Course : Managerial Accounting_Discussion2

Classmate Discussions:

Classmate1-

by Rithwick Maheshwaram - Saturday, 21 March 2020, 4:16 PM

 

Article 1: Role of Analysis CVP (Cost-Volume-Profit) Important Indicator for Planning and Making Decisions in the Business Environment           

 The article intentional was to know how much the cost-volume-profit analysis was used in planning and making the decision in the business environment. To have proper research and positive research was done on the manufacturing and service enterprises with a combination of econometric models. The collection of data was done through structured questionnaires. The aid the exercise, Mann-Whitney U test, Brunner Munzel test  DF-degree, percent confidence interval with both independent and dependent variables, among others, was used. After data collection, the hypotheses case raised earlier were verified. The result showed that there was a positive effect of the amount of product produced on the sale value to service firms. Besides, the result revealed that there was a valued relationship between sales and production to the production business environment. Hence, such a relationship contributed to growing profitability in the business environment. The research concluded that cost-volume-profit should be used as an essential reference in making decisions.

Article 2: Cost-volume-profit Analysis and Decision Making in the Manufacturing Industries of Nigeria

 The article was meant to determine the effect of cost-volume-profit in decision making in production industries. Both longitudinal research design and survey research were used as data collection methods. The result showed that the sales value of the products and quantity of the product produced had positive effects on profit made, and there existed a relationship between the cost of production and profit. The authors recommended that there was a need to use cost-volume-profit analysis when it comes to decision making.

Article 3: COST-VOLUME-PROFIT MODEL: A DISCUSS

 Another research was done where the authors insisted that a better understanding of cost and revenue behavior was critical to decision making. The study found that cost-volume-profit analysis should emphasize the interrelationships of the organization.

Part B

In the first case, a cost-volume-profit relationship is an important tool from the revealed articles (Ihemeje, 2015). A tool tells the behavior of the profit response on the change of cost of production volumes. The cost of production should exceed the volume of sales. Besides, the cost-volume-profit relationship is used to find a break-even point. The Break-even point is where the cost of production is the same as the revenue earned. Break-even point (in units) = total fixed costs/ contribution margin. For example, if the total fixed cost is $100,000 and the contribution margin is $ 10,000 the break-even point is $100,000/10,000= 10,000 units. It means then 10,000 units will be neither profit nor losses.

 Part c

Article 1: Absorption Costing and Variable Costing Income Differences: Exceptions to the General Expectations

 Salim Hassan, who is a managing director and senior lecturer, department of Business Administration, Uttara University, Bangladesh researched variable costing. The article was meant to find the effects of variable costing on internal reporting, analysis, and how it is applicable in the production environment. Variable and absorption costs were not excluded. The findings showed that variable costing could meet the internal requirement effectively since it provided better insight into cost relationships as the costing method met the external reporting requirements. The authors recommended several things concerning variable costing. One, budgeting and inventory planning should be carefully done to reduce the freedom of the managers and come up with more catalogs. Besides, most of the businesses should change their accounting systems and make them more flexible. 

Article 2: The Implementation of Variable Costing in the Management of Profitability of Sales in trade Companies

 The main aim of this paper was to come up with means of construction of an income statement on variable costing. It also tried to find out how variable costing would be used in the trading companies. The paper contained four parts. The first part included the general presentation on the financial report based on the cost variable. The second part was meant to analyses the general assumption concerning the activities in trade companies. The third part was about reporting on the progress of customer profitability and fundamental financial ratios. The last part was the conclusion and recommendation to make the variable cost more effective. The accountant recommended that income statement contribution based on variable costing would enable implantation in various business branches.

Article 3: Cost Analysis for Decision Making and Control: Marginal Costing versus Absorption Costing

The purpose of the research was to come up with a way in which managers would use adequate and systematic together with cost data to manage their business enterprises and be able to achieve the business objectives. Most of the finding was from the cost records and report in cost accounting. This finding defined management accountant as the application of accounting methods to provide information to assist in planning and to control business in enterprise decisions. The paper was the extension of the previous research on marginal, absorption, and variable cost.

Part D

Variable costing is generally used in decision-making. For example, in a given company where the variable costing includes:

Direct material of $100,000

Direct labor$50, 000

Variable manufacturing overhead$60,000

Further given the units produced in 2019 is 1000, 0000 units

The total variable costing is $210,000

The cost to produce a special order is $0.21x 1000, 000= $210,000 taking the total price to be $300,000, then the contribution margin will $300, 000-$210,000= $90,000.

