Managerial Accounting GMBA 2015

Managerial AccountingGMBA 20151. Introduction to management and cost accounting (sessions 1 and 2)QuestionQuestionQuestionQuestion1234––––Metalex, Ltd.Southern Sporting CompanySeaside MineralsGeneral Electric, Safeway and Google2. Alternative cost accumulation systems (sessions 3 and 4)Question 5 – North Winery, Ltd.Question 6 – Industrial Company3. Cost-volume-profit analysis (sessions 5 and 6)Question 7 – WalkWear CompanyQuestion 8 – Hamburg Concessions4. Measuring relevant costs and revenues for decision-making (sessions 7 to 10)QuestionQuestionQuestionQuestionQuestionQuestionQuestionQuestion9 – Gamex, Ltd.10 – Gate Ltd.11 – Plastex, Ltd. and Electomex, Ltd.12 – OnlyBoats, Ltd.13 – Even Ltd.14 – PenínsulAIR15 – Southwestern Company16 – Maria Salvador, Ltd.5. Product costing: issues and problems (sessions 11 and 12)Question 17 – Movex, Corp.Question 18 – Grimoak, Corp.6. Activity-Based Costing (sessions 13 and 14)Question 19 – Supermercado da EstrelaQuestion 20 – TekSound, Ltd.Question 21 – Banco LusitanoManagerial Accounting (GMBA)I. E. Business SchoolQuestion 1The following information has been taken from the accounting records of Metalex, Ltd.:Sales1,350,000 €Selling expenses108,000 €Purchases of raw materials (650,000 units)325,000 €Direct labour cost341,000 €Utilities (factory)80,000 €Depreciation (factory)115,000 €Insurance (factory)10,000 €Maintenance (factory)55,000 €Indirect labour100,000 €Administrative expenses85,500 €Financial expenses57,500 €Stocks1 JanuaryRaw materials50,000 units x 0.45 €Work in process31 December80,000 units26,500 €27,500 €150,000 units x 2 €Finish goods130,000 unitsAssuming production was 500,000 units and the company uses the LIFO method for valuingmovement of materials and finish goods:1. Prepare a schedule of cost of goods manufactured;2. Compute the cost of goods sold;3. Prepare the profit and loss account.2Managerial Accounting (GMBA)I. E. Business SchoolQuestion 2Last year, Southern Sporting Company manufactured 100,000 units and reported the followinginformation (in Euros):SandpaperMaterials handlingCoolants & lubricantsIndirect manufacturing labourDirect manufacturing labourDirect materials, 1/JanDirect materials, 31/DecFinished goods, 1/JanFinished goods, 31/DecWork-in-process, 1/JanWork-in-process, 31/Dec32,000320,00022,400275,2002,176,000384,000275,200672,0001,280,00096,00064,000Leasing costs — plantDepreciation — equipmentProperty taxes — equipmentFire insurance — equipmentDirect material purchasesFinancial costsSales revenueSales commissionsSales salariesAdvertising costsAdministration costsRequired:1. What is cost of goods manufactured?2. Prepare the profit and loss account.3384,000224,00032,00020,0003,136,00025,00012,800,000640,000572,000480,000800,000Managerial Accounting (GMBA)I. E. Business SchoolQuestion 3(Adapted from Horngren et al. (2012) – “Cost Accounting: A Managerial Emphasis”, 14th Edition, Pearson Global Edition)Seaside Minerals owns the rights to extract minerals from beach sands on Canary Islands. It hascosts in three areas:a) Payment to a mining subcontractor who charges 80 € per ton of beach sand mined andreturned to the beach (after being processed to extract three minerals: ilmenite, rutile, andzircon).b) Payment of a government mining and environmental tax of 40 € per ton of beach sandmined.c) Payment to a barge operator. This operator charges 160,000 € per month to transport eachbatch of beach sand – up to 100 tons per batch per day – to the mainland and then returnto Canary Islands (that is, 0 to 100 tons per day = 160,000€ per month; 101 to 200 tonsper day = 320,000€ per month, and so on).Each barge operates 25 days per month. The 160,000€ monthly charge must be paid even if fewerthan 100 tons are transported on any day and even if Seaside Minerals requires fewer than 25 daysof barge transportation in that month. The company is currently mining 160 tons of beach sandsper day for 25 days per month.Required:1. What is the variable cost per ton of beach sand mined? What is the fixed cost per month?2. Plot a graph of the variable costs and another graph of the fixed costs. Is the concept ofrelevant range applicable to your graphs? Explain.3. What is the unit cost per ton of beach sand mineda. If 160 tons are mined each day?b. If 230 tons are mined each day?Explain the difference in the unit-cost figures.4Managerial Accounting (GMBA)I. E. Business SchoolQuestion 4(Adapted from Horngren et al. (2012) – “Cost Accounting: A Managerial Emphasis”, 14th Edition, Pearson Global Edition)Each of the following cost items pertains to one of these companies: General Electric (amanufacturing-sector company), Safeway (a merchandise-sector company), and Google (aservice-sector