A net loss should be shown as a(n) a. addition on the Balance ...

[olgavictoria]

A net loss should be shown as a(n)
 a. addition on the Balance Sheet.
  b. addition on the Income Statement.
  c. subtraction on the Statement of Owner's Equity.
  d. addition on the Statement of Owner's Equity.

Question 2

Customer-cost hierarchy, customer profitability.
 
  Denise Nelson operates Interiors by Denise, an interior design consulting and window treatment fabrication business. Her business is made up of two different distribution channels, a consulting business in which Denise serves two architecture firms (Attractive Abodes and Better Buildings) and a commercial window treatment business in which Denise designs and constructs window treatments for three commercial clients (Cheery Curtains, Delightful Drapes, and Elegant Extras). Denise would like to evaluate the profitability of her two architecture firm clients and three commercial window treatment clients, as well as evaluate the profitability of each of the two channels and the business as a whole. Information about her most recent quarter follow:
 
  aDenise has determined that 25 of her overhead costs relate directly to her architectural business, 40 relate directly to her window treatment business, and the remainder are general in nature.
 
  On the revenues indicated above, Denise gave a 10 discount to Attractive Abodes in order to lure it away from a competitor and gave a 5 discount to Elegant Extras for advance payment in cash.
 
  Required:
  1. Prepare a customer-cost hierarchy report for Interiors by Denise, using the format in Exhibit 14- 6.
  2. Prepare a customer-profitability analysis for the five customers, using the format in Exhibit 14- 4.
  3. Comment on the results of the preceding reports. What recommendations would you give Denise?

Question 3

Price and efficiency variances, journal entries.
 
  The Schuyler Corporation manufactures lamps. It has set up the following standards per finished unit for direct materials and direct manufacturing labor:
 
  The number of finished units budgeted for January 2014 was 10,000; 9,850 units were actually produced.
 
   Actual results in January 2014 were as follows:
 
  Assume that there was no beginning inventory of either direct materials or finished units.
   During the month, materials purchased amounted to 100,000 lb., at a total cost of 465,000. Input price variances are isolated upon purchase. Input-efficiency variances are isolated at the time of usage.
 
  Required:
  1. Compute the January 2014 price and efficiency variances of direct materials and direct manufacturing labor.
  2. Prepare journal entries to record the variances in requirement 1.
  3. Comment on the January 2014 price and efficiency variances of Schuyler Corporation.
  4. Why might Schuyler calculate direct materials price variances and direct materials efficiency variances with reference to different points in time?

[Sophiapenny]

Answer to Question 1

C

Answer to Question 2

1.

Architecture Firms Commercial Clients
Total Total Total
(all customers) Architecture AA BB Commercial CC DD EE
(1) = (2) + (5) (2) = (3) + (4) (3) (4) (5) = (6)+(7)+( (6) (7) (
Gross Revenues 500,610 211,400 117,000 94,400 289,210 178,690 73,920 36,600
(less) Discounts 13,530 11,700 11,700 0 1,830 0 0 1,830
Net Revenues 487,080 199,700 105,300 94,400 287,380 178,690 73,920 34,770
Customer-level costs 327,770 132,100 73,500 58,600 195,670 109,290 57,860 28,520
Customer-level operating income 159,310 67,600  31,800 35,800 91,710  69,400 16,060  6,250
Distribution-channel (Overhead) costsa 110,630 42,550 68,080
Distribution-channel-level oper. income 48,680  25,050  23,630
Corporate-sustaining costsa 59,570
Operating income  (10,890)

a Architecture: 25  170,200 = 42,550; Commercial: 40  170,200 = 68,080; Corporate-sustaining: 35  170,200 = 59,570;

2.
Cumulative
Customer-Level
Operating Income
Customer-Level Customer-Level Cumulative as a  of Total
Operating Customer Operating Income Customer-Level Customer-Level
Customer Income Revenue as a  of Revenue Operating Income Operating Income
Code (1) (2) (3) = (1) (2)
(4) (5) = (4) 159,310

CC  69,400 178,690 38.84 69,400 43.6
BB 35,800 94,400 37.92 105,200 66.0
AA 31,800 105,300 30.20 137,000 86.0
DD 16,060 73,920 21.73 153,060 96.1
EE 6,250 34,770 17.98 159,310 100.0
159,310 487,080

3. Interiors by Denise reported a net operating loss for the quarter. All of Denise's customers are profitable, but the presence of substantial corporate-sustaining costs led to the overall negative level of income. Offering a discount to Attractive Abodes in order to gain their business was a good move because even with the discount the customer contributed significant customer-level operating income, without affecting overall profit margins. Similarly, despite the discount offered to Elegant Extras for advance cash payment, Elegant Extras still provided a positive contribution to overall income. However, Elegant Extras was the least profitable customer on the basis of profit margins. It is possible that Denise gave the discount at a time when she needed liquidity, thereby trading off some income for immediate cash. Going forward, it is important to ensure that customers do not come to expect the same deal for every transaction.

Yet, despite all customers being profitable, Interiors by Denise showed a loss. This performance is not sustainable over the long run. Therefore Denise must work to reduce costs at all levels and/or to increase prices for her services. Increasing prices may cause Denise to be uncompetitive (she had to offer discounts to lure away Attractive Abodes), so before she does so, Denise must look to increase the efficiency of her operations and to reduce costs.

Answer to Question 3

1. Direct materials and direct manufacturing labor are analyzed in turn:

Actual Costs
Incurred
(Actual Input Qty.
 Actual Price)

Actual Input Qty.
 Budgeted Price Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
 Budgeted Price)

Direct
Materials

(100,000  4.65a)
465,000 Purchases Usage

(100,000  4.50) (98,055  4.50)
450,000 441,248

(9,850  10  4.50)
443,250

15,000 U 2,002 F
Price variance Efficiency variance

Direct
Manufacturing
Labor

(4,900  31.5b)
154,350

(4,900  30)
147,000
(9,850  0.5  30) or
(4,925  30)
147,750

7,350 U 750 F
Price variance Efficiency variance
a 465,000  100,000 = 4.65
b 154,350  4,900 = 31.5

2. Direct Materials Control 450,000
Direct Materials Price Variance 15,000
Accounts Payable or Cash Control 465,000

Work-in-Process Control 443,250
Direct Materials Control 441,248
Direct Materials Efficiency Variance 2,002

Work-in-Process Control 147,750
Direct Manuf. Labor Price Variance 7,350
Wages Payable Control 154,350
Direct Manuf. Labor Efficiency Variance 750

3. Some students' comments will be immersed in conjecture about higher prices for materials, better quality materials, higher-grade labor, better efficiency in use of materials, and so forth. A possibility is that approximately the same labor force, paid somewhat more, is taking slightly less time with better materials and causing less waste and spoilage.
A key point in this problem is that all of these efficiency variances are likely to be insignificant. They are so small as to be nearly meaningless. Fluctuations about standards are bound to occur in a random fashion. Practically, from a control viewpoint, a standard is a band or range of acceptable performance rather than a single-figure measure.
4. The purchasing point is where responsibility for price variances is found most often. The production point is where responsibility for efficiency variances is found most often. The Schuyler Corporation may calculate variances at different points in time to tie in with these different responsibility areas.