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Managerial accounting Questions 1 and 3

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Exhibit 3
caspion sebant
annual sales and production in units 160,000 18,000
number of units per batch 80 20
number of purchase orders 400 125
number of machine hours per unit 0.15 0.8
total number of testing hours 8,000 5,000
total number of containers 2,500 800

REQUIRED: Students can work by themselves or in teams of up to four persons, all from the same class. Students should not discuss the case with anyone except their teammates (if any). If a student chooses to work alone, the student should not seek help from other students, faculty or other persons. The solution to all problems must be typed. Round off all calculations to two decimal points.

1. (20 Points) Prepare an income statement for caspion and an income statement for sebant using the traditional accounting system where overhead is applied at a rate of 600% of direct labor costs. The income statements should be prepared on a total basis and then show the average net operating income per unit using the following template for guidance:

caspion sebant
Sales $$$ $$$
Direct materials $$$ $$$
Direct labor $$$ $$$
Manufacturing overhead $$$ $$$
Total Costs $$$ $$$
Net operating income $$$ $$$
Average net operating income
per unit $$$ $$$

2. (20 Points) Calculate the five activity rates (predetermined overhead rates) under activity based costing.

3. (35 Points) Prepare an income statement for caspion and an income statement for sebant using activity based costing. The income statements should be prepared on a total basis and then show the average net operating income per unit using the following template for guidance:

caspion sebant
Sales $$$ $$$
Direct materials $$$ $$$
Direct labor $$$ $$$
Equipment Setups $$$ $$$
Purchase orders $$$ $$$
Machining $$$ $$$
Testing $$$ $$$
Packaging $$$ $$$
Total Costs $$$ $$$
Net operating income $$$ $$$
Average net operating income
per unit $$$ $$$
4. (10 Points) Assume next year that the activity rates (predetermined overhead rates) remain the same as you calculated in question (2). Assume that the demand for caspion is expected to increase significantly. Consequently, the firm expects to produce more batches of caspion next year than this year and the firm plans to produce in batch sizes of 125 rather than 80. Calculate what the equipment setup cost per unit of caspion will be next year if it can be calculated. If it cannot be calculated, then explain in words why the equipment setup cost per unit of caspion cannot be determined in the absence of more information. Excluding your quantitative analysis if any, your explanation should not be more than 1/3 page double spaced with a 12 font size. Your grade will be lowered for poor writing (e.g., grammar)

5. (15 Points) Question 5 is independent of question 4. Next year, because of an expected increase in product demand, machine hours are expected to increase from 900,000 to 1,000,000. The company will not need any new machinery since the current machinery is highly underutilized. Also, the number of testing hours will increase from 720,000 to 800,000. Assume that these new levels of operations are within the firm’s relevant range. Calculate what the activity rate for the cost pool of machining would be next year if it can be calculated. Also, calculate what the activity rate for the cost pool of testing would be next year if it can be calculated. If one or both rates cannot be calculated, then explain in words why the calculations cannot be determined in the absence of more information. Excluding any quantitative analysis, your explanation should not be more than 1/3 page double spaced with 12 font.

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