company):a) Perrier mineral water purchased by Safeway for sale to its customers;b) Electricity used to provide lighting for assembly-line workers at a General Electricrefrigerator-assembly plant;c) Depreciation on Google’s computer equipment used to update directories of Web sites;d) Electricity used to provide lighting for Safeway’s store aisles;e) Depreciation on General Electric’s computer equipment used for quality testing ofrefrigerator components during the assembly process;f)Salaries of Safeway’s marketing personnel planning local-newspaper advertising campaigns;g) Perrier mineral water purchased by Google for consumption by its software engineers;h) Salaries of Google’s marketing personnel selling banner advertising.Required:1. Distinguish between manufacturing-, merchandising-, and service-sector companies;2. Distinguish between inventoriable costs and period costs;3. Classify each of the cost items (a-h) as an inventoriable or a period cost. Explain youranswers.5Managerial Accounting (GMBA)I. E. Business SchoolQuestion 5North Winery Ltd. commercialises wine bottles and has reported profit as follows (variable costingbases):€Sales (@ 4 €)Less: variable costsManufacturing costsSelling and administrative costsTotal variable costsContribution marginLess: fixed costsManufacturing costsSelling and administrative costsTotal fixed costsNet income6,000,0002,250,000600,0002,850,0003,150.0001,064,000880,0001,944,0001,206,000Assume there was no opening stock of wine and production was 1,520,000 bottles.Required:1. Prepare the profit and loss account using absorption costing.2. Reconcile the absorption costing and the variable costing profit figures. Explain.6Managerial Accounting (GMBA)I. E. Business SchoolQuestion 6During the first two years of operations, a company reported profit as follows (absorption costingbasis):Year 12,000,000 €1,620,000 €1,620,000 €180,000 €1,440,000 €560,000 €420,000 €140,000 €Sales (@ 50 €)Opening stocksCost of goods manufactured (@ 36 €)Goods available for saleLess ending stocksCost of goods soldGross marginSelling and administrative expenses*ProfitYear 22,500,000180,0001,620,0001,800,0001,800,000700,000460,000240,000€€€€€€€€* Includes 4 € per unit variable and 260,000 € fixed costs each year.The company’s 36 € unit product costing is computed as follows:Direct materialsDirect labourVariable manufacturing overheadFixed manufacturing overheadUnit product cost81421236€€€€€Required:1. Prepare the profit and loss account for each year in the contribution format using variablecosting.2. Reconcile the absorption costing and the variable costing profit figures for each year.3. Compute the break-even point and quote the assumptions on which cost-volume-profitanalysis is based.7Managerial Accounting (GMBA)I. E. Business SchoolQuestion 7(Adapted from Horngren et al. (2012) – “Cost Accounting: A Managerial Emphasis”, 14th Edition, Pearson Global Edition)Each WalkWear Company operates a chain of shoe stores that sell 10 different styles ofinexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as a pair ofshoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive afixed salary and a sales commission. WalkWear is
considering opening another store and collectedthe following information:Unit variable data (per pair of shoes)Selling priceAnnual fixed costs32.00 €RentSalariesCost of shoesSales commissionVariable cost per unitAdvertising22.00 €Other fixed costs2.00 €Total fixed costs24.00 €60,000 €204,000 €82,000 €26,000 €372,000 €Required:1. What is the annual breakeven point in (a) units sold and (b) revenues?2. If 37,000 units are sold, what will be the store’s operating income (loss)?3. If sales commissions are discontinued and fixed salaries are raised by a total of 89,000€,what would be the annual breakeven point in (a) units sold and (b) revenues?4. [Refer to the original data] If, in addition to his fixed salary, the store manager is paid acommission of 0.25€ per unit sold, what would be the annual breakeven point in (a) unitssold and (b) revenues?5. [Refer to the original data] If, in addition to his fixed salary, the store manager is paid acommission of 0.25€ per unit in excess of the breakeven point, what would be the store’soperating income, if 50,000 units were sold?8Managerial Accounting (GMBA)I. E. Business SchoolQuestion 8Hamburg Concessions currently sells hot dogs. During a typical month, the stand reports a profitof 9,000 € with sales of 50,000 €, fixed costs of 21,000 €, and variable costs of 0.64 € per hot dog.Next year, the company plans to start selling nachos for 3 € per unit. Nachos will have a variablecost of 0.72 € and new equipment and personnel to produce nachos will increase monthly fixedcosts by 8,880 €. Initial sales of