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MANAGERIAL ACCOUNTING (8508)

Assignment No. 1
QUESTION.NO1
Durban Metal Products Ltd., makes
specialty metal parts used in applications ranging
from the cutting edges of bulldozer blades to
replacement parts for Land Rovers. The company uses
an activity-based costing system for internal
decision-making purposes. The company has four
activity cost pools as listed below:
Activity Cost Pool Activity Measure Activity Rate
Order size ......................Number of direct
labor-hours Rs.16.85 / direct labor-hour
Customer orders ............Number of customer
orders Rs.320.00 / customer order
Product testing ...............Number of testing
hours Rs.89.00 / testing hour
Selling ............................umber of sales
calls Rs.1,090.00 / sales call
The managing director of the company would like
information concerning the cost of a recently
completed order for heavy-duty trailer axles. The
order required 200 direct labor-hours, 4 hours of
product testing, and 2 sales calls.
Required:
Prepare a report summarizing the overhead costs
assigned to the order for heavy-duty trailer axles.
What is the total overhead cost assigned to the
order?
ANSWER.
(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Activity ABC Cost
Order size..... R 16.85 per direct labor- 200 direct labor- R 3,370
hour hours
Customer orders.... R 320.00 per customer 1 customer order R 320
order
Product testing R 89.00 per product 4 product testing R 356
testing hour hours
Selling . R 1,090.00 per sales call 2 sales calls R 2,180
TOTAL 6,226
QUESTION NO2
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Purity, Inc., bottles and

distributes mineral water from the company’s natural
springs in northern Oregon. Purity markets two
products: twelve-ounce disposable plastic bottles
and four-gallon reusable plastic containers.
Required:
For 2018, Purity marketing managers project monthly
sales of 400,000 twelve-ounce bottles and 100,000
four-gallon containers. Average selling prices are
estimated at Rs.0.25 per twelve-ounce bottle and
Rs.1.50 per four-gallon container. Prepare a
revenues budget for Purity, Inc., for the year
ending December 31, 2018.
Purity begins 2018 with 900,000 twelve-ounce bottles
in inventory. The vice president of operations
requests that twelve-ounce bottles ending inventory
on December 31, 2018, be no less than 600,000
bottles. Based on sales projections as budgeted
previously, what is the minimum number of twelve-
ounce bottles Purity must produce during 2018?
The VP of operations requests that ending inventory of four-gallon containers
on December 31, 2018, be 200,000 units. If the production budget calls for
Purity to produce 1,300,000 four-gallon containers during 2018, what is the
beginning inventory of four-gallon containers on January 1, 2018
ANSWER
selling unit Total
price sold Revenues
12ounce bottles 0.25 4,800,000 1,200,000
4gallon unit 1.50 1,200,000 1,800,000
3,000,000
400,000 × 12 months=4,800,000
100,000 × 12 months=1,200,000

Budgeted unit sales (12-ounce bottles) 4,800,000

Add target ending finished goods inventory 600,000
Total requirements 5,400,000
Deduct beginning finished goods inventory 9,00,000
Units to be produced 45,00,000
Beginning inventory Budgeted sale+ Target ending inventory- Budgeted Production
1,200,000+ 2,00,000- 1,300,000
1,00,000 4gallon unit
QUESTION.3
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(A) What are the main costs and limitations of

