Cost Management Questions - Assignment Example

Cost Management Questions College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Question One: Marshall Engineering makes trailers using sheet metal.  As a new employee of the company you have been asked to review the current purchasing data and number of purchase orders during the previous 12 months of 2013. Month (2013) Purchasing Costs $ Number of Purchasing Orders January 18,860 370 February 18,065 330 March 19,250 370 April 18,050 410 May 19,345 400 June 19,500 450 July 19,670 460 August 20,940 560 September 19,430 440 October 20,020 500 November 18,800 470 December 19,340 480 Required: using this data: 1) Determine the high point and low point during the last 12 months? From the data given above, the high point during the last 12 months was in August where the purchasing orders were 560 with a purchasing cost of $20,940. The low point was in February where the purchasing orders were 330 with a purchasing cost of $18,065. 2) Calculate the variable rate for purchasing cost based on the number of purchase orders. To find the variable rate for purchasing cost based on the number of purchase orders, we regress the purchasing cost against the number of purchase orders. Using excel, the variable rate for purchasing cost based on the number of purchase orders is $9.74 per order. 3) Calculate the fixed monthly cost of purchasing the sheet metal. Following the same procedure in (2) above, the fixed monthly cost of purchasing the sheet metal is $15,020.79. 4) If Marshall Engineering estimates that January will have 430 purchase orders, what is the estimated purchasing cost for January? Using the fixed monthly cost of purchasing the sheet metal and the variable rate for purchasing cost based on the number of purchase orders, the estimated purchasing cost for January would be; Estimated purchasing cost = $15,020.79 + ($9.74 per order x 430 purchase orders) = $15,020.79 + $4,188.2 = $19,209. 5) Now Marshall Engineering wants to estimate purchasing cost for the full year 2014 and expects 5,340 purchase orders. 1. What will estimates total purchasing cost be? Using the fixed monthly cost of purchasing the sheet metal and the variable rate for purchasing cost based on the number of purchase orders, the estimated purchasing cost for the full year 2014 would be; Estimated total purchasing cost = $15,020.79 + ($9.74 per order x 5,340 purchase orders) = $15,020.79 + $52,011.6 = $67,032. 2. What is the total fixed purchasing cost? The total fixed purchasing cost is $15,020.79. 3. Does this equal the fixed cost in part 3?? Explain why or why not. The fixed cost is equal to the fixed cost in part 3. This is because the cost does not vary with the number of orders. Question Two: Bright Ideas, a manufacturer of electric shopping carts, has just received an offer from a supplier to provide 2,600 units of a component used in its main motor. The component is motor part that is currently produced internally. The supplier has offered to sell the part for $66 per unit. Bright Ideas is currently using traditional, unit-based cost system that assigns overhead to jobs on the basis of direct labour hours. The exterminated traditional full cost of producing the part is as follows:             Direct Materials          $40.00             Direct Labour               16.50             Variable Overhead      4.50             Fixed Overhead             40.00 Prior to making a decision the manager commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results revealed the following: 3 set ups @ $1,160 (these could be avoided if the part is purchased). One half-time inspector is needed. Bright Ideas uses a part-time inspector employed from a temp agency; the yearly cost is $12,300 (this could be avoided if the part is purchased). Engineering labour: 470 hours @ $45 per hour. (This could be reduced by 470 hours if the part is purchased.) However the engineer would then spend the time working on other projects and there would be no reduction in the engineers salary. 75 fewer movements of machinery would be avoided costing $30 per movement. Required:        1) Ignoring the special study, determine whether the motor part should be produced internally or purchased from the supplier. We need to compare the cost of producing the part internally and the cost that would be incurred in purchasing the part from the supplier; The internal cost per unit is the total cost of the direct materials, direct labour, variable overhead and fixed overhead = 40.00 + 16.50 + 4.50 + 40.00 = $101. On the other hand the cost of purchasing the part from the supplier is $66. Therefore, the motor part should be purchased from the supplier. 2) Reading the special study how does this data change? Show your workings. Using the data from the special study, the new fixed cost per unit would be; Item Cost ($) 3 set ups @ $1,160 1160 part-time inspector 12,300 Engineering labour: 470 hours @ $45 per hour 21,150 75 movements of machinery $30 per movement 2,250 Total fixed cost 36860 Unit fixed cost = $36,860/2600 14.18 The new fixed cost per unit would be lower compared to the initial fixed cost. The new production cost per unit is would be; 40.00 + 16.50 + 4.50 + 14.18 = $75.18. 3) Discuss the qualitative factors that would affect this decision, including strategic implications. The qualitative factors that would affect this decision include; (1) control over quality of the part given that Bright Ideas would sacrifice the opportunity of checking quality controls, (2) reliability of suppliers seeing as the supplier may not guarantee constant supply of the part, (3) impact of the decision on suppliers and customers, (4) financial stability of the supplier must be taken into account as well to ensure they continue in business and will supply the part with no interruption. 