Case Study #1 ACCT2165 Forwell Concrete Inc. (FCI) processes and distributes various types of cement products. The company buys quarried local rock, limestone, and clay from around the area and mixes, blends, and packages the processed cement for resale. FCI offers a large variety of cement types that it sells in one kilogram bags to local retailers for small do-it-yourself jobs. The major cost of the cement is raw materials. However, the company's predominantly automated mixing, blending. and packaging processes require a substantial amount of manufacturing overhead. The company uses relatively little direct labour. There are relatively high direct materials prices for the various products. Some of FCI's cement mixtures are very popular and sell in large volumes, while a few of the recently introduced cement mixtures sell in very low volumes, FCI prices its cements at manufacturing cost plus a 25% markup, with some adjustments made to keep the company's prices competitive. For the coming year, FCI's budget includes estimated manufacturing overhead cost of $4,400,000. FCI assigns manufacturing overhead to products on the basis of direct labour- hours. The expected direct labour cost totals $1,200,000, which represents 100,000 hours of direct labour time. Based on the sales budget and expected raw materials costs, the company will purchase and use $10,000,000 of raw materials (mostly quarried rock, limestone, and clay during the year. The fixed manufacturing overhead for the plant was budgeted at $$3,080,000 based on 1,100,000 units produced The expected costs for direct materials and direct labour for one kilogram bags for two of the company's cement products appear below: Normal Portland High Sulphate Resistance The expected costs for direct materials and direct labour for one kilogram bags for two of the company's cement products appear below: Normal Portland High Sulphate Resistance $900 Direct materials Direct labour (002 hours per bog)........... $580 $0.24 $24 You have just been hired as FCI's Controller. The previous controller believed that the company's traditional costing system may be providing misleading cost information. To determine whether this is the case, your staff has prepared an analysis of the year's expected manufacturing overhead costs, as shown in the following table: Activity Cost Pool Purchasing ................. Materials handing .......... Quality control y control............... Meiding...................... Blending. Packaging Total manufacturing over head cost Expected Activity Activity Measure for the Year Purchase orders 4000 orders Number of setups 2000 setups Number of batches 1000 batches Miting hours 90,000 mbing hours Blending hours 64,000 blending hours Packaging hours 48.000 packaging hours Expected Cost for the Year $ U20000 386,000 130,000 2.090.000 384000 20,000 $4,400.000 Data regarding the expected production of Normal Portland and High Sulphate Resistance cement mixes are presented below: setups.... Expected sales.. Batch see......... ... Setups. Purchase order size. Miting time per 100 kilograms .............. Blending time per 100 kilograms............ Packaging time per 100 kilograms........... Normal Portland 60.000 kilograms 1.000 kilograms 4 per batch 20.000 kilograms 3ming hours 1 blending hour 06 packaging hours High Sulphate Resistance 8000 kilograms 500 kilograms 4 per batch 500 kiograms 3 mixing hours 1 blending hour 06 packaging hours Your accounting staff has also prepared the income Statement for the entire operation for the 6 months ended July 31, 2018: Sales (480,000 units) 12,300,000 Cost of goods sold 9,024,000 Gross margin $3,276,000 Selling and administrative expenses 2.200.000 Operating income $1,076.000 Additional information follows: Selling and administrative expenses include $2.50 of variable cost per unit sold. There was no beginning inventory, and 500,000 units were produced. Variable manufacturing costs were $16 per unit. Actual fixed costs were equal to budgeted fixed costs. Also, fixed costs include depreciation of $300,000. Average operating assets on the Balance Sheet were $7,500,000 Mr. Forwell ideally would like a rate of return of 15% Taking on the role of the new Controller of Forwell Concrete Inc. (FCI) The president of the company Mr. T Forwell, is concerned about a couple of things and has asked you do an analysis and prepare a report for the following issues he is concerned about: a. Determine the predetermined overhead rate used presently. b. Using the present costing system, calculate the total unit cost for both products. C. Using the ABC Costing, calculate the overhead rates by activity and then the Unit product costing using ABC. d. Discuss and analyze the data and prepare your report including the following analysis: 1. is the Manufacturing Overhead application used presently the best way to ensure we cover our costs, and still be competitive? 2. Analyze the system they suggested on overhead rates in the ABC calculation, le batch numbers, cost of producing a purchase order, etc. 3. Discuss how costing would be different if they used ABC Costing and how it would affect their selling prices. 4. Discuss the implications of costing on high and low volume products. 