Question

Fancy Millwork has a factory that produces custom kitchen cabinets. It has multiple product lines. Materials and labor for the cabinets are determined by each job. To simplify the assignment, we will assume the following average costs. The company estimates that it will have 32,000 direct labor hours in total for the kitchen cabinets. The materials include $2,000 for the wood and other materials on a per job basis. It requires 40 hours of labor on average for a custom kitchen. The hourly rate is $10. The sales price will be set at a markup of 80%. It assumes 800 units are sold on average per year. A breakdown of estimated yearly costs related to the kitchen cabinets follows. Please note that the amounts are per year unless identified otherwise: Salaries- office & administrative $ 400,000 Salaries for factory supervisors and janitors $ 200,000 Office Rent $ 90,000 Factory Rent $ 80,000 Office Utilities and Misc office expenses(based on units sold) $ 20,000 SalesTravel(based on units sold) $ 24,000 Insurance - office $ 14,000 Depreciation - office equipment $ 45,000 Depreciation for factory equipment $ 70,000 Advertising $ 15,000 Sales commissions(based on units sold) $ 50,000 Factory Property taxes $ 10,000 Maintenance for factory equipment $ 80,000 QUESTIONS: 1. Please identify the following classifications for all costs above: variable and fixed costs; product and period costs. I would recommend that you show a schedule for each area on a yearly basis. For the variable costs, also, show them on a per unit (800 units) How does a company identify each type of cost? Can a cost classification be changed over time? If yes, explain how and give an least one example. If no, explain why? 2. . Determine the average cost of manufacturing one custom kitchen assuming the units given. Assume the MOH costs are allocated based on the direct labor hours per unit. Please show all calculations and round to the nearest dollar. I would recommend that you calculate the MOH per kitchen first. You should calculate an Overhead rate. Discuss other options (at least 2) for the activity base and the importance of the MOH allocation. Do multiple product lines impact the MOH allocation? What happens if MOH is not allocated correctly to a product? 3. Prepare a Job Order Cost sheet for the following custom kitchen: Materials $5,500 and 60 hours of labor. What is the customer price? What other factors would impact the sales price for this type of company? Can a company rely on setting price based on just a % on cost? 4. What is the Contribution Margin (CM) in total and per unit dollars, and CM% for the sale of 800 kitchen cabinets? Explain the importance of CM and how it can be used by companies to predict future income. Create some examples in excel with numbers to show how it can be used. 5. Prepare a traditional Income Statement assuming a volume of 800 units. For the cost of goods sold, please use the per unit cost you calculated in #2 multiplied by number of units sold. You do not have to prepare any additional schedules. I would use a similar format to exhibit 16-8 on page 737 or from your lecture notes. I recommend that you list out all operating expenses given above. Do not use just Selling and General/Administrative Expenses for your categories. Points will be lost by not listing out all period costs. You can ignore interest and income tax expense. 6. Prepare three Cost Volume Profit(CVP) Income Statements using the following yearly volumes: 200, 800 and 1,400. Link this schedule to question #1 for VC and FC calculated. Keep in mind how variable and fixed costs behave. The traditional income statement from #5 should be about the same net income as the 800 units for the CVP format. (use exhibit 20-12 page 893 as your example – please note that it is missing a title and your numbers are for a year. I also will send out an example in chat slides) a) Calculate Break-even in units and sales $ for the company b) Calculate units and sales $ if the company wants a profit of $2,000,000. c) Margin of safety for 800 units. Discuss the importance of these calculations to a company. Fully discuss the differences(at least 3) between the traditional vs CVP format. Give examples supported by numbers in excel of how you would use these calculations as the CFO of the company 7. If the following changes were to be made, calculate a new CVP Income Statement: Direct Material costs decrease by 10%; fixed costs increase by 30% and sales price would increase by 5%. Assume you are selling the 800 units. Should the company consider these changes? Why or why not? This question is not just based on the new net income. Please review the full income statement for changes. What if the sales volume changes? Does this change your answer? I would recommend using volumes higher and lower to see how the changes impact your answer. Include CVP income statements in excel that are needed to support your answer. Discuss real examples of cost increases for fixed costs (at least 2) and decreases for direct materials (at least 2) that could be implemented for this business. Can the company increase price? What other areas might be impacted due to the price increase? You are the CFO of this business what is important to consider? Give 2 industry specific details that can impact this discussion. Do some research for this industry. It is always important to understand the industry that you are in as some industries have different factors that impact sales and profitability. Additional information for another product line: Assume another product line is also being considered – bookshelves. Only use this information for the questions listed directly below. ? Higher skilled workers would be required which will result in paying them $15 per hour. ? Additional MOH costs for the year will be $150,000. These costs will be in addition to the costs already being incurred. These costs are due to the additional product line and also related to the current product lines for additional production abilities. The two lines will share all MOH costs. 1. Should the company consider using ABC? Discuss why or why not? Areas to include in the discussion but not limited to the following: impact on product cost, implications of not using the right allocation and its impact on price if any, etc…. 2. How specifically would ABC help allocate MOH costs

PLEASE ANSWER PORTION IN BOLD.

Answer 1

1. Yes , the company should use ABC method for allocationof resources. Following are the reasons for application of ABC:

1. Since the new product line and existing product line will use the same machine overhead, it is necessary to use ABC to allocate the overheads on the appropriate basis to reach at the correct product cost.

2. Fancy Millwork sells its product at 80 % mark up, which will not be accurate if the product cost is not accurately calculated.

3. ABC is important to calculate the profit / loss or a particular product Line which will help in deciding whether a product line is profitable or not.

4. ABC will help to calculate whether additional cost incurred for the existing and new product line will be profitable or not.

2. Activity Base Costing apportion the overhead cost on the basis of the most appropraite cost driver to arrive at the accurate distribution of the overhead cost.

In the given question MOH is apportioned on the basis on the Direct Labour hours . So By using ABC MOH will be apportioned on the basis of the direct Labour hours by calculating activity rate for the same.