Accounting Chapter 14 Homework Show Results For Each Product Your Computations

14-21

14-22 (25 min.) Cost allocation to divisions.

Holbrook Corporation has three divisions: pulp, paper, and fibers. Holbrook’s new controller,

Paul Weber, is reviewing the allocation of fixed corporate-overhead costs to the three divisions.

He is presented with the following information for each division for 2013:

Until now, Holbrook Corporation has allocated fixed corporate-overhead costs to the divisions

on the basis of division margins. Weber asks for a list of costs that comprise fixed corporate

overhead and suggests the following new allocation bases:

Required:

1. Allocate 2013 fixed corporate-overhead costs to the three divisions using division margin as

the allocation base. What is each division’s operating margin percentage (division margin

minus allocated fixed corporate-overhead costs as a percentage of revenues)?

2. Allocate 2013 fixed costs using the allocation bases suggested by Weber. What is each

division’s operating margin percentage under the new allocation scheme?

3. Compare and discuss the results of requirements 1 and 2. If division performance is linked to

operating margin percentage, which division would be most receptive to the new allocation

scheme? Which division would be the least receptive? Why?

4. Which allocation scheme should Holbrook Corporation use? Why? How might Weber

overcome any objections that may arise from the divisions?

SOLUTION

14-22

14-23

14-24

14-23 (30–40 min.) Variance analysis, multiple products.

The Chicago Wolves play in the American Ice Hockey League. The Wolves play in the

Downtown Arena, which is owned and managed by the City of Chicago. The arena has a

capacity of 17,500 seats (6,500 lower-tier seats and 11,000 upper-tier seats). The arena charges

the Wolves a per-ticket charge for use of its facility. All tickets are sold by the Reservation

Network, which charges the Wolves a reservation fee per ticket. The Wolves’ budgeted

contribution margin for each type of ticket in 2013 is computed as follows:

The budgeted and actual average attendance figures per game in the 2013 season are as follows:

There was no difference between the budgeted and actual contribution margin for lower-tier or

upper-tier seats.

The manager of the Wolves was unhappy that actual attendance was 20% below budgeted

attendance per game, especially given the booming state of the local economy in the past six

months.

Required:

1. Compute the sales-volume variance for each type of ticket and in total for the Chicago

Wolves in 2013. (Calculate all variances in terms of contribution margins.)

2. Compute the sales-quantity and sales-mix variances for each type of ticket and in total in

2013.

3. Present a summary of the variances in requirements 1 and 2. Comment on the results.

14-25

SOLUTION

14-26

SOLUTION EXHIBIT 14-23

Columnar Presentation of Sales-Volume, Sales-Quantity and Sales-Mix Variances for Chicago

Wolves

Flexible Budget:

Actual Units of

All Products Sold

× Actual Sales Mix

× Budgeted

Contribution

Margin per Unit

(1)

Actual Units of

All Products Sold

× Budgeted Sales Mix

× Budgeted

Contribution Margin

per Unit

(2)

Static Budget:

Budgeted Units of

All Products Sold

× Budgeted Sales Mix

× Budgeted

Contribution

Margin per Unit

(3)

Panel A:

Lower-tier

(10,000 × 0.36a) × $17

3,600 × $17

(10,000 × 0.44b) × $17

4,400 × $17

(12,500 × 0.44b) × $17

5,500 × $17

$61,200 $74,800 $93,500

$13,600U $18,700 U

Sales-mix variance Sales-quantity variance

$32,300 U

Sales-volume variance

Panel B:

Upper-tier

(10,000 × 0.64c) × $8

6,400 × $8

(10,000 × 0.56d) × $8

5,600 × $8

(12,500 × 0.56d) × $8

7,000 × $8

$51,200 $44,800 $56,000

$6,400 F $11,200 U

Sales-mix variance Sales-quantity variance

$4,800 U

Sales-volume variance

Panel C:

All Tickets

(Sum of Lower-

tier and Upper-

tier Tickets)

$112,400e $119,600f $149,500g

$7,200 U $29,900 U

Total sales-mix variance Total sales-quantity variance

$37,100 U

Total sales-volume variance

F = favorable effect on operating income; U = unfavorable effect on operating income.

