You are on page 1of 15

MBAOUM 0312.

BMAC5203 ACCOUNTING FOR DECISION MAKING. ASSIGNMENT

Lecturer: Do, Van Thang PhD. Student : Trinh, Manh Tin


MBAOUM 0312_Class 2B

ASSIGNMENT BMAC5203

OCTOBER SEMESTER 2012 BMAC5203 ACCOUNTING FOR DECISION MAKING ASSIGNMENT

TASK 1: Cost Classification and Ethics The Sorrel Pharmaceuticals Corporation manufactures a variety of drugs that are marketed internationally. Inventories on May 31 and June 30 were as follows: May 31 Materials Inventory Work in Process Inventory Finished Goods Inventory $354,100 112,600 138,500 June 30 $327,400 116,400 142,800

Purchases of materials for June were $142,600. Direct labor costs were incurred and computed on the basis of 27,000 hours at $8 per hour. Actual overhead costs incurred in June were as follows: operating supplies used, $5,700; janitorial and materials handling labor, $38,100; employee benefits $110,800; heat, light, and power, $50,000; factory depreciation, $8,400; property taxes, $8,000; and expired portion of insurance premiums, $12,000. Net sales for June were $992,700. Selling and administrative expenses were $165,000. Prepare a statement of cost of goods manufactured for month ended June 30 [15 marks]. ANSWER: Direct materials for June = $354,100 + $142,600 $327,400 = $169,300 Direct labor for June = 27,000*$8 = $216,000 Manufacturing overhead = $5,700+$38,100+$110,800+$50,000+$8,400+$8,000 +$12,000 = $233,000 Operating supplies used Employee benefits Heat, light, and power Factory depreciation Property taxes = $5,700 Janitorial and materials handling labor = $38,100 = $110,800 = $50,000 = $8,400 = $8,000

Expired portion of insurance premiums = $12,000 Total manufacturing costs = $169,300 + $216,000 + $233,000 = $618,300 Cost of goods manufactured = $112,600 + $618,300 $116,400 = $614,500
1

ASSIGNMENT BMAC5203

PHARMACEUTICALS CORPORATION MANUFACTURES Statement of Cost of Goods Manufactured For the Month of June Direct materials Direct labor Manufacturing overhead Total manufacturing costs Work in Process, May 31 Work in Process, June 30 Cost of goods manufactured $169,300 $216,000 $233,000 $618,300 $112,600 ($116,400) $614,500

ASSIGNMENT BMAC5203

TASK 2: Comparing Traditional and ABC Production Costs The controller for Drisau Company is trying to decide whether or not the company should switch from the traditional approach of overhead cost allocation to the activity-based costing approach. She has gathered the following overhead data on the companys two products: estimated total overhead, $180,000 (consisting of the $70,000 for setups and $110,000 for assembly); estimated direct labor hours (Product A, 6,000; Product B, 3,000); estimated number of setups (Product A, 750; Product B, 1,250); estimated number of machine hours used in assembly (Product A, 3,000; Product B, 5,000); estimated number of units produced (Product A, 500; Product B, 200). 1. Using the traditional approach: a. Calculate the predetermined overhead rate using direct labor hours as the cost driver [5 marks]. b. Computer the amount of overhead costs applied to each product in total and per unit [5 marks]. 2. Using the activity-based approach: a. Calculated the overhead cost pool rates for each pool [5 marks]. b. Compute the amount of overhead costs applied to each product by cost pool, in total, and per unit [5 marks]. 3. Discuss the differences in the overhead costs allocated to two product lines [5 marks].
[TOTAL: 25 MARKS]

ANSWER: The overhead data: Total overhead cost: $180,000 (Consisting for set up $70,000 & for assembly $110,000 Product a Direct labor hours Number of setups Number of machine Hours used in assembly Number of units produced 3,000 500 5,000 200 6,000 750 Product B 3,000 1,250 )

