Question 1
On 14 February, a disgruntled employee, set alight the Jerry Company warehouse located beside the company's manufacturing facility. The fire spread and destroyed all of the inventory. The loss is fully covered and the insurance company requires an estimate of the inventory balances as at 14 February as a basis for negotiating a settlement.
The following information, for the period 1 January to 14 February, was extracted from records kept in another building.
$
Total conversion costs added
660,000
Depreciation of plant machinery
23,640
Direct materials purchased
240,000
General administrative cost
68,900
Sales revenues
1, 037,500
Sales salaries and commission
40,675
Taxes on manufacturing facility
3,500
Total manufacturing costs added during the period
840,000
Jerry Company kept periodic inventory records. As at the beginning of January, the following are the inventory account balances:
Account
1 January
14 February
Direct materials
$25,000
?
Work-in-process
$70,000
?
Finished goods
$145,000
?
Additional information provided by the company's financial and cost accountants:
a. Gross profit (gross margin) as a percentage of sales revenues is 20% before adjustment for under or over allocated overheads.
b. Cost of goods manufactured is 400% of cost of direct material used.
c. Manufacturing overhead (MOH) allocated is 40% of total conversion costs added.
d. Actual MOH incurred for the period is $270,000.
Required:
1. Calculate the unadjusted gross profit for the period.
2. Calculate the cost of direct materials used; and
3. Calculate the ending balance of direct materials inventory.
4. Calculate: a. cost of goods manufactured; and
b. ending balance of Work-in-Process inventory.
5. Calculate the ending balance of Finished goods inventory.
6. Calculate the total amount of manufacturing overhead over- or under-allocated (state clearly whether the amount is over- or under-allocated).
7. Briefly discuss one advantage and one disadvantage of using actual costing system.
Question 3
The Joondalup Bicycle Company (JBC) was set up in the previous financial year and manufactures bicycles. It is targeting the student market, hence the bicycle product Unibike features sturdy construction, plastic safety reflectors and special saddle bags for carrying backpack/ bag. The costs of production and selling each bicycle and other information for the last financial year are detailed below:
Beginning inventory (units)
0
Units produced
5,000
Units sold
4,000
Selling price per bicycle...............
$200
Variable costs per bicycle
Production costs...........................
$65
Sales commission ........................
5
Variable costs per bicycle
$70
Total fixed costs
Production costs.........................
450,000
Sales and administrative costs......
82,000
Total fixed costs.....................
$532,000
Required: Assume each requirement is independent.
1. Calculate: a. contribution margin per bicycle sold, and the
b. contribution margin ratio
2. Calculate the break-even point in units.
3. Assuming that JBC wishes to earn a net profit of $140,000 for the current year, calculate the sales revenue required to achieve this net profit. Assume that the company tax rate is 30%.
4. Market research estimates that sales volume would be increased to 7,000 bicycles (the current sales volume is 4,000 bicycles) if the selling price is reduced to $180 and if the company increases the sales commission per bicycle paid by $5.
At the projected sales volume (7,000 bicycles), calculate:
a. total variable cost of goods sold, and
b. the new operating income. Explain whether JBC should reduce the selling price and increase sales commission.