Costing and Income Statement for Printing Business

Calculation of Prime Costs

Question 1

Hakim has decided to open a printing shop. He has secured two contracts. One is a five-year contract to print a comic book. This contract calls for 5,000 copies each month. The second contract is a three-year agreement to print brochures for a Rima University College (RUC). RUC require 10,000 brochures per month.

Hakim has rented a building for RM1,400 per month. His printing equipment was purchased for RM40,000 and has a life expectancy of 20,000 hours with no salvage value. Depreciation is assigned to a period based on the hours of usage. Hakim has scheduled the delivery of the products so that two production runs are needed. In the first run, the equipment is prepared for the book printing. In the second run, the equipment is reconfigured for brochures printing. It takes twice as long to configure the equipment for the book setup as it does for the brochure setup. The total setup costs per month are RM600.

Insurance costs for the building and equipment are RM140 per month. Power to operate the printing equipment is strongly related to machine usage. The printing equipment causes virtually all the power costs. Power costs will run RM350 per month. Printing materials will costs RM0.40 per copy for the book and RM0.08 per copy for the brochure. Hakim will hire workers to run the presses as needed (part time workers are easy to hire). He must pay RM10 per hour. Each worker can produce 20 copies of the book per printing hour or 100 copies of the brochure. Distribution costs are RM500 per month. Hakim will receive a salary of RM1,500 per month. He is responsible for personnel, accounting, sales and production – in effect, he is responsible for administering all aspects of the business.

Required:

a. Calculate prime costs for both book and brochure and total monthly prime cost.

b. Calculate total cost of goods manufactured for the month.

c. Hakim receives RM1.80 per copy of the book and RM0.45 per brochure. Prepare an income statement for the first month of operation.

Question 2

NUR Berhad is a company producing tables. After discussing with the marketing manager, the production manager planning to focus on producing a product named AFI. The marketing manager is observing on two states, Selangor and Pahang, the sales at both states is expected to be RM500,000 an RM810,000 respectively. Information related to the cost per unit of the production for both states are as follows:

50% of the overhead in SELANGOR and PAHANG are fixed.

Required:

(Each question is to be treated independently)

a. Classify the cost incurred into variable cost per unit and total fixed cost for both states.

b. Calculate the followings and show all your workings.

i. The break-even point (in unit and sales value) for both states.

ii. The margin of safety (in unit) for both states.

iii. Advice to the management in which state should the company sell AFI.

c. Marketing manager suggested the company should sell AFI in both states as he is convinced the market would be good. However, the direct material cost will increase by 10%.

Advice the management on how many additional units to be sold for both states, assuming other information remains unchanged and NUR Berhad would like to maintain its annual profit.

Question 3

The Gombak Daisy Berhad (GDB) and its subunits must prepare budgets yearly. One of GDB subunit is Island Ice Cream (IIC) , a functioning producer of dairy products and famous for its delicious ice cream. Assume that IIC prepares monthly cash budgets. Relevant data from assumed operating budgets for 2017 are as follows:

January February

    RM     RM

Sales 460,000 412,000

Direct materials purchases 185,000 210,000

Direct labour   70,000   85,000

Manufacturing overhead   50,000   65,000

Selling and administrative expenses   85,000   95,000

IIC sells its ice cream in university’s shops located in Klang Valley. Collections are expected to be 75% in the month of sale and 25% in the month following sale. IIC pays 60% of direct materials purchases in cash in the month of purchase, and the balance due in the month following the purchase. All other items above are paid in the month incurred.

Additional information:

i. Sales: December 2018 was RM320,000

ii. Purchases of direct materials: December 2018 was RM175,000

iii. Other receipts: January – Donation received RM2,000.

                          February – Sale of used equipment RM4,000

iv. Other disbursement: February – Purchased equipment RM10,000

v. Repaid debt: January RM30,000.

The company’s cash balance on January 1, 2019 is expected to be RM50,000. The company wants to maintain a minimum cash balance of RM45,000.

Required:

a) Prepare schedule of collections from customer for January and February 2019.

b) Prepare schedule of payments   for January and February 2019.

c) Prepare a cash budget for January and February 2019.

Question 4

Green Company sells two items, corn and broccoli. The company is considering dropping corn. It is expected that sales of broccoli will increase by 40% as a result. Dropping corn will allow the company to cancel its monthly rental of its corn shucker machine costing RM100 a month. The other equipment will be used for additional production of broccoli.

Green’s other allocated costs are unavoidable. The company rents all of its equipment. A condensed, budgeted monthly income statement with both products is below:

Required: