Infolink University College
Department of Accounting and Finance
MSc Program in Accounting and Finance
Advanced Cost and Managerial Accounting Study Guide and
Individual Assignment (30%)
--------------------------------------------------------------------------------------------------------------------1. Assume that Mr. X is a Managerial Accountant in a certain firm and prepares
production cost report weekly to support Managers make an informed decision. In the
report this Managerial Accountant frequently treats product costs as period costs to
reduce the cost of goods manufactured and increase gross profit on the income
statement, thereby making the firm appear more profitable than it actually was.
Based on the above case;
A. Does the Managerial Accountant prepare an appropriate production cost report?
Why?
B. Differentiate product and period costs.
2. The Svenson Corporation manufactures cellular modems. It manufactures its own
cellular modem circuit boards (CMCB), an important part of the cellular modem. It
reports the following cost information about the costs of making CMCBs in 2011 and
the expected costs in 2012:
Current
Expected Costs in
Costs in 2011 2012
Variable manufacturing costs
Direct material cost per CMCB
$ 180
$ 170
Direct manufacturing labor cost per CMCB
50
45
Variable manufacturing cost per batch for
setups, materials handling, and quality control
Fixed manufacturing cost
1,600
1,500
Fixed manufacturing overhead costs that can 320,000
320,000
be avoided if CMCBs are not made
Fixed manufacturing overhead costs of plant 800,000
800,000
depreciation, insurance, and administration
that cannot be avoided even if CMCBs are not
made
Svenson manufactured 8,000 CMCBs in 2011 in 40 batches of 200 each. In 2012,
Svenson anticipates needing 10,000 CMCBs. The CMCBs would be produced in 80
batches of 125 each.
The Minton Corporation has approached Svenson about supplying CMCBs to
Svenson in 2012 at $300 per CMCB on whatever delivery schedule Svenson wants.
Required:
A. Calculate the total expected manufacturing cost per unit of making CMCBs in 2012.
B. Suppose the capacity currently used to make CMCBs will become idle if Svenson
purchases CMCBs from Minton. On the basis of financial considerations alone,
should Svenson make CMCBs or buy them from Minton? Show your calculations.
SOLUTION
Expected manufacturing costs 2015:
Direct materials $ 170 per unit x 10, 000 = $ 1,700, 000
Direct labour $ 180 per unit x 10, 000 = $ 450, 000
Variable overhead per batch $ 1,500 x 80 batches = $ 120, 000
Fixed overhead:
Avoidable $ 320, 000
Not avoidable $ 800, 000
A.
Calculate the total expected manufacturing cost per unit of making CMCBs in
2012.
$ 1,700, 000 + $ 450, 000 + $ 120, 000 + $ 320, 000 + $ 800, 000 = $ 3,390, 000
Cost per Unit = $ 3,390, 000 / 10,000
Units = $ 390 per unit
B.
Suppose the capacity currently used to make CMCBs will become idle if
Svenson purchases CMCBs from Minton. On the basis of financial considerations
alone, should Svenson make CMCBs or buy them from Minton?
Svenson should keep manufacturing the CMCBs:
Costs if CMCBs are purchased from Minton = ($ 180 x 10, 000) + $ 800, 000 = $ 3.000,000
+ $ 800, 000 = $ 3,800, 000
The cost purchasing is $ 410, 000 higher than the cost of manufacturing.
Current
Costs in
2011
Expected
Costs in
2012
Expected
total Costs
in 2015
Avoidable
Product cost
$ 180
$ 170
$1,700,000
$1,700,000
50
45
$450,000
$450,000
1,600
1,500
$120,000
$120,000
320,000
320,000
$320,000
$320,000
$800,000
$800,000
$800,000
$800,000
Variable manufacturing
costs
Direct material cost per
CMCB
Direct manufacturing labor
cost per CMCB
Variable manufacturing
cost per batch for setups,
materials handling, and
quality control
Fixed manufacturing
cost
Fixed manufacturing
overhead costs that can
be avoided if CMCBs are
not made
Fixed manufacturing
overhead costs of plant
depreciation, insurance,
and administration that
cannot be avoided even if
CMCBs are not made
3. Max Company produces a single product that it sells wholesale for $100 per unit.
Variable costs per unit amount to $80 and total fixed costs are $100,000. Assume the
applicable tax rate is 40%.
