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Inputs

VC1
80
VC2
50
TVC
130
Days/mo
25
Fixed Costs
TPD
FC
100
150000
200
300000
300
450000
Output Levels (TPD)
Case 1
180
Case 2
220
Graphing Costs
Increments
1

TPD mined
Total tons
TVC
FC
TC
Unit Cost

Static Analysis
Case 1
Case 2
180
220
4500
5500
$ 585,000 $
715,000
$ 300,000 $
450,000
$ 885,000 $ 1,165,000
$ 196.67 $
211.82

Output

Vc
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43

FC
0
130
260
390
520
650
780
910
1040
1170
1300
1430
1560
1690
1820
1950
2080
2210
2340
2470
2600
2730
2860
2990
3120
3250
3380
3510
3640
3770
3900
4030
4160
4290
4420
4550
4680
4810
4940
5070
5200
5330
5460
5590

TC
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000

VC/U
FC/U
TC/U
150000
#DIV/0!
#DIV/0!
#DIV/0!
150130
130
150,000 150,130
150260
130
75,000
75,130
150390
130
50,000
50,130
150520
130
37,500
37,630
150650
130
30,000
30,130
150780
130
25,000
25,130
150910
130
21,429
21,559
151040
130
18,750
18,880
151170
130
16,667
16,797
151300
130
15,000
15,130
151430
130
13,636
13,766
151560
130
12,500
12,630
151690
130
11,538
11,668
151820
130
10,714
10,844
151950
130
10,000
10,130
152080
130
9,375
9,505
152210
130
8,824
8,954
152340
130
8,333
8,463
152470
130
7,895
8,025
152600
130
7,500
7,630
152730
130
7,143
7,273
152860
130
6,818
6,948
152990
130
6,522
6,652
153120
130
6,250
6,380
153250
130
6,000
6,130
153380
130
5,769
5,899
153510
130
5,556
5,686
153640
130
5,357
5,487
153770
130
5,172
5,302
153900
130
5,000
5,130
154030
130
4,839
4,969
154160
130
4,688
4,818
154290
130
4,545
4,675
154420
130
4,412
4,542
154550
130
4,286
4,416
154680
130
4,167
4,297
154810
130
4,054
4,184
154940
130
3,947
4,077
155070
130
3,846
3,976
155200
130
3,750
3,880
155330
130
3,659
3,789
155460
130
3,571
3,701
155590
130
3,488
3,618

44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88

5720
5850
5980
6110
6240
6370
6500
6630
6760
6890
7020
7150
7280
7410
7540
7670
7800
7930
8060
8190
8320
8450
8580
8710
8840
8970
9100
9230
9360
9490
9620
9750
9880
10010
10140
10270
10400
10530
10660
10790
10920
11050
11180
11310
11440

150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000

155720
155850
155980
156110
156240
156370
156500
156630
156760
156890
157020
157150
157280
157410
157540
157670
157800
157930
158060
158190
158320
158450
158580
158710
158840
158970
159100
159230
159360
159490
159620
159750
159880
160010
160140
160270
160400
160530
160660
160790
160920
161050
161180
161310
161440

130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130

3,409
3,333
3,261
3,191
3,125
3,061
3,000
2,941
2,885
2,830
2,778
2,727
2,679
2,632
2,586
2,542
2,500
2,459
2,419
2,381
2,344
2,308
2,273
2,239
2,206
2,174
2,143
2,113
2,083
2,055
2,027
2,000
1,974
1,948
1,923
1,899
1,875
1,852
1,829
1,807
1,786
1,765
1,744
1,724
1,705

3,539
3,463
3,391
3,321
3,255
3,191
3,130
3,071
3,015
2,960
2,908
2,857
2,809
2,762
2,716
2,672
2,630
2,589
2,549
2,511
2,474
2,438
2,403
2,369
2,336
2,304
2,273
2,243
2,213
2,185
2,157
2,130
2,104
2,078
2,053
2,029
2,005
1,982
1,959
1,937
1,916
1,895
1,874
1,854
1,835

