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Note: please answer all question correctly as it is very important Question 1: Activity Based Costing (25 marks) The Try Corporation has a machining facility

Note: please answer all question correctly as it is very important

Question 1: Activity Based Costing (25 marks)

The Try Corporation has a machining facility specializing in jobs for the aircraft-components market. Try?s previous simple job-costing system had two direct-cost categories (direct materials and direct manufacturing labor) and a single indirect-cost pool (manufacturing overhead, allocated using direct manufacturing labor-hours). The indirect cost-allocation rate of the simple system for 2016 would have been $115 per direct manufacturing labor-hour.

Recently a team with members from product design, manufacturing, and accounting used an ABC approach to refine its job-costing system. The two direct-cost categories were retained. The team decided to replace the single indirect-cost pool with five indirect-cost pools. The cost pools represent five activity areas at the plant, each with its own supervisor and budget responsibility. Pertinent data are as follows:

Activity Area

Cost-Allocation Base

Cost-Allocation Rate

Materials handling

Parts

$ 0.40

Lathe work

Lathe turns

0.20

Milling

Machine-hours

20.00

Grinding

Parts

0.80

Testing

Units tested

15.00

Information-gathering technology has advanced to the point at which the data necessary for budgeting in these five activity areas are collected automatically.

Two representative jobs processed under the ABC system at the plant in the most recent period had the following characteristics:

Job 410

Job 411

Direct material cost per job

$ 9,700

$59,900

Direct manufacturing labor cost per job

$750

$11,250

Number of direct manufacturing labor-hours per job

25

375

Parts per job

500

2,000

Lathe turns per job

20,000

59,250

Machine-hours per job

150

1,050

Units per job (all units are tested)

10

200

Required:

1. Compute the manufacturing cost per unit for each job under the previous simple job-costing system.

2. Compute the manufacturing cost per unit for each job under the activity-based costing system.

3. Compare the per-unit cost figures for Jobs 410 and 411 computed in requirements 1 and 2. Why do the simple and the activity-based costing systems differ in the manufacturing cost per unit for each job? Why might these differences be important to Try Corporation?

(3 marks + 6 marks + 16 marks)

Question 2: Job costing (50 marks)

S Kumar Ltd manufactures water tanks for different sizes for use by industrial customers. The company uses a job costing system, in which manufacturing overhead is applied on the basis of direct labour dollar. The company?s budget for the current year included the following predictions:

Budgeted total manufacturing overhead $441,000

Budgeted Total direct labour hours 21, 000

Budgeted hourly direct labour rate $20

During June, the firm began two production jobs:

? Job number T81, consisting of 87 water tanks (Standard size).

? Job number C40, consisting of 100 water tanks (mini size).

The events of June are described below:

a) 1,000 square meters of rolled aluminium sheet metal were purchased for $6,000 on account.

b) 400 kilograms of aluminium tubing were purchased on account for $5,500.

c) The following requisitions were filed on 5 June:

? Requisition number 112: 260 square meters of aluminium sheet metal (for job number C40) @ $5.60 per square meter.

? Requisition number 113: 1,100 kilograms of aluminium sheet metal (for job T81) @ $9 per kilogram.

? Requisition number 114: 10 liters of superb glue @ $15 per liter.

All aluminuim used in production is treated as direct material. Superb glue is an indirect material.

d) An analysis of labour time sheets revealed the following labour usage for

June:

? Direct labour: job number C40, 850 hours @ $20 per hour

? Direct labour: job number T81, 950 hours @$20 per hour

? Indirect labour: general factory clean up, $5,500

? Indirect labour: factory supervision salaries $8,500

e) Depreciation of the factory building and equipment during June amounted to $12,000.

f) Rent paid in cash for warehouse space used during June was $1,330.

g) Electricity costs incurred during June amounted to $2,400. The invoices for these costs were received, but only half of the bill was paid in June.

h) June council rates and property taxes on the factory were paid in cash $2,370.

i) The insurance cost covering factory operations for the Month of June was $2,500. The insurance policy has been prepaid.

j) The costs of salaries and on-costs for sales and administrative personnel paid in cash during June amounted to $8,500.

k) Depreciation on administrative office equipment and space amounted to $4,500.

l) Other selling and administrative expenses paid in cash during June amounted to $1,150.

m) Job number C40 was completed during June.

n) 75% of the water tanks in job number C40 were sold on account during June for $750 each.

