Process costing - transfer from previous process
There are usually several processes for producing a product.
Four most types of manufacture, there are usually many cost elements.
1. Opening WIP (上一時期的在製品, 仍留在現部門, 沒有 transferred out)
2. Transfer-in (前工序的製成品, 從上一工序部門送來現部門, 約當 100%完成)
3. Materials added in this period
4. Concersion cost (= Labour cost +
Overhead) added in this period
5. Closing WIP (現期的在製品, 仍留在現部門, 尚待完成, 未能 transferred out)
6. Transfer-out (現工序的製成品, 從現部門送往下一工序部門, 約當 100%完成)
Normal losses and abnormal losses
1. Normal losses (正常損耗, 又稱為 uncontrollable losses)
They are part of the production process and cannot be eliminated.
They are not transferred from the process account, and are treated as part of the production costs.
Direct material
Conversion cost
Process a/c
Unit
$
10
900
Transfer out
/
200
Normal loss
Unit
$
8 1100
2
0
2. Abnormal losses (非正常損耗, 又稱為 controllable losses)
They are losses that can be avoid if there are efficient operating conditions.
They are transferred from out of the process account to an abnormal loss account.
They are then treated as period cost and to be shown in the profit and loss account.
Direct material
Conversion cost
Process a/c
Process a/c
Unit
$
10
900
Transfer out
/
200
Abnormal loss
Unit
8
2
$
950
150
Abnormal loss a/c
150
Profit and loss
Work example 1
For making fruit cake, it is stated that 6 kg flour and 6 kg fruit can be used to produce
9 kg fruit cake approximately.
If the cost of the 12 kg of ingredients (組成材料) are $60, then the cost of 9 kg of good
production is also $60 (plus any cost of processing); that is the cost of the normal loss
charged to good production.
The ledger account would be as follows:
Process accoutn
Material
kg
$
12
60
kg
$
Normal loss
3
0
Finished goods
9
60
60
60
material cost per unit of goods = $60 / 9 kg = $0.67 per unit
Work example 2
For the above example, assume now that the actual output is just only 6 kg.
This would be accounted for as follows:
Process a/c
Material
kg
$
12
60
kg
$
Normal loss
3
0
Balance c/d
9
60
60
Balance b/d
9
60
60
Abnormal loss
3
20
Finished goods
6
40
60
60
Abnormal loss a/c
Process a/c
kg
$
3
20
Profit and loss
kg
$
3
20
Work example 3
In case the situation may require the calculation of normal loss (eg, 5%) of output rather
than input.
The calculation is changed as follows:
$
$
Opening WIP
2,000
Input
40,000
Closing WIP
(40,000)
Output
38,000
(1) For 5% on input, the normal loss = 5% x $40,000 = $2,900
(2) For 5% on output, the normal loss = 5% x $38,000 = $1,900
Activity-based costing (ABC)
1. A producer always has to arrive at a cost per unit, and uses it
(a) to set an appropriate selling price
(b) to find the value of closing stock for a good or a service,
2. To find the unit cost, all the costs (both direct and indirect) are attributed to goods or services in
an appropriate way.
3. An important aim is to allocate indirect manufacturing overheads to the products,
So, the production cost of any article includes (a) direct materials, (2) direct labour, (3) other
direct expenses, and (4) a share of factory indirect expenses.
4. There are 2 traditional approaches:
<i> Absorption costing (also called full costing 分攤成本法)
Under this costing, all indirect costs (variable and fixed) are allocated to products.
<ii> Marginal costing (also called variable costing 邊際成本法).
Under this costing, only variable indirect cost are allocated to products.
When overhead is absorbed, a single measure of volume is used for each production cost centre,
eg, machine hours, direct labour hours, direct material costs, direct labour cost
(only a single allocation base is used).
However, these bases are often unjustifiable in some products.
It often under-allocates overheads to lower-volume products, and over-allocates overheads to
higher-volume products. Sometimes, low-volume products may consume very high overhead,
eg, in the case of railway service; eg, in a highly automated production process, most overhead s
are not related to direct labour.
5. Under activity-based costing (ABC 作業成本法), cost drivers are used as the basis for
overhead absorption.