Therefore, considering the variable cost taken, then the particular order must be made since the contribution margin is a positive number meaning additional to the profit earned.

References

Dyhdalewicz, A. (2015). The Implementation of Variable Costing in the Management of Profitability of Sales in trade Companies. E-Finance, 11(3), 116-127. Doe: 10.1515/fiqf-2016-0123

Hasan, S. (2015). Absorption Costing and Variable Costing Income Differences: Exceptions to the General Expectations. SSRN Electronic Journal. Doe: 10.2139/ssrn.921283

Ihemeje, J. (2015). Cost-volume-profit Analysis and Decision Making in the Manufacturing Industries of Nigeria. Journal of International Business Research and Marketing, 1(1), 8-16. Doe: 10.18775/jibrm.1849-8558.2015.11.3001

Ikponwosa, E. (2014). His Cost-Volume-Profit Model: A Discuss. His Cost-Volume-Profit Model: A Discuss, 8(5), 117-123. Doe: 10.5897/ajpsir08.020

Lakmal, D. (2014). Cost Analysis for Decision Making and Control: Marginal Costing versus Absorption Costing. SSRN Electronic Journal. Doe: 10.2139/ssrn.2417024

Lulaj, E., & Iseni, E. (2018). Role of Analysis CVP (Cost-Volume-Profit) as Important Indicator for Planning and Making Decisions in the Business Environment. European Journal of Economics and Business Studies, 4(2), 99-114. Doe: 10.2478/ejes-2018-0043

Classmate2:

by Bindiya Marneni - Saturday, 21 March 2020, 4:27 PM

 

PART A

Business organizations exist and operate intending to make profits and improve themselves to ensure that they become competitive in the long run (Clancy and Madison, 2016). The cost volume profit analysis is a tool that is used by many business organizations to analyze and establish a relationship between the costs and volume of the products manufactured in the organization. This, therefore, makes it obligatory for the organization to have reliable and robust methods of handling all organizational processes. There are assumptions made when an organization decides to use the Cost-Volume-Profit analysis tool (Lee He-Young, 2017). The three critical assumptions include the following.

First is that the sales price per unit is always constant. This, therefore, means that the organization takes the cost per unit at a constant price despite anything that can happen in the market and affect the process of their products. Consequently, it makes it easy to do the calculations and get the maximum profit made by the organization since the price of the products does not change.

The second assumption made is that the variable costs per unit are constant, too (Clancy and Madison, 2016). Variable expenses are costs that are incurred during the production process and always change depending on the product being manufactured. Therefore in the profit- cost-volume analysis, the variable costs are assumed to be constant.

The crucial third assumption made is that the total fixed costs are constant, too (Ghandour, 2017). This, therefore, means that all costs incurred during the production process and all other costs are assumed to be constant and do not change too. This, therefore, means that the organization can know the total expenses incurred and know how to minimize them and maximize the profit they make.

PART B

Profit cost-volume is significant in planning in the following aspects. It helps business organizations to ensure that they minimize the costs incurred while manufacturing their products and set affordable prices for their products. This move makes it possible for the organization to make a profit since many customers go for their products since they are affordable

Example

A company with $100,000 of fixed costs and a contribution margin of 40% must earn revenue of $250,000 to break even.

PART C

On the other hand, variable costing is a method used by organizations in cost accounting, where the fixed manufacturing overheads are excluded from the final price of the products (Baral, 2016). It is mostly used by the manager in organizations to conduct break-even analysis and contribution margin to understand the cost, volume, and profitability of the products manufactured. Therefore, an organization that uses variable costing the following are the critical costs considered as crucial to the products being manufactured. First is the price of direct materials. This gives the organization the actual costs of raw materials used to make a particular product. Second is direct labor costs, and this provides the organization with the accurate prices on human resources and other related expenses incurred when manufacturing the product. The third fundamental cost is the variable manufacturing overhead (VMOH).

The variable manufacturing overhead helps the organization to critically analyze the changes in manufacturing costs that end up affecting the production output (Novak, Papadaki, Hares & Popesko, 2017). Through this, the organization also gets reliable frameworks and models to be used on future expenditures and to come up with the lowest price at which a particular product ought to be sold.

