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## Process Costing

Question 1: Process Costing

Lake Surf Company uses an automated process to clean and polish its merchandise items. For March 2017, the company conducted the following activities:

Required:

Using the weighted average method, determine the following:

1a. the number of equivalent units

1b. cost per equivalent unit

1c. ending work in process inventory

1d. cost of normal and abnormal spoilage

1e. cost of goods completed and transferred out during March, 2017

Question 2: Budget Lulu Company has the following budgeted sales for the next six-month period:

There were 69,000 units of finished goods in inventory at the beginning of January. Plans are to have an inventory of finished products that equals 100% of the following month sales plus 25% of the second month sales. Two kilograms of raw materials are required for each unit produced. From January, each kilogram of material costs \$20 (up from \$18 in December last year). Inventory levels for materials are equal to 40% of the needs for the next month. Lulu Company uses a FIFO inventory method for both raw material and finished goods.

Required:

2a. Prepare a production budgets in units for January and February

2b. Prepare a materials usage budget in kilograms and dollars for January

2c. Prepare a materials purchases budget in kilograms and dollars for January

2d. List and explain some benefits to an organisation of preparing an operating budget, use the textbook and other relevant sources to support your answer

Question 3: Variance Analysis (20 marks in total)

The following standard cost data relate to the operation of Dragon Company for 2016. The standard cost per unit is based on the normal annual production of 15,000 units.

Actual production in 2016 was 10,000 units. The following data was obtained from Dragon Company’s records:

Actual variable overhead costs \$        100,000

Actual fixed overhead \$        125,000

Required:

3a. Calculate and show flexible budget variance for each cost item.

3b. Calculate the following variances and indicate whether they are favourable or unfavourable.

i.Direct material price variance

ii.Direct material efficiency variance

iii.Direct labour price variance

iv.Direct labour efficiency variance

v.Variable manufacturing overhead spending variance

vi.Variable manufacturing overhead efficiency variance

vii.Fixed manufacturing overhead spending variance

viii.Fixed manufacturing overhead efficiency variance

Question 4: Relevant Costs and Decision Making (20 marks in total)

Gordon Manufacturing is approached by a new customer to fulfill a 4,000 unit, one-time-only special order for a product similar to the one offered to existing customers. At present, the company has excess operating capacity. The following data apply to sales to existing customers:

Required:

4a. For Gordon Manufacturing, what is the total relevant cost of making this special order?

4b. If the new customer is offering \$350 per unit sold, should the company accept the special offer? Explain.

4c. Suppose the company is already operating at capacity when the special order is received. What would be the relevant cost of accepting the special order?

4d. List and explain any TWO potential problems that should be avoided when conducting a relevant cost analysis. Use the textbook and other relevant sources to support your answer.

Question 5: Balanced Scorecard (20 marks in total)

The Balanced Scorecard can be described as a tool that “translates an organisation’s mission and strategy into a set of performance measures that provide the framework for implementing its strategy” (Horgren et al., 2014, p.585). Drawing on the textbook and no less than Ten (10) academic references, provide your description of the Balanced Scorecard, in particular its relationship to planning, performance targets, strategy, prediction,

This assessment task will assess the following learning outcome/s:

• be able to discuss and critique the historical and ethical development of managementaccounting.
• be able to apply cognitive skills in the design and operation of costing systems.
• be able to critically evaluate the design and operation of performance management systems.
• be able to explain the role of management accounting in organisational contexts and the implications for management accounting of different paradigms.
• be able to apply analytical and synthetical skills in report writing, and use quantitative techniques and computer software including using the Internet as a professional source.
• be able to create and implement computerised decision models.
• be able to critique how managers make decisions.

This assignment assesses your achievement of learning outcomes including:

• the application of cognitive skills in the design and operation of costing systems;
• the design and operation of performance management systems;
• the role of management accounting in organisational contexts:
• the implications for management accounting of different paradigms;
• the application of analytical and synthetical skills in report writing;
• quantitative techniques and computer software;
• using the Internet as a professional source;
• the history of management accounting
• the creation and implementation of computerised decision models; and
• to critique how managers make decisions.

