Waterways Continuing Problem
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WATERWAYS CONTINUING PROBLEM
WCP19 Waterways Corporation is a private corporation formed for the purpose of providing the products
and the services needed to irrigate farms, parks, commercial projects, and private homes. It has a centrally
located factory in a U. S. city that manufactures the products it markets to retail outlets across the nation. It
also maintains a division that provides installation and warranty servicing in six metropolitan areas.
The mission of Waterways is to manufacture quality parts that can be used for effective irrigation
projects that also conserve water. By that effort, the company hopes to satisfy its customers, provide rapid
and responsible service, and serve the community and the employees who represent them in each
community.
The company has been growing rapidly, so management is considering new ideas to help the company
continue its growth and maintain the high quality of its products.
Waterways was founded by Will Winkman who is the company president and chief executive officer
(CEO). Working with him from the company’s inception was Will’s brother, Ben, whose sprinkler designs and
ideas about the installation of proper systems have been a major basis of the company’s success. Ben is
the vice president who oversees all aspects of design and production in the company.
The factory itself is managed by Todd Senter who hires his line managers to supervise the factory
employees. The factory makes all of the parts for the irrigation systems. The purchasing department is
Waterways Continuing Problem
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A partial list of Waterways’ accounts and their balances for the month of November follows.
Accounts Receivable $ 295,000
Advertising Expenses 54,000
Cash 260,000
Depreciation—Factory Equipment 16,800
Depreciation—Office Equipment 2,500
Direct Labor 22,000
Factory Supplies Used 16,850
Factory Utilities 10,200
Finished Goods Inventory, November 30 68,300
Finished Goods Inventory, October 31 72,550
Indirect Labor 48,000
Office Supplies Expense 1,400
Other Administrative Expenses 72,000
Prepaid Expenses 41,250
Raw Materials Inventory, November 30 52,700
Instructions
(a) Based on the information given, construct an organizational chart of Waterways Corporation.
(b) A list of accounts and their values are given above. From this information, prepare a cost of goods
manufactured schedule, an income statement, and the current assets section of the balance sheet for
Waterways Corporation for the month of November.
Waterways Continuing Problem
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WATERWAYS CONTINUING PROBLEM
(This is a continuation of the Waterways Problem from Chapter 19)
WCP20 Waterways has two major public-park projects to provide with comprehensive irrigation in one of
its service locations this month. Job J57 and Job K52 involve 15 acres of landscaped terrain which will
require special-order sprinkler heads to meet the specifications of the project. Using a job cost system to
produce these parts, the following events occurred during December.
Raw materials were requisitioned from the company’s inventory on December 2 for $5,202; on
December 8 for $1,200; and on December 14 for $3,600. In each instance, two-thirds (2/3) of these
materials were for J57 and the rest for K52.
Six time tickets were turned in for these two projects for a total amount of 18 hours of work. All the
workers were paid $16.50 per hour. The time tickets were dated December 3, December 9, and December
15. On each of those days, 6 labor hours were spent on these jobs, two-thirds (2/3) for J57 and the rest for
K52.
The predetermined overhead rate is based on machine hours. The expected machine hour use for the
year is 2,112 hours, and the anticipated overhead costs are $840,576 for the year. The machines were used
by workers on projects K52 and J57 on December 3, 9, and 15. Six machine hours were used for project
K52 (2 each day), and 8.5 machine hours were used for project J57 (2.5 the first day and 3 each of the other
days). Both of these special orders were completed on December 15, producing 244 sprinkler heads for J57
and 142 sprinkler heads for K52.
Additional job order activities during this period of time included:
Dec. 1 Purchased raw materials from Durbin Supply Company on account for $50,320.
Dec. 2 Issued $40,000 of direct materials from the company’s inventory to jobs other than K52 and J57
and $3,000 of indirect materials.
Dec. 12 Incurred Waterways’ factory salaries and wages in the amount of $64,000.
Dec. 13 Paid the factory’s water bill of $9,000.
Dec. 18 Transferred $49,000 of costs from other completed jobs to finished goods.
Dec. 21 Paid the factory’s electric bill of $12,000 for Waterways’ factory.
Dec. 31 Made adjusting entries for the factory that included accrued property taxes of $12,000, prepaid
insurance of $8,000, and accumulated depreciation of $16,800.
