Finance and accounting
Saeed AlGhamdi
ACCT212andFIN220.rarhelping resources/ACCT 212/Exercises/Module 1/ACCT212 - 161 Exercise Module 1.pdf
ACCT212 – Managerial Accounting Exercise Module 1
Theory
1. (a) “Managerial accounting is a field of accounting that provides economic information for all
interested parties.” Do you agree? Explain.
(b) Joe Delong believes that managerial accounting serves only manufacturing fi rms. Is Joe
correct? Explain.
2. Distinguish between managerial and financial accounting as to (a) primary users of reports, (b)
types and frequency of reports, and (c) purpose of reports.
3. How do the content of reports and the verification of reports differ between managerial and
financial accounting?
4. In what ways can the budgeting process create incentives for unethical behavior?
5. Linda Olsen is studying for the next accounting midterm examination. Summarize for Linda what
she should know about management functions.
6. “Decision-making is management’s most important function.” Do you agree? Why or why not?
9. Tony Andres is studying for his next accounting examination. Explain to Tony what he should
know about the differences between the income statements for a manufacturing and for a
merchandising company.
10. Jerry Lang is unclear as to the difference between the balance sheets of a merchandising
company and a manufacturing company. Explain the difference to Jerry.
11. How are manufacturing costs classified?
12. Mel Finney claims that the distinction between direct and indirect materials is based entirely on
physical association with the product. Is Mel correct? Why?
Calculations
helping resources/ACCT 212/Exercises/Module 1/Module 1 Exercises E1-3 E1-4 E1-8 E1-10 E1-12.pdf
Module 1 Managerial Accounting Question1 E1-3 Ryan Corporation incurred the following costs while manufacturing its product.
Materials used in product $100,000 Advertising expense $45,000
Depreciation on plant 60,000 Property taxes on plant 14,000
Property taxes on store 7,500 Delivery expense 21,000
Labor costs of assembly-line workers 110,000 Sales commissions 35,000
Factory supplies used 13,000 Salaries paid to sales clerks 50,000
Instructions (a) Identify each of the above costs as direct materials, direct labor, manufacturing overhead or period cost.
Question 2 E1-4 Knight Company reports the following costs and expenses in May.
Factory utilities $ 15,500 Direct labor $69,100
Depreciation on factory equipment 12,650 Sales salaries 46,400
Depreciation on delivery trucks 3,800 Property taxes on factory building 2,500
Indirect factory labor 48,900 Repairs to office equipment 1,300
Indirect materials 80,800 Factory repairs 2,000
Direct materials used 137,600 Advertising 15,000
Factory manager’s salary 8,000 Office supplies used 2,640
Instructions
From the information, determine the total amount of:
(a) Manufacturing overhead.
(b) Product costs.
(c) Period costs.
Question 3 E1-8 Lopez Corporation incurred the following costs while manufacturing its product.
Materials used in product $120,000 Advertising expense $45,000
Depreciation on plant 60,000 Property taxes on plant 14,000
Property taxes on store 7,500 Delivery expense 21,000
Labor costs of assembly-line workers 110,000 Sales commissions 35,000
Factory supplies used 23,000 Salaries paid to sales clerks 50,000
Work in process inventory was $12,000 at January 1 and $15,500 at December 31.
Finished goods inventory was $60,000 at January 1 and $45,600 at December 31.
Instructions
(a) Compute cost of goods manufactured.
(b) Compute cost of goods sold.
Question 4
E1-10 Manufacturing cost data for Copa Company are presented below.
Case A Case B Case C
Direct materials used $ (a) $68,400 $130,000
Direct labor 57,000 86,000 (g)
Manufacturing overhead 46,500 81,600 102,000
Total manufacturing costs 195,650 (d) 253,700
Work in process 1/1/14 (b) 16,500 (h)
Total cost of work in process 221,500 (e) 337,000
Work in process 12/31/14 (c) 11,000 70,000
Cost of goods manufactured 185,275 (f) (i)
Instructions
Indicate the missing amount for each letter (a) through (i).
Question 5 E1-12 Cepeda Corporation has the following cost records for June 2014.
Indirect factory labor $ 4,500 Factory utilities $ 400
Direct materials used 20,000 Depreciation, factory equipment 1,400
Work in process, 6/1/14 3,000 Direct labor 40,000
Work in process, 6/30/14 3,800 Maintenance, factory equipment 1,800
Finished goods, 6/1/14 5,000 Indirect materials 2,200
Finished goods, 6/30/14 7,500 Factory manager’s salary 3,000
Instructions (a) Prepare a cost of goods manufactured schedule for June 2014.
(b) Prepare an income statement through gross profit for June 2014 assuming sales revenue is $92,100.
helping resources/ACCT 212/Exercises/Module 2/Module 2 Answer to Exercise Process Costing.pdf
BRIEF EXERCISE 3-4 Materials Conversion Costs
January March July
45,000 (35,000 + 10,000) 48,000 (40,000 + 8,000) 61,000 (45,000 + 16,000)
39,000 (35,000 + 4,000 a )
46,000 (40,000 + 6,000 b )
49,000 (45,000 + 4,000 c )
a. 10,000 X 40% b. 8,000 X 75% c. 16,000 X 25%
BRIEF EXERCISE 3-5
Total materials costs
$36,000
÷
Equivalent units of materials
10,000
=
Unit materials cost $3.60
Total conversion
costs $54,000
÷
Equivalent units of conversion costs
12,000
=
Unit conversion cost $4.50
Unit materials
cost $3.60
+
Unit conversion cost $4.50
=
Total manufacturing cost per unit
$8.10 BRIEF EXERCISE 3-6 Assignment of Costs Equivalent Units Unit Cost Transferred out Transferred out 40,000 $11 $440,000 Work in process, 4/30 Materials Conversion costs Total costs
5,000 2,000
$ 4 $ 7
$20,000 14,000
34,000 $474,000
BRIEF EXERCISE 3-7 Total materials
costs $16,000
÷
Equivalent units of materials
20,000
=
Unit materials cost $.80
Total conversion
*costs* $47,500
÷
Equivalent units of conversion costs
19,000
=
Unit conversion cost $2.50
*$29,500 + $18,000 BRIEF EXERCISE 3-8 Costs accounted for Transferred out Work in process Materials Conversion costs Total costs
(18,000 X $3.30) (2,000 X $.80) (1,000* X $2.50)
$1,600 2,500
$59,400
4,100 $63,500
*2,000 X 50% BRIEF EXERCISE 3-9 (a)
Materials (b)
Conversion Costs
Units transferred out Work in process, November 30 Materials (7,000 X 100%) Conversion costs (7,000 X 40%) Total equivalent units
8,000
7,000 15,000
8,000
2,800 10,800
EXERCISE 3-5 (a) January May Units to be accounted for
Beginning work in process Started into production Total units Units accounted for Transferred out Ending work in process Total units
0 11,000 11,000
9,000 2,000 11,000
0 23,000 23,000
16,000 7,000 23,000
(b) (1) Materials (2) Conversion Costs January
March May July
11,000 ( 9,000 + 2,000) 15,000 (12,000 + 3,000) 23,000 (16,000 + 7,000) 11,500 (10,000 + 1,500)
10,200 ( 9,000 + 1,200) 12,900 (12,000 + 900) 21,600 (16,000 + 5,600) 10,600 (10,000 + 600)
EXERCISE 3-6 (a) (1)
Materials (2)
Conversion Costs Units transferred out
Work in process, July 31 3,000 X 100% 3,000 X 60% Total equivalent units
12,000
3,000 15,000
12,000
1,800 13,800
(b) Materials: $45,000 ÷ 15,000 = $3.00 Conversion costs: ($16,200 + $18,300) ÷ 13,800 = $2.50 Costs accounted for
Transferred out (12,000 X $5.50) Work in process, July 31 Materials (3,000 X $3.00) Conversion costs (1,800 X $2.50) Total costs
$9,000 4,500
$66,000
13,500 $79,500
EXERCISE 3-9
(a) Materials: 34,000* + 6,000 = 40,000
Conversion costs: 34,000* + (6,000 X 40%) = 36,400
*40,000 – 6,000
(b) Materials: $72,000/40,000 = $1.80
Conversion costs: ($81,000 + $101,000)/36,400 = $5.00
(c) Transferred out: 34,000 X $6.80 = $231,200 Ending work in process:
Materials (6,000 X $1.80) = $10,800 Conversion costs (2,400 X $5.00) = 12,000 Total $22,800
EXERCISE 3-10 (a) Physical
Units
Equivalent Units
Beginning work in process 20,000
Units started into production 164,000
184,000 Conversion
Materials Costs
Units transferred out 160,000 160,000 160,000
Ending work in process 24,000 24,000 14,400 (60% X 24,000)
184,000 184,000 174,400
(b) Conversion Materials Costs Total Costs incurred $101,200 $348,800 $450,000 Equivalent units 184,000 174,400 Unit costs $0.55 $2.00 $2.55 (c) Assignment of costs: Transferred out (160,000 X $2.55) $408,000 Ending work in process Materials (24,000 X $.55) $13,200 Conversion costs (14,400 X
$2.00)
28,800 42,000
Total costs $450,000
helping resources/ACCT 212/Exercises/Module 2/Module 2 Answer to Exercise Activity Based.pdf
EXERCISE 4-5 (a)
Activity Cost Pools
Estimated Overhead
÷
Expected use
of Cost Drivers
=
ABC Overhead Rates
Scheduling and travel $105,000 1,500 $ 70.00
Setup time $ 70,000 700 $100.00
Supervision $ 60,000 $400,000* $ .15
*$100,000 + $300,000
Commercial
Activity Cost Pools
Expected use of Cost
Drivers per Product
X
ABC Overhead Rates
=
Cost Assigned
Scheduling and travel 1,000 $ 70.00 $ 70,000
Setup time 450 $100.00 45,000
Supervision $100,000 $ .15 15,000
Total assigned costs $130,000
Residential
Activity Cost Pools
Expected use of Cost
Drivers per Product
X
ABC Overhead Rates
=
Cost Assigned
Scheduling and travel 500 $ 70.00 $ 35,000
Setup time 250 $100.00 25,000
Supervision $300,000 $ .15 45,000
Total assigned costs $105,000
EXERCISE 4-12 Total overhead assigned:
Activity Cost Pools
Cost Drivers
Used
X
Activity-
Based
Overhead
Rates
=
Overhead Cost
Assigned Sales commissions
Advertising—TV/Radio
Advertising—Newspaper
Catalogs
Cost of catalog sales
$900,000
250
2,000
60,000
9,000
$.05
$300
$10
$2.50
$1.00
$ 45,000
75,000
20,000
150,000
9,000
Credit and collection
Total assigned cost for March
$900,000 $.03 27,000
$326,000
PROBLEM 4-1A
(b) Activity Based Overhead Rate (per cost driver)
Activity Cost Pool
Estimated
Overhead
÷
Expected
Use of Cost Drivers
=
Activity-Based
Overhead Rate Receiving
Forming
Assembling
Testing
Painting
Packing and shipping
$ 70,350
150,500
412,300
51,000
52,580
820,750
$1,557,480
335,000 Pounds
35,000 Machine hours
217,000 Parts
25,500 Tests
5,258 Gallons
335,000 Pounds
$ .21 per pound
$ 4.30 per machine hour
$ 1.90 per part
$ 2.00 per test
$10.00 per gallon
$ 2.45 per pound
(c) Total Overhead cost per product Home Model Commercial Model
Activity Cost Pool
Expected
Use of Drivers
X
Activity- Based
Overhead Rates
=
Cost Assigned
Expected
Use of Drivers
X
Activity- Based
Overhead Rates
=
Cost Assigned
Receiving
Forming Assembling Testing Painting Packing and shipping Total costs assigned Units produced
(a) (b)
215,000 27,000 165,000 15,500 3,680 215,000
$ .21 $ 4.30 $ 1.90 $ 2.00 $10.00 $ 2.45
$ 45,150 116,100 313,500 31,000 36,800 526,750 $1,069,300
54,000
120,000 8,000 52,000 10,000 1,578 120,000
$ .21 $ 4.30 $ 1.90 $ 2.00 $10.00 $ 2.45
$ 25,200 34,400 98,800 20,000 15,780 294,000 $488,180
10,200
Overhead cost per unit [(a) ÷ (b)] $ 19.80 $ 47.86
helping resources/ACCT 212/Exercises/Module 2/Module 2 Exercise Activity Based Costing_Questions 02.pdf
MODULE 2 – ACTIVITY BASED COSTING
helping resources/ACCT 212/Exercises/Module 2/Module 2 Exercise Activity Based Costing_Questions.pdf
Module 2
Activity Based Costing
E4-5 Shady Lady sells window coverings (shades, blinds, and awnings) to both commercial and residential customers . The following information relates to its budgeted operations for the current year.