A key characteristic of variable costing is that when used by an organization, it makes the organization record a higher gross margin compared to absorption costing (Dyhdalewicz, 2018). This happens because there are no overhead charges allocated to the sales. Business organizations, therefore, use variable costing for controlling costs, avoiding the impact of fixed costs, and for planning and control purposes in the long run. Bearing in mind that the business environment is ever-changing, several factors affect their activities; hence using dynamic frameworks is paramount to success. The use of emerging technologies is the epicenter of these changes, and organizations ought to be prepared by having flexible methodologies to handle their operations.

PART D

As a manager, I would apply variable costing knowledge and insights to do the following. The first is to conduct a break-even analysis to help the organization identify the number of units to be sold for the organization to begin making a profit. Secondly, I would use variable costing to determine the contribution margin on a product. 

Example: An organization wants to produce 1,000,000 units under the following costs. What is the variable costing?

Direct material of $150,000

Direct labor of $75,000

Variable manufacturing overhead of $80,000

Total costs = $305,000 ÷ 1,000,000 units produced = $0.305 variable cost per unit 

References

Baral, G. (2016). Cost – Value – Profit Analysis and Target Costing with Fuzzy Logic Theory. Mediterranean Journal of Social Sciences.

Clancy, D., and Madison, T. (2016). Cost-Volume-Profit Analysis and Changing Costs: Reconciling Theory and Practice. The Journal of Cost Analysis, 14(2), pp.89-108.

Dyhdalewicz, A. (2018). The Implementation of Variable Costing in the Management of Profitability of Sales in trade Companies. E-Finance, 11(3), 116-127. doi: 10.1515/fiqf-2016-0123

Ghandour, D. (2017). The Relationship between Cost-Volume Profit Management and Profitability in Private Organizations. International Journal of Advanced Engineering Research and Science, 4(4), pp.281-288.

Lee Hee-Young (2017). A Profit Model Analysis of Abroad Performing Art based on Cost Volume Profit Approach. The Korean Journal of Dance Studies, 67(5), pp.121-137.

Novak, P., Papadaki, S., Hrabec, D., & Popesko, B. (2017). Comparison of managerial implications for utilization of variable costing and throughput accounting methods. Istrazivanja I Projektovanja Za Privredu, 14(3), 351-360. doi: 10.5937/jaes14-10895

Classmate3:

by Prakash Penikalapati - Wednesday, 18 March 2020, 4:32 PM

 

Cost volume profits analysis is a tool utilized by the organization in examining the relationship between changes in activities and changes in the organization’s total sales, costs as well as profits. The tools are essential since it provides viable information for a business that is in its primary stages or a business that is experiencing adverse economic conditions (Ihemeje, 2015). The authors documented that cost volume analysis is vital in determining the number of units that the organization should sell into break-even. Breakeven is a situation where the total revenue is equivalent to total costs, which results in zero. Break-even situations it means that the organization is neither making profit nor losses. The other article documented the assumptions that must be held for Cost volume analysis to hold. These assumptions influence the operations of the organization in the organization in a competitive environment. The authors documented the following assumptions all variables usually remain constant with the exception of volume; the total costs and revenues are in linear functions. The other assumptions are that the profits are computed using marginal costing models (Kim, 2015). This assumption must be held to aid in yielding the desired results for the organizations. The results for the organization are usually gauged based on productivity and performance. The tool hence contributes towards the meeting of the stakeholder’s expectations and profit maximization objective, which are the primary aims for establishment. The prosperity of the organization in the competitive environment requires the business to conduct effective planning to aid attaining the desired results (Dianawati, 2010). The authors documented that during uncertainty conditions, the organization can embrace cost volume profit analysis. The utilization of CVP contributes towards provisions of the necessary information that assists the organization in making viable decisions, thus succeeding in the competitive environment.

As a manager profit cost volume is an essential tool in planning since it will aid in establishing when the business will break even and start making the required profits. This is vital since it is the primary objective of establishing any business. The tool is vital since it assists in evaluating investments and establishing which projects are viable. The viability of projects is usually gauged in terms of net present value. Investment, which yields positive NPV are highly preferred. A tool is also an imperative tool for effective planning and budgeting of the organization. This is essential since it contributes to organizational prosperity in a competitive environment. Numerical illustration of CVP

XYZ Company is a newly established business that specializes in the production of electrical appliances. The company intended to establish its break-even. Below are cost incurred by the company Total sales volume per appliance was $150 PER fan which was equivalent to $150,000 variable costs was equivalent to $120,000 fixed costs was $30000 and the maximum capacity was 7000 units.

