WATERWAYS CONTINUING PROBLEM (WCP 1) Question (a): Based on the information given, construct an organizational chart of Waterways Corporation.

Answer:

Question (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 2012. Answer: (i) Cost of Goods Manufactured Schedule
Waterways Corporation Cost of Good Manufacturing Schedule For the Month Ended November 30, 2012 Work in Process, October 31 Direct materials Raw materials inventory, October 31 Raw materials purchases Total raw materials available for use Less: Raw materials inventory, November 30 Direct materials use Direct Labor Manufacturing Overhead Indirect labor Factories supply used Factory utilities Depreciation - Factory equipment Rent - Factory equipment Repairs - Factory equipment Total manufacturing overhead Total manufacturing cost Total cost of work in progress Less: Work in process, November 30 Cost of goods manufactured 48,000 16,800 10,200 16,800 47,000 4,500 143,300 355,100 407,800 42,000 $ 365,800 $ 38,000 184,500 222,500 52,700 $ 169,800 42,000 $ 52,700

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(ii)

Income Statement (with Cost of Goods Manufactured in Details)

Waterways Corporation INCOME STATEMENT FOR THE MONTH ENDED MARCH, 30

Sales Sales Commissions

1,350,000 (40,500) 1,309,500

Raw materials inventory, October 31 Raw materials purchases Raw materials inventory, November 30 Total of Material Direct labor Indirect labor Factories supply used Factory utilities Depreciation - Factory equipment Rent - factory equipment Repairs - factory equipment Total manufacturing overhead work in Process, October 31 Less: Work in Process, November 30 Total of WIP Total Cost of Goods Manufactured Finished goods inventory, October 31 Finished goods inventory, November 30 Total of finish goods Cost of Goods Sold Gross Profit Advertising & Promotion Depreciation - Office equipment Office Supplies Expense Other admin expense Salaries Operating cost Net Profit

38,000 184,500 (52,700) 169,800 42,000 48,000 16,800 10,200 16,800 47,000 4,500 143,300 52,700 (42,000) 10,700 365,800 72,550 (68,800) 3,750 365,800 943,700 54,000 2,400 1,600 7,200 325,000 390,200 553,500

Current assets Cash Receivabes (net)

260,000 275,000

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Inventories Finished goods Work in process Raw materials Prepaid expenses Total current assets

68,800 42,000 52,700 163,500 41,250 739,750

(iii)

Current Asset Section of Balance Sheet

Waterways Corporation Balance Sheet November 30, 2012

Current assets Cash Receivables (net) Inventories Finished goods Work in process Raw materials Prepaid expenses Total current assets 68,800 42,000 52,700 163,500 41,250 $ 739,750 $ 260,000 275,000

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WATERWAYS CONTINUING PROBLEM (WCP 4) Question (a) For each of these cost pools, what would be the likely activity cost driver? Answer
Cost Pools Assembling Billing Digging trenches Janitorial Machine maintenance Machine setups Molding Packaging Payroll Plant supervision Product design Purchasing materials Selling Testing Welding Cost Driver Product assembled Number of bills sent out Number of trenches dug Janitor hours Machine hours Number of setups Number of items molded Number of item packaged Number of employee on payroll Supervisor hours Cost per design Number of purchase done Number of item sold Number of test done Items welded

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Question (b) Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Waterways.

Answer WATERWAYS CORPORATION

Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers per Activity Actual Use of Drivers Overhead Rates Actual Cost Assigned

Irrigation installation Machining (all machine user) Customer orders Shipping Design Selling

Labor cost Machine hours Number of orders None (direct) Cost per design Number of sales calls

(A) $1,998,432 $1,670,400

(B) 12,960 33,408,000

(C) 12,941 33,409,000

[A B] (D) $154.20 0.05

[D x C] $1,995,502.20 $1,670,450

30,636

2,553 N/A

2,520 Traced directly 7 22,100

12 N/A 102.5 15

30,240 N/A $717.50 $353,600

$820 350,400

8 21,900

Question (C) How would you classify each of the following activities by levelunit level, batch level, product level, or facility level?