Actual Sales Mix:

aLower-tier = 3,600 ÷ 10,000 = 36%

cUpper-tier = 6,400 ÷ 10,000 = 64%

e$61,200 + $51,200 = $112,400

Budgeted Sales Mix:

bLower-tier = 5,500 ÷ 12,500 = 44%

dUpper-tier = 7,000 ÷ 12,500 = 56%

f $74,800 + $44,800 = $119,600

g $93,500 + $56,000 = $149,500

14-27

14-24 (30 min.) Variance analysis, working backward.

The Hiro Corporation sells two brands of wine glasses: Plain and Chic. Hiro provides the

following information for sales in the month of June 2014:

All variances are to be computed in contribution-margin terms.

Required:

1. Calculate the sales-quantity variances for each product for June 2014.

2. Calculate the individual-product and total sales-mix variances for June 2014. Calculate the

individual-product and total sales-volume variances for June 2014.

3. Briefly describe the conclusions you can draw from the variances.

SOLUTION

14-28

14-29

SOLUTION EXHIBIT 14-24

Columnar Presentation of Sales-Volume, Sales-Quantity and Sales-Mix Variances

for Hiro Corporation

Flexible Budget:

Actual Units

of All Glasses Sold

 Actual Sales Mix

 Budgeted

Contribution

Margin per Unit

Actual Units

of All Glasses Sold

 Budgeted Sales Mix

 Budgeted

Contribution

Margin per Unit

Static Budget:

Budgeted Units

of All Glasses Sold

 Budgeted Sales Mix

 Budgeted

Contribution

Margin per Unit

Panel A:

Plain

(1,900  0.6)  $5

1,140  $5

(1,900  0.75)  $5

1,425  $5

(2,300  0.75)  $5

1,725  $5

$5,700 $7,125 $8,625

$1,425 U $1,500 U

Sales-mix variance Sales-quantity variance

$2,925 U

Sales-volume variance

Panel B:

Chic

(1,900  0.4)  $12

760  $12

(1,900  0.25)  $12

475  $12

(2,300  0.25)  $12

575  $12

$9,120 $5,700 $6,900

$3,420 F $1,200 U

Sales-mix variance Sales-quantity variance

$2,220 F

Sales-volume variance

Panel C:

All Glasses

$14,820 $12,825 $15,525

$1,995 F $2,700 U

Total sales-mix variance Total sales-quantity variance

$705 U

Total sales-volume variance

F = favorable effect on operating income; U = unfavorable effect on operating income.

14-30

14-25 (60 min.) Variance analysis, multiple products.

Soda-King manufactures and sells two soft drinks: Kola and Limor. Budgeted and actual results

for 2014 are as follows:

Required:

1. Compute the total sales-volume variance, the total sales-mix variance, and the total sales-

quantity variance. (Calculate all variances in terms of contribution margin.) Show results for

each product in your computations.

2. What inferences can you draw from the variances computed in requirement 1?

SOLUTION

14-31

14-32

SOLUTION EXHIBIT 14-25

Sales-Mix and Sales-Quantity Variance Analysis of Soda King for 2014

Flexible Budget: Static Budget:

Actual Units of Actual Units of Budgeted Units of

All Products Sold All Products Sold All Products Sold

 Actual Sales Mix  Budgeted Sales Mix  Budgeted Sales Mix

 Budgeted Contribution  Budgeted Contribution  Budgeted Contribution

Margin Per Unit Margin Per Unit Margin Per Unit

Kola 1,230,000  0.41  $4.50 = $2,269,350 1,230,000  0.4  $4.50 = $2,214,000 1,250,000  0.4  $4.50 = $2,250,000

Limor 1,230,000  0.59  $3.50 = 2,539,950 1,230,000  0.6  $3.50 = 2,583,000 1,250,000  0.6  $3.50 = 2,625,000

$4,809,300 $4,797,000 $4,875,000

$ 12,300 F $ 78,000 U

Sales-mix variance Sales-quantity variance

$65,700 U

Sales-volume variance

F = favorable effect on operating income; U= unfavorable effect on operating income

14-26 (20 min.) Market-share and market-size variances (continuation of 14-25).

Soda-King prepared the budget for 2014 assuming a 12.5% market share based on total sales in

the western region of the United States. The total soft drinks market was estimated to reach sales

of 10 million cartons in the region. However, actual total sales volume in the western region was

12.3 million cartons.

Required:

Calculate the market-share and market-size variances for Soda-King in 2014. (Calculate all

variances in terms of contribution margin.) Comment on the results.