Number of units sold $150,000/$150=1000 units 

Variables cost per unit =$120000/1000= $120

Contribution per unit will be selling price per units less the variable cost per units 

=$150-$30 = $ 30 per unit 

Break-even point hence will be fixed costs/contribution per units 

= $30000/$30

1000 units 

Variable costing is a tool that is utilized to assigns variable costs to inventories. The major categories of inventories within the organization are classified into raw materials, work in progress and finished goods. Variable costing hence ensures that all overheads costs are charged to expenses in the period in which they were incurred while variable overheads and direct materials for the organization are assigned to inventory (Dyhdalewicz, 2015). Variable costs which vary with the final output for the organization are usually applicable in conducting of break-even analysis for the organizations. This is imperative since it aids in determining sales levels at which business or organization makes zero profits. The tool is essential in establishing the lowest price at which a product can be charged by the organizations. This is essential in ensuring that the organization does not make losses in both the short run and long run.

The other article documented the application of variable costing in manufacturing companies. Variable costing is an essential tool since it enhances effective planning and controlling for large manufacturing companies (Lakmal, 2014). Variable costs usually relate to only those costs that are related to the final products, and they usually vary with the final output for the organization. The use of variable costing has enabled the manufacturing companies to meet their internal requirements, thus leading to their success in the competitive environment. The organization’s success is gauged on how the organization utilizes the scarce resources to leads to wants attainment of the strategic goals for the organizations. These goals usually have a significant influence on the organization’s performance in a competitive environment. They should, therefore, carefully formulated to contribute towards organization prosperity as a going concern in the dynamic environment (Pong & Mitchell, 2006). The prosperity of the organization which is usually measured in terms of productivity and performance of the organization in the dynamic environment.

 As a manager, I will use variable costing to aid in establishing which products are profitable to the organization and the products which should be discontinued. This is essential since it will enable the organization to operate in a profitable manner and avoid losses. Variable costing also will assist a manager in determining which products to offer to the target markets. This is essential since it contributes towards customer’s retention and satisfaction.

Numerical Example

           Company ABC produces 750 computers. The company incurs $15000 on accessories, $2500 on salaries and $850 installation expense and security expenses of $ 300 and $400 incurred for rent and rates to produce 750 computers.

Total costs for producing computer= $15000+$2500+$300+$850+$400

 = $19050

Total Product Cost of tables = $19050

Unit Product Cost of $19050/750 = $25.4 

References

Dianawati, W. (2010). Cost-Volume-Profit Analysis Untuk Kondisi Uncertainty. AKRUAL: Jurnal Akuntansi, 2(1), 43. Doi: 10.26740/jaj.v2n1.p43-54

Dyhdalewicz, A. (2015). The Implementation of Variable Costing in the Management of Profitability of Sales in trade Companies. E-Finance, 11(3), 116-127. Doi: 10.1515/fiqf-2016-0123

Ihemeje, J. (2015). Cost-volume-profit analysis and Decision Making in the Manufacturing Industries. Journal of International Business Research and Marketing, 1(1), 8-16. Doi: 10.18775/jibrm.1849-8558.2015.11.3001

Kim, S. (2015). Cost-Volume-Profit Analysis for a Multi-Product Company: Micro Approach. International Journal of Accounting and Financial Reporting, 1(1), 23. Doi: 10.5296/ijafr.v5i1.6832

Lakmal, D. (2014). Cost Analysis for Decision Making and Control: Marginal Costing versus Absorption Costing. SSRN Electronic Journal. Doi: 10.2139/ssrn.2417024

Pong, C., & Mitchell, F. (2006). Full costing versus variable costing: Does the choice still matter? An empirical exploration of UK manufacturing companies 1988–2002. The British Accounting Review, 38(2), 131-148. Doi: 10.1016/j.bar.2005.09.003

Practice problems

for reference.docx

Module 2: Practice Problems/Applications: Please Review

Module 2 Review/Practice Problem 

In addition to the review problems in the assigned reading material, review the following problems to help you understand the application of the concepts covered in Module 2. To maximize the benefit of your practice, solve the problems with as much details as you can provide. Check your answer after you complete all the problems. You are encouraged to complete this review before you start the related quiz.