89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133

11570
11700
11830
11960
12090
12220
12350
12480
12610
12740
12870
13000
13130
13260
13390
13520
13650
13780
13910
14040
14170
14300
14430
14560
14690
14820
14950
15080
15210
15340
15470
15600
15730
15860
15990
16120
16250
16380
16510
16640
16770
16900
17030
17160
17290

150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
150000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000

161570
161700
161830
161960
162090
162220
162350
162480
162610
162740
162870
163000
313130
313260
313390
313520
313650
313780
313910
314040
314170
314300
314430
314560
314690
314820
314950
315080
315210
315340
315470
315600
315730
315860
315990
316120
316250
316380
316510
316640
316770
316900
317030
317160
317290

130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130

1,685
1,667
1,648
1,630
1,613
1,596
1,579
1,563
1,546
1,531
1,515
1,500
2,970
2,941
2,913
2,885
2,857
2,830
2,804
2,778
2,752
2,727
2,703
2,679
2,655
2,632
2,609
2,586
2,564
2,542
2,521
2,500
2,479
2,459
2,439
2,419
2,400
2,381
2,362
2,344
2,326
2,308
2,290
2,273
2,256

1,815
1,797
1,778
1,760
1,743
1,726
1,709
1,693
1,676
1,661
1,645
1,630
3,100
3,071
3,043
3,015
2,987
2,960
2,934
2,908
2,882
2,857
2,833
2,809
2,785
2,762
2,739
2,716
2,694
2,672
2,651
2,630
2,609
2,589
2,569
2,549
2,530
2,511
2,492
2,474
2,456
2,438
2,420
2,403
2,386

134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178

17420
17550
17680
17810
17940
18070
18200
18330
18460
18590
18720
18850
18980
19110
19240
19370
19500
19630
19760
19890
20020
20150
20280
20410
20540
20670
20800
20930
21060
21190
21320
21450
21580
21710
21840
21970
22100
22230
22360
22490
22620
22750
22880
23010
23140

300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000

317420
317550
317680
317810
317940
318070
318200
318330
318460
318590
318720
318850
318980
319110
319240
319370
319500
319630
319760
319890
320020
320150
320280
320410
320540
320670
320800
320930
321060
321190
321320
321450
321580
321710
321840
321970
322100
322230
322360
322490
322620
322750
322880
323010
323140

130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130

2,239
2,222
2,206
2,190
2,174
2,158
2,143
2,128
2,113
2,098
2,083
2,069
2,055
2,041
2,027
2,013
2,000
1,987
1,974
1,961
1,948
1,935
1,923
1,911
1,899
1,887
1,875
1,863
1,852
1,840
1,829
1,818
1,807
1,796
1,786
1,775
1,765
1,754
1,744
1,734
1,724
1,714
1,705
1,695
1,685

2,369
2,352
2,336
2,320
2,304
2,288
2,273
2,258
2,243
2,228
2,213
2,199
2,185
2,171
2,157
2,143
2,130
2,117
2,104
2,091
2,078
2,065
2,053
2,041
2,029
2,017
2,005
1,993
1,982
1,970
1,959
1,948
1,937
1,926
1,916
1,905
1,895
1,884
1,874
1,864
1,854
1,844
1,835
1,825
1,815

179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223

23270
23400
23530
23660
23790
23920
24050
24180
24310
24440
24570
24700
24830
24960
25090
25220
25350
25480
25610
25740
25870
26000
26130
26260
26390
26520
26650
26780
26910
27040
27170
27300
27430
27560
27690
27820
27950
28080
28210
28340
28470
28600
28730
28860
28990

300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
300000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000

323270
323400
323530
323660
323790
323920
324050
324180
324310
324440
324570
324700
324830
324960
325090
325220
325350
325480
325610
325740
325870
326000
476130
476260
476390
476520
476650
476780
476910
477040
477170
477300
477430
477560
477690
477820
477950
478080
478210
478340
478470
478600
478730
478860
478990

