Question

1. All the Karmichael businesses have inventory:

Crooked Creek Wines – raw materials such as grapes, work-in-process including wine in vats undergoing fermentation and wine in storage, and finished goods such as bottled wines;

Vine Dining – raw materials such as vegetables, fruit, meats, and spices; and

Rolling in Dough – raw materials including flour, yeast, salt and finished product in the form of bread.

The following information was provided by Crooked Creek Wines regarding their performance for last year.

Income Statement for year ending 2017
Revenue		$ ????
Cost of Goods Sold
Beginning Finished Goods Inventory	$ 312,500
Cost of goods manufactured	$ ????
Cost of goods available for sale	$ ????
Ending finished goods inventory	$ ????
Cost of Goods Sold		$1,016,285
Gross Margin		$ 733,715
Operating Costs
Marketing	$ ???
Distribution	$   44,250
Salaries	$   75,000
Total operating costs		$ 251,750
Operating Income		$ ????
Schedule of cost of goods manufactured
Direct Materials
Beginning direct materials inventory	$   25,000
Purchases of direct materials	$ ????
Cost of direct materials available for use	$ 700,820
Ending direct materials inventory	$   23,750
Direct materials used		$ 677,070
Direct manufacturing labour		$ 225,000
Manufacturing overheads
Indirect manufacturing labour	$   53,600
Supplies	$   13,777
Utilities	$   ????
Depreciation – machinery	$    4,300
Other expenses	$   29,875
Total manufacturing overheads		$ 167,352
Manufacturing costs incurred during period		$ 1,069,422
Beginning work-in-process inventory		$     ????
Total manufacturing costs to account for		$ 1,744,347
Ending work—in-process for period		$     ????
Cost of goods manufactured		$     985,035

Required

a. Using the information above calculate the missing values in the above table

                                                                         i.     Revenue

                                                                       ii.     Cost of goods manufactured

                                                                      iii.     Cost of goods available for sale

                                                                      iv.     Ending finished goods inventory

                                                                       v.     Marketing costs

                                                                      vi.     Operating income

                                                                     vii.     Purchases of direct materials

                                                                   viii.     Utilities

                                                                      ix.     Beginning work-in-process inventory

                                                                        x.     Ending work-in-process inventory

b)      Identify the prime cost and conversion cost for Crooked Creek Wines for the period.

c)      Assuming the Crooked Creek Wines produced 65,000 bottles during this period, what is the unit cost of production?

d)      Assuming the cost structures remain the same, what would be the cost per unit of manufacturing 110,000 bottles?

e)      Write a short paragraph to the management of Crooked Creek Wines explaining the differences between the unit costs, if any, calculated in requirement c and d.

2. As the Try It! Questions does not provide specific context in which to analyse and interpret information, consider the following:

a)      Direct materials cost is $1.70 per bottle for Crooked Creek Wines – what are the direct materials included in this cost? If the industry average is $1.65 per bottle, what can this comparison tell management of Crooked Creek Wines? Consider this question considering the strategy of either product differentiation or cost leadership

b)      Electricity cost for Rolling in Dough is $8000 per month regardless of the number of unit produced – what type of contract does Rolling in Dough have with their electricity provider? How much is the electricity cost per unit using the figures from Topic 1?

c)      Transport costs for Crooked Creek Wines includes a flat fee of $80 per day (for leased distribution truck) plus $2 per kilometre driven – If Crooked Creek Wines purchased the truck and then replaced the flat free with depreciation of $2,200 per month and still retain the variable cost of $2 per kilometre driven, should they? If the lease contract includes free servicing, would you change your mind?

d)      Machine operating costs for Vine Dining (kitchen appliances etc) includes $1000 of maintenance costs per month, with $12 of other costs for each day the machinery is in operation – estimate the monthly cost for operating the machinery assuming 28 operating days? What other information would Vine Dining need to determine whether any of the machinery should be upgraded?

3.      Cost estimation – utilities

The Karmichaels’ property has single connections and metres for gas and water. The following information is provided regarding these utilities for the past year.

Using the high-low method, determine the liner cost function for both the gas and water costs.

Express the combined costs in a single linear cost equation.

Write an explanation of the procedure and the information it produces, as well as how this information is useful for cost management, to the Karmichaels.

  

	Gas		Water
	Units	Cost $	Units	Cost $
January	375	343.75	3,500	1,530.00
February	425	356.25	3,750	1,612.50
March	550	387.50	2,250	1,117.50
April	350	337.50	2,000	1,035.00
May	345	336.25	1,800	969.00
June	420	355.00	2,100	1,068.00
July	425	356.25	2,750	1,282.50
August	476	369.00	2,615	1,237.95
September	510	377.50	2,800	1,299.00
October	445	361.25	2,975	1,356.75
November	375	343.75	3,100	1,398.00
December	315	328.75	3,255	1,449.15

Answer 1

Income Statement for year ending 2017		$	$		Working	Step No
Revenue			1750000		Cost of goods sold+Gross Margin	1
Cost of Goods Sold
Beginning Finished Goods Inventory		312500
Cost of goods manufactured		985035			Cost of goods manu schedule (Last point)	8
Cost of goods available for sale		1297535			Beginning+cost of goods manu	9
Ending finished goods inventory		281250			Cost of goods available for sale-Cost of goods sold	10
Cost of Goods Sold			1016285
Gross Margin			733715
Operating Costs
Marketing		132500			Total Operating Cost-Distribution-Salaries	2
Distribution		44250
Salaries		75000
Total operating costs			251750
Operating Income			481965		Gross Margin-Total Operating Cost	3
Schedule of cost of goods manufactured
Direct Materials
Beginning direct materials inventory	25000
Purchases of direct materials	675820				Direct Material Used+Ending-Beginning	4
Cost of direct materials available for use	700820
Ending direct materials inventory	23750
Direct materials used		677070
Direct manufacturing labour		225000
Manufacturing overheads
Indirect manufacturing labour	53600
Supplies	13777
Utilities	65800				Total Manu Ovh-Indirect-Supplies-Dep-other exp	5
Depreciation – machinery	4300
Other expenses	29875
Total manufacturing overheads		167352
Manufacturing costs incurred during period		1069422
Beginning work-in-process inventory		674925			Total Manu cost to account For-Manu cost incurred	6
Total manufacturing costs to account for		1744347
Ending work—in-process for period		759312			Total Manu cost to account For-Cost of goods manu	7
Cost of goods manufactured		985035

b
Prime Cost	Direct Material+Direct Labor	677070+225000	902070
Conversion Cost	Direct Labor+Manu Oveh	225000+167352	392352

c.

c
Cost of production	Direct Material+Direct Labor+Manu Ovh	677070+225000+167352	1069422
Unit Produced			65000
Per unit cost	1069422/65000		16.45

d.

d		For 65000 Unit	For 110000
Variable Cost	Direct Material	677070	1145811	677070/65000*110000
	Direct Labor	225000	380769	225000/65000*110000
Fixed Cost	Manufacturing OVH	167352	167352	Fixed hence unchanged
Total Cost			1693932
Per Unit	1693932/110000		15.40