Instructions
(a) Set up the job cost sheets for Job No. J57 and Job No. K52. Determine the total cost for each
manufacturing special order for these jobs. (Round unit cost to nearest cent.)
(b) Journalize the activities from these job cost sheets in the general journal. Also journalize the other
costs that occurred during this period of time.
(c) Assuming that Manufacturing Overhead has a debit balance of $3,500, determine whether overhead
has been under/over applied and make the adjusting entry.
(d) Why would Waterways choose machine hours as the cost driver for the overhead rather than direct
labor cost? What would Waterways be likely to choose as the cost driver for the overhead for the job
of installing the irrigation system and why?
Waterways Continuing Problem
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WATERWAYS CONTINUING PROBLEM
(This is a continuation of the Waterways Problem from Chapters 19 and 20).
WCP21 Because most of the parts for its irrigation systems are standard, Waterways handles the
majority of its manufacturing as a process cost system. There are multiple process departments. Three of
these departments are the Molding, Cutting, and Welding departments. All items eventually end up in the
Package department which prepares items for sale in kits or individually.
The following information is available for the Molding department for January.
Work in process beginning:
Units in process 24,000
Stage of completion for materials 80%
Stage of completion for labor and overhead 30%
Costs in work in process inventory:
Materials $168,360
Labor 67,564
Overhead 16,892
Total costs in beginning work in process $252,816
Units started into production in January 60,000
Units completed and transferred in January 58,000
Costs added to production:
Materials $265,450
Labor 289,468
Waterways Continuing Problem
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WATERWAYS CONTINUING PROBLEM
(This is a continuation of the Waterways Problem from Chapters 19 through 21.)
WCP22 Vice President for Sales and Marketing Sam Totter is trying to plan for the coming year in terms
of production needs to meet the sales demand. He is also trying to determine ways in which the company’s
profits might be increased in the coming year.
Instructions
(a) Waterways markets a simple water control and timer that it mass-produces. During the year, the
company sold 696,000 units at an average selling price of $4.22 per unit. The variable expenses were
$2,053,200, and the fixed expenses were $683,338.
(1) What is the product’s contribution margin ratio?
(2) What is the company’s break-even point in units and in dollars for this product?
(3) What is the margin of safety, both in dollars and as a ratio?
(4) If management wanted to increase its income from this product by 10%, how many additional
units would have to be sold to reach this income level?
(5) If sales increase by 71,090 units and the cost behaviors do not change, how much will income
increase on this product?
Waterways Continuing Problem
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WATERWAYS CONTINUING PROBLEM
(This is a continuation of the Waterways Problem from Chapters 19 through 22.)
WCP23 Waterways Corporation is preparing its budget for the coming year, 2017. The first step is to
plan for the first quarter of that coming year. Waterways gathered the following information from the
managers.
Sales
Unit sales for November 2016 112,500
Unit sales for December 2016 102,083
Expected unit sales for January 2017 113,333
Expected unit sales for February 2017 112,500
Expected unit sales for March 2017 116,667
Expected unit sales for April 2017 125,000
Expected unit sales for May 2017 137,500
Unit selling price $12
Waterways likes to keep 10% of the next month’s unit sales in ending inventory. All sales are on
account. 85% of the Accounts Receivable are collected in the month of sale, and 15% of the Accounts
Receivable are collected in the month after sale. Accounts receivable on December 31, 2016, totaled
$183,750.
Direct Materials
Item Amount used per unit Inventory, Dec. 31
Metal 1 lb @ 58¢ per lb. 5,177.5 lbs
Plastic 12 oz @ 6¢ per oz 3,883.125 lbs
Metal, plastic, and rubber together are 75¢ per pound per unit.
Waterways likes to keep 5% of the materials needed for the next month in its ending inventory.
Payment for materials is made within 15 days. 50% is paid in the month of purchase, and 50% is paid in the
month after purchase. Accounts Payable on December 31, 2016, totaled $120,595. Raw Materials on
Waterways Continuing Problem
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Manufacturing Overhead
Indirect materials 30¢ per labor hour
Indirect labor 50¢ per labor hour
Utilities 45¢ per labor hour
Maintenance 25¢ per labor hour
Salaries $42,000 per month
Depreciation $16,800 per month
Property taxes $2,500 per month
Insurance $1,200 per month
Maintenance $1,300 per month
Selling and Administrative
Variable selling and administrative cost per unit is $1.62.