Commercial Residential
Revenues $300,000 $480,000
Direct material costs $ 30,000 $ 50,000
Direct labor costs 100,000 300,000
Overhead costs 85,000 215,000 150,000 500,000
Operating income (loss) $ 85,000 ($ 20,000)
The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not
more profitable given that the installations of window coverings are less complex for residential customers. In addition, the
residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit
for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product
lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and
related information she developed:
Activity Cost Pools Estimated Overhead Cost Drivers
Scheduling and travel $105,000 Hours of travel
Setup time 70,000 Number of setups
Supervision 60,000 Direct labor cost
Expected Use of Cost Drivers per Product
Commercial Residential
Scheduling and travel 1,000 500
Setup time 450 250
Instructions
(a) Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to
each product line.
E4-12 Kragan Clothing Company manufactures its own designed and labeled sports attire and sells its products through catalog sales and retail outlets. While Kragan has for years used activity-based costing in its manufacturing activities, it has
always used traditional costing in assigning its selling costs to its product lines. Selling costs have traditionally been assigned to
Kragan’s product lines at a rate of 70% of direct material costs. Its direct material costs for the month of March for Kragan’s
“high-intensity” line of attire are $400,000. The company has decided to extend activity-based costing to its selling costs. Data
relating to the “high-intensity” line of products for the month of March are as follows.
Number of Cost
Overhead Drivers Used Activity Cost Pools Cost Drivers Rate per Activity
Sales commissions Dollar sales $0.05 per dollar sales $900,000
Advertising—TV/Radio Minutes $300 per minute 250
Advertising—Newspaper Column inches $10 per column inch 2,000
Catalogs Catalogs mailed $2.50 per catalog 60,000
Cost of catalog sales Catalog orders $1 per catalog order 9,000
Credit and collection Dollar sales $0.03 per dollar sales $900,000
Instructions
(a) Compute the selling costs to be assigned to the “high-intensity” line of attire for the
month of March using activity-based costing.
helping resources/ACCT 212/Exercises/Module 2/MODULE 2 Job Order Costing Exercise 2.pdf
MODULE 2 – JOB ORDER COSTING EXERCISE 2
helping resources/ACCT 212/Exercises/Module 2/Module 2 Job Order Costing Exercises.pdf
Summary Problem 1 Torn Baker manufactures custom teakwood patio furniture. Suppose Baker has the following transactions: .
a. Purchased rawmaterials on account, $135~000. b. Materials costing $130,000 were requisitioned (used) for production. Of .
this total, $30,000 were indirect materials.· . c. Labor rlm:e~ecords show that direct labor of $22,000 and indirect labor . of $5,000 were incurred (but not yet paid). .. . d. Assigned labor cost to work in process and manufacturing overhead.
Requirement
1. Prepare journal entries for each transaction. Then explain each journal entry in terms of what got increased and what got decreased.
"",.9 c\.s»: d- es D~ \)('W COS~\')j
-:s D\A\ r-.0-\, "2-\ 0J
Summary Problem 2 Skippy Scooters manufactures motor scooters. The company has automated production, so it allocates manufacturing overhead based on machine hours. Skippy expects to incur $240,000 of manufacturing overhead costs and to use 4,000 machine hours during 201L At the end of 2010, Skippy reported the following inventories:
Materials inventory . Work in process inventory . Finished goods inventory -
$20,000 17,000 11,000
During January 2011, Skippy actually used 300 machine hours and recorded the following transactions: -
a. Purchased materials on account, $31,000 b. Used direct materials, $39,000 c. Manufacturing wages incurred totaled $40,000 d. Manufacturing labor was 90% direct labor and 10% indirect labor e. Used indirect materials, $3,000 f. Incurred other manufacturing overhead, $13,000 (credit Accounts
payable) g. Allocated manufacturing overhead for January 2011 h. Cost of completed motor scooters, $100,000 i. Sold motor scooters on account, $175,000; cost of motor scooters sold,
$95,000
Requirements
1. Compute Skippy's predetermined manufacturing overhead rate for 201l. 2. Record ~~: tra~~~ctions ~_t~e ge~:r~U.9~~~l~ . _
----------------------------
MODULE 2 JOB ORDER COSTING
. EXERCISE 1 JOB ORDER COSTING
Accounting for Materials and Labor Cliffs Custom Machine Shop had the following transactions during April: a. Purchased raw materials on account for $98,000. b. Requisitioned $80,000 of materials into production. Of this total, $70,000 was for direct materials. c. Actual labor cost totaled $240,000. Assume labor has not yet been paid. d. Direct labor incurred for the period totaled $190,000 and indirect labor totaled $50,000. Requirement 1. Prepare summary journal entries for each transaction.
EXERCISE 2 ALLOCATING MANUFACTURING OVERHEAD
Luscious Licorice manufactures custom-made candy. The company is highly labor intensive, so it uses direct labor hours to allocate its manufacturing overhead. Luscious expects to incur $126,000 of manufacturing overhead costs and to use 14,000 direct labor hours during 2010. At the end of March 2010, Luscious Licorice reported the following inventories:
Materials inventory
Work in process inventory Finished goods inventory
$26,000
15,500 12,100
During April 2010, Luscious actually used 1,300 direct labor hours and recorded the following transactions: a. Indirect manufacturing labor, $1,200. b. Indirect materials used, $4,000. c. Other manufacturing overhead incurred, $7,000 (credit AlP). d. Allocated overhead for April. e. Finished jobs that totaled $3,000 on their job cost records. f. Sold inventory for $50,000 that cost $20,000 to produce. Requirements 1. Compute the predetermined manufacturing overhead rate for Luscious Licorice. 2. Journalize the transactions. 3. Prepare the journal entry to close the ending balance of manufacturing overhead.
helping resources/ACCT 212/Exercises/Module 2/Module 2 Process Costing Exercises.pdf
Module 2 Process Costing
Exercises
BE3-4 Goode Company has the following production data for selected months.
Ending
Beginning Units
Work in Process
% Complete as to
Month Work in Process Transferred Out Units Conversion Cost
January –0– 35,000 10,000 40%
March –0– 40,000 8,000 75
July –0– 45,000 16,000 25
Compute equivalent units of production for materials and conversion costs, assuming
materials are entered at the beginning of the process.
BE3-5 In Lopez Company, total material costs are $36,000, and total conversion costs are $54,000. Equivalent units of production are materials 10,000 and conversion costs 12,000. Compute
the unit costs for materials, conversion costs, and total manufacturing costs.
BE3-6 Trek Company has the following production data for April: units transferred out 40,000, and ending work in process 5,000 units that are 100% complete for materials and 40% complete
for conversion costs. If unit materials cost is $4 and unit conversion cost is $7, determine
the costs to be assigned to the units transferred out and the units in ending work in process.
BE3-7 Production costs chargeable to the Finishing Department in June in Cascio Company are materials $16,000, labor $29,500, overhead $18,000. Equivalent units of production are materials 20,000 and conversion costs 19,000. Compute the unit costs for materials and
conversion costs.
BE3-8 Data for Cascio Company are given in BE3-7. Production records indicate that 18,000 units were transferred out, and 2,000 units in ending work in process were 50% complete as to conversion cost and 100% complete as to materials. Prepare a cost reconciliation schedule.
BE3-9 The Smelting Department of Mathews Company has the following production and
cost for data November.
Production: Beginning work in process 2,000 units that are 100% complete as to
materials and 20% complete as to conversion costs; units transferred out 8,000 units;
and ending work in process 7,000 units that are 100% complete as to materials and
40% complete as to conversion costs.
Compute the equivalent units of production for (a) materials and (b) conversion costs for
the month of November.
E3-5 In Wayne Company, materials are entered at the beginning of each process. Work in process inventories, with the percentage of work done on conversion costs, and production data for its
Sterilizing Department in selected months during 2014 are as follows.
Beginning Ending
Work in Process Work in Process
Conversion Units Conversion Month Units Cost% Transferred Out Units Cost%
January –0– — 9,000 2,000 60
March –0– — 12,000 3,000 30
May –0– — 16,000 7,000 80
July –0– — 10,000 1,500 40
Instructions
(a) Compute the physical units for January and May.
(b) Compute the equivalent units of production for (1) materials and (2) conversion costs for each
month.
E3-6 The Cutting Department of Cassel Company has the following production and cost data for July.
Production Costs 1. Transferred out 12,000 units. Beginning work in process $ –0–
2. Started 3,000 units that are 60% Materials 45,000
complete as to conversion Labor 16,200
costs and 100% complete as Manufacturing overhead 18,300
to materials at July 31.
Materials are entered at the beginning of the process. Conversion costs are incurred uniformly
during the process.