The 1 June balances in selected accounts are as

Cash

$11,000

Accounts receivable

20,000

Prepaid insurance

7,500

Raw material inventory

150,000

Manufacturing supplies inventory

600

Work in process inventory

89,000

Finished goods inventory

223,000

Accumulated depreciation: Buildings and Equipment

99,000

Accounts payable

14,500

Wages payable

8,500

Requirements:

1. Calculate the company?s predetermined overhead rate for the current year.

(3 marks)

2. Complete the job cost sheets for job number C40 (Round-off unit cost to the nearest cent and where necessary, show ALL relevant workings. The job cost sheet can be downloaded from the AF102 Moodle page.) (12 marks)

3. Prepare journal entries to record the events of June. (Where appropriate, show ALL relevant workings. Ignore narrations.) (9 marks)

4. Calculate the over-applied or under-applied overhead for June. Prepare a journal entry to close this balance in the cost of goods sold. (Show calculation for actual and applied overhead.) (8 marks)

5. Prepare a schedule of cost of goods manufactured for June. (10.5 marks)

6. Prepare a schedule of cost of goods sold for June. (4.5 marks)

7. Prepare an income statement for June. (3 marks)

Question 3: Cost Volume Profit Analysis (25 marks)

Mr. High and Mr. Lowe are the presidents of their respective companies. The two firms manufacture and sell the same product, and due to the competitive nature of the market, they charge the same selling price of $10 per unit.

High and Lowe differ regarding their production and management philosophies. The High Company is almost completely automated, and the labor force is paid on a fixed salary basis. The Lowe Company uses a high degree of manual labor paid on an hourly basis. The sales force at the High Company is paid fixed annual salaries with very small commissions, whereas the sales force at Lowe Company is paid strictly on a commission basis. Mr. Lowe constantly makes fun of Mr. High's operations, saying the High Company is inflexible and unable to adjust costs as sales volume fluctuates.

During 2011, both firms reported net income of $12,000 on sales of $120,000. However, Mr. Lowe was shocked when examining the results for 2012, which showed that High Company's profits were ahead of Lowe Company's, even though Lowe Company had higher sales. The results for the two years are as follows:

High Company

Lowe Company

2011

2012

2011

2012

Sales revenue

$ 120,000

$ 150,000

$ 120,000

$ 180,000

Total costs

108000

117000

108000

153000

Net income

12000

33000

12000

27000

Fixed costs

$ 72,000

$ 72,000

$ 18,000

$ 18,000

Mr. Lowe is trying to figure out why the profit increase of his company was less than that of High Company. His company's accountants carefully examined the costs for each year and found no operating inefficiencies or costs that were out of line. He has hired you as a consultant to help solve the dilemma.

Required:

A. Compute the break-even point in units, break-even point in dollar sales and the margin of safety (in units and percentage) for each company in 2011 and 2012. (6 marks)

B. Present the income statements for 2011 and 2012 for both companies in contribution margin format. (8 marks)

C. Prepare an explanation for Mr. Lowe showing why Lowe Company's profits for 2012 were lower than those reported by High Company despite the fact that Lowe Company's sales were higher. Use the concept of operating leverage for your analysis. (6 marks)

D. Comment on the relative position of the two companies if sales in the future begin to decline.

(5 marks)

