Cost Accounting Scenarios | Course Scholars

Question 1

There are five scenarios in this report. In the first scenario cost have been allocated using different methods, in the second scenario pre-determined overhead rate has been ascertained and underapplied or overapplied overhead has also been calculated. Calculation of net operating income has also been done. In the third scenario cost per equivalent, the unit has been ascertained using the FIFO method and weighted average method. In the fourth scenario break-even point, operating income, and number of units sold have been ascertained. In the last scenario budgeted cost per unit and total cost has been ascertained.

Part a
Part 1
Allocation of cost using the direct method
Details Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Human resource	Computing	Audit	Internal control
Cost of each department	80000	66000
Allocation of hr department to another department	-80000		40000	40000
Allocation of computing department to audit and internal control		-66000	37714.29	28285.71429
Total	0	0	77714.29	68285.71429

Part 2
Allocation of cost using step down method
Details	Human resource	Computing	Audit	Internal control
Cost of each department	80000	66000	350000	400000
Allocation of hr department to another department	-80000	16000	32000	32000
Total	0	82000	382000	432000
Allocation of computing department to audit and internal control		-82000	51250	30750
Total		0	433250	462750

Part 3
Allocation of cost using the reciprocal method
Details	Human resource	Computing	Audit	Internal control
Cost before allocation	80000	66000
Allocation of hr department to another department	-80000	16000	32000	32000
Total	0	82000
Allocation of computing department	16400	-82000	41000	24600
Allocation of hr cost	-16400	3280	6560	6560
Allocation of computing cost	656	-3280	1640	984
Allocation of hr cost	-656	131.2	262.4	262.4
Allocation of computing cost	26.24	-131.2	65.6	39.36
Allocation of hr cost	-26.24	5.248	10.496	10.496
Allocation of computing cost	1.0496	-5.248	2.624	1.5744
Allocation of hr cost	-1.0496	0.20992	0.41984	0.41984
Details	Audit	Internal control
Allocation of hr department cost	38833.32	38833.32
Allocation of computing department cost	42708.22	25624.93
The total cost allocated to each department	81541.54	64458.25

Part b

Among all the three methods it is suggested to use the reciprocal method as in this method all services among support and operating department are recognized which indicates that costs of the service department are allocated to and from the other service departments. Hence, it is the most accurate method and this method should be preferred.

	Part a
	Calculation of predetermined overhead rate
A	Manufacturing overhead cost	1545000
B	Computer hours	103000
C=a/b	Predetermined overhead rate	15

	Part b
	Calculation of over or under applied overhead
A	Applied overhead	1125000
B	Actual overhead	1257000
B-A	Under applied overhead	132000

Part c
Journal entry
Details	Debit	Credit
Work in progress	7920
Finished goods	42240
Cost of goods sold	81840
Manufacturing overhead		132000

Working

175560*(132000/2926000)

936320*(132000/2926000)

1814120*(132000/2926000)

	Part d
	Net operating income
A	Work in progress	7920
B	Finished goods	42240
A+B	Net operating income	50160

Net operating income will be $50160 greater when underapplied overhead is allocated rather than closed to the cost of goods sold.

Part a
Cost of production using the FIFO method
		Materials		Conversion cost
Details	Physical units	Complete %	Equivalent units	Complete %	Equivalent units
Units to be accounted for
Beginning WIP	2500
Started production	18500
Total units to be accounted for	21000
Units accounted for
Transferred out from the beginning WIP	2500	0%	0	30%	750
Transferred out from current input (18000-2500)	15500	100%	15500	100%	15500
Ending WIP	3000	100%	3000	40%	1200
Total units accounted for	21000		18500		17450
Costs	Total costs	Direct material	Conversion cost
Cost to account for
Beginning WIP	727750	225000	502750
Cost added during the period	7857500	3500000	4357500
Total cost to account for	8585250	3725000	4860250
Cost added during period	7857500	3500000	4357500
Equivalent unit		18500	17450
Cost per equivalent unit		189.19	249.71
Cost accounted for	727750	225000	502750
Cost already accounted in beg WIP	187285.1003	0	187285.1003
Transferred out from beg WIP	6802991.172	2932432.432	3870558.739
Transferred out from current period	7718026.272	3157432.432	4560593.84
Ending WIP	867223.728	567567.5676	299656.1605
Total cost accounted for	8585250	3725000	4860250

