Problem 18-4 p551Weld Canning Company has a busy season lasting six months from September through February and a slack season lasting from March through August. Typical data for these seasons are as follows:
Factory overhead cost is allocated to cases of canned goods on the basis of direct laborhours. The typical case requires one direct labor-hour. The same type of products is packed in all months. On December 31, the company has 25,000 cases in finished goods inventory.
Required:
- a. If the company allocated each month’s factory overhead costs to the products made in that month, what would be the factory overhead cost per case in the busy season and in the slack season, respectively? What would be the factory overhead cost component of finished goods inventory?
- b. If, instead, the company used a predetermined annual overhead rate, what would be its cost per case? What would be the factory overhead cost component of finished goods inventory?
- c. Discuss which method of overhead allocation is preferable
Problem 22-1 p665 Problem 22–1.
Department 7 of the Arbia Company manufactures a variety of components for products, one of which is Part No. 211. Data on this part are as follows:
MPC ACJ
Direct material and direct labor 30.17 29.82 29820
Fixed costs, Dept 7 6.49 6.88 6880
Costs allocated to Dept 7 13.83 14.29 14290
Total 50.49 50.99 50990
Part No. 211 can be purchased from an outside vendor for $31.00.
What costs are relevant for each of the following purposes?
a. For preparing financial statements for July?
b. For deciding whether to make or buy Part No. 211?
c. For assessing the performance of the manager of Department 7?
Case 22–5: Piedmont Universiy*
When Hugh Scott was inaugurated as the 12th president of Piedmont University in 1991, the university was experiencing a financial crisis. For several years enrollments had been declining and costs had been increasing. The resulting deficit had been made up by using the principal of “quasi-endowment” funds. For true endowment funds, only the income could be used for operating purposes; the principal legally could not be used. Quasi-endowment funds had been accumulated out of earlier years’ surpluses with the intention that only the income on these funds would be used for operating purposes; however, there was no legal prohibition on the use of the principal. The quasi-endowment funds were nearly exhausted.
Scott immediately instituted measures to turn the financial situation around. He raised tuition, froze faculty and staff hirings, and curtailed operating costs. Although he had come from another university and was therefore viewed with some skepticism by the Piedmont faculty, Scott was a persuasive person, and the faculty and trustees generally agreed with his actions. In the year ended June 30, 1993, there was a small operating surplus.
In 1993, Scott was approached by Neil Malcolm, a Piedmont alumnus and partner of a local management consulting firm. Malcolm volunteered to examine the situation and make recommendations for permanent measures to maintain the university’s financial health. Scott accepted this offer.
Malcolm spent about half of his time at Piedmont for the next several months and had many conversations with Scott, other administrative officers, and trustees. Early in 1994 he submitted his report. It recommended increased recruiting and fundraising activities, but its most important and controversial 693694recommendation was that the university be reorganized into a set a profit centers.
At that time the principal means of financial control was an annual expenditure budget submitted by the deans of each of the schools and the administrative heads of support departments. After a dean or department head discussed a budget with the president and financial vice president, it was usually approved with only minor modifications. There was a general understanding that each school would live within the faculty size and salary numbers in its approved budget, but not much stress was placed on adhering to the other items.
Malcolm proposed that in the future the deans and other administrators submit budgets covering both the revenues and the expenditures for their activities. The proposal also involved some shift in responsibilities, and new procedures for crediting revenues to the profit centers that earned them and charging expenditures to the profit centers responsible for them. He made rough estimates of the resulting revenues and expenditures of each profit center using 1993 numbers; these are given in Exhibit 1.
Several discussions about the proposal were held in the University Council, which consisted of the president, academic deans, provost, and financial vice president. Although there was support for the general idea, there was disagreement on some of the specifics, as described below.
Questions
- How should each of the issues described above be resolved?
Central Administrative Costs – This could be determined by creating formulas that gives responsibility to the graduate school based on the percentage of students. Graduate schools generally have less enrollment so this would make it so the undergraduate school would be responsible for a bigger part of the costs.
Gifts and Endowment– The board should be the only one to have a vote on where the money is allocated, especially since it seems as though the president and dean must not like each other. The less people involved in the process the better.
Athletics– University rec centers have upkeep and students aren’t always the best at making sure things aren’t damaged. It makes sense they would want to charge a fee for this, but charging for intramural activities will probably result in people not signing up for these activities.
Maintenance– Piedmont could be seeking bids from outside contractors to attempt to lower their maintenance costs so that way they could always have a backup in case the current maintenance team was unable to complete the jobs. Schools shouldalso be responsible for their own maintenance needs and they should make sure to find a cost effective solution.
Computers– I believe that if they try to charge for using a computer that students would not be likely to use them any longer. They may end up losing revenue if it got out that they were trying to charge for using computer labs to make money. A better way to make sure damages occur less would be to require students and staff to use a specified log in and to monitor if any damages that way.
Library-I am not sure why anyone would still go to a library when you can get any book or article online so it would be ridiculous for someone to want to charge to have access to the library. I can see that there could be a hold placed on registration, transcripts or graduation if the fees are not paid if someone did go and rent out books or journals.
Cross Registration-Piedmont should be reimbursed by the alternative college that the students are attending? No the reason why students generally take classes at another school are often due to the cost of the classes. I don’t think that they should get a cut of this since they are typically make double the amount.
2.) Do you see other problems with the introduction of the profit centers? If so, how would you deal with them?
I did see that many of the profit center ideas called for a lot of extra organization, paper work and new policies, which is the opposite of they should be doing to cut costs. By adding extra work this causes revenue to be spent vs cutting costs. The ideal solution would be to cut cost by finding efficient ways to work and to eliminate ideas that are time consuming and less productive.
3.) What are the alternatives to a profit center approach?
The profit centers approach could be to raise the tuition to a high enough percentage that the needs are met to have a comfortable amount. They could look at hosting fundraisers to get alumni donations, which mighthelp the school as it changes from year to year and based on economic fluctuations. Increasing class sizes could be an option to allow more students into a program.
4.) Assuming that most of the issues could be resolved to your satisfaction, would you recommend that the profit center idea be adopted, or is there an alternative that you would prefer?
If it was up to me I would look at better ways to be efficient tweak a few of the options and really look at fundraising. I am great at parties so this could be a way to help with costs and maybe even up enrollment.
