Costing and Pricing Problems Solutions

Auto Driver Ltd. Activity Based Costing

Auto Driver Ltd. (ADL) manufactures and sells automotive parts. ADL allocates manufacturing overhead to both of its customers based on machine hours. One of ADL’s customers, Prairie Motors, has regularly complained of being charged non-competitive prices, so ADL is considering using an activity-based costing (ABC) system and has collected the following infomation: 

Â	Â	Â	Use of cost drivers
Â	Â	Â	Â	Prairie	Â
Activity	Cost driver	Costs	BC Motors	Motors	Total
Machine setup	Number of setups	$  37,200	210	100	310
Material handling	Number of parts	27,300	100	30	130
Milling	Machine hours	24,000	1,200	2,800	4,000
Assembly	Direct labour hours	136,500	1,500	2,400	3,900

1. Calculate the overhead costs that should be allocated to Prairie Motors under ADL’s current costing system.
2. Calculate the overhead costs that should be allocated to Prairie Motors under the ABC system.
3. Assume that ADL sets prices based on a cost-plus-25% methodology, and all other costs remain constant. Calculate the amount by which the price charged to Prairie Motors should increase or decrease if ADL changes to an ABC system.

Kew Beach Wear Inc. (KBW) manufactures swimsuits and beach accessories at a rented plant in Oshawa, Ontario. In 2019, KBW decided to extend its product line by manufacturing colourful beach bags. 

Each bag requires 0.7 metres of waterproof canvas that costs $14.00 per metre. Each bag also requires 0.5 direct labour hours to cut and assemble the canvas. KBW pays its employees $12.50 per hour. 

KBW’s controller noted that plant utilities expense for 2019 was $35,000 and that the rental cost for the production plant was $65,000 in 2019. KBW allocates all relevant overhead costs to inventory. 

KBW is facing increased competition for swimsuits from low-price imports; as a result, production output from the Oshawa plant has decreased in 2019. The plant’s normal capacity is 90,000 labour hours. However, in 2019 the plant has operated at only 70,000 labour hours. KBW hopes to return to normal production levels within two years. 

KBW uses absorption costing for overhead based on direct labour hours. 

Calculate the amount that KBW should record in its inventory for each completed beach bag. Show all calculations and state all assumptions.

The production accountant for Children’s Car Manufacturers Ltd. (CCM) is looking at its production costs. Recently, CCM changed its supplier for direct materials to ensure that it was using high-quality components. In addition to this change, CCM hired more skilled labourers to decrease the likelihood of defects in the completed toy cars for children. 

The following information has been compiled for creating a variance analysis at CCM’s December 31, 2019, year end: 

• CCM paid $12,600,000 in direct labour costs for 2019, relating to 325,000 direct labour hours. The budget for direct labour was 110 hours per car at a rate of $36 per hour.

• Actual usage shows 370,000 direct materials were purchased for $225 each and 3,095 cars were produced. There were NOdirect materials left in inventory at December 31, 2019. CCM budgeted the use of 112 direct materials for each car with a standard price of $231 per direct material and production of 3,150 cars.

1. Calculate the direct materials price and quantity variances.
2. Calculate the direct labour rate and efficiency variances.

Ryan Palmer operates a hot dog cart at the local stadium every Saturday. It is currently Thursday, and Ryan needs to inform stadium management today whether he will set up his hot dog cart inside or outside on Saturday. Ryan has watched the weather channel, and the probability of rain on Saturday is 60%. 

Each hot dog sells for $2.50, and the total variable cost of each hot dog is $0.80. 

Ryan knows from past experience that he will likely sell the following number of hot dogs: 

Kew Beach Wear Inc. Inventory Valuation

Â	Rain	No rain
Inside	1,500	800
Outside	700	2,200

1. Set up a pay-off table and determine whether Ryan should set up his hot dog cart inside or outside on Saturday.
2. Assume that Ryan has the opportunity to hire a weather expert who can determine with 100% certainty whether it will rain on Saturday. Calculate the most that Ryan should be willing to pay this expert.

