ACCT204 The Direct Method to Allocated the Budget
Assume that Mahoney uses plantwide predetermined overheads based on direct labour hours. Calculate the total cost and the unit cost for each of the 2,000 units produced by Job 888 ignoring the support department costs. [1 marks] 2. Assume that Mahoney uses separate departmental overhead rates based upon direct labour hours for assembly and upon machine hours for finishing. Calculate the total cost and the unit cost for each of the 2,000 units produced by Job 888 ignoring the support department costs. [1 marks] 3. Repeat requirement 1 with considerations of support department costs added to each departmental overhead costs. Use the direct method to allocated the budgeted overhead costs of the Maintenance and HR departments to the production departments (Assembly and Finishing) [4 marks] 4. Repeat requirement 2 with considerations of support department costs added to each departmental overhead costs. Use the direct method to allocated the budgeted overhead costs of the Maintenance and HR departments to the production departments (Assembly and Finishing) [4 marks].
Suggested Solutions to Week 4 Workshop Activities 4 Total MOH $300,000 $160,000 $460,000 DLH 45000 35000 $80,000 Machine hours 5000 16000 $21,000 Raw materials used $20,000 DL costs $16,000 DLH: Assembly 1800 DLH: Finishing 1100 2900 MH: Assembly 1200 MH: Finishing 700 Total units produced 2400 Total cost of job = $52,675 Unit cost $22 Total cost of job = $55,000 Unit cost $22.92 Maintenance HR Maintenance HR 50 Assembly 150 100 Assembly 60% 67% Finishing 100 50 Finishing 40% 33% 250 150 Support departments Maintenance .
HR Assembly Finishing $100,000.00 $80,000.00 $300,000.00 $160,000.00 Alloc of Maint. Costs $100,000.00 $60,000.00 $40,000.00 Alloc of HR Costs $80,000.00 $53,333.33 $26,666.67 $413,333.33 $226,666.67 Total MOH $413,333 $226,667 $640,000 DLH 45000 35000 $80,000 Machine hours 5000 16000 $21,000 Raw materials used $20,000 DL costs $16,000 DLH: Assembly 1,800 DLH: Finishing 1,100 2900 MH: Assembly 1,200 MH: Finishing 700 Total units produced $2,400 Total cost of job = $59,200 Unit cost $25 Total cost of job = $62,450 Unit cost $26.02 Suggested Solutions to Week 4 Workshop Activities 5 Question 3 Family Supermarkets (FS) has decided to increase the size of its Adelaide store. It wants information about the profitability of individual product lines:
soft drinks, fresh produce and packaged food. FS provides the following data for 2014 for each product line: Soft drinks Fresh produce Packaged food Revenues $317,400 $840,240 $483,960 Cost of goods sold $240,000 $600,000 $360,000 Cost of bottles returned $4,800 $0 $0 Number of purchase orders placed 144 336 144 Number of deliveries received 120 876 264 Hours of shelf-stocking time 216 2,160 1,080 Items sold 50,400 441,600 122,400 FS also provides the following information for 2014: Activity Description of activity Total support costs Cost-allocation base Bottle returns Returning of empty bottles to store $4,800 Direct tracing to soft drink line Ordering Placing of orders for purchases $62,400 624 purchase orders Delivery Physical delivery and receipt of merchandise $100,800 1,260 deliveries Shelf-stocking Stocking of merchandise on store shelves and ongoing restocking $69,120 3,456 hours of shelf-stocking time Customer support Assistance provided to customers, including checkout and bagging $122,880 614,400 items sold Total $360,000 Required: 1.
FS currently allocates store support costs (all costs other than cost of goods sold) to product lines on the basis of cost of goods sold of each product line. Calculate the operating profit and operating profit as a percentage of revenues for each product line. [3 marks] 2. If FS allocates store support costs (all costs other than cost of goods sold) to product lines using an ABC system, calculate the operating profit and operating profit as a percentage of revenues for each product line. [3 marks] 3. Manager believes ABC system is more credible than the simple costing system. Provide reasons to support or disagree with manager’s belief. [4 marks] Suggested Solutions to Week 4 Workshop Activities 6 Solution: Soft drinks Fresh produce Pack.
food Total Revenues 317,400 840,240 483,960 1,641,600 COGS 240,000 600,000 360,000 1,200,000 Store support cost 72,000 180,000 108,000 360,000 Total costs 312,000 780,000 468,000 1,560,000 Operating profit 5,400 60,240 15,960 81,600 Operating profit/ revenues 1.70% 7.17% 3.30% 4.97% 1 mark for correct calculation for store support costs; 1 mark for deriving operating profit and 1 mark for correct percentages for all three product lines Activity Cost hierarchy Total costs Qty of cost driver OH alloc rate Ordering Batch level 62,400 624 purchase order 100 Delivery Batch level 100,800 1,260 deliveries 80 Shelf-stocking unit level 69,120 3,456 shelf-stocking hours 20 Customer sup unit level 122,880 614,400 items sold 0.2.
