the current year as soon as possible.

REQUIRED:

Prepare a pro forma income statement for Hardin Tools for the current year in the same format, as was used last year with new Product C replacing the old product. Make the same assumptions about cost flows and allocations as you used in your revised income statement for last year.

Attachment:- Assignment Files.zip