Part b
Cost of production using the weighted average method
		Materials		Conversion cost
Details	Physical units	Complete %	Equivalent units	Complete %	Equivalent units
Units to be accounted for
Beginning WIP	2500
Started production	18500
Total units to be accounted for	21000
Units accounted for
Transferred out	18000	100%	18000	100%	18000
Ending WIP	3000	100%	3000	40%	1200
Total units accounted for	21000		21000		19200

Costs	Total costs	Direct material	Conversion cost
Cost to account for
Beginning WIP	727750	225000	502750
Cost added during the period	7857500	3500000	4357500
Total cost to account for	8585250	3725000	4860250
Equivalent unit		21000	19200
Cost per equivalent unit		177.38	253.14
Cost accounted for	Total cost	Direct material	Conversion cost
Transferred out	7749341.518	3192857.143	4556484.375
Ending WIP	835908.4821	532142.8571	303765.625
Total cost accounted for	8585250	3725000	4860250

	Part a
	Details	VR1	VR2	Total
A	Sales mix	62.50%	37.50%
	Contribution margin
C	Sales	1200	1520
D	Less: variable cost	600	728
E=C-D	Contribution margin	600	792
F=A*F	Contribution margin based on sales mix	375	297	672
	Break-even point in units
G	Fixed cost	16128000
H	Contribution margin per unit	672
I=G/H	Break-even point in units	24000

	Part b
			VR1			VR2
	Details	Working	Units	Per unit	Amount	Units	Per unit	Amount	Total
	Sales unit
	Vr1	48000*67.5%	32400
	Vr2	48000*37.5%				18000
A	Sales price			1200			1520
	Variable cost
B	Manufacturing			500			610
C	Marketing			100			118
D=B-C	Contribution margin			600	19440000		792	14256000	33696000
E	Fixed costs								-16128000
F=D-E	Operating income								17568000

Part c
Details
Operating income after tax	16934400
Tax rate	30%
Operating income before tax	24192000
Fixed cost	16128000
Contribution ratio	40320000
Contribution per unit	672
Units sold	60000
Units sold for vr1	40500
Units sold for vr2	22500

Part a
Cost	Cost hierarchy level
Direct material-activewear	Output unit-level cost
Direct material-sport shoes	Output unit-level cost
Direct labour-active wear	Output unit-level cost
Direct labour-sport shoes	Output unit-level cost
Set up	Batch level cost
Shipping	Batch level cost
Design	Product sustaining cost
Plant maintenance and administration	Facility sustaining cost

Part b
Cost	Cost driver	Reason
Direct material-activewear	No. of activewear	The cost is determined by no. of output
Direct material-sport shoes	No. of sports shoes	The cost is determined by no. of output
Direct labour-active wear	No. of activewear	The cost is determined by no. of output
Direct labour-sport shoes	No. of sports shoes	The cost is determined by no. of output
Set up	No. of batches	The cost is determined by no. of batches
Shipping	No. of batches	The cost is determined by no. of batches
Design	No. of design	The cost is determined by no. of designs
Plant maintenance and administration	Hours of production	The more the machines are used the higher is the cost

Part c
Details	Cost	Total quantity of cost driver	Cost driver rate
Direct material-activewear	450000	9000	50.00
Direct material-sport shoes	258000	6000	43.00
Direct labour-active wear	240000	9000	26.67
Direct labour-sport shoes	95950	6000	15.99
Set up	179930	190	947.00
Shipping	145730	190	767.00
Design	124000	4	31000.00
Plant maintenance and administration	245000	5000	49.00

Part d
Details	Activewear	Sportwear
Direct material	450000	258000
Direct labour	240000	95950
Set up	137315	42615
Shipping	111215	34515
Design	62000	62000
Plant maintenance and administration	159250	85750
Total costs	1159780	578830
Units	9000	6000
Cost per activewear and sport shoes	128.86	96.47

Part e

Based on analysis it has been seen that more than 50% of product cost is related to direct materials. Hence, the manager should focus on whether the cost of materials should be reduced. Producing in small lots will result in an increase in setup as well as shipping costs. While both are small components of the product cost. Therefore, management may want to evaluate various ways for reducing the number of setups and cost per setup.

Part f

Refining of ABC costing system will enable effective challenges of operating costs and at the same time allocation and estimation of overhead will be done in a better way. Refining of ABC system will also help in improving product and customer profitability analysis and will also support performance management techniques like continuous improvement and scorecards. Hence, refining of ABC system will be ethical.

Based on the above analysis it is recommended that the reciprocal method is the best method for allocating costs. It is also recommended that net operating income will be more when overhead is underapplied. Based on the discussion recommendation can also be made that refining of ABC system will be ethical.

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