Computation of Budgeted Amounts for 2022 for Parson's Company

Chapter 11

E11.1 (LO 1), AP An icon reads, Writing. Parsons Company is planning to produce 2,000 units of product in 2022. Each unit requires 3 pounds of materials at $5 per pound and a half-hour of labor at $16 per hour. The overhead rate is 70% of direct labor.

Instructions

Compute the budgeted amounts for 2022 for direct materials to be used, direct labor, and applied overhead.

Compute the standard cost of one unit of product.

What are the potential advantages to a corporation of using standard costs?

Compute standard materials costs.

E11.16 (LO 4), AP Fisk Company uses a standard cost accounting system. During January, the company reported the following manufacturing variances.

Materials price variance $1,200 U

Materials quantity variance 800 F

Labor price variance 550 U

Labor quantity variance $750 U

Overhead variance 800 U

In addition, 8,000 units of product were sold at $8 per unit. Each unit sold had a standard cost of $5. Selling and administrative expenses were $8,000 for the month

Instructions

Prepare an income statement for management for the month ended January 31, 2022.

Identify performance evaluation terminology.

E11.17 (LO 1, 4), C The following is a list of terms related to performance evaluation.

1.Balanced scorecard

2. Variance

3. Learning and growth perspective

4. Nonfinancial measures

5. Customer perspective

6. Internal process perspective

7. Ideal standards

8. Normal standards

Instructions

Match each of the following descriptions with one of the terms above.

The difference between total actual costs and total standard costs.

An efficient level of performance that is attainable under expected operating conditions.

An approach that incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company’s strategic goals.

A viewpoint employed in the balanced scorecard to evaluate how well a company develops and retains its employees.

An evaluation tool that is not based on dollars.

A viewpoint employed in the balanced scorecard to evaluate the company from the perspective of those people who buy its products or services.

An optimum level of performance under perfect operating conditions.

A viewpoint employed in the balanced scorecard to evaluate the efficiency and effectiveness of the company’s value chain.

Identity balanced scorecard perspectives.

P11.2 (LO 2, 3, 4), AP Ayala Corporation accumulates the following data relative to jobs started and finished during the month of June 2022.

Costs and Production Data Actual Standard

Raw materials unit cost $2.25 $2.10

Raw materials units 10,600 10,000

Direct labor payroll $120,960 $120,000

Direct labor hours 14,400 15,000

Manufacturing overhead incurred $189,500

Manufacturing overhead applied $193,500

Machine hours expected to be used at normal capacity 42,500

Budgeted fixed overhead for June $55,250

Variable overhead rate per machine hour $3.00

Fixed overhead rate per machine hour $1.30

Overhead is applied on the basis of standard machine hours. Three hours of machine time are required for each direct labor hour. The jobs were sold for $400,000. Selling and administrative expenses were $40,000. Assume that the amount of raw materials purchased equaled the amount used.

Instructions

Compute all of the variances for (1) direct materials and (2) direct labor.

a. LQV $4,800 F

2. Compute the total overhead variance.

3. Prepare an income statement for management. (Ignore income taxes.)

Compute and identify significant variances.

Chapter 12

Compute annual rate of return, cash payback, and net present value.

P12.1 (LO 1, 2, 5), AN U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.

Project Bono Project Edge Project Clayton

Capital investment Annual net income: $160,000 $175,000 $200,000

Year1 14,000 18,000 27,000

2 14,000 17,000 23,000

3 14,000 16,000 21,000

4 14,000 12,000 13,000

5 14,000 9,000 12,000

Total $ 70,000 $ 72,000 $ 96,000

Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.)

Instructions

Compute the cash payback period for each project. (Round to two decimals.)

Compute the net present value for each project. (Round to nearest dollar.)

E $(7,312); C $2,163

Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your computation.)

Rank the projects on each of the foregoing bases. Which project do you recommend?

Compute annual rate of return, cash payback, and net present value.

P12.3 (LO 2, 3, 4), AN Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company’s cost of capital is 8%.

Option A Option B

Initial cost $160,000 $227,000

Annual cash inflows $71,000 $80,000

Annual cash outflows $30,000 $31,000

Cost to rebuild (end of year 4) $50,000 $0

Salvage value $0 $8,000

Estimated useful life 7 years 7 years

Instructions

Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.)

(1) NPV A $16,709 (3) IRR B 12%

2. Which option should be accepted?

Compute net present value considering intangible benefits.

P12.4 (LO 2, 3), E. Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $60,000 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased.

Initial cost $60,000

Estimated useful life 8 years

Net annual cash flows from towing $8,000

Overhaul costs (end of year 4) $6,000

Salvage value $12,000

Jane’s good friend, Rick Ryan, stopped by. He is trying to convince Jane that the tow truck will have other benefits that Jane hasn’t even considered. First, he says, cars that need towing need to be fixed. Thus, when Jane tows them to her facility, her repair revenues will increase. Second, he notes that the tow truck could have a plow mounted on it, thus saving Jane the cost of plowing her parking lot. (Rick will give her a used plow blade for free if Jane will plow Rick’s driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by Jane’s tow truck will feel grateful and might be more inclined to use her service station in the future or buy gas there. Fourth, the tow truck will have “Jane’s Auto Care” on its doors, hood, and back tailgate—a form of free advertising wherever the tow truck goes. Rick estimates that, at a minimum, these benefits would be worth the following.

Additional annual net cash flows from repair work $3,000

Annual savings from plowing 750

Additional annual net cash flows from customer “goodwill” 1,000

Additional annual net cash flows resulting from free advertising 750

The company’s cost of capital is 9%.

Instructions

Calculate the net present value, ignoring the additional benefits described by Rick. Should the tow truck be purchased?

NPV $(13,950)

Calculate the net present value, incorporating the additional benefits suggested by Rick. Should the tow truck be purchased?

NPV $16,491

Suppose Rick has been overly optimistic in his assessment of the value of the additional benefits. At a minimum, how much would the additional benefits have to be worth in order for the project to be accepted?

Compute net present value and internal rate of return with sensitivity analysis.