Bac203 Week 3 Assignment
BMAC5203 ASSIGNMENT
MAY SEMISTER 2013
BMAC5203 - ACCOUNTING FOR BUSINESS DECISION
MAKING 'S ASSIGNMENT
BASEM NOOR MOHAMMED
OPEN UNIVERSITY MALAYSIA, USTY CENTER
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BMAC5203 ASSIGNMENT
TASK 1
ReebookRealflex produces shoes for circuit training and walking. Recently, the management of the company has decided to adopt the activity-based costing system and has identified three activity cost pools. Information on its annual overhead costs and the activity cost pools are as follows:
Activity cost pools (rate of consumption)
Overhead
Leather
Insole
Other
Total
costs
cutting
fabrication
Production overhead
RM240,000
35%
45%
20%
100%
Office expense
RM160,000
15%
55%
30%
100%
The “Other” …show more content…
activity cost pool consists of the costs of idle capacity and organizationsustaining costs.
The amount of activity for the year is as follows:
Activity Cost Pool
Annual Activity
Leather cutting
4,000 pairs
Insole fabrication
100 jobs
Other
Not applicable
Required:
a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:
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BMAC5203 ASSIGNMENT
Leather
Insole
cutting
Other
Total
fabrication
Production overhead
Office expense
Total
b. Compute the activity rates (i.e., cost per unit of activity) for the leather cutting activity and sole fabrication activity cost pools by filling in the table below:
Leather cutting
Insole fabrication
Production overhead
Office expense
Total
c. Prepare an action analysis report in good form of a job that involves making 53 pairs of circuit trainers and has direct materials and direct labour cost of RM1,480.
The sales revenue from this job is RM5,200. For purposes of this action analysis report, direct materials and direct labour should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost.
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BMAC5203 ASSIGNMENT
Solution:
a. The first-stage allocation of overhead costs to the activity cost pools
Leather
Insole
Other
Total
cutting
fabrication
Production overhead
RM84,000
RM108,000
RM48,000
RM240,000
Office expense
RM24,000
RM88,000
RM48,000
RM160,000
Total
RM108,000
RM196,000
RM96,000
RM400,000
b. The activity rates (i.e., cost per unit of activity) for the leather cutting activity and sole fabrication activity cost pools
Activity Cost Pool
Annual Activity
Leather cutting
4,000 pairs
Insole fabrication
100 jobs
Leather cutting
Insole fabrication
Production overhead
RM21.00
RM1,080.00
Office expense
RM6.00
RM880.00
Total
RM27.00
RM1,960
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BMAC5203 ASSIGNMENT
c. Action Analysis Report
Overhead costs of the job:
Leather cutting
Insole fabrication
53
1
Activity
Production overhead ..........
Office expense....................
Total ...................................
Sales ...............................................
Green costs:
Direct materials and labour.........
Green margin .................................
Yellow costs:
Office expense ............................
Yellow margin ...............................
Red costs:
Production overhead ...................
Red margin.....................................
RM1,113.00
318.00
RM1,431.00
RM1,080.00
880.00
RM1,960.00
Total
RM2,193.00
1,198.00
RM3,391.00
RM 5,200
1,480
3,720
1,198
2,522
RM
2,193
329
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BMAC5203 ASSIGNMENT
TASK 2
a. Tulips Events International sells tickets for two types of events: jazz concert and antiques exhibition. The following information relates to each of the event, expressed on a per-case basis:
Jazz concert
Antiques exhibition
80%
20%
Selling price
RM40
RM30
Contribution margin
RM16
RM9
Revenue representation
Monthly fixed costs average is RM620,000
Required:
Compute the followings:
i)
The total monthly sales revenue required to break-even.
ii)
The total monthly sales revenue required to earn an operating income of
RM135,000.
iii)
The company 's margin of safety at a monthly sales level of RM2,500,000.
iv)
If monthly fixed costs increase by RM10,000, what is the break-even point, expressed in sales dollars?
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BMAC5203 ASSIGNMENT
Solution:
i) First, we have to compute the contribution margin ratio for each type of event:
Contribution margin per unit
Contribution margin ratio= __________________________
Price
RM16
Contribution margin ratio for Jazz concert= _______ = 40%
RM40
RM9
Contribution margin ratio for Antiques exhibition = _______ = 30%
RM30
Then, we have to compute the total contribution margin ratio for all sales. The total contribution margin ratio means the percentage of sales remaining after variable costs are covered. The sales of Jazz concert type represents 80%, so the total contribution margin ratio for Jazz concert type will be 40% of 80% of all sales. Also, the total contribution margin ratio for Antiques exhibition type will be
30% of 20% of all sales.
Contribution margin ratio= contribution margin ratio for Jazz concert + contribution margin ratio for Antiques exhibition
Contribution margin ratio=(40% x 80%) + (30% x 20%)=32%+6%=38%
Now, we can compute the break-even sales:
Total fixed cost
Break-even sales= ________________________
Contribution margin ratio
RM620,000
Break-even sales= ________________ = RM1,631,578.95
0.38
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BMAC5203 ASSIGNMENT
ii) To compute the total monthly sales revenue to earn an operating income of
RM135,000 :
Total fixed cost + Target income
Sales to earn target income= ______________________________________
Contribution margin ratio
RM620,000+RM135,000
Break-even sales= ___________________________ = RM1,986,842.11
0.38
iii) To compute the margin of safety at a monthly sales level of RM2,500,000
Margin of safety of sales=Revenues – Break-even sales
Margin of safety of sales=RM2,500,000 - RM1,631,578.95= RM868,421.05
iv) To compute the break-even sales if monthly fixed costs increase by RM10,000 :
Total fixed cost
Break-even sales= ________________________
Contribution margin ratio
RM620,000 + RM10,000
Break-even sales= __________________________ = RM1,657,894.74
0.38
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BMAC5203 ASSIGNMENT
b. Skywalker Incorporation produces and sells remote-controlled helicopters for
RM250 each. The variable costs of each helicopter total RM160 while total monthly fixed costs are RM19,800. Current monthly sales are RM100,000. The company is considering a proposal that will increase the selling price by 10%, increase total fixed costs by 10% and increase unit sales to 500 units per month.
