Exam 9: Absorption and Variable Costing

A company BB Ltd makes a product, selling for 20pence - a can of baked beans. A major supermarket who currently buys their baked beans from a rival baked bean company asks BB Ltd if they will provide them with ‘Own Label' baked beans for 16 pence a can, the costs of manufacture are as follows: BB Baked Beans: Costs per can Direct Materials 4 Direct Labour 4 Variable Overheads 3 FO 4 Manufacturing Absorption Cost 15 Advertising 1 Transport costs (variable) 1 Total Cost 17p Should they supply the Supermarket at this price (16p)? What reservations would you have?

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 handles

Which of the following are valid reasons for eliminating a product line? I. The product line's contribution margin is negative. II. The product line's traceable fixed costs plus its allocated common corporate costs are less than its contribution margin.

The Kelso Company has two divisions--Eastern and Western. The divisions have the following revenues and expenses: Eastem Westem Sales. £450,000 £400,000 Variable expenses 225,000 150,000 Traceable fixed expenses. 130,000 105,000 Allocated common corporate expenses. 120,000 95,000 Net operating income (loss). £(25,000) £50,000 Management of Kelso is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of the Eastern Division would result in an overall company net operating income (loss) of

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 supervisor

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London area. Selected data from the budget for the 12 months ending 31st December is available: Budget 2000 £ Sales (90,000 units) 2,700,000 Cost of goods sold (see notes 1 and 2) 1,800,000 Gross profit 900,000 Selling general \& administrative overheads (see note 3) 650,000 Profit betore tax 250,000 Note 1. Cost of goods sold includes fixed costs of £400,000 Note 2. If production is increased from 90,000 units to 100,000 units per annum it is estimated that fixed costs will increase by £20,000 Note 3. Sales commission on the existing orders is 7.5% of sales and is included in the total cost of £650,000. All other costs are assumed to be fixed. Capacity The current capacity at the factory is 100,000 units per year. In the budget for the year the company expect to sell 90,000 units. New order After agreeing the budget a company in South Africa contacted Greenwich to discuss two orders. This is an unusual situation, as the Rewehon department has never exported before. The first order is for 10,000 units but if the selling price is reduced they will place a larger order. Rewehon have to accept only 1 order. Details of the orders are as follows: Order 1* Quantity 10,000 units Selling price £22 per unit *The sales commission for this order will increase to 10%. Additional variable shipping costs will be 5% of sales value and additional insurance to export the toy cars will be £3,000. (Also refer to note 2 above) Order 2* Quantity 20,000 units Selling price £21 per unit **The sales commission for this order will be 10%. Additional variable shipping costs will be 5% of sales value and additional insurance costs will be £8,000. (Also refer to note 2 above) Calculate the opportunity cost for lost contribution for order 2

Avoidable costs are also called differential costs

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. -How much of the unit product cost of £54.90 is relevant in the decision of whether to make or buy the part?

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London area. Selected data from the budget for the 12 months ending 31st December is available: Budget 2000 £ Sales (90,000 units) 2,700,000 Cost of goods sold (see notes 1 and 2) 1,800,000 Gross profit 900,000 Selling general \& administrative overheads (see note 3) 650,000 Profit betore tax 250,000 Note 1. Cost of goods sold includes fixed costs of £400,000 Note 2. If production is increased from 90,000 units to 100,000 units per annum it is estimated that fixed costs will increase by £20,000 Note 3. Sales commission on the existing orders is 7.5% of sales and is included in the total cost of £650,000. All other costs are assumed to be fixed. Capacity The current capacity at the factory is 100,000 units per year. In the budget for the year the company expect to sell 90,000 units. New order After agreeing the budget a company in South Africa contacted Greenwich to discuss two orders. This is an unusual situation, as the Rewehon department has never exported before. The first order is for 10,000 units but if the selling price is reduced they will place a larger order. Rewehon have to accept only 1 order. Details of the orders are as follows: Order 1* Quantity 10,000 units Selling price £22 per unit *The sales commission for this order will increase to 10%. Additional variable shipping costs will be 5% of sales value and additional insurance to export the toy cars will be £3,000. (Also refer to note 2 above) Order 2* Quantity 20,000 units Selling price £21 per unit - **The sales commission for this order will be 10%. Additional variable shipping costs will be 5% of sales value and additional insurance costs will be £8,000. (Also refer to note 2 above) Calculate the contribution for order 2