Cost drivers (成本動因) are activities that generate cost.
They are the factors that caused
overhead to be incurred.
Costs are attributed to cost units on the basis of benefit received from indirect activities,
eg. ordering, setting up, assuring quality.
Under ABC, a cost pool is created for each activity area, ie, several drivers are
used. (A cost pool is a collection of individual costs.)
In order to attribute costs in a cost pool to an item, the cost pool is divided by the appropriate
quantity of the related cost driver. (Even non-product cost is included.)
Case study 1
Dell Computer Ltd’s old accounting system traced direct materials and direct labour to individual
product line, but did not do a good job matching indirect costs with the specific products. They
needed a more finely turned cost system. They identified the 10 most important indirect activities
from all elements of the value chain – eg, purchases of materials, assembly labour, and warranty
service. Then for each activity, they developed a separate indirect cost allocation rate.
The goal was to assign the cost of each activity to the product lines that caused that activity cause.
For example
Activity
Cost driver
Materials purchasing
Number of purchase order
Materials handling
Number of parts
Production scheduling
Number of batches
Quality inspection
Number of inspections
Photocopying
Number of pages copied
Warranty services
Number of service calls
Shipping
Number of pounds
Case study 2
JCC Chemical Manufacturing Company produces hundreds of different chemicals.
Last updated
in 1990, the company’s cost system uses a single indirect cost pool and allocates manufacturing
overhead at 200% of direct labour cost.
The following is the information about two chemicals ABC and DEF:
ABC
DEF
7,000 lb
5 lb
Direct materials cost per pound
$ 1
$ 20
Direct labour cost per pound
$ 1
$ 10
Sale price per pound
$ 10
$ 70
Number of pounds per year
ABC
Sales price per pound
(in $)
DEF
(in $)
10.00
70.00
Less: Manufacturing cost per pound:
Direct materials
5.00
20.00
Direct labour
1.00
10.00
2.00
20.00
Manufacturing overhead
(at 200% of direct labour cost)
Total manufacturing cost per pound
8.00
50.00
Gross profit per pound
2.00
20.00
The company wanted to developing an ABC system. Its followed 7 steps.
Step 1 – Identify the activities (確定活動的項目)
Step 2 – Estimate the total indirect costs of each activity (估算每項活動的間接成本)
Step 3 – Identify the allocation base for each activity (確定每項活動的分攤準則)
Step 4 – Estimate the total quantity of each allocation base (估算分攤準則的數量)
Step 5 – Compute the allocation rate of each activity (計算每項活動的分攤比率)
Step 6 – Obtain the actual quantity of each allocation base used by each product
(確定每種產品的分攤準則數量)
Step 7 – Allocate the indirect costs to each product (將間接成本分攤到每種產品去)
The following information is given:
Step 1
Step 2
Estimated
Activity
Step 3
Step 4
Step 5
Step 6
Step 7
Estimated
Cost
Actual
Allocated
quantity
allocation
quantity
cost
base
of base
rate
ABC
DEF
ABC
DEF
-----------
----------
----------
---
---
-------
----
Allocation
costs
--------
---------
Mixing
Processing
$600,000
batches
4,000
$150
60
1
$9,000
$150
$1000,000
M hours
50,000
$60
30.5
2
$1,830
$120
$600,000
samples
3,000
$200
14
1
$2,800
$200
Testing
Schedule A – Manufacturing overhead per pound
ABC
Mixing
$
DEF
9,000
$ 150
Processing
1,830
120
Testing
2,800
200
$ 13,630
$ 470
7,000
$ 1,95
5
$ 94
Total manufacturing overhead
Divide by number of pounds
Overhead per pound
Schedule B – Gross profit per pound
ABC (in $)
DEF (in $)
10.00
70.00
Sales price per pound
Less: Manufacturing cost per pound:
Direct materials
5.00
20.00
Direct labour
1.00
10.00
Manufacturing overhead
1.95
94.00
Total manufacturing cost per pound
7.95
124.00
Gross profit per pound
2.05
(54.00)
Exercise 1 (Activity-based Costing)
1. JCC has a Seat Manufacturing Department that uses activity-based costing.
JCC’s system has the following features:
Activity
Cost Allocation Base
Purchasing
Number of purchase orders
Assembling
Number of parts
Packaging
Number of finished seats
Cost Allocation Rate
$60.00 per order
$0.50 per part
$0.90 per seat
Each seat has 20 parts; direct materials cost per seat is $11. Suppose a car producer has asked
for a bid (招標) on 50,000 built-in baby seats that would be installed as an option on some cars.