Required:
i)
Compute the company 's current break-even point in units and dollars.
ii)
What is the company 's current margin of safety in units, dollars, and percentage?
iii)
Compute the company 's margin of safety in units assuming the proposal is accepted. iv)
Compute the increase or decrease in profit assuming the proposal is accepted.
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BMAC5203 ASSIGNMENT
Solution:
Current
Proposal
Price
RM250
RM250 x 1.10=RM275
Units
RM100,000 / RM250=400
500
Sales
RM100,000
RM275 x 500=RM137500
Variable cost
RM160
RM160
Fixed cost
RM19,800
RM19,800 x 1.10=RM21,780
Contribution Margin
RM90
RM115
i) To compute the current break-even point in units and RM :
First, break-even point in units:
Total fixed cost
Break-even units = _______________________________
Unit price – Variable cost per unit
RM19,800
Break-even units = ________________ = 220
250 - 160
Second, break-even point in sales RM:
Contribution margin per unit = Price – Variable cost per unit
Contribution margin per unit = RM250 - RM160 = RM90
Contribution margin per unit
Contribution margin ratio= __________________________
Price
RM90
Contribution margin ratio = _________ = 0.36
RM250
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BMAC5203 ASSIGNMENT
Total fixed cost
Break-even sales = ________________________
Contribution margin ratio
RM19,800
Break-even sales = ________________ = RM55,000
0.36
Another way:
Break-even sales = Price x Break-even units
Break-even sales = RM250 x 220= RM55,000
ii) To compute the current margin of safety in units, sales RM, and percentage:
First, margin of safety in units:
Margin of safety in units = Sales in units – Break-even units
Margin of safety in units = 400 – 220 = 180
Second, margin of safety in sales RM (revenues):
Margin of safety in sales RM = Revenues – Break-even sales
Margin of safety in sales RM = RM100,000 – RM55,000 = RM45,000
Thirs, margin of safety in percentage (ratio):
Margin of safety sales
Margin of safety ratio = ________________________
Revenues
RM45,000
Margin of safety ratio = ____________ =45%
RM100,000
iii) To compute the proposal margin of safety in units:
Total fixed cost
Break-even units = _______________________________
Unit price – Variable cost per unit
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BMAC5203 ASSIGNMENT
RM21,780
Break-even units = ________________ = 190
275 – 160
Margin of safety in units = Sales in units – Break-even units
Margin of safety in units = 500 – 190 = 310
iv) Summary of the effects of the proposal
Current
Units
Unit contribution margin
Total Contribution Margin
Less: Fixed cost
Operating income
400 x RM90
RM36,000
19,800
RM16,200
Proposal
500
x RM115
RM57,500
21,780
RM35,720
Difference in Profit
Change in contribution margin (RM57,500 - RM36,000)
Less: change in fixed cost (RM21,780 - RM19,800)
Increase in operating income
RM21,500
1980
RM19,520
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BMAC5203 ASSIGNMENT
TASK 3
Mr. Doctor is the brand name of a therapeutic pillow produced by the Streussles
Company. For 2013, the operating budget is based on an estimated sale of 20,000 units at RM100 per pillow. Additional information pertaining to its budget is as follows: Operating income anticipated
RM120,000
Budgeted variable costs
RM64 per unit
Total fixed costs
RM600,000
Actual income for 2013 was a surprising RM354,000 on actual sales of 21,000 units of pillow at RM104 each.
Actual variable costs were RM60 per unit and fixed
costs totaledRM570,000.
Required:
a) Prepare a variance analysis report showing the flexible-budget variance.
b) Prepare a variance analysis report showing the sales-volume variance.
c) Describe four factors that should be considered in establishing standards for use with a standard costing system.
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BMAC5203 ASSIGNMENT
Solution:
a) Variance analysis report showing the flexible-budget variance:
Flexible-budget variance is the difference between an actual result and a flexible budget amount.
Streussles Company
Variance Analysis Report – Flexible-Budget Variances
Actual Results
Flexible-Budget
Flexible Budget
Variances
Units sold
21,000
0
21,000
Sales
RM2,184,000 a
RM 84,000 c F
RM2,100,000 b
Variable costs
RM1,260,000 d
RM 84,000 f F
RM1,344,000 e
Contribution Margin
RM 924,000 g
RM168,000 i F
RM 756,000 h
Fixed costs
RM 570,000 g
RM 30,000 j F
RM 600,000 g
Operating income
RM 354,000 g
RM198,000 l F
RM 156,000 k
a.
21,000 x RM104
b.
21,000 x RM100
c.
RM2,184,000 - RM2,100,000
d.
21,000 x RM60
e.
21,000 x RM64
f.
RM1,344,000 – RM1,260,000
g.
RM2,184,000 – RM1,260,000
h.
RM2,100,000 – RM1,344,000
i.
RM924,000 – RM756,000
j.
RM600,000 – RM570,000
k.
RM756,000 – RM600,000
l.
RM354,000 – RM156,000
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BMAC5203 ASSIGNMENT
b) Variance analysis report showing the sales-volume variance:
Sales-volume variance is the difference between a flexible budget amount and a static budget amount.