Soft drinks Fresh produce Packaged food Total Revenues 317,400 840,240 483,960 1,641,600 Cost of goods sold 240,000 600,000 360,000 1,200,000 Bottle-return costs 4,800 0 0 4,800 Ordering costs 14,400 33,600 14,400 62,400 Delivery costs 9,600 70,080 21,120 100,800 Shelf-stocking costs 4,320 43,200 21,600 69,120 Customer-support costs 10,080 88,320 24,480 122,880 Total costs 283,200 835,200 441,600 1,560,000 Operating profit 34,200 5,040 42,360 81,600 Operating profit/ revenues 10.78% 0.60% 8.75% 4.97% 0.5 marks for correct calculation for each of all five activity costs;
0.5 mark for calculating correct percentages for all three product lines Part (3) mention about different resources consumed for each product line with supporting data for 4 marks; correct conclusions without supporting data, 3 marks; some sketchy explanations for rationale of selecting ABC, 2 marks; offer some arguments, valid or invalid, 1 mark Suggested Solutions to Week 4 Workshop Activities 7 Question 4 ChocLover Ltd manufacturers boxes of chocolate. A unit of production is a tray of 12 boxes. The following standards have been developed by the production engineering staff and the factory accountant: Direct material Direct labour Quantity: 4 kilograms Quantity: 0.25 hour Price: $ 32.00 per kg Rate: $22 per hour Actual material purchases amounted to 240,000 kilograms at $33.20 per kg. Actual costs incurred in the production of 50,000 units were as follows: Direct material $130,200 for 210,000 kilograms Direct labour $300,000 for 15,000 hours Required:
1. Calculate the following variances and indicate whether the variances are favourable or unfavourable:
(a) Direct material price variance. [1.5 marks]
(b) Direct material quantity variance. [1.5 marks]
(c) Direct labour rate variance. [1.5 marks]
(d) Direct labour efficiency variance. [1.5 marks]
2. Prepare journal entries to record:
(a) The purchase of direct materials and the direct material price variance. [1mark]
(b) The use of direct material in production and the direct material quantity variance. [1mark]
3. Explain the phrase management by exception. [2 marks] Suggested Solutions to Week 4 Workshop Activities 8 Solutions: 1. Data Standard cost card Direct material per unit 4 kg @ $32 per kg Direct labour per unit 0.25 hours @ $22 per hour Actual data Production 50 000 units Purchases 240 000 kg @ $33.2 per kg Direct material used $130 200 for 210 000 kg Direct labour used $300 000 for 15 000 hours Variances Negative is unfavourable, positive is favourable Purchase quantity 240 000 Purchase price per kg $33.2 Standard price per kg $32 a. Direct material price variance -$288,000 [1.5 marks]
Actual quantity used 210 000 Standard quantity for output 200 000 Standard price per kg $32 Direct material quantity variance -320,000 [1.5 marks] Actual hours used 15,000 Actual cost per hour $20 Standard cost per unit $22 Direct labour rate variance $30,000 [1.5 marks] Actual hours used 15,000 Standard hours for output 12,500 Standard labour rate per hour $22 Direct labour efficiency variance -55,000 [1.5 marks] 2. (a) Raw materials inventory 7,680,000 Direct material price variance 288,000 Accounts payable 7,968,000 [1mark] (b) Work in process inventory 6,400,000 Direct material quantity variance 320,000 Raw materials inventory 6,720,000 [1 mark]
3. Management by exception is a managerial technique in which only significant deviations from expected performance are investigated. [2 marks] Suggested Solutions to Week 4 Workshop Activities 9 Question 5 1. Provide two advantages for holding inventory in managing working capital. [2 marks] 2. List the motives for holding cash in a business. [2 marks] 3. Name any two factors that influence the length of the credit period in a business. [2 marks] 4. Calculate the operating cash cycle if the inventory turnover period is 21 days, the debtor's turnover period is 32 days and the creditor turnover period is 40 days. [2 marks] 5. Violet Pty Ltd usually takes 50 days to pay its suppliers. In order to encourage prompt payment, supplier T offers Violet Pty Ltd a 2% discount for payment within 10 days. What is the annual percentage cost of the discount to Violet Pty Ltd? [2 marks]
Answer:
| PART 1 | ||||||||||
| on 1st July | 50000 | |||||||||
| Units transferred in | 120000 | |||||||||
| Units accounted for | 170000 | |||||||||
| Units transferred out | 90000 | |||||||||
| As at 31 st july | 80000 | |||||||||
| 170000 | ||||||||||
| Units transferred in | Direct Material | Conversion Cost | ||||||||
| Units transferred out | 90000 | 90000 | 90000 | |||||||
| As at 31 st july | 80000 | 80000 | 80000 | |||||||
| Percentage of completion | 100% | 100% | 40% | |||||||
| Equivalent Units | 80000 | 80000 | 32000 | |||||||
| Equivalent Units | 170000 | 170000 | 122000 | |||||||
| PART 2 | calculation of unit cost | |||||||||
| Units transferred in | Direct Material | Conversion Cost | Total | |||||||
| on 1st July | 80000 | 80000 | 6000 | 166000 | ||||||
| added during july | 490000 | 300000 | 190000 | 980000 | ||||||
| Total | 570000 | 380000 | 196000 | 1146000 | ||||||
| Equivalent Units | 170000 | 170000 | 122000 | 462000 | ||||||