Instructions
(a) Determine the equivalent units of production for (1) materials and (2) conversion costs.
(b) Compute unit costs and prepare a cost reconciliation schedule.
E3-9 Kostrivas Company has gathered the following information.
Units in beginning work in process
–0–
Units started into production 40,000
Units in ending work in process 6,000
Percent complete in ending work in process: Conversion costs 40%
Materials 100%
Costs incurred: Direct materials $72,000
Direct labor $81,000
Overhead $101,000
Instructions
(a) Compute equivalent units of production for materials and for conversion costs.
(b) Determine the unit costs of production.
(c) Show the assignment of costs to units transferred out and in process.
helping resources/ACCT 212/Exercises/Module 3/Module 3 Exercises Extra Questions.pdf
Module 3 – Additional Exercises
helping resources/ACCT 212/Exercises/Module 3/Module 3 Exercises_Answer.pdf
E5-4 1. Wood used in the production of furniture. Variable. 2. Fuel used in delivery trucks. Variable. 3. Straight-line depreciation on factory building. Fixed. 4. Screws used in the production of furniture. Variable. 5. Sales staff salaries. Fixed. 6. Sales commissions. Variable. 7. Property taxes. Fixed. 8. Insurance on buildings. Fixed. 9. Hourly wages of furniture craftsmen. Variable. 10. Salaries of factory supervisors. Fixed. 11. Utilities expense. Mixed. 12. Telephone bill. Mixed.
E5-3 (a) Maintenance Costs:
$4,900 – $2,500
700 – 300 =
$2,400
400 = $6 variable cost per machine hour
700 Machine Hours
300 Machine Hours
Total costs
Less: Variable costs 700 X $6 300 X $6 Total fixed costs
$4,900
4,200 $ 700
$2,500
1,800 $ 700
Thus, maintenance costs are $700 per month plus $6 per machine hour.
E5-5 (a) Maintenance Costs:
$5,000 – $2,750
8,000 – 3,500 =
$2,250
4,500 = $.50 variable cost per machine hour
Activity Level
High Low Total cost
Less: Variable costs 8,000 X $.50 3,500 X $.50 Total fixed costs
$5,000
4,000 00,000 $1,000
$2,750
1,750 $1,000
Thus, maintenance costs are $1,000 per month plus $.50 per machine hour.
E5-8 (a) Contribution margin per lawn
Contribution margin per lawn Contribution margin ratio
= = =
$60 – ($12 + $10 + $2) $36 $36 ÷ $60 = 60%
Fixed costs = $1,400 + $200 + $2,000 = $3,600 Break-even point in lawns = $3,600 ÷ $36 = 100 (b) Break-even point in dollars = 100 lawns X $60 per lawn
= $6,000 per month OR
Fixed costs ÷ Contribution margin ratio = $3,600 ÷ .60 = $6,000 per month
E5-9 1. Contribution margin per room
Contribution margin per room Contribution margin ratio
= = =
$60 – ($11 + $28) $21 $21 ÷ $60 = 35%
Fixed costs = $6,200 + $1,100 + $1,000 + $100 = $8,400 Break-even point in rooms = $8,400 ÷ $21 = 400
2. Break-even point in dollars = 400 rooms X $60 per room
= $24,000 per month OR
Fixed costs ÷ Contribution margin ratio = $8,400 ÷ .35 = $24,000 per month
BE 6-7
Model
Sales Mix Percentage
Unit Contribution Margin
Weighted-Average Unit Contribution Margin
A12 B22
C124
60% 15% 25%
$10 ($50 – $40) $30 ($100 – $70)
$100 ($400 – $300)
$ 6.00 4.50 25.00 $35.50
BE 6-8 Total break-even = ($213,000 ÷ $35.50*) = 6,000 units *Computed in BE 6-7 Sales Units Units of A12 = .60 X 6,000 = 3,600 Units of B22 = .15 X 6,000 = 900 Units of C124 = .25 X 6,000 = 1,500 6,000
BE 6-9 (a) Weighted-average contribution = (.30 X .20) + (.50 X .20) + ( .20 X .45) = .25 margin ratio (b) Total break-even point = ($440,000 ÷ .25) = $1,760,000 in dollars
Birthday $1,760,000 X .30 = $ 528,000 Standard tapered $1,760,000 X .50 = 880,000 Large scented $1,760,000 X .20 = 352,000
$1,760,000 BE 6-10 (a) Sales Mix Bedroom Division $500,000 ÷ $1,250,000 = .40 Dining Room Division $750,000 ÷ $1,250,000 = .60 (b) Weight-average contribution
= $575,000
= .46 margin ratio $1,250,000
OR Contribution Margin Ratio Bedroom Division ($275,000 ÷ $500,000) = .55 Dining Room Division ($300,000 ÷ $750,000) = .40
Weighted-average contribution margin ratio = (.55 X .40) + (.40 X .60) = .46
E6-9
(a) Weighted-average unit contribution margin = ($40 X .30) + ($20 X .60) + ($60 X .10) = $30
Break-even point in units = $630,000 ÷ $30 = 21,000
(b) Shoes (21,000 X .30) = 6,300 pairs of shoes
Gloves (21,000 X .60) = 12,600 pairs of gloves Range-finders (21,000 X .10) = 2,100 range-finders
(c) Shoes: 6,300 X $40 = $252,000
Gloves: 12,600 X $20 = 252,000 Range-finders: 2,100 X $60 = 126,000 Total contribution margin 630,000 Fixed costs 630,000 Net income $ 0
E6-10 (a) Sales mix percentage
iPad division: $600,000 ÷ ($600,000 + $400,000) = .60 iPod division: $400,000 ÷ ($600,000 + $400,000) = .40
Contribution margin ratio: iPad division: $180,000 ÷ $600,000 = .30 iPod division: $140,000 ÷ $400,000 = .35
(b) Weighted-average contribution
= $320,000
= .32 OR margin ratio $1,000,000
Weighted-average contribution
margin ratio = (.60 X .30) + (.40 X .35) = .32 (c) Break-even point in dollars = $120,000 ÷ .32 = $375,000 (d) Sales dollars needed at break-even point for each division
iPad division: $375,000 X .60 = $225,000 iPod division: $375,000 X .40 = $150,000
helping resources/ACCT 212/Exercises/Module 3/Module 3 Exercises_Questions.pdf
Module 3 Cost Volume Profit Analysis
E5-4 Family Furniture Corporation incurred the following costs. 1. Wood used in the production of furniture. 2. Fuel used in delivery trucks. 3. Straight-line depreciation on factory building. 4. Screws used in the production of furniture. 5. Sales staff salaries. 6. Sales commissions. 7. Property taxes. 8. Insurance on buildings. 9. Hourly wages of furniture craftsmen. 10. Salaries of factory supervisors. 11. Utilities expense. 12. Telephone bill. Instructions Identify the costs above as variable, fixed, or mixed. E5-3 The controller of Furgee Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.
Total Total
Month Maintenance Costs Machine Hours
January $2,500 300
February 3,000 350
March 3,600 500
April 4,500 690
May 3,200 400
June 4,900 700
Instructions
(a) Determine the fixed- and variable-cost components using the high-low method.
E5-5 The controller of Dousmann Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.
Total Total
Month Maintenance Costs Machine Hours
January $2,750 3,500
February 3,000 4,000
March 3,600 6,000
April 4,500 7,900
May 3,200 5,000
June 5,000 8,000
Instructions
(a) Determine the fixed- and variable-cost components using the high-low method.
E5-8 All That Blooms provides environmentally friendly lawn services for homeowners. Its operating costs are as follows. Depreciation $1,400 per month Advertising $200 per month Insurance $2,000 per month Weed and feed materials $12 per lawn Direct labor $10 per lawn Fuel $2 per lawn All That Blooms charges $60 per treatment for the average single-family lawn. Instructions Determine the company’s break-even point in (a) number of lawns serviced per month and (b) dollars.
E5-9 The Green Acres Inn is trying to determine its break-even point. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows. Salaries $6,200 per month Utilities $1,100 per month Depreciation $1,000 per month Maintenance $100 per month Maid service $11 per room Other costs $28 per room Instructions Determine the inn’s break-even point in (a) number of rented rooms per month and (b) dollars. BE6-7 Markowis Corporation sells three different models of mosquito “zapper.” Model A12 sells for $50 and has variable costs of $40. Model B22 sells for $100 and has variable costs of $70. Model C124 sells for $400 and has variable costs of $300. The sales mix of the three models is: A12, 60%; B22, 15%; and C124, 25%. What is the weighted-average unit contribution margin? BE6-8 Information for Markowis Corporation is given in BE6-7. If the company has fixed costs of $213,000, how many units of each model must the company sell in order to break even?
BE6-9 Peine Candle Supply makes candles. The sales mix (as a percentage of total dollar sales) of its three product lines is birthday candles 30%, standard tapered candles 50%, and large scented candles 20%. The contribution margin ratio of each candle type is shown below.
Candle Type Contribution Margin Ratio
Birthday 20%
Standard tapered 20%
Large scented 45%
(a) What is the weighted-average contribution margin ratio? (b) If the company’s fixed costs are $440,000 per year, what is the dollar
amount of each type of candle that must be sold to break even? BE6-10 Faune Furniture Co. consists of two divisions, Bedroom Division and Dining Room Division. The results of operations for the most recent quarter are:
Bedroom
Division
Dining
RoomDivision
Total
Sales
Variable costs
$500,000
225,000
$750,000
450,000
$1,250,000
675,000
Contribution
margin $275,000 $300,000 $ 575,000
(a) Determine the company’s sales mix. (b) Determine the company’s weighted-average contribution margin ratio.
E6-9 Palmer Golf Accessories sells golf shoes, gloves, and a laser-guided range-finder that measures distance. Shown below are unit cost and sales data.