Streussles Company
Variance Analysis Report – Sales-Volume Variances
Flexible Budget
Sales-Volume
Static Budget
Variances
Units sold
21,000
1,000 F
20,000
Sales
RM2,100,000 b
RM 100,000 b F
RM2,000,000 a
Variable costs
RM1,344,000 e
RM
64,000 d U
RM1,280,000 c
Contribution Margin
RM 756,000 h
RM
36,000 f F
RM 720,000 e
Fixed costs
RM 600,000 g
Operating income
RM 156,000 k
a.
RM1,344,000 – RM1,280,000
e.
RM2,000,000 – RM1,280,000
f.
RM756,000 – RM720,000
g.
RM600,000 – RM600,000
h.
RM720,000 – RM600,000
i.
RM 120,000 h
20,000 x RM64
d.
36,000 i F
RM2,100,000 – RM2,000,000
c.
RM
RM 600,000 g
20,000 x RM100
b.
0g
RM156,000 – RM120,000
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BMAC5203 ASSIGNMENT
c) Actually, the factors that should be considered in establishing standards for use with a standard costing system are more than four, and they could be summarized as following:
1- HISTORICAL DATA AND EXPERIENCE
Historical experience can provide an initial guide for setting standards, but should be used with caution because they can perpetuate existing inefficiencies.
Managers set standards by analyzing historical data when the firm has experience in producing certain product. This historical data must be tempered by giving consideration to expected changes in technology, the production process, inflation and other similar factors.
One indicator of future costs is historical cost data. In a mature production process, where the firm has a lot of production experience, historical costs can provide a good basis for predicting future costs.
Standards based on the average of recent historical performance are the least desirable.. 2- ENGINEERING STUDIES
Engineering studies can identify efficient approaches and can provide rigorous guidelines, but engineered standards often are too rigorous. Managers also use task analysis to focus on how much a product should cost (e.g., time and motion studies). In using task analysis, the emphasis shifts from what the product did cost in the past to what it should cost in the future. The managerial accountant typically works with engineers to conduct studies in an effort to determine exactly
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BMAC5203 ASSIGNMENT how much direct material should be required, how machinery should be used in the production process, and many direct labor hours are required.
3- INPUT FROM OPERATING PERSONNEL
Since operating personnel are accountable for meeting standards, they
should have significant input in setting standards. Standards should not be determined by the managerial accountant alone. People generally will be more committed to meeting standards if they are allowed to participate in setting them. For example, production supervisors should have a role in setting production cost standards, and sales managers should be involved in setting targets for sales prices and volume.
In addition, knowledgeable staff personnel should participate in the standardsetting process.
4- CURRENT AND PALNNED TECHNOLOGY, PLANT LAYOUT, AND
OPERATING PROCEDURES
At the most basic level, you can create a standard cost simply by calculating the average of the most recent actual cost for the past few months. In many smaller companies, this is the extent of the analysis used. However, there are some additional factors to consider, which can significantly alter the standard cost that you elect to use. They are:
Equipment age. If a machine is nearing the end of its productive life, it may produce a higher proportion of scrap than was previously the case.
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BMAC5203 ASSIGNMENT
Equipment setup speeds. If it takes a long time to setup equipment for a production run, the cost of the setup, as spread over the units in the production run, is expensive. If a setup reduction plan is contemplated, this can yield significantly lower overhead costs.
Labor efficiency changes. If there are production process changes, such as the installation of new, automated equipment, then this impacts the amount of labor required to manufacture a product.
Labor rate changes. If you know that employees are about to receive pay raises, either through a scheduled raise or as mandated by a labor union contract, then incorporate it into the new standard. This may mean setting an effective date for the new standard that matches the date when the cost increase is supposed to go into effect.
Learning curve. As the production staff creates an increasing volume of a product, it becomes more efficient at doing so. Thus, the standard labor cost should decrease (though at a declining rate) as production volumes increase.
Purchasing terms. The purchasing department may be able to significantly alter the price of a purchased component by switching suppliers, altering contract terms, or by buying in different quantities.
Any one of the additional factors noted here can have a major impact on a standard cost, which is why it may be necessary in a larger production environment to spend a significant amount of time formulating a standard cost.
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BMAC5203 ASSIGNMENT
5- BEHAVIORAL IMPLICATIONS
Standards that are as tight as practical, but still are expected to be attained, are called practical (or attainable) standards. Such standards assume a production process that is as efficient as practical under normal operating conditions.
Practical standards allow for such occurrences as occasional machine breakdowns and normal amounts of raw-material waste.
Some managers believe that perfection standards motivate employees to achieve the lowest cost possible. They claim that since the standard is theoretically attainable, employees will have an incentive to come as close as possible to achieving it. Other managers and many behavioral scientists disagree.
They feel that perfection standards discourage employees, since they are so unlikely to be attained. Moreover, setting unrealistically difficult standards may encourage employees to sacrifice product quality to achieve lower costs.
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BMAC5203 ASSIGNMENT
TASK 4
a) In job order cost systems, actual direct materials and actual direct labour are charged to the work in process account; however, an estimated amount of overhead is charged to the account. Why is overhead accounted for differently than the other costs of production? Provide an example.
Solution:
When production takes place, direct material and direct labor takes place, so it is not difficult to identify them in the product costing system. We can know the amount of direct material and direct labor used in production at the end of production period by using appropriate source documents. However, actual overhead costs may take place at a different time from the time when products are being made and don 't have a direct relationship with units produced.
Another problem is the non-uniform production levels. The low production in one month would give rise to high unit overhead costs, and high production in another month would give rise to low unit overhead costs. Yet the production process and total overhead costs may remain unchanged.
For example, production takes place during the year but actual repair cost occurs whenever a machine breakdown occurs. Assigning all of the repair cost to the month when it occurs would overstate the cost of this month production and understate the cost of production during the other months. Because of this timing problem, companies use a predetermined overhead rate to assign an estimated amount of overhead to production throughout the year; this reduces the distortions that will occur if actual costs are used.
