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Managerial accounting Case Study_Cellphone Industries designs and manufactures specialty cellular phones_Answer

Managerial accounting Case Study_Cellphone Industries designs and manufactures specialty cellular phones_Answer

Managerial accounting Case Study_Cellphone Industries designs and manufactures specialty cellular phones_Answer

Managerial accounting Case Study_Cellphone Industries designs and manufactures specialty cellular phones_Answer

Managerial accounting Case Study_Cellphone Industries designs and manufactures specialty cellular phones_Answer

Background

Cellphone Industries designs and manufactures specialty cellular phones. The company was
founded in 1999 by Bob Easterly, its current president and CEO. Other top management
officials are shown in the organization chart.

At a meeting of the top management team, Brad Southern, Cellphone’s CFO presented a
preliminary year-end income statement that had just been prepared by Lisa Booker, CMA
the company’s new management accountant.

“Our financial statements haven’t been audited yet, but I doubt the figures will change much.
Lisa tells me she has been very careful to make all the necessary expense accruals and
depreciation adjustments. It’s not a pretty picture, especially since we’ve all worked so hard to
cut administrative expenses to the bone. Sorry to be the bearer of bad news.”

Bob Easterly voiced his frustration, “I knew we’d show a loss this year, but this is much worse
than I expected. As you say, we’ve already cut every ounce of fat out of the administrative
expenses. What’s the answer, Brad?”

CELLPHONE INDUSTRIES
Income Statement
For the year ended December 31, 2001

Sales:
Standard model $28,40,000 60.20%
Deluxe model 18,80,000 39.80%
Total sales 47,20,000 100.00%

Cost of goods sold 34,60,000 73.30%

Gross margin 12,60,000 26.70%

Selling and Administrative 15,20,000 32.20%

Net loss ($2,60,000) 5.50%

“Lisa says that the financial statements are probably misleading because all of the manufacturing
costs we incurred during the year are showing up in Cost of Goods Sold.”

“I’m an electronics engineer, not an accountant, but I know from my old Accounting 101 course
that “Cost of Goods Sold” SHOULD contain all the manufacturing costs — that is, the cost of
the materials, labor and manufacturing overhead costs that went into making the product.”

“That’s true, but only the manufacturing costs of the goods that were SOLD during the year should
be included in Cost of Goods Sold. The cost of the goods that havn’t been sold yet should NOT be
included. Those costs should be reflected on the balance sheet as Inventory. The only inventory
we show on our balance sheet now is the Materials inventory. The cost of Work-in-Process and
Finished Goods that are not yet sold should be pulled out of Cost of Goods Sold and put on the
balance sheet as Inventory. That would make a big difference to our bottom line.”

“Right, so why didn’t we do that in the first place?”

“Because we havn’t been tracking the cost of our products. We know we have 1,500 units of
the “Standard” model in inventory, but we haven’t accumulated the cost of materials, labor and
overhead for those units to know what cost value to assign to them…

…Lisa says we need a cost accounting system to track the manufacturing costs of each product,
so that we can cost out the work-in-process (unfinished goods) and the finished goods that are
still in inventory. Since our sales and inventory have been increasing each year, our “P & L”
should look much better.”

“Good, let’s get going on the cost accounting system immediately so we can get a true picture
of our profit and net worth. We’re certainly going to need it if we hope to ever get more financing.”

A1 Questions:…

Plant Manager’s salary
Plant supervisors salaries
Setup labor wages
Employee benefits
Power (utilities)
Depreciation – Machines
Depreciation – Building
Supplies, insurance, etc.

(1) Why aren’t overhead costs charged directly to each of the jobs in process, the same
way that direct materials and direct labor costs are?
(2) Why not use actual overhead costs in determining the overhead rate, rather than
estimated overhead costs?

Applying Manufacturing Overhead, and Determining Product Cost
Facts:
During the period, direct labor and direct materials were posted to the job cost sheets as shown below…

Required:
1 Calculate total direct labor cost for each job
2 Use the DL Hr overhead rate to apply overhead to each of the two jobs
3 Calculate the total cost and the cost per unit for each of the two jobs
……………………………………………………………………………………………………………………………..
……………………………………………………………………………………………………………………………….

All answers to the question from A1 through J1 .. Variable

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