image text in transcribed Note: please answer all question correctly as it is very important Question 1: Activity Based Costing (25 marks) The Try Corporation has a machining facility specializing in jobs for the aircraft-components market. Try's previous simple job-costing system had two direct-cost categories (direct materials and direct manufacturing labor) and a single indirect-cost pool (manufacturing overhead, allocated using direct manufacturing labor-hours). The indirect cost-allocation rate of the simple system for 2016 would have been $115 per direct manufacturing labor-hour. Recently a team with members from product design, manufacturing, and accounting used an ABC approach to refine its job-costing system. The two direct-cost categories were retained. The team decided to replace the single indirect-cost pool with five indirect-cost pools. The cost pools represent five activity areas at the plant, each with its own supervisor and budget responsibility. Pertinent data are as follows: Activity Area Materials handling Lathe work Milling Grinding Testing Cost-Allocation Base Parts Lathe turns Machine-hours Parts Units tested Cost-Allocation Rate $ 0.40 0.20 20.00 0.80 15.00 Information-gathering technology has advanced to the point at which the data necessary for budgeting in these five activity areas are collected automatically. Two representative jobs processed under the ABC system at the plant in the most recent period had the following characteristics: Job 410 $ 9,700 Job 411 $59,900 Direct manufacturing labor cost per job $750 $11,250 Number of direct manufacturing labor-hours per job 25 375 Parts per job 500 2,000 Lathe turns per job 20,000 59,250 Machine-hours per job 150 1,050 Units per job (all units are tested) 10 200 Direct material cost per job Required: 1. Compute the manufacturing cost per unit for each job under the previous simple job-costing system. 2. Compute the manufacturing cost per unit for each job under the activity-based costing system. 3. Compare the per-unit cost figures for Jobs 410 and 411 computed in requirements 1 and 2. Why do the simple and the activity-based costing systems differ in the manufacturing cost per unit for each job? Why might these differences be important to Try Corporation? (3 marks + 6 marks + 16 marks) Question 2: Job costing (50 marks) S Kumar Ltd manufactures water tanks for different sizes for use by industrial customers. The company uses a job costing system, in which manufacturing overhead is applied on the basis of direct labour dollar. The company's budget for the current year included the following predictions: Budgeted total manufacturing overhead $441,000 Budgeted Total direct labour hours 21, 000 Budgeted hourly direct labour rate $20 During June, the firm began two production jobs: Job number T81, consisting of 87 water tanks (Standard size). Job number C40, consisting of 100 water tanks (mini size). The events of June are described below: a) 1,000 square meters of rolled aluminium sheet metal were purchased for $6,000 on account. b) 400 kilograms of aluminium tubing were purchased on account for $5,500. c) The following requisitions were filed on 5 June: Requisition number 112: 260 square meters of aluminium sheet metal (for job number C40) @ $5.60 per square meter. Requisition number 113: 1,100 kilograms of aluminium sheet metal (for job T81) @ $9 per kilogram. Requisition number 114: 10 liters of superb glue @ $15 per liter. All aluminuim used in production is treated as direct material. Superb glue is an indirect material. d) An analysis of labour time sheets revealed the following labour usage for June: Direct labour: job number C40, 850 hours @ $20 per hour Direct labour: job number T81, 950 hours @$20 per hour Indirect labour: general factory clean up, $5,500 Indirect labour: factory supervision salaries $8,500 e) Depreciation of the factory building and equipment during June amounted to $12,000. f) Rent paid in cash for warehouse space used during June was $1,330. g) Electricity costs incurred during June amounted to $2,400. The invoices for these costs were received, but only half of the bill was paid in June. h) June council rates and property taxes on the factory were paid in cash $2,370. i) The insurance cost covering factory operations for the Month of June was $2,500. The insurance policy has been prepaid. j) The costs of salaries and on-costs for sales and administrative personnel paid in cash during June amounted to $8,500. k) Depreciation on administrative office equipment and space amounted to $4,500. l) Other selling and administrative expenses paid in cash during June amounted to $1,150. m) Job number C40 was completed during June. n) 75% of the water tanks in job number C40 were sold on account during June for $750 each. The 1 June balances in selected accounts are as $11,000 Cash Accounts receivable 20,000 Prepaid insurance 7,500 Raw material inventory 150,000 Manufacturing supplies 600 inventory Work in process inventory 89,000 Finished goods inventory 223,000 Accumulated depreciation: 99,000 Buildings and Equipment Accounts payable 14,500 Wages payable 8,500 Requirements: 1. Calculate the company's predetermined overhead rate for the current year. (3 marks) 2. Complete the job cost sheets for job number C40 (Round-off unit cost to the nearest cent and where necessary, show ALL relevant workings. The job cost sheet can be downloaded from the AF102 Moodle page.) (12 marks) 3. Prepare journal entries to record the events of June. (Where appropriate, show ALL relevant workings. Ignore narrations.) (9 marks) 4. Calculate the over-applied or under-applied overhead for June. Prepare a journal entry to close this balance in the cost of goods sold. (Show calculation for actual and applied overhead.) (8 marks) 5. Prepare a schedule of cost of goods manufactured for June. (10.5 marks) 6. Prepare a schedule of cost of goods sold for June. (4.5 marks) 7. Prepare an income statement for June. (3 marks) Question 3: Cost Volume Profit Analysis (25 marks) Mr. High and Mr. Lowe are the presidents of their respective companies. The two firms manufacture and sell the same product, and due to the competitive nature of the market, they charge the same selling price of $10 per unit. High and Lowe differ regarding their production and management philosophies. The High Company is almost completely automated, and the labor force is paid on a fixed salary basis. The Lowe Company uses a high degree of manual labor paid on an hourly basis. The sales force at the High Company is paid fixed annual salaries with very small commissions, whereas the sales force at Lowe Company is paid strictly on a commission basis. Mr. Lowe constantly makes fun of Mr. High's operations, saying the High Company is inflexible and unable to adjust costs as sales volume fluctuates. During 2011, both firms reported net income of $12,000 on sales of $120,000. However, Mr. Lowe was shocked when examining the results for 2012, which showed that High Company's profits were ahead of Lowe Company's, even though Lowe Company had higher sales. The results for the two years are as follows: Sales revenue Total costs Net income Fixed costs High Company 2011 2012 $ 120,000 $ 150,000 108000 12000 $ 72,000 117000 33000 $ 72,000 Lowe Company 2011 2012 $ 120,000 $ 180,000 108000 12000 $ 18,000 153000 27000 $ 18,000 Mr. Lowe is trying to figure out why the profit increase of his company was less than that of High Company. His company's accountants carefully examined the costs for each year and found no operating inefficiencies or costs that were out of line. He has hired you as a consultant to help solve the dilemma. Required: A. Compute the break-even point in units, break-even point in dollar sales and the margin of safety (in units and percentage) for each company in 2011 and 2012. (6 marks) B. Present the income statements for 2011 and 2012 for both companies in contribution margin format. (8 marks) C. Prepare an explanation for Mr. Lowe showing why Lowe Company's profits for 2012 were lower than those reported by High Company despite the fact that Lowe Company's sales were higher. Use the concept of operating leverage for your analysis. (6 marks) D. Comment on the relative position of the two companies if sales in the future begin to decline

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