Another example, a security guard’s salary could not be assigned to a unit of product or service. If the firm average overhead costs by totaling manufacturing overhead cost
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BMAC5203 ASSIGNMENT for given period and then divides this total by the number of units produced, distorted costs can occur.
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BMAC5203 ASSIGNMENT
b) On December 31, 2011, ZamGabra Manufacturing Company reported the following balances in its inventory accounts:
Account
Balance
Raw materials inventory
RM42,000
Work-in-process inventory
RM65,000
Finished goods inventory
RM73,000
The following events occurred during 2012:
Purchased raw materials for cash, RM750,000
Raw materials used to make products, RM719,000
Direct labour costs of RM408,000 were paid in cash
Estimated overhead applied to work in process, RM367,200
Paid cash for actual overhead costs, RM361,000
Completed products that cost RM1,409,000
Sold goods that had cost RM1,392,000 for RM1,970,000 cash
Paid cash for selling and administrative expenses, RM412,000
Required:
Prepare ZamGabra’s schedule of cost of goods manufactured and sold for 2012.
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BMAC5203 ASSIGNMENT
Solution:
ZamGabra
Schedule of Cost of Goods Manufactured
For 2012
Direct Materials:
Beginning raw materials inventory
RM 42,000 a
Purchases of raw materials
750,000 b
Total raw materials available
792,000 c
Less: Ending row materials inventory
73,000 d
RM 719,000 e
Total raw materials used
408,000 f
Direct labor
Overhead
Actual overhead
Add: Overapplied overhead
Overhead applied
Current manufacturing costs
Add: Beginning work-in-process inventory
Total manufacturing costs
Less: Ending work-in-process inventory
Cost of goods manufactured
RM 361,000 g
6,200 h
367,200 i
RM 1,494,200 j
65,000 k
RM 1,559,200 l
144,000 m
RM 1,415,200 n
a.
Given
b.
Given (Purchased raw materials for cash)
c.
Beginning raw materials inventory + Purchases of raw materials = RM42,000 + RM750,000
= RM792,000
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BMAC5203 ASSIGNMENT
d.
Total raw materials available - Total raw materials used = RM792,000 - RM719,000 =
RM73,000
e.
Given (Raw materials used to make products )
f.
Given (Direct labour costs)
g.
Given (Paid cash for actual overhead costs )
h.
Overhead applied - Actual overhead = RM367,200 – RM361,000 = RM6,200
i.
Given (Estimated overhead applied to work in process )
j.
Total raw materials used + Direct labor + Overhead applied = RM719,000 + RM408,000 +
RM367,200 = RM1,494,200
k.
Given
l.
Current manufacturing costs + Beginning work-in-process inventory=RM1,494,200 +
RM65,000 = RM1,559,200
m. Total manufacturing costs - Cost of goods manufactured = RM1,559,200 – RM1,415,200 =
RM144,000
n.
Completed products cost (given) + Overapplied overhead = RM1,409,000 + RM6,200 =
RM1,415,200
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BMAC5203 ASSIGNMENT
ZamGabra
Schedule of Cost of Goods Sold
For 2012
Beginning finished goods inventory
1,415,200 b
Cost of goods manufactured
Goods available for sale
73,000 a
RM
RM 1,488,200 c
90,000 d
Less: ending finished goods inventory
Normal cost of goods sold
RM 1,398,200 e
Less: Overapplied overhead
6,200 f
Adjusted cost of goods sold
RM 1,392,000 g
a.
Given
b.
Completed products cost (given) + Overapplied overhead = RM1,409,000 + RM6,200 =
RM1,415,200
c.
Beginning finished goods inventory + Cost of goods manufactured = RM73,000 + 1,415,200
= RM1,488,200
d.
Goods available for sale - Normal cost of goods sold = RM1,488,200 – RM1,398,200 =
RM90,000
e.
Adjusted cost of goods sold + Overapplied overhead = RM1,392,000 + RM6,200 =
RM1,398,200
f.
Overhead applied - Actual overhead = RM367,200 – RM361,000 = RM6,200
g.
Given (Sold goods cost)
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BMAC5203 ASSIGNMENT
ZamGabra
Income Statement
For 2012
RM 1,970,000 a
Sales
1,392,000 b
Less: Cost of goods sold
Gross margin
RM
578,000 c
412,000 d
Less: selling and administrative expenses
Operating income
RM
a.
Given (Sold goods for)
b.
Given (Sold goods cost)
c.
Sales – Cost of goods sold = RM1,970,000 – RM1,392,000 = RM578,000
d.
Given (Paid cash for selling and administrative expenses )
e.
166,000 e
Gross margin – selling and administrative expenses = RM578,000 – RM412,000 =
RM166,000
So, On December 31, 2012, ZamGabra Manufacturing Company should report the following balances in its inventory accounts:
Account
Raw materials inventory
Work-in-process inventory
Finished goods inventory
Balance
RM73,000
RM144,000
RM90,000
The operating income should be RM166,000.
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BMAC5203 ASSIGNMENT
REFERENCES
[1]
Accounting 202 Home. Standard Costing and Performance Measures for
Today’s Manufacturing Environment. Retrieved August 10, 2013 from http://acct202.tripod.com/Chapter%2010%20Outline.htm [2]
Blocher, E, Stout, D. & Cokins, G. (2008) Cost Management: A Strategic
Emphasis (4th ed.). New York: McGraw-Hill.
[3]
Mowen, M.M., Hansen, D.R & Heitger, D.L. (2012). Managerial Accounting:
The Cornerstone of Business Decisions (4th ed.). South Western: Cengage
Learning.
[4]
Horngren, C.T, Foster, G., Datar, S.M., Rajan & M., Ittner, C.M. (2008). Cost
Accounting: A Managerial Emphasis (13th ed.). South Western: Cengage
Learning.