| Unit cost for july | 3.352941176 | 2.235 | 1.607 | 3.842 | ||||||
| (490000/170000) | (38000/170000) | (196000/122000) | (2.235+1.607) | |||||||
| PART 3 | Cost of goods completed and transferred | 3.842*90000 | ||||||||
| 345766.6345 | ||||||||||
| PART 4 | cost of remaining WIP | |||||||||
| Units transferred in | Direct Material | Conversion Cost | Total | |||||||
| As at 31 st july | 80000 | 80000 | 80000 | |||||||
| percentage of completion | 100% | 100% | 40% | |||||||
| Equivalent units | 80000 | 80000 | 32000 | |||||||
| Unit cost for july | 3.352941176 | 2.235 | 1.607 | |||||||
| WIP | 268235.2941 | 178823.5294 | 51409.84 | ` | 230233.4 | |||||
| (178823.5+51409.84) | ||||||||||
| PART 1 | ||||||||||
| Assembly | Finishing | Total | ||||||||
| Manufacturing Overheads | 300000 | 160000 | 460000 | |||||||
| No. of Direct Labours | 45000 | 35000 | 80000 | |||||||
| Predetermined ovehead Recovery rate per hour | $ 6.67 | $ 4.57 | $ 5.75 | |||||||
| Total Direct Labours | ||||||||||
| Assembly | 1800.00 | |||||||||
| Finishing | 1100.00 | |||||||||
| 2900.00 | ||||||||||
| Total Machine hours | ||||||||||
| Assembly | 1200.00 | |||||||||
| Finishing | 700.00 | |||||||||
| 1900.00 | ||||||||||
| Since plantwide ovehead recovery rate is used by the company Total Manufacturing overheads will be divided by total labour hours to determine the overall recovery rate | ||||||||||
| Total Cost of producing Job 888 | ||||||||||
| Direct Material | $ 20,000.00 | |||||||||
| Direct Labour | $ 16,000.00 | |||||||||
| Manufacturing overhead | (5.75*2900) | $ 16,675.00 | ||||||||
| Total cost of job 888 | $ 52,675.00 | |||||||||
| Per unit cost | Total cost of job 888 | 52675 | $ 26.34 | |||||||
| No. of units | 2000 | |||||||||
| However if 2400 units are prepared per unit cost will be | 52675 | $ 21.95 | ||||||||
| 2400 | ||||||||||
| PART 2 | Separate Departmental Overhead Recovery Rate | Assembly | Finishing | |||||||
| Manufacturing Overheads | $ 3,00,000.00 | $ 1,60,000.00 | ||||||||
| No. of Direct Labours | 45000 | |||||||||
| 16000 | ||||||||||
| Predetermined ovehead Recovery rate per hour | $ 6.67 | $ 10.00 | ||||||||
| (300000/45000) | (160000/16000) | |||||||||
| Total Cost of producing Job 888 | ||||||||||
| Direct Material | $ 20,000.00 | |||||||||
| Direct Labour | $ 16,000.00 | |||||||||
| Manufacturing overhead | ||||||||||
| Assembly | (1800*6.67) | $ 12,000.00 | ||||||||
| Finishing | (700*10) | $ 7,000.00 | ||||||||
| Total Cost of producing Job 888 | $ 55,000.00 | |||||||||
| Per unit cost | (55000/2000) | $ 27.50 | ||||||||
| PART 3 | Maintenance | HR | ||||||||
| Assembly | 150 | 100 | ||||||||
| Finishing | 100 | 50 | ||||||||
| Total No. of Hours | 250 | 150 | ||||||||
| Maintenance | HR | |||||||||
| Assembly | 60% | 66.67% | ||||||||
| (150/250) | (100/150) | |||||||||
| Finishing | 40% | 33.33% | ||||||||
| (100/250) | (50/150) | |||||||||
| allocation of support department cost | Maintenance | HR | ||||||||
| Budgeted overhead cost | $ 1,00,000.00 | $ 80,000.00 | ||||||||
| Assembly | $ 60,000.00 | $ 53,333.33 | ||||||||
| (100000*60%) | (80000*66.67%) | |||||||||
| Finishing | $ 40,000.00 | $ 26,666.67 | ||||||||
| (100000*40%) | (80000*33.33%) | |||||||||
| Total Overheads | ||||||||||
| Assembly | Finishing | |||||||||
| Manufacturing Overheads | $ 3,00,000.00 | $ 1,60,000.00 | $ 4,60,000.00 | |||||||
| Maintenance | $ 60,000.00 | $ 40,000.00 | $ 1,00,000.00 | |||||||
| HR | $ 53,333.33 | $ 26,666.67 | $ 80,000.00 | |||||||
| Total | $ 4,13,333.33 | $ 2,26,666.67 | $ 6,40,000.00 | |||||||
| Predetermined overhead recovery rate on the basis of total labour hours | ||||||||||
| Total Direct Labour Hours | Assembly | Finishing | Total | |||||||
| 45000 | 35000 | 80000 | ||||||||
| Total Machine Hours | Assembly | Finishing | Total | |||||||
| 5000 | 16000 | 21000 | ||||||||
| Total Overhead | 640000.00 | $ 8.00 | ||||||||
| Total Direct Labour Hours | 80000.00 | |||||||||
| Total Cost of producing Job 888 | ||||||||||
| Direct Material | $ 20,000.00 | |||||||||
| Direct Labour | $ 16,000.00 | |||||||||
| Manufacturing overhead | (8*2900) | $ 23,200.00 | ||||||||
| Total Cost of producing Job 888 | $ 59,200.00 | |||||||||
| Per unit cost | (59200/2000) | $ 29.60 | ||||||||
| PART 4 | Total Cost of producing Job 888 | |||||||||
| Direct Material | $ 20,000.00 | |||||||||
| Direct Labour | $ 16,000.00 | |||||||||
| Manufacturing overhead | ||||||||||
| Assembly | (9.19*1800) | $ 16,533.33 | ||||||||
| Finishing | (14.17*700) | $ 9,916.67 | ||||||||
| Total Cost of producing Job 888 | $ 62,450.00 | |||||||||
| Per unit cost | (62450/2000) | $ 31.23 | ||||||||
| Assembly overhead per labour hour | 413333.33 | $ 9.19 | ||||||||
| 45000 | ||||||||||
| Finishing overhead per machine hour | 226666.67 | $ 14.17 | ||||||||
| 16000 | ||||||||||
| PART 1 | ||||||||||
| Soft drinks | Fresh produce | Packaged food | ||||||||
| Revenue | 317400 | 840240 | 483960 | 1641600 | ||||||
| Less | Cost of goods sold | 240000 | 600000 | 360000 | 1200000 | |||||
| Store Support Costs | 72000 | 180000 | 108000 | 360000 | ||||||
| (360000*240000/1200000) | (360000*600000/1200000) | (360000*360000/1200000) | ||||||||
