Blb00045-5 1 calculate the cost per unit for each product

Question

Learning outcomes:

LO1 Analyse costs in business organisations contexts

LO2 Apply cost estimation techniques in a range of business situations

L03 Evaluate cost and revenue information and costing methods for managerial decision-making

LO4 Effectively communicate cost and revenue information in a decision making context.

Question 1:

The exchange of information between production and finance departments is crucial when it comes to controlling costs and meeting production needs. Any information produced by accountants needs to be timely and readily understood by non-financial managers if cost reductions are to be realised.

In 2011, GlaxoSmithKline's finance team in Cape Town embarked on a mission to simplify and improve the flow of financial and operational information across the organisation. The key objective was to embed sound management accountancy principles within the Cape Town factory so that meaningful information could be shared and acted upon.

This initiative gave management accountants greater participation and involvement with the operational side of the business. In turn, that led to an increased ability within production departments to make more effective and timely decisions.

The initiative was particularly effective for the annual standard setting process. Leveraging clearer management information meant that the finance and production teams could identify a range of key products and trim costs by 9% to 15% year on year.

With a strong commitment to driving improvement, reducing cost and waste, and increasing the robustness of the manufacturing process while maintaining the highest quality in its production line, the company's management accountants now have more exposure within production departments. They directly influence the daily activities of the Cape Town factory and those cost reductions testify to the fact that having the right people with the right knowledge and attitude in place is crucial when it comes to achieving growth and sustainability.

Mark Petersen, Cost Accountant at GlaxoSmithKline, says: As an organisation and a CIMA Training Partner, our perspective is that CIMA has the right balance of professional knowledge and understanding when it comes to interpreting what the numbers mean and what you can do with them. Our job as management accountants is to assist in the interpretation of those numbers to non-financial users through simplification and easy to understand reporting within the factory and providing possible solutions as opposed to merely laying out the trends and analysis.

For me, a good management accountant takes the data presented to a simplistic level by putting forward ideas for possible remedial actions. Developing simplified management accounting visuals and placing them in the hallways of the factory has enabled daily interaction with the production department, where real-time reporting information is shared on the factory floor. The major advantage is knowing exactly what product to focus on at that given period.'

Based on the article above, you are required to:

i. Set out the main types of purpose for which managerial accounting may be required in a business organisation.

ii. Explain how GlaxoSmithKline improved the performance of its management accounting system.

Question 2

Auckland Public Limited Company manufactures three products in two production departments, a machine shop and a fitting section; it also has two service departments, a canteen and a machine maintenance section. Shown below are next year's budgeted production data and manufacturing costs for the company.

	Product X1	Product X2	Product X3
Production	8400 units	13800 units	3400 units
Prime cost:
Direct materials	OMR22 per unit	OMR28 per unit	OMR34 per unit
Direct labour:
Machine shop	OMR12 per unit	OMR8 per unit	OMR4 per unit
Fitting section	OMR24 per unit	OMR6 per unit	OMR42 per unit
Machine hours per unit	12 hours per unit	6 hours per unit	8 hours per unit

Machine shop	Fitting section	Canteen	Machine maintenance section	Total
Budgeted overheads (OMR):	55 320	38 940	33 200	53 300	180 760
Allocated overheads
Rent, rates, heat and light					34 000
Depreciation and insurance of equipment					50 000
Additional data:
Gross book value of equipment (OMR)	300 000	150 000	60 000	90 000
Number of employees	36	28	8	8
Floor space occupied (square metres)	7 200	2 800	2 000	1 600

It has been estimated that approximately 70 per cent of the machine maintenance section's costs are incurred servicing the machine shop and the remainder incurred servicing the fitting section.

Required:

1. Calculate the following budgeted overhead absorption rates:
i. A machine hour rate for the machine shop
ii. A rate expressed as a percentage of direct wages for the fitting section.

All workings and assumptions should be clearly shown.