5. Discuss the importance of using a Contribution Margin Statement Case Study #1 ACCT2165 Forwell Concrete Inc. (FCI) processes and distributes various types of cement products. The company buys quarried local rock, limestone, and clay from around the area and mixes, blends, and packages the processed cement for resale. FCI offers a large variety of cement types that it sells in one kilogram bags to local retailers for small do-it-yourself jobs. The major cost of the cement is raw materials. However, the company's predominantly automated mixing, blending. and packaging processes require a substantial amount of manufacturing overhead. The company uses relatively little direct labour. There are relatively high direct materials prices for the various products. Some of FCI's cement mixtures are very popular and sell in large volumes, while a few of the recently introduced cement mixtures sell in very low volumes, FCI prices its cements at manufacturing cost plus a 25% markup, with some adjustments made to keep the company's prices competitive. For the coming year, FCI's budget includes estimated manufacturing overhead cost of $4,400,000. FCI assigns manufacturing overhead to products on the basis of direct labour- hours. The expected direct labour cost totals $1,200,000, which represents 100,000 hours of direct labour time. Based on the sales budget and expected raw materials costs, the company will purchase and use $10,000,000 of raw materials (mostly quarried rock, limestone, and clay during the year. The fixed manufacturing overhead for the plant was budgeted at $$3,080,000 based on 1,100,000 units produced The expected costs for direct materials and direct labour for one kilogram bags for two of the company's cement products appear below: Normal Portland High Sulphate Resistance The expected costs for direct materials and direct labour for one kilogram bags for two of the company's cement products appear below: Normal Portland High Sulphate Resistance $900 Direct materials Direct labour (002 hours per bog)........... $580 $0.24 $24 You have just been hired as FCI's Controller. The previous controller believed that the company's traditional costing system may be providing misleading cost information. To determine whether this is the case, your staff has prepared an analysis of the year's expected manufacturing overhead costs, as shown in the following table: Activity Cost Pool Purchasing ................. Materials handing .......... Quality control y control............... Meiding...................... Blending. Packaging Total manufacturing over head cost Expected Activity Activity Measure for the Year Purchase orders 4000 orders Number of setups 2000 setups Number of batches 1000 batches Miting hours 90,000 mbing hours Blending hours 64,000 blending hours Packaging hours 48.000 packaging hours Expected Cost for the Year $ U20000 386,000 130,000 2.090.000 384000 20,000 $4,400.000 Data regarding the expected production of Normal Portland and High Sulphate Resistance cement mixes are presented below: setups.... Expected sales.. Batch see......... ... Setups. Purchase order size. Miting time per 100 kilograms .............. Blending time per 100 kilograms............ Packaging time per 100 kilograms........... Normal Portland 60.000 kilograms 1.000 kilograms 4 per batch 20.000 kilograms 3ming hours 1 blending hour 06 packaging hours High Sulphate Resistance 8000 kilograms 500 kilograms 4 per batch 500 kiograms 3 mixing hours 1 blending hour 06 packaging hours Your accounting staff has also prepared the income Statement for the entire operation for the 6 months ended July 31, 2018: Sales (480,000 units) 12,300,000 Cost of goods sold 9,024,000 Gross margin $3,276,000 Selling and administrative expenses 2.200.000 Operating income $1,076.000 Additional information follows: Selling and administrative expenses include $2.50 of variable cost per unit sold. There was no beginning inventory, and 500,000 units were produced. Variable manufacturing costs were $16 per unit. Actual fixed costs were equal to budgeted fixed costs. Also, fixed costs include depreciation of $300,000. Average operating assets on the Balance Sheet were $7,500,000 Mr. Forwell ideally would like a rate of return of 15% Taking on the role of the new Controller of Forwell Concrete Inc. (FCI) The president of the company Mr. T Forwell, is concerned about a couple of things and has asked you do an analysis and prepare a report for the following issues he is concerned about: a. Determine the predetermined overhead rate used presently. b. Using the present costing system, calculate the total unit cost for both products. C. Using the ABC Costing, calculate the overhead rates by activity and then the Unit product costing using ABC. d. Discuss and analyze the data and prepare your report including the following analysis: 1. is the Manufacturing Overhead application used presently the best way to ensure we cover our costs, and still be competitive? 2. Analyze the system they suggested on overhead rates in the ABC calculation, le batch numbers, cost of producing a purchase order, etc. 3. Discuss how costing would be different if they used ABC Costing and how it would affect their selling prices. 4. Discuss the implications of costing on high and low volume products. 5. Discuss the importance of using a Contribution Margin Statement