Required:
A. Find the breakeven point in sales dollars.
B. Find the sales dollars needed to generate $20,000 in net income before taxes
C. Find the sales dollars needed to generate $24,000 in net income after taxes
D. Find the sales dollars needed to generate a 9% return on sales dollars after taxes
SOLUTION
Sales Price per Units = $100
Variable costs = $80
Fixed Cost = $100,000
Per Unit
Sales
$100
Variable costs
80
Contribution Margin
$20
Contribution Margin Ratio
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
$20
=
= 20%
𝑆𝑎𝑙𝑒𝑠
$100
Break‐even point in dollars. The break‐even point in sales dollars is calculated by
dividing total fixed costs of $100,000 by the contribution margin ratio of 20%.
A.
Find the breakeven point in sales dollars.
𝐵𝑟𝑒𝑎𝑘‐ 𝑒𝑣𝑒𝑛 𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝐷𝑜𝑙𝑙𝑎𝑟𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
$100,000
=
= $500, 000
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜
20%
B.
Find the sales dollars needed to generate $20,000 in net income
before taxes
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝐷𝑜𝑙𝑙𝑎𝑟𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝐴𝑋 =
=
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 + 𝑇𝑎𝑟𝑔𝑒𝑡𝑒𝑑 𝐼𝑛𝑐𝑜𝑚𝑒
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜
$100,000 + $20,000
= $600,000
20%
C.
Find the sales dollars needed to generate $24,000 in net income after
taxes
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝐷𝑜𝑙𝑙𝑎𝑟𝑠 𝐴𝑓𝑡𝑒𝑟 40 % 𝑇𝐴𝑋 =
=
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 + 𝑇𝑎𝑟𝑔𝑒𝑡𝑒𝑑 𝐼𝑛𝑐𝑜𝑚𝑒
∗ 40%
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜
$100,000 + $20,000
∗ 40% = $240,000
20%
D.
Find the sales dollars needed to generate a 9% return on sales
dollars after taxes
The sales dollars needed to generate a 9% return on sales dollars after tax
= $240,000 ∗ 9% = $218, 400
4. The Rapid meal has two restaurants that are open 24 hours a day. Fixed costs for the
two restaurants together total $450,000 per year. Service varies from a cup of coffee
to full meals. The average sales check per customer is $8.00. The average cost of
food and other variable costs for each customer is $3.20. The income tax rate is 30
percent. Target net income is $105,000.
Required:
A. Compute the revenues needed to obtain the target net income
B. How many sales checks are needed to breakeven? To earn net income of
$105,000?
C. Compute net income if the number of sales checks is 150,000?
SOLUTION
Target Net profit = 105000
Let profit before tax be p
So, p - 30%p = 105000
0.70p = 105000
p = 150000
Total Net profit = Total revenue - Total cost
Average net profit = Average revenue - average cost. Let no. of customers, or sales
checks =x
Total profit / x = 8 - (450000/ x + 3.2)
150000/ x = 8 - 3.2 - 450000/x
150000/x = 4.8 - 450000/x
x (no. of customers needed) = 125000 [b]
a] Total revenue needed = Average revenue x no. of customers needed
= 125000 x 8 = 1000000
b] Customers needed for break even {where TR = TC}
8x = 450000 + 3.2x
x = 93750
c] Net Income if sales checks is 150000 = TR - TC
= 150000 (8) - 450000 - 3.2 (150000) = 1200000 - 450000 - 480000
= 270000
5. XYZ furniture business, a partnership business in Bule Hora Town, produces M, N,
and L. These items are produced using the same machines, and there is a maximum
of 80,000 machine-hours available during the year. The information about the
production time and costs for these three items is:
M
N
L
Hours to produce
1
0.5
0.25
Selling price
$350
$200
$175
Direct Materials
$40
$30
$35
Direct Labor
$70
$65
$50
Variable Overhead
$55
$50
$45
Fixed Overhead
$28
$32
$24
XYZ is limited in producing its products by the number of possible machine-hours.
Orders have been received for 60,000 M, 48,000 N, and 40,000 L, which will require
94,000 machine-hours to produce. Since there are not enough machine-hours
available to fill all of the orders,
A. which orders should XYZ fill first?
B. how many of each item will be produced?
SOLUTION
the contribution margin per machine-hour since machine-hours are the
constraining factor for production
M
N
L
Selling price
$350
$200
$175
Direct Materials
$40
$30
$35
Direct Labor
$70
$65
$50
Variable Overhead
$55
$50
$45
Contribution margin
$185
$55
$48
Hours to produce
1
0.5
0.25
Contribution margin per
machine hour
$185
$110
$192
XYZ should fulfill the orders for L, M, and N. L provide the highest contribution margin
per machine-hour, followed by M and then N. Maximizing the contribution margin per
constraint, in this case per machine-hour, is the best way for XYZ to manage the
constraint. How many of each item will be produced?