JCC will use a total of 200 purchase orders if its bid is accepted.
Required:
1. Compute the total cost JCC will incur to purchase the needed materials and then assemble and
package 50,000 baby seats. Also find the average cost per seat.
2. For bidding, JCC adds a 30% markup to total cost. What price will the company bid for the
order?
3. Suppose that, instead of an ABC system, JCC has a traditional product costing system that
allocates all costs other than direct materials at the rate of $65 per direct labour hour. The baby
seat order will require 10,000 direct labour hours. What price will JCC bid using this system’s
total cost?
Answers
ABC: Bid price = $ 1,439,100
Direct materials (50,000 x $11)
$ 550,000
Activity costs:
Purchasing (200 x $60)
Assembling (50,000 x 20 x $0.5)
Packaging (50,000 x $0.9)
Total cost of order
Divide by number of seats
Average cost per seat
12,000
500,000
45,000
$ 1,107,000
50,000
$
22.14
Traditional: Bid price = $ 1,560,500
Direct materials (50,000 x $11)
Other product costs (10,000 x $65)
Total cost of order
Divide by number of seats
Average cost per seat
$ 550,000
650,000
$ 1,200,000
50,000
$
24.00
Exercise 2 (Activity-based Costing)
Suppose that Sandy Company manufactures 4 products, A、B、C and D.
Output and cost data for the period just ended are as follows:
Output
No of production
Material cost
Direct labour
units
runs in the period
per unit
hours per unit
per unit
40
2
2
$
Machine hours
A
10
2
B
10
2
160
6
6
C
100
5
40
2
2
D
100
5
160
6
6
Direct labour cost per hour is $5. Overhead costs are as follows:
$
Variable costs
6,160
cost driver
machine hours
Set-up costs
21,840
production runs
Scheduling costs
18,200
production runs
Materials handling costs
15,400
production runs
You are required to calculate product costs, using the following approaches:
(a) (traditional) absorption costing
(b) activity-based costing
------------------------------------------------------------------------------------------------------Answers to (a) Absorption costing approach
A ($)
B ($)
C ($)
D ($)
Total ($)
Answers to (b) Activity-based costing approach
A ($)
B ($)
C ($)
D ($)
Total ($)
Direct material
Direct labour
Overheads
Total cost
Units produced
Unit cost ($)
Direct material
Direct labour
Variable OH
Set-up costs
Scheduling costs
Material handling
Total cost
Units produced
Unit cost ($)
Exercise 3 (Activity-based Costing)
YCH produces a chain of chairs. Activity areas and related data are as follows:
Production
Budgeted conversion
Cost driver used as
Conversion cost per
Activity area
costs for current year
allocation base
unit of allocation base
Assembly
$ 50,000
direct labour hours
$ 50.00
Cutting
20,000
number of pairs
5.00
Handling
2,000
number of pairs
0.50
Finishing
10,000
44.00
number of painted chairs
Two styles of chairs were produced in April, the standard chairs and unpainted chairs (that had
fewer parts and required no painting activities). Their quantities, direct material costs, and other
data are as follows:
Units
Direct material Number of Assembly direct
produced
cost
parts
labour hours
Standard chairs
50
$ 6,000
1,000
75
Unpainted chairs
10
850
150
11
Required
(a) Compute the total production costs and unit costs of both chairs.
(b) Suppose the basic activities, such as product design, were analysed and applied
to the standard chairs at $2.0 each, and unpainted chairs at $1.5 each.
Moreover, similar analyses were conducted of the selling and servicing
activities, such as distribution, marketing, and customer service. The said costs
applied to the standard chairs at $20 each, and unpainted chairs at $8 each.