| Operating Profit | 5400 | 60240 | 15960 | 81600 | ||||||
| operating profit as a percentage of revenues | 1.70% | 7.17% | 3.30% | 4.97% | ||||||
| PART 2 | ABC METHOD | |||||||||
| Ordering Cost Per Order= | Total Ordering Cost | $ 62,400.00 | $ 100.00 | |||||||
| No. of purchase orders | 624 | |||||||||
| Delivering Cost Per Order= | Total Delivering Cost | $ 1,00,800.00 | $ 80.00 | |||||||
| No. of Deliveries | 1260 | |||||||||
| Cost per shelf stock hour= | Total Shelf Stocking Cost | $ 69,120.00 | $ 20.00 | |||||||
| No. of Shelf Stocking Hours | 3456 | |||||||||
| Support cost per item sold= | Total Customer Support Cost | $ 1,22,880.00 | $ 0.20 | |||||||
| No.of Items Sold | 614400 | |||||||||
| Soft drinks | Fresh produce | Packaged food | Total | |||||||
| Revenue | 317400 | 840240 | 483960 | 1641600 | ||||||
| Less | Cost of goods sold | 240000 | 600000 | 360000 | 1200000 | |||||
| Less | Store Supports Costs | |||||||||
| Cost of bottles returned | 4800 | 4800 | ||||||||
| Ordering Cost | 14400 | 33600 | 14400 | 62400 | ||||||
| (100*144) | (100*336) | (100*144) | ||||||||
| Delivering Cost | 9600 | 70080 | 21120 | 100800 | ||||||
| (80*120) | (80*876) | (80*264) | ||||||||
| Shelf- stocking cost | 4320 | 43200 | 21600 | 69120 | ||||||
| (20*216) | (20*2160) | (20*100800) | ||||||||
| Customer Support Cost | 10080 | 88320 | 24480 | 122880 | ||||||
| (0.2*50400) | (0.20*441600) | (0.20*122400) | ||||||||
| Operating Profit | 34200 | 5040 | 42360 | 81600 | ||||||
| operating profit as a percentage of revenues | 10.78% | 0.60% | 8.75% | 4.97% | ||||||
| PART 3 | As ABC undertakes the overhead allocation on the basis of overheads consumed by each product, it provides the most apporpriate basis of indirect cost allocation. | |||||||||
| This cost allocation helps the firm in idnetifying the true and accurate cost involved in the production of all the products dealt by it. | ||||||||||
| Correct cost determination helps the manangement to set appropriated prices without under rating or over rating the product's value. | ||||||||||
| PART 1 | ||||||||||
| 1 | Direct material price variance. | Actual Quantity x ( Standard Price - Actual Price) | ||||||||
| 210000 kgs | x | ($32-$33.20) | ||||||||
| $ -2,52,000.00 | Unfavourable | |||||||||
| Actual price | total purchase cost | 130200 | 1.61 | per kg | ||||||
| total number of kgs | 210000 | |||||||||
| Standard price | 32 | per kg | ||||||||
| Standard Data | ||||||||||
| 1 unit | 4 Kgs | |||||||||
| Standard qty required for production | 50000 units | (4*50000) | 200000 kgs | |||||||
| Actual Data | ||||||||||
| Actual Quantity Consumed | 210000 kgs | |||||||||
| 2 | Direct material quantity variance | Standard Price * (Standard Quantity - Actual Quantity) | ||||||||
| 32 *(200000-210000) | ||||||||||
| $ -3,20,000.00 | Unfavourable | |||||||||
| 3 | Direct labour rate variance. | Actual Hours Worked x ( Standard Rate - Actual Rate) | ||||||||
| Actual labour rate per hour | total labour cost | $ 3,00,000.00 | $ 20.00 | per hour | ||||||
| total number of hours worked | 15000 | |||||||||
| 15000 *(22-20) | ||||||||||
| $ 30,000.00 | favourable | |||||||||
| 4 | Direct labour efficiency variance | Standard Rate* (Standard Hours - Actual Hours) | ||||||||
| 22* (12500-15000) | ||||||||||
| $ -55,000.00 | unfavourable | |||||||||
| Standard Hours | No. of units * standard hours per unit | |||||||||
| 50000* 0.25 | ||||||||||
| 12500 | ||||||||||
| PART 2 | Journal Entries | |||||||||
| Raw materials inventory | 7968000 | |||||||||
| (240000*33.20) | ||||||||||
| Direct material price variance | 252000 | |||||||||
| Accounts payable | 8220000 | |||||||||
| Work in process inventory | 7648000 | |||||||||
| (7968000-320000) | ||||||||||
| Direct material quantity variance | 320000 | |||||||||
| Raw materials inventory | 7968000 | |||||||||
| 3 | Management by excepition is the managerial system under which only those areas where deviations are significant enough are examined. | |||||||||
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ACCT204 The Direct Method to Allocated the Budget
Assume that Mahoney uses plantwide predetermined overheads based on direct labour hours. Calculate the total cost and the unit cost for each of the 2,000 units produced by Job 888 ignoring the support department costs. [1 marks] 2. Assume that Mahoney uses separate departmental overhead rates based upon direct labour hours for assembly and upon machine hours for finishing. Calculate the total cost and the unit cost for each of the 2,000 units produced by Job 888 ignoring the support department costs. [1 marks] 3. Repeat requirement 1 with considerations of support department costs added to each departmental overhead costs. Use the direct method to allocated the budgeted overhead costs of the Maintenance and HR departments to the production departments (Assembly and Finishing) [4 marks] 4. Repeat requirement 2 with considerations of support department costs added to each departmental overhead costs. Use the direct method to allocated the budgeted overhead costs of the Maintenance and HR departments to the production departments (Assembly and Finishing) [4 marks].