In particular, this assignment is designed to assess your application of knowledge, understanding and skills in certain topics including cost flows in management accounting, spreadsheet construction, job and process costing, variance analysis, joint costing and budgeting.

Any assignments with evidence of plagiarism may be referred to the university's academic misconduct processes and will receive a grade of zero. See

The marking criteria for your assignments will be based on the content of the subject as identified by the learning objectives as outlined above and at the beginning of each of the various topics as outlined at the beginning of each Interact2 topic. Good spreadsheet answers will comply with the assignment requirements.

Example criteria used in marking essays/discussion questions/case studies/business reports

Relevance of the answer. Are the important issues raised in the question identified? Did the student answer the questions?

Critical capacity. Has reference material been carefully analysed or critically accepted?

Structure of the answer. Is the answer well-structured and the argument logically developed?

Writing style. Is the style concise and lucid or confused, making it difficult for the reader to get the point?

Scope of reading. Does the answer indicate a satisfactory coverage of literature relevant to the questions?

Process Costing

Part a.

 Calculation of Equivalent unit using Weighted average Particulars Input Output Material % - Weights Equivalent material units Conversion Costs % - Weights Equivalent conversion cost units Opening inventory - WIP 3,000 Units Introduced 12,000 Units completed 9,000 100 9,000 100 9,000 Abnormal Loss 1,000 100 1,000 100 1,000 Closing inventory - WIP 5,000 100 5,000 60 3,000 Total Equivalent Units 15,000 15,000 15,000 13,000

Part b.

 Cost per equivalent unit Particulars Opening Inventory - WIP Units Introduced Total Units 3,000 12,000 Total Material Cost 2,100 9,000 11,100 Material- equivalent units 15,000 Material cost per equivalent unit 0.74 Total Conversion Cost 485 10,045 10,530 Conversion Cost- equivalent units 13,000 Conversion Cost per equivalent unit 0.81

Part c.

 Value Of Ending Inventory Particulars Units (\$) Total Direct Materials 5,000 0.74 3,700.00 Conversion Costs 3,000 0.81 2,430.00 Total 6,130.00

Part d.

 Value Of Abnormal Loss Particulars Units (\$) Total Direct Materials 1,000 0.74 740.00 Conversion Costs 1,000 0.81 810.00 Total 1,550.00

Note: due to lack of information we have ignored the normal loss.

Part e.

 Value Of Goods Completed And Transferred Particulars Units (\$) Total Direct Materials 9,000 0.74 6,660.00 Conversion Costs 9,000 0.81 7,290.00 Total 13,950.00

Part a.

 Production Budget (In Units) Particulars January February Sales 48,000 84,000 Less : Opening Stock 69,000 99,000 Add : Closing Stock 99,000 78,000 Total 78,000 63,000

Working:

 Calculation Of Closing Stock : Month Jan Feb Mar Apr Unit Sales 48,000 84,000 60,000 72,000 Closing stock 99,000 78,000 72,000 -

Part b.

 Material Usage Budget Particulars January Production 78,000 Raw material per unit 2 Total Material - unit 1,56,000 Total Material - amount 31,20,000

Part c:

 Material Purchase Budget Particulars January Raw Material Required 1,56,000 Less : Opening Stock 62,400 Add : Closing Stock 50,400 Total Material Purchase 1,44,000

Working:

 Calculation Of Stock : Month Jan Feb Unit Produced 78,000 63,000 Raw Material Required 1,56,000 1,26,000 Opening stock -Raw material 62,400 50,400 Closing stock 50,400

Part d.

