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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 2012BMAC5203 – 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 June 30

Materials Inventory $354,100 $327,400

Work in Process Inventory 112,600 116,400

Finished Goods Inventory 138,500 142,800

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 = $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

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

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PHARMACEUTICALS CORPORATION MANUFACTURES

Statement of Cost of Goods Manufactured

For the Month of June

Direct materials $169,300

Direct labor $216,000

Manufacturing overhead $233,000

Total manufacturing costs $618,300

Work in Process, May 31 $112,600

Work in Process, June 30 ($116,400)

Cost of goods manufactured $614,500

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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 company’s 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 Product B

Direct labor hours 6,000 3,000

Number of setups 750 1,250

Number of machine

Hours used in assembly 3,000 5,000

Number of units produced 500 200

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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 = $120,000/500 = $240

*For B product:

Total overhead costs applied to B product = $20 x 3000 = $60,000

Overhead costs applied per B unit = $60,000/200 = $300

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

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

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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.

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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 $10.90

Direct labor 7.18

Overhead 1.92

Selling cost 4.00

Annual fixed costs:

Taxes on property used $8,870

Depreciation on building and equipment 18,920

Advertising 38,840

Other 2,070

The product is to be sold for $49.

[TOTAL: 20 MARKS]ANSWER:

We have:

Variable unit cost is $ 24

Annual fixed costs are $68,700

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

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

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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:


= 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.


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:



$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

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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.

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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 50,000 bottles

February 60,000 bottles

March 100,000 bottles

April 80,000 bottles

May 40,000 bottles

June 20,000 bottles

The desired ending inventory for each month must be equal to the 30 percent of the next month’s 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 month’s 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 = 30%*60,000 = 18,000 bottles

Ending inventory for February = 30%*100,000 = 30,000 bottles

Ending inventory for March = 30%*80,000 = 24,000 bottles

Ending inventory for April = 30%*40,000 = 12,000 bottles

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Unit: bottle

Production budget for the first four months of 2012:

Production budget for January = 50,000 + 18,000 – 15,000 = 53,000 bottles

Production budget for February = 60,000 + 30,000 – 18,000 = 72,000 bottles

Production budget for March = 100,000 + 24,000 – 30,000 = 94,000 bottles

Production budget for April = 80,000 + 12,000 – 24,000 = 68,000 bottles

CROSSON WINERIES & BOTTLING

The Production Budget for the First Four Months Of 2012

Month January Feb March April

Unit to be produced 50,000 60,000 100,000 80,000

Add desire ending Inventory 18,000 30,000 24,000 12,000

Total needed 68,000 90,000 124,000 92,000

Less Beginning Inventory 15,000 18,000 30,000 24,000

Required 53,000 72,000 94,000 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 March’s 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 May’s 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 month’s 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]...

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CROSSON WINERIES & BOTTLING

The direct materials purchases budget for the first three months of 2012

Jan Feb Mar

Production (Bottls) 53,000 72,000 94,000

Materials per unit (Ounces) 25 25 25

Production needs (Ounces) 1,325,000 1,800,000 2,350,000

Add desired ending inventory (Ounces) 360,000 470,000 340,000

Total needed (Ounces) 1,685,000 2,270,000 2,690,000

Less beginning inventory (Ounces) 290,000 360,000 470,000

Materials to be purchased (Ounces) 1,395,000 1,910,000 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 = 94,000 *25 = 2,350,000 (ounces)

Production needs for April = 68,000 * 25 =1,700,000 (ounces)

Desired ending inventory for January = 1,800,000 * 20% = 360,000 (ounces)

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Desired ending inventory for February = 2,350,000 * 20% = 470,000 (ounces)

Desired ending inventory for March = 1,700,000 * 20% = 340,000 (ounces)

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

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TASK 5: Relevant Costs & Decision Making

On November 25, 2011, Stanford Sporting Equipment, Inc. received a special order for 5,000 three-

wood 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) $ 275,000

Variable costs:

Total direct materials ($17.5 x 5,000) $87,500

Direct labor is $20 per set ($20 x5, 000) $100,000

Variable manufacturing cost is $12 per set $60,000

Total manufacturing cost $ 247,500

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Contribution margin $ 27,500

Bulk shipping costs will total $11,000, $ 11,000

Net operating Income increased $ 16,500

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.

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