Pairs of
Shoes
Pairs of
Gloves
Range-
Finder
Unit sales price
Unit variable costs
$100
60
$30
10
$260
200
Unit contribution margin $ 40 $20 $ 60
Sales mix 30% 60% 10%
Fixed costs are $630,000. Instructions (a) Compute the break-even point in units for the company. (b) Determine the number of units to be sold at the break-even point for each product line. E6-10 Personal Electronix sells iPads and iPods. The business is divided into two divisions along product lines. CVP income statements for a recent quarter’s activity are presented below.
iPad Division iPod Division Total
Sales
Variable costs
$600,000
420,000
$400,000
260,000
$1,000,000
680,000
Contribution margin $180,000 $140,000 320,000
Fixed costs 120,000
Net income $ 200,000
Instructions (a) Determine sales mix percentage and contribution margin ratio for each division. (b) Calculate the company’s weighted-average contribution margin ratio. (c) Calculate the company’s break-even point in dollars. (d) Determine the sales level in dollars for each division at the break-even point.
helping resources/ACCT 212/Exercises/Module 4/Module 4 Short Term Business Decisions Exercise Combined.pdf
Module 4 SHORT TERM BUSINESS DECISION
EXERCISES BE7-3 (Special Order) At Jaymes Company, it costs $30 per unit ($20 variable and $10 fixed) to make a product at full capacity that normally sells for $45. A foreign wholesaler offers to buy 3,000 units at $25 each. Jaymes will incur special shipping costs of $2 per unit. Assuming that Jaymes has excess operating capacity, indicate the net income (loss) Jaymes would realize by accepting the special order. BE7-4 (Outsourcing/Make or Buy) Manson Industries incurs unit costs of $8 ($5 variable and $3 fixed) in making a subassembly part for its finished product. A supplier offers to make 10,000 of the assem- bly part at $6 per unit. If the offer is accepted, Manson will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Manson will realize by buying the part. BE7-5 (Sell as is or process further) Chudrick Inc. makes unfinished bookcases that it sells for $62. Production costs are $36 variable and $10 fixed. Because it has unused capacity, Chudrick is considering finishing the bookcases and selling them for $70. Variable finishing costs are expected to be $7 per unit with no increase in fixed costs. Prepare an analysis on a per unit basis show- ing whether Chudrick should sell unfinished or finished bookcases. BE7-7 (Keep or Replace Asset) Kobe Company has a factory machine with a book value of $90,000 and a remain- ing useful life of 5 years. It can be sold for $30,000. A new machine is available at a cost of $300,000. This machine will have a 5-year useful life with no salvage value. The new ma- chine will lower annual variable manufacturing costs from $600,000 to $500,000. Prepare an analysis showing whether the old machine should be retained or replaced.
E7-2 (Special Order) Gruden Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is: Materials $ 10,000
Labor 30,000
Variable overhead 20,000
Fixed overhead 40,000
Total $100,000
Gruden also incurs 5% sales commission ($0.35) on each disc sold. McGee Corporation offers Gruden $4.80 per disc for 5,000 discs. McGee would sell the discs under its own brand name in foreign markets not yet served by Gruden. If Gruden accepts the offer, its fixed overhead will increase from $40,000 to $46,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Gruden accept the special order? Why or why not? E7-5 (Outsourcing/Make or Buy) Schopp Inc. has been manufacturing its own shades for its table lamps. The com- pany is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $4 and $5, respectively. Normal production is 30,000 table lamps per year. A supplier offers to make the lamp shades at a price of $12.75 per unit. If Schopp Inc. accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products. Instructions (a) Prepare the incremental analysis for the decision to make or buy the lamp shades. (b) Should Schopp Inc. buy the lamp shades?
Flowers Inc. manufactures silk roses. Bud Company has approached Flowers with a proposal to buy 2,000 silk roses for $4.00 each. Regular customers are charged $4.25 for each rose. Flowers has the necessary capacity. The following costs are associated annually with silk roses with the company's normal production and sales of 10,000 roses:
Direct material $21,000 Direct labor 13,000 Manufacturing overhead 9,000 Total $43,000
Forty percent of the manufacturing overhead is variable. All fixed overhead is allocated equally to all products produced. In good form, prepare an incremental analysis to analyze whether Flowers should accept the order from Bud Company. Solution Step 1: Determine incremental revenue. The sale of 2,000 roses at $4 each will increase revenue by $8,000 and is relevant.
$4.00 x 2,000 = $8,000 The normal sales of 10,000 roses is not incremental as it will produce the same revenue regardless if the special order is accepted or not. Step 2: Determine incremental variable costs. When 2,000 additional roses are produced, the company will incur material, labor, and variable overhead costs for these roses. Because unit variable costs remain the same regardless of the activity level, you must calculate the variable unit cost for both materials and labor. Unit direct material cost = $21,000/10,000 roses = $2.10 per rose Unit direct labor cost = $13,000/10,000 roses = $1.30 per rose Unit variable overhead cost = [$9,000 x 40%]/10,000 roses = $0.36 per rose
The unit costs of $2.10, $1.30, and $0.36 are for a single rose. Multiple the unit costs by the 2,000 roses in the special order to obtain total incremental variable costs: Direct materials cost for the special order = $2.10 x 2,000 = $4,200 Direct labor cost for the special order = $1.30 x 2,000 = $2,600 Variable overhead cost for the special order = $0.36 x 2,000 = $720
Because variable costs are increased, profit will decrease by these three incremental amounts. The incremental variable costs are shown as negative amounts in the incremental analysis. Step 3: Determine incremental fixed costs. Allocated fixed overhead is not relevant because the total fixed overhead of $5,400 (60% x $9,000) will result in the same total amount no matter if the order is accepted or not.
Step 4: List the amounts in good form beginning with incremental revenue. The analysis should appear similar to the form of an income statement with descriptive line item labels:
Incremental revenue $8,000
Incremental costs:
Direct materials (4,200) Direct labor (2,600) Variable overhead (720) Incremental increase in profit if the order is accepted $ 480
Note the distinctive label adjacent to the $480 net total line of the analysis. It contains three key components:
The 'incremental increase' (or decrease) indicates that the change is incremental, and whether the change is an increase or decrease.
The 'in profit' indicates what financial component the change will affect. 'If the order is accepted' indicates what action must be taken to result in
the additional (reduction of) profit.
Because profit is expected to increase by $480 if the order is accepted, managers should follow through and accept the order unless qualitative issues warrant otherwise.
E8-2 Eckert Company is involved in producing and selling high-end golf equipment. The
company has recently been involved in developing various types of laser guns to measure
yardages on the golf course. One small laser gun, called LittleLaser, appears to have a very large
potential market. Because of competition, Eckert does not believe that it can charge more than
$90 for LittleLaser. At this price, Eckert believes it can sell 100,000 of these laser guns. Eckert
will require an investment of $8,000,000 to manufacture, and the company wants an ROI of
20%.
E8-4 Kaspar Corporation makes a commercial-grade cooking griddle. The following information
is available for Kaspar Corporation’s anticipated annual volume of 30,000 units.
The company uses a 40% markup percentage on total cost.
Instructions
(a) Compute the total cost per unit.
(b) Compute the target selling price.
E8-5 Paige Corporation makes a mechanical stuffed alligator that sings the Martian national
anthem. The following information is available for Paige Corporation’s anticipated annual
volume of 500,000 units.
The company has a desired ROI of 25%. It has invested assets of $26,000,000.
Instructions
(a) Compute the total cost per unit.
(b) Compute the desired ROI per unit.
(c) Compute the markup percentage using total cost per unit.
(d) Compute the target selling price.
Module 4 Short Term Business Decision
Keep or Replace Equipment
Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.
Current Machine New Machine Original purchase cost $15,000 $25,000 Accumulated depreciation $ 6,000 — Estimated annual operating costs $25,000 $20,000 Useful life 5 years 5 years If sold now, the current machine would have a salvage value of $6,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years. Instructions Should the current machine be replaced?
- Module 4 Short Term Business Decision_Question.pdf
- Module 4 Short Term Business Decsion Special Order Flowers Inc.pdf
- Module 4 Short Term Business Target Costing Cost Plus Pricing Exercise.pdf
- Module 4 Short Term Business Decision keep or replace.pdf
helping resources/ACCT 212/Exercises/Module 5/MODULE 5_EXERCISES_ANSWER.pdf
BE 9-2
PALERMO COMPANY Sales Budget
For the Year Ending December 31, 2014 Quarter 1 2 3 4 Year
Expected unit sales Unit selling price Total sales
10,000
X $70 $700,000
12,000
X $70 $840,000
15,000
X $70 $1,050,000
18,000
X $70 $1,260,000
55,000
X $70 $3,850,000
BE9-3
PALERMO COMPANY Production Budget
For the Six Months Ending June 30, 2014 Quarter Six
Months 1 2
Expected unit sales Add: Desired ending finished goods Total required units Less: Beginning finished goods inventory Required production units
10,000 3,000 13,000 2,500 10,500
a
b
12,000 3,750 15,750 3,000 12,750
c
23,250 a12,000 X .25 b10,000 X .25 c15,000 X .25
BE 9-4
PERINE COMPANY Direct Materials Budget
For the Month Ending January 31, 2014 Units to be produced ........................................................ 4,000 Direct materials per unit ................................................... X 2 Total pounds required for production ............................. 8,000 Add: Desired ending inventory (25% X 5,000 X 2) ....... 2,500 Total materials required ................................................... 10,500 Less: Beginning materials inventory (4,000 X 2 X 25%) ................................................... 2,000 Direct materials purchases .............................................. 8,500 Cost per pound .................................................................. X $6 Total cost of direct materials purchases ........................ $51,000 BE 9-5
MIZE COMPANY Direct Labor Budget
For the Six Months Ending June 30, 2014 Quarter Six
Months 1 2
Units to be produced Direct labor time (hours) per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost
5,000 X 1.6 8,000 X $15 $120,000
6,000 X 1.6
9,600 X $15 $144,000
$264,000
BE 9-6
ROCHE INC. Manufacturing Overhead Budget
For the Year Ending December 31, 2014 Quarter 1 2 3 4 Year Variable costs Fixed costs Total manufacturing overhead
$20,000 40,000 $60,000
$25,000 40,000 $65,000
$30,000 40,000 $70,000
$35,000 40,000 $75,000
$110,000 160,000 $270,000
BE 9-7
NOBLE COMPANY Selling and Administrative Expense Budget
For the Year Ending December 31, 2014 Quarter 1 2 3 4 Year Variable expenses Fixed expenses Total selling and administrative expenses
$22,000 40,000
$62,000
$26,000 40,000
$66,000
$30,000 40,000
$70,000
$34,000 40,000
$74,000
$112,000 160,000
$272,000
BE 9-8
NORTH COMPANY Budgeted Income Statement
For the Year Ending December 31, 2014 Sales ................................................................................... $2,250,000 Cost of goods sold (50,000 X $25) ................................... 1,250,000 Gross profit........................................................................ 1,000,000 Selling and administrative expenses .............................. 300,000 Income before income taxes ............................................ 700,000 Income tax expense .......................................................... 210,000 Net income ......................................................................... $ 490,000
E 9-14
DANNER COMPANY Cash Budget
For the Two Months Ending February 28, 2014 January February
Beginning cash balance .......................................... Add: Receipts Collections from customers ....................... Sale of marketable securities ..................... Total receipts ............................................... Total available cash ................................................. Less: Disbursements Direct materials ........................................... Direct labor .................................................. Manufacturing overhead ............................. Selling and administrative expenses ........ Total disbursements ................................... Excess (deficiency) of available cash over cash disbursements ..................................................... Financing Add: Borrowings .................................................... Less: Repayments ................................................... Ending cash balance ...............................................