implementing ABC systems
ANSWER
The main cost and limitations of ABC are the
measurements necessary to implement the systems. Even
basic ABC systems require many calculations to determine
costs of products and services. Activity-cost rates often need
to be updated regularly. Very detailed ABC systems are costly
to operate and difficult to understand. Sometimes the
allocations necessary to calculate activity costs often result in
activity-cost pools and quantities of cost-allocation bases
being measured with error. When measurement errors are
large, activity-cost information can be misleading
(B) For work done during August,
Pansey Company incurred direct materials
costs of Rs.120,000 and conversion costs of
Rs.260,000. The company employs a just-in-
time operating philosophy and backflush
costing. At the end of August, it was
determined that the Work in Process Inventory
account had been assigned Rs.900 of costs,
and the ending balance of the Finished Goods
Inventory account was Rs.1,300. There were no
beginning inventory balances. How much was
charged to the Cost of Goods Sold account
during August? What was the ending balance of
that account?
ANSWER
A total of 380,000 ($120,000+260,000) was charged to the cost of
good sold account during august the ending balance of cost of good
sold was 377800(380,000-900-1300)
QUESTION.4
(A)What do you understand by the term
absorption costing? How does it differ from Direct
Costing?
ANSWER
Definition
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A method of costing a product in which all fixed and variable costs are apportioned to cost centers
where they are accounted for using absorption rates. This method ensures that all incurred costs
are recovered from the selling price of a good or service.

What Does Absorption Costing Mean?

If Apple used full absorption costing when they were valuing their inventory of iPods, the
inventory value would include the following: the materials to make the iPods, the money
paid to workers to manufacture the iPods, the manufacturing overhead, as well as the fixed
overhead for the entire operation. In contrast, variable costing only takes into consideration
the first three of these costs or the variable costsI think this table might help show the
differences between the two inventory valuable methods. The right column shows the
absorption costing method. Notice that all the costs are included in the final inventory
valuation. Take a look at the two total values of the inventory. Look how much less the
variable costing method values your inventory. This could be a major problem when it
comes to marketing and pricing your productsIf the management isn’t taking all fixed costs
into consideration when valuing the true cost of producing inventory, the sales price might
be too low and the company might actually be losing money on every product sold

Components of Absorption Costing

Under the absorption method of costing (aka “full costing”), the following costs go into the
product

 Direct material (DM)

 Direct labor (DL)
 Variable manufacturing overhead (VMOH)
 Fixed manufacturing overhead (FMOH)

Under absorption costing, the costs below are considered period costs
and do not go into the cost of a product. They are, instead, expensed in
the period occurred:

 Variable selling and administrative

 Fixed selling and administrative

Direct Costing Vs. Absorption Costing

Direct Costing is a method of cost accounting in which only those costs
which are a direct result of production of the product are assigned to
the product and all costs associated with the providing of plant capacity
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to produce the product are treated as expenses in the period. In

Absorption Costing not only those costs which can be directly assigned
to a product but fixed costs as well are included in the cost of
production. This paper was undertaken with the intent of utilyzing the
skills I have acquired over the past several years in Absorption Costing
and comparing that against what I have researched and studied on
Direct Costing. The basic item of difference between advocates of
absorption costing valuation on one hand, and of direct costing
valuation on the other hand, is in the definition of and distinction
between fixed and variable manufacturing cost. In my report, I have
reported on both Direct and Absorption Costing views concerning the
validity of the charge of fixed cost to inventory. I have also tried to
show how direct costing information can be used in planning and
controlling costs in an organization in all departments, not only the
production department. It is now my belief that a Direct Costing System
can be a very important tool to the financial manager if properly
utilized.

(B)
Dixon Company manufactures and sells recreational
equipment. One of the company’s products, a small
camp stove, sells for Rs. 50 per unit. Variable
expenses are Rs. 32 per stove, and fixed expenses
associated with the stove total Rs. 108,000 per
month.
Required:
Compute the break-even point in number of stoves and
in total sales dollars.
If the variable expenses per stove increase as a
percentage of the selling price, will it result in a
higher or a lower break-even point? Why? (Assume
that the fixed expenses remain unchanged)
At present, the company is selling 8,000 stoves per
month. The sales manager is convinced that a 10
percent reduction in the selling price would result
in a 25 percent increase in monthly sales of stoves.
Prepare two contribution income statement, one under
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present operating conditions, and one as operations

would appear after the proposed changes. Show both
total and per unit data on your statements.
Refer to the data in (iii) above. How many stoves
would have to be sold at the new selling price to
yield a minimum net income of Rs. 35,000 per month?
ANSWER
Sales = Variable expenses + Fixed expenses + Profits

$50Q = $32Q + $108,000 + $0

$18Q = $108,000

Q = $108,000 ÷ $18 per stove

Q = 6,000 stoves, or at $50 per stove, $300,000 in sales.