There are two product departments at Bob’s Baseballs Ltd. (BBL): Bats and 

Gloves. The Bats department produces synthetic rubbers bats in various sizes. Gloves uses the same rubber manufactured by Bats to make glove inserts that are more comfortable for recreational baseball players. Bats is able to sell each rubber bat for $10.00; it has variable production costs of $5.00 to make a decigram of rubber and $2.00 to turn a decigram of rubber into a bat. Selling costs for Bats are $0.50 per bat. 

Bats produces 2,500 decigrams of rubber, which makes 2,500 bats. This level of operations is based on 90% of capacity. 

Gloves would like Bats to transfer 1,500 decigrams of rubber at $6.00 per decigram to Gloves for the production of glove inserts. Gloves has been purchasing rubber from an outside supplier for $6.50 per decigram. 

1. Calculate whether there is a monetary benefit or cost to Bats in transferring rubber to Gloves.
2. Calculate the net monetary benefit or cost to BBL if this transfer is made.
3. Explain whether BBL should require Bats to transfer rubber to Gloves.

Ivan Co. (Ivan) currently produces a single product, OP. Budgeted operating information for expected sales of 40,000 units is as follows: 

Sales	$	2,000,000
Cost of goods sold	Â	Â
Variable manufacturing costs	$	300,000
Fixed manufacturing costs	Â	600,000
Â	$	900,000
Gross profits	$	1,100,000
Selling and administrative expenses	Â	Â
Sales commission (9% of selling price)	$	180,000
Fixed advertising expenses	Â	266,000
Fixed administrative expenses	Â	350,000
Â	$	796,000
Operating income before taxes	$	304,000
Income tax (40%)	Â	121,600
Net income	$	182,400

Fixed manufacturing costs are allocated at a rate of $2.50 per machine hour. 

Ivan’s management is considering the introduction of a new product, NZ, to diversify its product lines and use up all available machine hour capacity. Ivan estimates the following sales and costs related to NZ: 

Expected sales	10,000 units
Selling price per unit	$20
Variable manufacturing cost per unit	$9
Fixed manufacturing cost (allocated) per unit	$5
Sales commission per unit (15% of selling price)	$3
Incremental fixed advertising expenses	$32,000
Incremental fixed administrative expenses	$16,000

1. Assume that Ivan produces OP only. Calculate Ivan’s margin of safety ratio.
2. Assume that Ivan starts producing NZ, and that the estimates above occur as expected. Calculate Ivan’s new margin of safety ratio.
3. Calculate the impact to Ivan’s operating income before taxes if both OP and NZ are produced, and discuss whether Ivan should diversify its product line, including why. 

Will Tree Beef Ltd. (WTB) processes cow beef into three main products: steak, hamburger, and hides. The average cost per cow is $1,400. The three main products emerge from a process that costs $200 per cow to run, and output from each cow can be sold for the following net amounts: 

Steak	120 kilograms	$2,400
Hamburger	80 kilograms	1,000
Hides	25 kilograms	120
Total	Â	$3,520

 
The steak can be processed further into frozen steak dinners at WTB’s packaging plant. Each of the 360 dinners produced from the 120 kilograms of steak include vegetables that cost an average of $1 per dinner. Production, selling, and other costs for the 360 dinners cost $230 in total. Each dinner can be sold for $16. 

The hamburger could be made into frozen hamburger patties. The only additional cost would be $2 per kilogram of hamburger processed to shape the patties. Frozen hamburger patties sell for $14 per kilogram. 

1. Using the relative sales value at split-off point method for joint cost allocation, calculate the joint costs allocated to each of WTB’s three products: steak, hamburger, and hides.
2. Assume that the net revenue of hides is NOTsignificant, and that WTB processes the steak and hamburger further into frozen dinners and frozen hamburger patties. Using the estimated net realizable value method for joint cost allocation, calculate the total cost of goods sold for one cow.
3. WTB is considering an option to process the original hamburger into fresh steak patties (instead of frozen) at a different plant. The additional processing cost would be $3 per kilogram of hamburger processed plus an additional $40 for total setup costs. The fresh hamburger patties could be sold for $18 per kilogram. Determine whether the hamburger should be processed into fresh hamburger patties or frozen hamburger patties, and explain. Show all calculations.