ASSIGNMENT BMAC5203

1. Using the traditional approach: a. Calculate the predetermined overhead rate using direct labor hours as the cost driver. Total Direct labor-hour = 6,000 + 3,000 = 9,000

Predetermined overhead cost rate = Total cost overhead / Total direct labor hour = $180,000/9000 = $20 per direct labor hour Predetermined overhead cost rate is $20 per direct labor hour b. Computer the amount of overhead costs applied to each product in total and per unit *For A product: Total overhead costs applied to A product = $20 x 6000 = $120,000 Overhead costs applied per A unit *For B product: Total overhead costs applied to B product Overhead costs applied per B unit 2. Using the activity-based approach: a. Calculated the overhead cost pool rates for each pool. Overhead cost rates for Setups = $70,000/ (750+1250) setup hours = $ 35 per setup hour Overhead cost rates for Assembly = $110,000/ (3000+5000) machine hours = $13.75 per machine hour = $20 x 3000 = $60,000 = $60,000/200 = $300 = $120,000/500 = $240

b. The amount of overhead costs applied to each product by cost pool, in total, and per unit. Overhead cost applied to A product in total = $35 x 750 + $13.75 x 3000 = $67,500. Overhead cost applied to B product in total = $35 x 1250 + $13.75 x 5000 = $112,500 Overhead cost applied to each product per unit: Overhead cost applied per A unit = $67500 / 500 = $135 per unit

Overhead cost applied per B unit = $112,500 / 200 = $562.5 per unit

ASSIGNMENT BMAC5203

c. Discuss the differences in the overhead costs allocated to two product lines. According to the Web named differencebetween.com(1) we have some differences between two approaches: - In the traditional system, a few allocation bases are used to allocate overhead costs, whereas ABC system uses many drivers as allocation basis. - Traditional method allocates overheads first to the individual departments, whereas activity based costing assigns over heads to each activity first. - Activity based costing is more technical and time consuming, while traditional method or system is quiet straight forward. - Activity based costing can give more accurate indication of where cost cuttings can be made than the traditional system; that means, activity based costing facilitates more rigorous or accurate decision making than traditional system.

ASSIGNMENT BMAC5203

TASK 3: Managerial Planning Projected cost in formation for a new product to be produced by Kolier Company is as follows: Expected variable unit cost: Direct materials Direct labor Overhead Selling cost Annual fixed costs: Taxes on property used Depreciation on building and equipment Advertising Other The product is to be sold for $49. [TOTAL: 20 MARKS] ANSWER: We have: Variable unit cost is Annual fixed costs are The product is to be sold for $49. a. Compute the number of units that must be sold to earn a profit of $80,000. Suppose X is the number of units that must be sold to earn a profit of $80,000 We have: Price for sold per unit = Total cost per unit + Expected profit per unit. = Variable cost per unit + fixed cost per unit + Expected profit per unit $49 = $24 + 68,700/X + $80,000/X $ 25 = $148,700/X X = 5,948 units $ 24 $68,700 $8,870 18,920 38,840 2,070 $10.90 7.18 1.92 4.00

The quantity that must be sold to earn a profit of $80,000 is 5,948 units

ASSIGNMENT BMAC5203

b. Compute the number of units that must be sold if advertising costs rise by $12,000 and a targeted profit of $120,000 is to be obtained [5 marks].