130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130

1,676
1,667
1,657
1,648
1,639
1,630
1,622
1,613
1,604
1,596
1,587
1,579
1,571
1,563
1,554
1,546
1,538
1,531
1,523
1,515
1,508
1,500
2,239
2,228
2,217
2,206
2,195
2,184
2,174
2,163
2,153
2,143
2,133
2,123
2,113
2,103
2,093
2,083
2,074
2,064
2,055
2,045
2,036
2,027
2,018

1,806
1,797
1,787
1,778
1,769
1,760
1,752
1,743
1,734
1,726
1,717
1,709
1,701
1,693
1,684
1,676
1,668
1,661
1,653
1,645
1,638
1,630
2,369
2,358
2,347
2,336
2,325
2,314
2,304
2,293
2,283
2,273
2,263
2,253
2,243
2,233
2,223
2,213
2,204
2,194
2,185
2,175
2,166
2,157
2,148

224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
268

29120
29250
29380
29510
29640
29770
29900
30030
30160
30290
30420
30550
30680
30810
30940
31070
31200
31330
31460
31590
31720
31850
31980
32110
32240
32370
32500
32630
32760
32890
33020
33150
33280
33410
33540
33670
33800
33930
34060
34190
34320
34450
34580
34710
34840

450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000

479120
479250
479380
479510
479640
479770
479900
480030
480160
480290
480420
480550
480680
480810
480940
481070
481200
481330
481460
481590
481720
481850
481980
482110
482240
482370
482500
482630
482760
482890
483020
483150
483280
483410
483540
483670
483800
483930
484060
484190
484320
484450
484580
484710
484840

130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130

2,009
2,000
1,991
1,982
1,974
1,965
1,957
1,948
1,940
1,931
1,923
1,915
1,907
1,899
1,891
1,883
1,875
1,867
1,860
1,852
1,844
1,837
1,829
1,822
1,815
1,807
1,800
1,793
1,786
1,779
1,772
1,765
1,758
1,751
1,744
1,737
1,731
1,724
1,718
1,711
1,705
1,698
1,692
1,685
1,679

2,139
2,130
2,121
2,112
2,104
2,095
2,087
2,078
2,070
2,061
2,053
2,045
2,037
2,029
2,021
2,013
2,005
1,997
1,990
1,982
1,974
1,967
1,959
1,952
1,945
1,937
1,930
1,923
1,916
1,909
1,902
1,895
1,888
1,881
1,874
1,867
1,861
1,854
1,848
1,841
1,835
1,828
1,822
1,815
1,809

269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294
295
296
297
298
299
300

34970
35100
35230
35360
35490
35620
35750
35880
36010
36140
36270
36400
36530
36660
36790
36920
37050
37180
37310
37440
37570
37700
37830
37960
38090
38220
38350
38480
38610
38740
38870
39000

450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000
450000

484970
485100
485230
485360
485490
485620
485750
485880
486010
486140
486270
486400
486530
486660
486790
486920
487050
487180
487310
487440
487570
487700
487830
487960
488090
488220
488350
488480
488610
488740
488870
489000

130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130
130

1,673
1,667
1,661
1,654
1,648
1,642
1,636
1,630
1,625
1,619
1,613
1,607
1,601
1,596
1,590
1,585
1,579
1,573
1,568
1,563
1,557
1,552
1,546
1,541
1,536
1,531
1,525
1,520
1,515
1,510
1,505
1,500

1,803
1,797
1,791
1,784
1,778
1,772
1,766
1,760
1,755
1,749
1,743
1,737
1,731
1,726
1,720
1,715
1,709
1,703
1,698
1,693
1,687
1,682
1,676
1,671
1,666
1,661
1,655
1,650
1,645
1,640
1,635
1,630

