Financial Accounting Sample Assignment

Question 1.

a)

units produced	10500
units sold	9400
units remaining	1100
direct material cost	$           2,300
direct material cost per unit	$           0.219
direct labor cost	$           3,300
direct labor cost per unit	$           0.314
variable manufacturing overhead	$           2,800
variable manufacturing overhead per unit	$           0.267
fixed manufacturing overhead	$           8,250
fixed manufacturing overhead per unit	$           0.786

 

i)

direct material cost per unit	$           0.219
direct labor cost per unit	$           0.314
variable manufacturing overhead per unit	$           0.267
total variable cost per unit	$           0.800
ending inventory using variable costing	$              880

 

ii)

direct material cost per unit	$           0.219
direct labor cost per unit	$           0.314
variable manufacturing overhead per unit	$           0.267
fixed manufacturing overhead	$           0.786
total absorption cost per unit	$           1.586
ending inventory using absorption costing	$     1,744.29

b)

i)

AGEAN  IRON
INCOME STATEMENT( variable costing)
for the year ended
revenue		$          32,900
less: cost of goods sold
opening inventory	$                 -
variable cost of production	$           8,400
closing inventory	$             (880)	$           (7,520)
		$          25,380
variable selling cost		$              (940)
contribution margin		$          24,440
less: fixed costs
manufacturing overhead		$           (8,250)
selling overhead		$        (14,560)
net operating  income		$            1,630

 

ii)

AGEAN  IRON
INCOME STATEMENT( absorption costing)
for the year ended
sales		$          32,900
less: cost of goods sold
opening inventory	$                 -
full production cost	$         16,650
closing inventory	$         (1,744)	$          14,906
under/over absorption		$                   -
gross profit		$          17,994
less: non production cost
variable selling overheads		$              (940)
fixed selling overhead		$        (14,560)
net operating income		$            2,494

 

c) Absorption costing is one kind of managerial accounting method. It is used by companies to capture all the costs that are associated with producing a product. The various kinds of expenses like direct material cost, direct labour cost, fixed overhead, selling overhead all are taken into consideration (Gersil and Kayal, 2016). The difference between the absorption costing method and the marginal costing method is that the absorption costing method allocates the fixed overhead costs for each unit of a product. As absorption costing is known to allocate fixed overhead cost to inventory and cost of goods sold. So absorption costing reflects higher inventory cost than variable costing.

Yes, the result is always the same in every case. There ought to be a fixed cost for every company in the production of a product (Reynolds, Fourie and Erasmus, 2018).

d) Breakeven is calculated with the formula fixed cost divided by contribution per unit. There is no difference in calculating contribution per unit while calculating in absorption or variable costing (Rout et al. 2017). Therefore we can conclude the breakeven doesn’t get affected under both absorption and variable costing.

Question 2

a)

units produced	72000
the time required for each unit ( minutes)	20
direct cost per unit	$4
no of workers working	6
no of hours ( each worker)	4000
total no of hours	24000
Cost per hour	$12
total direct labour cost	$288,000
The total cost of producing Beta
direct material	$288,000
direct labor	$288,000
indirect labor	$15,000
utilities	$3,000
rates and insurance	$2,000
total cost	$596,000
cost per unit	$8.28
Total cost if purchased( Beta A)
purchase cost	$      576,000
delivery cost	$         57,600
part time employee	$         17,000
	$      650,600
cost savings
storage cost for finished product	$         14,400
total cost	$      636,200

For producing the product BetaA the total cost is $596000, whereas the total cost when buying the product is $650600. But as given in the question we should also take into consideration the cost savings that has occurred due to the outsourcing of the product, this leads to storage cost savings which are $14400. Therefore we should also take into consideration the cost savings and should be deducted from the cost. Therefore the cost of buying the product is $636200.

Therefore we can conclude that it is better to make the product than buy one.

b) One of the paramount decisions that a manager needs to make is whether to buy or make a product that is required for the production of the final product. The qualitative factors that need to be considered are the reliability and reputation of the suppliers. The manager should also think about the longer-term outlook.

c) Relevant costs are considered to be those cost that helps to determine the different alternatives. No routine decisions mean accepting or rejecting a special order, make or buy a product component, sell or process further, add or drop a segment or product line, product combination in maximizing scarce resources. Therefore when the above decisions affect and have a better alternative the cost is considered to be relevant costing.

Question 3

a)

cost of new machine	$1,000,000
sell price of the old machine	$60,000
initial outflow	$940,000
annual cash savings	$300,000
total estimated life( years)	5
Rate	12%
	YEAR
	0	1	2	3	4	5
initial outflow	($940,000)
cost savings		$300,000	$300,000	$300,000	$300,000	$300,000
PV	$    (940,000.00)	$ 267,857.14	$535,714.29	$ 803,571.43	$ 1,071,428.57	$ 1,339,285.71
NPV	$ 3,077,857.14

 

b) Payback period = initial investment / cost savings per year = 1000000/300000 = 3.33 years

c)

Advantages of NPV:

1. NPV (net present value) takes into consideration the time value of money.
2. Cash flows are considered while calculating NPV
3. The risk and profitability of the projects are taken in consideration.
4. NPV maximizes the firm’s value

Disadvantages of NPV

1. It is difficult to interpret
2. It does not help to make an accurate decision.
3. Difficulty in the calculation of the appropriate rates
4. If the life of the project or machine is different it doesn’t give correct decision-making criteria.

