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Question:
  1. Prepare an activity-based customer-cost report, distribution channel cost report and a customer-profitability analysis for the five customers. Ensure that you also include an overall total profitability analysis for the business.
  2. Write a report to Louise Fairbern relating customer costs, customer profitability, distribution channel profitability and total profitability. Support the report with the analyses you have prepared and recommend courses of action to Louise. The report excluding the computational analysis should be around 500-1000 words and should include a brief introduction, analysis, recommendation and conclusion.
  3. Calculate the contribution margin per hour of selling the Super-chip and the Okay-chip. If no transfers of Super-chip are made to the Process Control Division, how many Super-chips and Okay-chips should the Semiconductor Division manufacture and sell? Show your calculations.
  4. The Process Control Division expects to sell 5000 process-control units this year. From the viewpoint of AIC as a whole, should 5000 Super-chips be transferred to the Process Control Division to replace circuit boards? Show your calculations.
  5. What transfer price, or range of prices, would ensure goal congruence among the division managers? Show your calculations and provide an explanation.
Answer:

Part 1: Customer-Cost Report

The following table shows in the various cost reports:

Particulars

 Adams

 Betz

 Chatham

 Dedham

 Elm

 General

 Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Fixed costs allocated

             42,550.00

    42,550.00

    45,386.67

         45,386.67

   45,386.67

   1,19,140.00

   3,40,400.00

 

 

 

 

 

 

 

 

 

 

 Costs

             42,550.00

    42,550.00

    45,386.67

         45,386.67

   45,386.67

   1,19,140.00

   3,40,400.00

 

 

 

 

 

 

 

 

 

 

 

Particulars

 Adams

 Betz

 Chatham

 Dedham

 Elm

 General

 Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct costs

       1,47,000.00

    1,17,200.00

      2,18,400.00

       1,15,720.00

       57,040.00

 

      6,55,360.00

 

 Discounts

          23,400.00

 

 

 

         3,660.00

 

         27,060.00

 

 Fixed costs

          42,550.00

       42,550.00

         45,386.67

          45,386.67

       45,386.67

   1,19,140.00

      3,40,400.00

 

 

 

 

 

 

 

 

 

 

 Total costs

       2,12,950.00

    1,59,750.00

      2,63,786.67

       1,61,106.67

    1,06,086.67

   1,19,140.00

    10,22,820.00

 

 

 

 

 

 

 

 

 

 

The following is the profitability analysis:

Particulars

 Adams

 Betz

 Chatham

 Dedham

 Elm

 General

 Total

 

 

 

 

 

 

 

 

 

 

 Gross revenue

       2,34,000.00

    1,88,800.00

      3,57,380.00

       1,47,840.00

       73,200.00

 

    10,01,220.00

 

 Less: direct costs

       1,47,000.00

    1,17,200.00

      2,18,400.00

       1,15,720.00

       57,040.00

 

      6,55,360.00

 

 Less: discount

          23,400.00

 

 

 

         3,660.00

 

         27,060.00

 

 Less: fixed costs

          42,550.00

       42,550.00

         45,386.67

          45,386.67

       45,386.67

   1,19,140.00

      3,40,400.00

 

 

 

 

 

 

 

 

 

 

 Profit earned

          21,050.00

       29,050.00

         93,593.33

        -13,266.67

      -32,886.67

  -1,19,140.00

        -21,600.00

 

 

 

 

 

 

 

 

 

 

Part 2:
Introduction:

The report talks about the concept of ABC costing which means the allocation of the costs on the basis of some drivers that drives those costs.  This report further throws light on the profitability analysis of these departments.

Analysis:

The total fixed costs of the company comes to be $340400 which is divided on the basis of costing drivers. These are allocated on the basis of the judgment of the management or the past experience or on the basis of some estimate.

