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Problem 1
Kurena Co.’s job-order cost system uses a single plant-wide overhead rate. The company calculates its overhead costs using normal costing.
On April 1, Kurena Co. had the following balances in its inventory accounts:
Materials Inventory
Work-in-Process Inventory
Finished Goods Inventory
$16,350
21,232
15,200
On April 1, work-in-process is made up of three jobs with the following costs:
Direct materials
Direct labor
Applied overhead
Job 30
$2,650
1,900
1,520
Job 31
$1,900
1,340
1,072
Job 32
$3,650
4,000
3,200
During April, Kurena experienced the following transactions:
• Purchases materials on account for $21,000
• Requisitioned materials: Job 30, $12,500; Job 31, $11,200, and Job 32, $5,500.
• Collected and summarized job tickets; Job 30, 250 hours at $12 per hour; Job 31,
275 hours at $15 per hour; and Job 32, 140 hours at $20 per hour.
• Applied overhead on the basis of direct labor cost.
• Actual overhead was $8,718.
• Completed and transferred Job 31 to the finished goods warehouse.
• Shipped Job 31 and billed the customer for 130 percent of the cost.
Required:
a. Calculate the predetermined overhead rate based on direct labor cost.
b. Calculate the cost of each job as of April 30.
c. Calculate the ending balance of Work-in-process as of April 30.
d. Calculate the cost of goods sold for April.
e. Assuming that Kurena prices its jobs at cost plus 30 percent, calculate the price of
one job that was sold during April (round to the nearest dollar).
Problem 2
Glencoe First national Bank operated for years under the assumption that profitability can
be increased by increasing total dollar volumes of sales and account balances. In recent
years, however, First National’s profits have been eroding. Increased competition,
particularly from savings and loan institutions, was the cause of the difficulties. As
managers discussed the banks problems, it became apparent that they had no idea what
their products were costing.
After some discussion, the bank management decided to hire a consultant to construct an
activity-based cost model for three products: checking accounts, personal loans, and the
gold VISA. The consultants identified the following activities, costs, and activity drivers
(annual data):
Activity
Providing ATM service
Computer processing
Issuing statements
Customer inquiries
Activity Cost
$100,000
1,000,000
800,000
360,000
Activity Driver
ATM transactions
Computer transactions
No. of statements
Telephone minutes
Activity Capacity
200,000
2,500,000
500,000
600,000
The following annual information on the three products was available:
Units of product
ATM transactions
Computer transactions
Number of statements
Telephone minutes
Checking Accounts
30,000
180,000
2,000,000
350,000
350,000
Personal Loans
5,000
0
200,000
50,000
90,000
Gold Visa
10,000
20,000
300,000
150,000
160,000
• Last year Glencoe decided to discontinue charging a $60 service fee on all
checking account balances over $1,000.01 and to only charge a service fee on
balances below $1,000.01.
In light of the new cost information, Larry Roberts, the bank president, wanted to know
whether a decision made two years ago to eliminate the $60 service charge on checking
account balances over $1,000 was sound. The following information is available:
• There are four categories of checking accounts:
Balance:
(1) less than $500
(2) between $500.01 and $1,000
(3) between $1,000.01 and 2,767
(4) Over 2,767.01
Average balance:
$400
$750
$2,000
$5,000
• Checking account balances can be invested at an expected return of 4%
• Checking account balances over $500.01 are paid interest of 2%
Requirements:
a. Calculate activity rates and compute the average per unit profitability of
each category of checking accounts.
b. What recommendations would you make to increase profitability?
Problem 3
Pronto Corp. is trying to decide whether to overhaul an existing truck or buy a new one.
The old truck was purchased two and a half years ago for $30,000 and is being
depreciated using the straight-line method using the half-year convention (five year class
for tax purposes). The cash operating costs of the old truck total $18,000 per year. To
enable the truck to last four more years, an overhaul costing $7,000 is needed. Assume
that the overhaul will be expensed for tax purposes. If the truck is overhauled, it is
estimated to have a salvage value of $10,000.
The new truck would cost $45,000 and is expected to have annual operating costs of
$8,000. If the new truck is purchased it is expected to be disposed of at the beginning of
its fifth year for $15,000. Assuming the new truck is purchased, the old truck can
probably be sold “as is” for $5,000. MACRS depreciation with a five-year life will be
used for the new truck.
• Cost of capital is 12% and the tax rate is 40%.
Required:
(a) Assuming that the company overhauls the old truck, what will the after-tax proceeds
be from selling this truck at the end of its life?
(b) Assuming that the company overhauls the old truck, what is the depreciation tax
shield?
(c) Assuming that the company purchases the new truck, what are the after-tax proceeds
from selling the old truck? What are the after-tax proceeds from selling the new
truck?
(d) Assuming that the company purchases the new truck, what is the depreciation tax
shield?
(e) If the firm uses net-present-value and increases the cost of capital how would it
change the weight on cash-flows in year 2 versus year 3 (this is a qualitative question,
no calculations are needed)?