 

d) As the forecasting is made for 20 years, the value after depreciation will be very less. As NPV calculation takes cash flow into consideration and the discount rate is period apportioned, therefore error in estimation won't affect much

Question 4

average operating assets	500000
net operating income	65000
the minimum required rate of return	10%

 

a)

ROI

13%

 

b)

Residual Income

15000

 

c) ROI (return on investment) is disliked by most of the managers as it can lead to unfavorable decision making for a division or can be very beneficial for a particular division. Residual income is the amount of division operating profit over the division cost of acquiring capital to purchase operating assets. As ROI is a percentage it can lead to vague decision making as it doesn’t give the actual figure.

d) In transfer pricing 2 related parties trade which artificially distort prices. Transfer pricing requires a lot of professionals which is costly for the company. As transfer pricing is a new domain and there is a lack of supply of experienced professionals, it becomes very hard for the company to hire good professionals. It is also time-consuming as the methods of recording are different.

After the consolidation of the entities accounts the allocation of the cost all is eliminated. Thus all the cost that is incurred for the transfer pricing department goes in vain and is considered a waste of resources.

e) Cost allocation has no impact as the cost at which the product will be transferred from one department to another depends on the company as the departments decide the price. It is also kept in mind that the decisions are not taken unanimously and are consulted with all the relevant departments. So the cost allocation has no impact on the transfer price set.

Question 5

a) Customer Profitability Analysis is a method that determines the profitability of a segment or customer by segregating or attributing costs and profits to each separately.

We can explain the process of customer profitability analysis and discuss the steps to improve the performance of a service organization:

In the example, we are taking a 5-star hotel. At first, we need to obtain the financial statement of the company and should study in detail. The controls and processes should be understood from the audit report. Then the revenue and profits should be segregated into different verticals.

Observations: the company’s cost structure is the same year on year and it depicted consistency. The guest transportation cost was very high. 30% of the total revenue was staff-related which is considered to be on the higher range. The desk attendants were responsible for marketing which they were not able to fulfil. The stores and purchases were handled by 1 person. The delay in order is one of the big problems which leads to customer dissatisfaction. The purchase cost was not uniform and the foods were wasted. Feedback was not received in a formal process. The gross margin was very low due to low occupancy

Changes suggested: the guest transportation should be kept in check which will reduce the administration cost and will affect the bottom line positively. Staff should be more efficient and the % of the cost should be reduced. A separate dedicated team should be prepared for marketing. Different persons should be kept in stores and purchase. Formal feedback should be taken and the mistakes should be rectified. The wastage of foods should be kept in check.

b) (i) Advantages of the balanced scorecard are:

1. It provides a visual picture of strategy
2. Works as a base for the discussion
3. Easier data collection
4. Easier strategy reporting
5. Easy to get trained in the concept

Disadvantages of the balanced scorecard are:

1. Balanced scorecard term is misleading
2. Won’t work without a cultural shift
3. Strategy map are hard to maintain
4. Unidirectional bottom-up cause and effect logic

(ii) One potential measure for each scorecard perspective appropriate for CARE house.

Financial: how do the NPO receive more funding to help more needy people out there in society?

Customer: How to increase the accommodation capacity?

Internal perspective: the wastage in space should be mitigated and the volunteers should work more efficiently

Learning and growth perspective: the preparation of the budget should be done properly and the directors should work efficiently for raising funds for the NPO.

(iii) Strategy maps are used in describing how the company can be efficient in performing work. The strategy maps are useful as it gives a visual picture of how a job can be done. This can be helpful in motivating the employees and also helps in explaining the long term target of the company.

Question 6.  Number of employees

Question 7.  A span of activity where both total fixed cost and variable cost per unit of activity remain constant

Question 8. Cost object

Question 9. $5.39

budgeted total overhead	$269,500
machine hours	50000
pre determined indirect cost rate	$5.390

 

Question 10. 3230 units

units for breakeven = fixed cost / weighted average contribution
weighted average contribution	50
fixed cost	$161,500
units for breakeven	3230

 

Question 11. 12402 units

sales price	50
variable cost	25
variable selling cost	2
contribution	23
fixed cost- manufacturing	72000
fixed cost- selling cost	57000
breakeven units	5609
post tax profit	125000
tax (20%)	31250
sales revenue	156250
units required to reach 156250 sales	6793
total no of units	12402

 

Question 12. Rewards are linked to meeting budget targets

Question 13. $121250

	feb
cash sales	50000
credit sales
50% in the month following sale	75000
	125000
discount	3750
anticipated cash receipts	121250

 

Question 14. Variable costing

Question 15. Direct material, direct labour, variable and fixed overhead

Question 16. Primary cost element

Question 17. 2500F

budgeted price	$22
actual price	$21.50
labour hours	5000
labour price variance	2500	F

 

Question 18. Relevant

Question 19.Direct labour

Question 20. Multiple products and opportunity cost

Question 21. $1597

facility rent	area occupied	500
utilities	area occupied	220
computer equipment	no of students	176
training	no of swim teachers	500
life savings	no of classes	201
		1597

 

Question 22. Cost driver

Question 23. Assessment

Question 24. A dollar received today will be worth more than a dollar received in the future

Question 25. NPV equal to Zero

Question 26.None of the options listed

Question 27. $7.5

selling price	10
profit margin	25%
profit	2.5
target cost	7.5

 

Question 28. $400

operating profit	$4,000
required rate of return	12%
average operating assets	$30,000
residual income	$400

 

Question 29. 32%

required rate of return	12%
net profit	400000
residual income	250000
average operating assets	1250000
ROI	32%

 

Question 30. The tracing factor is used to allocate the cost

References

Gersil, A. and Kayal, C., 2016. A Comparative Analysis of Normal Costing Method with Full Costing and Variable Costing in Internal Reporting. International Journal of Management, 7(3).

Reynolds, A., Fourie, H. and Erasmus, L., 2018. A framework for time-driven activity-based costing implementation at small and medium enterprises. The Southern African Journal of Entrepreneurship and Small Business Management, 10(1), pp.1-11.