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MAY SEMISTER 2013
BMAC5203 - ACCOUNTING FOR BUSINESS DECISION
MAKING 'S ASSIGNMENT
BASEM NOOR MOHAMMED
OPEN UNIVERSITY MALAYSIA, USTY CENTER
1
BMAC5203 ASSIGNMENT
TASK 1
ReebookRealflex produces shoes for circuit training and walking. Recently, the management of the company has decided to adopt the activity-based costing system and has identified three activity cost pools. Information on its annual overhead costs and the activity cost pools are as follows:
Activity cost pools (rate of consumption)
Overhead
Leather
Insole
Other
Total
costs
cutting
fabrication
Production overhead
RM240,000
35%
45%
20%
100%
Office expense
RM160,000
15%
55%
30%
100%
The “Other” …show more content…
activity cost pool consists of the costs of idle capacity and organizationsustaining costs.
The amount of activity for the year is as follows:
Activity Cost Pool
Annual Activity
Leather cutting
4,000 pairs
Insole fabrication
100 jobs
Other
Not applicable
Required:
a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:
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BMAC5203 ASSIGNMENT
Leather
Insole
cutting
Other
Total
fabrication
Production overhead
Office expense
Total
b. Compute the activity rates (i.e., cost per unit of activity) for the leather cutting activity and sole fabrication activity cost pools by filling in the table below:
Leather cutting
Insole fabrication
Production overhead
Office expense
Total
c. Prepare an action analysis report in good form of a job that involves making 53 pairs of circuit trainers and has direct materials and direct labour cost of RM1,480.
The sales revenue from this job is RM5,200. For purposes of this action analysis report, direct materials and direct labour should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost.
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BMAC5203 ASSIGNMENT
Solution:
a. The first-stage allocation of overhead costs to the activity cost pools
Leather
Insole
Other
Total
cutting
fabrication
Production overhead
RM84,000
RM108,000
RM48,000
RM240,000
Office expense
RM24,000
RM88,000
RM48,000
RM160,000
Total
RM108,000
RM196,000
RM96,000
RM400,000
b. The activity rates (i.e., cost per unit of activity) for the leather cutting activity and sole fabrication activity cost pools
Activity Cost Pool
Annual Activity
Leather cutting
4,000 pairs
Insole fabrication
100 jobs
Leather cutting
Insole fabrication
Production overhead
RM21.00
RM1,080.00
Office expense
RM6.00
RM880.00
Total
RM27.00
RM1,960
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BMAC5203 ASSIGNMENT
c. Action Analysis Report
Overhead costs of the job:
Leather cutting
Insole fabrication
53
1
Activity
Production overhead ..........
Office expense....................
Total ...................................
Sales ...............................................
Green costs:
Direct materials and labour.........
Green margin .................................
Yellow costs:
Office expense ............................
Yellow margin ...............................
Red costs:
Production overhead ...................
Red margin.....................................
RM1,113.00
318.00
RM1,431.00
RM1,080.00
880.00
RM1,960.00
Total
RM2,193.00
1,198.00
RM3,391.00
RM 5,200
1,480
3,720
1,198
2,522
RM
2,193
329
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BMAC5203 ASSIGNMENT
TASK 2
a. Tulips Events International sells tickets for two types of events: jazz concert and antiques exhibition. The following information relates to each of the event, expressed on a per-case basis:
Jazz concert
Antiques exhibition
80%
20%
Selling price
RM40
RM30
Contribution margin
RM16
RM9
Revenue representation
Monthly fixed costs average is RM620,000
Required:
Compute the followings:
i)
The total monthly sales revenue required to break-even.
ii)
The total monthly sales revenue required to earn an operating income of
RM135,000.
iii)
The company 's margin of safety at a monthly sales level of RM2,500,000.
iv)
If monthly fixed costs increase by RM10,000, what is the break-even point, expressed in sales dollars?
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BMAC5203 ASSIGNMENT
Solution:
i) First, we have to compute the contribution margin ratio for each type of event:
Contribution margin per unit
Contribution margin ratio= __________________________
Price
RM16
Contribution margin ratio for Jazz concert= _______ = 40%
RM40
RM9
Contribution margin ratio for Antiques exhibition = _______ = 30%
RM30
Then, we have to compute the total contribution margin ratio for all sales. The total contribution margin ratio means the percentage of sales remaining after variable costs are covered. The sales of Jazz concert type represents 80%, so the total contribution margin ratio for Jazz concert type will be 40% of 80% of all sales. Also, the total contribution margin ratio for Antiques exhibition type will be
30% of 20% of all sales.
Contribution margin ratio= contribution margin ratio for Jazz concert + contribution margin ratio for Antiques exhibition
Contribution margin ratio=(40% x 80%) + (30% x 20%)=32%+6%=38%
Now, we can compute the break-even sales:
Total fixed cost
Break-even sales= ________________________
Contribution margin ratio
RM620,000
Break-even sales= ________________ = RM1,631,578.95
0.38
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BMAC5203 ASSIGNMENT
ii) To compute the total monthly sales revenue to earn an operating income of
RM135,000 :
Total fixed cost + Target income
Sales to earn target income= ______________________________________
Contribution margin ratio
RM620,000+RM135,000
Break-even sales= ___________________________ = RM1,986,842.11
0.38
iii) To compute the margin of safety at a monthly sales level of RM2,500,000
Margin of safety of sales=Revenues – Break-even sales
Margin of safety of sales=RM2,500,000 - RM1,631,578.95= RM868,421.05
iv) To compute the break-even sales if monthly fixed costs increase by RM10,000 :
Total fixed cost
Break-even sales= ________________________
Contribution margin ratio
RM620,000 + RM10,000
Break-even sales= __________________________ = RM1,657,894.74
0.38
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BMAC5203 ASSIGNMENT
b. Skywalker Incorporation produces and sells remote-controlled helicopters for
RM250 each. The variable costs of each helicopter total RM160 while total monthly fixed costs are RM19,800. Current monthly sales are RM100,000. The company is considering a proposal that will increase the selling price by 10%, increase total fixed costs by 10% and increase unit sales to 500 units per month.
