Tutorials week 49 Amsterdam Business School Accounting 2016-2017 P 6011P0148 / PE 6011P0150 Tutorials week 49 Amsterdam Business School

The aim of today’s tutorial Insight into managerial accounting Introduction into cost types (by cost behavior, by cost assignment) Product costing Accounting Week 48

Contents CH12: E12.10, P12.17, P12.28 CH13: P13.23, C13.30 CH14: E 14.15, P14.21, P14.23 Accounting week 49

E12.10 (page 452) Understanding how variable and fix costs work Understanding the importance of planning costs Help: page 427 Accounting Week 48

Factory depreciation expense 40,500 Raw materials 41,600 Factory depreciation expense 40,500 Direct labor 99,200 Production supervisor’s salary 6,100 Computer rental expense 4,200 Maintenance supply used 800 Accounting Week 48

Raw materials ($41,600 / 8,000 = $5.20 per unit)…… Variable $ 41,600   a. Cost Element Probable Cost Behavior Pattern August 8,000 units (Actual) September 9,600 units (Estimated) Raw materials ($41,600 / 8,000 = $5.20 per unit)…… Variable $ 41,600 $ 49,920 Factory depreciation expense …………… Fixed 40,500 Direct labor ($99,200 /8,000 = $12.40 per unit) ….. 99,200 119,040 Production supervisor’s salary…………… 6,100 Computer rental expense………………… 4,200 Maintenance supplies used ($800 / 8,000 = $0.10) 800 960 Total cost ($50,800 + $17.70 per unit) …………… $192,400 $220,720 Accounting week 49

Total cost = $50,800 fixed cost + $17.70 per unit variable cost. Average total cost per unit produced in August = $192,400 / 8,000 = $24.05 per unit. It would not be meaningful to use this average total cost figure to predict the cost in subsequent months; that would involve unitizing the fixed expenses—and they do not behave on a per unit basis. Average total cost per unit calculations are only valid for the number of units used in the calculation. An average total cost for any other number of units produced would be different because the fixed expenses per unit would decrease for each additional unit produced. Using the average total cost of $24.05 to estimate the cost of producing 9,600 units in September would give an estimate of $230,880, which is significantly higher than the $220,720 shown in part a above using a cost formula: Total cost = $50,800 fixed cost + $17.70 per unit variable cost. Accounting week 49

P12.28 (page 459-60) Choice between two strategies Break-even analysis Calculating break even in terms of produced quantity Calculating break-even in terms of revenue Accounting Week 48

Revenues (1,500 units) 840,000 Variable expenses 462,000 Contribution margin 378,000 Fixed expenses 290,000 Operating income 88,000 Accounting Week 48

Contribution margin ratio = $378,000 / $840,000 = 45% P12.28   a. Contribution margin ratio = $378,000 / $840,000 = 45% Break-even revenues = ($290,000 fixed expenses / 45% CM ratio) = $644,444 (rounded) b. If the new machine is leased: Sales volume = 1,500 units * 120% = 1,800 units Selling price per unit = $840,000 / 1,500 units = $560 per unit Variable expenses per unit = (($462,000 / 1,500 units) - $28) = $308 - $28 = $280 per unit Contribution margin per unit = $560 - $280 = $280 per unit Contribution margin ratio = $280 / $560 = 50% Fixed expenses = $290,000 + $30,000 = $320,000 Break-even revenues = ($320,000 fixed expenses / 50% CM ratio) = $640,000 Accounting week 49

Accounting week 49

Yes, the new machine should be leased. The break-even point in sales dollars remains nearly the same under both alternatives because the increase in fixed costs is offset by a decrease in variable costs, which results in an increase in the contribution margin ratio. Yet, operating income is expected to improve dramatically due to the increases in sales volume and operating leverage. The firm is already operating at a volume well beyond the break-even point, and sales are expected to increase, so there is little risk that the additional fixed costs cannot be covered. Accounting week 49

P13.23 (page 499) Product costing and cost assignment Variable vs. absorption costing Accounting Week 48

Variable manufacturing overhead 11,250 Raw materials 62,100 Direct labor 16,500 Variable manufacturing overhead 11,250 Fixed manufacturing overhead 18,000 Accounting Week 48

