HI5017 Questions

Question 1 Absorption costing

Absorption overhead rate

Predetermined overhead rate (Aurora, 2013) = Budgeted overhead / budgeted hours

= 1000000 / 25000 = $ 40 per hour

Overhead applied in the quarter

Hours applied during the quarter = (900+1600+2000) = 4500

Rate per hour = $ 40

Total overhead applied = 4500 *40 = 180000

Cost of the job completed during the period

Details

L1

L2

Opening WIP

68000

30000

Direct material

15000

0

Direct labor

30000

33000

Machine cost

36000

48000

Total cost

149000

111000

Cost of Job WIP

Details

L3

Direct Material

45000

Direct labor

65000

Machine Overhead

80000

Total Cost

190000

Question 2 Equivalent units using FIFO and WACC

Equated value of direct material in FIFO

(Utami, Sabarkhah, Petrina, and Huda., 2018)

Details

Amount

Units started and completed during the month

6000

Closing WIP (5000*100%)

5000

Total equivalent units of direct material

11000

Equated value of conversion according to FIFO

Details

Amount

Opening WIP (8000*45%)

3600

Units completed in this month

6000

Closing WIP (5000 *35%)

1750

Equated units of conversion

11350

Direct material equated units using WACC

Details

Amount

Completed units during the month (8000+6000)

14000

Units WIP at end

5000

Equated units of Direct material

19000

Equated value of conversion using WACC

Details

Amount

Units completed in the month

14000

Units WIP (5000*35%)

1750

Total equated value

15750

Question 3 Activity-based costing

Per unit cost according to traditional costing

Details

Spirit

Companion

Direct material

180

180

Direct labor (3.2*32)

112

112

Manufacturing OH (285000 / 25000)

11.4

11.4

Total Cost

303.4

303.4

Cost per unit using ABC

Details

Spirit

Companion

Direct material

180

180

Direct labor

112

112

Machine set up cost

1.05

3.8

[(200*105)/20000]

[(200*95)/5000]

Sewing cost

4.23

10.08

[(23500*3.6)/20000]

[(14000*3.6)/5000]

Inspection cost

0.625

2.5

[(500*25)/20000]

[(500*25)/5000]

Remaining cost (285000-200000)/25000

3.4

3.4

Total cost

301.31

311.78

Working Note-

Activity cost pools

Estimated OH

Cost driver

Activity-based OH

Machine Set – up

40000

200

200

Sewing

135000

37500

3.6

Inspection

25000

1000

25

Question 4 Transfer price costing

Transfer pricing using general transfer pricing rule

According to the general rule of transfer pricing if any product is transferred from one division to another division then-

  • If spare capacity available then the transfer pricing will be the marginal cost of the product.
  • If spare capacity is not available then the transfer price will be the marginal cost + opportunity cost.

In the current case, the company has spare capacity therefore the transfer price will be the marginal cost of $ 5000 (Picciotto, 2018).

Special offer recommendation

The total cost of product for special offer = $ 530 + $ 260 = $ 790

In the current case, the special offer of $ 740 cannot be accepted and therefore the project cannot be accepted.

Best decision for wattle division

In the current case, the variable cost of the product for both divisions is $ 760 ($ 500 + $ 260) that is more than the special offer of $ 740. Therefore, accepting the special offer is not correct and the special offer should be rejected.

Question 5 CVP Analysis

Contribution margin per unit

Details

Calculations

Amount

Sales price per unit

(3300000/22000)

150

Less: Material cost

(726000/22000)

33

Less: Direct labor cost

(374000/22000)

17

Variable production Overhead

 

9

Variable selling OH

 

11

Contribution per unit

 

80

Break-even points in units

Total production Overhead

798000

Less; Variable production Overhead

198000

Fixed production OH (A)

600000

Total selling overhead

1042000

Less: Variable selling OH

242000

Fixed selling overhead

800000

Total fixed cost

1400000

Contribution per unit

80

BEP in Units

17500

The usefulness of breakeven point –

Break-even point provides a point at which the profit and loss of the company are minimum and it does not affect the company very much.  It provides the minimum units required by the company to be sold to recover the fixed cost of the production. The breakeven points provide minimum sales targets to the sales team of the organization. The break-even point is used for the purpose of calculation of the break-even points. Setting the standards of sales and budget for the sale price (Sintha, L., 2020).

The margin of safety in the case

Units sold = 22000

Break-even points = 17500

Margin of safety in units = 22000 -17500 = 4500

Margin of safety (%) = 4500/22000 *100 = 25.70 %

Cost volume profit statement for alternate option

Details

Amount

Sales ( 150*28600)

4290000

Less: Material cost (33*28600)

943800

Less: Direct labor cost (17*28600)

486200

Less: Variable production OH (9*28600)

257400

Less: Variable selling OH (11*28600)

314600

Less: Fixed production OH

600000

Less: Selling OH

800000

Less: Advertisement expense

200000

Profit on sales

688000

The advertisement cost of the company increases the sales by 30 %, the profit increased from the previous level, therefore, the alternate project should be acceptable and the advertisement expense provides more profits to the company.

Target sales

Total fixed cost = $ 1400000 + $ 200000 = $ 1600000

Required profit = $ 750000

Contribution per unit = $ 80 per unit

Target sales =     (Fixed cost + profit)/ contribution per unit            

= (1600000+750000)/80 = 29375 units and 29375*150 = $ 4406250.

Question 6: CVP analysis and special-order decisions

Irrelevant Information

The apportioned cost of the product by rose should not be included in the decision making because while assessing the special decisions the sunk cost is not allowed and only the incremental cost is taken into consideration (Beykaei, Abekah, and Rahim, 2020).

Therefore, the absorption cost of $ 3600 is to be ignored.

Cost of special offer

Details

Amount

Direct material

12.20

Direct labor

4.50

Manufacturing overhead

20.00

Additional set up cost (7400/11000)

0.67

Special equipment cost

0.44

Cost of production

37.81

The cost of production is more than the price of the special offer; therefore, the project should not be accepted and rejected by the company.

Production cost at 80 % capacity

Details

Amount

Direct material

12.20

Direct labor

4.50

Manufacturing overhead

7.5

Additional set up cost (7400/11000)

0.67

Special equipment cost

0.44

Cost of production

25.31

The production capacity is at 80 % therefore fixed cost of $ 12.5 (1500000/60000) *0.50 is ignored for decision making. Therefore, the company should accept the production at the level of 80 % capacity.

References

Aurora, B.B.C., 2013. The Cost of Production Under Direct Costing and Absorption Costing–A Comparative Approach. Annals of the Constantin Brâncuşi” University of TârguJiu, Economy Series2, pp.23-129.

Bekasi, S., Rebekah, J. and Rahim, A., 2020. Integration of Uncertainty in Profit Planning: A Current Application. Applied Mathematics and Computation4(4), pp.195-205.

Picciotto, S., 2018. Problems of transfer pricing and possibilities for simplification.

Sintha, L., 2020. Importance of Break-Even Analysis for the Micro, Small and Medium Enterprises. International Journal of Research-Granthaalayah8(6).

Utami, M.C., Sabarkhah, D.R., Fetrina, E. and Huda, M.Q., 2018, August. The use of FIFO method for analyzing and designing the inventory information system. In 2018 6th International Conference on Cyber and IT Service Management (CITSM) (pp. 1-4). IEEE.

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