Suggested Solutions to Week 4 Workshop Activities 4 Total MOH $300,000 $160,000 $460,000 DLH 45000 35000 $80,000 Machine hours 5000 16000 $21,000 Raw materials used $20,000 DL costs $16,000 DLH: Assembly 1800 DLH: Finishing 1100 2900 MH: Assembly 1200 MH: Finishing 700 Total units produced 2400 Total cost of job = $52,675 Unit cost $22 Total cost of job = $55,000 Unit cost $22.92 Maintenance HR Maintenance HR 50 Assembly 150 100 Assembly 60% 67% Finishing 100 50 Finishing 40% 33% 250 150 Support departments Maintenance .
HR Assembly Finishing $100,000.00 $80,000.00 $300,000.00 $160,000.00 Alloc of Maint. Costs $100,000.00 $60,000.00 $40,000.00 Alloc of HR Costs $80,000.00 $53,333.33 $26,666.67 $413,333.33 $226,666.67 Total MOH $413,333 $226,667 $640,000 DLH 45000 35000 $80,000 Machine hours 5000 16000 $21,000 Raw materials used $20,000 DL costs $16,000 DLH: Assembly 1,800 DLH: Finishing 1,100 2900 MH: Assembly 1,200 MH: Finishing 700 Total units produced $2,400 Total cost of job = $59,200 Unit cost $25 Total cost of job = $62,450 Unit cost $26.02 Suggested Solutions to Week 4 Workshop Activities 5 Question 3 Family Supermarkets (FS) has decided to increase the size of its Adelaide store. It wants information about the profitability of individual product lines:
soft drinks, fresh produce and packaged food. FS provides the following data for 2014 for each product line: Soft drinks Fresh produce Packaged food Revenues $317,400 $840,240 $483,960 Cost of goods sold $240,000 $600,000 $360,000 Cost of bottles returned $4,800 $0 $0 Number of purchase orders placed 144 336 144 Number of deliveries received 120 876 264 Hours of shelf-stocking time 216 2,160 1,080 Items sold 50,400 441,600 122,400 FS also provides the following information for 2014: Activity Description of activity Total support costs Cost-allocation base Bottle returns Returning of empty bottles to store $4,800 Direct tracing to soft drink line Ordering Placing of orders for purchases $62,400 624 purchase orders Delivery Physical delivery and receipt of merchandise $100,800 1,260 deliveries Shelf-stocking Stocking of merchandise on store shelves and ongoing restocking $69,120 3,456 hours of shelf-stocking time Customer support Assistance provided to customers, including checkout and bagging $122,880 614,400 items sold Total $360,000 Required: 1.
FS currently allocates store support costs (all costs other than cost of goods sold) to product lines on the basis of cost of goods sold of each product line. Calculate the operating profit and operating profit as a percentage of revenues for each product line. [3 marks] 2. If FS allocates store support costs (all costs other than cost of goods sold) to product lines using an ABC system, calculate the operating profit and operating profit as a percentage of revenues for each product line. [3 marks] 3. Manager believes ABC system is more credible than the simple costing system. Provide reasons to support or disagree with manager’s belief. [4 marks] Suggested Solutions to Week 4 Workshop Activities 6 Solution: Soft drinks Fresh produce Pack.
food Total Revenues 317,400 840,240 483,960 1,641,600 COGS 240,000 600,000 360,000 1,200,000 Store support cost 72,000 180,000 108,000 360,000 Total costs 312,000 780,000 468,000 1,560,000 Operating profit 5,400 60,240 15,960 81,600 Operating profit/ revenues 1.70% 7.17% 3.30% 4.97% 1 mark for correct calculation for store support costs; 1 mark for deriving operating profit and 1 mark for correct percentages for all three product lines Activity Cost hierarchy Total costs Qty of cost driver OH alloc rate Ordering Batch level 62,400 624 purchase order 100 Delivery Batch level 100,800 1,260 deliveries 80 Shelf-stocking unit level 69,120 3,456 shelf-stocking hours 20 Customer sup unit level 122,880 614,400 items sold 0.2.