Available machine hour
80,000
Hours to fill L orders (40,000*0.25)
10,000
Remaining hours
70,000
Hours to fill M orders(60,000*1)
60,000
Remaining hours
10,000
Hours needed to produce N
÷0.50
N orders that would be filled
20,000
Therefore, based on contribution margin and the constraint of machine hours, XYZ
should fill all 40,000 of the L orders first, then fill the 60,000 M and, and fill 20,000 of the
N orders last.
6. For what purpose does Managers use cost-volume-profit (CVP) analysis? List
Introduction of Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit Analysis (as the name suggests) is the analysis of three variable viz.,
cost, volume and profit. Such an analysis explores the relationship existing amongst
costs, revenue, activity levels and the resulting profit. It aims at measuring variations of
cost with volume. In the profit planning of a business, cost-volume-profit (C-V-P)
relationship is the most significant factor.
Features of CVP Analysis:

It is a technique for studying the relationship between cost volume and profit.

Profit of an undertaking depends upon a large number of factors. But the most
important of these factors are the cost of manufacture, volume of sales and
selling price of products.

In words of Herman C. Heiser, “the most significant single factor in profit
plannibg of the average business is the relationship between volume of
business, cost and profits”.

The CVP relationship is an important tool used for profit planning of a business.
Some important marginal cost concepts are as follows
1.
Profit Statement under Marginal Costing
2.
Sales - Variable Cost = Contribution = Fixed Cost ± Profit/ (loss)
3.
Profit Volume (P/V) Ratio or Contribution to Sales (C/S) Ratio also known as
contribution margin ratio = Contribution¸ Sales
4.
Breakeven Point (BEP): Point where there is no profit or no loss. at BEP,
Contribution = Fixed Cost
5.
Margin of safety = Sales – BEP sales
6.
Profit = (Sales ´ P/V ratio) – Fixed Cost
7.
BEP - Calculation in different scenario :
8.
a. BEP in case of process costing is expressed in terms of total raw material
input
b.
In capital budgeting, BEP is that sales volume where discounted cash inflow
= discounted cash outflow.
c.
Potential BE : On the basis of sales out of current period production only.
d.
Multiple BE : Different BE due to change in sales price, variable costs &
fixed costs for different production level.
e.
Cash BEP = Cash fixed cost ÷contribution p.u. So do not consider the sunk
cost.
f.
BEP for decision making purpose: Accept that proposal where BEP is
lowest provided the profit cannot be calculated.
In all recommendations of marginal costing decisions, the following factors are to be
considered:
(i)
Whether the product or production line in question makes a contribution.
(ii)
Where a choice is to be made between two courses of action, the additional
fixed overhead, if any, should be taken into account.
(iii)
The continuity of demand after expansion or renovation or installation of the
sophisticated machine and its impact on the selling price should also be
considered. For example, if the selling price goes down when the supply
increases the possible drop in profit should be taken into account.
(iv)
Cost is not the only criterion for decision making. Non-cost factors like the
necessity to retain the experienced employees, etc. should also be considered.
Advantages of using CVP analysis
The cost-volume-profit analysis offers advantages to help you make good business
decisions. It is an effective method that helps accountants make decisions that help with
future operations. Some advantages of using CVP analysis include:
Saves time: Helps accountants save time compared with other accounting analysis tools
Improves decision making: Helps managers make proactive decisions that influence
budgeting and increase production efforts to achieve profitability
Improves product selection: Can help you analyze which products are the most
profitable and how a business can manufacture more products to increase revenue
Manages costs: Helps to prevent spending money on unnecessary distribution and
production costs
7. List assumptions of CVP
Common Assumptions in Cost-Volume-Profit (CVP) Analysis
CVP analysis is used to determine how changes in costs and volume affect a company’s
operating income and net income. Certain underlying assumptions place definite
limitations on the use of CVP analysis. Therefore, it is essential that anyone preparing
CVP information should be aware of the underlying assumptions on which the information
is to be derived. CVP analysis requires that all the company’s costs, including
manufacturing, selling, and administrative costs, be identified as variable or fixed. If these
assumptions are not recognized, serious errors may result and incorrect conclusions may
be drawn from the analysis. A cost volume profit definition, defined also as the CVP
model, is a financial model that shows how changes in sales volume, prices, and costs
will affect profits. These components are vital to determining the success of a company
through profit margins.