 

 

 

Process Costing

 

Review 1: Conversion Cost Using Weighted-Average Methods

 

Kamp Company uses the weighted-average method in its process costing. Information about

units processed during a recent month in the Curing Department follow:

           

		Units	Conversion Percent Completion
	Beginning work in process inventory.......	10,000	30%
	Units started into production.....................	150,000
	Units completed and transferred out.........	140,000
	Ending work in process inventory.............	20,000	40%

 

            The beginning work in process inventory had $4,600 in conversion cost. During the month, the Department incurred an additional $210,000 in conversion cost.

           

            Required:

           

a.      Determine the equivalent units of production for conversion for the month.

b.     Determine the cost per equivalent unit of production for conversion for the month.

c.      Determine the total conversion cost transferred out during the month.

d.     Determine the conversion cost assigned to the ending work in process inventory.

 

           

 

Review 2: Materials/Conversion Cost Using Weighted-Average Methods

 

Bansal Inc. uses the weighted-average method in its process costing system. The following data

concern the operations of the company's first processing department for a recent month.

           

	Work in process, beginning:
	Units in process...............................	300
	Percent complete with respect to materials.......................................	60%
	Percent complete with respect to conversion....................................	60%
	Costs in the beginning inventory:
	Materials cost..................................	$342
	Conversion cost...............................	$4,518
	Units started into production during the month........................................	22,000
	Units completed and transferred out...	21,800
	Costs added to production during the month:
	Materials cost..................................	$45,963
	Conversion cost...............................	$538,602
	Work in process, ending:
	Units in process...............................	500
	Percent complete with respect to materials.......................................	50%
	Percent complete with respect to conversion....................................	20%

 

            Required:

           

            Using the weighted-average method:

a.      Determine the equivalent units of production for materials and conversion costs.

b.     Determine the cost per equivalent unit for materials and conversion costs.

c.      Determine the cost of units transferred out of the department during the month.

d.     Determine the cost of ending work in process inventory in the department.

 

Review 3-A: Conversion/Material Cost Using FIFO

 

Engsbye Inc. uses the FIFO method in its process costing system. The following data concern the

operations of the company's first processing department for a recent month.

           

	Work in process, beginning:
	Units in process.........................................	200
	Percent complete with respect to materials................................................	80%
	Percent complete with respect to conversion.............................................	10%
	Costs in the beginning inventory:
	Materials cost............................................	$800
	Conversion cost.........................................	$406
	Units started into production during the month........................................................	20,000
	Units completed and transferred out............	20,000
	Costs added to production during the month:
	Materials cost............................................	$96,000
	Conversion cost.........................................	$413,648
	Work in process, ending:
	Units in process.........................................	200
	Percent complete with respect to materials................................................	80%
	Percent complete with respect to conversion.............................................	50%

 

            Required:

           

            Using the FIFO method:

a.      Determine the equivalent units of production for materials and conversion costs.

b.     Determine the cost per equivalent unit for materials and conversion costs.

c.      Determine the cost of ending work in process inventory.

d.     Determine the cost of units transferred out of the department during the month.

 

Review 3-B: Conversion/Material Cost Using FIFO

 

 

Rauzman Corporation uses the FIFO method in its processing costing. The following data concern the company's Mixing Department for the month of August.

           

		Materials	Conversion
	Work in process, August 1.................................	$25,641	$15,300
	Cost added to production in the Mixing Department during August.............................	$170,940	$179,775
	Equivalent units of production for August.........	7,770	7,650

 

            Required:

           

            Compute the cost per equivalent unit for materials and conversion for the Mixing Department for August using the FIFO method.

 

           

Review 3-C: Conversion/Material Cost Using FIFO

          

The following data has been provided by Glasco Inc., a company that uses the FIFO method in

its processing costing system. The data concern the company's Shaping Department for the

month of June.

           

	Cost in beginning work in process inventory............	$1,690
	Units started and completed this month........................	4,110

 

		Materials	Conversion
	Cost per equivalent unit.......................................	$12.50	$45.70
	Equivalent units required to complete the units in beginning work in process inventory...........	460	260
	Equivalent units in ending work in process inventory..........................................................	220	176

 

            Required:

           

            Determine the cost of ending work in process inventory and the cost of the units transferred out of the department during June using the FIFO method.

 

           

Review 4: Service Cost Allocation using Direct Method

 

Mercik Consultancy uses the direct method to allocate its service department costs to its

operating departments. The company has two service departments, Information Technology and

Administration, and two operating departments, Corporate Practice and Government Practice.

