Assignment 1

 

 

Question 1 (38 marks)

 

The Stylish Shoe Company operates a chain of shoe stores that sell ten different styles of ladies’ shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. Stylish is considering opening another store that is expected to have the revenue and cost relationship shown here.

 

Total fixed costs

 

Required

 

Consider each question independently.

 

a     Calculate the annual breakeven point in (i) units sold and (ii) revenues. (4 marks)

 

b       If 8,000 units are sold, determine the store’s operating income /

 

(loss).                                                                                                   (8 marks)

 

c       If sales commissions are discontinued and fixed costs are raised by a total of $77,500, calculate the annual breakeven point in (i) units

sold and (ii) revenues.                                                                     (4 marks)

 

d       Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $10.00 per unit sold, calculate the annual breakeven point in (i) units sold and (ii) revenues? (4 marks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 150,000 500,000

200,000

50,000

 

$900,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12   ACT B313 Management and Cost Accounting

e       Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $10.00 per unit in excess of the breakeven point, calculate the store’s operating income if 12,000

units were sold.                                                                                 (6 marks)

 

f     As the owner, which sales compensation plan would you choose if the forecasted annual sales of the new store were at least 10,000 units? What do you think about the motivational aspect of your

chosen compensation plan?                                                           (6 marks)

 

g       Suppose the target operating income is $34,500. How many units must be sold to reach the target operating income under (i) the original salary-plus-commissions plan and (ii) the higher-fixed-salaries-only plan? Which method would you prefer? Explain

briefly.                                                                                                 (6 marks)

 

Question 2 (22 marks)

 

John Ting, Event Manager of Vision Music, schedules concerts for local bands and creates CDs and T-shirts to sell at each concert. Vision Music uses a normal-costing system with two direct-cost pools, labour and materials, and one indirect-cost pool, general overhead. General overhead is allocated to each concert based on 120% of the direct labour cost. The actual overhead equalled the allocated overhead as of March 20x7. The actual overhead in April was $19,800. All costs incurred during the planning stage for a concert and during the concert are gathered in a balance sheet account called ‘Concert in Progress (CIP)’.

 

When a concert is completed, the costs are transferred to an income statement account called ‘Cost of Completed Concerts (CCC)’. The following is cost information for April 20x7:

 

 

As of April 1, there were three concerts in progress: Irok, Freke Out, and Bottom Rung. The concerts for Dish Towel and Rail Ride were started during April. The concerts for Freke Out and Dish Towel were completed during April.

 

Required

 

a     Calculate CIP at the end of April.                                                  (3 marks)

 

b     Calculate CCC for April.                                                                 (3 marks)

 

c       Calculate the ending balances in CIP and CCC if the under- or overallocated overhead amount is as follows:

 

i   Written off to CCC

Assignment File       13

ii      Prorated based on the ending balances (before proration) in CIP and CCC

 

iii     Prorated based on the overhead allocated in April in the ending balances of CIP and CCC (before proration)

(12 marks)

 

d       Which method would you choose? Explain. Would your choice depend on whether overhead cost is underallocated or overallocated?

 

Explain.                                                                                               (4 marks)

 

Question 3 (20 marks)

 

Jacob Hong, the new plant manager of Vantage Manufacturing Plant

 

Number 5, has just reviewed a draft of his year-end financial statements. Hong receives a year-end bonus of 8% of the plant’s operating income before tax. The year-end income statement provided by the plant’s controller was disappointing to say the least. After reviewing the numbers, Hong demanded that his controller go back and ‘work the numbers’ again. Hong insisted that, if he didn’t see a better operating income number the next time round, he would be forced to look for a new controller.

 

Vantage Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All order expenses, including finished goods warehousing costs of $ 7,140,000, are classified as period expenses. Hong had suggested that warehousing costs be included as product costs because they are

 

‘definitely related to our product’. The company produced 210,000 units during the period and sold 190,000 units.

 

As the controller reworked the numbers, he discovered that if he included warehousing costs as product costs, he could improve operating income by $680,000. He was also sure these new numbers would make Hong happy.