Alternative solution:

Break-even point in unit sales= Fixed expenses/ Unit contribution margin

= $108,000/ $18.00 per stove= 6,000 stoves

or at $50 per stove, $300,000 in sales.

2. An increase in the variable expenses as a percentage of the selling price would result in a
higher break-even point. The reason is that if variable expenses increase as a percentage of
sales, then the contribution margin will decrease as a percentage of sales. A lower CM ratio
would mean that more stoves would have to be sold in order to generate enough
contribution margin to cover the fixed costs

Present: 8,000 Proposed:

Stoves 10,000
Stoves*
PER PER
Total Unit Total Unit
Sales $400,000 $50 $450,000 $45 *
Less variable expenses 256,000 32 320,000 32
Contribution margin. 144,000 $18 130,000 $13
Less fixed expenses... 108,000 108,000
Net operating income ... 36,000 $ 22,000
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*8,000 stoves × 1.25 = 10,000 stoves

**$50 × 0.9 = $45

As shown above, a 25% increase in volume is not enough to offset a 10% reduction in
the selling price; thus, net operating income decreases.

Sales = Variable expenses + Fixed expenses + Profits

$45Q = $32Q + $108,000 + $35,000
$13Q = $143,000
Q = $143,000 ÷ $13 per stove
Q = 11,000 stoves
Alternative solution:
Unit sales to attain target profit = Fixed expenses + Target profit/ Unit contribution
margin
$108,000 + $35,000/ $13 per stove = 11,000 stoves
QUESTION.5
(A) A company has an inventory of 1,100
assorted parts for a line of missiles that has been discontinued.
The inventory cost is Rs.78,000. The parts can be either (a) re-
machined at total additional costs of Rs.24,500 and then sold for
Rs.33,000 or (b) sold as scrap for Rs.6,500. Which action is more
profitable? Show your calculations.
Particulars Re machining Sell as scrap
($) ($)
Future revenues 33,000 6,500
Deduct future costs 24,500
Operating income 8500 6,500
Difference in of remachining $2000F

(B) DeCesare Computers makes 5,200 units of a circuit board, CB76

at a cost of Rs.28 each. Variable cost per unit is Rs.190 and
fixed cost per unit is Rs.90. Peach Electronics offers to supply
5,200 units of CB76 for Rs.260. If DeCesare buys from Peach it
will be able to save Rs.10 per unit in fixed costs but continue to
incur the remaining Rs.80 per unit. Should DeCesare accept Peach’s
offer? Explain
Make Buy
Relevant costs
Variable costs $190
Avoidable fixed costs 10
Purchase price $260
Unit relevant cost $200 $260
DeCesare Computers should reject Peach’s offer. The $80 of fixed costs is irrelevant because it
will be incurred regardless of this decision. When comparing relevant costs between the choices,
Peach’s offer price is higher than the cost to continue to produce.
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QUESTION ,6
The Lopez Company uses standard costing in its
manufacturing plant for auto parts. The standard cost of a
particular auto part, based on a denominator level of 4,000 output
units per year, included 6 machine-hours of variable manufacturing
overhead at Rs. 8 per hour and 6 machine-hours of fixed
manufacturing overhead at Rs. 15 per hour. Actual output produced
was 4,400 units. Variable manufacturing overhead incurred was Rs.
245,000. Fixed manufacturing overhead incurred was Rs. 373,000.
Actual machine-hours were 28,400.
Required:
Prepare an analysis of all variable manufacturing overhead and
fixed manufacturing overhead variances.
Prepare journal entries using the 4-variance analysis.
Describe how individual fixed manufacturing overhead items are
controlled from day to day.
Discuss possible causes of the fixed manufacturing overhead
variances
ANSWER
The budget for fixed manufacturing overhead is 4,000 units × 6 machine-hours ×
$15machine-hours/unit = $360,000
An overview of the 4-variance analysis is:

