Question
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)
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