$ 45,000
85,000 12,000 97,000 142,000
50,000 30,000 19,500 15,000 114,500
27,500
0
0 $ 27,500
$ 27,500
150,000 0 150,000 177,500
75,000 45,000 23,500 20,000 163,500
14,000
6,000 0 $ 20,000
E 9-15
AARON CORPORATION Cash Budget
For the Quarter Ended March 31, 2014 Beginning cash balance ............................................................. Add: Receipts Collections from customers .......................................... Sale of equipment .......................................................... Total receipts ........................................................... Total available cash .................................................................... Less: Disbursements Direct materials .............................................................. Direct labor ..................................................................... Manufacturing overhead ................................................ Selling and administrative expenses ........................... Purchase of securities ................................................... Total disbursements ................................................ Excess of available cash over disbursements......................... Financing Add: Borrowings ....................................................................... Less: Repayments ..................................................................... Ending cash balance ..................................................................
$ 30,000
180,000 3,000 183,000 213,000
41,000 70,000 35,000 45,000
14,000 205,000
8,000
17,000 –0– $ 25,000
helping resources/ACCT 212/Exercises/Module 5/MODULE 5_EXERCISES_QUESTIONS.pdf
MODULE 5 MASTER BUDGET
EXERCISES
BE9-2 (Sales Budget)
Palermo Company estimates that unit sales will be 10,000 in quarter 1; 12,000 in quarter 2; 15,000 in
quarter 3; and 18,000 in quarter 4. Using a sales price of $70 per unit, prepare the sales budget by
quarters for the year ending December 31, 2014.
BE9-3 (Production Budget)
Sales budget data for Palermo Company are given in BE9-2. Management desires to have an ending
finished goods inventory equal to 25% of the next quarter’s expected unit sales. Prepare a production
budget by quarters for the first 6 months of 2014.
BE9-4 (Direct Material Budget)
Perine Company has 2,000 pounds of raw materials in its December 31, 2013, ending inventory.
Required production for January and February of 2014 are 4,000 and 5,000 units, respectively. Two
pounds of raw materials are needed for each unit, and the estimated cost per pound is $6. Management
desires an ending inventory equal to 25% of next month’s materials requirements. Prepare the direct
materials budget for January.
BE9-5 (Direct Labor Budget)
For Mize Company, units to be produced are 5,000 in quarter 1 and 6,000 in quarter 2. It takes 1.6 hours
to make a finished unit, and the expected hourly wage rate is $15 per hour. Prepare a direct labor
budget by quarters for the 6 months ending June 30, 2014.
BE9-6 (Manufacturing Overhead Budget)
For Roche Inc., variable manufacturing overhead costs are expected to be $20,000 in the first quarter of
2014, with $5,000 increments in each of the remaining three quarters. Fixed overhead costs are
estimated to be $40,000 in each quarter. Prepare the manufacturing overhead budget by quarters and
in total for the year.
BE9-7 (Selling and Administrative Expenses Budget)
Noble Company classifies its selling and administrative expense budget into variable and fixed
components. Variable expenses are expected to be $22,000 in the first quarter, and $4,000 increments
are expected in the remaining quarters of 2014. Fixed expenses are expected to be $40,000 in each
quarter. Prepare the selling and administrative expense budget by quarters and in total for 2014.
BE9-8 (Budgeted Income Statement)
North Company has completed all of its operating budgets. The sales budget for the year shows 50,000
units and total sales of $2,250,000. The total unit cost of making one unit of sales is $25. Selling and
administrative expenses are expected to be $300,000. Income taxes are estimated to be $210,000.
Prepare a budgeted income statement for the year ending December 31, 2014.
E9-14 (Cash Budget)
Danner Company expects to have a cash balance of $45,000 on January 1, 2014.
Relevant monthly budget data for the first 2 months of 2014 are as follows.
Collections from customers: January $85,000, February $150,000.
Payments for direct materials: January $50,000, February $75,000.
Direct labor: January $30,000, February $45,000. Wages are paid in the month they are incurred.
Manufacturing overhead: January $21,000, February $25,000. These costs include depreciation of
$1,500 per month. All other overhead costs are paid as incurred.
Selling and administrative expenses: January $15,000, February $20,000. These costs are exclusive of
depreciation. They are paid as incurred.
Sales of marketable securities in January are expected to realize $12,000 in cash. Danner
Company has a line of credit at a local bank that enables it to borrow up to $25,000. The
company wants to maintain a minimum monthly cash balance of $20,000.
Instructions
Prepare a cash budget for January and February.
E9-15 (Cash Budget)
Aaron Corporation is projecting a cash balance of $30,000 in its December 31, 2013, balance sheet. Aaron’s schedule of expected collections from customers for the first quarter of 2014 shows total collections of $180,000. The schedule of expected payments for direct materials for the first quarter of 2014 shows total payments of $41,000. Other information gathered for the first quarter of 2014 is sale of equipment $3,000; direct labor $70,000, manufacturing overhead $35,000, selling and administrative expenses $45,000; and purchase of securities $14,000. Aaron wants to maintain a balance of at least $25,000 cash at the end of each quarter. Instructions
Prepare a cash budget for the fi rst quarter.
helping resources/ACCT 212/Exercises/Module 6/Module 6 Exercises_ Question.pdf
MODULE 6
EXERCISES
Question 1
Consider the following key performance indicators (KPI):
a. Number of employee suggestions implemented
b. Revenue growth
c. Number of on-time deliveries
d. Percentage of sales force with access to real-time
inventory levels
e. Customer satisfaction ratings
f. Number of defects found during manufacturing
g. Number of warranty claims
h. Return on investment
i. Variable cost per unit
j. Percentage of market share
k. Number of hours of employee training
l. Number of new products developed
m. Yield rate (number of units produced per hours)
n. Average repair time
o. Employee satisfaction
p. Number of repeat customers
Classify each of the preceding key performance indicators according to the balanced scorecard
perspective it address. Choose from financial perspective, customer perspective, internal
business perspective or learning and growth perspective.
Question 2
Consider the following key performance indicators (KPI):
a. Number of customer complaints
b. Number of information system upgrades completed
c. Economic value added
d. New product development time
e. Employee turnover rate
f. Percentage of products with online help manuals
g. Customer retention
h. Percentage of compensation based on performance
i. Percentage of orders filled each week
j. Gross margin growth
k. Number of new patents
l. Employee satisfaction ratings
m. Manufacturing cycle time (average length of production
process)
n. Earnings growth
o. Average machine setup time
p. Number of new customers
q. Employee promotion rate
r. Cash flow from operations
s. Customer satisfaction ratings
t. Machine downtime
u. Finished products per day per employee
v. Percentage of employees with access to upgraded
system
w. Wait time per order prior to start of production
Classify each of the preceding key performance indicators according to the balanced scorecard
perspective it address. Choose from financial perspective, customer perspective, internal
business perspective or learning and growth perspective.
helping resources/ACCT 212/Slides/MODULE 1 Managerial Accounting.pptx
MODULE 1 INTRODUCTION TO MANAGEMENT ACCOUNTING
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.
Management accountability
Management accountability is the manager’s responsibility to the various stakeholders of the company
Management accountability requires two forms of accounting:-
Financial accounting provides financial statements that report results of operations, financial position and cash flows both to managers and to external stakeholders: owners, creditors, suppliers, customers, the governments and society.
Management or managerial accounting provides information to help manager plan and control operations as they lead the business.
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Managerial accounting is a field of accounting that provides economic and financial information for managers and other internal users.
Managerial accounting applies to all types of businesses.
Corporations
Proprietorships
Partnerships
Not-for-profit
Managerial Accounting Basics
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Comparing Managerial and Financial Accounting
Managerial Accounting Basics
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a. Is governed by generally accepted accounting principles.
b. Places emphasis on special-purpose information.
c. Pertains to the entity as a whole and is highly aggregated.
d. Is limited to cost data.
Managerial accounting:
Review Question
Managerial Accounting Basics
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Management Functions
Planning
Maximize short-term profit and market share.
Commit to environmental protection and social programs.
Add value to the business.
Directing
Controlling
Coordinate diverse activities and human resources.
Implement planned objectives.
Provide incentives to motivate employees
Hire and train employees.
Produce smooth-running operation.
Keeping activities on track.
Determine whether goals are met.
Decide changes needed to get back on track.
May use an informal or formal system of evaluations.
Managerial Accounting Basics
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a. Planning, directing, and selling.
b. Directing, manufacturing, and controlling.
c. Planning, manufacturing, and controlling.
d. Planning, directing, and controlling.
The management of an organization performs several broad functions. They are:
Managerial Accounting Basics
Review Question
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Indicate whether the following statements are true or false.
Managerial accountants have a single role within an organization, collecting and reporting costs to management.
Financial accounting reports are general-purpose and intended for external users.
Managerial accounting reports are special-purpose and issued as frequently as needed.
False
True
True
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Business Ethics
Managerial Accounting Basics
Business process and accounting system change.
However the need for accountants to maintain high ethical standards of professional conduct will never change.
The Institute of Management Accountants says that ethics deals with human conduct in relation to what is morally good and bad, right and wrong.
It is the application of values to decision making.
These values include honesty, fairness, responsibility, respect and compassion
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Business Ethics
Creating Proper Incentives
Systems and controls sometimes create incentives for managers to take unethical actions.
Controls need to be effective and realistic.
Managerial Accounting Basics
All employees are expected to act ethically.
Many organizations have codes of business ethics
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Business Ethics
Sarbanes-Oxley Act (SOX)
Clarifies management’s responsibilities.
Requires certifications by CEO and CFO.
Selection criteria for Board of Directors and Audit Committee.
Substantially increased penalties for misconduct.
Code of Ethical Standards
Managerial Accounting Basics
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IMA Code of conduct
Managerial Accounting Basics
Competence – maintain professional expertise by continually developing knowledge and skills, perform professional duty accordance with relevant laws, regulations and technical standard, provide decision support information and recommendation that are accurate, clear, concise and timely and recognize and communicate professional limitations.
Confidentiality – keep information confidential, refrain from using the confidential information and inform all relevant parties regarding appropriate use of confidential information.
Integrity – avoid conflict of interest, refrain from engaging in conduct that would be prejudice and abstain from engaging in or supporting activity that might discredit the profession.
Credibility – communicate information fairly and objectively and disclose all relevant information that can influence user decision
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Managers should ask questions such as the following.
What costs are involved in making a product or providing a service?
If we decrease production volume, will costs decrease?
What impact will automation have on total costs?
How can we best control costs?
Manufacturing Costs
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Manufacturing consists of activities and processes that convert raw materials into finished goods.
