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Costing and Decision Making - Practice Problems

Question 1

Question 1: 
Wellington Company manufactures custom-designed pens. Previously, the company has been using a traditional overhead allocation system based solely on direct labuor-hours. However, the company’s top management thought that the traditional overhead allocation system was distorting costs and selling prices. Hence, it has decided to switch to an activity-based costing system using. The company provides the following information:
Activity cost pool    Total cost    Total activity
Labour related    $30,000    10,000 direct labour hours
Machine related    $40,000    8,000 machine hours
Quality control    $10,000    1,000 inspections
Others    $32,000    N/A
The company has recently completed a job (Job #24) that required producing 1,000 pens. It incurred $1,200 direct material, 20 hours of direct labour at $50 per hour, 120 machine hours, and 7 inspections to complete the job.

Required: (show your calculations):

a.Prepare a report showing the cost of Job #24 using the actvity-based costing system.

b.You think that the cost of the Job #24 is higher in the activity-based costing system than the traditional costing system? Explain your answers.

Question 2: 
Absorption costing and variable costing and budgeting
a. Italy Corporation manufactures baby toys. It usually follows the absorption costing system to prepare its income statement. During a top management team meeting, the CFO recently presented two income statements. The absorption costing system income statement showed $10,000 Net Operating Income, whereas the variable costing income statement displayed $14,500 Net Operating Income. During the meeting, the Marketing Manager made the following statement: “Something must be wrong. The Net Operating Income should be the same regardless of which costing system you use”. However, the CFO could not reply as the meeting had to end soon. Imagine that you are the CFO and write down your responses to the Marketing Manager. Clearly mention your assumptions that underlie your answers.

b.Super Company buys furniture from Brazil and sells it in a retail shop in Spain and beyond. Information about the company’s business is as follows:
Sales are budgeted at $40,000 for November, $42,000 for December and $45,000 for January. All sales are credit sales.
Collections for sales are expected to be 70% in the month of sale and 30% in the month following sales.
The company likes to hold an ending merchandise inventory equal to 75% of the cost of goods sold in the following month.
The company purchased merchandise for $55,000 in November. Payment for merchandise purchased is made in the month following purchase.
Other monthly cash expenses are $9,000.
Monthly depreciation is $2,000.
October 31st Cash balance was 18,000. 
October 31st Accounts receivable balance was $10,000, which will be collected in November.
October 31st Accounts payable balance was $29,000, which will be paid in November. 

Question 2


i.Imagine that the company likes to keep a minimum cash balance of $15,000 at the end of each month. The company can borrow up to $50,000 @ 20% interest rate per annum, which will be paid at the end of each month. Prepare a cash budget for November. 
ii.Imagine that the company likes to keep a minimum cash balance of $18,000 at the end of each month. Do you think the company needs to borrow any amount for November? Explain your answers. 

Question 3
Flexible budget and performance analysis and standard costing
a.Diaspora Limited is a charity supported by donations, which provides free meals to the homeless. The charity’s budget for August was based on 2,900 meals. The charity’s director has provided the following cost data to use in the budget: groceries, $3.50 per meal; kitchen operations, $4,500 per month plus $1.75 per meal; administrative expenses, $3,200 per month plus $0.85 per meal; and fundraising expenses, $2,200 per month. The director has also provided the charity's statement of actual expenses for the month:

Diaspora Limited
Statement of Expenses
For the month ended 31 August
Actual mea2,700
Groceries    $6,540
Kitchen operations    $9,065
Administrative expenses    $4,715
Fundraising expenses    $1,620
Total expense    $21,940


Prepare a report showing the company’s spending variances for each of the expenses and for total expenses for August. Label each variance as favourable (F) or unfavourable (U).

b.At a recent company meeting, the Senior Business Analyst mentioned that she believes that the performance report of a for-profit organization (e.g., Air New Zealand) will be different from a non-profit organization (e.g., Auckland Museum). However, the Marketing Manager disputed it and argued that he believes that the performance report of both for-profit and non-profit organizations will be the same. Do you support the viewpoint of the Senior Business Analyst or the Marketing Manager? Explain your answers. 

Question 4: 
Differential analysis and decision making

a.The constraint at Shanghai Company is an expensive milling machine. The three products listed below use this constrained resource.
Red    Green    Blue
Selling price per unit    $85    $195    $70
Variable cost per unit    $45    $155    $30
Time on the constraint (minutes)    1.30    2.70    1.10

Required (show your calculations):

i.Rank the products in order of their current profitability from the most profitable to the least profitable.

ii. Assume that sufficient constraint time is available to satisfy the demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource. Explain your answer.
b.Switzerland Machinery Limited uses 7,500 units of Part X each year as a component in assembling one of its products. The company is presently producing Part X internally at a total cost of $110,000 as follows:

Direct materials    $22,000
Direct labour    32,000
Variable manufacturing overhead    17,000
Fixed manufacturing overhead    39,000
Total costs    $110,000

An outside supplier has offered to provide Part X at a price of $15 per unit. If the company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated.

Required (show your calculations):

Prepare an analysis showing the annual advantage or disadvantage of accepting the outside supplier’s offer.

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