Suppose X is the number of units that must be sold if advertising costs rise by $12,000 and a targeted profit of $120,000 is to be obtained Use the equation: Price for sold per unit = Total cost per unit + Expected profit per unit. = Variable cost per unit + Fixed cost per unit + Expected profit per unit $49 = ($24 + 80,700/X) + $120,000/X X= 8,028 units The quantity must be sold to earn a profit of $120,000 if advertising costs rise by $12,000 is 8,028 units c. Use the original information and sales of 10,000 units to compute the new selling price that the company must use to obtain a profit of $200,000 [5 marks]. Use the equation: New Price for sold per unit = Total cost per unit + Expected profit per unit. = Variable cost per unit + Fixed cost per unit + Expected profit per unit New Price for sold per unit = $ 24 + $ 68,700/10,000 + $ 200,000/10,000 = $ 50.87 The new selling price that the company must use to sales of 10,000 units and obtain a profit of $200,000 is $50.87 d. The most in annual sales that could be projected is 20,000 units. Determine the added amount that could be spent on fixed advertising costs if the highest possible selling price that management believes can be charged is $50 and if there is a targeted profit of $ 225,000 [5 marks]. Use the equation: Price for sold per unit = Total cost per unit + Expected profit per unit. = Variable cost per unit + Fixed cost per unit + Expected profit per unit $50= $24 + Fix cost /20,000 + $225,000/20,000 => Fix cost = $ 295,000 <=> the fixed advertising costs added amount = $295,000- $68,700= $226,300

ASSIGNMENT BMAC5203

So, the added amount that could be spent on fixed advertising costs if the highest possible selling price that management believes can be charged is $50 and if there is a targeted profit of $ 225,000 is $226,300.

ASSIGNMENT BMAC5203

TASK 4: Production Budgeting and Control Crosson Wineries & Bottling is preparing its budget for 2012 and has completed the sales budget for the first six month of the year. The projected volume is as follows: January February March April May June 50,000 bottles 60,000 bottles 100,000 bottles 80,000 bottles 40,000 bottles 20,000 bottles

The desired ending inventory for each month must be equal to the 30 percent of the next months sales. The December 31, 2011, inventory was 15,000 bottles. a. Prepare the production budget for the first four months of 2012 [6 marks]. b. Explain why Crosson Wineries & Bottling must produce more bottles than it sells in January and February, and why it must produce fewer bottles than it sells in March and April [6 marks]. c. Assume each finished bottle requires 25 ounces of wine and that the ending inventory each month must be equal to 20 percent of the next months production needs. The December 31, 2011, inventory of wine was 290,000 ounces. Prepare the direct materials purchases budget for the first three months of 2012 [8 marks]... [TOTAL: 20 MARKS] ANSWER: a. Prepare the production budget for the first four months of 2012 [6 marks]. Ending inventory for January Ending inventory for February Ending inventory for March Ending inventory for April = 30%*60,000 = 18,000 bottles = 30%*100,000 = 30,000 bottles = 30%*80,000 = 24,000 bottles = 30%*40,000 = 12,000 bottles

Unit: bottle
9

ASSIGNMENT BMAC5203

Production budget for the first four months of 2012: Production budget for January = 50,000 + 18,000 15,000 Production budget for February = 60,000 + 30,000 18,000 Production budget for March = 100,000 + 24,000 30,000 Production budget for April = 80,000 + 12,000 24,000 = 53,000 bottles = 72,000 bottles = 94,000 bottles = 68,000 bottles

CROSSON WINERIES & BOTTLING The Production Budget for the First Four Months Of 2012 Month Unit to be produced Add desire ending Inventory Total needed Less Beginning Inventory Required January 50,000 18,000 68,000 15,000 53,000 Feb 60,000 30,000 90,000 18,000 72,000 March April 100,000 24,000 124,000 30,000 94,000 80,000 12,000 92,000 24,000 68,000

b. Crosson Wineries & Bottling must produce more bottles than it sells in January and February, because the quantity of desired ending inventory for Feb. and Marchs sales increase larger than latest month. It must produce fewer bottles than it sells in March and April because the desired ending inventory for April and Mays sales decrease less than latest month.

c. Assume each finished bottle requires 25 ounces of wine and that the ending inventory each month must be equal to 20 percent of the next months production needs. The December 31, 2011, inventory of wine was 290,000 ounces. Prepare the direct materials purchases budget for the first three months of 2012 [8 marks]...