There are various types of budgets that are prepared by the managers of the company in order to assist them with the workings. The budget which is prepared to forecast the revenues and cost for the organisation is known as the operating budget. An operating budget is prepared in the format of income stamen stating all the revenues and cost. These revenue and cost are estimates set by the management which is based on various assumptions and factors. A detailed study and market research is conducted in order to prepare the operating budget including the amounts and units. There are various advantages of an operating budget, few of which have been listed below:

- Helps in tracking the fixed costs: the fixed cost of the company does not change. When a budget is prepared a thorough investigation of each and every item of cost and revenue are done which also include fixed costs. If there are any changes found in the fixed cost of the company during such research then the management can compare and find the reasons for such changes. This will help control the fixed cost and provide maximum benefits (Atkinson, 2012).

- Helps in planning the availability of the resources: when an operating budget is prepared it makes an estimate of the resources that would be required for the upcoming production cycle. This gives the management a chance to take to the suppliers regarding the resources at pre determined rates. This prevents the situations of shortages of raw materials (Berry, 2009).

- Helps in cost control: since the production is carried out taking the budget as a base, the resources allocated are also based on the budget. The departments are motivated to work within the set allocated resources, which helps to promote efficiency and cost control within the organisation (Boyd, 2013).

- sets a direction for the company to move forward: all the organisations need a path or a direction which helps them plan the activities. The operating budgeted helps the management set such a path for the company (Datar, 2015).

- helps to improve efficiency: the operating budget prepared estimates the production requirement for the products. While setting these requirements, a proper study and research can helps the management plan the resources in such a way that provides maximum output with minimal resources. This helps to improve the production efficiency (Datar, 2016).

## Budgeting

Therefore, we see that there are a lot of advantages of creating a operating budget for an organisation.

Part a.

 Calculation Of Flexible Budget Variance Particulars Standard Cost per unit 10,000 Units Variance Standard Cost Actual Cost Direct Materials 20 2,00,000 2,02,500 -2,500 Direct Labour 25 2,50,000 3,25,000 -75,000 Variable Overhead 6 60,000 1,00,000 -40,000 Fixed Overhead 10 1,50,000 1,50,000 - Total Cost 61 6,60,000 7,77,500 -1,17,500

Part b.

 Calculation Of Various Variance : Particulars Standard Cost (\$) Actual Cost (\$) Amount (\$) Status Direct Materials Price Variance 225000 202500 22500 Favourable [(Actual Qty * Standard Rate)- Actual Cost ] Direct Materials Efficiency Variance 200000 225000 (25000) Adverse [(Standard Qty - Actual Qty)*Standard Rate] Direct Labour Price Variance 312500 325000 (12500) Adverse [(Actual Hours*Standard Rate)-Actual Cost] Direct Labour Efficiency Variance 250000 312500 (62500) Adverse [(Standard Hours - Actual Hours)*Standard Rate] Variable Manufacturing Overhead Spending Variance 75000 100000 (25000) Adverse [(Actual Qty * Standard Rate)- Actual Cost ] Variable Manufacturing Overhead Efficiency Variance 60000 75000 (15000) Adverse [(Standard Hours - Actual Hours)*Standard Rate] Fixed Manufacturing Overhead Spending Variance 150000 125000 25000 Favourable (Standard Cost-Actual Cost) Fixed Manufacturing Overhead Efficiency Variance 100000 125000 (25000) Adverse [(Standard Hours - Actual Hours)*Standard Rate]

Part a.

 Calculation Of Total Relevant Cost Of The Special Order Particulars Amount (\$) Direct Materials 100 Direct Labour 50 Manufacturing Support 90 Total Relevant Cost 240

Note: Assuming there is spare capacity.

Part b.

The relevant cost for the product is \$240 per unit, whereas the customer is offering \$350 per unit. Since the customer is offering more than what company will incur the special order should be accepted. This conclusion is based on the availability of spare capacity. If the company has no spare capacity then the conclusion may change.

Part c.