 

Required

 

a       Show numerically how operating income would improve by $680,000 just by classifying the preceding costs as product costs

instead of period expenses.                                                            (8 marks)

 

b       Is Hong correct in his justification that these costs are ‘definitely

 

related to our product’?                                                                   (4 marks)

 

c       By how much will Hong benefit personally if the controller makes

 

the adjustments in requirement (a)?                                             (2 marks)

 

d     Suggest the actions to be taken by the plant controller.          (6 marks)

14   ACT B313 Management and Cost Accounting

 

Question 4 (20 marks)

 

Modern Computer Limited is an IT consulting firm which helps commercial companies to instal a general accounting programme. It uses 90% cumulative average-time learning model as a basis for forecasting direct labour-hours for the coming jobs. The company’s information is as follows:

 

Programme purchase cost                           $5,000 per unit

 

Direct labour hour for the first job            200 hours

 

Direct labour cost                                          $50 per hour

 

Note: For a 90% learning curve, b = ln0.9/ln0.2 = -0.152004

 

Required

 

a     Calculate the total costs for the first four jobs.                          (7 marks)

 

b       What would be the total costs for the first four jobs if Modern

 

Computer changes to the use of the incremental unit-time learning

 

model?                                                                                                 (7 marks)

 

c       Compare the results of requirements (a) and (b). Why are they different? How would Modern Computer decide which model it

should use?                                                                                        (6 marks)

 

Question 5 (32 marks)

 

Bear Bear Limited manufactures toys for kids and began operations in 2016. For 2016, Bear Bear budgeted to produce and sell 2,000 units.

The company had no price, spending, or efficiency variances and writes off production- volume variance to cost of goods sold. Actual data for 2016 are given as follows:

 

 

d, Bear Bear’s management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. What incentives will this bonus plan create for the supervisors?

What modifications could Bear Bear’s management make to improve such a plan? Explain briefly.              (5 marks)

 

Question 6 (28 marks)

 

Harry Super-Store (HS) operates at capacity and decides to apply ABC analysis to three product lines: food, home utensils and lifestyle products. It identifies four activities and their activity cost rates as follows:

 

Ordering                                                                 $51 per purchase order

 

Delivery and receipt of merchandise              $39 per delivery

 

Shelf-stocking                                                      $42 per hour

 

Customer support and assistance                     $0.22 per item sold

 

The revenues, cost of goods sold, store support costs, activities that account for the store support costs, and activity-area usage of the three product lines are as follows:

 

 

Under its simple costing system, HS allocated support costs to products at the rate of 30% of cost of goods sold.

 

Required

 

c       Use the simple costing system to prepare a product-line profitability

 

report for HS.                                                                                     (8 marks)

 

d       Use the ABC system to prepare a product-line profitability report for

 

HS.                                                                                                     (14 marks)

 

c     What new insights does the ABC system in requirement (b) provide to HS managers? (6 marks)

 

 

 

 

 

Question 7 (20 marks)

 

Atlantis Handcraft is a manufacturer of picture frames for large retailers. Every picture frame passes through two departments: the assembly department and the finishing department. This problem focuses on the assembly department. The process-costing system at Atlantis has

a single direct-cost category (direct materials) and a single indirect-cost category (conversion costs) . Direct materials are added when the assembly department process is 10% complete. Conversion costs are added evenly during the assembly department’s process.

 

Atlantis uses the weighted-average method of process costing. Consider the following data for the assembly department in April 20x7:

 

 

A degree of completion: direct materials, 100%; conversion costs, 40%

^ 

B degree of completion: direct materials, 100%; conversion costs, 15%.

 

Required

 

A Summarize the total assembly department costs for April 20x7, and assign them to units completed (and transferred out) and to units in

ending work in process.                                                                (16 marks)

 

b     What issues should a manager focus on when reviewing the

 

equivalent units calculation?                                                          (4 marks)

 

Question 8 (20 marks)

 

Peterson Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, John Leung, is opposed

to the idea of a new JIT system. He is concerned that the new system

 

(a) will be too costly to manage; (b) will result in too many stock outs; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Susan Chow, is in favour of the new system, due to the likely result in cost savings. John wants Susan to revise her cost saving estimation because he is concerned that top management will give more weight to financial factors and not give due consideration

 

to nonfinancial factors such as employee morale. In addition to the reduction in inventory described previously, Susan has gathered the following information for the upcoming year regarding the JIT system:

 

l  Annual insurance and warehousing costs for inventory would be reduced by 60% of the current budgeted level of $350,000.

 

l  Payroll expenses for current inventory management staff would be reduced by 15% of the budgeted total of $600,000.