nachos should total 5,000 units. Most of the nacho sales areanticipated to come from current hot dog purchasers, therefore, monthly sales of hot dogs areexpected to decline to 22,500 €.After the first year of nacho sales, the company president believes that hot dog sales will increaseto 40,500 € a month and nacho sales will increase to 9,000 units a month.Required:1. Determine the monthly breakeven sales in dollars before adding nachos.2. Determine the monthly breakeven sales during the first year of nachos sales.9Managerial Accounting (GMBA)I. E. Business SchoolQuestion 9(Adapted from Horngren et al. (2012) – “Cost Accounting: A Managerial Emphasis”, 14th Edition, Pearson Global Edition)Gamex Ltd., manufactures game systems. Gamex has decided to create and market a new systemwith wireless controls and excellent video graphics. Gamex’s managers are thinking of calling thissystem the Yew. Based on past experience they expect the total life cycle of the Yew to be fouryears, with the design phase taking about a year.They budget the following costs for the Yew:Total fixed costsover four yearsYear 1Years 2-4R&D costsDesign costsProductionMarketing & DistributionCustomer service6,590,0001,450,00019,560,0005,242,0002,900,000Variable costper unit€€€€€—-50€ per unit10€ per unit—Required:1. Suppose the managers at Gamex price the Yew system at 110€ per unit. How many units dothey need to sell to break even?2. The managers at Gamex are thinking of two alternative pricing strategies.a. Sell the Yew at 110€ from the outset. At this price they expect to sell 1,500,000units over its life-cycle.b. Boost the selling price of the Yew in year 2 when it first comes out to 240€ per unit.At this price they expect to sell 100,000 units in year 2. In year 3 and 4 drop theprice to 110€ per unit. The managers expect to sell 1,200,000 units in years 3 and 4.Which pricing strategy would you recommend? Explain.3. What other factors should Gamex consider in choosing its pricing strategy?10Managerial Accounting (GMBA)I. E. Business SchoolQuestion 10Gate Ltd., a manufacturer and distributor of mobile phones, knows that in order to achieve a 20per cent share of the domestic market next year the selling price per unit for its standard productshould be set at 120 €. The company wishes to earn profit equal to 10 per cent of the sales. Unitcost is anticipated to be 110 € next year.Required:1. What is the target cost per unit for Gate’s standard product?2. Distinguish between target costing and kaizen costing.11Managerial Accounting (GMBA)I. E. Business SchoolQuestion 11AFor the next year Plastex Ltd. has capacity to make 60,000 units of its plastic product. Thevariable cost of production is 4€ per unit. Fixed costs per annum are budgeted at 120,000€.In the past prices have been set on a cost plus basis, with 25% being added to the full cost perunit. Overheads being absorbed on the assumption of full capacity utilisation. As there is adepressed market, it is now suggested that the market research survey would help to set a moreprofitable price for the product.The survey discloses the following:Price per unit€Anticipated demandunits6.507.007.508.008.509.0068,00055,00046,00040,00028,000——Required:1. If the cost plus 25% price were charged and the market survey proved reliable, what wouldbe the estimated profit for next year?2. If the market survey proved reliable what would be the profit maximising price?BO Electromex, Ltd. wishes to capture 20% of the market for new type of heating equipment.Market research has established that the selling price to achieve this volume is 375 € per unit.Calculate the target cost for the new heating equipment, considering that the company’s targetprofit margin for this type of product is 30%.CExplain both pricing strategies and discuss the difference between them.12Managerial Accounting (GMBA)I. E. Business SchoolQuestion 12OnlyBoats Ltd. has been asked to refit a boat for a customer. Skilled labour costing of 8 € perhour will be required for the refit. The workers will have to be taken off from the production ofcanoes for resale for a total of 240 hours. The canoes are sold for 240 € each and each take 12hours of skilled labour. The cost card for canoes is as follows:Cost per CanoeDirect materialsDirect labourVariable overheadsFixed overheadsTotal cost40 €96 €20 €60 €216 €What is the relevant cost of labour when assessing the viability of the refit contract?13Managerial Accounting (GMBA)I. E. Business SchoolQuestion 13Even Ltd. specialises in the production of white paint. It normally produces three types of whitepaint, details as follows:Gloss3,000275 €Profit per drumProcessing hours per drumEmulsion5,000225 €Undercoat4,000150 €185 €55 €240 €35 €5 hoursExpected demand