1
Cost and Management Accounting 202 (CMA612S)
Feedback Tutorial Letter
Assignment 1 – sem 2 of 2015
QUESTION 1 (25 marks)
1.
BEP in N$ =
Total fixed costs
Contribution margin per unit
=
N$2 000 000
N$7 500
BEP in N$
=
267 canopies
=
Total fixed costs
Contribution margin ratio
=
N$2 000 000
0.6
=
Or;
N$3 333 333
= 266.66666666..canopies x N$12 500
=
N$3 333 333
2.
Sales
Propose(A)
Proposed (B)
Proposed (C)
N$
N$
N$
3 840 000
2 530 000
4 050 000
(1 600 000)
(990 000)
(1 800 000)
2 240 000
1 540 000
2 250 000
(2 000 000)
(2 000 000)
(1 800 000)
240 000
(460 000)
450 000
Less: Variable costs
Contribution Margin
Less: Fixed costs
Net profit
2
Comment: None of the above proposed situations will achieve the targeted annual after-tax of
N$450 000, however proposed in (C) is a bit better compares to (A). However the proposed in
(B) is results on a loss, and should not be recommended at all.
3.
Limitations of the Cost-Volume-Profit-Analysis (CVPA):
•
Costs are assumed to behave in a linear fashion. Unit variable costs are assumed
to be constant and fixed costs are assumed not to change. This is not true
because in reality there are semi variable and semi fixed costs which do not
behave that way.
•
Sales revenue is assumed to be constant for each unit sold. This is unrealistic
because of the necessity to reduce selling price to achieve higher volumes.
•
It assumes there are no inventories which is not realistic.
•
It assumes activity is the only factor affecting costs and factors such as inflation
are ignored.
•
The analysis only works in short term.
•
It assumes that as long as an activity is above breakeven point then it’s profitable.
This is not realistic because changes in cost and revenue pattern may result in
breakeven points after which losses are made.
QUESTION 2 (20 marks)
1. Weighted average contribution (P/V) ratio = Total contribution x 100%
Total sales
= N$36 100 000 x 100%
N$73 333 333
= 49.22….%
Or:
Weighted average contribution (P/V) ratio = Weighted average contribution x 100%
Weighted average sales
= N$902.50 x 100%
N$1 833.32
= 49.22…..%
Please see the workings below:
3
Mini-phone N$
Direct materials (N$50 x .95)
Net-phone N$
47.50
47.50
Direct labour
550.00
(550 x 1.5) 825.00
Variable overheads¹
150.00
150.00
Variable production cost per unit
747.50
1 022.50
Sales commission per unit (5%)
100.00
75.00
847.50
1 097.50
Variable production overheads¹ = High/low method used:
= N$8 000 000 - N$5 000 000
40 000 – 20 000
= N$150 per unit
Fixed cost = N$8 000 000 – (N$150 x 40 000)
= N$2 000 000
Or
= N$5 000 000 – (N$150 x 20 000)
= N$2 000 000
Details
Sales
Less: Total variable costs
variable production costs
Sales commission (5%)
Contribution
Mini-phone
Net-phone
Total
(40 000 x 2/3)N$
(40 000 x 1/3)N$
N$
53 333 333
20 000 000
73 333 333
(22 600 000)
(14 633 333)
(37 233 333)
19 933 333
13 633 333
33 566 666
2 666 667
1 000 000
3 666 667
30 733 333
5 366 667
36 100 000
Less: Fixed costs
3 500 000
(N$1 500 000 + N$2 000 000)
Net profit
32 600 000
Weighted
Selling price
per unit
x Sales mix
Sales (N$)
Mini-phone
N$2 000
0,6667
1 333.32
Net-phone
N$1 500
0,3333
500.00
4
1 833.32
Weighted
Contribution per unit
x Sales mix
contribution
(N$)
Mini-phone
N$1 152.50 (N$2 000 - N$847.50)
0,6667
768.33
N$402.50 (N$1 500 – N$1 097.50)
0,3333
134.17
902.50
Net-phone
Fixed costs
2. Break-even point in units = Weighted average contribution per unit
N$3 500 000
=
N$902.50
= 3 878 units
Break-even point in sales value = Break-even point in units x Weighted average selling price
= 3 878… units x N$1 833. 32…..
= N$7 109 829
Or;
Fixed costs
Break-even point in sales value = Weighted average contribution ratio
N$3 500 000
=
0.492275
= N$7 109 847
3. Net profit ratio = Net profit x 100%
Total sales
= N$32 600 000 x 100%
N$73 333 333
5
= 44.45%
4. Margin of safety (%) = Total sales – Break-even in N$ x 100%
Total sales
= (N$73 333 333 - N$ N$7 109 847) x 100%
N$73 333 333
= 90.3….%
Or;
Margin of safety (%)
= Sales in units – Break-even in units x 100%
Sales in units
= 40 000 units – 3 878 units x 100%
40 000 units
= 90.3….%
QUESTION 3 (20 marks) has been cancelled because there was some missing information,
given that, the students cannot able to answer the requirements.