600000
500000
400000
300000
200000
100000
0
0

50

100

150

200

250

300

5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
0

50

100

150

200

250

300

35

00

Vc
FC
TC

250

300

350

VC/U
FC/U
TC/U

250

300

350

Sweetum Candies

Curren
Machine Capacity
Machine Cost
Useful Life
FMOH
DMC
Current volume
Expected growth
Expected volume
Expected discount

4100 units
$ 9,000
10 years
$ 1,200 monthly
$ 0.30 unit
3800 units
100%
7600 units
10%

Relevant range of
output

Cost of Good
Output
Variable Manufacturing cost
DMC
Total VMC
Fixed manufacturing cost
FMOH
Depreciation
Total FMC
Total Cost
Unit cost

Current situation
Min
Max

Cost of Goods Manufactured


Monthly
3,800
nufacturing cost
$
1,140
$
$
1,140
acturing cost
$
1,200
$
$
75
$
$
1,275
$
2,415

Projecti
0
4100

Relevant range of
output

Cost of Goods Ma
Annual
45,600
13,680
$ 13,680
14,400
900
$ 15,300
$ 28,980
$
0.64

Output
Variable Manufacturing cost
DMC
Total VMC
Fixed manufacturing cost
FMOH
Depreciation
Total FMC
Total Cost
Unit cost

Projections
Min
Max

0
8200

Cost of Goods Manufactured


Monthly
Annual
7,600
91,200
nufacturing cost
$ 2,052
$ 24,624
$ 2,052
$ 24,624
facturing cost
$ 1,200
$ 14,400
$
150
$ 1,800
$ 1,350
$ 16,200
$ 3,402
$ 40,824
$
0.45

Sweetum Candies

Current situa
Machine Capacity
Machine Cost
Useful Life
FMOH
DMC
Current volume
Expected growth
Expected volume
Expected discount

4100 units
$ 9,000
10 years
$ 1,200 monthly
$ 0.30 unit
3800 units
100%
7600 units
10%

Relevant range of
output

Min
Max

Cost of Goods Man


Monthly
Output
Variable Manufacturing cost
DMC
$
1,140
Total VMC
Fixed manufacturing cost
FMOH
$
1,200
Depreciation
$
75
Total FMC
Total Cost
Unit cost

Current situation

Projectio
0
4100

Cost of Goods Manufactured


Monthly
3,800
$
$

$
$
$

Cost of Goods Ma
Annual
45,600
13,680

1,140
$
$
1,275
2,415
0.64

Relevant range of output

13,680

$
$
$

15,300
28,980
0.64

14,400
900

Output
Variable Manufacturing cost
DMC
Total VMC
Fixed manufacturing cost
FMOH
Depreciation
Total FMC
Cost]
Unit cost

Projected Reduction in Unit Manufacturing Cost due to Expansion


Current
Projected
Cost
Explanation
Per unit cost
$0.64
$0.45
($0.19)
Of which
DMC
$0.30
$0.27
($0.03) discount
Monthly FMOH
$0.32
$0.16
($0.16) utilization
Depreciation
$0.02
$0.02
$0.00

The capacity expansion will increase Sweetum's capacity utilization


as it will be processing double the volume in the same space. This
will reduce unit fixed costs by 16 cents. Its material costs per unit
wll also drop by 10%, .e., 3 cents..

Projections
Min
Max

0
8200

Cost of Goods Manufactured


Monthly
Annual
7,600
91,200
ring cost
$ 2,052
$ 24,624
$ 2,052
$ 24,624
$
$

1,200
150

$ 14,400
$ 1,800
$ 1,350
$ 3,402
$
0.45

$ 16,200
$ 40,824
$
0.45

Splash manufacturing
Cost system
Normal cost
Allocation base
DMLHrs
Demand
Seasonal
Season
Units
Demand Schedule
Q1
700
Q2
500
Q3
150
Q4
150
Annual
1500
Input Usage
Dir Manuf Labor
0.5 hrs/unit
Costs
Dir Mat Cost
$7.50 $/unit
Dir Manuf Labor Rate
$16 $/hr
Bud Var Manuf OH Rate
$12 lab hour
Bud Fixed Manuf OH
$10,500 $/quarter
Markup

