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Accounting Theory Of Mavis Ltd

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Questions:

1.Compute the Budgeted factory overhead rate for Department Alpha.

2.Compute the Budgeted factory overhead rate for Department Beta.

3.What is the Total Overhead Cost of Job 100?

4.What are thepossible reasons why Mavis Ltd uses two different Allocation rate for each Department?

5.Equipment to be used in producing the order has a book value of $2,000. The equipment has no other use for Lansing Company. If the order is not accepted, the equipment will be sold for $1,500. If the equipment is used in producing the order, it can be sold in three months for $800.

6.If the special order is accepted, the operations will require some of the storage space in the Company’s plant. If the space is used for this purpose, the Company will rent Storage Space Temporarily in a nearby warehouse at a cost of $18,000. The building depreciation allocated to the Storage Space to be used in producing the special order is $12,000.

7.If the special order is accepted, it will require a subassembly. Lansing Camera can purchase the subassembly for $24.00 per unit from an outside supplier or make it for $30.00 per unit. The 330.00 per unit was determined as follows:

Direct material ……………………….$10.00

Direct labor……………………………...6.00

Variable overhead…………………….....6.00

Allocated fixed overhead……………..... 8.00

Total unit of subassembly…………….. 30.00

8.Why is the distinction between relevant and non-relevant costs so important for Decision making in Cost and Management Accounting?       

9.Equipment to be used in producing the order has a book value of $2,000. The equipment has no other use for Lansing Company. If the order is not accepted, the equipment will be sold for $1,500. If the equipment is used in producing the order, it can be sold in three months for $800.

10.If the special order is accepted, the operations will require some of the storage space in the company’s plant. If the space is used for this purpose, the company will rent storage space temporarily in a nearby warehouse at a cost of $18,000. The building depreciation allocated to the storage space to be used in producing the special order is $12,000. (1.5 marks)

11.If the special order is accepted, it will require a Subassembly. Lansing Camera can purchase the subassembly for $24.00 per unit from an outside supplier or make it for $30.00 per unit. The 330.00 per unit was determined as follows:

Direct material ……………………….$10.00

Direct labor……………………………...6.00

Variable overhead…………………….....6.00

Allocated fixed overhead……………..... 8.00

Total unit of subassembly…………….. 30.00

12.Why is the distinction between relevant and non-relevant costs so important for decision making in Cost and Management Accounting?

13.Equipment to be used in producing the order has a book value of $2,000. The equipment has no other use for Lansing Company. If the order is not accepted, the equipment will be sold for $1,500. If the equipment is used in producing the order, it can be sold in three months for $800.

14.If the special order is accepted, the operations will require some of the Storage Space in the Company’s plant. If the space is used for this purpose, the Company will rent storage space temporarily in a nearby warehouse at a cost of $18,000. The building depreciation allocated to the storage space to be used in producing the special order is $12,000.

15.If the special order is accepted, it will require a subassembly. Lansing Camera can purchase the subassembly for $24.00 per unit from an outside supplier or make it for $30.00 per unit. The 330.00 per unit was determined as follows:

Direct material ……………………….$10.00

Direct labor……………………………...6.00

Variable overhead…………………….....6.00

Allocated fixed overhead……………..... 8.00

Total unit of subassembly…………….. 30.00                                           

16.Why is the distinction between relevant and non-relevant Costs so important for decision making in cost and Management Accounting? 

 

Answers:

1.Computation of budgeted factory overhead rate for Department Alpha.

Particulars

Amount

Direct Labour Cost

$180,000

Factory Overhead

$225,000

Machine hours

51,000 mh

 

 

Overhead application base

Direct labour cost

 

 

Budgeted Factory Overhead Rate ($225,000/$180,000)

                              1.25

 
2.Computation of budgeted factory overhead rate for Department Bet

Particulars

Amount

Direct Labour Cost

$165,000

Factory Overhead

$180,000

Machine hours

40,000 mh

 

 

Overhead application base

Machine hours

 

 

Budgeted Factory Overhead Rate ($180,000/40,000)

                              4.50


3.Calculation of total overhead cost for Job 100
 

 Particulars

Department Alpha

Department Beta

Total

Direct Material Cost

10,000

16,000

26,000

Direct Labour Cost

11,000

14,000

25,000

Factory Overhead (refer WN-1)

13,750

13,500

27,250

Total

34,750

43,500

78,250

The total overhead cost of Job 100 is Rs. 78,250/-

WN-1: Calculation of factory overhead:

 Particulars

Department Alpha

Department Beta

Overhead application base

Direct labour cost

Machine hours

Direct Labour Cost – (a)

11,000

 

Machine hours – (b)

 

3,000 mh

Overhead Rate – (c)

1.25

4.50

Factory Overhead (a*c),(b*c)

13,750

13,500

4.It is possible to have different overhead allocation rates. The possible reasons for using different allocation rate by Mavis Ltd. could be to split overhead costs in most appropriate and justifiable manner by using different cost pools. As this approach results in more fine-tuned allocations and costing.