Variable manufacturing costs: Raw materials ……………………………………………………………. P13.23.   a. Variable manufacturing costs: Raw materials ……………………………………………………………. $ 62,100 Direct labor ………………………………………………………………. 16,500 Variable manufacturing overhead………………………………………… 11,250 Total variable costs ……………………………………………………. $ 89,850 Fixed manufacturing overhead…………………………………………… 18,000 Total manufacturing costs……………………………………………… $107,850 Variable cost per rod = $89,850 / 15,000 = $5.99 each Absorption cost per rod = $107,850 / 15,000 = $7.19 each Accounting week 49

The fixed cost per rod is $7.19 - $5.99 = $1.20. b. The fixed cost per rod is $7.19 - $5.99 = $1.20. This can also be computed as: $18,000 / 15,000 = $1.20. The total fixed cost associated with the 300 fishing rods in inventory is: 300 * $1.20 = $360.   This amount would be included in ending inventory under absorption costing, but would be reported as an operating expense under variable costing. Thus, under variable costing, operating income would be $360 less than under absorption costing. c. Total cost = $18,000 + $5.99 per fishing rod produced.   The cost of making 200 more units = 200 * $5.99 = $1,198 Accounting week 49

C13.30 (page 503) Costing inventories Costs assignment Accounting Week 48

Predetermined fixed manufacturing overhead application rate   a. Predetermined fixed manufacturing overhead application rate = $312,000 / 96,000 machine hours = $3.25 per machine hour The predetermined overhead rate will be used to apply fixed manufacturing overhead to each unit produced during the year at the rate of $3.25 for each machine hour incurred. Accounting Week 48

Accounting Week 48

Accounting Week 48

Accounting Week 48

Direct labor hours worked during the year = ($480,000 direct labor costs incurred / $16.00 per hour direct labor rate) = 30,000 direct labor hours Variable manufacturing overhead applied to work in process = (30,000 direct labor hours * $6 per hour) = $180,000   Yes, the applied amount of variable overhead for the year could differ from the actual amount incurred for several reasons. The cost category of variable overhead is comprised of many individual cost items such as indirect materials, some indirect labor, electricity, shop supplies, etc. The variable overhead rate of $6.00 per direct labor hour was based on an expectation of using a certain amount of each variable overhead item per direct labor hour and paying a certain amount to acquire each variable overhead item. It is possible that more or less of any variable overhead item could be used during the year compared to the quantity planned and it is also possible that Custom Granite could have paid more or less to acquire any particular variable overhead item. It is also likely that the items comprising variable overhead are not as directly associated with the use of direct labor as the overhead rate implies. Accounting Week 48

Accounting Week 48

Analysis of the Work in Process Inventory account: g. Analysis of the Work in Process Inventory account:   Beginning balance ……………………………………………………… $ 33,000 Add: Raw materials used ………………………..……………………… 252,000 Direct labor ……………………………..………………………… 480,000 Fixed manufacturing overhead applied….………………………… 286,000 Variable manufacturing overhead applied………………………… 180,000 Total manufacturing costs ………………….…………………………… 1,231,000 Less: Cost of goods manufactured ……………………………………… ( ? ) Ending balance ………………………..………………………………… $ 51,500   Solving for the missing amount, cost of goods manufactured = $1,179,500 Accounting week 49

h. Analysis of the Finished Goods Inventory account:   Beginning balance $ 104,000 Add: Cost of goods manufactured 1,179,500 Less: Cost of goods sold ( ? ) Ending balance $ 122,000 Solving for the missing amount, cost of goods sold = $1,161,500 The cost of goods manufactured and not sold is represented by the ending balance of the finished goods inventory = $122,000 "T" accounts for requirements (g) and (h): Work in Process Inventory Finished Goods Inventory BI 33,000 BI 104,000 Raw Material Used 252,000 ? 1,179,500 ? Direct Labor 480,000 Cost of Goods Manufactured CoGS Variable OH Applied 180,000 Fixed OH Applied 286,000 EI 122,000 EI 51,500 Accounting week 49

Accounting week 49