Some of the key assumptions underlying the cost-volume-profit analysis are as follows:
(1) All costs can be classified as fixed and variable
All costs are presumed to be classified as either variable or fixed. While developing and
applying cost-profit-analysis including the break-even analysis, it is assumed that all costs
can be classified into fixed and variable costs. In the real business environment, however,
costs behave differently. In fact, it is difficult to identify each and every cost element as
fixed and variable. If anyone fails to identify the cost as fixed and variable, the application
of cost-volume-profit analysis becomes almost impossible.
(2) Behavior or costs will be linear within the relevant range
Cost-volume-profit (CVP) analysis assumes that total fixed costs do not change in the
short-run within the relevant range. Cost and revenue relationships are linear within a
relevant range of activity and over a specified period of time. Total variable costs are
exactly proportionate to sales volume. But in reality, cost behavior may not remain
constant.
(3) The difficulty of steps fixed costs
The relevant range for many costs is very short. If prices, unit costs, sales-mix, operating
efficiency, or other relevant factors change, then the overall CVP analysis and
relationships also must be modified. In that case, it becomes very uncomfortable to
compute the required volume because it is difficult to say that which the relevant range
for our needed volume is.
(4) Selling price remains constant for any volume
The selling price and market conditions are constant. Indeed, most often quantity discount
is offered for different lots of purchase. Also, if the business produces and sells multiple
products, the sales mix is assumed constant. This causes difficulty in determining the
contribution margin per unit(CMPU) and contribution margin ratio.
(5) There is no significant change in the size of the inventory
Application of cost-volume-profit (CVP) analysis is possible only under the following two
situations:

Either the company should follow variable costing for the inventoriable product
cost.

Or all the production volumes should be sold within the same period.
(6) Cost-volume-profit (CVP) analysis applies only to a short-term time horizon
CVP analysis is a short term planning tool because nothing remains stable in the longrun. When circumstances change, CVP analysis should also be revised to reflect the
changing situations. In the condition of changing variables, all equations of CVP analysis
need a readjustment of figures.
8. What is break-even point?
What Is the Breakeven Point (BEP)?
The breakeven point (break-even price) for a trade or investment is determined by
comparing the market price of an asset to the original cost; the breakeven point is
reached when the two prices are equal.
In corporate accounting, the breakeven point formula is determined by dividing the total
fixed costs associated with production by the revenue per individual unit minus the
variable costs per unit. In this case, fixed costs refer to those which do not change
depending upon the number of units sold. Put differently, the breakeven point is the
production level at which total revenues for a product equal total expenses.
In accounting, the breakeven point is calculated by dividing the fixed costs of production
by the price per unit minus the variable costs of production.
The breakeven point is the level of production at which the costs of production equal the
revenues for a product.
In investing, the breakeven point is said to be achieved when the market price of an
asset is the same as its original cost.
Breakeven points can be applied to a wide variety of contexts. For instance, the
breakeven point in a property would be how much money the homeowner would need
to generate from a sale to exactly offset the net purchase price, inclusive of closing costs,
taxes, fees, insurance, and interest paid on the mortgage—as well as costs related to
maintenance and home improvements. At that price, the homeowner would exactly
break even, neither making nor losing any money.
Traders also apply BEPs to trades, figuring out what price a security must reach to
exactly cover all costs associated with a trade including taxes, commissions,
management fees, and so on. A company's breakeven is likewise calculated by
taking fixed costs and dividing that figure by the gross profit margin percentage.
A breakeven point is used in multiple areas of business and finance. In accounting terms,
it refers to the production level at which total production revenue equals total production
costs. In investing, the breakeven point is the point at which the original cost equals the
market price. Meanwhile, the breakeven point in options trading occurs when the market
price of an underlying asset reaches the level at which a buyer will not incur a loss.
To calculate the breakeven point in business, fixed costs are divided by the gross profit
margin.