As in the above case, department alpha is using direct labour cost for allocation of factory overhead because it could be a labour intensive department and most of the tasks are done by labour. So, using labour cost as allocation rate is more appropriate. Whereas, the department beta could be machine intensive department, an

The relevance of each of the following items in computation of the costs of the special order is as follows:

5.The book value of equipment to be used in producing the order of $2,000 is a sunk cost and therefore it is irrelevant for the decision. The relevant cost of the equipment is $ 700, i.e. $1,500 (sale value of equipment now, if the order is not accepted) Less $800 (sale value of equipment after 3 months, after producing the equipment).

 


6.The $12,000 building depreciation allocated to the storage space to be used in producing the special order is irrelevant that means the company will going to incur it irrespective of the fact whether the special order is accepted or not. So, it is a sunk cost. Further, the relevant cost is $18,000 which the company is going to incur only for the special order, if accepted.

7.The purchasing cost of subassembly is $24 per unit whereas if the company made it in house it will cost $22 calculated as below:

Direct Material

$10

Direct Labour

$6

Variable Overhead

$6

Total cost p.u.

$22

Allocated fixed overhead of $8 is irrelevant for the special order as the company will incur this overhead irrespective of the fact whether the special order is accepted or not.

So, from above it is clear that, the company should make the subassembly instead of purchasing it from outside.

8.The distinction between relevant and non-relevant costs is determined to ascertain the profitability of different alternatives available with the management. There are some costs which remain the same irrespective of the alternative chosen, these costs are irrelevant costs and hence are ignored while decision making, while the costs which changes or have impact on alternative chosen are treated as relevant costs. For ex, for the decision of making a particular product in house or purchasing it from outside, there may be come costs which the company has to incur in both the alternatives, is treated as irrelevant costs.

9.Calculation of Unit Contribution Margin

 

Unit Contribution Margin             =             Sales – Variable Cost

                                                                =             $5,595 – $899-$233

                                                                =             $4,463

10.Calculation of breakeven point in units

 

Breakeven Point                               =             Fixed Cost / Unit contribution Margin

                                                                =             $2,352,000/$4,463

                                                                =             527 units

 

Calculation of breakeven point in dollars

 

Breakeven Point                               =             Fixed Cost / Unit Contribution Margin * Sales Price

                                                                =             $2,352,000/$4,463 * $5,595

=             $2,948,563.75

11.Desired level of sales if the company plans to increase fixed costs by 5 percent and achieve a desired before-tax profit of $200,000 is 598 units amounting to $3,345,810 calculated as follows:

Current Fixed costs                                                         =             $2,352,000

Proposed Fixed Costs (2,352,000*105%)                                =             $2,469,600

Desired Profit                                                                    =             $  200,000

Total Contribution Margin                                            =             $2,669,600

Units to be sold (2,669,600/4,463)                            =             598

Sales value (598*5,595)                                                 =             $3,345,810

12.If the company’s income tax rate is 22 per cent, then 570 units (Sales value 3,189,649) are required to be sold to achieve an after-tax profit of $150,000.

Particulars

 Amount

Profit after tax

       150,000.00

Tax @ 22%

         42,307.69

Profit before tax

       192,307.69

Fixed Cost

   2,352,000.00

Contribution required

   2,544,307.69

Contribution p.u.

4,463.00

Number of Units to be sold

570.00

Sales

   3,189,648.56

Managers uses break even analysis to determine the point of sales or the number of units required to be sold to recover all the costs incurred, meaning thereby to determine the level of sales where the company is having no profit or no loss. Thus, it also helps management in decision making.

13.Calculation of Contribution margin per unit of service

Charges per night            =             $50

Variable expense             =             $20

Contribution                      =             $30


14.Calculation of Contribution-margin ratio

 

Contribution Margin Ratio           =             contribution margin / sales

                                                                =             $30/$50

                                                                =             60%

15.Calculation of annual break-even point in units of service and in dollars of service revenue

Particulars

Amount

Charges per night

$50

Less: Variable Expenses per night

$20

Contribution Margin per night

430

fixed cost

$42,000

Annual break-even point in units ($42,000/$30)

1,400

Annual break-even point in dollars of service revenue ($42,000/60%)

70,000

 
34,000 nights of services is required to earn a target net profit of $60,000 for the year.

Particulars

Amount

Required profit before tax

$60,000

Fixed costs

$42,000

Contribution Margin

$102,000

Contribution margin per unit

30

Number of nights to be sold

34,000

 

 

16.Understanding of cost-volume-profit relationships is necessary for the managers to analysis the impacts of changes in sales, variable costs etc. on profits. Further it helps in establishing targets of profit for the company and further analyzing them as well. Moreover, it helps in understanding the break even points, i.e. the point of no profit/ no loss. Thus, it also helps management to minimize or effectively manage the costs of the com
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