Problem 6-24A Context-sensitive relevance
Continent Construction Company is a building contractor specializing in small commercial buildings. The company has the opportunity to accept one of two jobs: it cannot accept both because they must be performed at the same time and Continent does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with each job follow:
Cost Category | Job A | Job B |
Contract price | $800,000 | $750,000 |
Unit-level materials | 250,000 | 220,000 |
Unit-level labor | 260,000 | 310,000 |
Unit-level |
40,000 | 30,000 |
Supervisor’s salary | 70,000 | 70,000 |
Rental equipment costs | 26,000 | 29,000 |
19,900 | 19,900 | |
Allocated portion of companywide facility-sustaining costs | 10,400 | 8,600 |
Insurance cost for job | 18,200 | 18,200 |
Required
- a. Assume that Continent has decided to accept one of the two jobs. Identify the information relevant to selecting one job versus the other. Recommend which job to accept and support your answer with appropriate computations.
- b. Assume that Job A is no longer available. Continent’s’s choice is to accept or reject Job B alone. Identify the information relevant to this decision. Recommend whether to accept or reject Job B. Support your answer with appropriate computations.
a.
Identify the information relevant to selecting one job versus the other. Select the appropriate Job based on the relevant information and provide the calculations for the same.
Explanation of Solution
Relevant information: Relevant information is considered as information that can be functional to resolve an issue. This is a specific issue while deciding the configuration and substance of financial statement of an entity, since the best possible design and dimension of detail of data can alter the conclusions of clients with respect to the future bearing of a business.
Decision making: It is a vital capacity in the management, since decision making is identified with issue, a compelling decision making accomplishes the preferred objectives or goals by taking care of such issues.
Determine the contribution to profit for Job A
Therefore, the contribution to profit for Job A is $224,000.
Determine the contribution to profit for Job B
Therefore, the contribution to profit for Job B is $161,000.
The reasons on identifying the information relevant to selecting one job versus the other are as follows:
The decision with respect to the selection of Job A against Job B, the differential revenue and the avoidable costs that vary between the respective alternatives are relevant. The distributed facility-sustaining cost is not relevant since it is brought about to support companywide actions. These facility-sustaining costs will be incurred irrespective of the job that is accepted and subsequently are not avoidable.
The way that a greater amount of the companywide overhead cost is assigned to one job than another is not relevant since the aggregate companywide overhead cost may not be avoided irrespective of how it is distributed among each job. The supervisor's salary and the insurance protection are not relevant since they do not vary between the alternatives. Depreciation is a sunk cost and is not relevant. These costs will be the equivalent irrespective to which alternative is accepted.
From the results obtained above, Job A gives the higher contribution to profit than Job B, hence it should be accepted.
Therefore, Job A should be accepted.
b.
Identifying the information relevant to the decision and to recommend whether to accept or reject Job B.
Explanation of Solution
Determine the contribution to profit for Job B
Therefore, the contribution to profit for Job B is $72,800.
The reason on identifying the information relevant decision is as follows:
The decision with respect to accepting or rejecting Job B remaining alone, changing the decision setting changes the items that are viewed as relevant. Whereas supervisor's salary and insurance costs will not be avoided by choosing one job over another, they can be avoided by the means of rejecting the two jobs. Consequently, these costs would be relevant to a decision with respect to whether to accept or reject Job B remaining alone.
From the results obtained above, the contribution to profit is positive, Job B should be selected or accepted. This issue delineates the way that the avoidable cost idea is context profound. Under various settings, the relevant items for decision making are diverse. Recognizing relevant items is basically essential for appropriate decision making activities.
Therefore, Job B should be accepted.
Want to see more full solutions like this?
