DLH Total Costs ??94,000 18,552,825 ??100,750 19,123,325 ??102,150 21,986,000 ??80,000 17,888,000 ??87,000 17,888,625 ??96,500 18
DLH Total Costs 94,000 18,552,825 100,750 19,123,325 102,150 21,986,000 80,000 17,888,000 87,000 17,888,625 96,500 18,052,625 88,500 18,184,325 119,000 20,737,000 96,000 18,606,650 88,200 18,642,850 93,500 18,854,000 95,000 18,845,875 100,500 18,841,750 95,500 18,870,550 97,000 18,907,675 101,150 18,917,100 99,500 20,746,375 96,650 19,068,275 83,000 19,264,875 91,850 19,248,100 91,250 19,367,600 98,500 19,777,050 110,500 19,785,375 99,000 19,921,275 109,000 19,906,775 101,000 19,999,375 81,600 20,126,550 80,400 20,390,850 86,000 20,376,500 115,500 20,398,050 92,650 20,574,050 97,950 20,567,150 91,000 20,606,925 98,000 20,696,675 120,000 20,619,150 101,500 20,756,850 92,000 20,873,100 82,000 21,007,375 116,000 21,057,775 90,500 21,210,675 98,250 18,187,375 105,500 21,259,100 104,000 21,431,000 105,000 19,151,500 106,000 20,831,825 100,000 21,685,650 99,350 20,723,050 104,400 20,130,600
DATA SET 1
| Observations | DLH | Total Costs |
| 1 | 94,000 | 18,552,825 |
| 2 | 100,750 | 19,123,325 |
| 3 | 102,150 | 21,986,000 |
| 4 | 80,000 | 17,888,000 |
| 5 | 87,000 | 17,888,625 |
| 6 | 96,500 | 18,052,625 |
| 7 | 88,500 | 18,184,325 |
| 8 | 119,000 | 20,737,000 |
| 9 | 96,000 | 18,606,650 |
| 10 | 88,200 | 18,642,850 |
| 11 | 93,500 | 18,854,000 |
| 12 | 95,000 | 18,845,875 |
| 13 | 100,500 | 18,841,750 |
| 14 | 95,500 | 18,870,550 |
| 15 | 97,000 | 18,907,675 |
| 16 | 101,150 | 18,917,100 |
| 17 | 99,500 | 20,746,375 |
| 18 | 96,650 | 19,068,275 |
| 19 | 83,000 | 19,264,875 |
| 20 | 91,850 | 19,248,100 |
| 21 | 91,250 | 19,367,600 |
| 22 | 98,500 | 19,777,050 |
| 23 | 110,500 | 19,785,375 |
| 24 | 99,000 | 19,921,275 |
| 25 | 109,000 | 19,906,775 |
| 26 | 101,000 | 19,999,375 |
| 27 | 81,600 | 20,126,550 |
| 28 | 80,400 | 20,390,850 |
| 29 | 86,000 | 20,376,500 |
| 30 | 115,500 | 20,398,050 |
| 31 | 92,650 | 20,574,050 |
| 32 | 97,950 | 20,567,150 |
| 33 | 91,000 | 20,606,925 |
| 34 | 98,000 | 20,696,675 |
| 35 | 120,000 | 20,619,150 |
| 36 | 101,500 | 20,756,850 |
| 37 | 92,000 | 20,873,100 |
| 38 | 82,000 | 21,007,375 |
| 39 | 116,000 | 21,057,775 |
| 40 | 90,500 | 21,210,675 |
| 41 | 98,250 | 18,187,375 |
| 42 | 105,500 | 21,259,100 |
| 43 | 104,000 | 21,431,000 |
| 44 | 105,000 | 19,151,500 |
| 45 | 106,000 | 20,831,825 |
| 46 | 100,000 | 21,685,650 |
| 47 | 99,350 | 20,723,050 |
| 48 | 104,400 | 20,130,600 |
,
Case 1 – Due February 20, 2022
Case 2 – Due April 3, 2022
Case 1 and Case 2 are continuous cases. That is, Case 2 will build on the results of Case 1. For case 1 you will receive an email from me which includes two files: a written case and an Excel spreadsheet. Please make sure the company name for both files match. Also, please note that not all students will receive the same Case 1 and Case 2.
Before you start working on Case 1, I suggest that you go to the module created for Case 1 and Case 2. There you will find a recorded lecture that demonstrates how to perform correlations and regression analysis using Excel. You will need to be able to calculate correlations for both Case 1 and Case 2.
