B313F Management and Cost Accounting Assignment 1 Date due:29 October 2008 Weighting:15% of the total marks of the course Question 1(25 marks) Mini Case – Seto’s Storage Warehouse Paul Seto owns and manages a commercial storage warehouse. He stores a vast variety of perishable goods for his customers. Under the existing pricing policy, he has charged customers using a flat rate of $2. 40 per kilogram per month for goods stored. His storage warehouse has 10,000 cubic metres of storage capacity.
In the past two years, Seto has become dissatisfied with the profitability of the warehouse operation. Despite the fact that the warehouse remains relatively full, revenues have not kept pace with operating costs. Recently, Seto approached his accountant, Albert Lo, about using activity-based costing (ABC) to improve his understanding of the causes of costs and revise the pricing formula. Lo has determined that most costs can be associated with one of four activities. Those activities and their related monthly costs, volume measures, and volume levels for 2008 are as follows: Activity |Cost |Monthly Volume Measure | |Send/receive goods | $80,000 |Weight in kilograms – 50,000 | |Store goods | $8,000 |Volume in cubic metres – 800 | |Move goods | $10,000 |Volume in square metres – 500 | |Identify goods | $3,000 |Number of packages – 500 |
Lo has also collected last month’s information on the following 3 customers whose goods were all received on the first day of last month. |Customers |Weight of Order |Cubic Metres |Square Metres |Number of Packages | | |(Kilograms) | | | | |Sunshine Co. |20,000 |600 |30 |10 | |Best Buy Co. 20,000 |400 |20 |40 | |Chow’s Trading |20,000 |200 | 100 | 160 | Seto would like Lo to perform some analyses based on the above information and data in order to evaluate whether to use ABC. Required: a. Determine the price to be charged to each of the 3 customers under the existing pricing policy. (3 marks) b. Based on the monthly activity cost and volume data provided, determine the amount of cost assigned to each of the 3 customers. 10 marks) c. Determine the price to be charged to each of the 3 customers using activity-based costing (ABC), assuming Seto would base the price on the cost determined in part (b) plus a markup of 40 percent. (3 marks) d. Critically discuss whether Seto’s existing pricing policy captures the costs incurred to provide the warehouse services. (5 marks) e. A cost hierarchy categorizes costs into different cost pools on the basis of the different types of cost drivers or cost-allocation bases. Describe the four levels of a manufacturing cost hierarchy under the ABC system. 4 marks) Question 2(25 marks) Antique Furnishings Ltd. is a Yuen Long based manufacturer making three unique wood products: bed-frames, coffee tables, footstools. These products are completely carved by hand by skilled craftspeople who have been trained in making these products. Since it takes about a year to train each craftsperson, the labour cost is a fixed production constraint over the short term. For the year ended 31 December 2008, the company expects to have 34,000 available labour hours. The average hourly labour rate is $25.
Information regarding the current product line is as follows: Bed-framesCoffee tablesFootstools $ $ $ Selling price900 680 240 Variable costs: Direct material220 160 60 Direct manufacturing-labour costs 300 275 75 Indirect manufacturing-labour costs 80 40 21 Other indirect manufacturing costs100 80 20 Variable selling expense 20 15 10 Variable manufacturing costs are variable with respect to units produced. Variable selling expenses are variable with respect to units sold.
Fixed costs: Indirect manufacturing-labour costs 80,000 Other indirect manufacturing costs 70,000 Selling & administration 75,000 Required: a. Compute the contribution margin per unit for each of the three products above. (6 marks) b. Assuming that the market demand exceeds the company’s production capacity for all products, determine the number of units of each product that the company should make. (Hint: You need to maximize the contribution per unit of the scarce resource. ) Calculate the profit before tax based on your determination of units of each product. (7 marks) c.
Assuming that the company has a policy of devoting between 20% to 50% of its available skilled labour capacity to one product, determine the number of units of each product that the company should make and calculate the maximum profit before tax. (7 marks) d. Discuss how managers decide whether a cost is a direct or an indirect cost and describe the factors that will affect the classification of a cost as direct or indirect. (5 marks) Question 3(25 marks) DVD Express is a large manufacturer of affordable DVD players. Management recently became aware of rising costs resulting from returns of malfunctioning products.
As a starting point for further analysis, Bonnie Lee, the controller, wants to test different forecasting methods and then use the best one to forecast quarterly expenses for 2009. The relevant data for the previous three years follows: 2006Return 2007Return2008Return QuarterExpensesQuarterExpensesQuarterExpenses 1$15,0001$16,2001$16,600 217,500217,800218,100 318,500318,800319,000 418,600417,700419,200 The result of a simple regression analysis using all 12 data points yielded an intercept of $16,559. 09 and a coefficient for the independent variable of $183. 22 (R-squared = . 27, t = 1. 4, SE = 1128). Required: a. Calculate the quarterly forecast for 2009 using the high-low method and regression analyses. Recommend which method Bonnie should use. (15 marks) b. How does your analysis in requirement #1 change if DVD Express manufactures its products in multiple global production facilities to serve the global market? (5 marks) c. How do we know when high correlation exists? Explain whether high correlation is the same as cause and effect? (5 marks) Question 4(25 marks) Quik Printing Inc. , is a rapidly growing company that has not been profitable despite increases in sales.
It has hired you as a consultant to find ways to improve the situation. You believe that the problem results from poor cost control and inaccurate cost estimation on jobs. To gather data for your investigation, you turn to the accounting system and find that it is almost nonexistent. However, you piece together the following information for April: • Production 1. Completed job 101. 2. Started and completed job 102. 3. Started job 103. • Inventory values: 1. Work-in-process inventory: |March 31: Job 101 | | | Direct material………………….. $ 2,000 | | Labor (960 hours ( $10)………… | 9,600 | |April 30: Job 103 | | | Direct material………………….. |$ 1,600 | | Labor (1,040 hours ( $10)……… | 10,400 | 2. Each job in work-in-process inventory was exactly 50 percent completed as to labor hours; however, all direct material necessary to do the entire job was charged to each job as soon as it was started. 3. There were no raw-material inventories or finished-goods inventories at either March 31 or April 30. Actual manufacturing overhead was $20,000. • Cost of goods sold (before adjustment for over-or underapplied overhead): |Job 101 | | | Direct material…………………… | $ 2,000 | | Labor…………………………….. | ? | | Overhead………………………… | ? | |Total………………………………… | $ 30,800 | | | | |Job 102 | | | Direct material…………………… ? | | Labor…………………………….. | ? | | Overhead………………………… | ? | |Total………………………………… | ? | • Overhead was applied to jobs using a predetermined rate per labor dollar that has been used since the company began operations. • All raw materials were purchased for cash and charged directly to Work-in-Process Inventory when purchased. Raw material purchased in April amounted to $4,600. • Direct-labor costs charged to jobs in April totaled $32,000.
All labor costs were the same per hour for April for all laborers. Required Write a report, with supporting calculations, to management to show the following: a. The cost elements (direct material, labor, and overhead) of cost of goods sold before adjustment for over-or underapplied overhead for each job sold. (14 marks) b. The value of each cost element (direct material, labor, and overhead) for each job in work-in-process inventory at April 30. (7 marks) c. Over-or underapplied overhead for April. (4 marks)