Exam 9: Absorption and Variable Costing

Consider the following production and cost data for two products, L and C: ProductL Product C Contribution margin per unit £120 £112 Machine minutes needed per unit 10 minutes 8 minutes A total of 60,000 machine minutes are available each period and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period

An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of eliminating a sunk cost

Gerond Ltd has developed a new product ‘Q' and is deciding whether to ‘outsource' it (get it made outside) or to make it themselves. It is a key product in their new range. It has researched the figures and using these and the company's overhead absorption rates has calculated the absorption production cost as follows. It has also obtained a quote for making it from a firm in the same industry sector Costs of Manufacture Buy in Cost Direct Mats 4 Direct Labour 6 Variable Overheads 3 Fixed Overheads 7 --- Absorption Cost £20 Price to Buy £15 --- --- Should it buy or make it on the grounds of: 1 Cost only? 2 Taking other factors into account

Talboe Company makes wheels that it uses in the production of children's wagons. Talboe's costs to produce 200,000 wheels annually are as follows: Direct materials £40,000 Direct labour. 60,00 Variable manufacturing overhead 30,000 Fixed manufacturing overhead Total An outside supplier has offered to sell Talboe similar wheels for £0.80 per wheel. If the wheels are purchased from the outside supplier, £25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to anther company for £55,000 per year. -If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a

Barrus Company makes 30,000 motors to be used in the productions of its power lawn mowers. The manufacturing cost per motor at this level of activity is as follows: Direct materials £9.50 Direct labour. £8.60 Variable manufacturing overhead £3.75 Fixed manufacturing overhead. £4.35 This motor has recently become available from an outside supplier for £25 per motor. If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities. If Barrus decides to continue making the motor, how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier

In a sell or process further decision, which of the following costs are relevant I. A variable production cost incurred prior to the split-off point. II. An avoidable fixed production cost incurred after the split-off point.

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000. An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year. The accountant has provided the following information for the factory managers. Costs incurred last year on special windows now held in stock PVC material = £5,000 Labour = £3,000 (i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200. (ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase. (iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each. (iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour. (v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted. (vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week. (vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs (viii) The original design costs for this type of window was £5,000 in 1998. -Calculate the relevant cost for the administrative costs

Explain why it is important to distinguish between Relevant and Irrelevant costs in decisions giving examples.

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000. An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year. The accountant has provided the following information for the factory managers. Costs incurred last year on special windows now held in stock PVC material = £5,000 Labour = £3,000 (i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200. (ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase. (iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each. (iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour. (v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted. (vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week. (vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs (viii) The original design costs for this type of window was £5,000 in 1998. -Calculate the relevant cost for labour

Sunk costs are considered to be avoidable costs

Joint products are products that are sold to customers as a set or as part of a group of products

The book value of a machine, as shown on the balance sheet, is relevant in a decision concerning the replacement of that machine by another machine

Consider the following production and cost data for two products, X and Y: Product X Product Y Contribution margin per unit £24 £18 Machine-hours needed per unit 3 hours 2 hours The company has 15,000 machine hours available each period, and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period

Ahrends Company makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:Direct materials. $\quad$$\quad$ £17.80 Direct labour. $\quad$$\quad$ 19.00 Variable manufacturing overhead. $\quad$$\quad$ 1.00 Fixed manutacturing ov erhead. $\quad$$\quad$ 17.10 Unit product cost. $\quad$$\quad$ £54.90 An outside supplier has offered to sell the company all of these parts it needs for £48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be £273,000 per year. If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. - What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 70,000 units required each year?

Consider the following production and cost data for two products, Q and P: Product O product P Contribution margin per unit £40 £36 Machine minutes needed per unit 8 minutes 6 minutes A total of 24,000 machine minutes are available each period and there is virtually unlimited demand for each product. What is the largest possible total contribution margin that can be realised each period

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of £720,000. If these microcomputers are upgraded at a total cost of £100,000, they can be sold for a total of £160,000. As an alternative, the microcomputers can be sold in their present condition for £50,000. -Suppose the selling price of the upgraded computers has not been set. At what selling price per unit would the company be as well off upgrading the computers as if it just sold the computers in their present condition?

Opportunity costs are

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000. An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year. The accountant has provided the following information for the factory managers. Costs incurred last year on special windows now held in stock PVC material = £5,000 Labour = £3,000 (i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200. (ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase. (iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each. (iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour. (v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted. (vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week. (vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs (viii) The original design costs for this type of window was £5,000 in 1998. -Calculate the relevant cost for the specialist equipment

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000. An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year. The accountant has provided the following information for the factory managers. Costs incurred last year on special windows now held in stock PVC material = £5,000 Labour = £3,000 (i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200. (ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase. (iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each. (iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour. (v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted. (vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week. (vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs (viii) The original design costs for this type of window was £5,000 in 1998. -Calculate the contribution for the new order

In a sell or process further decision, which of the following costs are not relevant I. A variable production cost incurred after split-off. II. A fixed production cost incurred prior to split-off.