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QU# 1 Kaizen Furniture has the following information in respect to coffee tables for 2011: Production...

QU# 1

Kaizen Furniture has the following information in respect to coffee tables for 2011:

Production specifications:

                                                Beginning                    Target Ending

                                                Inventory                     Inventory

Direct Materials:

            Particle board              20,000 b.f.                   18,000 b.f.

            Red oak                       25,000 b.f.                   22,000 b.f.

Finished goods

            Coffee tables               5,000 units                  3,000 units

Revenue expected for 2011 are:

            Selling price                            $392 per table

            Units sold                            52,000 coffee tables

Each coffee table requires 9.00 b.f. of particle board and 10.00 b.f. of red oak.

Costs expected for 2011 include:

                                                                        2010               2011

            Particle board (per b.f.)                       $ 3.90             $ 4.00

            Red oak (per b.f.)                                $ 5.80             $ 6.00

            Laminating labor (per hour)                $24.00             $25.00

            Machining labor (per hour)                 $29.00             $30.00            

Prepare the following budgets for 2011:

  1. Revenues Budget---
  2. Production Budget (in units)---
  3. Direct Materials Usage Budget---

QU#2

Sandwich Ltd prepares meals for sale 24 hours a day. Fixed cost for the restaurant is $450000 per year. On average the sales check per customer is $8.00. The average cost of food and other variable costs is $3.20 per customer. The income tax rate is 30%. Target net income is $105000.

  1. What revenues are needed to earn the target net income?---
  2. How many customers are needed to breakeven? To earn net income of $105000?
  3. What is the net income if the number of customers is 150000?

QU #3

  1. Explain giving examples why it is important to keep current cost in line with planned cost. Using examples where possible, describe the process of job costing used in non-profit organizations.
  2. Why is it important to establish appropriate cost pools?
  3. An electrical component manufacturer has selected direct labour hours as an application base. They plan to sell 35,000 units of copper tubing although the factory has the capacity to produce 40,000 units under normal circumstances.

       Overheads are estimated as follows:

  • Indirect materials and supplies --------------------------- $96,200
  • Repairs and maintenance            -------------------------- $24,100
  • Plant service contracts                  ---------------------------$37,000
  • Refurbishing cost                          -------------------------- $89,100
  • Machinery depreciation               ------------------------ $185,000
  • Factory insurance                          ------------------------- $18,200
  • Property taxes                                 ---------------------------$4,500
  • Heat, light and power                   --------------------------$51,700
  • Miscellaneous factory overhead -------------------------- $6,000
  • indirect Labour                       -------------------------------$120,000
  • Materials                                 --------------------------------$80,000
  • Transportation                         ---------------------------------$25,000
  • Rent                                        ---------------------------------$40,000
  • Security Cost                          ---------------------------------$15,000

All overhead costs except depreciation, property taxes and miscellaneous factory overhead are expected to increase by 10% during the year. Depreciation should increase by 12% and a 20% increase in property taxes and miscellaneous overhead is expected. A total of 55,600 direct labour hours was actually used to produce 35,000 units of copper tubing . Direct labour hours is expected to increase to 60,000 hours as production volume increases.

  1. Determine the Total estimated overheads? (5Marks )
  2. Calculate the predetermined overhead rate
  3. Calculate the overhead application rate if 60,000 Direct Labour hours was used in production . Ascertain the overhead applied to the job if it took 120 direct labor hours.

QU#4) -----------Mark—25%

Two emerging fields that are becoming more relevant in management accounting as in other professional areas are environmental issues and transfer pricing. In an increasingly global economy effective management of both environmental and transfer pricing issues may become a source of competitive advantage.

  1. How is Environmental Management Accounting used in Decision Making?---(12%)
  2. Why is Transfer Pricing relevant to multinational corporations?--- (13%)

Solutions

Expert Solution

Answer:-

a.)
Revenue Budget - 2011
Sales in Units                     52,000
SP per Unit                           392
Sales in $           2,03,84,000
b)
Production Budget (In Units) - 2011
Sales in Units                     52,000
Add: Ending Inventory - Finished                       3,000
Total needs                     55,000
Less: Beginning Inventory - Finished                     -5,000
Expected Production in Units                     50,000
C)
Direct Material Usage Budget -2011
Particle Board Red Oak
Expected Production in Units                     50,000                50,000
b.f. required per Unit                               9 10
Total b.f required for Production                 4,50,000            5,00,000
Add: Ending Inventory                     18,000 22000
Total needs                 4,68,000            5,22,000
Less: Beginning Inventory                   -18,000 -25000
b.f Purchased during the year                 4,50,000            4,97,000
Cost per b.f.                               4 6
Total Purchases in $               18,00,000          29,82,000

Answer#2:-

Target income volume = [Fixed costs + (Target after-tax income/(1-tax rate)]/(selling price - variable cost)

If all the variables are known target income volume can be determined by above mentioned formula

If,

Fixed cost = $450000

Target after tax income = $105000

Selling price = $8 per unit

Variable cost = $3.2 per unit

Tax rate = 0.3

Target income will be,

= [450000 + {105000/ (1 - 0.3)}]/ (8 - 3.2)