Required:
i)
Compute the company 's current break-even point in units and dollars.
ii)
What is the company 's current margin of safety in units, dollars, and percentage?
iii)
Compute the company 's margin of safety in units assuming the proposal is accepted. iv)
Compute the increase or decrease in profit assuming the proposal is accepted.
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BMAC5203 ASSIGNMENT
Solution:
Current
Proposal
Price
RM250
RM250 x 1.10=RM275
Units
RM100,000 / RM250=400
500
Sales
RM100,000
RM275 x 500=RM137500
Variable cost
RM160
RM160
Fixed cost
RM19,800
RM19,800 x 1.10=RM21,780
Contribution Margin
RM90
RM115
i) To compute the current break-even point in units and RM :
First, break-even point in units:
Total fixed cost
Break-even units = _______________________________
Unit price – Variable cost per unit
RM19,800
Break-even units = ________________ = 220
250 - 160
Second, break-even point in sales RM:
Contribution margin per unit = Price – Variable cost per unit
Contribution margin per unit = RM250 - RM160 = RM90
Contribution margin per unit
Contribution margin ratio= __________________________
Price
RM90
Contribution margin ratio = _________ = 0.36
RM250
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BMAC5203 ASSIGNMENT
Total fixed cost
Break-even sales = ________________________
Contribution margin ratio
RM19,800
Break-even sales = ________________ = RM55,000
0.36
Another way:
Break-even sales = Price x Break-even units
Break-even sales = RM250 x 220= RM55,000
ii) To compute the current margin of safety in units, sales RM, and percentage:
First, margin of safety in units:
Margin of safety in units = Sales in units – Break-even units
Margin of safety in units = 400 – 220 = 180
Second, margin of safety in sales RM (revenues):
Margin of safety in sales RM = Revenues – Break-even sales
Margin of safety in sales RM = RM100,000 – RM55,000 = RM45,000
Thirs, margin of safety in percentage (ratio):
Margin of safety sales
Margin of safety ratio = ________________________
Revenues
RM45,000
Margin of safety ratio = ____________ =45%
RM100,000
iii) To compute the proposal margin of safety in units:
Total fixed cost
Break-even units = _______________________________
Unit price – Variable cost per unit
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BMAC5203 ASSIGNMENT
RM21,780
Break-even units = ________________ = 190
275 – 160
Margin of safety in units = Sales in units – Break-even units
Margin of safety in units = 500 – 190 = 310
iv) Summary of the effects of the proposal
Current
Units
Unit contribution margin
Total Contribution Margin
Less: Fixed cost
Operating income
400 x RM90
RM36,000
19,800
RM16,200
Proposal
500
x RM115
RM57,500
21,780
RM35,720
Difference in Profit
Change in contribution margin (RM57,500 - RM36,000)
Less: change in fixed cost (RM21,780 - RM19,800)
Increase in operating income
RM21,500
1980
RM19,520
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BMAC5203 ASSIGNMENT
TASK 3
Mr. Doctor is the brand name of a therapeutic pillow produced by the Streussles
Company. For 2013, the operating budget is based on an estimated sale of 20,000 units at RM100 per pillow. Additional information pertaining to its budget is as follows: Operating income anticipated
RM120,000
Budgeted variable costs
RM64 per unit
Total fixed costs
RM600,000
Actual income for 2013 was a surprising RM354,000 on actual sales of 21,000 units of pillow at RM104 each.
Actual variable costs were RM60 per unit and fixed
costs totaledRM570,000.
Required:
a) Prepare a variance analysis report showing the flexible-budget variance.
b) Prepare a variance analysis report showing the sales-volume variance.
c) Describe four factors that should be considered in establishing standards for use with a standard costing system.
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BMAC5203 ASSIGNMENT
Solution:
a) Variance analysis report showing the flexible-budget variance:
Flexible-budget variance is the difference between an actual result and a flexible budget amount.
Streussles Company
Variance Analysis Report – Flexible-Budget Variances
Actual Results
Flexible-Budget
Flexible Budget
Variances
Units sold
21,000
0
21,000
Sales
RM2,184,000 a
RM 84,000 c F
RM2,100,000 b
Variable costs
RM1,260,000 d
RM 84,000 f F
RM1,344,000 e
Contribution Margin
RM 924,000 g
RM168,000 i F
RM 756,000 h
Fixed costs
RM 570,000 g
RM 30,000 j F
RM 600,000 g
Operating income
RM 354,000 g
RM198,000 l F
RM 156,000 k
a.
21,000 x RM104
b.
21,000 x RM100
c.
RM2,184,000 - RM2,100,000
d.
21,000 x RM60
e.
21,000 x RM64
f.
RM1,344,000 – RM1,260,000
g.
RM2,184,000 – RM1,260,000
h.
RM2,100,000 – RM1,344,000
i.
RM924,000 – RM756,000
j.
RM600,000 – RM570,000
k.
RM756,000 – RM600,000
l.
RM354,000 – RM156,000
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BMAC5203 ASSIGNMENT
b) Variance analysis report showing the sales-volume variance:
Sales-volume variance is the difference between a flexible budget amount and a static budget amount.
Streussles Company
Variance Analysis Report – Sales-Volume Variances
Flexible Budget
Sales-Volume
Static Budget
Variances
Units sold
21,000
1,000 F
20,000
Sales
RM2,100,000 b
RM 100,000 b F
RM2,000,000 a
Variable costs
RM1,344,000 e
RM
64,000 d U
RM1,280,000 c
Contribution Margin
RM 756,000 h
RM
36,000 f F
RM 720,000 e
Fixed costs
RM 600,000 g
Operating income
RM 156,000 k
a.