Case 1 will reinforce the learning objectives covered in chapters 2 and 3. You should use the provided Excel file to perform your calculations and analysis. Make sure your solution is easy to follow and well organized (see Excel hint file). After completing your quantitative analysis, develop a short paper summarizing your analysis, findings, any identified issues, and suggestions or alternatives. An example outline for this paper is provided in the Case 1 and 2 Canvas module. My expectation is the paper will be no longer than 2 – 3 pages. If you provide me a draft of your paper more than 4 days before the due date, I will provide you with some initial feedback.
Case 2 will use the activity-based costing information provided in Chapter 7 and will be provided to you once you submit your final paper and Excel file for Case 1. Otherwise, I will send out Case 2 to all remaining students on Monday, February 28. The Case 1 and Case 2 module in Canvas includes a lecture of a similar ABC exercise for your reference (ABC Example – Emerson Company).
As you work on these two cases, feel free to contact me with any questions. I will try to give you a timely response to your questions. Good luck!
Glenn
,
Graphs
| 1) | 2) | 3) | ||||||||||||||
| Total Fixed Costs | Total Variable Costs | Total Costs | ||||||||||||||
| TC = a + bX | ||||||||||||||||
| b = slope of line | ||||||||||||||||
| a | FC = a | VC = bX | a | |||||||||||||
| b = slope of line | ||||||||||||||||
| Units Produced | Units Produced | Units Produced | ||||||||||||||
| 4) | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| TR = pX | ||||||||||||||||
| p = selling price per unit | ||||||||||||||||
| Units Produced | ||||||||||||||||
| 5) | C-V-P Graph | TR = pX | ||||||||||||||
| p = selling price per unit | ||||||||||||||||
| TC = a + bX | ||||||||||||||||
| b = slope of line | ||||||||||||||||
| BE ( Sales $) | ||||||||||||||||
| a | ||||||||||||||||
| BE (Units) |
Breakeven
| Example: | ||||
| Total fixed costs (a) = | 40,000 | |||
| Variable cost per unit (b) = | 6 | |||
| Selling price per unit (p) = | 10 | |||
| Tax rate % | 40% | |||
| 1. What is the breakeven point in units? | ||||
| 2. What is the breakeven point in sales dollars? | ||||
| At breakeven, TR = TC | ||||
| Thus, BE (Units) = | 10X = 40,000 + 6X | where; X = BE (Units) | ||
| Then, | 10X – 6X = 40,000 | |||
| Then, | (10 – 6)X = 40,000 | |||
| Finally, | X= | 40,000 | = | 10,000 units |
| (10 – 6) | ||||
| Now, BE (Sales Dollars) = | 10,000 x $10 | = | 100,000 | |
| Check it! | ||||
| Sales | 100,000 | 10,000 X $10 | ||
| Less: variable costs | 60,000 | 10,000 x $6 | ||
| Contribution margin | 40,000 | |||
| Less: fixed costs | 40,000 | |||
| Operating income | 0 | |||
| Less: income taxes expense | 0 | |||
| Net income | 0 | |||
| It Checks! |
Target Pretax Profit
| What sales in units and dollars will provide a pretax (operating) income of $20,000? | 20,000 | |||||||||||
| Let's start off using the Contribution Income Statement and filling in what we know. | ||||||||||||
| Sales | = | 10 | X | |||||||||
| Less: variable costs | = | 6 | X | |||||||||
| Contribution margin | 60,000 | = | 4 | X | 60,000 | = | 4 | X | ||||
| Less: fixed costs | 40,000 | 15,000 | = | X | ||||||||
| Operating income | 20,000 | |||||||||||
| Let's check our answers! | ||||||||||||
| Sales | 150,000 | = | 10 | X | 15,000 | |||||||
| Less: variable costs | 90,000 | = | 6 | X | 15,000 | |||||||
| Contribution margin | 60,000 | = | 4 | X | 15,000 | |||||||
| Less: fixed costs | 40,000 | |||||||||||
| Operating income | 20,000 | |||||||||||
| Less: income taxes expense | 8,000 | = | 0.40 | X | Operating income | |||||||
| Net income | 12,000 | |||||||||||
| Sales in units will be | 15,000 | Units | ||||||||||
| Sales in dollars will be | $150,000 |
Target NI
| What sales in units and dollars will provide an after-tax or net income of $18,000? | 18,000 | |||||||||||
| Let's start off using the Contribution Income Statement and filling in what we know. | ||||||||||||
| Sales | = | 10 | X | |||||||||
| Less: variable costs | = | 6 | X | |||||||||
| Contribution margin | 70,000 | = | 4 | X | 70,000 | = | 4 | X | ||||
| Less: fixed costs | 40,000 | 17,500 | = | X | ||||||||
| Operating income | 30,000 | = | 1.00 | P | ||||||||
| Less: income taxes expense | = | 0.40 | P | |||||||||
