Topic: Cost Management Accounting
Q1. Cost-Volume-Profit Analysis (CVP)
Williams Walk in Wardrobes Corporation has collected the following information after its first year of sales.
Sales were $1,650,000 on 100,000 units;
Selling expenses $220,000 (45% variable, 55% fixed);
Direct materials $510,000; direct labour $290,000;
Administrative expenses $260,000 (25% variable, 75% fixed);
Manufacturing overhead $355,000 (70% variable, 30% fixed).
The owner Mr. William Gup has asked you to do a CVP analysis so that it can make plans for the coming year. William has projected that unit sales will increase by 10% next year.
Required (show all calculations):
a) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. Assume that fixed costs will remain the same in the projected year.
b) Compute the break-even point in units and sales dollars for the current year. Briefly comment on this result.
c) The company is considering the purchase of equipment that would reduce its direct labour costs by $90,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $355,000, as above). It is also considering switching to pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $220,000, as above). Assuming sales remain constant at 100,000 units, compute (1) the contribution margin and (2) the contribution margin ratio, and re-compute (3) the break-even point sales dollars. Comment on the effect of these proposed changes on the break-even point.
d) Discuss the strengths and weaknesses of break-even analysis.
Q2. Support Department Cost Allocation - Calculating direct and step-down methods;
Discussion of Reciprocal methods.
Abdullah and Sara's Financial Advisory firm is organised around two major sales divisions: High end financial clients and retail clients. The firm also has two support departments: Policy and administration. The Policy department's costs are allocated to the other departments based on a log of hours spent on tasks for each user. The administration department's costs are allocated based on the number of employees in each department.
Records are available for last period as follows:
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Support departments
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Operating departments
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Policy
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Administrative
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High end
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Retail
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Payroll costs
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$30,000
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$250,000
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$450,000
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$650,000
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Other costs
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$200,000
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$120,000
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$90,000
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$210,000
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Research hours
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100
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200
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250
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400
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Number of employees
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5
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11
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8
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20
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Required (show all workings and round all allocation ratios to at least four decimal points, where applicable):
1. Allocate the support department costs using the direct method.
2. Allocate the support department costs using the step-down method. Briefly outline the criteria, which could determine the sequence for allocating support department costs using the step-down method. Allocate the support department costs using the 'magnitude of costs' criterion.
3. Discuss the reciprocal method of allocation and state its advantages and disadvantages.
Q3. Job Order Costing:
Information.
The Timor Leste Timber Structures Company costs its products using Job Order Costing. Manufacturing overhead is applied on the basis of direct labour hours. On July 1st 2017, Job No. 82B was the only job in process. The costs incurred on Job 82B prior to July 1st were: -
- direct materials $10,000,
- direct labour $6,000.
- manufacturing overhead $9,000.
- As of July 1, Job No. 82B had been completed at a cost of $42,000 and was part of finished goods inventory.
- There was a $5,000 balance in the Raw Materials Inventory account.
During the month of July, Timor Leste Structures began production on Jobs 84 and 85, and completed Jobs 83 and 84.
Jobs 82B and 83 were sold on credit during the month for $65,000 and $76000 respectively.
The following additional events occurred during the month.
1. The firm purchased on credit: 9,000 metres of raw material for $45,000.
2. The following raw materials were transferred to production (requisitioned):
a. Job number 83: 2,000 metres of raw material at $6 per metre (Requisition number 210)
b. Job number 84: 4,000 metres of raw material for $20,000 (Requisition number 211)
c. Job number 85: 5,000 metres of material for $15,000 (Requisition number 212)
3. Time sheets showed the following use of labour:
a. Job number 83: 150 hours of direct labour @ $20 per hour.
b. Job number 84: 600 hours of direct labour @ $20 per hour.
c. Job number 85: 360 hours of direct labour @ $25 per hour.
d. Indirect labour: maintenance and supervision, $6,000.
Manufacturing overhead is applied to production based on actual direct labour hours used each month.
4. 1000 litres of indirect material were requisitioned and issued to production (Requisition number 213) at a cost of $10,000.
5. Depreciation on the production building and equipment for July was $12,000.
6. The month's $5,000 utilities bill for production was received and paid (show both entries).
7. The July Local Government Council rates and property taxes bill for the production building of $3,000 was received.
8. Depreciation on Timor Leste's administration office equipment amounted to $6,000.
Required:
1. Calculate Timor Leste's predetermined overhead rate for 2017 assuming Timor Leste estimates total manufacturing overhead costs of $450,000, direct labour costs of $300,000 and direct labour hours of 15,000 for the year.
2. Open and complete job cost sheets for job numbers 83, 84 and 85 using the template provided over the page, and submit with your assignment (one job cost sheet per job). Tip: Don't forget to calculate and include the relevant overhead cost for each job. Where you don't have information to complete certain fields, you can leave blank. Remember, these sheets summarise the TOTAL cost of each job.
3. Provide journal entries (properly presented and including explanations/narrations) to record all of the events of July, including the completion and sale of relevant jobs.
4. Set up a Manufacturing Overhead Control ledger account for the company, complete the relevant entries for July, balance and close off the account on 31 July (assume the opening balance on 1 July is $0). What is the under or over-applied overhead for July? Close off the amount to COGS with a journal entry.
Q4. Process Costing - Transferred-in costs, WA.
Menz Chocolates has two departments, Mixing and Packaging. Each unit of product is a 500 gram bag of Fruchocs.
The Packaging department started in December with opening work in process inventory of 10,000 bags of Fruchocs - 40% complete as materials and 20% complete as to conversion in the Packaging department. This inventory had $24,000 of transferred-in costs, $6,000 of Packaging material costs, $5,000 of Packaging labour costs and $3,000 of Packaging overhead.
During December, Packaging received a further 50,000 bags from Mixing at a cost of $120,000 (transferred-in costs).
Packaging also incurred $34,500 of material cost, $27,600 of labour, and $16,100 of overhead during the month of December.
At the end of December, Packaging had ending work in process inventory of 2500 bags. These units were 20% complete with respect to material, and 10% complete as to labour and overhead.
(TIP: Conversion costs are direct labour and overhead costs combined. Your process cost report should show conversion costs)
Required (show all workings)
Using the Weighted Average method, prepare a process cost report for the Packaging department for December. Prepare a journal entry that transfers the goods from the Packaging department to finished goods.
Please use 4 decimal places for workings in Process costing.