Exercise 4 (Activity-based Costing)
YCH Factory overhead budget is $200,000. The allocation bases, expected levels of activity for
each cost pool, and overhead rates are as follows:
Cost pool
Expected
Expected level of
Overhead
amount ($)
allocation base
absorption rate
Direct labour cost
60,000
20,000 hours
$ 3 / hour
Machine cost
80,000
10,000 hours
$ 8 / hour
Machine set-ups
40,000
200 set-ups
$200 / set-up
Design changes
20,000
50 design changes
$400 / change
Required:
Assume that Job #20 that has already been completed required $2,000 for direct
materials, $6,000 for direct labour, 1,000 direct labour hours, 150 machine hours,
2 set-ups, and 1 design change.
What was the job cost?
JCCSS(YL)
7A - Test on activity-based costing
Indirect production costs of Sandy Company are applied to product costs
using a single indirect cost pool.
The indirect manufacturing cost
application base is direct labour hours, and the indirect cost rate is $230
per direct labour hour.
Sandy Company is switching from a labour intensive to a machine
intensive production approach at its metal components plant. Recently,
the plant manager set up 5 activity areas, each with its own supervisor and
budget responsibility.
Activity
Cost driver used as indirect
Cost per unit of
area
cost application base
application base
Polishing
Number of parts
$
1.60
Cutting
Number of cuts
0.40
Material handling
Number of parts
0.80
Milling
Number of machine hours
40.00
Shipping
Number of orders shipped
3,000.00
The necessary data for budgeting in these 5 activity areas are automatically
collected. The 2 job orders processed under the new system at the aircraft
components plant in the most recent period had the following characteristics.
Job #1
Job #2
Direct material cost
$ 19,400
$ 119,800
Direct labour cost
$ 1,500
$ 22,500
50
750
Number of parts
1,000
4,000
Number of cuts
40,000
120,000
300
2,100
Number of job orders shipped
1
1
Number of units in each job
20
400
Number of direct labour hours
Number of machine hours
Required:
(a) Compute the per unit production cost of each job under the current manufacturing costing
system. Indirect costs are collected in a single cost pool with direct labour hours
as the application base.
(b) Assume Sandy Company adopts an activity based costing system.
Indirect costs are applied to products using separate indirect cost
pools for each of the 5 activity areas. The application base and rate
for each activity area are described. Compute the per unit production
cost of each job under the activity based costing system.
Test on activity-based costing (Answers)
(a) Traditional costing system
Direct material cost
Job #1
Job #2
$ 19,400
$ 119,800
Direct labour cost (50 x $30)
Indirect cost (50 x $230)
Total manufacturing cost
1,500
22,500 (750 x $30)
11,500
172,500 (750 x $230)
$ 32,400
$ 314,800
20
400
Divide by units in job order
Unit cost per job
$ 1,620
$
787
(b) Activity-based costing system
Direct material cost
Job #1
Job #2
$ 19,400
$ 119,800
Direct labour cost (50 x $30)
1,500
22,500 (750 x $30)
Indirect cost
Material handling (1000 x $0.8)
800
3,200 (4000 x $0.8)
Cutting (4000 x $0.4)
16,000
48,000 (120000 x $0.4)
Milling (300 x $40)
12,000
84,000 (2100 x $40)
Polishing (1000 x $1.6)
1,600
6,400 (4000 x $1.6)
Shipping (1 x $3000)
3,000
3,000 (1 x $3000)
Total manufacturing cost
$ 54,300
$ 286,900
20
400
Divide by units in job order
Unit cost per job
$ 2,715
Exercise 1 (Activity-based Costing)
$ 717.25
Answers
ABC: Bid price = $ 1,439,100
Direct materials (50,000 x $11)
Activity costs:
Purchasing (200 x $60)
Assembling (50,000 x 20 x $0.5)
Packaging (50,000 x $0.9)
Total cost of order
Divide by number of seats
Average cost per seat
Traditional: Bid price = $ 799,500
Direct materials (50,000 x $11)
Other product costs (10,000 x $6.5)
Total cost of order
Divide by number of seats
Average cost per seat
$ 550,000
12,000
500,000
45,000
$ 1,107,000
$
50,000
22.14
$ 550,000
65,000
$ 615,000
50,000
$
12.30
Exercise 2 (Activity-based Costing)