SOLUTION

14-33

14-34

SOLUTION EXHIBIT 14-26

Market-Share and Market-Size Variance Analysis of Soda King for 2014

Static Budget:

Actual Market Size Actual Market Size Budgeted Market Size

 Actual Market Share  Budgeted Market Share  Budgeted Market Share

 Budgeted Average  Budgeted Average  Budgeted Average

Contribution Margin Contribution Margin Contribution Margin

Per Unit Per Unit Per Unit

12,300,000  0.10a  $3.90b 12,300,000  0.125c  $3.90b 10,000,000  0.125c  $3.90b

$4,797,000 $5,996,250 $4,875,000

$1,199,250 U $1,121,250 F

Market-share variance Market-size variance

$78,000 U

Sales-quantity variance

F = favorable effect on operating income; U = unfavorable effect on operating income

aActual market share: 1,230,000 units ÷ 12,300,000 units = 0.10, or 10%

bBudgeted average contribution margin per unit $4,875,000 ÷ 1,250,000 units = $3.90 per unit

cBudgeted market share: 1,250,000 units ÷ 10,000,000 units = 0.125, or 12.5%

14-27 (30 min.) Purposes of cost allocation

Sarah Reynolds recently started a job as an administrative assistant in the cost accounting

department of Mize Manufacturing. New to the area of cost accounting, Sarah is puzzled by the

fact that one of Mize’s manufactured products, SR460, has a different cost depending on who

asks for it. When the marketing department requested the cost of SR460 in order to determine

pricing for the new catalog, Sarah was told to report one amount, but when a request came in the

very next day from the financial reporting department for the cost of SR460, she was told to

report a very different cost. Sarah runs a report using Mize’s cost accounting system, which

produces the following cost elements for one unit of SR460:

14-35

aThese costs are specific to SR460, but would not be eliminated if SR460 were purchased from

an outside supplier. Allocated costs would be reallocated elsewhere in the company should the

company cease production of SR460.

Required:

1. Explain to Sarah why the cost given to the marketing and financial reporting departments

would be different.

2. Calculate the cost of one unit of SR460 to determine the following:

a. The selling price of SR460

b. The cost of inventory for financial reporting

c. Whether to continue manufacturing SR460 or to purchase it from an outside source

(Assume that SR460 is used as a component in one of Mize’s other products.)

d. The ability of Mize’s production manager to control costs

SOLUTION

14-36

14-28 (25 min.) Customer-profitability.

Bracelet Delights is a new company that manufactures custom jewelry. Bracelet Delights

currently has six customers referenced by customer number: 01, 02, 03, 04, 05, and 06. Besides

the costs of making the jewelry, the company has the following activities:

Required:

1. Customer orders. The salespeople, designers, and jewelry makers spend time with the

customer. The cost driver rate is $42 per hour spent with a customer.

2. Customer fittings. Before the jewelry piece is completed, the customer may come in to make

sure it looks right and fits properly. Cost driver rate is $30 per hour.

3. Rush orders. Some customers want their jewelry quickly. The cost driver rate is $90 per rush

order.

4. Number of customer return visits. Customers may return jewelry up to 30 days after the

pickup of the jewelry to have something refitted or repaired at no charge. The cost driver rate

is $40 per return visit.

Information about the six customers follows. Some customers purchased multiple items. The cost

of the jewelry is 60% of the selling price.

14-37

Required:

1. Calculate the customer-level operating income for each customer. Rank the customers in

order of most to least profitable and prepare a customer-profitability analysis, as in Exhibits

14-3 and 14-4.

2. Are any customers unprofitable? What is causing this? What should Bracelet Delights do

about these customers?

SOLUTION

14-38

14-39

14-29 (30 min.) Customer profitability, distribution.

Green Paper Delivery has decided to analyze the profitability of five new customers. It buys

recycled paper at $20 per case and sells to retail customers at a list price of $26 per case. Data

pertaining to the five customers are:

Green Paper Delivery’s five activities and their cost drivers are:

Required:

1. Compute the customer-level operating income of each of the five retail customers now being

examined (1, 2, 3, 4, and 5). Comment on the results.

2. What insights do managers gain by reporting both the list selling price and the actual selling

price for each customer?

3. What factors should managers consider in deciding whether to drop one or more of the five

customers?

14-40

SOLUTION