QUESTION 1

Russell Company has the following projected account balances for June 30, 20X5:

Accounts payable $40,000 Sales $800,000
Accounts receivable 100,000 Capital stock 400,000
Depreciation, factory 24,000 Retained earnings ?
Inventories (5/31 & 6/30) 180,000 Cash 56,000
Direct materials used 200,000 Equipment, net 240,000
Office salaries 80,000 Buildings, net 400,000
Insurance, factory 4,000 Utilities, factory 16,000
Plant wages 140,000 Selling expenses 60,000
Bonds payable 160,000 Maintenance, factory 28,000

Required:

a. Prepare a budgeted income statement for June 20X5.

b. Prepare a budgeted balance sheet as of June 30, 20X5

c. How do we use computer-based budgeting in sensitivity analysis?

d. Explain how the choice of the type of responsibility center affects managers' behaviour.

QUESTION 2

The Alex Miller Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year:

Budgeted costs of the operating the plant
for 10,000 to 20,000 hours:
Fixed operating costs per year $240,000
Variable operating costs $10 per hour
Practical capacity 20,000 hours per year
Budgeted long-run usage per year:
Lamp Division 800 hours × 12 months = 9,600 hours per year
Flashlight Division 450 hours × 12 months = 5,400 hours per year

Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June.

Required:

a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?

b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs.

c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?

d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

e. Explain which method is the most practical?

QUESTION 3

a. Oregon Lumber processes timber into four products. During January, the joint costs of processing were $280,000. There was no inventory at the beginning of the month. Production and sales value information for the month is as follows: (2 marks)

Sales Value at

Product Board feet Splitoff Point Ending Inventory
2 x 4's 6,000,000 $0.30 per board foot 500,000 bdft.
2 x 6's 3,000,000 0.40 per board foot 250,000 bdft.
4 x 4's 2,000,000 0.45 per board foot 100,000 bdft.
Slabs 1,000,000 0.10 per board foot 50,000 bdft.

Required:

Determine the value of ending inventory if the sales value at splitoff method is used for product costing. Round to 3 decimal places when necessary.

b. Silver Company uses one raw material, silver ore, for all of its products. It spends considerable time getting the silver from the ore before it starts the actual processing of the finished products, rings, lockets, etc. Traditionally, the company made one product at a time and charged the product with all costs of production, from ore to final inspection. However, in recent months, the cost accounting reports have been somewhat disturbing to management. It seems that some of the finished products are costing more than they should, even to the point of approaching their retail value. It has been noted by the accounting manager that this problem began when the company started buying ore from different parts of the world, some of which require difficult extraction methods. (3 marks)

Required:

Can you explain how the company might change its accounting system to reflect the reporting problems better? Are there other problems with the purchasing area?

QUESTION 4

When cost-based transfer pricing is used between subunits of a large organization, describe how to avoid making suboptimal decisions. Your discussion should be supported by research and real world examples.