(a) Absorption costing approach
A ($)
B ($)
C ($)
Direct material
400
1600
4000
16000
22000
Direct labour
100
300
1000
3000
4400
Overheads (*)
1400
4200
14000
42000
61600
Total cost
1900
6100
19000
61000
88000
10
10
100
100
$190
$610
$190
$610
Units produced
Unit cost ($)
D ($)
Total ($)
(*) Absorption base = either labour hours or machine hours
Absorption rate = $ 61,600 / 880 hours = $ 70 per hour
(b) Activity-based costing approach
A ($)
B ($)
C ($)
Direct material
400
1600
4000
16000
22000
Direct labour
100
300
1000
3000
4400
Variable overhead
140
420
1400
4200
6160
Set-up costs
3120
3120
7800
7800
21840
Scheduling costs
2600
2600
6500
6500
18200
_ 2200
2200
5500
5500
15400
8560
10240
26200
43000
88000
10
10
100
100
$856
$1024
$262
$430
Material handling
Total cost
Units produced
Unit cost ($)
D ($)
Total ($)
Conclusion:
Traditional volume based absorption costing system
(1) under-allocates overheads to lower-volume products (A and B) with 10 units of output, and
over-allocates overheads to higher-volume product (D)
under-allocates overheads to less complex products (A and B) with 1 hour of work, per unit, and
Cost-volume-profit analysis (本量利的分析, 簡稱為 CVP)
1. If all costs are variable, pricing is very easy.
But, it is not the case in reality.
2. Take railway service as an example. Few costs (eg, food and beverage) vary with the number
of passengers, because most costs are fixed (eg, maintenance, insurance, depreciation,
administrative cost … ).
3. The railway’s managers must set ticket prices high enough to cover costs and earn a profit, but
low enough to fill seats. As the extra costs to serve each additional passenger are low, once
fixed costs are covered, most of the revenue from extra guests goes toward profits. So, how
many seats must the railway fill to cover costs and provide profits?
4. CVP analysis expresses the relationships among costs, volume, and profit/loss.
5. Variable cost (VC)
A cost changes in total
In direct proportion to
changes in volume of
activity.
eg, food & beverage
The higher the VC per
unit, the steeper the slope
of the TVC line.
6. Fixed cost (FC)
A cost does not change in total despite
wide change in volume, eg, accountancy fee.
TFC remain constant, but FC per unit
(AC) is inversely proportional to the
volume of activity.
7. Mixed cost (MV)
A cost is partly variable and partly fixed.
eg, mobile phone service
8. Relevant range – It is a band of volume within which a specific relationship exists between cost
and volume. Outside the relevant range, the cost changes. A fixed cost is fixed only within a
given relevant range of volume. Companies use the relevant range concept in planning.
9. Suppose a shoes seller expects to sell 12,000 pairs of shoes. The relevant range is between
10,000 and 20,000 pairs of shoes, so managers budget fixed expenses of $80,000. If actual
sales exceed 20,000 pairs, the seller will expand the store, which will increase rent expense.
Conversely, if the seller expects to sell only 8,000 pairs of shoes next year, the store will budget
fixed costs of only $40,000. Its managers may have to cut back operating hours, lay off
employees, or take other actions to cut costs.
10. Income statement formats:
Conventional Income Statement
For the year ended 31 December 2003
$
$
$
Sales revenue
2,100
Cost of sales
1,320
Gross profit
780
Less: Operating expenses
Marketing expense
Variable
150
Fixed
160
310
Distribution expense
Variable
Fixed
210
80
290
Operating profit
600
180
Contribution Marginal Income Statement
For the year ended 31 December 2003
$
Sales revenue
$
2,100
Variable expenses:
Variable manufacturing cost of sales
840
Variable marketing expense
150
Variable distribution expense
210
Contribution margin
1,200
900
Fixed expenses:
Fixed manufacturing expense
480
Fixed marketing expense
160
Fixed distribution expense
Operating profit
80
720
180
Basic cost-volume-profit analysis – The breakeven point
When the following assumptions are met, CVP analysis is accurate.