Manufacturing Costs
Manufacturing Costs
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Direct Materials
Raw Materials
Basic materials and parts used in manufacturing process.
Direct Materials
Raw materials that can be physically and directly associated with the finished product during the manufacturing process.
Manufacturing Costs
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Indirect Materials
Not physically part of the finished product or they are an insignificant part of finished product in terms of cost.
Considered part of manufacturing overhead.
Direct Materials
Manufacturing Costs
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Work of factory employees that can be physically and directly associated with converting raw materials into finished goods.
Indirect Labor
Work of factory employees that has no physical association with the finished product or for which it is impractical to trace costs to the goods produced.
Direct Labor
Manufacturing Costs
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Costs that are indirectly associated with manufacturing the finished product.
Includes all manufacturing costs except direct materials and direct labor.
Also called factory overhead, indirect manufacturing costs, or burden.
Manufacturing Overhead
Manufacturing Costs
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Which of the following is not an element of manufacturing overhead?
a. Sales manager’s salary.
b. Plant manager’s salary.
c. Factory repairman’s wages.
d. Product inspector’s salary.
Review Question
Manufacturing Costs
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Components:
Costs that are an integral part of producing the product.
Recorded in “inventory” account.
Not an expense (COGS) until the goods are sold.
Product Costs
Direct materials
Direct labor
Manufacturing overhead
Product Versus Period Costs
Period Costs
Charged to expense as incurred.
Non-manufacturing costs.
Includes all selling and administrative expenses.
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Product Versus Period Costs
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A bicycle company has these costs: tires, salaries of employees who put tires on the wheels, factory building depreciation, wheel nuts, spokes, salary of factory manager, handlebars, and salaries of factory maintenance employees. Classify each cost as direct materials, direct labor, or overhead.
Direct Materials
Tires.
Spokes.
Handlebars.
Direct Labor
Overhead
Salaries of employees who put tires on the wheels.
Factory depreciation.
Factory manager salary.
Factory maintenance employees salary.
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Determining the Cost of Goods Manufactured
Total Work in Process – (1) cost of beginning work in process and (2) total manufacturing costs for the current period.
Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead in the current year.
LO 6 Indicate how cost of goods manufactured is determined.
Illustration 1-6
Manufacturing Costs in Financial Statements
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Illustration 1-8
Illustration 1-7
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Manufacturing Costs in Financial Statements
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Illustration 1-8
Inventory accounts for a manufacturer
The balance sheet for a merchandising company shows just one category of inventory.
Balance Sheet
Manufacturing Costs in Financial Statements
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Illustration 1-9
Current assets sections of merchandising and manufacturing balance sheets
Balance Sheet
Manufacturing Costs in Financial Statements
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a. Raw materials and work in process only
b. Work in process only
c. Raw materials only
d. Raw materials, work in process, and finished goods
A cost of goods manufactured schedule shows beginning and ending inventories for:
Review Question
Manufacturing Costs in Financial Statements
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Illustration 1-10
Illustration: Suppose you started your own snowboard factory, KRT Boards. Here are some of the costs that your snowboard factory would incur. Assign the following costs:
Manufacturing Costs in Financial Statements
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Illustration 1-10
Manufacturing Costs in Financial Statements
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Refers to all business process associated with providing a product or service.
For a manufacturing firm these include the following:
Focus on the Value Chain
Illustration 1-12
Managerial Accounting Today
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The process or activities by which a company adds value to an article, including production, marketing, and the provision of after-sales service.
Definition: A value chain is the whole series of activities that create and build value at every step. The total value delivered by the company is the sum total of the value built up all throughout the company. Michael Porter developed this concept in his 1980 book 'Competitive Advantage'. Description: The significance of the value chain: The value chain concept separates useful activities (which allow the company as a whole to gain competitive advantage) from the wasteful activities (which hinder the company from getting a lead in the market). Focusing on the value-creating activities could give the company many advantages. For example, the ability to charge higher prices; lower cost of manufacture; better brand image, faster response to threats or opportunities.
What is the value chain made of? Porter defines the value chain as made of primary activities and support activities. Primary involves inbound logistics (getting the material in for adding value by processing it), operations (which are all the processes within the manufacturing), outbound (which involves distribution to the points of sale), marketing and sales (which go sell it, brand it and promote it) and service (which maintains the functionality of the product, post sales). The support functions which feed into all the primary functions are the firm infrastructure, like MIS which allows managers to monitor the environment well; Human Resource, which develops the skills needed to steer the company well; procurement to buy/ source goods at the right price, which increasingly takes importance because of difficult economic conditions and technology, which could give the firm speed, accuracy and quality. Both these allow the firm to charge a margin, which partly comes from the value addition of the primary and support functions and partly from the advantage that the company gains due to communication of the value addition to the consumer (brand image, faith, trust and so on).
Just-In-Time Inventory Methods
Inventory system in which goods are manufactured or purchased just in time for sale.
LO 8 Identify trends in managerial accounting.
Reduce defects in finished products, with the goal of zero defects.
Total Quality Management (TQM)
Managerial Accounting Today
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Constraints (“bottlenecks” ) limit the company’s potential profitability.
A specific approach to identify and manage these constraints in order to achieve company goals.
Theory of Constraints
LO 8 Identify trends in managerial accounting.
Software programs designed to manage all major business processes.
Enterprise Resource Planning (ERP)
Managerial Accounting Today
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Allocates overhead based on use of activities.
Results in more accurate product costing and scrutiny of all activities in the value chain.
LO 8 Identify trends in managerial accounting.
Activity-Based Costing (ABC)
Managerial Accounting Today
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Evaluates operations in an integrated fashion.
Uses both financial and non-financial measures.
Links performance to overall company objectives.
Balanced Scorecard
LO 8 Identify trends in managerial accounting.
Managerial Accounting Today
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Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner?
Just-in-time inventory.
Total-quality management.
Balanced scorecard.
Activity-based costing.
Review Question
Managerial Accounting Today
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3. ______ Systems implemented to reduce defects in finished products with the goal of achieving zero defects.
1. ______ All activities associated with providing a product or service.
2. ______ A method of allocating overhead based on each product’s use of activities in making the product.
Match the descriptions that follow with the corresponding terms.
e
a
d
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4. ______ A performance-measurement approach that uses both financial and nonfinancial measures, tied to company objectives, to evaluate a company’s operations in an integrated fashion.
b
c
5. ______ Inventory system in which goods are manufactured or purchased just as they are needed for use.
Match the descriptions that follow with the corresponding terms.
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Net sales revenue$$$$$$$
Cost of goods sold:
Beginning finished goods inventory$$$$$$
Plus: Cost of goods manufactured$$$$$
Less: Ending finished goods inventory($$$$$)
Cost of goods sold$$$$$$
Gross profit$$$$$$
Selling and administrative expense$$$$$
Operating income$$$$$$
Any Manufacturing Company
Income Statement
For the year ended December 31, 2011
Sheet1
| Any Manufacturing Company | ||||
| Income Statement | ||||
| For the year ended December 31, 2011 | ||||
| Net sales revenue | $$$$$$$ | |||
| Cost of goods sold: | ||||
| Beginning finished goods inventory | $$$$$$ | |||
| Plus: Cost of goods manufactured | $$$$$ | |||
| Less: Ending finished goods inventory | ($$$$$) | |||
| Cost of goods sold | $$$$$$ | |||
| Gross profit | $$$$$$ | |||
| Selling and administrative expense | $$$$$ | |||
| Operating income | $$$$$$ |
Sheet2
Sheet3
helping resources/ACCT 212/Slides/MODULE 2 Job Order Costing, Process Costing and Activity Based Costing.pptx
MODULE 2 Process costing, Job order costing and Activity based Costing
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Cost Accounting involves:
Measuring, Recording, and Reporting product costs.
The cost accounting system typically includes two processes:-
1. Cost accumulation: Collecting costs by some natural classification such as materials or labor or by activities performed such as order processing or machine processing.
2. Cost assignment: Attaching costs to one or more cost objects, such as activities, processes, departments, customers or products.
Three basic types: (1) a job order cost system and (2) a process cost system and (3) ABC
Cost Accounting Systems
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Job Order Cost System
Costs are assigned to each job or batch.
Key feature: Each job or batch has its own distinguishing characteristics.
Objective: Compute the cost per job.
Measures costs for each job completed – not for set time periods.
Cost Accounting Systems
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Cost Accounting Systems
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Advantages
More precise in assignment of costs to projects than process costing.
Provides more useful information for determining the profitability of particular projects and for estimating costs when preparing bids on future jobs.
LO 5 Prepare entries for jobs completed and sold.
Disadvantage
Requires a significant amount of data entry.
Job Order Cost Flow
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The cost flow parallels the physical flow of the materials as they are converted into finished goods
Manufacturing costs are assigned to Work in Process (WIP).
Cost of completed jobs is transferred to Finished Goods.
When units are sold, the cost is transferred to Cost of Goods Sold.
Job Order Cost Flow
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LO 5
Job Order Cost Flow
Summary
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Accumulating Manufacturing Costs
Raw Material Costs
Job Order Cost Flow
Journal entry when company purchase direct material and indirect material.
When materials are used,
direct material costs go directly into the Work in process inventory account.
Indirect materials are debited to manufacturing overhead.
For both direct materials and indirect materials, the production team completes a document called a materials requisition to request the transfer of materials to the production floor.
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S01 – 09/09/2015
S02 – 09/09/2015
Accumulating Manufacturing Costs
Labor Costs
Job Order Cost Flow
Incurrence of labor cost -assign labor cost to individual jobs.
Assignment of labor cost to jobs –
Direct labor - transfer labor cost out of the Manufacturing wages account and into Work in process inventory
Indirect labor – transfer into Manufacturing overhead
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Many types of overhead costs
For example, property taxes, depreciation, insurance, and repairs.
Costs unrelated to manufacturing process are expensed.
Costs related to manufacturing process are accumulated in Manufacturing Overhead.
Manufacturing overhead subsequently assigned to work in process.
Job Order Cost Flow
Manufacturing Overhead Costs
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Relates to production operations as a whole.
Cannot be assigned to specific jobs based on actual costs incurred.
Companies assign to work in process and to specific jobs on an estimated basis through the use of a …
Manufacturing Overhead Costs
Predetermined Overhead Rate
Job Order Cost Flow
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Based on the relationship between estimated annual overhead costs and expected annual operating activity
Expressed in terms of an activity base such as
Direct labor costs
Direct labor hours
Machine hours
Any other activity that is an equitable base for applying overhead costs to jobs
Job Order Cost Flow
Predetermined Overhead Rate
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Established at the beginning of the year.
Formula for computing the predetermined rate overhead rate is
Job Order Cost Flow
Predetermined Overhead Rate
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Assigned to Work in Process during the period to get timely information about the cost of a completed job.
