Managerial Accounting

5 Managerial Accounting Questions due Saturday, August 5th at 12:00 PM CDT. 

EXERCISE 8: TARGET COSTING AND PRICING 

Lovebug Company has determined that its new automotive hood screen would gain widespread customer acceptance if the company could price it at or under $30.  Anticipated labor hours and costs for each unit of the new product follow. 

Direct Materials Cost			$5
Direct labor cost
Manufacturing labor:
Hours			0.2
Hourly labor rate			$10
Assembly labor:
Hours			0.5
Hourly labor rate			$15
Machine hours			1
The company currently uses the following three activity-based cost rates:
Machine handling			$0.30 per dollar of direct materials
Production			$5.00 per machine hour
Product delivery			$0.50 per unit

The company’s minimum desired profit is 40 percent over total production and delivery cost.  Compute the target cost for the new hood screen, and determine if the company should market it (Round to two decimal places).

Problem 5: DEVELOPING TRANSFER PRICES 

Sand Company has two divisions, Glass Division and Instrument Division.  For several years, Glass Division has manufactured a special glass container, which it sells to Instrument Division at the prevailing market price of $20.  Glass Division produces the glass containers only for Instrument Division and does not sell the product to outside customers.  Annual production and sales volume is 20,000 containers.  A unit cost analysis for Glass Division follows. 

Cost Categories				Costs per Container
Direct Materials				$3.50
Direct labor, 1/4 hour				2.3
Variable overhead				7.5
Avoidable fixed costs: $30,000/20,000 units		1.5
Corporate overhead: $3.60 per direct labor hour	4.5
Variable shipping costs			1.2
Unit Cost				$20.50

 Corporate overhead represents the allocated joint fixed costs of production- building depreciation, property taxes, insurance, and executives’ salaries.  A profit markup of 20 percent is used to determine transfer prices. 

REQUIRED: 

1.  What would the appropriate transfer price for Glass Division to use in billing its transactions with Instrument Division?
2. If Glass Division decided to sell some containers to outside customers, would your answer to requirement 1 change?  Defend your response.
3. What factors concerning transfer price should management consider when transferring products between divisions?

EXERCISE 4: MEASURES OF QUALITY IN A SERVICE BUSINESS 

Rehab Health Care, LLC, incurred the service-related activity costs for the month that follow. 

Total sales	$40,000
Customer complaint processing	1,000
Employee training	400
Reinspection and retesting	500
Design review of service procedures	300
Technical support	200
Investigation of service defects	800
Sample testing of vendors	100
Inspection of supplies	150
Quality audits	250
Quality-related downtime	300

Prepare an analysis of the costs of quality for Rehab Health Care.  Categorize the costs as (a) costs of conformance, with subsets of prevention costs and appraisal costs, or (b) costs or nonconformance, with subsets of internal failure costs and external failure costs.  Compute the percentage of sales represented by prevention costs, appraisal costs, total costs of conformance, internal failure costs, external failure costs, total costs of nonconformance, and total costs of quality.  Also compute the ratio of costs of conformance to total costs of quality of costs of nonconformance to total costs of quality. 

EXERCISE 9: MEASURES OF PRODUCTION PERFORMANCE 

Analyze the following nonfinancial measures of quality for Sweet Express, Inc., a supplier of novelty candy boxes, for a recent four-week period.  Focus specifically on measures of production performance.

Measures of Quality	Week 1	Week 2	Week 3	Week 4
Percentage of defective products per million produced	0.9%	0.7%	0.5%	0.4%
Equipment utilitization rate	89%	90%	89%	90%
Machine downtime (hours)	11	9	12	11
Machine maintenance time (hours)	9	8	8	9
Machine setup time (hours)	3	4	5	3

PROBLEM 4: INTERPRETING MEASURES OF QUALITY 

Circuit Corporation supplies integrated circuitry to major appliance manufacturers in all parts of the world.  Producing a high-quality product in each of the company’s four divisions is the mission of management.  Each division is required to record and report its efforts to achieve quality in all of its primary product lines.  The following information for the most recent three-month period was submitted to the chief financial officer: 

	Macon Division	Dothan Division	Valdosta Division	Columbia Division
	Amount	% of Rev	Amount	% of Rev	Amount	% of Rev	Amount	% of Rev
Costs of Conformance
Prevention Costs:
Quality training of employees	$4,400		$15,600		$23,600		$8,900
Process engineering	3,100		19,700		45,900		9,400
Preventive maintenance	5,800		14,400		13,800		11,100
Total prevention costs	$13,300	0.95%	$49,700	3.11%	$83,300	5.55%	$29,400	1.73%
Appraisal costs:
End-of-process sampling and testing	$3,500		$19,500		$21,400		$6,900
Quality audits of products	6,100		11,900		17,600		8,700
Vendor Audits	4,100		10,100		9,800		7,300
Total appraisal costs	13,700	0.98%	$41,500	2.59%	$48,800	3.25%	22,900	1.35%
Total costs of conformance	27,000	1.93%	$91,200	5.70%	$132,100	8.80%	$52,300	3.08%
Costs of Nonconformance
Internal failure costs:
Quality-related downtime	$26,800		$8,300		$6,500		$22,600
Scrap and rework	17,500		9,100		7,800		16,200
Scrap disposal losses	31,200		7,200		3,600		19,900
Total internal failure costs	75,500	5.39%	$24,600	1.54%	$17,900	1.19%	$58,700	3.45%
External failure costs
Warranty claims	$22,600		$4,400		$2,500		$17,100
Customer complaint processing	31,600		8,100		6,400		22,300
Returned goods	29,900		5,600		3,100		19,800
Total external failure costs	$84,100	6.01%	$18,100	1.13%	12,000	0.80%	59,200	3.48%
Total costs of nonconformance	$159,000	11.40%	$42,700	2.67%	$29,900	1.99%	$117,900	6.93%
Total costs of quality	$186,600	13.33%	$133,900	8.37%	$162,200	10.79%	$170,200	10.01%
	Ratios of Nonfinancial Measures:
	Number of sales to number of warranty claims	168 to 1		372 to 1		996 to 1		225 to 1
	Number of products produced to number of products reworked	1,420 to 1		3,257 to 1		6,430 to 1		2,140 to 1
	Change in throughout time (positive amoun means time reduction)	(-4.615%)		2.163%		5.600%		(-1.241%)
	Total number of deliveries to number of late deliveries	86 to 1		168 to 1		290 to 1		128 to 1

REQUIRED: 

1.  Rank the divisions in order of their apparent product quality.
2. What three measures were most important in your rankings in 1?  Why?
3. Which division is most successful in its bid to improve quality?  What measures illustrate its high-quality rating?
4. Consider the two divisions producing the lowest-quality products.  What actions would recommend to the management of each division?  Where should their quality dollars be spent?

 

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