| Net income | 18,000 | = | 0.60 | P | 18,000 | = | 0.60 | P | ||||
| 30,000 | = | P | ||||||||||
| Let's check our answers! | ||||||||||||
| Sales | 175,000 | = | 10 | X | 17,500 | |||||||
| Less: variable costs | 105,000 | = | 6 | X | 17,500 | |||||||
| Contribution margin | 70,000 | = | 4 | X | 17,500 | |||||||
| Less: fixed costs | 40,000 | |||||||||||
| Operating income | 30,000 | |||||||||||
| Less: income taxes expense | 12,000 | = | 0.40 | X | Operating income | |||||||
| Net income | 18,000 | |||||||||||
| Sales in units will be | 17,500 | Units | ||||||||||
| Sales in dollars will be | $175,000 |
Target % Pretax
| What sales in dollars will provide a pretax (operating) income equal to 20 percent of sales dollars? | 0.20 | |||||||||||||||
| Let's start off using the Contribution Income Statement and filling in what we know. | ||||||||||||||||
| Sales | = | 1.00 | X | |||||||||||||
| Less: variable costs | = | 0.60 | X | |||||||||||||
| Contribution margin | 40,000 | + | 0.20 | X | = | 0.40 | X | 40,000 | + | 0.20 | X | = | 0.40 | X | ||
| Less: fixed costs | 40,000 | 40,000 | = | 0.20 | X | |||||||||||
| Operating income | 0.20 | X | 200,000 | = | X | |||||||||||
| Let's check our answers! | ||||||||||||||||
| Sales | 200,000 | = | 1.00 | X | 200,000 | |||||||||||
| Less: variable costs | 120,000 | = | 0.60 | X | 200,000 | |||||||||||
| Contribution margin | 80,000 | = | 0.40 | X | 200,000 | |||||||||||
| Less: fixed costs | 40,000 | |||||||||||||||
| Operating income | 40,000 | |||||||||||||||
| Less: income taxes expense | 16,000 | = | 0.40 | X | Operating income | |||||||||||
| Net income | 24,000 | |||||||||||||||
| It checks out! $40,000 of operating income is equal to 20 percent of $200,000 in sales! | ||||||||||||||||
| Sales in units will be | 20,000 | Units | ||||||||||||||
| Sales in dollars will be | $200,000 |
Target % NI
| What sales in dollars will provide an after-tax or net income equal to 18 percent of sales in dollars? | 0.18 | |||||||||||||||
| Let's start off using the Contribution Income Statement and filling in what we know. | ||||||||||||||||
| Sales | = | 1.00 | X | |||||||||||||
| Less: variable costs | = | 0.60 | X | |||||||||||||
| Contribution margin | 40,000 | + | 0.30 | X | = | 0.40 | X | 40,000 | + | 0.30 | X | = | 0.40 | X | ||
| Less: fixed costs | 40,000 | 40,000 | = | 0.10 | X | |||||||||||
| Operating income | 0.30 | X | = | 1.00 | P | 400,000 | = | X | ||||||||
| Less: income taxes expenses | = | 0.40 | P | |||||||||||||
| Net income | 0.18 | X | = | 0.60 | P | 0.18 | X | = | 0.60 | P | ||||||
| 0.30 | X | = | P | |||||||||||||
| Let's check our answers! | ||||||||||||||||
| Sales | 400,000 | = | 1.00 | X | 400,000 | |||||||||||
| Less: variable costs | 240,000 | = | 0.60 | X | 400,000 | |||||||||||
| Contribution margin | 160,000 | = | 0.40 | X | 400,000 | |||||||||||
| Less: fixed costs | 40,000 | |||||||||||||||
| Operating income | 120,000 | |||||||||||||||
| Less: income taxes expense | 48,000 | = | 0.40 | X | Operating income | |||||||||||
| Net income | 72,000 | |||||||||||||||
| It checks out! $72,000 of net income is equal to 18 percent of $200,000 in sales! | ||||||||||||||||
| Sales in units will be | 40,000 | Units | ||||||||||||||
| Sales in dollars will be | $400,000 |
,
APPLE TIRE COMPANY
INTRODUCTION
Though it is nearly impossible to calculate the precise cost of a manufactured product, businesses make every effort to determine the most accurate cost estimates for decision-making purposes. This case illustrates the difference in a traditional costing system using a single overhead rate and an activity-based costing system.
Traditional cost accounting systems accumulate overhead costs into one or more cost pools and then allocate the overhead costs to individual products using an allocation base such as direct labor cost or hours, machine hours, or the number of units. These allocation bases are increasingly viewed as arbitrary as they seldom represent a product’s use of resources in complex manufacturing processes (Eldenburg & Wolcott, 2011). As a result, organizations that use a traditional costing system may experience substantial product cost distortions due to the lack of correlation between the allocation bases and overhead costs (Kimmel, Weygandt, & Kieso, 2016).
