# Cost Accounting

Posted: September 9th, 2013

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Cost Accounting

PART A:

1. Verify the overhead cost per unit reported by the consulting group using direct labour hours to assign overhead.  Compute the per unit gross margin per product.

 X-12 S-15 Production (kilograms) 1,000,000 200,000 Selling Price \$15.93 \$12.00 Overhead Cost per Unit* \$6.41 \$2.89 Prime cost per Kg \$4.27 \$3.13 Number of Production Runs 100 200 Receiving Orders 400 1,000 Machine Hours 125,000 60,000 Direct Labour Hours 250,000 22,500 Engineering Hours 5,000 5,000 Material Handling (number of moves) 500 400

 Overhead table Setup Costs \$240,000 Machine Costs 1,750,000 Receiving Costs 2,100,000 Engineering Costs 2,000,000 Material Handling Costs 900,000 Total \$6,990,000

Total OH= \$6,990,000

Units produced: X-12= 1,000,000, S-15= 200,000

= 5:1

= 6,990,000/5= 1,398,000

Overhead allocation for the two products: X-12 = \$5,592,000, S-15 =\$ 1,398,000

2. Recompute the unit cost of each product using activity based costing.  Compute the per unit gross margin for each product.

Activity Based Cost per Unit Produced= total activity costs/ total number units for the activity.

Total activity costs:

•X-12=Prime costs +OH costs

= \$4.27+\$6.41

=\$10.68

•S-15= Prime costs +OH costs

= \$3.13+\$2.89

=\$6.02

Per unit Gross Margin:

Revenues per unit: = units sold * selling price

X-12= 1,000,000*\$15.93=\$15,930,000

S-15=200,000*\$12.00=\$2,400,000

Total Unit costs: X12=\$10.68, S15=\$6.02

X-12=\$ (15.93-10.68) = \$5.25, S-15=\$ (12-6.02) =\$5.98

Per unit profit margin for product X-12\$5.25/15.93*100=32.97%

Per unit product margin for unit S-15\$5.98/12*100=49.83%

Hence, a further increase in the price of S-15 would provide the entity with a greater profit as well as enabling the entity to increase its profitability through additional production of the commodity. As provided product, x-12 has lower profit margin per unit because of the great costs associated with the production process. However, such costs could be reduced in various ways by the management to increase the profitability form the product.

3. Should the company switch its emphasis from the high volume product to the low volume product?  Comment on the validity of the plant manager’s concern that competitors are selling below the cost of producing compound X-12.

The overheads of the product X-12 are reducing the profitability of the organisation. Some measures in terms of cost reduction could be established by the organisation in the specified production process. This would ensure an increase in revenues and profitability from the product. Furthermore, the product has higher demand than the S-15; hence, there is a need to ensure that the organisation would reduce the costs of production associated with the specified product. This would accrue economies of scale associated with the production process as well as organisational processes.

4. Explain the apparent lack of competition for S-15.  Comment also on the willingness of customers to accept a 25% increase in price for this compound.

The production processes of product S-15 are specialised requiring the need for special handling and labour to run the processes steps. Consumers are willing to accept the 255 increase in the purchase price of this commodity as it is scarce in the market.  The scarcity of the product S-15 is due to minimal presence of manufacturers in this product making of S-15. Hence, they are willing to accept the product at any price, as they understand the speciality procedures sued in making the product.

5. Describe what actions you would take based on the information provided by the activity-based unit costs.

As an organisational executive, I would ensure an increase in the price of the product S-15 to ensure that the product reduces the costs of product X-12. In addition, I would also ensure that the organisation increases sales in relation to the demand of product X-12 by reducing the overhead costs of the product. The overhead costs have increased costs of making of the product. The product X-12 does not require any form of specialised production process, which translates to the presence of irrelevant costs in the production processes that could be reduced o r done away with to increase the profitability of the organisation from the sale of the product X-12.

PART B:

 Direct Materials \$9.00 Direct Labour 3.00 Variable Overhead 2.50 Fixed Overhead 4.00 Total \$18.50

1.●Cost to buy goods (CTB) =Volume * supplier’s landed costs

●Cost to make product (CTM) = fixed costs of making product+ (Per unit direct cost of making)

The differences in the results of the tow methods lead to a conclusion of either making or purchasing the goods. If the values of CTB are lesser than the values of CTM, then it is favourable to purchase form other manufacturers instead of making the goods.

• Z911=40,000 units annually

Total costs of production of units produced annually = 40,000*\$18.50=\$ 740,000

Total overheads per unit of production = 2.50+4.0 =\$6.50

Total Overheads fro all the units produced annually= \$ 6.50* 40,000= \$260,000

Total fixed costs=

●Cost To Buy = 40,000 unit * cost of purchase = \$16

=40,000*16= \$640,000

●Cost to make product (CTM) = fixed costs of making product+ (Per unit direct cost of making)

Total fixed costs

Direct materials=9.00

Direct labour =   3.00

Fixed OH=         4.00

Total costs=       \$16.0

2. Hence, the organisation could be better off to make the purchase the product from other manufacturers as they are able to ensure that the there are cost reductions in terms of labour and from the operation of the line of production.

3. This would save the entity \$88, 000 in costs, which can be used for other purposes in the organisation or production processes.

PART C:

Essentially management accountants are tasked with ensuring that the information they provide is relevant and precise for the numerous organisational purposes of such information. In addition, the complexities encountered in the allocation of costs in the production process require specialised skills of management accountants to arrive at succinct and precise information about the costs in the various production processes.

Cost accounting has been in focus since the advent of the industrial revolution, as the production process became complex as well as separated form control issues in the organisation. Hence, management accountants are tasked with ensuring that the entity acquires adequate information in terms of the costs related to the production processes for eventual allocation of resources by the management. The core activities revolving around the roles of management accountants include participation in planning in both strategic and operational levels that involve the establishment of regulations and policies in the budget making policies. Hence, they are greatly involved in the allocation of costs to the various production processes in a plant as well as other activities that aid in running of the entity.

Management accountants are accustomed to the evaluation of stocks, as well as the preparation of monthly reports on such issues in the organisation that forms part of the cost and management accounting roles in any organisation. Such ensures that the entity evaluates the profitability levels, as well as the growth of the shareholder’s equity. In essence, this enables managers to understand the various fundamentals, which have a role in the share value of the organisation. In addition, other roles are evident from the examples; the management accountants are tasked with ensuring that there are changes in terms of the perspectives of view of the various costs in the organisation.

Fundamentally, they are tasked with informing the organisation of the profitability of some production processes. In addition, such provides management with the view of making decisions such as the make or buy decisions commonly found in manufacturing entities. Ensures that entities are able to put a balance between the qualities of products and consumer satisfaction as well ensuring the profitability of the organisation form the production processes.

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