4) After reading the special study, the manager mad this remark: “This study ignores the additional activity demands that purchasing would cause. For example, even although we need to inspect the part in our production area we may need to inspect the purchased parts when we receive them for quality assurance. Will we actually save any inspection costs?” Is the manager right? Discuss. The manager is right. In many instances, quantitative information may not offer adequate information on quality. As the company briskly looks to cut costs, caution must be taken to evade sacrificing the abiding benefit of being linked with quality products for the short-range quantitative benefit of reducing costs. Therefore, even though the Bright Ideas may be able to pass some of the cost savings on to the customer, the connotation with lower quality products may be damaging to the company. Question Three: Celebrations Part Shop operates a part hire company in Armidale. Celebrations provide food and staff for parties. The company rents tables and chairs, dinnerware, glasses and linen. Abigail and Jon have contacted Celebrations to plan for their daughter Zoe’s 21st birthday party that will be held at Dangersleigh Dam. Jon has decided on an open bar with a sit down dinner for 350 people with a tent and a dance floor. Abigail wants waiters to serve dinner, with the hire of tables and chairs, dinnerware, glasses and linen. Zoe’s friends will organise the decorations, flowers and the hire of a band. Celebrations Quote: Rental:             Dance Floor                            $ 300                         Linen                                          80                         Tables                                      200                         Dinnerware                                120                         Glasses                                     150 Dinner:                         Food (350 x $25)                    $8,750                         Drinks (350 x $15)                   5,250                         Waiters (6x4hrsx$10)                240                         Bartenders (2x4hrsx$10)            80                         Clean-up staff (3x3hrsx$10)       90                                                                                             Total Cost                                                $ 15,260                                              Required: 1) Explain where services costs for Celebrations and profit are calculated in this quote. Service costs for celebrations and profit are calculated under dinner costs. Profit is calculated after taking away all the costs from the total payment made to the company. 2) Suppose that Abigail and Jon are concerned at the total cost of the quote, as they had expected to spend $10,000 on Zoe’s 21st birthday party. How can Celebrations work with Abigail and Jon to achieve their target cost of $10,000? If Abigail and Jon are concerned with a lower total cost they may well opt to consider another company that may offer the services at a lower cost. They may also change the location that could be cheaper or use disposable dinnerware and glassware that could be cheaper. They could also negotiate for rate reductions from Celebrations Part Shop. 3) Jon is unhappy with the cost of the dance floor and commented; “I’ve seen those for rent in the Tamworth for $75.” How would you respond to this remark if you were Celebrations? (Hint: you want this job, so telling Jon: “Go ahead and do it yourself, Cheapskate!!” is not an option). The cost for the dance floor could be higher owing to various reasons such as the number of expected guests. Also, the rates vary according to the location. Question Four: Promotional Banners had the following operating data for its first two years of operations             Variable Costs per unit                       Direct materials                       $ 4.00 Direct Labour                            2.90 Variable Overhead                  1.50             Fixed Costs per year                         Overheads                             $ 180,000                         Selling and Marketing                70,350 Promotional Banners produced 90,000 units in the first year and sold 80,000. In the second year, it produced 80,000 units and sold 90,000 units. The selling price per unit each was $12. Promotional Banners uses an actual costing system. Required: 1) Prepare Income Statements for both years using Absorption costing. Has firm performance, as measured by income, improved or declined when comparing the two years. Year 1 Details Amount ($) Amount ($) Amount ($) Sales Revenue 80,000 x 12 960000 Cost of Sales Production Cost Direct Materials 360000 Direct Labour 261000 Variable Overheads 135000 Fixed Overheads 180000 936000 Total Production Cost   936000 Closing Stock 10000/90000 * 936000 104000 Absorption Cost of Production 832000 Sales Commission 70350 Absorption Cost of Sales   902350 Over Absorption 57650 Year 2 Details Amount ($) Amount ($) Amount ($) Sales Revenue 90,000 x 12 1080000 Cost of Sales Opening stock 104000 Production Cost Direct Materials 320000 Direct Labour 232000 Variable Overheads 120000 Fixed Overheads 180000 852000 Total Production Cost   852000 Absorption Cost of Production 852000 Sales Commission 70350 Absorption Cost of Sales   922350 Over Absorption 157650 2) Prepare Income Statements for both years using Variable costing. Has firm performance, as measured by income, improved or declined when comparing the two years. Year 1 Details Amount ($) Amount ($) Amount ($) Sales Revenue 80,000 x 12 960000 Cost of Sales Production Cost Direct Materials 360000 Direct Labour 261000 Variable Overheads 135000 Total Production Cost   756000 Closing Stock 10000/90000 x 756000 84000 Marginal Cost of Production 672000 Sales Commission 70350 Marginal Cost of Sales   742350 Fixed Overheads 180000 Profit 37650 Year 2 Details Amount ($) Amount ($) Amount ($) Sales Revenue 90,000 x 12 1080000 Cost of Sales Opening Stock 84000 Production Cost Direct Materials 320000 Direct Labour 232000 Variable Overheads 120000 Total Production Cost   672000 Marginal Cost of Production 756000 Sales Commission 70350 Marginal Cost of Sales   826350 Fixed Cost 180000 Profit 73650 3) Which method do you think most accurately measures firm performance? Variable costing most accurately measures firm performance. The key reason for this is that the variable costing method allows management's attention to be focused on the changes which result from the decision being considered. References Ashish Garg, Debashis Ghosh, James Hudick and Chuen Nowacki, 2003. “Roles and Practices in Management Accounting Today,” Strategic Finance, 30-35. Chadwick, L. 2001. Essential management accounting for managers. 3rd edn. London: Prentice-Hall. Drury, C. 2005. Management Accounting for Business, Thomson publishers, pp: 144-148. Ostonaqulov, M. 2005. Accounting Theory (Buxgalteriya Hisobi Nazariyasi), State Economics University Press. Read More