Exercise 15.5 Part Level Submission: Ikerd Company Ap 017160

Exercise 15 5 Part Level Submissionikerd Company Applies Manufacturi

Exercise 15-5 (Part Level Submission) Ikerd Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $330,264 for the year, and machine usage is estimated at 125,100 hours. For the year, $393,740 of overhead costs are incurred and 131,000 hours are used. Compute the manufacturing overhead rate for the year. (Round answer to 2 decimal places, e.g. 1.25.) The ledger of American Company has the following work in process account. Work in Process—Painting 5/1 Balance 3/31 Transferred out ? 5/31 Materials 6/31 Labor 3/31 Overhead 1/31 Balance ? Production records show that there were 460 units in beginning inventory, 30% complete, 1,690 units started, and 1,400 units transferred out. The beginning work in process had materials cost of $2,940 and conversion costs of $950. The units in ending inventory were 40% complete. Materials are entered at the beginning of the painting process. How many units are in process at May 31? Work in process, May 31 units Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Overhead costs are estimated at $303,000, with $196,000 allocated to machining and $107,000 to setup. Standard Direct labor costs are $43,000 with 1,270 machine hours; Custom costs are $102,000 with an unknown machine hours. Compute the traditional overhead rate based on direct labor costs. Vin Diesel owns the Fredonia Barber Shop. He employs four barbers earning $1,250/month, plus the manager with an additional $500/month. Each receives $4.50 per haircut. Additional costs are advertising ($200/month), rent ($1,100/month), supplies ($0.30 per haircut), utilities ($175/month + $0.20 per haircut), and magazines ($25/month). He charges $10 per haircut. (a) Determine the variable costs per haircut and total fixed costs. (b) Compute the break-even point in units and dollars. (c) Prepare a CVP graph assuming a maximum of 1,800 haircuts per month, with increments of 300 haircuts and $3,000 on the vertical axis. (d) Determine net income assuming 1,600 haircuts monthly. Easton Corporation produces two boat anchors—a traditional fishing anchor and a high-end yacht anchor—using the same machinery. The contribution margin of the yacht anchor is three times higher than that of the fishing anchor. Operations are at full capacity. The CEO wants to cut back the fishing anchor to produce more yacht anchors, assuming higher contribution margin. Write a memo advising on the analysis needed before making this decision and other factors to consider.

Paper For Above instruction

The analysis of manufacturing overhead rates, work-in-process inventory, activity-based costing, cost behavior, break-even points, and capacity decisions constitutes critical financial management essentials for manufacturing and service enterprises. This paper explores these elements through practical scenarios and calculations, emphasizing their relevance in strategic decision-making processes.

Manufacturing Overhead Rate Calculation

In the scenario involving Ikerd Company, the application of manufacturing overhead is based on machine hours. Estimating the overhead rate involves dividing expected total overhead costs by estimated machine hours. The expected overhead costs for the year are $330,264, with an estimated machine usage of 125,100 hours. The actual overhead incurred was $393,740 over 131,000 hours of machine use.

Using the formula:

Overhead Rate = Total Estimated Overhead / Estimated Machine Hours

Calculating:

Overhead Rate = $330,264 / 125,100 hours ≈ $2.64 per machine hour

This rate allows for assigning manufacturing overhead to jobs based on actual machine hours used, ensuring accurate job costing and inventory valuation.

Work-in-Process Inventory Analysis

The American Company's work-in-process (WIP) account details and production records reveal the beginning inventory, units started, units transferred out, and ending inventory. Calculating units in process at month-end involves considering beginning inventory, units started, units transferred, and ending inventory. Beginning inventory was 460 units, 30% complete. Units started totaled 1,690, with 1,400 transferred out, and ending inventory units are to be determined.

Assuming units are completed on a proportional basis, units in process at May 31 can be computed using the equivalent units method for materials and conversion costs. The beginning inventory units are partially complete, and ending inventory was 40% complete, which influences the calculation of equivalent units. Such calculations support accurate costing and inventory valuation.

Activity-Based Costing vs. Traditional Costing

Saddle Inc.’s scenario presents the choice between traditional overhead allocation based on direct labor costs and activity-based costing (ABC), which allocates overhead based on activities such as machining and setup. ABC can provide more precise cost information, particularly when products consume overhead resources differently.

