lOMoARcPSD 49006972 Scan to open on Studocu Scan to open on Studocu Problem Set2 How to compute ABC costing Problem Set2 How to compute ABC costing Managerial Economics University of California Irvine Managerial Economics University of California Irvine Studocu is not sponsored or endorsed by any college or university Studocu is not sponsored or endorsed by any college or university Downloaded by Jose Ornelas izaickcastaneda2 gmail com lOMoARcPSD 49006972 Team Akshay Raghav Nivetha PROBLEM SET 2 Problem 1 Jennings Corporation s income statement for Year 2 that is the second year of the company s existence based on FIFO and absorption costing is as follows Sales 415 000 Cost of Goods Sold Expense 251 000 Gross Margin 164 000 Marketing Expenses 83 000 Administrative Expenses 49 800 Operating Income 31 200 The ending balance for the work in process inventory account is 0 at the end of Year 1 and Year 2 The ending balance of the finished goods inventory account in Year 1 and Year 2 are 22 000 and 86 000 respectively At the end of Year 2 the finished goods inventory consists only of units produced in Year 2 45 percent of the manufacturing costs incurred in Year 1 are variable and 70 percent of the manufacturing costs incurred in Year 2 are variable Also 80 percent of marketing expenses and 40 percent of administrative expenses are considered variable a Suppose Jennings Corporation is considering switching to a variable costing system in which all fixed costs both manufacturing and selling and administrative costs are treated as period costs Prepare an income statement for Year 2 using variable costing Solution Income statement using variable costing 1 2 3 Only variable costs are used to calculate the COGS All fixed costs are placed below contribution margin Variable selling and admin is placed above the contribution margin We know Beginning Finished goods COGAS Manufacturing costs Ending finished goods COGS COGAS Manufacturing costs 86000 251000 22000 315000 INCOME STATEMENT for year 2 using Variable costing Sales 415 000 COGS Variable Beginning finished goods Variable Ending finished goods Variable COGAS Manufacturing costs 220500 315000 70 100 Less Total COGS 9900 22000 45 100 60200 86000 70 100 170200 220500 9900 60200 244800 Gross Profit Less Variable Marketing Expenses 66400 83000 80 100 Less Variable Administrative Expenses 19920 49800 40 100 Contribution Margin 158480 Less Fixed Marketing Expenses 16600 83000 20 100 Less Fixed Administrative Expenses 29880 49800 60 100 Less Fixed Manufacturing Costs 94500 315000 30 100 Less Total Fixed Cost 140980 Operating Income 17500 b Explain why the company could be experiencing a cash flow shortage despite the adequate income shown in its income statement based on FIFO and absorption costing Solution We know that Absorption costing allocates fixed overhead costs to the product This type of costing method means that more cost is included in the ending inventory which is carried over into the next period as an asset on the balance sheet i e absorption costing defers a portion of fixed manufacturing costs in finished goods inventory As the ending inventory in year 2 is higher leading to higher net income for the period Hence the company could be experiencing a cash flow shortage c What is the impact on inventory levels if the manager is evaluated on operating income based on FIFO and absorption costing Are there circumstances in which you would recommend the manager be evaluated in this manner Solution Effect of Inventory levels evaluated on operating income Under FIFO and absorption costing the inventory levels will be high because the fixed overhead costs will be deferred in the inventory levels and the net target income is more if there is fully transferred inventory Above we see that the net income for absorption costing is more since the COGS consists of fixed manufacturing overhead cost Downloaded by Jose Ornelas izaickcastaneda2 gmail com lOMoARcPSD 49006972 Team Akshay Raghav Nivetha PROBLEM SET 2 Problem 2 For geriatric patients requiring hospitalization being able to walk without assistance known as ambulation is important for recovery A team of medical researchers have developed a new ambulation program intended to increase the chances that geriatric patients achieve ambulation before being discharged from the hospital The researchers conduct an initial test of the program at two hospitals At each location some patients are randomly selected to participate in the program while the remaining patients do not participate in the program They are hoping for a successful test so that they can apply for further research funding to administer the program at more hospitals The researchers obtain the following data about the initial test of their program Participate in program Achieve ambulation before discharge No No of patients 5 950 Yes of patients 5 050 1 095 Total of patients 11 000 Yes 9 005 10 100 The researchers are extremely discouraged as these initial results suggest the program doesn t work If anything it appears the program is actually making it less likely that a patient achieves ambulation before discharge To better understand the results the researchers take a closer look at the data and observe the following Hospital A Participate in program Achieve ambulation before discharge No No of patients Yes of patients Total of patients The researchers are puzzled now it appears the program does improve the chances of achieving ambulation before discharge Hospital B Participate in program No Yes 5 000 5 5 000 950 50 1 000 1 000 10 000 95 100 Yes 9 000 10 000 Required Why are the researchers coming to different interpretations based on how they analyze the data Problem 3 Lang Industries makes and sells two types of security systems Standard and Supreme The Standard system is the baseline system and the Supreme system is the high end system The Standard system requires 30 in direct materials per unit and 20 in direct labor per unit The Supreme system requires 70 in direct materials per unit and 5 in direct labor per unit Currently Lang Industries allocates overhead using direct labor costs Lang Industries estimates overhead for the upcoming month will be 23 500 and estimates it will produce 100 units of the Standard system and 20 units of the Supreme Downloaded by Jose Ornelas izaickcastaneda2 gmail com lOMoARcPSD 49006972 Team Akshay Raghav Nivetha PROBLEM SET 2 system The Standard system is produced in batches of 50 units Units of