QUESTION 1: PROCESS COSTING SYSTEM: CASE STUDY: ACCOUNTING FOR SPOILED UNITS
The House Hold Products Company assembles clip clothespins in three sections, and uses process costing. Under normal operating conditions, each section has a spoilage rate of 4%. However, spoilage can go as high as 7% and is usually discovered when a faulty pin enters process or on final completion by a section.
The spring mechanism is the only material which can be saved from a spoiled unit. The production supervisor assigns a worker once or twice a week to remove the springs from spoiled units. The salvaged springs are placed in bins at the assembly tables in section No1 to be used again. No accounting entry is made of this salvage operation.
In the past, the controller has made no attempt to account for spoilage separately. Lost unit costs have been absorbed by the units transferred out of the section and those remaining in the process. However, because spoilage is increasing, a different method is needed.
Describe the method that can be used for accounting for spoiled units?
QUESTION 2: University AAA is organized into four colleges with the following characteristics:
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Business
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Engineering
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Science
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Humanities
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Number of majors
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10,000
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9,000
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9,600
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2,400
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Number of non-majors taking classes
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2,000
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1,000
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4,800
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7,200
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Revenue from student fees
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$1,200,000
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$1,000,000
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$1,440,000
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$960,000
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Revenue from external grants
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$400,000
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$3,000,000
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$1,600,000
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$240,000
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Variable cost per student
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$35.00
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$65.00
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$80.00
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$25.00
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Fixed cost per student (based on total students)
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$35.00
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$65.00
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$25.00
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$10.00
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A. List three items that would likely be included in the category of variable costs per student from the perspective of each college.
B. List two items that would likely be included as fixed costs per student from the perspective of each college.
C. Calculate the contribution margin per student from the perspective of each college and then from the perspective of the university as a whole.
D. Calculate the total profit from the perspective of each college and then for the university as a whole.
E. Based on financial considerations alone, identify the college that would be most likely to be dropped from the university during a budget crisis. Then identify the candidate that would least likely be dropped.
QUESTION 3: Abdullah and Rahman Corporation produces and sells two types of sofa pillow: Plain and fancy. Currently, Abdullah and Rahman uses a traditional costing system with direct labor hours as the allocation base. Actual hours for 20X3 were 20,000. In anticipation of developing an activity-based costing system, Abdullah and Rahman has identified the following cost pools and activities associated with pillow production:
Estimated Costs Actual Costs
for 20x4 for 20x3
Activity Driver
Material cutting Number of cuts $32,000 $27,330
Sewing machine setups Number of setups 54,000 49,600
Factory maintenance Number of direct labor hours 30,000 34,000
$116,000 $110,930
Direct costs for a plain sofa pillow are $1.25 for material and $2.00 for direct labor (15 minutes @ $8.00 per hour). Direct costs for a fancy sofa pillow are $1.50 for material and $4.00 (30 minutes @ $8.00 per hour). In 20x4, BCH expects to make 8,000 fancy pillows and 10,000 plain pillows. Those output levels will require 5 setups for fancy pillows and 10 setups for plain pillows. For the material cutting activity, the number of cuts is estimated at 10,000 for each type of pillow.
What will be the cost per unit for each type of pillow under traditional costing?
QUESTION 4: Describe quantitative and qualitative approaches/information's, and explain why both are important in management decision making.