4-VarianceAnalysis Spending Efficiency Production-Volume

Variance Variance Variance
Variable Manufacturing $17,800 U $16,000 U Never a Variance
Overhead
Fixed Manufacturing Overhead $13,000 U Never a Variance $36,000 F
A detailed comparison of actual and flexible budgeted amounts is:
Actual Flexible Budget
output units (auto parts) 4,400 4,400
Allocation base (machine-hours) 28,400 26,400a
Allocation base per output unit 6.45b 6.00
Variable MOH $245,000 $211,200c
Variable MOH per hour $8.63d $8.00
Fixed MOH $373,000 $360,000e
Fixed MOH per hour $13.13f
a4,400 units × 6.00 machine-hours/unit = 26,400 machine-hours
b28,400 ÷ 4,400 = 6.45 machine-hours per unit
c 4,400 units × 6.00 machine-hours per unit × $8.00 per machine-hour = $211,200
$245,000 ÷ 28,400 = $8.63
e 4,000 units × 6.00 machine-hours per unit × $15 per machine-hour = $360,000f
f $373,000 ÷ 28,400 = $13.13
2
Variable Manufacturing Overhead Control
Accounts Payable Control and other accounts
Work-in-Process Control
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Variable Manufacturing Overhead Allocated

Variable Manufacturing Overhead Allocated
Variable Manufacturing Overhead Spending Variance
Variable Manufacturing Overhead Efficiency Variance
Variable Manufacturing Overhead Control
Fixed Manufacturing Overhead Control
Wages Payable Control, Accumulated
Depreciation Control, etc
Work-in-Process Control
Fixed Manufacturing Overhead Allocated
Fixed Manufacturing Overhead Allocated
Fixed Manufacturing Overhead Spending Variance
Fixed Manufacturing Overhead Production-Volume
Variance
Fixed Manufacturing Overhead Control

3 Individual fixed manufacturing overhead items are not usually affected very much byday-to-day
control. Instead, they are controlled periodically through planning decisions and
budgeting procedures that may sometimes have horizons covering six months or a year (for
example, management salaries) and sometimes covering many years (for example, long-term
leases and depreciation on plant and equipment)..
4 The fixed overhead spending variance is caused by the actual realization of fixed costs differing
from the budgeted amounts. Some fixed costs are known because they are contractually specified,
such as rent or insurance, although if the rental or insurance contract expires during the year, the
fixed amount can change. Other fixed costs are estimated, such as the cost of
managerial salaries, which may depend on bonuses and other payments not known
at the beginning of the period. In this example, the spending variance is unfavorable, so actual
FOH is greater than the budgeted amount of FOH. The fixed overhead production volume variance
is caused by production being over or under expected capacity. You may be under capacity when
demand drops from expected level sor if there are problems with production. Over capacity is
usually driven by favorable demands hocks or a desire to increase inventories. The fact that there
is a favorable volume varian ceindicates that production exceeded the expected level of output
(4,400 units actual relative to adenominator level of 4,000 output unit..

Flexible Budget: Allocated:

Budgeted Input Budgeted Input
Variable Allowed for Allowed for
Actual Actual Actual Output Actual Output
MOH Input × Budgeted Rate × Budgeted Rate
Cost
× Budgeted (3) (4)
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Incurred(1 Rate
) (2)

Variable
4

MOH
The fixed overhead spending
variance is caused by the actual
realization of fixed costs
differing from the budgeted
amounts. Some fixed costs are
known because they are
contractually
specified, such as rent or insurance,
although if the rental or insurance
contract expires during the
year, the fixed amount can
change. Other fixed costs are
estimated, such as the cost of
managerial salaries, which may
depend on bonuses and other
payments not known at the
beginning of the period. In this
example, the spending variance is
unfavorable, so actual FOH is
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greater than the budgeted amount

