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.

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