Job Order Cost Flow
Manufacturing Overhead Costs
To allocate overhead to jobs, the application rate is multiplied by the actual quantity of allocation base used on the job.
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Assigning Costs to Finished Goods
LO 5
When a job is completed, the costs are summarized and the job cost sheet is completed.
Job Order Cost Flow
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LO 5 Prepare entries for jobs completed and sold.
Job Order Cost Flow
Summary
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LO 6 Distinguish between under- and overapplied manufacturing overhead.
Under- or Overapplied Overhead
A debit balance in manufacturing overhead means that overhead is underapplied.
A credit balance in manufacturing overhead means that overhead is overapplied.
Illustration 2-19
Reporting Job Cost Data
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Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods sold.
Underapplied overhead is debited to COGS
Overapplied overhead is credited to COGS
LO 6 Distinguish between under- and overapplied manufacturing overhead.
Reporting Job Cost Data
Under- or Overapplied Overhead
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Refer to handout exercise
Reporting Job Cost Data
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Use to apply costs to similar products that are mass-produced in a continuous fashion
Examples include the production of Cereal, Paint, Manufacturing Steel, Oil Refining and Soft Drinks
Illustration 3-1
Uses of Process Cost Systems
Nature of Process Cost Systems
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Illustration 3-2
Process and Job Cost Comparison
Nature of Process Cost Systems
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Which of the following items is not a characteristic of a process cost system:
a. Once production begins, it continues until the finished product emerges.
b. The focus is on continually producing homogenous products.
c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.
d. The products produced are heterogeneous in nature.
Review Question
Nature of Process Cost Systems
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Similarities and Differences Between Job Order Cost and Process Cost Systems
Job Order Cost
Costs assigned to each job.
Products have unique characteristics.
Process Cost
Costs tracked through a series of connected manufacturing processes or departments.
Products are uniform or relatively homogeneous and produced in a large volume.
Nature of Process Cost Systems
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Similarities
Manufacturing cost elements.
Accumulation of the costs of materials, labor, and overhead.
Flow of costs.
Number of work in process accounts used.
Documents used to track costs.
Point at which costs are totaled.
Unit cost computations.
Differences
Nature of Process Cost Systems
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Both a job order and a process cost system track the same three manufacturing cost elements – direct materials, direct labor, and manufacturing overhead.
b. In a job order cost system, only one work in process account is used, whereas in a process cost system, multiple work in process accounts are used.
c. Manufacturing costs are accumulated the same way in a job order and in a process cost system.
d. Manufacturing costs are assigned the same way in a job order and in a process cost system.
Indicate which of the following statements is not correct:
Review Question
Nature of Process Cost Systems
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Process Cost Flow
.
Nature of Process Cost Systems
There are two methods for handling process costing: weighted average and FIFO.
Two building blocks for process costing using weighted average:
Conversion costs – combining direct labor and manufacturing overhead. It is called conversion cost because this cost is involved in converting raw materials into finished goods.
Equivalent units of production - allows us to measure the amount of work done on a partially finished group of units during a period and to express it in terms of fully complete units of output.
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Process Cost Flow
.
Nature of Process Cost Systems
In process costing, all units go through the same production process and therefore, have the same unit cost.
Each process requires the use of a separate Work in process inventory account.
Costs are collected by process (or department).
The costs accumulate until all costs have been added to the product, and it is sent to finished goods.
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Process Cost Flow
Nature of Process Cost Systems
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Summarize the flow of physical units
Compute the cost per equivalent unit
Assign costs to completed and ending inventory units
Compute output in equivalent units
Refer to handout exercise
Reporting process Cost Data
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Allocates overhead using a single predetermined rate.
Job order costing: direct labor cost may be the relevant activity base.
Process costing: machine hours may be the relevant activity base.
Assumption was satisfactory when direct labor was a major portion of total manufacturing costs.
Wide acceptance of a high correlation between direct labor and overhead costs.
Traditional Costing Systems
Traditional Costing and Activity-Based Costing
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Activity-Based Costing
Allocates overhead to multiple activity cost pools and
Assigns the activity cost pools to products or services by means of cost drivers.
Traditional Costing and Activity-Based Costing
The business environment has become more complex.
This has led to the most significant improvement in cost accounting system design – activity-based costing (ABC).
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Activity-Based Costing
Activity: any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.
Activity Cost Pool: a distinct type of activity. For example: ordering materials or setting up machines.
Cost Drivers: any factors or activities that have a direct cause-effect relationship with the resources consumed.
Traditional Costing and Activity-Based Costing
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Activity-Based Costing
ABC allocates overhead costs in two stages:
Stage 1: Overhead costs are allocated to activity cost pools.
Stage 2: Assigns overhead allocated to the activity cost pools to products, using cost drivers.
The more complex a product’s manufacturing operation, the more activities and cost drivers are likely to be present.
Traditional Costing and Activity-Based Costing
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Activity-Based Costing
Illustration 4-2
Activities and related cost drivers
Traditional Costing and Activity-Based Costing
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Activity-Based Costing
Illustration 4-3
ABC system design—Lift Jack Company
Traditional Costing and Activity-Based Costing
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Indicate whether the following statements are true or false.
A traditional costing system allocates overhead by means of multiple overhead rates.
Activity-based costing allocates overhead costs in a two-stage process.
Direct material and direct labor costs are easier to trace to products than overhead.
As manufacturing processes have become more automated, more companies have chosen to allocate overhead on the basis of direct labor costs.
In activity-based costing, an activity is any event, action, transaction, or work sequence that incurs cost when producing a product.
Solution: 1. false. 2. true. 3. true. 4. false. 5. true.
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Activity-Based Costing
Involves the following four steps.
Identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools.
Identify the cost driver that has a strong correlation to the costs accumulated in the cost pool.
Compute the activity-based overhead rate for each cost driver.
Assign overhead costs to products, using the overhead rates determined for each cost pool (cost per driver).
Example of ABC Versus Traditional Costing
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Atlas Company produces two products (abdominal trainers):
Ab Bench: a high volume item with sales totaling 25,000 units annually.
Ab Coaster: a low volume item with sales totaling 5,000 units annually.
Each product requires 1 hour of direct labor.
Total annual direct labor hours (DLH) 30,000 (25,000 + 5,000)
Direct labor cost $12 per unit for each product
Expected annual manufacturing overhead costs $900,000.
Direct materials cost:
Ab Bench - $40 per unit
Ab Coaster - $30 per unit
Illustration:
Required: Calculate unit costs under ABC.
Example of ABC Versus Traditional Costing
Identify and Classify Activities and Allocate
Overhead to Cost Pools (Step 1)
Illustration 4-4
Overhead costs are assigned directly to the appropriate activity cost pool.
Example of ABC Versus Traditional Costing
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Identify Cost Drivers (Step 2)
Cost driver must accurately measure the actual consumption of the activity by the various products. In assigning overhead costs, it is necessary to know the expected use of cost drivers for each product. Because of its low volume, Ab Coaster requires more set-ups and inspections than Ab Bench
Example of ABC Versus Traditional Costing
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Compute Overhead Rates (Step 3)
Illustration 4-6
Illustration 4-7
Next, the company computes an activity-based overhead rate per cost driver.
Example of ABC Versus Traditional Costing
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Assign Overhead Cost to Products (Step 4)
To assign overhead costs, Atlas multiplies the activity-based overhead rates per cost driver by the number of cost drivers expected to be used per product
Example of ABC Versus Traditional Costing
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Assign Overhead Cost to Products (Step 4)
To assign overhead costs, Atlas multiplies the activity-based overhead rates per cost driver by the number of cost drivers expected to be used per product .
Example of ABC Versus Traditional Costing
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Example of ABC Versus Traditional Costing
Calculate cost per products.
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Casey Company has five activity cost pools and two products. It expects to produce 200,000 units of its automobile scissors jack and 80,000 units of its truck hydraulic jack. Having identified its activity cost pools and the cost drivers for each cost pool, Casey Company accumulated the following data relative to those activity cost pools and cost drivers.
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Casey Company has five activity cost pools and two products. It expects to produce 200,000 units of its automobile scissors jack and 80,000 units of its truck hydraulic jack. Having identified its activity cost pools and the cost drivers for each cost pool, Casey Company accumulated the following data relative to those activity cost pools and cost drivers.
Using the above data, do the following.
Prepare a schedule showing the computations of the activity-based overhead rates per cost driver.
Prepare a schedule assigning each activity’s overhead cost to the two products.
Compute the overhead cost per unit for each product.
Comment on the comparative overhead cost per unit.
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Prepare a schedule showing the computations of the activity-based overhead rates per cost driver.
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Prepare a schedule assigning each activity’s overhead cost to the two products.
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c. Compute the overhead cost per unit for each product.
These data show that the total overhead assigned to 80,000 hydraulic jacks exceeds the overhead assigned to 200,000 scissors jacks. The overhead cost per hydraulic jack is $34.25. It is only $12.80 per scissors jack.
d. Comment on the comparative overhead cost per unit.
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More accurate product costing through:
Use of more cost pools to assign overhead costs.
Enhanced control over overhead costs.
Better management decisions.
Benefits of ABC
Can be expensive to use.
Some arbitrary allocations continue.
Limitations of ABC
Activity-Based Costing: A Closer Look
Value-Added Versus Non–Value-Added Activities
Activity Based Management (ABM):
An extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making.
Value-added activities
Non–value-added activities
Activity-Based Costing: A Closer Look
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19
Total estimated manufacturing overhead costsTotal estimated quantity of the manufacturing overhead allocation base
Primary cost driver of overhead costs
Examples: Direct labor hoursDirect labor costMachine hours
Copyright (c) 2009 Prentice Hall. All rights reserved.
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Predetermined Manufacturing Overhead Rate
Total estimated manufacturing overhead costs
Total estimated quantity of the manufacturing
overhead allocation base
Primary cost driver of overhead costs
Examples:
Direct labor hours
Direct labor cost
Machine hours
Copyright (c) 2009 Prentice Hall. All rights reserved.
19
The most accurate allocation can be made only when total overhead cost is known—and that is not until the end of the year. But managers cannot wait that long for product cost information. So the predetermined overhead rate is calculated before the year begins. Then throughout the year, companies use this predetermined rate to allocate estimated overhead cost to individual jobs.
The key to assigning indirect manufacturing costs to jobs is to identify a workable manufacturing overhead allocation base. The allocation base is a common denominator that links overhead costs to the products. Ideally, the allocation base is the primary cost driver of manufacturing overhead—that is, the more “allocation base,” the more overhead costs and vice-versa. As the phrase implies, a cost driver is the primary factor that causes (drives) a cost. Traditionally, manufacturing companies have used:
• Direct labor hours (for labor-intensive production environments)
• Direct labor cost (for labor-intensive production environments)
• Machine hours (for machine-intensive production environments)
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Allocated manufacturing overhead costActual quantity of allocation base used on the jobPredetermined overhead application rate
Copyright (c) 2009 Prentice Hall. All rights reserved.
