Order Analyzing The Problem Discussion
1. P6-74B Analyze cost behavior
Watson Industries is in the process of analyzing its manufacturing overhead costs. Management is not sure if the number of units produced or the number of direct labor (DL) hours is the best cost driver to use for predicting manufacturing overhead (MOH) costs. The following information is available:
Direct Labor Hours
MOH Cost per DL Hour
MOH Cost per Unit Produced
1. Are manufacturing overhead costs fixed, variable, or mixed? Explain.
2. Graph the company’s manufacturing overhead costs against DL hours.
3. Graph the company’s manufacturing overhead costs against units produced.
4. Do the data appear to be sound, or do you see any potential data problems? Explain.
5. Use the high-low method to determine the company’s manufacturing overhead cost equation using DL hours as the cost driver. Assume that management believes all the data to be accurate and wants to include all of it in the analysis.
6. Estimate manufacturing overhead costs if the company incurs 26,000 DL hours in January.
2. E7-44B Prepare contribution margin income statements
Hopper Travel uses the contribution margin income statement internally. Hopper’s second-quarter results are as follows:
1. Worldwide Travel
2. Contribution Margin Income Statement
3. Three Months Ended June 30
5. Sales Revenue
6. Less: Variable expenses
7. Contribution margin
8. Less: Fixed expenses
Hopper’s relevant range is sales of between $100,000 and $640,000.
1. Prepare contribution margin income statements at sales levels of $200,000 and $420,000. (Hint: Use the contribution margin ratio.)
2. Compute breakeven sales in dollars.
3. A7-82 CVP analysis by intern with an ethical dilemma
Horner Work Wear, Inc., supplies uniforms for a variety of businesses. Collin Hoffman is a new intern in the Accounting Department at Horner. To expand sales, the company is considering paying commissions to its sales force. The controller, John Wallace, asks Collin to complete an analysis assuming sales would increase 25% under the proposed sales commission plan. This analysis should include 1) the new breakeven sales figure and 2) the operating profit under the new sales commission plan.
Collin does his best to perform the analysis. He is not exactly sure what he is doing but he does not want to appear like he does not understand accounting. After he gets his preliminary analysis finished, he calls his friend, Meghan Peyton, who is an accounting analyst at Scrubs and More, a competing uniform supplier. He knows Meghan from a church group and figures he can trust her. He tells her he is working on a new project and asks her if they can meet for dinner later, where he can ask her advice.
At dinner, Collin confesses to Meghan that he really does not know if he did his analysis correctly. Meghan assures him that she has worked on similar things at her company. She asks him if they can go over the analysis together. He readily agrees because this is just the type of help, he had hoped to get. He shows her the spreadsheet he has been working on; the two of them discuss each item on the analysis. Collin explains his reasoning behind each calculation and his data assumptions. Meghan tells him that his analysis is thorough and agrees that he has done it all correctly as far as she can tell.
Now confident in his work, Collin turns in the proposed sales commission plan analysis the following day. His report ends with a recommendation that the new sales commission plan be undertaken, since it will lead to a significant increase in operating income with only a small increase in breakeven sales. John Wallace glances through the report and is impressed with the appearance of the report; it looks professional and complete. Since John has a lot of other work tasks, he approves the new sales commission plan without any further analysis or investigation.
When he is booking some payroll entries the following week, Collin realizes that he made an error in the CVP analysis he did for the sales commission project. He failed to include the monthly salaries of the sales staff in his computations. Collin is in a panic. If he tells John Wallace of his mistake, Collin is afraid he will not be offered a full-time position upon completion of his internship. Collin decides to keep quiet and not let the controller know of his error. He reasons that it is unlikely that the difference between what he projected versus the actual expenses will be discovered since Horner does not create detailed monthly operating statements.
1. Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:
a. What is (are) the ethical issue(s) in this situation?
b. What are Collin Hoffman’s responsibilities as a management accountant?
c. What are John Wallace’s responsibilities as a management accountant?
d. What are Meghan Peyton’s responsibilities as a management accountant?
2. What would be the impact on breakeven sales from failing to include the fixed monthly salaries? Would the breakeven using the erroneous data be lower or higher than the correct breakeven (the breakeven calculation including the monthly salaries)? Do you think this error would be likely to influence the decision of whether to proceed with the new sales commission proposal?
3. Discuss the specific steps Collin should take to resolve the situation. Refer to the IMA Statement of Ethical Professional Practice in your response.
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