The allocated costs comes to be the following:

Particulars

 Adams

 Betz

 Chatham

 Dedham

 Elm

 General

 Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Fixed costs allocated

             42,550.00

    42,550.00

    45,386.67

         45,386.67

   45,386.67

   1,19,140.00

   3,40,400.00

 

 

 

 

 

 

 

 

 

 

 Costs

             42,550.00

    42,550.00

    45,386.67

         45,386.67

   45,386.67

   1,19,140.00

   3,40,400.00

 

 

 

 

 

 

 

 

 

 

Secondly, talking about the total costs that have been allocated to each and every department. The following are the desired costs:

Particulars

 Adams

 Betz

 Chatham

 Dedham

 Elm

 General

 Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct costs

       1,47,000.00

    1,17,200.00

      2,18,400.00

       1,15,720.00

       57,040.00

 

      6,55,360.00

 

 Discounts

          23,400.00

 

 

 

         3,660.00

 

         27,060.00

 

 Fixed costs

          42,550.00

       42,550.00

         45,386.67

          45,386.67

       45,386.67

   1,19,140.00

      3,40,400.00

 

 

 

 

 

 

 

 

 

 

 Total costs

       2,12,950.00

    1,59,750.00

      2,63,786.67

       1,61,106.67

    1,06,086.67

   1,19,140.00

    10,22,820.00

 

 

 

 

 

 

 

 

 

 

The total amounts of the costs that are being incurred have now reached $10,22,820.

Now, if we analyse the profits that the company has earned from each of the customer and also as the whole, then we get losses which could be seen form the below table:

Particulars

 Adams

 Betz

 Chatham

 Dedham

 Elm

 General

 Total

 

 

 

 

 

 

 

 

 

 

 Gross revenue

       2,34,000.00

    1,88,800.00

      3,57,380.00

       1,47,840.00

       73,200.00

 

    10,01,220.00

 

 Less: direct costs

       1,47,000.00

    1,17,200.00

      2,18,400.00

       1,15,720.00

       57,040.00

 

      6,55,360.00

 

 Less: discount

          23,400.00

 

 

 

         3,660.00

 

         27,060.00

 

 Less: fixed costs

          42,550.00

       42,550.00

         45,386.67

          45,386.67

       45,386.67

   1,19,140.00

      3,40,400.00

 

 

 

 

 

 

 

 

 

 

 Profit earned

          21,050.00

       29,050.00

         93,593.33

        -13,266.67

      -32,886.67

  -1,19,140.00

        -21,600.00

 

 

 

 

 

 

 

 

 

 

From the above table, it could be seen that the company earns a loss of $21,600 in total. If we break this down, then we realise that Dedham and Elm is giving us losses. Though Chatham is able to earn profit for the company but these losses along with the general losses are so much that the total amount is going into losses. Hence, the company is not bale to earn profit even when it is working so hard to do so.

On top of that the company is giving cash discounts to its customers.

Conclusion and recommendation:

The company is working very hard to generate in profits. Hence, though the technique of the company of allocating these fixed costs is in line with the profit objective but its rules and policies may not be so strong that the company generates in profits.

ABC costing technique is the method through which the costs are identified these are then loaded into the secondary pools, primary cost pools are loaded, the various drivers of the activities are measured, the secondary costs are allocated into the primary pools and the costs are charged on the basis of these cost objects (Accounting tools, 2018).

In order to generate in profits, the company could do the following:

  • Increase the amounts that it charges from its customers
  • Stop giving cash discounts to them
  • Think of more activities that could be introduced so as to maximise its revenue
  • Think of ways of reducing its expenses which would help in reduction of the costs.
Scenario 2:
Part 1:

The following table shows the calculation of contribution per hour:

 

 Semiconductor Division

 

 Particulars

 Super-chip

 Okay-chip

 

 

 

 

 

 Direct materials

              5.00

              2.00

 

 Direct manufacturing labour

            60.00

            20.00

 

 

 

 

 

 Annual F overhead

     40,000.00

 

 

 

 

 

 

 Capacity

 45000 hours

 

 

 

 

 

 

 Particulars

 Super-chip

 Okay-chip

 

 

 

 

 

 Selling price

            80.00

            26.00

 

 Less: variable cost:

 

 

 

 Direct material

              5.00

              2.00

 

 Direct manufacturing labour

            60.00

            20.00

 

 

 

 

 

 Contribution

            15.00

              4.00

 

 Divided by the number of hours

              3.00

              1.00

 

 

 

 

 

 Contribution per hour

              5.00

              4.00

 

 

 

 

 

Keeping in mind the total number of direct labour hours, the following number of units should be produced:

 

 

 

 

Particulars

Number of hours per unit

Number of units to be produced

Total hours

 

 

 

 

 Super-chip

       3.00

 15,000.00

 45,000.00

 

 

 

 

 Okay chip

          -   

 15,000.00

              -   

 

 

 

 

 

 

 

 

 Total

 

 

 45,000.00

 

 

 

 

The company should manufacture 15,000 units of Super Chips and 15,000 units of Okay chips.