next period (drums)Selling price per drumCost per drum:Variable costsAllocated fixed costs165 €45 €210 €15 €2.5 hours100 €30 €130 €20 €2 hoursFixed costs have been allocated to products on the assumption that full demand would be matchedby production, but due to machine breakdown, processing hours are limited to 30,000 hours forthe next period.Assuming that any shortfall in supply of one product does not affect demand for the other products:1. What are the expected profits, if the company decides to meet next period demand for Glossand Emulsion and sell no Undercoat?2. What will be the contribution if the company chooses the product mix that will maximise itsprofits?14Managerial Accounting (GMBA)I. E. Business SchoolQuestion 14PenínsulAIR operates scheduled commercial passenger flights between regional centres. Thecompany’s aircraft have three passenger classes: Club, Business and Economy. The availablelanding slots mean that current passenger capacity is limited. The company has 16 aircrafts, eachof which carries 125 passengers. Each aircraft makes five flights per day. The average flight is 500miles.Key demand and cost data are set out below:ClubDemand (passenger-miles per day)Fares per passenger-mileVariable costs per passenger mileBusiness1,000,0000.90 €0.38 €3,500,0000.60 €0.22 €Economy2,000,0000.50 €0.10 €Total6,500,000———–Fixed operating costs average 0.35 € per passenger-mile. How should the company arrange itsaircraft seating to maximise short-term profitability? Explain.15Managerial Accounting (GMBA)I. E. Business SchoolQuestion 15Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buythe motors from Jinx Motors for 1,250€ each.
Southwestern’s plant can manufacture themotors for the following costs per unit:Direct materialsDirect manufacturing laborVariable manufacturing overheadFixed manufacturing overheadTotal5003501 003501,300€If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead appliedwill not be avoided.Required:1.Should the company make or buy the motors?2.What additional factors should Southwestern consider in deciding whether or not tomake or buy the motors?16Managerial Accounting (GMBA)I. E. Business SchoolQuestion 1617Managerial Accounting (GMBA)I. E. Business SchoolQuestion 17This problem introduces the cost accounting system called “job-costing”. This system attempts to(a) measure the direct costs of each order and (b) allocate the indirect costs on the basis of anoverhead rate.Movex, Corp. produces furniture by order / contract and uses a job-order cost system. At thebeginning of January, they had order 397 in process, carrying the following costs from the previousperiod:Raw materialsDirect labourOverheads80,000 €40,000 €20,000 €The company applies overhead cost to jobs on the basis of direct labour hours worked. For the yearjust started, management estimated that it would work 150,000 labour hours and incur about1,800,000 € in manufacturing overhead costs.In January, the following events took place:1. Order 397 was finished, using additional 50,000 € of direct materials, and 25,000 € of directlabour (3,125 hours). Order 397 was sold for 300,000 €.2. Order 401 was started and finished. 150,000 € of raw materials, and 44,000 € (5,500hours) of direct labour were used for that order. Order 401 was sold for 350,000 €.3. Order 402 was started. 48,000 € of direct labour (6,000 hours), and 120,000 € of rawmaterials were used for that order, which was not finished at the end of the month.4. Overhead costs incurred during the month were:Indirect materialsIndirect labourDepreciationUtilities12,00025,00090,00048,000€€€€5. Selling and administrative expenses were 57,500 €.Required:1. Compute the cost of each order;2. Prepare a profit and loss account for January.18Managerial Accounting (GMBA)I. E. Business SchoolTwo possibilities arise with respect to calculating the absorption rate – doing it a priori or aposteriori.If it is done a posteriori, that is, according to actual data, then this means that either the timeperiod chosen for this purpose is short (such as a week or month), in which case the overhead ratewill be constantly fluctuating (especially if the business is seasonal), or else that the period isrelatively long (such as a year), and then one must wait until December to be able to calculate thefull cost of all production orders, even those which were finished in January.As a result, in practice, a predetermined or standard rate is used. This rate is established at thebeginning of the year based on data taken from experience, with whatever modifications areexpected for the coming year. All orders are debited overhead at this rate until the end of the year,when the actual total amount of overhead is known. This total will not agree with