of FOH.
The fixed overhead production
volume variance is caused by
production being over or
under expected capacity. You may
be under capacity when demand
drops from expected levels
or if there are problems with
production. Over capacity is usually
driven by favorable demand
shocks or a desire to increase
inventories. The fact that there is a
favorable volume variance
indicates that production exceeded
the expected level of output (4,400
units actual relative to a
denominator level of 4,000 output
units)
(28,400 × $8)
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The fixed overhead spending

variance is caused by the actual
realization of fixed costs
differing from the budgeted
amounts. Some fixed costs are
known because they are
contractually
specified, such as rent or insurance,
although if the rental or insurance
contract expires during the
year, the fixed amount can
change. Other fixed costs are
estimated, such as the cost of
managerial salaries, which may
depend on bonuses and other
payments not known at the
beginning of the period. In this
example, the spending variance is
unfavorable, so actual FOH is
greater than the budgeted amount
of FOH.
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The fixed overhead production

volume variance is caused by
production being over or
under expected capacity. You may
be under capacity when demand
drops from expected levels
or if there are problems with
production. Over capacity is usually
driven by favorable demand
shocks or a desire to increase
inventories. The fact that there is a
favorable volume variance
indicates that production exceeded
the expected level of output (4,400
units actual relative to a
denominator level of 4,000 output
units
The fixed overhead spending variance is caused by the actual realization of fixed costsdiffering
from the budgeted amounts. Some fixed costs are known because they are contractuallyspecified,
such as rent or insurance, although if the rental or insurance contract expires during theyear, the
fixed amount can change. Other fixed costs are estimated, such as the cost
ofmanagerial salaries, which may depend on bonuses and other payments not known
at thebeginning of the period. In this example, the spending variance is unfavorable, so actual
FOH isgreater than the budgeted amount of FOH. The fixed overhead production volume variance
is caused by production being over orunder expected capacity. You may be under capacity when
demand drops from expected levelsor if there are problems with production. Over capacity is
usually driven by favorable demandshocks or a desire to increase inventories. The fact that there
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is a favorable volume varianceindicates that production exceeded the expected level of output

(4,400 units actual relative to adenominator level of 4,000 output units) Variable
MOH
The fixed overhead spending
variance is caused by the actual
realization of fixed costs
differing from the budgeted
amounts. Some fixed costs are
known because they are
contractually
specified, such as rent or insurance,
although if the rental or insurance
contract expires during the
year, the fixed amount can
change. Other fixed costs are
estimated, such as the cost of
managerial salaries, which may
depend on bonuses and other
payments not known at the
beginning of the period. In this
example, the spending variance is
unfavorable, so actual FOH is
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greater than the budgeted amount

of FOH.
The fixed overhead production
volume variance is caused by
production being over or
under expected capacity. You may
be under capacity when demand
drops from expected levels
or if there are problems with
production. Over capacity is usually
driven by favorable demand
shocks or a desire to increase
inventories. The fact that there is a
favorable volume variance
indicates that production exceeded
the expected level of output (4,400
units actual relative to a
denominator leveVariable
MOH
l of 4,000 output unit
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$245,000 (28,400 × $8)

$227,200
(28,400 × $8)
$227,200
(28,400 × $8)
$227,20$245,00 $245,000 (28,400 × $8) (4,400 × 6 × $8)
(4,400 × 6 × $8) (4,400 × 6 × $8)
$245,000 $245,000 $245,000
$245,000 $245,000
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\
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200$211,

$17,800U I6,000U

Spending variance Efficiency variance Never a variance

S33,800U

Flexible-budget variance Never a variance

S33,800U

Underallocated variable overhead

(Total variable overhead variance)

Fixed MOH
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Flexible
Same Budget: Allocated:
Budgete Same Budgeted
Lump Sum
Budgeted Input
Allowed for
d (as in Static
Budget)
Lump
Sum
Same
Budgete
d
Lump
Sum
Same
Budge
ted
Lump
Sum
Same
Budgete
d
Lump
Sum
Same
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Budge
ted
Lump
Sum
Same Budgeted
Lump Sum
(as in Static Budget)

Same
Budge
ted
Lump
Sum

Same Budgeted
Lump Sum
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