Mikey and Mable Ltd. (MML) provides vacation planning for families. MML has two production departments, Planning and Touring, and two support departments, Call Lines and IT. MML is looking for assistance in allocating the costs of the support departments to the production departments. The Call Lines department is allocated based on phone hours, and the IT department is allocated based on the number of computer terminals. The following information is available for the most recent fiscal period:

CCM Variance Analysis

Â	Support departments		Production departments
Â	Call Lines	IT	Planning	Touring
Costs	$225,000	$165,000	$345,000	$515,000
Phone hours	5,500	500	7,500	4,500
Computer terminals	35	5	50	15

1. Using the direct method to allocate support costs, calculate the total costs for the Planning department.
2. Using the step method to allocate support costs, allocating to IT first, calculate the total costs for the Touring department.

Alberta Corp. manufactures hair shampoo using two departments: a mixing department and a bottling department. At the beginning of the process, shampoo manufacturing starts with the addition of all of the direct materials in the mixing department. Direct labour and overhead are added evenly throughout the month. Alberta uses the first in, first out method of process costing and provided the following information for the month of October. 

Beginning work-in-process (WIP) inventory in the mixing department consisted of 750 litres that were 15% of the way through the process. This beginning inventory included costs of $5,150 for direct materials, direct labour of $6,250, and overhead of $8,315. 

During October, direct materials of $28,950 were added to the mixing department, and $32,650 in direct labour costs and $55,450 in overhead costs were incurred. At the end of October, 13,500 completed litres were transferred to the bottling department, and the remaining 1,650 litres in the mixing department were 55% complete. 

Calculate the value of WIP inventory in the mixing department at the end of October.

Odette’s Oil Co. (OOC) produces high-quality olive oil and has implemented a standard costing system. Below is part of a standard cost card for one batch of oil:

Direct materials (20 kilograms × $10 per kilogram)	$200
Direct labour (six hours × $15 per hour)	90
Variable overhead	54
Total variable costs of manufacturing	$344

Variable overhead is applied based on direct labour hours. 

The production and costing information for the last year has just arrived on OOC’s controller’s desk. The information shows that 20,000 batches of oil were produced. OOC purchased 408,000 kilograms of direct materials at a total cost of $4,386,000. Total direct labour was $1,700,400, and total hours worked were 109,000. Actual variable overhead for the year was $946,120. 

Calculate the following variances: 

1. Direct materials price variance
2. Direct labour efficiency variance
3. Variable overhead rate variance

Snowbird Inc. manufactures and sells one model of sled. Snowbird’s accountant gathered the following information to prepare the budget for 2018:

First quarter Second quarter Third quarter Fourth quarter

Projected sales

2,000 units

1,800 units

1,000 units

3,500 units

Snowbird has a policy of maintaining finished goods inventory at the end of each quarter equal to 5% of the following quarter’s projected sales. There were 150 sleds in finished goods inventory at the start of 2018, with a total cost of $45,000. Materials and labour requirements for the sleds are:

Direct materials 

Four board-metres per sled

Direct labour hours

Three hours per sled

Machine hours

Two hours per sled

Direct materials inventory on the first day of 2018 was 1,000 board-metres. Direct materials were originally purchased at $33 per board-metre. Prices have now risen to $34 per board-metre. The desired ending materials inventory is 10% of the following quarter’s projected production needs. 

Snowbird’s direct labourers are paid $16 per hour. Variable manufacturing overhead is allocated at a rate of $15 per direct labour hour. Fixed manufacturing overhead costs, also allocated per direct labour hour, are budgeted at $186,240 per quarter for 2018. Snowbird uses first in, first out to account for its inventory flow. 

Prepare the following budgets and schedules as part of the master budget for the first quarter of 2018: 

1. Production budget
2. Direct materials purchase budget
3. Direct labour budget
4. Manufacturing overhead budget
5. Ending finished goods inventory budget

CTA Corp. (CTA) produces and sells three products: chairs, tables, and artificial plants. Information related to the three products is as follows: 

Â	Chairs	Tables	Artificial plants
Expected sales volume (units)	800	200	50
Price per unit	$60	$170	$20
Variable cost per unit	$42	$110	$6

CTA’s total fixed costs are $139,970. CTA is subject to tax at a rate of 30%. CTA has a target net income of $105,000. 

Determine the number of unit sales required for each production order for CTA to achieve its target net income.