the amount ofoverhead allocated to products except by chance; although it is hoped, provided the rate used iscalculated based on reasonable expectations, that the difference will not be too great.Over-absorption (or over-applied) overhead if the overhead which has been absorbed isgreater than the real overhead;Under-absorption (or under-applied) overhead if the reverse is true.Two reasons:Actual overhead expenditure not as budget;Actual activity levels not as budget.19Managerial Accounting (GMBA)I. E. Business SchoolQuestion 18A manufacturing business, Grimoak, Corp., organises its production into four cost centres. Lastmonth the company produced 60,000 items of product. Further details of the costs are included inthe following table:Cost centreMachiningAssembly & finishingPackagingMaintenance & repairsTotalProduction overhead(excluding the factory rental)291,975 €130,305 €116,140 €68,965 €607,385 €Floor area1,5001,7001,6002,1006,900sq.sq.sq.sq.sq.m.m.m.m.m.Maintenance & repairs is a service cost centre that has worked 6,000 LH to Machining, 3,400 LH toAssembly & finishing and 5,800 LH to Packaging.Required:1. Using the floor area as base of apportionment, compute the cost of the factory rental(23,115 €) of each cost centre.2. Calculate the overhead absorption rate for each department on the following basis:a. Machiningmachine time120,000 MHb. Assembly & Finishing direct labour hours30,000 LHc. Packagingunits of production60,000 itemsd. Maintenance & Repairs direct labour hours15,200 LH3. The prime cost and timing details for one unit of production are:€MaterialsDirect labourPrime cost (or direct cost)16.2019.0035.20Each unit uses 2 hours of machine time in the machining department.Each unit uses 0.5 direct labour hours in the assembly and finishing department.Calculate the total production cost for one unit of the company’s product.20Managerial Accounting (GMBA)I. E. Business SchoolQuestion 19Supermercado da Estrela has decided to increase the size of its store. It wants information about theprofitability of individual product lines: soft drinks, fresh produce, and packaged food.Soft drinksFresh producePackaged foodRevenues (€)317,400840,240483,960Cost of goods sold (€)Cost of bottles returned (€)Number of purchase orders placedNumber of deliveries receivedHours of self-stocking timeItems sold240,0004,80014412021650,400600,00003368762,160441,600360,00001442641,080122,400Additional information for the current year:ActivityBottle returnsOrderingDeliveryShelf-stockingCustomer supportDescription of activityTotalcostsReturning of empty bottles to storePlacing orders for purchasesPhysical delivery and receipt of merchandiseStocking of merchandise on store shelvesAssistance provided to customers (i.e. checkout, bagging…)Cost-allocation base4,80062,400100,80069,120122,880360,000Direct tracing to soft-drink line624 purchase orders1,260 deliveries3,456 hours of shelf-stocking time614,400 items soldRequired:1.2.3.The supermarket currently allocates store support costs to product lines on the basis of cost ofgoods sold of each product line. Calculate the operating income as a percentage of revenues foreach product line.If they use an ABC system, calculate the operating income as a percentage of revenues for eachproduct line.Comment on your answers above.21Managerial Accounting (GMBA)I. E. Business SchoolQuestion 20TekSound, Ltd. makes two products, a radio with a built-in tape player and one with a built-incompact disc (CD) player. For the current year, TekSound has budgets sales of 50,000 CD unitsand 200,000 tape units. All production is sold to auto manufacturers for installation in new cars andtrucks.Direct costs:CD unitTape unitDirect materials90 €50 €Direct labour* (10 € per direct labour hour)20 €20 €*Both products require two labour hours to complete, therefore the company plans to work 500,000 hours.Total manufacturing overhead costs for the current year are estimated to be 10,000,000 €.Required:1. Compute the unitary product cost, assuming the company allocates overheads based onlabour-hours.2. The ABC project team has developed the following basic information:Expected activityEstimatedActivity e cost driversoverheadCDcostTapeTotalMaterial receipts (receipts)2,000,000 €1,8003,2005,000Machine setups (setups)2,600,000 €3,0001,0004,000Production orders (orders)900,000 €4008001,200Product testing (tests)3,400,000 €16,0004,00020,000Machine related tasks (machine hours)1,100,000 €300,000700,0001,000,000Compute the unitary product cost, using activity-based costing. Comment the results.3. Evaluate the benefits and limitations of activity-based costing.22Managerial Accounting (GMBA)I. E. Business SchoolQuestion 21Banco Lusitano is examining the profitability of its premier…