 Calculation Of Total Relevant Cost Of The Special Order : Particulars Amount (\$) Direct Materials 100 Direct Labour 50 Manufacturing Support 90 Contribution Loss 225 Total Relevant Cost 465 Working: Calculation Of Contribution Per Unit From Current Operations Particulars Amount (\$) Sales 500 Less : Direct Materials 100 Direct Labour 50 Manufacturing Support 90 Marketing Costs 35 Contribution 225

Part d.

Relevant costing is the costing method that is used to evaluate the special offers. While conducting the relevant cost analysis for a product the two potential problems that should be avoided are as follows:

- Consideration of fixed costs- the fixed costs are irrelevant costs. These costs do not affect the decisions, as these costs will be incurred irrespective of what the decision is. Therefore, while conducting a relevant cost analysis of a product, we should make sure to not consider fixed costs.

- Consideration of Selling and distribution costs- while evaluating a decision of a special order which includes relevant cost analysis, one must make sure to eliminate the costs related to selling and distribution. The selling and distribution costs are incurred in order to sell more units. But when a customer is already present then no selling and distribution costs for such order are required to be incurred. Hence, we should make sure to not include the selling and distribution costs while analysing the relevant costs (Holtzman, 2013).

Therefore, while we calculate the relevant for a given order we must make sure to eliminate all irrelevant cots in order to ensure correct relevant cost information.

Balanced scorecard is a management system of strategic planning which is used by the organisations for effective communication of the goals. Also, it helps to plan the work and set the strategies. This method helps to prioritise the work for a given time and also helps to measure and monitor the progress towards strategic targets. The other methods which are used by the organisations are basically used to evaluate the short term progress of the organisation. This method helps the management attain short tern objectives by keeping its eye on the long term goal. This means that the organisations keep taking small steps which contribute towards the accomplishment of the long term objective of the organisation (Horngren, 2012).

## Variance Analysis

The method of the balanced scorecard helps to improve the communications in the organisation. Increased communication leads to awareness amongst various departments that helps to promote smooth functioning (Noreen, 2015).

This method helps the organisation to create a link between the various elements of the business in order to achieve the long term target. These elements include mission, vision, strategic core values, objectives measures, etc.

The balanced scorecard method is used to improve the internal functions of the company so that there resulting external outcomes can be improved. The quantitative data collected is interpreted by the management of the organisation which is used to make better decisions for the company. This method is extensively used by the various business organisations, industries and government worldwide (Seal, 2012).

Evaluating the internal elements of the organisation will help the management understand the areas with problems. The areas which create obstacles or slow the later processes can easily be identified because of the balances scorecard methods (Siciliano, 2015).

The balanced scorecard method helps improve the functioning by dividing the organisation into four major legs, which are finance, customers, growth and business process.

The financial data of the enterprise is very helpful in analysing the financial performance. The financial metrics such as ratio calculations, budget variances or targets, can be used to access the performance of the enterprise.

Customers form one of the most important parts of organisation. The workings of the organisation are done in order to satisfy the customer needs. The customer feedback should be taken into consideration as it provides scope for improvement.

The growth of the enterprise is very much dependent on the learning. It is important that the members are the enterprise is continuously trained in order to keep up with the changing trends. Continuous learning will help the organisation have a competitive advantage over the other enterprises of the same industry.

Lastly, there are business processes. These business processes are investigated by studying the product. The efficiency in production, savings in cost etc are the factors that help us evaluate the business processes

The best part of using the balanced scorecard method is that it very prominently links the various elements of the business with one another. The connection between the activities can very easily be identified which can be used to analyse the relation between the two elements. This helps to ensure smooth flow of data and recourses, which helps to promote organisational efficiency.

References

Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.

Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.

Boyd, W. K. (2013). Cost Accounting For Dummies. Hoboken: Wiley.

Datar, S. (2015). Cost accounting. Boston: Pearson.

Datar, S. (2016). Horngren's Cost Accounting: A Managerial Emphasis. Hoboken: Wiley.

Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.

Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.

Noreen, E. (2015). The theory of constraints and its implications for management accounting. Great Barrington, MA: North River Press.

Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.

Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.

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250 words