Testing product Designing new products Packaging Molding Assembling Depreciation Machine maintenance Advertising Equipment setups

Product-level activities Product-level activities Unit-level activities Unit-level activities Unit-level activities Facility-level activities Batch-level activities Facility-level activities Batch-level activities -6-

Electricity required to equipment Requisitioning materials

run Facility-level activities Product-level activities

Question (d-1) The results of ABC can provide a more accurate picture of costs. Discuss the value of Waterways using this system to determine overhead costs.

Answer By implementing ABC costing, Waterways Corporation will gain primary benefits includes: Leads to more cost pools cost are assigned more directly on the basis of the cost drivers used t produced each product. Leads to enhanced control over overhead cost Waterways can trace many overhead costs directly to activities allowing some indirect costs to be identified as direct costs. Thus managers will become more aware of their responsibility to control the activities that generate those costs. Lead to better management decisions accurate product costing should contribute to setting selling prices that can help achieve desired product profitability levels. Furthermore, accurate cost data could be helpful in deciding whether to make or to buy a product part or component, and sometimes even whether to eliminate a product.

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Question (d-2) How might using ABC affect decision making at Waterways? Answer Activity based costing has revolutionized product costing, planning, and forecasting in the last decade. It is based on a philosophy of estimation that: "it is better to be approximately right, than precisely wrong." In summary, activity-based costing is a management decision-making tool. It provides financial support data structured in a fashion fundamentally different from accounting data provided in the general ledger. By associating cost to the activity, a clear relationship can be established between sources of activity demand and the related costs. This association can benefit the distributor in determining where costs are being incurred, what is initiating the costs and where to apply efforts to curb inflationary costs. This can be of particular value in tracking new products or customers

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WATERWAYS CONTINUING PROBLEM (WCP 7) Question (Part 1 - a) What are the consequences of Waterways agreeing to provide the 15,000 units to the Canadian company? Would this be a wise special order to accept?

Answer
Reject Accept Net Income Increase (Decrease) Revenue Costs Net Income : : : -$0-$0-$015,000 x 2.60 15,000 x $2.30 4,500 39,000 (34,500) 4,500

Waterways Corporation should accept the Special offer from Canadian Company.

Question (Part 1 - b) Should Waterways accept the special order from the irrigation company? Answer
Reject Accept Net Income Increase (Decrease) Revenue Costs Net Income : : : -$0-$0-$02,000 x $3.10 2,000 x $2.30 1,600 6,200 (4,600) 1,600

Waterways Corporation should accept the Special offer from irrigation Company.

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Question (Part 1 - c) What would be the consequences of accepting both special orders? Answer If Waterways Corporation accepts both offers from Canadian and irrigation company, Waterways would be working overcapacity.

Question (Part 2 - a) Without considering the possibility of making the timing unit, evaluate whether Waterways should buy or continue to make the small fitting.

Answer
Make Buy Net Income Increase (Decrease) Variable Mfg. Fix Mfg. Purchase Cost Total Annual Cost : : : $460,000 9,200 0 $469,200 -$09,200 377,200 $386,400 $460,000 0 (377,200) (82,800)

Therefore, Waterways Corporation should continue to make the small fitting.

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Question (Part 2 - b) (1) What is Waterways opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit?

Answer
Make Buy Net Income Increase (Decrease) Total Annual Cost Opportunity Cost Total Cost : : : $469,200 6,330* $469,200 $386,400 7,295** $386,400 $828,000 (965) 82,800

* Opportunity cost (Make) = 500 x $12.66 ** Opportunity cost (Buy) = $2,345 + (500 x $9.90)

(2) Would it be wise for Waterways to buy the fitting and manufacture the timing unit? Explain.

Answer No, it wouldnt be wise for Waterways Corporation to buy the fitting and manufacture the timing unit. Waterways Corporation would make more profit by making the timing unit rather than bought and made the fitting.

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Question (Part 3) Given the information above, what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns? Answer
Production of antiquated machine for 1 year Cost of production Profit of produced goods per year Total profit in 2 years : 260 days x 50 units = 13,000 units : 13,000 units x $6.50 = $84,500 : 13,000 ($8.50 - $6.50) = $26,000 : $26,000 x 2 = $52,000

Consider Waterways Corporation replaces the machine.

