1. Tutorials week 49 Amsterdam Business School
Accounting P 6011P0148 / PE 6011P0150
Tutorials week 49 Amsterdam Business School

2. The aim of today’s tutorial
Insight into managerial accounting
Introduction into cost types (by cost behavior, by cost assignment)
Product costing
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3. Contents
CH12: E12.10, P12.17, P12.28
CH13: P13.23, C13.30
CH14: E 14.15, P14.21, P14.23
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4. E12.10 (page 452) Understanding how variable and fix costs work
Understanding the importance of planning costs
Help: page 427
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5. 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
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6. 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
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7. 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.
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8. 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
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9. Revenues (1,500 units) 840,000 Variable expenses 462,000
Contribution margin
378,000
Fixed expenses
290,000
Operating income
88,000
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10. 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
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12. 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.
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13. P13.23 (page 499) Product costing and cost assignment
Variable vs. absorption costing
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14. Variable manufacturing overhead 11,250
Raw materials
62,100
Direct labor
16,500
Variable manufacturing overhead
11,250
Fixed manufacturing overhead
18,000
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15. 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
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16. The fixed cost per rod is $7.19 - $5.99 = $1.20. b.
The fixed cost per rod is $ $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
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17. C13.30 (page 503) Costing inventories Costs assignment
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18. 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.
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22. 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.
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24. Analysis of the Work in Process Inventory account: g.
Analysis of the Work in Process Inventory account:
Beginning balance ………………………………………………………
$ ,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
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25. 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 , BI ,000
Raw Material Used 252, ? ,179, ?
Direct Labor 480, Cost of Goods Manufactured CoGS
Variable OH Applied 180,000
Fixed OH Applied 286,000
EI ,000
EI 51,500
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