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Exercises Topic 2

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11 views2 pages

Exercises Topic 2

Uploaded by

Daria Demian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Universitat Pompeu Fabra – Cost Accounting

1.2 Exercises - Topic 2: Costing Method I: Partial Costing.

1.2.1 Company AB (1st part)


Company AB produces two products and has provided the following information:

• Number of units produced: Product 1: 900


Product 2: 100
• Direct materials: Product 1: 9,000 €
Product 2: 500 €
• Direct labor: Product 1: 1,800 €
Product 2: 400 €
(the fixed part of direct labor amounts to 80 % for both products).

• Indirect costs: 5,850 €


(fixed part of indirect costs): 3,650 €

• Sales price per unit: Product 1: 16 €


Product 2: 8€
Required:
a) Calculate the costs per unit for both products under a Direct, a Variable and an Evolved
Costing System.
b) Calculate the margin for both products and the profit or loss (operating income) of the
company under the following assumptions:
(1) the company uses a Direct Costing System.
(2) the company uses a Variable Costing System.
(3) the company uses an Evolved Costing System.

1.2.2 Sun S.A (1st part). Computing the selling price

The company is specialized in manufacturing products for private gardens. The star product is a
swimming pool made of plastic with a dimension of 9 square meters (3x3 meters). Due to the success
of this product, the company is considering launching a new version of the product that would have a
dimension of 16 square meters (4x4) in the next summer.
However, before making a final decision the manager wants to know the selling price of the product. It
must be taken into account that according to the company’s pricing policy a gross margin (sales minus
the direct costs of the product) of 30% is required for each product. For that reason, the manager
wants to calculate the standard cost first.

The data for the production of a swimming pool of 16 m2 are as follows:


• Direct materials (plastic): 3 kg at 35 €/kg.
• Direct materials (paint): 2 liters at 25 €/l.
• Production process:
o Direct labor: 2 hours at 500 €/hour.
o 2 machine-hours (variable & direct cost) at 250 €/machine hour.
Required:
Calculate the minimum selling price at which the new product could be sold according to the
company's pricing policy.
Cost Accounting I Topic 2

1.2.3 Mini Case Study: True Fittings


True Fittings is a company that produces and installs equipment for industrial air conditioning. The
equipment is only produced when a client places an order. The production cycle lasts for seven
months, four of them correspond to the production process.

The management team is concerned about the losses generated by the company (see details in table
1). This fact is exacerbated by the high selling prices, during the past two years only 10% of the bids
have been accepted by clients.

The selling price is determined by the budgeted costs for the direct materials and direct wages on
which the company adds 100% for structural (indirect) costs. In practice, however, the actual costs of
materials and direct wages are subject to important fluctuations due to errors in the budgets. A recent
market survey has revealed that prices fixed by the company are 20% above those of its best
competitors, offering the same level of quality.

Total
Sales 180
- Materials - 80
- Wages for production and installation - 90
- Wages of administrative personnel - 20
- Structural costs - 40
Result - 50
Table 1. True fitting's profit and loss account (in thousands €).

Recently, the finance director has carried out a study that indicates that the company could reduce
administrative wages by 5,000 € and structural costs by 15,000 € at the actual level of activity.
During the last period the company worked on four orders that have already been delivered to the
clients. Detailed information about their selling prices and material consumption is listed below:

Order 1 Order 2 Order 3 Order 4


Sales (in 000’s €) 50 20 70 40
- Materials (in 000’s €) - 25 - 12 - 30 - 13

The company also provides detailed information about the direct labor hours required for the
production and installation of each order. The direct labor cost per hour is taken from the production
and installation wages cost, and it’s the same for all the company.

Order 1 Order 2 Order 3 Order 4


Direct labor (hours) 8 15 5 12

Required:
• Calculate
o the gross margin of each order, and
o the total profit
• Formulate recommendations based upon your calculations.

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