Production of antiquated machine for 1 year Cost of production Profit of produced goods per year Total profit in 2 years : 260 days x 100 units = 26,000 units : 26,000 units x $6.50 = $169,000 : 26,000 ($8.50 - $6.50) = $52,000 : $52,000 x 2 = $104,000

In addition, the cost of the new machine mentioned is $55,000. Therefore, the net profit is $104,000 - $55,000 = $49,000. Hence, due to the replacement, the profit will decrease by $3,000 and the cost of production will increased by $84,500 due to the machine replacement. The conclusion is, replacing the old machine to the new proposed machine is not a brilliant idea.

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WATERWAYS CONTINUING PROBLEM (WCP 8) Question (a) Compute the rate per hour of labor. (Round to two decimal places). Answer Labor Rate Per Hour = Time charges Budgeted Hours $353,950 $5,750 = $61.56

Question (b) Compute the material loading charge. (Round to two decimal places). Answer Material Loading (%) = Material Loading Charge for 2013 Estimated Material in 2012 x 100 $125,000 $640,000 x 100 = 19.53% Material Loading Charge = $640,000 x (19.53% + 16%) Material Loading Charge = $640,000 x 35.58% = $227,712

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Question (c) Waterways has received a request for a bid to do a parkway for the city. The irrigation manager estimates that it will take about a month to complete the project and require 480 hours of labor and $80,000 of materials. Compute the total estimated bid for the parkway project

Answer
Labor (480 x ($61.56 +$14) Parts Material Loading Charge Total Bill = = = = $36,268.80 $640,000 $227,712 $903,980.80

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WATERWAYS CONTINUING PROBLEM (WCP 10) Question (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 (5) 119,500 units Answer
WATERWAYS CORPORATION Felxible Budget (Manufacturing Overhead) For the Month of March 2012 Production in Units Costs: Variable Factory Overhead Indirect Materials Indirect Labor Utilities Other Total Variable Costs Fixed Factory Overhead Salaries Depreciation Property taxes Insurance Janitorial total Fixed Costs Total Costs 115,500 116,500 117,500 118,500 119,500

$ $ $ $ $ $ $ $ $ $ $

5,775 13,860 11,550 8,085 39,270 42,000 16,800 3,000 1,200 1,500 64,500

$ $ $ $ $ $ $ $ $ $ $

5,825 13,980 11,650 8,155 39,610 42,000 16,800 3,000 1,200 1,500 64,500

$ $ $ $ $ $ $ $ $ $ $

5,875 14,100 11,750 8,225 39,950 42,000 16,800 3,000 1,200 1,500 64,500

$ $ $ $ $ $ $ $ $ $ $

5,925 14,220 11,850 8,295 40,290 42,000 16,800 3,000 1,200 1,500 64,500

$ $ $ $ $ $ $ $ $ $ $

5,975 14,340 11,950 8,365 40,630 42,000 16,800 3,000 1,200 1,500 64,500

$ 103,770

$ 104,110

$ 104,450

$ 104,790

$ 105,130

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Question (b) Prepare a flexible budget report showing the differences (favorable and unfavorable) in manufacturing overhead costs for the month of March. Answer
WATERWAYS CORPORATION Flexible Budget Performance Report (Manufacturing Overhead) For the Month of March 2012 Planning Budget Activity Variance Flexible Budget Spending Actual Result

Production in units Costs: Variable Factory Overhead Indirect Materials Indirect Labor Utilities Other Total Variable Costs Fixed Factory Overhead Salaries Deppreciation Property taxes Insurance Janitorial Total Fixed Costs Total Costs

117,500

118,500

118,500

5,875 14,100 11,750 8,225 39,950

50 120 100 70 340

U U U U U

5,925 14,220 11,850 8,295 40,290

15 25 30 20 90

F F F U F

5,910 14,195 11,880 8,275 40,260

42,000 16,800 3,000 1,200 1,500 64,500 104,450

340 U

42,000 16,800 3,000 1,200 1,500 64,500 104,790

340 F

42,000 16,800 3,000 1,200 1,500 64,500 104,790

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Question (c) Prepare a responsibility report for the manufacturing overhead for March, assuming only variable costs are controllable. Answer
WATERWAYS CORPORATION (Manufacturing Overhead Responsibility Report) For the Month of March 2012 Planning Budget Indirect Materials Indirect Labor Utilities Maintenance Total Controllable Costs 5,925 14,220 11,850 8,295 40,290 Actual 5,910 14,195 11,880 8,275 40,260 Difference U/F F F U F F

15 25 (30) 20 30

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