Chapter 22: Problem Set B

Problem 22-1B: Responsibility Accounting Performance Reports (P1) This problem requires preparing responsibility accounting performance reports for GT Co.’s Chicago plant, managed by Britney Brown. The plant has two departments—Refrigerator and Dishwasher—and an Office department that serves both equally. Key Information: • • Controllable Costs for Operating Departments: Include direct materials, direct labor, supplies, and utilities, as managed by the department managers. Controllable Costs for Plant Manager: Include the costs of the Office department, salaries of department managers, building rent, and all the costs controlled by the Refrigerator and Dishwasher department managers. Steps to Solve: 1. Responsibility Report for Refrigerator Department Manager (1a): o Include all costs that the Refrigerator department manager controls. o Compare the budgeted costs to the actual costs. o Calculate the variance (under or over budget). The check figure indicates a total of $6,800 under budget. 2. Responsibility Report for Dishwasher Department Manager (1b): o Similar to the Refrigerator department, include controllable costs and compare budget to actual. o Calculate variances for each item. 3. Responsibility Report for Chicago Plant Manager (1c): o Include all controllable costs under the plant manager’s responsibility, including both departments and the Office department. o Summarize the variances from the reports of the Refrigerator and Dishwasher departments. o Include the Office department’s costs and compare against the budget to find the total variance, which is $3,900 over budget. Analysis Component: • • Review which manager had the best control over their costs by comparing the variance outcomes from each report. Identify if the plant manager or an individual department manager was more effective in cost control. Problem 22-2B: Allocation of Indirect Expenses to Departments (P2) Harmon’s has two departments—Clothing and Shoes—and needs to allocate indirect expenses. Indirect Expenses: Include rent, advertising, and insurance. Allocation Methods: 1. Previous Method: o Calculate the average cost per square foot ($23). o Multiply the square footage occupied by each department by $23 to find the allocated amount. 2. New Method: o Rent Expense: Allocated based on square footage occupied. o Advertising Expense: Allocated based on total sales of each department. o Insurance Expense: Allocated based on the value of insured assets. Steps to Solve: 1. Calculate the total allocation of each expense using both methods. 2. Ensure the sum of allocated expenses matches the provided totals. 3. Check Figures: Ensure the total allocated to the Shoes department is $36,800, and the insurance allocated to Clothing is $3,600. Problem 22-3B: Departmental Income Statements (P3) Bonanza has two operating departments—Movies and Video Games—and one service department—Office. Steps to Solve: 1. Prepare a Departmental Contribution to Overhead Report: o Allocate the Office department’s expenses to the Movies and Video Games departments using a reasonable method (e.g., sales or number of employees). o Calculate each department’s contribution to overhead by subtracting direct and allocated expenses from their respective revenues. 2. Evaluate if the Video Games Department Should Be Eliminated: o Compare the contribution to overhead for Video Games against the fixed costs it helps cover. o If the department’s contribution is positive (even if the net income is negative), it may still help cover some of the fixed costs, suggesting that it should not be eliminated immediately. Problem 22-4B: Departmental Income (P3) Sadar Company operates two departments—Guitar and Piano—and has various indirect expenses. Steps to Solve: 1. Allocate Indirect Expenses: o Use provided information to distribute expenses like rent, advertising, and utilities based on suitable bases (e.g., floor space for rent, sales for advertising). 2. Prepare Departmental Income Statements: o Include each department’s sales, cost of goods sold, direct expenses, and allocated indirect expenses. o Calculate net income for each department. o Check Figure: Ensure the net income for the Piano department is $58,150. Problem 22-5BA: Allocation of Joint Costs (C2) Tampa Tomatoes processes different grades of tomatoes, and the costs need to be allocated using the value basis. Key Information: • • Sales Values: Provided for each grade. Joint Costs: These are the total processing costs shared among all grades. Steps to Solve: 1. Use Value Basis to Allocate Joint Costs: o Calculate the proportion of each grade’s sales value relative to the total sales value. o Apply this proportion to the total joint costs to determine the allocation for each grade. Formula: Allocation Proportion = (Sales Value of Grade / Total Sales Value) o Allocated Joint Cost = Allocation Proportion × Total Joint Costs 2. Compute Gross Profit for Each Grade: o Subtract the allocated joint costs from the sales value for each grade. o o Gross Profit = Sales Value - Allocated Joint Cost. By following these steps, you can accurately allocate costs, evaluate department performance, and prepare financial statements that reflect responsibility accounting principles.