1. Expenses are either variable or fixed.
2. Cost-volume-profit relationships are linear over a wide range of production and sales. Linear
relationships appear on graphs as straight lines.
3. Sales prices, unit variable costs, and total fixed expenses will not change during the period.
4. Volume is the only cost driver. Other possible cost drivers are held constant.
5. The relevant range of volume is specified.
6. Inventory levels will not change.
7. The sales mix of products will not change during the period. Sales mix is the combination of
products that make up total sales, eg, furniture warehouse may sell 70% household furniture and
30% office furniture.
Work example:
YCH is considering starting an e-tail business to sell art posters on the Internet. YCH plans to use
business-to-business software that will enable him to purchase only those posters needed to satisfy
his customers’ demand. The posters will cost YCH $21 each, and he plans to sell them for $35 a
piece. Monthly fixed costs for server leasing and maintenance, high-speed Internet access, and
office rental total $7,000.
Question 1 – What is YCH’s Breakeven Sales Level?
1. The breakeven point is the sales level at which operating profit is zero: total revenues equal total
expenses. Sales below the breakeven result in a loss.
2. equation approach
operating profit = sales revenue – variable costs – fixed costs
Let U = units sold
sales revenue = (sales price per unit) x (units sold) = $35 U
variable costs = (variable cost per unit) x (units sold) = $21 U
fixed costs = $7000
At breakeven point, sales revenue = total expenses
$35 U = $21 U + $7,000
$35 U – $21 U = $7,000
$14 U = $7,000
U = 500 units
YCH must sell 500 posters to break even.
Conventional Income Statement
$
$
Sales revenue ($35 x 500)
17,500
Less: Variable expenses ($21 x 500)
10,500
Fixed expenses
7,000
17,500
Operating profit
0
3. contribution margin formula – (a shortcut method )
Unit sold = (fixed expenses) / (contribution margin per unit)
$
Sales revenue per unit
35
Less Variable expenses per unit
21
Contribution margin
14
operating profit = sales revenue – variable costs – fixed costs
sales revenue – variable cost
= (unit sold x sales price per unit) – (unit sold x variable cost per unit)
= unit sold x (sales price per unit – variable cost per unit)
= unit sold x contribution margin per unit
operating profit + fixed costs = unit sold x contribution margin per unit
At breakeven, operating profit = $0, therefore,
Unit sold = (fixed costs) / (contribution margin per unit)
= $7,000 / $14 = 500 posters
題目有時給予 contribution margin ratio, 要我們計算 contribution margin per unit
contribution margin per unit = ratio x (sales price per unit
contribution margin ratio = (contribution margin) / (sales revenue)
= $14 / $35 = 0.4 (or 40%)
Sales in dollars = sales price per unit x unit sold
= $35 x 500 posters = $17,500
Unit sold = (fixed costs) / (contribution margin per unit)
= $7,000 / $14 = 500 posters
Sales in dollars
= (fixed costs) x (sales price per unit) / (contribution margin per unit)
= (fixed costs) x contribution margin ratio
= $7,000 x 0.4 = $175,000
Exercise 1
Suppose the sale price per poster is $38.5 rather than $35.
Variable cost per poster remains at $21, and fixed costs stay at $7,000
What is the revised breakeven point in units and in dollars?
Exercise 2
Suppose the variable cost per poster is $23.8 instead of $21.
The sales price per poster remains $35, and fixed costs stay at $7,000.
What is the breakeven point in units and in dollars?
Exercise 3
Suppose the fixed costs total $10,500 instead of $7,000.
The sales price per poster stays at $35, and variable cost per unit remains at $21.
What is the breakeven point in units and in dollars?
Exercise 4
Suppose YCH hopes to earn operating profit of $4,900.
Assuming fixed costs of $7,000, variable cost $21 per poster, and a $35 per poster.
sales price, how many posters must he sell?
Exercise 5
The relationship between income / volume suggests that there are four ways by which profit
can be increased.
