Author Question: Which of the following errors will probably be located when preparing a trial balance? a. Posting ... (Read 62 times)

hbsimmons88 · **on:** Jul 6, 2018

Which of the following errors will probably be located when preparing a trial balance?
a. Posting the debit of a journal entry as a credit and the credit as a debit
b. Failure to record an entire entry in the journal
c. Failure to post an entire entry in the ledger
d. Failure to post part of an entry
e. Posting the correct amount to the incorrect credit account

Question 2

Downward demand spiral.

Gostkowski Company is about to enter the highly competitive personal electronics market with a new optical reader. In anticipation of future growth, the company has leased a large manufacturing facility and has purchased several expensive pieces of equipment. In 2013, the company's first year, Gostkowski budgets for production and sales of 24,000 units, compared with its practical capacity of 48,000. The company's cost data are as follows:

Required:
1. Assume that Gostkowski uses absorption costing and uses budgeted units produced as the denominator for calculating its fixed manufacturing overhead rate. Selling price is set at 130 of manufacturing cost. Compute Gostkowski's selling price.
2. Gostkowski enters the market with the selling price computed previously. However, despite growth in the overall market, sales are not as robust as the company had expected, and a competitor has priced its product 16 lower than Gostkowski's. Enrico Gostkowski, the company's president, insists that the competitor must be pricing its product at a loss and that the competitor will be unable to sustain that. In response, Gostkowski makes no price adjustments but budgets production and sales for 2014 at 18,000 units. Variable and fixed costs are not expected to change. Compute Gostkowski's new selling price. Comment on how Gostkowski's choice of budgeted production affected its selling price and competitive position.
3. Recompute the selling price using practical capacity as the denominator level of activity. How would this choice have affected Gostkowski's position in the marketplace? Generally, how would this choice affect the production-volume variance?

ngr69 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

d

Answer to Question 2

1. Fixed manufacturing overhead rate = 576,000/24,000 units = 24 per unit
Manufacturing cost per unit:
20 direct materials + 35 direct mfg. labor + 9 var. mfg. OH + 24 fixed mfg. OH = 88
Selling price: 88 130 = 114.40

2. Fixed manufacturing overhead rate = 576,000/18,000 units = 32 per unit
Manufacturing cost per unit:
20 direct materials + 35 direct mfg. labor + 9 var. mfg. OH + 32 fixed mfg. OH = 96
Selling price: 96 130 = 124.80
By using budgeted units produced, and not practical capacity, as the denominator level, Gostkowski is burdening its products with the cost of unused capacity. Apparently, the competitor has not done this, and because of its higher selling price, Gostkowski's sales decline. Consequently, 2014 budgeted quantities are even lower, which increases the unit cost and selling price. This phenomenon is known as the downward demand spiral, and it causes Gostkowski to continually inflate its selling price, which in turn leads to progressively lower sales.

3. Fixed manufacturing overhead rate = 576,000/48,000 units = 12 per unit
Manufacturing cost per unit:
20 direct materials + 35 direct mfg. labor + 9 var. mfg. OH + 12 fixed mfg. OH = 76
Selling price: 76 130 = 98.80
If Gostkowski had used practical capacity as its denominator level of activity, its initial selling price of 98.60 would have been virtually in line with the 98.40 selling price of Gostkowski's competitor, and it would likely have resulted in higher sales. Using practical capacity will result in a higher unfavorable production-volume variance, which will most likely be written off to cost of goods sold and reduce operating income. However, as sales and production increase in future years and the company grows into its capacity, the amount of unused capacity will be lower, resulting in future cost savings.