Data concerning those departments follow:

           

		Service Departments		Operating Departments
		Information Technology	Admini-stration		Corporate Practice	Government Practice
	Departmental costs	$26,244	$21,696		$226,170	$477,980
	eComputers...........	39	14		51	30
	Employees.............	32	10		70	26

 

            Information Technology Department costs are allocated on the basis of computers and Administration Department costs are allocated on the basis of employees.

           

            Required:

           

            Allocate the service department costs to the operating departments using the direct method.

 

           

 

Activity-Based Costing (ABC)

 

Review 5: Unit Cost Using Traditional and ABC

 

Bullie Manufacturing Corporation has a traditional costing system in which it applies

manufacturing overhead to its products using a predetermined overhead rate based on direct

labor-hours (DLHs). The company has two products, D31X and U75X, about which it has

provided the following data:

           

		D31X	U75X
	Direct materials per unit..............	$29.20	$47.40
	Direct labor per unit....................	$1.10	$23.10
	Direct labor-hours per unit..............	0.10	2.10
	Annual production	35,000	15,000

 

The company’s estimated total manufacturing overhead for the year is $1,147,650 and the company’s estimated total direct labor-hours for the year is 35,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

	Activities and Activity Measures	Estimated Overhead Cost
	Assembling products (DLHs)........	$   140,000
	Preparing batches (batches)...........	241,150
	Axial milling (MHs)......................	766,500
	Total...............................................	$1,147,650

 

		D31X	U75X	Total
	Assembling products.........	3,500	31,500	35,000
	Preparing batches...............	560	1,295	1,855
	Axial milling......................	1,540	1,015	2,555

 

            Required:

           

a.      Determine the manufacturing overhead cost per unit of each of the company's two products under the traditional costing system.

b.     Determine the manufacturing overhead cost per unit of each of the company's two products under activity-based costing system.

 

           

Review 6: ABC First Stage Cost Allocation

 

IGL Draperies makes custom draperies for homes and businesses. The company uses an activity-

based costing system for its overhead costs. The company has provided the following data

concerning its annual overhead costs and its activity cost pools.

           

            Overhead costs:

	Production overhead....	$140,000
	Office expense.............	140,000
	Total.............................	$280,000

 

Distribution of resource consumption:

	Activity Cost Pools	Making Drapes	Job Support	Other	Total
	Production overhead....	60%	20%	20%	100%
	Office expense.............	15%	55%	30%	100%

 

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

 

	Activity Cost Pool	Annual Activity
	Making drapes.......	3,000	yards
	Job support.............	140	jobs
	Other......................	Not	applicable

 

Required:

 

a.      Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

 

		Making Drapes	Job Support	Other	Total
	Production overhead....
	Office expense.............
	Total.............................

 

b.     Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes and Job Support activity cost pools by filling in the table below:

 

		Making Drapes	Job Support
	Production overhead....
	Office expense.............
	Total.............................

 

 

a.      Prepare an action analysis report in good form of a job that involves making 85 yards of drapes and has direct materials and direct labor cost of $2,990. The sales revenue from this job is $6,000. For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost.

 

           

Review 7: Using ABC to Compute Customer Margin

 

Dane Housecleaning provides housecleaning services to its clients. The company uses an

activity-based costing system for its overhead costs. The company has provided the following

data from its activity-based costing system.

           

	Activity Cost Pool	Total Cost	Total Activity
	Cleaning....................	$263,784	34,800	hours
	Job support................	145,180	7,000	jobs
	Client support...........	4,774	220	clients
	Other.........................	170,000	Not	applicable
	Total..........................	$583,738

 

            The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

 

            One particular client, the Hoium family, requested 45 jobs during the year that required a total of 90 hours of housecleaning. For this service, the client was charged $2,000.