RM1,344,000 – RM1,280,000
e.
RM2,000,000 – RM1,280,000
f.
RM756,000 – RM720,000
g.
RM600,000 – RM600,000
h.
RM720,000 – RM600,000
i.
RM 120,000 h
20,000 x RM64
d.
36,000 i F
RM2,100,000 – RM2,000,000
c.
RM
RM 600,000 g
20,000 x RM100
b.
0g
RM156,000 – RM120,000
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BMAC5203 ASSIGNMENT
c) Actually, the factors that should be considered in establishing standards for use with a standard costing system are more than four, and they could be summarized as following:
1- HISTORICAL DATA AND EXPERIENCE
Historical experience can provide an initial guide for setting standards, but should be used with caution because they can perpetuate existing inefficiencies.
Managers set standards by analyzing historical data when the firm has experience in producing certain product. This historical data must be tempered by giving consideration to expected changes in technology, the production process, inflation and other similar factors.
One indicator of future costs is historical cost data. In a mature production process, where the firm has a lot of production experience, historical costs can provide a good basis for predicting future costs.
Standards based on the average of recent historical performance are the least desirable.. 2- ENGINEERING STUDIES
Engineering studies can identify efficient approaches and can provide rigorous guidelines, but engineered standards often are too rigorous. Managers also use task analysis to focus on how much a product should cost (e.g., time and motion studies). In using task analysis, the emphasis shifts from what the product did cost in the past to what it should cost in the future. The managerial accountant typically works with engineers to conduct studies in an effort to determine exactly
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BMAC5203 ASSIGNMENT how much direct material should be required, how machinery should be used in the production process, and many direct labor hours are required.
3- INPUT FROM OPERATING PERSONNEL
Since operating personnel are accountable for meeting standards, they
should have significant input in setting standards. Standards should not be determined by the managerial accountant alone. People generally will be more committed to meeting standards if they are allowed to participate in setting them. For example, production supervisors should have a role in setting production cost standards, and sales managers should be involved in setting targets for sales prices and volume.
In addition, knowledgeable staff personnel should participate in the standardsetting process.
4- CURRENT AND PALNNED TECHNOLOGY, PLANT LAYOUT, AND
OPERATING PROCEDURES
At the most basic level, you can create a standard cost simply by calculating the average of the most recent actual cost for the past few months. In many smaller companies, this is the extent of the analysis used. However, there are some additional factors to consider, which can significantly alter the standard cost that you elect to use. They are:
Equipment age. If a machine is nearing the end of its productive life, it may produce a higher proportion of scrap than was previously the case.
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BMAC5203 ASSIGNMENT
Equipment setup speeds. If it takes a long time to setup equipment for a production run, the cost of the setup, as spread over the units in the production run, is expensive. If a setup reduction plan is contemplated, this can yield significantly lower overhead costs.
Labor efficiency changes. If there are production process changes, such as the installation of new, automated equipment, then this impacts the amount of labor required to manufacture a product.
Labor rate changes. If you know that employees are about to receive pay raises, either through a scheduled raise or as mandated by a labor union contract, then incorporate it into the new standard. This may mean setting an effective date for the new standard that matches the date when the cost increase is supposed to go into effect.
Learning curve. As the production staff creates an increasing volume of a product, it becomes more efficient at doing so. Thus, the standard labor cost should decrease (though at a declining rate) as production volumes increase.
Purchasing terms. The purchasing department may be able to significantly alter the price of a purchased component by switching suppliers, altering contract terms, or by buying in different quantities.
Any one of the additional factors noted here can have a major impact on a standard cost, which is why it may be necessary in a larger production environment to spend a significant amount of time formulating a standard cost.
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BMAC5203 ASSIGNMENT
5- BEHAVIORAL IMPLICATIONS
Standards that are as tight as practical, but still are expected to be attained, are called practical (or attainable) standards. Such standards assume a production process that is as efficient as practical under normal operating conditions.
Practical standards allow for such occurrences as occasional machine breakdowns and normal amounts of raw-material waste.
Some managers believe that perfection standards motivate employees to achieve the lowest cost possible. They claim that since the standard is theoretically attainable, employees will have an incentive to come as close as possible to achieving it. Other managers and many behavioral scientists disagree.
They feel that perfection standards discourage employees, since they are so unlikely to be attained. Moreover, setting unrealistically difficult standards may encourage employees to sacrifice product quality to achieve lower costs.
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BMAC5203 ASSIGNMENT
TASK 4
a) In job order cost systems, actual direct materials and actual direct labour are charged to the work in process account; however, an estimated amount of overhead is charged to the account. Why is overhead accounted for differently than the other costs of production? Provide an example.
Solution:
When production takes place, direct material and direct labor takes place, so it is not difficult to identify them in the product costing system. We can know the amount of direct material and direct labor used in production at the end of production period by using appropriate source documents. However, actual overhead costs may take place at a different time from the time when products are being made and don 't have a direct relationship with units produced.
Another problem is the non-uniform production levels. The low production in one month would give rise to high unit overhead costs, and high production in another month would give rise to low unit overhead costs. Yet the production process and total overhead costs may remain unchanged.
For example, production takes place during the year but actual repair cost occurs whenever a machine breakdown occurs. Assigning all of the repair cost to the month when it occurs would overstate the cost of this month production and understate the cost of production during the other months. Because of this timing problem, companies use a predetermined overhead rate to assign an estimated amount of overhead to production throughout the year; this reduces the distortions that will occur if actual costs are used.