Allocate Overhead Costs to Jobs
20
Allocated manufacturing overhead cost
Actual quantity of allocation base used on the job
Predetermined overhead application rate
Copyright (c) 2009 Prentice Hall. All rights reserved.
To allocate overhead to jobs, the application rate is multiplied by the actual quantity of allocation base used on the job. So, if the overhead application rate is based on direct labor hours, the rate is multiplied by the direct labor hours used on each job.
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helping resources/ACCT 212/Slides/MODULE 3 Cost Behavior and CVP Analysis.pptx
MODULE 3 COST VOLUME PROFIT (CVP) ANALYSIS
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Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business activity.
Some costs change; others remain the same.
Helps management plan operations and decide between alternative courses of action.
Applies to all types of businesses and entities.
Starting point is measuring key business activities.
Cost Behavior Analysis
Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business activity.
Activity levels may be expressed in terms of:
Sales dollars (in a retail company)
Miles driven (in a trucking company)
Room occupancy (in a hotel)
Dance classes taught (by a dance studio)
Many companies use more than one measurement base.
Cost Behavior Analysis
Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business activity.
Changes in the level or volume of activity should be correlated with changes in costs.
Activity level selected is called activity or volume index.
Activity index:
Identifies the activity that causes changes in the behavior of costs.
Allows costs to be classified as variable, fixed, or mixed.
Cost Behavior Analysis
Variable Costs
Cost Behavior Analysis
Costs that vary in total directly and proportionately with changes in the activity level.
Cost that increase or decrease in total as the volume of activity increases or decreases.
Total variable costs increase as activity increases, but the variable cost per unit does not change.
Example: If the activity level increases 10 percent, total variable costs increase 10 percent.
Example: If the activity level decreases by 25 percent, total variable costs decrease by 25 percent.
Illustration: Damon Company manufactures tablet computers that contain a $10 camera. The activity index is the number of
tablets produced. As Damon manufactures each tablet, the total cost of the camera increases by $10.
Cost Behavior Analysis
| Units produced | Direct materials cost per unit | Total direct materials cost |
| 2000 | $10 | $20,000 |
| 4000 | $10 | 40,000 |
| 6000 | $10 | 60,000 |
| 8000 | $10 | 80,000 |
| 10,000 | $10 | 100,000 |
The illustration shows, total cost of the cameras will be $20,000 if Damon produces 2,000 tablets, and $100,000 when it produces 10,000 tablets. We also can see that a variable cost remains the same per unit as the level of activity changes.
Illustration 5-1
Cost Behavior Analysis
Fixed Costs
Costs that remain the same in total regardless of changes in the activity level.
Per unit cost varies inversely with activity: As volume increases, unit cost declines, and vice versa
Examples:
Property taxes
Insurance
Rent
Depreciation on buildings and equipment
Cost Behavior Analysis
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Illustration: Damon Company leases its productive facilities at a cost of $10,000 per month. Total fixed costs of the facilities will remain constant at every level of activity, as part of Illustration shows.
Cost Behavior Analysis
Illustration: Damon Company leases its productive facilities at a cost of $10,000 per month. Total fixed costs of the facilities will remain constant at every level of activity. But, on a per unit basis, the cost of rent will decline as activity increases. At 2,000 units, the unit cost per tablet computer is $5 ($10,000 ÷ 2,000). When Damon produces 10,000 tablets, the unit cost is only $1 ($10,000 ÷ 10,000).
Cost Behavior Analysis
Variable costs are costs that:
a. Vary in total directly and proportionately with changes in the activity level.
b. Remain the same per unit at every activity level.
c. Neither of the above.
d. Both (a) and (b) above.
Review Question
Cost Behavior Analysis
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Costs that have both a variable cost element and a fixed cost element.
Mixed Costs
Cost Behavior Analysis
Change in total but not proportionately with changes in activity level.
Helena Company, reports the following total costs at two levels of production.
Classify each cost as variable, fixed, or mixed.
Variable
Fixed
Mixed
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High-Low Method
Mixed costs must be classified into their fixed and variable elements.
High-Low Method uses the total costs incurred at both the high and the low levels of activity to classify mixed costs.
The difference in costs between the high and low levels represents variable costs, since only variable costs change as activity levels change.
Cost Behavior Analysis
STEP 1: Determine variable cost per unit using the following formula:
Cost Behavior Analysis
High-Low Method
STEP 2: Determine the fixed cost by subtracting the total variable cost at either the high or the low activity level from the total cost at that level.
STEP 3: An equation is formulated to show the cost behavior
Illustration: Metro Transit Company has the following maintenance costs and mileage data for its fleet of buses over a 6-month period.
Change in Costs
(63,000 - 30,000) $33,000
High minus Low
(50,000 - 20,000) 30,000
=
$1.10
cost per unit
Cost Behavior Analysis
High-Low Method
STEP 2: Determine the fixed cost by subtracting the total variable cost at either the high or the low activity level from the total cost at that level.
Cost Behavior Analysis
High-Low Method
Maintenance costs are therefore $8,000 per month plus $1.10 per mile. This is represented by the following formula:
Maintenance costs = Fixed costs + ($1.10 x Miles driven)
Example: At 45,000 miles, estimated maintenance costs would be:
Fixed
$ 8,000
Variable
($1.10 x 45,000) 49,500
$57,500
Cost Behavior Analysis
High-Low Method
Mixed costs consist of a:
a. Variable cost element and a fixed cost element.
b. Fixed cost element and a controllable cost element.
c. Relevant cost element and a controllable cost element.
d. Variable cost element and a relevant cost element.
Cost Behavior Analysis
Review Question
19
Prepared by: Ms Rahayu Abdull Razak
Byrnes Company accumulates the following data concerning a mixed cost, using units produced as the activity level.
Compute the variable and fixed cost elements using the high-low method.
Estimate the total cost if the company produces 6,000 units.
20
Prepared by: Ms Rahayu Abdull Razak
Compute the variable and fixed cost elements using the high-low method.
Variable cost: ($14,740 - $11,100) / (9,800 - 7,000) = $1.30 per unit
Fixed cost: $14,740 - $12,740 ($1.30 x 9,800 units) = $2,000
or $11,100 - $9,100 ($1.30 x 7,000) = $2,000
21
Prepared by: Ms Rahayu Abdull Razak
Estimate the total cost if the company produces 6,000 units.
Total cost (6,000 units): $2,000 + $7,800 ($1.30 x 6,000) = $9,800
22
Prepared by: Ms Rahayu Abdull Razak
Cost-volume-profit (CVP) analysis is the study of the effects of changes of costs and volume on a company’s profits.
Important in profit planning
Critical factor in management decisions as
Setting selling prices,
Determining product mix, and
Maximizing use of production facilities.
Cost-Volume-Profit Analysis
Illustration 5-9
Cost-Volume-Profit Analysis
Basic Components
Basic Components - Assumptions
Behavior of both costs and revenues is linear throughout the relevant range of the activity index.
All costs can be classified as either variable or fixed with reasonable accuracy.
Changes in activity are the only factors that affect costs.
All units produced are sold.
When more than one type of product is sold, the sales mix will remain constant.
Cost-Volume-Profit Analysis
Which of the following is NOT involved in CVP analysis?
a. Sales mix.
b. Unit selling prices.
c. Fixed costs per unit.
d. Volume or level of activity.
Cost-Volume-Profit Analysis
Review Question
26
Prepared by: Ms Rahayu Abdull Razak
A statement for internal use.
Classifies costs and expenses as fixed or variable.
Reports contribution margin in the body of the statement.
Contribution margin – amount of revenue remaining after deducting variable costs.
Reports the same net income as a traditional income statement.
CVP Income Statement
Cost-Volume-Profit Analysis
Illustration: Vargo Video produces a high-definition digital camcorder with 15x optical zoom and a wide-screen, high-resolution LCD monitor. Relevant data for the camcorders sold by this company in June 2014 are as follows.
Cost-Volume-Profit Analysis
CVP Income Statement
Cost-Volume-Profit Analysis
CVP Income Statement
Illustration: The CVP income statement for Vargo Video therefore would be reported as follows.
Contribution margin is available to cover fixed costs and to contribute to income.
Formula for contribution margin per unit and the computation for Vargo Video are:
Cost-Volume-Profit Analysis
Contribution Margin per Unit
Vargo’s CVP income statement assuming a zero net income.
Cost-Volume-Profit Analysis
Contribution Margin per Unit
Assume that Vargo sold one more camcorder, for a total of 1,001 camcorders sold.
Cost-Volume-Profit Analysis
Contribution Margin per Unit
Shows the percentage of each sales dollar available to apply toward fixed costs and profits.
Formula for contribution margin ratio and the computation for Vargo Video are:
Cost-Volume-Profit Analysis
Contribution Margin Ratio
Assume Vargo Video’s current sales are $500,000 and it wants to know the effect of a $100,000 (200-unit) increase in sales.
Illustration 5-18
Cost-Volume-Profit Analysis
Contribution Margin Ratio
Contribution margin:
a. Is revenue remaining after deducting variable costs.
b. May be expressed as contribution margin per unit.
c. Is selling price less cost of goods sold.
d. Both (a) and (b) above.
Cost-Volume-Profit Analysis
Review Question
35
Prepared by: Ms Rahayu Abdull Razak
Process of finding the break-even point level of activity at which total revenues equal total costs (both fixed and variable).
Can be computed or derived
from a mathematical equation,
by using contribution margin, or
from a cost-volume profit (CVP) graph.
Expressed either in sales units or in sales dollars.
Cost-Volume-Profit Analysis
Break-Even Analysis
Computation of break-even point in units.
Break-Even Analysis
Mathematical Equation/income statement
Break-even occurs where total sales equal variable costs plus fixed costs; i.e., net income is zero
At the break-even point, contribution margin must equal total fixed costs
(CM = total revenues – variable costs)
Break-even point can be computed using either contribution margin per unit or contribution margin ratio.
Break-Even Analysis
Contribution Margin Technique
When the BEP in units is desired, contribution margin per unit is used in the following formula which shows the computation for Vargo Video:
Break-Even Analysis
Contribution Margin Technique
When the BEP in dollars is desired, contribution margin ratio is used in the following formula which shows the computation for Vargo Video:
Break-Even Analysis
Contribution Margin Technique
Because this graph also shows costs, volume, and profits, it is referred to as a cost-volume-profit (CVP) graph.
Graphic Presentation
Break-Even Analysis