Chapter 13 Solutions
Survey Of Accounting
- Finch Construction Company is a building contractor specializing in small commercial buildings. The company has the opportunity to accept one of two jobs; it cannot accept both because they must be performed at the same time and Finch does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with each job follow. Cost Category Contract price Unit-level materials. Unit-level labor Unit-level overhead Supervisor's salary Rental equipment costs Depreciation on tools (zero market value) Allocated portion of company-wide facility-sustaining costs Insurance cost for job Required Assume that Finch has decided to accept one of the two jobs. Fill in the information relevant to selecti versus the other. Recommend which job to accept. Required Required A B one job b. Assume that Job A is no longer available.…arrow_forwardFanning Construction Company is a building contractor specializing in small commercial buildings. The company has the opportunity to accept one of two Jobs; it cannot accept both because they must be performed at the same time and Fanning does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor If either job is accepted. Furthermore, additional Insurance will be required if elther job is accepted. The revenue and costs associated with each job follow. Cost Category Contract price Unit-level materials. Unit-level labor Unit-level overhead Supervisor's salary Rental equipment costs Depreciation on tools (zero market value) Allocated portion of companywide facility-sustaining costs Insurance cost for job Complete this question by entering your answers in the tabs below. Required A Required a. Assume that Fanning has decided to accept one of the two Jobs. Fill in the information relevant to selecting one job versus the other. Recommend…arrow_forward15. Which of the following is NOT an effective way of dealing with a production constraint (i.e., bottleneck)? Select one: a. Subcontract work that would otherwise require use of the bottleneck. b. Pay overtime to workers assigned to workstations located after the bottleneck in the production process. c. Reduce the number of defective units produced at the bottleneck. d. Pay overtime to workers assigned to the bottleneck.arrow_forward
- ok j int 3 ences Baird Manufacturing Company uses two departments to make its products. Department I is a cutting department that is machine Intensive and uses very few employees. Machines cut and form parts and then place the finished parts on a conveyor belt that carries them to Department II, where they are assembled into finished goods. The assembly department is labor Intensive and requires many workers to assemble parts Into finished goods. The company's manufacturing facility Incurs two significant overhead costs: employee fringe benefits and utility costs. The annual costs of fringe benefits are $256,000 and utility costs are $184,000. The typical consumption patterns for the two departments are as follows: Machine hours used Direct labor hours used Department 1 15,900 5,100 The supervisor of each department receives a bonus based on how well the department controls costs. The company's current policy requires using a single allocation base (machine hours or labor hours) to…arrow_forwardExamples of indirect costs typically include: (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.) check all that apply The labor costs of temporary workers on the project. The rental of the corporate building. The rental of the temporary project office space.unanswered The salary of the CEO.unanswered The salary of the project manager.unanswered The labor cost of the accounting department.arrow_forward14. An example of labor-related costs is: a. fringe benefits b. factory labor c. bonus pay d. operating expense 15. Wages in excess of the regular rate paid for work after normal closing time is: a. Vacation and holiday pay b. Pension pay c. Overtime premium d. Regular wage 16. If the job is taken as a rush order with the knowledge that overtime will be necessary, the overtime premium should be charged to: a. General expense b. Factory overhead c. Specific job d. Selling expense 17. If the overtime premium is charge to specific job, it should be debited to: a. Work in process account b. General expense account c. Manufacturing overhead account d. Selling expense accountarrow_forward
- 23. Which of the following costs is relevant to a make-or-buy decision of a particular part of a product? a.The direct labor costs used to manufacture the part b.The depreciation on the plant used to manufacture the part c.The fixed annual rent paid for the office building d.The salary of the sales manager who sells the productarrow_forwardDarnell Poston, owner of Poston Manufacturing, Inc., wants to determine the cost behavior of labor and overhead. Darnell pays his workers a salary; during busy times, everyone works to get the orders out. Temps (temporary workers hired through an agency) may be hired to pack and prepare completed orders for shipment. During slower times, Darnell catches up on bookkeeping and administrative tasks while the salaried workers do preventive maintenance, clean the lines and building, etc. Temps are not hired during slow times. Darnell found that workers salaries, temp agency payments, rentals, utilities, and plant and equipment depreciation are the largest dollar accounts. He believes that workers salaries and plant and equipment depreciation are fixed, temp agency payments are associated with the number of orders (since temp workers are used to pack and prepare completed orders for shipment), and electricity is associated with the number of machine hours. When the number of different parts stored by Poston exceeds the space in the materials storeroom, Darnell rents nearby warehouse space. He can rent as much or as little space as he wants on a month-to-month basis. Therefore, he believes warehouse rental payments are variable with the number of parts purchased and stored. The account balances for the past six months as well as the six-month total are as follows: Information on number of machine hours, orders, and parts for the six-month period follows: Required: 1. Calculate the monthly average account balance for each account. Calculate the average monthly amount for each of the three drivers. 2. Calculate fixed monthly cost and the variable rates for temp agency payments, warehouse rent, and electricity. Express the results in the form of an equation for total cost. 3. In July, Darnell predicts there will be 420 orders, 250 parts, and 5,900 machine hours. What is the total labor and overhead cost for July? 4. What if Darnell buys a new machine in July for 24,000? The machine is expected to last 10 years and will have no salvage value at the end of that time. What part of the cost equation will be affected? How? What is the new expected cost in July?arrow_forward6arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College