9. What is fixed and variable cost in CVP analysis?
Cost-volume-profit analysis is a mathematical equation businesses apply to see how
many units of a product they need to sell to gain a profit or break even. Businesses use
this formula to determine how the changes in fixed costs, variable costs and sales volume
can contribute to the profits of a business. Running a CVP analysis involves using several
equations for price, cost and other variables, which it then plots out on an economic graph.
Businesses often use the CVP analysis to calculate the break-even point, which is the
number of units they must sell in order to cover the costs required to make the product.
This may help them understand how to improve their performance. For example, a sock
company may use the cost-volume-profit analysis to understand how many socks they
need to sell to earn a $70,000 profit.
The CVP analysis contains different components, which involve various calculations.
These components are:
Fixed costs: These are the costs that don't fluctuate with changes in sales or product
productions. Examples of fixed costs include rent and advertising.
Variable costs: These are the costs that change as the quantity of products changes.
Examples of variable costs include raw materials and direct labor.
10. What is product and sales mix?
What is Product Mix? (Definition & Meaning)
Also known as ‘product assortment‘ and ‘product portfolio‘, the product mix refers to
the total number of goods and services a seller in the market offers to consumers.
A product mix consists of several products lines offered by a company, and a company
may contain one or multiple product lines in its product mix. Also, each product line might
have several products under it.
For instance, a company might offer multiple fairly similar product lines – such as
mouthwash, toothbrush, and toothpaste. Whereas, a company might even have varied
product lines that don’t have any relation to each other – such as soft drinks and clothing
apparel.
In simple words, the product mix is the amalgamation of all the product lines a firm has
under it. The deeper and wider a product mix is, the more products a company can offer,
which will ultimately lead to more reach.
The product mix has a profound impact on company’s brand image. With a larger product
mix, you will be able to meet the demands of different consumers and target markets.
In addition, the more product width and depth company has, the more diversified it would
be. The result? There would be less risk as your company wouldn’t be entirely dependent
on one product or product line.
Another reason why having a product mix is important is because it helps you understand
the direction in which your company is heading. The data that you accumulate through a
product mix helps you determine what’s working, what’s not working, and where you want
to take the company in the future.
Not just that, expanding the product mix also helps you cater to your existing customers in
a much more efficient and fulfilling way. Remember that the needs of your customers keep
changing as time moves forward, so keep updating your product mix accordingly.
Most importantly, as the business grows, you might be tempted to update your product mix
to reach more people. While doing so, make sure that you don’t compromise on your
existing products’ quality. Be extremely careful while changing and adding product lines.
What is sales mix?
Sales mix refers to the proportion of sales a single product accounts for in a company’s
total sales. It is used to determine which products are performing well and which products
are sinking so that inventory adjustments can be made down the line.
It’s worth noting that sales mix can also refer to the variety of products sold by a company
(or the “mix” of “sales,” if you will), but for business purposes, we’re going to use the
definition above.
Sales mix is one of the more fast-paced sales analytics. Because products and inventory
constantly move at different speeds depending on advertising, time of year, and societal
circumstances, sales managers must calculate sales mix regularly to ensure the current
products are meeting sales goals.
It sounds complicated, but as we’ll see in the next section, the formula is quite simple. It’s
keeping tabs on product changes and remembering to do the calculations that can get
overwhelming and cause revenue losses.
How to calculate sales mix
There are several ways to calculate sales mix; it depends on what aspect of sales you’re
looking to analyze. Sales mix is all about understanding profit margin, which is the
percentage of a product’s profit divided by its sale price. You can then compare the profit
margins of multiple products to understand your sales mix.
Below, we’ll take a look at the sales mix formula, sales mix percentage, sales mix
contribution margin, and sales mix variance for one company analyzing its products.
Sales mix formula
Based on this sales mix, sales managers can go to marketing and advise that more
advertising budget be allocated to the weight-lifting set than to the heat-tech running jacket
for the next quarter. Even though the price of the product is lower, the profit margin is
higher, so the company will make more profit overall by selling weight-lifting sets than
heat-tech running jackets.
Sales mix percentage
Sales mix percentage is the number of one product’s sales divided by the number of total
products sold. There are two sales mix percentages to be aware of: projected and current.
Projected sales mix percentages are based on the time period of the last time sales mix was
calculated.
Sales mix contribution margin
The sales mix contribution margin is the amount of actual dollars a company sees from the
sales mix percentage in a given time period. This metric is used to calculate the number of
product units a company needs to sell in order to remain at its sales mix goal.