These are
1. Increase unit selling price.
2. Decrease unit variable cost.
3. Decrease fixed cost.
4. Increase volume.
Assume that the current situation for a product is as follows:
Sales volume
1,000 units
Selling price
$ 2 each
Variable cost
$ 1 each
Fixed costs
$ 500
You are required to:
(a) Draw 4 separate break-even charts showing the effect of the following
changes on the current situation:
<1> a 10 per cent increase in volume
<2> a 10 per cent increase in selling price
<3> a 10 per cent increase in variable cost
<4> a 10 per cent increase in fixed cost
(b) Use your charts to state the additional profit resulting from each change.
Exercise 6
You are employed by JCC Ltd which manufactures specialist hydraulic seals for the aircraft
industry. The company has developed a new seal with the following budgeted data.
Variable cost per unit
$
Direct materials
8
Direct labour
4
Variable overheads
4
16
The draft budget for the following year is as follows:
Production and sales
60,000 units
$
Fixed cost: Production
260,000
Administration
90,000
Selling & marketing
Contribution
100,000
840,000
Certain departmental managers within the company believe there is room for improvement on
the budgeted figures, and the following options have been suggested:
<1> The sales manager has suggested that if the selling price was reduced by
10%, then an extra 30% units could be sold. The purchasing manager has
indicated that if materials requirements were increased in line, then a
materials price reduction of 6.25% could be negotiated. With this
additional output, fixed production costs would increase by $30,000,
administration by $5,000 and selling and marketing by $10,000. Other
costs remain unchanged.
<2> The export manager has suggested that if the company increased marketing
by $15,000, then exports would increase from 15,000 units to 17,000 units.
With this suggestion, distribution costs would increase by $12,000, and
all other costs would remain unchanged.
<3> The marketing manager has suggested that if an extra $40,000 were spent
on advertising, then sales quantity would increase by 25%. The purchasing
manager has indicated that in such circumstances, materials costs would
reduced by $0.30 per unit.
With this suggestion, fixed production costs
would increase by $25,000, administration by $4,000 and other selling and
marketing costs by $7,000.
All other costs would remain unchanged.
<4> The managing director believes the company should be aiming for a profit
of $486,000.
He asks what the selling price would be per unit if
marketing were increased by $50,000, this leading to an estimated
increase in sales quantity of 30%? Other fixed costs would increase
by $67,000, whilst materials prices would decrease by 6.25% per unit.
All other costs would remain unchanged.
Required:
(a) Taking each suggestion independently, compile a profit statement for
options <1> to <3>, showing clearly the contribution per unit in each
case.
For suggestion <4>, calculate the selling price per unit as
requested by the managing director.
(b) Calculate the break-even quantity in units if the managing director’s
suggestion were implemented.
Draw a contribution / sales graph to
illustrate your calculations. Read from the graph the profit if
60,000 units were sold.
Exercise 7
YCH Company Ltd is engaged in the processing and selling of material X.
During the coming year, the management has determined the following
Cost structure:
Cost of material X
$ 118 per ton
Processing costs:
Variable
$ 35 per ton
Fixed
$ 320,000 per year
Marketing costs:
Variable
$ 27 per ton
Fixed
$ 160,000 per year
Administrative costs
All fixed, $290,000 per year
It is estimated that the company can sell all its output for the coming year
at $250 per ton of material processed. Assume there is no loss or gain
during the processing of material X.
Required:
(a) Compute the <i> contribution margin <ii> contribution margin ratio.
per ton of material X processed.
(b) Determine the break-even sales volume in <i> dollars <ii> tons of output.
(c) Calculate the sales volume required to reach a target profit of $299,600
in <i> dollars <ii> tons of output.
(d) What is the maximum amount that the company can afford to pay per ton of
material X, and still break-even by processing and selling only 20,000
tons of materials X during the current year.
Exercise 8
A company’s detailed information of costs and sales has been destroyed because of a computer
malfunction.
The following data has, however, been found
from various sources.
Sales volume (units)
10,000
12,000
Costs ($) – Direct materials
30,000
36,000
– Direct labour
28,000
33,000
– Overheads
20,500
24,100
Selling price per unit at all volumes of output is $12.3
Calculate: (a) the cost of an additional 2,000 units of output
(b) the variable costs of 10,000 units of output
(c) the fixed element – if any – of each component cost
(d) the break-even point