Activity-based costing (ABC) is a system that allocates overhead costs to distinct tasks or activities (activity cost pools) performed in a manufacturing process. The overhead costs in the cost pools are then assigned to specific products employing cost drivers that reflect each product’s use of the activities. Thus, ABC utilizes multiple activity cost pools and cost drivers that increase the accuracy of product costs (Eldenburg & Wolcott, 2011).
COMPANY INFORMATION
Apple Tire Company (ATC) is a manufacturing company that produces tires and manufactures over 200 different tires and sizes in its Memphis plant. In 2018, ATC automated the Memphis, Tennessee plant to take advantage of reasonably priced cutting-edge technology. Before automation, ATC used a single plantwide rate to allocate conversion costs using direct labor hours. At that time, the correlation between conversion costs and direct labor hours was 0.842. Because of the technological improvements, the number of direct labor hours was cut in half.
Alfred Olson, the Controller at ATC, was concerned with the accuracy of the assignment of product costs. Alfred had recently attended a seminar on activity-based costing and was interested in how it may improve ATC’s ability to assign indirect costs to the tires and thus may likewise enhance its pricing decisions.
James Jetter is the Chief Executive Officer (CEO) of ATC in Memphis, Tennessee. Before becoming the CEO in 2012, he served as the Chief Operating Officer (COO) for 8 years. ATC has its international headquarters in Memphis, Tennessee. Currently, ATC has three manufacturing plants in the United States, as well as a plant in Cortez, Mexico. The other two locations in the United States are in Casper, Wyoming and Cleveland, Ohio.
ATC manufactures tires in seven different tire types; all-season, light/medium truck, passenger, performance, summer, touring and winter. Additionally, ATC produces seven different brands with over 70 different models, and produces 20 different tire widths, with aspect ratios from 20 to 85, and tire diameters between 15 and 20 inches. As mentioned previously, ATC produces more than 200 different tires and sizes in the Memphis plant and employs between 2,000 to 3,000 employees during its slow and busy seasons, respectively.
As the Controller of ATC, Alfred Olson has gathered data after the automation of the Memphis manufacturing plant. He has provided this data in a Microsoft Excel spreadsheet file referred to as Data Set 1. In this data file, he has provided the total conversion costs and direct labor hours for 48 daily observations.
Data Set 1 provides enough data to do a simple regression model and/or measure the correlation between variables. Again, Alfred is concerned with the relationship between total conversion costs and direct labor hours, because of the investment in new technology. Currently, ATC allocates conversion costs using direct labor hours based on an average of the 48 observations. In other words, ATC finds the sum of the total conversion costs and direct labor hours over the 48 observations. Then ATC finds the predetermined conversion costs rate by dividing the total conversion costs by the total direct labor hours. Meanwhile, material costs are assigned directly to the tires. Direct labor costs are assigned as part of the conversion costs.
Last month, ATC manufactured 20,000 ATC/A105 and 5,000 ATC/B107 tires. ATC/A105 is a more popular tire that is produced in larger batches than ATC/B107. Additionally, the average direct materials costs for ATC/A105 and ATC/B107 are $55 and $80, respectively. While the ATC/A105 fits on a common family car or van, the ATC/B107 is not suitable for the family vehicles because it is a larger tire.
The direct labor hours used to produce ATC/A105 and ATC/B107 last month were:
ATC/A105 – 9,000 direct labor hours
ATC/B107 – 3,000 direct labor hours
REFERENCES
Eldenburg, Leslie G., & Wolcott, Susan K. (2011). Cost Management: Measuring, Monitoring, and Motivating Performance (2nd ed.). John Wiley & Sons, Inc.
Kimmel, Paul D., Weygandt, Jerry J., & Kieso, Donald E. (2016). Accounting: Tools for Business Decision Making (6th ed.). John Wiley & Sons, Inc.
Case 1:
Alfred Olson has provided you with the first data set. Also, he has informed you that ATC is currently assigning conversion costs to all tires based on the average conversion cost per direct labor hour for the 48 observations.
James Jetter, the CEO of ATC, would like to know the total product costs and unit costs for ATC/A105 and ATC/B107. In addition to the total product costs and unit costs for ATC/A105 and ATC/B107, he would also like to know the strength of the relationship between direct labor hours and total conversion costs. Has this relationship improved or weakened since automation?
Provide James Jetter with a short paper summarizing your findings. This short paper should 1) summarize the information and findings of your analysis, such as production cost per tire, 2) compare the results of your current correlation analysis with the correlation analysis prior to automation, and 3) discuss your suggestions on how to improve the overall calculation of total product and unit costs for the different tires.
5
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