Part 2:

The following are the relevant calculations:

Particulars

 Costs in $

 

 

 

 

 Selling price of process control unit

             132.00

 

 

 

 

 Less: variable costs:

 

 

 Direct labour

               70.00

 

 Direct manufacturing labour

               45.00

 

 

 

 

 Contribution per unit

               17.00

 

 Number of direct labour hours

                 3.00

 

 

 

 

 Contribution per hour

5.666666667

 

 

Particulars

 Costs in $

 

 

 

 

 Selling price of process control unit

              145.00

 

 

 

 

 Less: variable costs:

 

 

 Direct labour

                65.00

 

 Direct manufacturing labour

                45.00

 

 

 

 

 Contribution per unit

                35.00

 

 Number of direct labour hours

                  3.00

 

 

 

 

 Contribution per hour

11.66666667

 

Conclusion: the company must go for the production of the transfer of the Super chips at the price at which the company sells it to the outside. This would result in an increased amount of the revenue being generated for the company.

In the given question, the fixed costs have been ignored since these have to be incurred even if the company decides to stop its production.

Part 3:

The following table shows in the relevant calculations:

Particulars

 Costs in $

 

 Super chips

 Process control unit

Improved control unit

 Selling price of process control unit

                     80.00

             132.00

145

 

 

 

 

 Less: variable costs:

 

 

 

 Direct labour

                       5.00

               70.00

                        65.00

 Direct manufacturing labour

                     60.00

               45.00

                        45.00

 

 

 

 

 Contribution per unit

                     15.00

               17.00

                        35.00

 Number of direct labour hours

                       3.00

                 3.00

                          3.00

 

 

 

 

 Contribution per hour

5

5.666666667

11.66666667

 

 

 

 

Total

10.66666667

 

Total

 

 

16.66666667

In order to achieve the goal congruence, the Semiconductor division must transfer the super chips at its variable cost since it can be seen that the total of the contribution of both the departments comes out to be $(5+5.67) =$10.67 and if the new improved control unit is sold, then the total contribution comes out to be $(5+11.67)=$16.67.

Part 4:

Yes, the answer would still be the same as above.

The following table shows in the relevant calculations:

Particulars

 Costs in $

 

 Super chips

 Process control unit

Improved control unit

 Selling price of process control unit

                     80.00

             132.00

145

 

 

 

 

 Less: variable costs:

 

 

 

 Direct labour

                       5.00

               70.00

                        65.00

 Direct manufacturing labour

                     60.00

               45.00

                        45.00

 

 

 

 

 Contribution per unit

                     15.00

               17.00

                        35.00

 Number of direct labour hours

                       3.00

                 3.00

                          3.00

 

 

 

 

 Contribution per hour

5

5.666666667

11.66666667

 

 

 

 

Total

10.66666667

 

Total

 

 

16.66666667

In order to achieve the goal congruence, the Semiconductor division must transfer the super chips at its variable cost since it can be seen that the total of the contribution of both the departments comes out to be $(5+5.67) =$10.67 and if the new improved control unit is sold, then the total contribution comes out to be $(5+11.67)=$16.67.

References:

Bragg, S. and Bragg, S. (2018). Activity based costing. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/2017/5/14/activity-based-costing [Accessed 11 Sep. 2018].

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2021). Activity-Based Customer-Cost Report And Profitability Analysis. Retrieved from https://myassignmenthelp.com/free-samples/acc202-management-accounting/accounting-tools.html.

"Activity-Based Customer-Cost Report And Profitability Analysis." My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/acc202-management-accounting/accounting-tools.html.

My Assignment Help (2021) Activity-Based Customer-Cost Report And Profitability Analysis [Online]. Available from: https://myassignmenthelp.com/free-samples/acc202-management-accounting/accounting-tools.html
[Accessed 20 May 2024].

My Assignment Help. 'Activity-Based Customer-Cost Report And Profitability Analysis' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/acc202-management-accounting/accounting-tools.html> accessed 20 May 2024.

My Assignment Help. Activity-Based Customer-Cost Report And Profitability Analysis [Internet]. My Assignment Help. 2021 [cited 20 May 2024]. Available from: https://myassignmenthelp.com/free-samples/acc202-management-accounting/accounting-tools.html.

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