10

ASSIGNMENT BMAC5203

CROSSON WINERIES & BOTTLING The direct materials purchases budget for the first three months of 2012
Jan Production (Bottls) Materials per unit (Ounces) Production needs (Ounces) Add desired ending inventory (Ounces) Total needed (Ounces) Less beginning inventory (Ounces) Materials to be purchased (Ounces) 53,000 25 1,325,000 360,000 1,685,000 290,000 1,395,000 Feb 72,000 25 1,800,000 470,000 2,270,000 360,000 1,910,000 Mar 94,000 25 2,350,000 340,000 2,690,000 470,000 2,220,000

Explaining: Production needs for January = 53,000 * 25 = 1,325,000 (ounces) Production needs for February = 72,000 * 25 = 1,800,000 (ounces) Production needs for March Production needs for April = 94,000 *25 = 2,350,000 (ounces) = 68,000 * 25 =1,700,000 (ounces)

Desired ending inventory for January = 1,800,000 * 20% = 360,000 (ounces) Desired ending inventory for February = 2,350,000 * 20% = 470,000 (ounces) Desired ending inventory for March = 1,700,000 * 20% = 340,000 (ounces)

11

ASSIGNMENT BMAC5203

Beginning inventory for February = 290,000 (ounces) Beginning inventory for February = Desired ending inventory for January Beginning inventory for March = Desired ending inventory for February

12

ASSIGNMENT BMAC5203

TASK 5: Relevant Costs & Decision Making On November 25, 2011, Stanford Sporting Equipment, Inc. received a special order for 5,000 threewood golf sets. These golf clubs will be marketed in Europe. Dover Imports, Ltd., the purchasing company, wants the clubs bulk packaged and is willing to pay $55 per se for clubs. John Stanford, president of Stanford Sporting Equipment, Inc., has gathered the following product costing information about the set of woods being discussed: direct materials (wood) cost $600 per 100 sets, direct materials (metal shafts) are $1,000 per 100 sets, and direct materials (grips) are $150 per 100 sets. Direct labor is $20 per set. Variable manufacturing cost is $12 per set, and fixed manufacturing costs are 20 percent of direct labor dollars. Variable selling expenses are $10 per set, and variable shipping costs are $7 per set. Fixed general and administrative costs are figured at 30 percent of direct labor dollars. Bulk shipping costs will total $11,000, thus eliminating both variable selling and variable shipping costs from consideration. The company did not expect this order and will reach planned production capacity for the year; however, enough plant capacity for the special order exits. a. Prepare an analysis for the Stanford to use in deciding to accept or reject the offer by Dover Imports Ltd. What decision should be made? [10 marks]. b. What is the lowest possible price Stanford Sporting Equipment, Inc., could charge per set of woods and still make $9,000 in operating income on this order? [10 marks]. ANSWER: a. Prepare an analysis for the Stanford to use in deciding to accept or reject the offer by Dover Imports Ltd. What decision should be made? [10 marks]. Contribution Income Statement: Revenue (5,000 x $55) Variable costs: Total direct materials ($17.5 x 5,000) Direct labor is $20 per set ($20 x5, 000) Variable manufacturing cost is $12 per set Total manufacturing cost Contribution margin Bulk shipping costs will total $11,000, Net operating Income increased $87,500 $100,000 $60,000 $ 247,500 $ 27,500 $ 11,000 $ 16,500
13

$ 275,000

ASSIGNMENT BMAC5203

If Stanford Sporting Equipment, Inc. accepts the offer, Net operating Income will increase by $16,500. Stanford should accept this offer because they get $16,500 if they provide 5,000 three-wood golf sets with $55 per set. b. What is the lowest possible price Stanford Sporting Equipment, Inc., could charge per set of woods and still make $9,000 in operating income on this order? [10 marks]. We have, the amount of $9,000 in operating income on this order (5,000 sets) means: Expected operating income per set = $9,000/5,000 = $1.8 per set. Use the equation: Price per set = Cost per set + expected operating income per set = $ 49.5 +$2.2 + $1.8 = $53.5 Bulk shipping cost per set = $11,000/5,000 = $ 2.2

The lowest possible price company could charge per set of woods is 53.5 that still make $9,000 in operating income on this order.

14

You might also like