           

            Required:

           

a.      Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round off all calculations to the nearest whole cent.

b.     Using the activity-based costing system, compute the customer margin for the Hoium family. Round off all calculations to the nearest whole cent.

c.      Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Hoium family. Round off all calculations to the nearest whole cent.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Answers

 

 

Process Costing

 

Review 1: Conversion Cost Using Weighted-Average Methods

 

            Ans: 

           

a.	Units transferred out..................................	140,000
	Add: equivalent units in the ending inventory................................................	8,000
	Equivalent units of production..................	148,000
b.	Cost in the beginning inventory................	$   4,600
	Cost added during the month....................	210,000
	Total cost...................................................	$214,600

     $214,600 ÷ 148,000 units = $1.45 per unit

 

c. 140,000 units × $1.45 per unit = $203,000

 

d. 20,000 units × 40% × $1.45 per unit = $11,600

 

 

Review 2: Materials/Conversion Cost Using Weighted-Average Methods

 

          

            Ans:

 

Weighted-average method:

a.		Materials	Conversion
	Units transferred to next department...	21,800	21,800
	Ending work in process:
	Materials: 500 units × 50%..........	250
	Conversion: 500 units × 20%..........		100
	Equivalent units of production	22,050	21,900

 

b.		Materials	Conversion
	Cost of beginning work in process.....................................	$    342	$   4,518
	Cost added during the month......	45,963	538,602
	Total cost....................................	$46,305	$543,120
	Equivalent units..........................	22,050	21,900
	Cost per equivalent unit..............	$2.10	$24.80

 

c.	Ending work in process:	Materials	Conversion	Total
	Equivalent units of production.........	250	100
	Cost per equivalent unit..	$2.10	$24.80
	Cost of ending work in process.	$525	$2,480	$3,005

 

d.		Materials	Conversion	Total
	Units completed and transferred out.....................	21,800	21,800
	Cost per equivalent unit..	$2.10	$24.80
	Cost of units transferred out...	$45,780	$540,640	$586,420

 

Review 3-A: Conversion/Material Cost Using FIFO

 

          

 

            Ans:

           

FIFO method:

a.		Materials	Conversion
	To complete the beginning work in process:
	Materials: 200 units × (100% − 80%).........	40
	Conversion: 200 units × (100% − 10%).....		180
	Units started and completed (20,000 − 200)..	19,800	19,800
	Ending work in process:
	Materials: 200 units × 80%.........................	160
	Conversion: 200 units × 50%......................		100
	Equivalent units of production.......................	20,000	20,080

 

b.		Materials	Conversion
	Cost added during the month.........................	$96,000	$413,648
	Equivalent units of production.......................	20,000	20,080
	Cost per equivalent unit.................................	$4.80	$20.60

 

c.	Ending work in process:	Materials	Conversion	Total
	Equivalent units of production...............	160	100
	Cost per equivalent unit..........................	$4.80	$20.60
	Cost of ending work in process..............	$768	$2,060	$2,828
d.		Materials	Conversion	Total
	Cost from the beginning inventory.........	$800	$406	$1,206
	Cost to complete the units in beginning inventory:
	Equivalent units to complete...............	40	180
	Cost per equivalent unit.......................	$4.80	$20.60
	Cost to complete..................................	$192	$3,708	$3,900
	Cost of units started and completed:
	Units started and completed................	19,800	19,800
	Cost per equivalent unit.......................	$4.80	$20.60
	Cost of units started and completed....	$95,040	$407,880	$502,920
	Total cost of units transferred out...........			$508,026

 

 

Review 3-B: Conversion/Material Cost Using FIFO

 

             Ans:    

           

FIFO method:

		Materials	Conversion
	Cost added during the month........	$170,940	$179,775
	Equivalent units.............................	7,770	7,650
	Cost per equivalent unit................	$22.00	$23.50

 

 

Review 3-C: Conversion/Material Cost Using FIFO

          

            Ans: 

           

FIFO method:

	Transferred to the next department:
	From the beginning work in process inventory:
	Cost in beginning work in process inventory.................	$    1,690
	Cost to complete these units:
	Materials, at 460 EUs $12.50 per EU.......................	5,750
	Conversion, at 260 EUs $45.70 per EU.......................	11,882
	Total cost from beginning inventory	19,322
	Units started and completed this month, 4,110 units at $58.20 per unit.......................	239,202
	Total cost transferred to the next department...	$258,524
	Work in process, June 30:
	Materials, 220 EUs at $12.50 per EU............	$ 2,750
	Conversion, 176 EUs at $45.70 per EU............	8,043
	Total work in process, June 30.......................	$10,793

 

Review 4: Service Cost Allocation using Direct Method

 

             Ans:

 

Allocation rate for Information Technology costs

= Cost to be allocated ÷ Allocation base = $26,244 / (51 + 30) = $324.00

Allocation rate for Administration costs

= Cost to be allocated ÷ Allocation base = $21,696 / (70 + 26) = $226.00

 