Soft drinks Fresh produce Packaged food Total Revenues 317,400 840,240 483,960 1,641,600 Cost of goods sold 240,000 600,000 360,000 1,200,000 Bottle-return costs 4,800 0 0 4,800 Ordering costs 14,400 33,600 14,400 62,400 Delivery costs 9,600 70,080 21,120 100,800 Shelf-stocking costs 4,320 43,200 21,600 69,120 Customer-support costs 10,080 88,320 24,480 122,880 Total costs 283,200 835,200 441,600 1,560,000 Operating profit 34,200 5,040 42,360 81,600 Operating profit/ revenues 10.78% 0.60% 8.75% 4.97% 0.5 marks for correct calculation for each of all five activity costs;
0.5 mark for calculating correct percentages for all three product lines Part (3) mention about different resources consumed for each product line with supporting data for 4 marks; correct conclusions without supporting data, 3 marks; some sketchy explanations for rationale of selecting ABC, 2 marks; offer some arguments, valid or invalid, 1 mark Suggested Solutions to Week 4 Workshop Activities 7 Question 4 ChocLover Ltd manufacturers boxes of chocolate. A unit of production is a tray of 12 boxes. The following standards have been developed by the production engineering staff and the factory accountant: Direct material Direct labour Quantity: 4 kilograms Quantity: 0.25 hour Price: $ 32.00 per kg Rate: $22 per hour Actual material purchases amounted to 240,000 kilograms at $33.20 per kg. Actual costs incurred in the production of 50,000 units were as follows: Direct material $130,200 for 210,000 kilograms Direct labour $300,000 for 15,000 hours Required:
1. Calculate the following variances and indicate whether the variances are favourable or unfavourable:
(a) Direct material price variance. [1.5 marks]
(b) Direct material quantity variance. [1.5 marks]
(c) Direct labour rate variance. [1.5 marks]
(d) Direct labour efficiency variance. [1.5 marks]
2. Prepare journal entries to record:
(a) The purchase of direct materials and the direct material price variance. [1mark]
(b) The use of direct material in production and the direct material quantity variance. [1mark]
3. Explain the phrase management by exception. [2 marks] Suggested Solutions to Week 4 Workshop Activities 8 Solutions: 1. Data Standard cost card Direct material per unit 4 kg @ $32 per kg Direct labour per unit 0.25 hours @ $22 per hour Actual data Production 50 000 units Purchases 240 000 kg @ $33.2 per kg Direct material used $130 200 for 210 000 kg Direct labour used $300 000 for 15 000 hours Variances Negative is unfavourable, positive is favourable Purchase quantity 240 000 Purchase price per kg $33.2 Standard price per kg $32 a. Direct material price variance -$288,000 [1.5 marks]
Actual quantity used 210 000 Standard quantity for output 200 000 Standard price per kg $32 Direct material quantity variance -320,000 [1.5 marks] Actual hours used 15,000 Actual cost per hour $20 Standard cost per unit $22 Direct labour rate variance $30,000 [1.5 marks] Actual hours used 15,000 Standard hours for output 12,500 Standard labour rate per hour $22 Direct labour efficiency variance -55,000 [1.5 marks] 2. (a) Raw materials inventory 7,680,000 Direct material price variance 288,000 Accounts payable 7,968,000 [1mark] (b) Work in process inventory 6,400,000 Direct material quantity variance 320,000 Raw materials inventory 6,720,000 [1 mark]
3. Management by exception is a managerial technique in which only significant deviations from expected performance are investigated. [2 marks] Suggested Solutions to Week 4 Workshop Activities 9 Question 5 1. Provide two advantages for holding inventory in managing working capital. [2 marks] 2. List the motives for holding cash in a business. [2 marks] 3. Name any two factors that influence the length of the credit period in a business. [2 marks] 4. Calculate the operating cash cycle if the inventory turnover period is 21 days, the debtor's turnover period is 32 days and the creditor turnover period is 40 days. [2 marks] 5. Violet Pty Ltd usually takes 50 days to pay its suppliers. In order to encourage prompt payment, supplier T offers Violet Pty Ltd a 2% discount for payment within 10 days. What is the annual percentage cost of the discount to Violet Pty Ltd? [2 marks]
Answer:
| PART 1 | ||||||||||
| on 1st July | 50000 | |||||||||
| Units transferred in | 120000 | |||||||||
| Units accounted for | 170000 | |||||||||
| Units transferred out | 90000 | |||||||||
| As at 31 st july | 80000 | |||||||||
| 170000 | ||||||||||
| Units transferred in | Direct Material | Conversion Cost | ||||||||
| Units transferred out | 90000 | 90000 | 90000 | |||||||
| As at 31 st july | 80000 | 80000 | 80000 | |||||||
| Percentage of completion | 100% | 100% | 40% | |||||||
| Equivalent Units | 80000 | 80000 | 32000 | |||||||
| Equivalent Units | 170000 | 170000 | 122000 | |||||||