Advertising $15,000 a month
Insurance $1,400 a month
Salaries $72,000 a month
Depreciation $2,500 a month
Other fixed costs $3,000 a month
Other Information
The Cash balance on December 31, 2016, totaled $100,500, but management has decided it would like to
maintain a cash balance of at least $800,000 beginning on January 31, 2017. Dividends are paid each
month at the rate of $2.50 per share for 5,000 shares outstanding. The company has an open line of credit
with Romney’s Bank. The terms of the agreement requires borrowing to be in $1,000 increments at 8%
interest. Waterways borrows on the first day of the month and repays on the last day of the month. A
$500,000 equipment purchase is planned for February.
Instructions
For the first quarter of 2017, do the following.
(a) Prepare a sales budget.
(b) Prepare a production budget.
Waterways Continuing Problem
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WATERWAYS CONTINUING PROBLEM
(This is a continuation of the Waterways Problem from Chapters 19 through 23.)
WCP24 Waterways Corporation is continuing its budget preparations. Waterways had the following
static budget and overhead costs for March.
Waterways Corporation Waterways Corporation
Manufacturing Overhead Budget (Static) Manufacturing Overhead Costs (Actual)
For the Month of March For the Month of March
Budgeted production in units 117,500 Production in units 118,500
Budgeted costs Costs
Indirect materials $ 7,050 Indirect materials $ 7,100
Indirect labor 11,750 Indirect labor 11,825
Utilities 10,575 Utilities 10,700
Maintenance 5,875 Maintenance 5,900
Salaries 42,000 Salaries 42,000
Depreciation 16,800 Depreciation 16,800
Property taxes 2,500 Property taxes 2,500
Insurance 1,200 Insurance 1,200
Janitorial 1,300 Janitorial 1,300
Total budgeted costs $99,050 Total costs $99,325
Waterways produced 118,500 units in March rather than the budgeted number of units.
Instructions
(a) Prepare a flexible overhead budget based on the following amounts produced.
(1) 115,500 units
(2) 116,500 units
(3) 117,500 units
(4) 118,500 units
Waterways Continuing Problem
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WATERWAYS CONTINUING PROBLEM
(This is a continuation of the Waterways Problem from Chapters 19 through 24.)
WCP25 Waterways Corporation uses very stringent standard costs in evaluating its manufacturing
efficiency. These standards are not “ideal” at this point, but the management is working toward that as a
goal. At present, the company uses the following standards.
Materials
Item
Per Unit
Cost
Metal
1 lb.
58¢ per lb.
Plastic
12 oz.
96¢ per lb.
Rubber
4 oz.
80¢ per lb.
Direct Labor
Item
Per Unit
Cost
Labor
12 min.
$8.00 per hr.
Predetermined overhead rate based on
direct labor hours = $4.28
The January figures for purchasing, production, and labor are:
The company purchased 229,000 pounds of raw materials in January at a cost of
74¢ a pound.
Production used 229,000 pounds of raw materials to make 115,500 units in January.
Direct labor spent 15 minutes on each product at a cost of $7.75 per hour.
Overhead costs for January totaled $54,673 variable and $63,800 fixed.
Instructions
Answer the following questions about standard costs.
(a) What is the materials price variance?
(b) What is the materials quantity variance?
(c) What is the total materials variance?
(d) What is the labor price variance?
(e) What is the labor quantity variance?
(f) What is the total labor variance?
(g) What is the total overhead variance?
(h) Evaluate the variances for this company for January. What do these variances suggest to
management?
Waterways Continuing Problem
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WATERWAYS CONTINUING PROBLEM
(This is a continuation of the Waterways Problem from Chapters 19 through 25.)
WCP26 Waterways puts much emphasis on cash flow when it plans for capital investments.
The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors.
Using that rate, Waterways then uses different methods to determine the best decisions for making capital
outlays.
Waterways is considering buying five new backhoes to replace the backhoes it now has. The new
backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the
operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just
fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old
backhoes and would need to learn some new skills to use the new backhoes.
The following information is available to use in deciding whether to purchase the new backhoes.
Old Backhoes New Backhoes
Purchase cost when new $90,000 $200,000
Salvage value now $42,000
Investment in major overhaul needed in next year $55,000
Salvage value in 8 years $15,000 $90,000
Remaining life 8 years 8 years
Net cash flow generated each year $40,425 $53,900
Instructions
(a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment.
(Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine,