Department of Accounting & Information Systems

University of Dhaka

Masters in Professional Accounting (MPA) Program

Course code: MPA-604, Cost & Managerial Accounting

Assignment

Question 1: Exclusive Resorts (ER) operates a five-star hotel with a championship golf
course. ER has a decentralized management structure, with three divisions:
- Lodging (rooms, conference facilities)
- Food (restaurants and in-room service)
- Recreation (golf course, tennis courts, swimming pool, etc.)
Starting next month, ER will offer a two-day, two-person “getaway package” for $1,000.
This deal includes the following:

As Priced Separately
Two nights’ stay for two in an ocean-view room $ 800 ($400 per night)
Two rounds of golf (can be used by either guest) $ 375 ($187.50 per round)
Candlelight dinner for two at ER’s finest restaurant $ 200 ($100 per person)
Total package value $1,375

Jenny Lee, president of the recreation division, recently asked the CEO of ER how her
division would share in the $1,000 revenue from the getaway package. The golf course was
operating at 100% capacity. Currently, anyone booking the package was guaranteed access to
the golf course. Lee noted that every “getaway” booking would displace $375 of other golf
bookings not related to the package. She emphasized that the high demand reflected the
devotion of her team to keeping the golf course rated one of the “Best 10 Courses in the
World” by Golf Monthly. As an aside, she also noted that the lodging and food divisions had
to turn away customers during only “peak-season events such as the New Year’s period.”
1. Using selling prices, allocate the $1,000 getaway-package revenue to the three divisions
using:Required
a. The stand-alone revenue-allocation method
b. The incremental revenue-allocation method (with recreation first, then lodging, and
then food)
2. What are the pros and cons of the two methods in requirement 1?
3. Because the recreation division is able to book the golf course at 100% capacity, the
company CEO has decided to revise the getaway package to only include the lodging and
food offerings shown previously. The new package will sell for $900. Allocate the revenue to
the lodging and food divisions using the following:
a. The Shapley value method.
b. The weighted Shapley value method, assuming that lodging is three times as likely
to sell as the food.

Question 2: Lester Company makes metal products and has a forging department. In this
department, materials are added at the beginning of the process and conversion takes place
uniformly. At the start of November 2011, the forging department had 20,000 units in
beginning work in process, which are 100% complete for materials and 40% complete for
conversion costs. An additional 100,000 units are started in the department in November, and
30,000 units remain in work in process at the end of the month. These unfinished units are
100% complete for materials and 70% complete for conversion costs. The forging department
had 15,000 spoiled units in November. Normal spoilage is 12% of good units.

The department’s costs for the month of November are as follows:

Beginning WIP Costs Incurred During Period

Direct materials costs $ 64,000 $ 200,000
Conversion costs 102,500 1,000,000

1. Compute the normal and abnormal spoilage in units for November, assuming the
inspection point is at (a) the 30% stage of completion, (b) the 60% stage of completion,
and (c) the 100% stage of completion.
2. Refer to your answer in requirement 1. Why are there different amounts of normal and
abnormal spoilage at different inspection points?
3. Now assume that the forging department inspects at the 60% stage of completion. Using
the weighted average method, calculate the cost of units transferred out, the cost of abnormal
spoilage, and the cost of ending inventory for the forging department in November.

Question 3: Super Bookstore (SB) is a large city bookstore that sells books and music CDs,
and has a café. SB operates at capacity and allocates selling, general, and administration (S,
G & A) costs to each product line using the cost of merchandise of each product line. SB
wants to optimize the pricing and cost management of each product line. SB is wondering if
its accounting system is providing it with the best information for making such decisions.