| PART 2 | calculation of unit cost | |||||||||
| Units transferred in | Direct Material | Conversion Cost | Total | |||||||
| on 1st July | 80000 | 80000 | 6000 | 166000 | ||||||
| added during july | 490000 | 300000 | 190000 | 980000 | ||||||
| Total | 570000 | 380000 | 196000 | 1146000 | ||||||
| Equivalent Units | 170000 | 170000 | 122000 | 462000 | ||||||
| Unit cost for july | 3.352941176 | 2.235 | 1.607 | 3.842 | ||||||
| (490000/170000) | (38000/170000) | (196000/122000) | (2.235+1.607) | |||||||
| PART 3 | Cost of goods completed and transferred | 3.842*90000 | ||||||||
| 345766.6345 | ||||||||||
| PART 4 | cost of remaining WIP | |||||||||
| Units transferred in | Direct Material | Conversion Cost | Total | |||||||
| As at 31 st july | 80000 | 80000 | 80000 | |||||||
| percentage of completion | 100% | 100% | 40% | |||||||
| Equivalent units | 80000 | 80000 | 32000 | |||||||
| Unit cost for july | 3.352941176 | 2.235 | 1.607 | |||||||
| WIP | 268235.2941 | 178823.5294 | 51409.84 | ` | 230233.4 | |||||
| (178823.5+51409.84) | ||||||||||
| PART 1 | ||||||||||
| Assembly | Finishing | Total | ||||||||
| Manufacturing Overheads | 300000 | 160000 | 460000 | |||||||
| No. of Direct Labours | 45000 | 35000 | 80000 | |||||||
| Predetermined ovehead Recovery rate per hour | $ 6.67 | $ 4.57 | $ 5.75 | |||||||
| Total Direct Labours | ||||||||||
| Assembly | 1800.00 | |||||||||
| Finishing | 1100.00 | |||||||||
| 2900.00 | ||||||||||
| Total Machine hours | ||||||||||
| Assembly | 1200.00 | |||||||||
| Finishing | 700.00 | |||||||||
| 1900.00 | ||||||||||
| Since plantwide ovehead recovery rate is used by the company Total Manufacturing overheads will be divided by total labour hours to determine the overall recovery rate | ||||||||||
| Total Cost of producing Job 888 | ||||||||||
| Direct Material | $ 20,000.00 | |||||||||
| Direct Labour | $ 16,000.00 | |||||||||
| Manufacturing overhead | (5.75*2900) | $ 16,675.00 | ||||||||
| Total cost of job 888 | $ 52,675.00 | |||||||||
| Per unit cost | Total cost of job 888 | 52675 | $ 26.34 | |||||||
| No. of units | 2000 | |||||||||
| However if 2400 units are prepared per unit cost will be | 52675 | $ 21.95 | ||||||||
| 2400 | ||||||||||
| PART 2 | Separate Departmental Overhead Recovery Rate | Assembly | Finishing | |||||||
| Manufacturing Overheads | $ 3,00,000.00 | $ 1,60,000.00 | ||||||||
| No. of Direct Labours | 45000 | |||||||||
| 16000 | ||||||||||
| Predetermined ovehead Recovery rate per hour | $ 6.67 | $ 10.00 | ||||||||
| (300000/45000) | (160000/16000) | |||||||||
| Total Cost of producing Job 888 | ||||||||||
| Direct Material | $ 20,000.00 | |||||||||
| Direct Labour | $ 16,000.00 | |||||||||
| Manufacturing overhead | ||||||||||
| Assembly | (1800*6.67) | $ 12,000.00 | ||||||||
| Finishing | (700*10) | $ 7,000.00 | ||||||||
| Total Cost of producing Job 888 | $ 55,000.00 | |||||||||
| Per unit cost | (55000/2000) | $ 27.50 | ||||||||
| PART 3 | Maintenance | HR | ||||||||
| Assembly | 150 | 100 | ||||||||
| Finishing | 100 | 50 | ||||||||
| Total No. of Hours | 250 | 150 | ||||||||
| Maintenance | HR | |||||||||
| Assembly | 60% | 66.67% | ||||||||
| (150/250) | (100/150) | |||||||||
| Finishing | 40% | 33.33% | ||||||||
| (100/250) | (50/150) | |||||||||
| allocation of support department cost | Maintenance | HR | ||||||||
| Budgeted overhead cost | $ 1,00,000.00 | $ 80,000.00 | ||||||||
| Assembly | $ 60,000.00 | $ 53,333.33 | ||||||||
| (100000*60%) | (80000*66.67%) | |||||||||
| Finishing | $ 40,000.00 | $ 26,666.67 | ||||||||
| (100000*40%) | (80000*33.33%) | |||||||||
| Total Overheads | ||||||||||
| Assembly | Finishing | |||||||||
| Manufacturing Overheads | $ 3,00,000.00 | $ 1,60,000.00 | $ 4,60,000.00 | |||||||
| Maintenance | $ 60,000.00 | $ 40,000.00 | $ 1,00,000.00 | |||||||
| HR | $ 53,333.33 | $ 26,666.67 | $ 80,000.00 | |||||||
| Total | $ 4,13,333.33 | $ 2,26,666.67 | $ 6,40,000.00 | |||||||
| Predetermined overhead recovery rate on the basis of total labour hours | ||||||||||
| Total Direct Labour Hours | Assembly | Finishing | Total | |||||||
| 45000 | 35000 | 80000 | ||||||||
| Total Machine Hours | Assembly | Finishing | Total | |||||||
| 5000 | 16000 | 21000 | ||||||||
| Total Overhead | 640000.00 | $ 8.00 | ||||||||
| Total Direct Labour Hours | 80000.00 | |||||||||
| Total Cost of producing Job 888 | ||||||||||
| Direct Material | $ 20,000.00 | |||||||||
| Direct Labour | $ 16,000.00 | |||||||||
| Manufacturing overhead | (8*2900) | $ 23,200.00 | ||||||||
| Total Cost of producing Job 888 | $ 59,200.00 | |||||||||
| Per unit cost | (59200/2000) | $ 29.60 | ||||||||
| PART 4 | Total Cost of producing Job 888 | |||||||||
| Direct Material | $ 20,000.00 | |||||||||
| Direct Labour | $ 16,000.00 | |||||||||
| Manufacturing overhead | ||||||||||