Please see the question below equivalent to question 3 with its solution for learning purpose.
REVIEW QUESTION
Helao Ltd manufactures two products. Details of the two products and budgeted information are
given below for one period.
Product
Production units
Cost per unit
Production cost
Machine hours (per unit)
X
Y
200
150
N$
N$
73 960
2
65 350
3
The above production costs contain only a prime cost and a fixed production overhead of
N$52 275.The fixed production overhead is currently absorbed by using a machine hour rate.
The company has decided to change to an activity based costing system and the total of the
fixed production overhead has been analyzed as follows:
N$
Machining costs
20 800
6
Set-up costs
10 500
Stores ordering costs
7 200
Quality inspection
4 575
Stores issues
9 200
52 275
The company has also provided you with the following information:
Product
X
Y
200
150
10
5
Inspections per production run
5
2
Number of issues from stores
400
300
Budgeted production units
Units per production run
Product X and product Y are sold in batches of 50 units and 30 units per order respectively.
Required:
1. Calculate the predetermined overhead rate using traditional costing system based on
direct labor- hours.
2. Calculate the amount of prime cost each product if all overhead costs are absorbed on a
machine hours basis.
3. Calculate the total cost for each product if all overhead costs are absorbed on a machine
hours basis.
4. Calculate the total cost of each product, using activity-based costing.
Calculate and list the unit costs from your figures in (a) and (b) above, to show the
differences and comment briefly on any conclusions which may be drawn which could
have pricing and profit implications.
7
Solution to review question:
1. POR = Budgeted production overhead cost
Budgeted machine hours
= N$52 275
850¹
= N$61.50 per machine hour
850¹ = (200 units x 2 machine hour per unit) + (150 units x 3 machine hours per unit)
2.
Production cost
Less: Overhead cost¹
X
Y
N$
N$
73 960
65 350
(24 600)
(27 675)
49 360
37 675
Prime cost
Overhead cost¹ = N$24 600 (200 x 2 x N$61.50) and N$27 675 (150 x3 x N$61.50)
3.
X
Production cost
Product unit cost
Y
N$73 960
N$65 350
÷ 200 units
÷ 150 units
N$369.80
N$435.67
4.
(a) Overheads absorbed based on ABC
Overhead costs
N$
level of activity
cost/activity
Machine costing
20 800
850¹
N$24.47…/hour
Set-up costs
10 500
50*
N$210.00/run
Ordering costs
7 200
9*
N$800/order
Inspection/quality costs
4 575
160*
N$28.59../inspect.
Stores issues
9 200
700
N$13.14..per issue
Workings:
8
850¹ = (200 units x 2 machine hour per unit) + (150 units x 3 machine hours per unit)
*No. of production runs = {(200÷ 10) + (150 ÷ 5)}
= 50
*No of orders
= {(200 ÷ 50) + 150 ÷ 30)}
=9
*Inspection
= {(20 runs x 5) + {30 runs x 2)}
= 160
Total costs based on ABC
Prime cost
X
Y
N$
N$
246.80
251.17
Machine costs
48.94
73.41
Set up costs
21.00
42.00
Ordering costs
16.00
26.67
Inspection
14.30
11.44
Stores issues
26.29
26.28
373.33..
430.97..
Production cost/unit
Output in units
Total production costs
200
150
74 666
64 645
Alternative
a) ABC
Prime cost
X
Y
N$
N$
49 360
37 675
Machine costs
9 788
11 012
Set up costs
4 200
6 300
Ordering costs
3 200
4 000
Inspection
2 859
1 716
Stores issues
5 257
3 943
74 664
64 646
200
150
Total production cost
Output in units
9
Production cost/unit
373.33
430.97
5. Comparison of the two unit costs calculated in (a) and (b) above
Based on machine
X
Y
N$
N$
369.80
435.67
Hour rate
ABC method
Difference
373.33
430.97
3.53
4.70
Products X and Y have the largest differences. The ABC approach in theory, attributes the cost
of resources to each product which uses those resources on a more appropriate basis than the
traditional method.
Traditional costing method over allocates overheads to low volume products in this case
product Y (by N$4.7), under allocates overheads to higher volume products in this case X (by
N$3.53). The result is that it leads to wrong decisions. For example when this cost information is
used for pricing purposes, the price arrived at would not be realistic.