Super Bookstore
Product Line Information
For the Year Ended December 31, 2010
Books CDs Café
Revenues $3,720,480 $2,315,360 $736,216
Cost of merchandise $2,656,727 $1,722,311 $556,685
Cost of café cleaning — — $ 18,250
Number of purchase orders placed 2,800 2,500 2,000
Number of deliveries received 1,400 1,700 1,600
Hours of shelf stocking time 15,000 14,000 10,000
Items sold 124,016 115,768 368,108

Super Bookstore incurs the following selling, general, and administration costs:

Super Bookstore
Selling, General, & Administration (S, G & A) Costs
For the Year Ended December 31, 2010
Purchasing department expenses $ 474,500
Receiving department expenses 432,400
 Shelf stocking labor expense 487,500
Customer support expense (cashiers and floor employees) 91,184
$1,485,584

1. Suppose Super Bookstore uses cost of merchandise to allocate all S, G & A costs. Prepare
product line and total company income statements.
2. Identify an improved method for allocating costs to the three product lines. Explain. Use
the method for allocating S, G & A costs that you propose to prepare new product line and
total company income statements. Compare your results to the results in requirement 1.
3. Write a memo to Super Bookstore’s management describing how the improved system
might be useful for managing Super Bookstore.

Question 4: Elite Manufacturing Company uses a job order cost system to cost its products.
It recently signed a new contract with the union that calls for time-and-a-half for all work
over 40 hours a week and double-time for Saturday and Sunday. Also, a bonus of 1% of the
employees’ earnings for the year is to be paid to the employees at the end of the fiscal year.
The controller, the plant manager, and the sales manager disagree as to how the overtime pay
and the bonus should be allocated. An examination of the first month’s payroll under the new
union contract provisions shows the following:

Direct labor:
Regular—40,200 hours@$10 . . . . . . . . . . . . . . . . . $402,000
Overtime:
Weekdays—1,700 hours@$15 . . . . . . . . . . .$25,500
Saturdays—400 hours@$20 . . . . . . . . . . . . . . 8,000
Sundays—300 hours@$20 . . . . . . . . . . . . . . . .6,000 39,500
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,800
$456,300

Analysis of the payroll supporting documents revealed the following:

a. More production was scheduled each day than could be handled in a regular
workday, resulting in the need for overtime.
b. The Saturday and Sunday hours resulted from rush orders with special contract
arrangements with the customers.
The controller believes that the overtime premiums and the bonus should be charged to
factory overhead and spread over all production of the accounting period, regardless of when
the jobs were completed. The plant manager favors charging the overtime premiums directly
to the jobs worked on during overtime hours and the bonus to administrative expense. The
sales manager states that the overtime premiums and bonus are not factory costs chargeable
to regular production but are costs created from administrative policies and, therefore, should
be charged only to administrative expense.

1. Evaluate each position—the controller’s, the plant manager’s, and the sales manager’s. If
you disagree with all of the positions taken, present your view of the appropriate allocation.
2. Prepare the journal entries to illustrate the position you support, including the accrual for
the bonus.
Question 5: Clark Kent, Inc. buys crypton for $0.80 a gallon. At the end of processing in
Dept. 1, crypton splits off into products A, B, and C. Product A is sold at the split-off point
with no further processing. Products B and C require further processing before they can be
sold. Product B is processed in Dept. 2, and Product C is processed in Dept. 3. Following is a
summary of costs and other related data for the year ended December 31:

Dept. 1 Dept. 2 Dept. 3

Cost of crypton . . . . . . . . . . . . . . . . $ 76,000 — —
Direct labor . . . . . . . . . . . . . . . . . . . . .14,000 $51,000 $ 65,000
Factory overhead . . . . . . . . . . . . . . . . 10,000 26,500 49,000
Total . . . . . . . . . . . . . . . . . . . . . . . . $100,000 $77,500 $114,000

Product A Product B Product C

Gallons sold . . . . . . . . . . . . . . . . . . . . . 20,000 30,000 45,000
Gallons on hand at December 31 . . . . . 10,000 — 15,000
Sales in dollars . . . . . . . . . . . . . . . . . . $30,000 $96,000 $141,750

No inventories were on hand at the beginning of the year, and no crypton was on hand at the
end of the year. All gallons on hand at the end of the year were complete as to processing.
Kent uses the relative sales value method of allocating joint costs.

1. Calculate the allocation of joint costs.

2. Calculate the total cost per unit for each product.
3. In examining the product cost reports, Lois Lane, Vice President— Marketing, notes that
the per-unit cost of Product B is greater than the selling price of $3.20 that can be received in
the competitive marketplace. Lane wonders if they should stop selling Product B. How did
Lane determine that the product was being sold at a loss? What per unit cost should be used
in determining whether Product B should be sold?