| Assembly | (9.19*1800) | $ 16,533.33 | ||||||||
| Finishing | (14.17*700) | $ 9,916.67 | ||||||||
| Total Cost of producing Job 888 | $ 62,450.00 | |||||||||
| Per unit cost | (62450/2000) | $ 31.23 | ||||||||
| Assembly overhead per labour hour | 413333.33 | $ 9.19 | ||||||||
| 45000 | ||||||||||
| Finishing overhead per machine hour | 226666.67 | $ 14.17 | ||||||||
| 16000 | ||||||||||
| PART 1 | ||||||||||
| Soft drinks | Fresh produce | Packaged food | ||||||||
| Revenue | 317400 | 840240 | 483960 | 1641600 | ||||||
| Less | Cost of goods sold | 240000 | 600000 | 360000 | 1200000 | |||||
| Store Support Costs | 72000 | 180000 | 108000 | 360000 | ||||||
| (360000*240000/1200000) | (360000*600000/1200000) | (360000*360000/1200000) | ||||||||
| Operating Profit | 5400 | 60240 | 15960 | 81600 | ||||||
| operating profit as a percentage of revenues | 1.70% | 7.17% | 3.30% | 4.97% | ||||||
| PART 2 | ABC METHOD | |||||||||
| Ordering Cost Per Order= | Total Ordering Cost | $ 62,400.00 | $ 100.00 | |||||||
| No. of purchase orders | 624 | |||||||||
| Delivering Cost Per Order= | Total Delivering Cost | $ 1,00,800.00 | $ 80.00 | |||||||
| No. of Deliveries | 1260 | |||||||||
| Cost per shelf stock hour= | Total Shelf Stocking Cost | $ 69,120.00 | $ 20.00 | |||||||
| No. of Shelf Stocking Hours | 3456 | |||||||||
| Support cost per item sold= | Total Customer Support Cost | $ 1,22,880.00 | $ 0.20 | |||||||
| No.of Items Sold | 614400 | |||||||||
| Soft drinks | Fresh produce | Packaged food | Total | |||||||
| Revenue | 317400 | 840240 | 483960 | 1641600 | ||||||
| Less | Cost of goods sold | 240000 | 600000 | 360000 | 1200000 | |||||
| Less | Store Supports Costs | |||||||||
| Cost of bottles returned | 4800 | 4800 | ||||||||
| Ordering Cost | 14400 | 33600 | 14400 | 62400 | ||||||
| (100*144) | (100*336) | (100*144) | ||||||||
| Delivering Cost | 9600 | 70080 | 21120 | 100800 | ||||||
| (80*120) | (80*876) | (80*264) | ||||||||
| Shelf- stocking cost | 4320 | 43200 | 21600 | 69120 | ||||||
| (20*216) | (20*2160) | (20*100800) | ||||||||
| Customer Support Cost | 10080 | 88320 | 24480 | 122880 | ||||||
| (0.2*50400) | (0.20*441600) | (0.20*122400) | ||||||||
| Operating Profit | 34200 | 5040 | 42360 | 81600 | ||||||
| operating profit as a percentage of revenues | 10.78% | 0.60% | 8.75% | 4.97% | ||||||
| PART 3 | As ABC undertakes the overhead allocation on the basis of overheads consumed by each product, it provides the most apporpriate basis of indirect cost allocation. | |||||||||
| This cost allocation helps the firm in idnetifying the true and accurate cost involved in the production of all the products dealt by it. | ||||||||||
| Correct cost determination helps the manangement to set appropriated prices without under rating or over rating the product's value. | ||||||||||
| PART 1 | ||||||||||
| 1 | Direct material price variance. | Actual Quantity x ( Standard Price - Actual Price) | ||||||||
| 210000 kgs | x | ($32-$33.20) | ||||||||
| $ -2,52,000.00 | Unfavourable | |||||||||
| Actual price | total purchase cost | 130200 | 1.61 | per kg | ||||||
| total number of kgs | 210000 | |||||||||
| Standard price | 32 | per kg | ||||||||
| Standard Data | ||||||||||
| 1 unit | 4 Kgs | |||||||||
| Standard qty required for production | 50000 units | (4*50000) | 200000 kgs | |||||||
| Actual Data | ||||||||||
| Actual Quantity Consumed | 210000 kgs | |||||||||
| 2 | Direct material quantity variance | Standard Price * (Standard Quantity - Actual Quantity) | ||||||||
| 32 *(200000-210000) | ||||||||||
| $ -3,20,000.00 | Unfavourable | |||||||||
| 3 | Direct labour rate variance. | Actual Hours Worked x ( Standard Rate - Actual Rate) | ||||||||
| Actual labour rate per hour | total labour cost | $ 3,00,000.00 | $ 20.00 | per hour | ||||||
| total number of hours worked | 15000 | |||||||||
| 15000 *(22-20) | ||||||||||
| $ 30,000.00 | favourable | |||||||||
| 4 | Direct labour efficiency variance | Standard Rate* (Standard Hours - Actual Hours) | ||||||||
| 22* (12500-15000) | ||||||||||
| $ -55,000.00 | unfavourable | |||||||||
| Standard Hours | No. of units * standard hours per unit | |||||||||
| 50000* 0.25 | ||||||||||
| 12500 | ||||||||||
| PART 2 | Journal Entries | |||||||||
| Raw materials inventory | 7968000 | |||||||||
| (240000*33.20) | ||||||||||
| Direct material price variance | 252000 | |||||||||
| Accounts payable | 8220000 | |||||||||
| Work in process inventory | 7648000 | |||||||||
| (7968000-320000) | ||||||||||
| Direct material quantity variance | 320000 | |||||||||
| Raw materials inventory | 7968000 | |||||||||
| 3 | Management by excepition is the managerial system under which only those areas where deviations are significant enough are examined. | |||||||||
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