= [450000 + {105000/ 0.7}]/ 4.8

= [450000 + 150000]/4.8

= 600000/ 4.8

= 125000

So to achieve target profit of $105000 the required units to sell is 125000 units

Target Revenue = 125000 * 8 = $1000000

Target income volume = [Fixed costs + (Target after-tax income/(1-tax rate)]/(selling price - variable cost)

If all the variables are known target income volume can be determined by above mentioned formula

If,

Fixed cost = $450000

Target after tax income = $0

Selling price = $8 per unit

Variable cost = $3.2 per unit

Tax rate = 0.3

Target income will be,

= [450000 + {0/ (1 - 0.3)}]/ (8 - 3.2)

= [450000 + {0/ 0.7}]/ 4.8

= [450000 + 0]/4.8

= 450000/ 4.8

= 93750

To reach breakeven required sale unit is 93750

Target income volume = [Fixed costs + (Target after-tax income/(1-tax rate)]/(selling price - variable cost)

150000 = [450000 + (X/(1-0.3)]/(8-3.2)

150000 = [450000 + (X/(.7)]/4.8

720000 = 450000 + X/.7

720000 = (450000*.7 + X)/.7

504000 = 315000 +X

X = 189000

Answer#3:-

Cost Control is the practice of identifying & reducing business expenses to increases profits, and it starts with the budgeting process. A business owner composes actual results to the budget expectations, and if actual costs are higher than planned, management takes action.

Importance of Cost Control:-

  • Enables the firm to achieve defined objectives
  • Proper utilization of the firm's resources
  • Growth and survival of a firm
  • Make the organization efficient

Process of Job costing in Non-Profit Organization:

The Job costing model generally suggests the idea that a "JOB" can be identified as some tangible products. The cost of services must be determined with some reasonable degree of accuracy

In nonprofit organizations, the "product" is usually not called a"job order." It may be called a program or class of service. A"program" is an identifiable group of activities that frequently produces outputs in the form of services rather than goods (e.g., a safety program, an education program, and a family counseling program). Costs or revenues may be traced to individual hospital patients, individual social welfare cases, and individual university research projects. However, departments often work simultaneously on many programs, so the "job-order" costing challenge is to "apply" the various department costs to the various programs. Only then can managers make wiser decisions regarding the allocation of limited resources among competing programs. In service industries (e.g., repairing, consulting, legal, and/or accounting services), each customer order is a different job with a special account or order number.

b.) Importance to establish appropriate cost pools:-

A Cost pool is a grouping of individual costs, typically by department or service center, Cost allocations are then made from a cost pool.

Manufacturing overhead costs are the expenses incurred in the manufacture of a product that cannot be directly allocated to that product. Activity cost pools are an important part of an activity based on costing

Given a plant that produces many different products, financial managers are tasked with the problem of how to accurately assign production costs to each product. Using an activity-based costing method for assigning costs since it is a good compromise between efficiency and accuracy. Assigning costs accurately is important to determine the profitability of products and subsequently, to make rational production decisions.

Answer#3:-

a)statement showing calculation of Total estimated overhead
Indirect Materials & Supplies - $96200 X 110%        1,05,820
Repair & Maintenance - $24,100 X 110%            26,510
Plant Service Contracts - $37,000 X 110%            40,700
Refurbishing Costs - $89100 X 110%            98,010
Machinery Depreciation - $185,000 X 112%        2,07,200
Factory Insurance - $18,200 X 110%            20,020
Property Taxes - $4500 X 120%              5,400
Heat, Light & Power - $51,700 X 110%            56,870
Miscellaneous factory overheads - $6000 X 120%              7,200
Indirect Labor - $120,000 X 110%        1,32,000
Materials - $80,000 X 110%            88,000
Transportation - $25,000 X 110%            27,500
Rent - $40,000 X 110%            44,000
Security Cost - $15,000 X 110%            16,500
Total Estimated Overheads         $8,75,730
b)Predetermined overhead rate=Total estimated overheads/Estimated Hours
$8,75,730/55,600hours=15.75$
c)over head application cost if 60,000hours used for production
60,000hours*15.75$=9,45,032$
And overhead applied for the job =120hours*15.75$ = $1890

Answer#4:-

Environmental management accounting involves generation as well as analysis of information that supports internal environmental management processes within an organization. The information that is being generated and analyzed includes both financial as well as non-financial information.

Environmental management accounting and decision making: Environmental management accounting helps the managers of an organization to make decisions in the following areas – product pricing, budgeting, and investment appraisal, calculating costs and savings of environmental projects, and setting of quantified performance targets.

2. Transfer pricing, in very simple terms, is the price at which divisions of a company transact with each other. In other words, it is the price at which two related parties transact business between themselves.

Transfer pricing is relevant for multinational corporations as a multinational corporation has divisions in different countries across the globe. For example, P&G’s Australia unit manufactures and sells Pantene shampoos to P&G’s division in India and Sri Lanka. Having a transfer price will help P&G maximize its operating performance and optimize its tax arrangements.

In a multinational corporation transfer pricing provides divisional managers relevant information about cost and profitability of transactions that are conducted on an intra-company level.


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