A

REVIEW SESSION FOR FINAL EXAM

CVP question

Company X gave the following information to its management accounting department to make a cost profit volume analysis about the company

Sales	$46,000
Variable cost [factory]	$14,000
Fixed Cost [factory]	$5,000
Units sold	700
Production Capacity	1200 units
Selling fixed cost	$4,000
Variable cost [Selling]	$ 12000
Accrued cost	$1500

REQUIRED

1. Calculate CM per unit; CMR

2. Determine the breakeven point in units and $

3. Calculate margin of safety in $ & %.

4. The sales manager believes that the company could increase sales by 200 units if advertising is increased by $1500. Should the company increase advertising expenses?

5. Determine sales revenue in units and $ necessary to generate after-tax profit of $30,000

6. Determine the sales revenue in units and $ necessary to generate before tax profit of $28000 if tax rate is 20%

7. Calculate degree of leverage [DOL] and if sales increases by 15%, what will be the net income of this company. [use original data in the beginning]

Solution of Assignment

1. Find CM per unit and CMR

Sales = 46,000

VC = (26,000) [14,000 + 12,000]

CM = 20,000

FC = (9,000 ) [5,000+ 4,000]

NI = 11,000

CM Per Unit

Sales = $65.70 [46000 / 700]

VC = ($37.14) [26,000 / 700 ]

CM = $28.56

CMR = CM / sales = 28.56 / 65.70 =0.44

2. BE sales in Units = FC / CM per unit

Fixed Cost = $9,000

BE sales in units = 9000/ 28.56 =315 units

BE sales in $ = FC /CMR = 9000 / 0.44 = $20,455

3. Margin of safety :

MS in $ = E(sales) - BEsales = 46,000 – 20.455 = $20,409

MS in % = MS in $ / Actual Sales =20,409 / 46,000=0.44 =44%

4. Incremental CM = increase in sales x CMR

Selling price = $65.70

Increase in sales = 200 units x 65.70 = $13,140

Increase in CM in $ = Sales increase [$] x CMR

Increase in Contribution =$5,782 [ 13,140 x 0.44]

Increase in FC = ($15,00)

Increase in profit = $4,282

Accept the increase in advertising because overall profit will increase by $4,282.

5. After Tax Profit = 30,000

Target sales (AT) in units = (TP + FC)/CM PER UNIT= [30,000 +9000]/ 28.56 =1366 units

TP sales in $ [AT] in $ = [9000 +30,000 ] / 0.44 = $ 88,637

6. Target Profit = $ 28,000 AFTER tax

Before tax profit = 28000/ 1- 0.20 =$35,000

Before tax target sales in units = [FC + (TP/1-T)] /CM PER UNIT

=(35,000 + 9,000) /28.56 =1541 units

Before tax Target Sales in $ = [FC + TP ]/ CMR

= (9000 +35000) / 0.44 = $100,000

7 DOL = Degree of operating leverage

DOL = CM / profit = 20,000 / 11,000 = 1.82

If Sales increase by 15% , NI will increase by 27.3% [1.82 x 15%]

NI increase = 11,000 x 0.273 =$ 3,003

Total NI after sales increase = 11,000 +3,003 = $14,003

Question 2

IBL Ltd has identified the following overhead costs and cost drivers for next year

Overhead Items	Estimated ( cost) $
Setups cost	50,000
Ordering Cost	27,000
Maintenance cost	25,000
Power	48,000
Cost Driver	Estimated ( actual transactions)
Number of setups	800
Number of orders	1,500
Machine Hours	5,000
Kilowatt hours	35,000

The following is one of the jobs completed during the year

	Product A
Direct materials	$4,000
Direct Labour	$6,500
Units completed	150
DLH	140
Number of setups	8
Number of orders	12
Machine hours	250
Kilowatt hours	160
Actual overhead	$4,800

The company’s practical activity is 5000 machine hours

REQUIRED

Part 1

1. Calculate the predetermined rate for the plant using FBC based on machine hours for each job

2. Calculate total product cost using FBC based on Machine hours for each job

3. Calculate the unit cost for each Product

4. Is the overhead over-applied or under-applied?

Part 2

5. Calculate the predetermined rate for the plant using ABC based on machine hours for each job

6. Calculate product cost under ABC.

7. Calculate the unit cost for each Product [ABC]

8. Is the overhead over-applied or under-applied under ABC?

9. Compare the result of FBC and ABC.

Part 1

Solution for product A under FBC

1. Budgeted overhead = $ 150,000

Budgeted machine Hours = 5000 hours

PR = Budgeted overhead / Budgeted activity = 150,000 /5000 = $30.00

2. Direct Materials = 4,000

Direct Labour = 6,500

Applied overhead = 7,500 [30 x 250]

TPC for Product A = $18,000

3. Unit cost for Product A =18,000/ 150 = $120.00

4. Overhead is over-applied by $2,700.00 [ 7500 -4800]

Solution for Product A using ABC

Part 2

5. Under ABC method each E(overhead) is divided by the E( activity ) = PR

Overhead Items	Estimated ( cost) $
Setups cost	50,000
Ordering Cost	27,000
Maintenance cost	25,000
Power	48,000

Cost Driver	Estimated( actual transactions)
Number of setups	800
Number of orders	1,500
Machine Hours	5000
Kilowatt hours	35000

PRs = OVERHEADs / ACTIVITYs = 50,000 /800 = $62.50

PRo = OVERHEADo / ACTIVITYo = 27,000/1500 = $18.00

PRm = OVERHEADm / ACTIVITYm = 25,000 /5,000 =$5.00

PRp = OVERHEADp / ACTIVITYp = 48,000 / 35,000 = $1.37

6. Product cost under ABC

PC = DM + DL + E( overhead )

Direct materials		$ 4,000
Direct Labour		$ 6,500
Manufacturing Cost
Set up cost [8 x 62.50]	500
Ordering cost [12 x 18]	216
Maintenance cost [ 250 x 5]	1,250
Power Cost [160 x 1.37 ]	219
Total Overhead		$ 2185
Total Cost		$ 12,685

7 Unit cost = TC / Units produced = 12,685/150 = $ 84.57

[Under Activity Based Costing ]

Applied cost	$ 2185
Actual cost	$ 4800
Under applied [4800 - 2185 ]	$ 2,615
Under applied under ABC by $2,615
Over-applied under FBC by $2,700