		Information Technology	Administration	Corporate Practice	Government Practice
	Departmental costs	$26,244	$21,696	$226,170	$477,980
	Information Technology........	(26,244)		16,524	9,720
	Administration.......		(21,696)	15,820	5,876
	Total costs after allocation...........	$         0	$         0	$258,514	$493,576

 

 

 

Activity-Based Costing (ABC)

 

Review 5: Unit Cost Using Traditional and ABC

 

          

            Ans: 

 

a.      Traditional Manufacturing Overhead Costs

Predetermined overhead rate = $1,147,650 ÷ 35,000 DLHs = $32.79 per DLH

 

		D31X	U75X
	Direct labor-hours............	0.10	2.10
	Predetermined overhead rate per DLH................	$32.79	$32.79
	Manufacturing overhead cost per unit..................	$3.28	$68.86

 

b.     ABC Manufacturing Overhead Costs

 

		Estimated Overhead Cost	Total Expected Activity	Activity Rate
	Assembling products...	$140,000	35,000	DLHs	$4	per DLH
	Preparing batches........	$241,150	1,855	batches	$130	per batch
	Axial milling................	$766,500	2,555	MHs	$300	per MH

 

Overhead cost for D31X

		Activity Rate	Activity	ABC Cost
	Assembling products........	$4	per DLH	3,500	DLHs	$  14,000
	Preparing batches.............	$130	per batch	560	batches	72,800
	Axial milling....................	$300	per MH	1,540	MHs	462,000
	Total.................................					$548,800
	Annual production............					35,000
	Manufacturing overhead cost per unit..................					$15.68

 

Overhead cost for U75X

		Activity Rate	Activity	ABC Cost
	Assembling products........	$4	per DLH	31,500	DLHs	$126,000
	Preparing batches.............	$130	per batch	1,295	batches	168,350
	Axial milling....................	$300	per MH	1,015	MHs	304,500
	Total.................................					$598,850
	Annual production............					15,000
	Manufacturing overhead cost per unit..................					$39.92

 

Review 6: ABC First Stage Cost Allocation

 

            Ans: 

 

            a. First-stage allocation

		Making Drapes	Job Support	Other	Total
	Production overhead....	$84,000	$28,000	$28,000	$140,000
	Office expense.............	21,000	77,000	42,000	140,000
	Total.............................	$105,000	$105,000	$70,000	$280,000
	Activity........................	3,000 yards	140 jobs

 

b. Activity rates (costs divided by activity)

		Making	Job
		Drapes	Support
	Activity...................	3,000 yards	140 jobs
	Production overhead..............	$28.00	$200.00
	Office expense........	7.00	550.00
	Total........................	$35.00	$750.00

 

c. Overhead cost of the job.

 

		Making Drapes	Job Support	Total
	Activity.........................	85	1
	Production overhead.....	$2,380	$200	$2,580
	Office expense..............	595	550	1,145
	Total..............................	$2,975	$750	$3,725

 

 

	Sales..........................................	$6,000
	Green costs:
	Direct materials and labor.....	2,990
	Green margin............................	3,010
	Yellow costs:
	Office expense.......................	1,145
	Yellow margin..........................	1,865
	Red costs:
	Production overhead..............	2,580
	Red margin................................	($  715)

 

Review 7: Using ABC to Compute Customer Margin

 

            Ans: 

 

            a. The computation of the activity rates follow:

		Total Cost	Total Activity	Activity Rates
	Cleaning...........	$263,784	34,800 hours	$7.58 per hour
	Job support.......	$145,180	7,000 jobs	$20.74 per job
	Client support..	$4,774	220 clients	$21.70 per client

 

b. The customer margin for the family is computed as follows:

	Client charges...		$2,000.00
	Costs:
	Cleaning.........	$682.20
	Job support.....	933.30
	Client support	21.70	1,637.20
	Customer margin...........		$  362.80

 

Computations for costs:

Cleaning: 90 hours × $7.58 per hour = $682.20

Job support: 45 jobs × $20.74 per job = $933.30

Client support: 1 client × $21.70 per client = $21.70

 

c. The margin if all costs are allocated on the basis of cleaning hours:

 

Predetermined overhead rate = $583,738 ÷ 34,800 hours = $16.77 per hour

 

	Client charges................	$2,000.00
	Allocated costs*.............	1,509.30
	Customer margin...........	$  490.70

 

* 90 hours × $16.77 per hour = $1,509.30