2. Calculate the budgeted manufacturing overhead cost per unit of product X1.

3. The production director of Auckland PLC has suggested that as the actual overheads incurred and units produced are usually different from the budgeted and as a consequence profits of each month end are distorted by over/under absorbed overheads, it would be more accurate to calculate the actual overhead cost per unit each month end by dividing the total number of all units actually produced during the month into the actual overheads incurred.'

Critically examine the production director's suggestion.

Question 3

You are provided with the following data from the books of the company Paragon Product Ltd., producing one product XXX, for the year 2016.

Direct material cost per unit	OMR24
Direct labour cost per unit	OMR27.20
Variable manufacturing overhead per unit	OMR2.80
Total fixed manufacturing overhead per year	OMR344,000
Variable selling and administration expenses	OMR6 per unit sold
Fixed selling and administration expenses	OMR196,000
Number of units produced per year	30,000 Units
Number of units sold per year	24,000 Units
Opening stock of finished goods
Selling price	OMR120

You are required to:
1. Calculate the profit under marginal costing and absorption costing
2. Explain the reason for any difference in net profit reported in the two statements and reconcile any such difference
3. According to the information given, calculate the quantity of product XXX that Paragon Product Ltd. needs to sell to breakeven next year.
4. Based on the following expectations of Paragon Product Ltd. for the next year 2017: - All the variable costs will increase by one third.
- Fixed costs will increase by 10%.

- The income tax rate of 40% will be unchanged

You are required to:

i. Calculate the selling price to be adopted in 2017 which would maintain the same contribution rate as 2016
ii. Calculate the sales volume for a target net profit of OMR180,000 in 2017
iii. Critically evaluate the use of 'Cost-Volume-Profit analysis in decision making.

Question 4

A furniture making business manufactures quality furniture to customers' orders. It has three production departments and two service departments. Budgeted overhead costs for the coming year are as follows:

	Total(OMR)
Rent and rates	25 600
Machine insurance	12 000
Telephone charges	6 400
Depreciation	36 000
Production supervisor's salaries	48 000
Heating and lighting	12 800
	140 800

The three production departments - A, B and C and the two service departments - X and Y, are housed in the new premises, the details of which, together with other statistics and information, are given below.

	Departments
	A	B	C	X	Y
Floor area occupied(sq.metres)	6 000	3 600	1200	1 200	800
Machine value(OMR '000)	48	20	16	8	4
Direct labour hours budgeted	6 400	3 600	2 000
Labour rates per hour(OMR)	7.6	7	6.8	6	6
Allocation overheads:
Specific to each department(OMR'000)	5.6	3.4	2.4	1.6	1.2
Service department X's cost apportioned	50%	25%	25%
Service department Y's cost apportioned	20%	30%	50%

Required:

i. Prepare a statement showing the overhead cost budgeted for each department, showing the basis of apportionment used. Also calculate suitable overhead absorption rates.
ii. Why are budgeted overhead rates preferred to actual overhead rates?
iii. Give the reasons for the under or over-recovery of overheads at the end of the accounting period.

Question 5

XYZ Limited makes three main products, using broadly the same production methods and equipment for each. A conventional product costing system is used at present, although fin Activity Based Costing System is being considered. Details of the three products for a typical period are:

	Hours per Unit Labour hours	Machine hours	Materials Per unit (OMR)	Volumes
Product X	1	3	40	1500
Product Y	3	2	24	2500
Product Z	2	6	50	14000

Direct labour cost OMR6 per hour and production overheads are absorbed on a machine hour basis. The rate for the periods is OMR28 per machine hour.

Further analysis shows that the total of production overheads can be divided as follows:

Costs relating to set ups	35%
Cost relating to machinery	20%
Costs relating to materials handling	15%
Costs relating to inspection	30%
Total production overhead	100%

The following activity volumes are associated with the product line for the period as whole.

Total activities for the period:

	Number of Set ups	Number of Movements of materials	Number of inspections
Product X	150	24	300
Product Y	230	42	360
Product Z	960	174	1340
	1340	240	2000

You are required:

1. Calculate the cost per unit for each product using conventional method.

2. Calculate the cost per unit for each product using ABC principles.

3. Comment on the reason for any differences in the costs in your answers to questions (1) and (2).