Using data provided, the traditional overhead rate is calculated as follows:

Traditional Overhead Rate = Total Overhead / Total Direct Labor Costs

Given the totals, the rate becomes:

$303,000 / ($43,000 + $102,000) = $303,000 / $145,000 ≈ 2.09 or 209%

In contrast, ABC would allocate overhead based on specific activity drivers, providing finer granularity and potentially highlighting cost-saving opportunities or product profitability differences previously masked by broad averages.

Variable and Fixed Costs; Break-Even Analysis

Vin Diesel’s barber shop scenario requires calculating variable costs per haircut and fixed costs, essential for conducting break-even analysis and CVP (cost-volume-profit) analysis. Variable costs per haircut include supplies ($0.30), utilities ($0.20), and the proportional share of rent and advertising, while fixed costs include the barber salaries, the manager’s extra pay, and fixed monthly expenses.

Calculations yield variable costs per haircut as:

Variable costs = Supplies + Utilities = $0.30 + $0.20 = $0.50

Total fixed monthly costs include salaries, rent, advertising, and fixed utilities, summing to:

Salaries: 4 barbers × $1,250 + $500 (manager) = $5,000

Fixed expenses: Rent ($1,100) + Advertising ($200) + Magazines ($25) = $1,325

Total fixed costs: $5,000 + $1,325 = $6,325

The break-even point in units (haircuts) is calculated as:

Break-even units = Fixed costs / (Price per haircut - Variable costs per haircut)

=$6,325 / ($10 - $0.50) ≈ 678 haircuts

The break-even in dollars is:

678 haircuts × $10 = $6,780

CVP Analysis and Graph

Assuming a maximum of 1,800 haircuts, the CVP graph illustrates how profit changes with volume. At full capacity, profit is maximized, but at the break-even point (678 haircuts), profit is zero. The graph would show total sales line intersecting total costs at the break-even volume, with profit increasing linearly beyond that point, illustrating the contribution margin per haircut.

Profitability at 1,600 Haircuts

At 1,600 haircuts, total revenue is $16,000, and total variable costs are $800, resulting in variable costs of $0.50 per haircut. Fixed costs are $6,325. Therefore, net income is:

Net income = (Price per haircut × Quantity) - Total fixed costs - Variable costs

$10 × 1,600 - $6,325 - $0.50 × 1,600 = $16,000 - $6,325 - $800 = $8,875

Capacity Decision Analysis

The scenario with Easton Corporation requires analysis before reducing production of the fishing anchor to produce more yacht anchors. Since the contribution margin of the yacht anchor is three times higher, the initial assumption is that reallocating capacity would increase profitability. However, a thorough analysis should include calculating specific contribution margins, analyzing capacity constraints, assessing incremental costs and revenues, and considering strategic factors such as market demand and product mix. The company should also evaluate whether fixed costs are avoidable and whether the shift aligns with long-term strategic goals.

Additionally, analysis should incorporate qualitative considerations such as customer satisfaction, brand positioning, and potential future demand shifts. The decision should be supported by detailed contribution margin analysis, capacity utilization assessment, and sensitivity analysis to evaluate potential risks and benefits effectively.

Conclusion

Complex financial decisions in manufacturing and service organizations require careful analysis of overhead costs, inventory, product costing methods, and capacity management. Accurate overhead allocation through traditional and activity-based costing affects product pricing, profitability, and strategic choices. Break-even and CVP analyses inform operational decisions, while capacity planning ensures optimal resource utilization aligning with corporate objectives. A comprehensive approach considering quantitative and qualitative factors enables informed decision-making, driving profitability and competitive advantage in dynamic markets.

References

• Drury, C. (2013). Management and Cost Accounting (9th ed.). Cengage Learning.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2014). Introduction to Management Accounting (16th ed.). Pearson.
• Kaplan, R. S., & Anderson, S. R. (2004). Time-driven Activity-Based Costing. Harvard Business Review, 82(11), 131-138.
• Langfield-Smith, K., Thorne, H., & Vernon, J. (2012). Management Accounting (6th ed.). McGraw-Hill Education.
• Hilton, R. W., & Platt, D. E. (2013). Managerial Accounting: Creating Value in a Dynamic Business Environment (10th ed.). McGraw-Hill Education.
• Sepe, S. M. (2017). Practical Cost Management: Activity-Based Costing and Beyond. Routledge.
• Innes, J., & Mitchell, F. (2005). Activity-Based Costing: An Examination of Some Key Issues. Management Accounting Research, 16(2), 219-246.
• Hansen, D. R., & Mowen, M. M. (2014). Cost Management: Accounting and Control. Cengage Learning.
• Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.