Question 1:

"Hawthorn Corporation manufactures custom all-terrain vehicles (ATVs) and uses a job costing system to assign and track costs. March's beginning inventory consisted of the following components:"

"The above beginning work in process consisted only of Job #02.778. The finished goods inventory consisted of Job #01.987 ($42,500) and Job #02.665 ($37,500)."

"The following descriptions summarize the various transactions that occurred during March:"

Purchased $112,000 of raw materials.

Used $117,000 of raw materials in the production process. Of this amount, $95,000 consisted of parts and other materials "directly" incorporated into ATVs. The remainder was "indirect" material for shop supplies and small dollar items that are not otherwise traceable to specific ATVs.

Total wages and salaries were $225,000. This total was 60% attributable to direct labor, 10% to indirect labor, 5% to sales commissions, and 25% to general and administrative activities.

Depreciation for the period totaled $28,000. Of this amount, 75% related to factory and factory related equipment, and is contemplated in the factory overhead rates. The other 25% is related to general and administrative activities.

Other general and administrative costs, excluding wages and depreciation, totaled $15,000.

Other factory overhead costs, excluding indirect materials, wages, and depreciation, totaled $35,500.

Hawthorn applies factory overhead at 75% of direct labor costs.

"The ending work in process consisted of two jobs: Job #03.004 ($25,500) and Job #03.772 ($21,500). All completed units had been delivered to customers, and there was no ending finished goods inventory. Sales for the month amounted to $625,000. All sales are for cash at time of shipment."

(a) Prepare T-accounts showing how the above costs flow through the accounting system. For simplicity, you may assume that all expenditures and receipts settle in cash, and you will only need the following T-accounts:

(b) Was overhead underapplied or overapplied? What is the disposition of the difference between actual and applied factory overhead?

(c) Prepare an income statement for March. Income taxes of $50,000 were incurred during March.

(d) Prepare summary journal entries to record March's transactions.

Question 2:

Storm Tools has formed a new business unit to produce battery-powered drills. The business unit was formed by the transfer of selected assets and obligations from the parent company. The unit's initial balance sheet on January 1 contained cash ($500,000), plant and equipment ($2,500,000), notes payable to the parent ($1,000,000), and residual equity ($2,000,000).

The business unit is expected to repay the note at $50,000 per month, plus all accrued interest at 1/2% per month. Payments are made on the last day of each month.

The unit is scheduled to produce 25,000 drills during January, with an increase of 2,500 units per month for the next three months. Each drill requires $40 of raw materials. Raw materials are purchased on account, and paid in the month following the month of purchase. The plant manager has established a goal to end each month with raw materials on hand, sufficient to meet 25% of the following month's planned production.

The unit expects to sell 20,000 drills in January; 25,000 in February, 25,000 in March, and 30,000 per month thereafter. The selling price is $100 per drill. Half of the drills will be sold for cash through a website. The others will be sold to retailers on account, who pay 40% in the month of purchase, and 60% in the following month. Uncollectible accounts are not material.

Each drill requires 20 minutes of direct labor to assemble. Labor rates are $24 per hour. Variable factory overhead is applied at $9 per direct labor hour. The fixed factory overhead is $25,000 per month; 60% of this amount is related to depreciation of plant and equipment. With the exception of depreciation, all overhead is funded as incurred.

Selling, general, and administrative costs are funded in cash as incurred, and consist of fixed components (salaries, $100,000; office, $40,000; and advertising, $75,000) and variable components (15% of sales).

Prepare a monthly comprehensive budget plan for Storm's new business unit for January through March. The plan should include the (a) sales and cash collections budget, (b) production budget, (c) direct materials purchases and payments budget, (d) direct labor budget, (e) factory overhead budget, (f) ending finished goods budget (assume total factory overhead is applied to production at the rate of $11.73 per direct labor hour), (g) SG&A budget, and (h) cash budget.