Another example, a security guard’s salary could not be assigned to a unit of product or service. If the firm average overhead costs by totaling manufacturing overhead cost
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BMAC5203 ASSIGNMENT for given period and then divides this total by the number of units produced, distorted costs can occur.
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BMAC5203 ASSIGNMENT
b) On December 31, 2011, ZamGabra Manufacturing Company reported the following balances in its inventory accounts:
Account
Balance
Raw materials inventory
RM42,000
Work-in-process inventory
RM65,000
Finished goods inventory
RM73,000
The following events occurred during 2012:
Purchased raw materials for cash, RM750,000
Raw materials used to make products, RM719,000
Direct labour costs of RM408,000 were paid in cash
Estimated overhead applied to work in process, RM367,200
Paid cash for actual overhead costs, RM361,000
Completed products that cost RM1,409,000
Sold goods that had cost RM1,392,000 for RM1,970,000 cash
Paid cash for selling and administrative expenses, RM412,000
Required:
Prepare ZamGabra’s schedule of cost of goods manufactured and sold for 2012.
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BMAC5203 ASSIGNMENT
Solution:
ZamGabra
Schedule of Cost of Goods Manufactured
For 2012
Direct Materials:
Beginning raw materials inventory
RM 42,000 a
Purchases of raw materials
750,000 b
Total raw materials available
792,000 c
Less: Ending row materials inventory
73,000 d
RM 719,000 e
Total raw materials used
408,000 f
Direct labor
Overhead
Actual overhead
Add: Overapplied overhead
Overhead applied
Current manufacturing costs
Add: Beginning work-in-process inventory
Total manufacturing costs
Less: Ending work-in-process inventory
Cost of goods manufactured
RM 361,000 g
6,200 h
367,200 i
RM 1,494,200 j
65,000 k
RM 1,559,200 l
144,000 m
RM 1,415,200 n
a.
Given
b.
Given (Purchased raw materials for cash)
c.
Beginning raw materials inventory + Purchases of raw materials = RM42,000 + RM750,000
= RM792,000
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BMAC5203 ASSIGNMENT
d.
Total raw materials available - Total raw materials used = RM792,000 - RM719,000 =
RM73,000
e.
Given (Raw materials used to make products )
f.
Given (Direct labour costs)
g.
Given (Paid cash for actual overhead costs )
h.
Overhead applied - Actual overhead = RM367,200 – RM361,000 = RM6,200
i.
Given (Estimated overhead applied to work in process )
j.
Total raw materials used + Direct labor + Overhead applied = RM719,000 + RM408,000 +
RM367,200 = RM1,494,200
k.
Given
l.
Current manufacturing costs + Beginning work-in-process inventory=RM1,494,200 +
RM65,000 = RM1,559,200
m. Total manufacturing costs - Cost of goods manufactured = RM1,559,200 – RM1,415,200 =
RM144,000
n.
Completed products cost (given) + Overapplied overhead = RM1,409,000 + RM6,200 =
RM1,415,200
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BMAC5203 ASSIGNMENT
ZamGabra
Schedule of Cost of Goods Sold
For 2012
Beginning finished goods inventory
1,415,200 b
Cost of goods manufactured
Goods available for sale
73,000 a
RM
RM 1,488,200 c
90,000 d
Less: ending finished goods inventory
Normal cost of goods sold
RM 1,398,200 e
Less: Overapplied overhead
6,200 f
Adjusted cost of goods sold
RM 1,392,000 g
a.
Given
b.
Completed products cost (given) + Overapplied overhead = RM1,409,000 + RM6,200 =
RM1,415,200
c.
Beginning finished goods inventory + Cost of goods manufactured = RM73,000 + 1,415,200
= RM1,488,200
d.
Goods available for sale - Normal cost of goods sold = RM1,488,200 – RM1,398,200 =
RM90,000
e.
Adjusted cost of goods sold + Overapplied overhead = RM1,392,000 + RM6,200 =
RM1,398,200
f.
Overhead applied - Actual overhead = RM367,200 – RM361,000 = RM6,200
g.
Given (Sold goods cost)
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BMAC5203 ASSIGNMENT
ZamGabra
Income Statement
For 2012
RM 1,970,000 a
Sales
1,392,000 b
Less: Cost of goods sold
Gross margin
RM
578,000 c
412,000 d
Less: selling and administrative expenses
Operating income
RM
a.
Given (Sold goods for)
b.
Given (Sold goods cost)
c.
Sales – Cost of goods sold = RM1,970,000 – RM1,392,000 = RM578,000
d.
Given (Paid cash for selling and administrative expenses )
e.
166,000 e
Gross margin – selling and administrative expenses = RM578,000 – RM412,000 =
RM166,000
So, On December 31, 2012, ZamGabra Manufacturing Company should report the following balances in its inventory accounts:
Account
Raw materials inventory
Work-in-process inventory
Finished goods inventory
Balance
RM73,000
RM144,000
RM90,000
The operating income should be RM166,000.
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BMAC5203 ASSIGNMENT
REFERENCES
[1]
Accounting 202 Home. Standard Costing and Performance Measures for
Today’s Manufacturing Environment. Retrieved August 10, 2013 from http://acct202.tripod.com/Chapter%2010%20Outline.htm [2]
Blocher, E, Stout, D. & Cokins, G. (2008) Cost Management: A Strategic
Emphasis (4th ed.). New York: McGraw-Hill.
[3]
Mowen, M.M., Hansen, D.R & Heitger, D.L. (2012). Managerial Accounting:
The Cornerstone of Business Decisions (4th ed.). South Western: Cengage
Learning.
[4]
Horngren, C.T, Foster, G., Datar, S.M., Rajan & M., Ittner, C.M. (2008). Cost
Accounting: A Managerial Emphasis (13th ed.). South Western: Cengage
Learning.
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