30%

Cost Per Unit An


Season
Output
Direct Costs
Material
Labor
Total Direct Costs
Indirect costs
Variable MOH
Fixed MOH
Total Indirect Costs
Total Direct Costs
Cost Per Unit
Price Per Unit

Step 1: Plan

Cost Per Unit Analysis By Season


Q1
Q2
Q3
Q4

Annual
0

0
0
#DIV/0!
#DIV/0!

0
0
#DIV/0!
#DIV/0!

0
0
#DIV/0!
#DIV/0!

Step 1: Plan out the table.

0
0
0

0
0
#DIV/0!
#DIV/0!

0
0
0
0
#DIV/0!
#DIV/0!

Cost system
Normal cost
Allocation base
DMLHrs
Demand
Seasonal
Season
Units
Demand Schedule
Q1
700
Q2
500
Q3
150
Q4
150
Annual
1500
Input Usage
Dir Manuf Labor
0.5 hrs/unit
Costs
Dir Mat Cost
$7.50 $/unit
Dir Manuf Labor Rate
$16 $/hr
Bud Var Manuf OH Rate
$12 lab hour
Bud Fixed Manuf OH
$10,500 $/quarter
Markup

30%

Step 2: Populate the key cells

Splash manufacturing

Season
Output
Direct Costs
Material
Labor
Total Direct Costs
Indirect costs
Variable MOH
Fixed MOH
Total Indirect Costs
Total Direct Costs
Cost Per Unit
Price Per Unit

Cost Per Unit Analysis By Season


Q1
Q2
Q3
Q4
700
500
150

150

Annual
1,500

5,250
5,600
10,850

3,750
4,000
7,750

1,125
1,200
2,325

1,125
1,200
2,325

11,250
12,000
23,250

4,200
10,500
14,700
25,550
36.50
47.45

3,000
10,500
13,500
21,250
42.50
55.25

900
10,500
11,400
13,725
91.50
118.95

900
10,500
11,400
13,725
91.50
118.95

9,000
42,000
51,000
74,250
49.50
64.35

The substantial seasonal variation in production volume causes Splash


Manufacturing's quarterly Fixed MOH per unit to fluctuate dramatically. This
coupled with a fixed markup pricing explains the current volatility in its selling
prices. By contrast, using a Fixed MOH recovery rate based on expected annual
Fixed MOH (i.e., an annualized normal FMOH recovery rate), Splash will be
recovering the same amount of overhead on all units produced during the year
and its sales price volatility due to variations in seasonal cost of production will
be eliminated. Splash may also want to decouple pricing from costs and charge
a premium during the busy season while offering discounts during the slack
season.

Line 1
Line 2
Line 3

Line 4
Line 5

Automatic

One can also use Excel's array functions!

Sequence of
operations

Season
Output
Direct Costs
Material
Labor
Total Direct Costs
Indirect costs
Variable MOH
Fixed MOH
Total Indirect Costs
Total Direct Costs
Cost Per Unit
Price Per Unit

Cost Per Unit Analysis By Season


Q1
Q2
700
500
5,250
5,600
10,850

3,750
4,000
7,750

4,200
10,500
14,700
25,550
36.50
47.45

3,000
10,500
13,500
21,250
42.50
55.25

Dont forget to use the Form


Precedent / Trace Dependent
better reveal the connection
cells (the "wiring" diagram)

Analysis By Season
Q3
Q4
150

150

Annual
1,500

1,125
1,200
2,325

1,125
1,200
2,325

11,250
12,000
23,250

900
10,500
11,400
13,725
91.50
118.95

900
10,500
11,400
13,725
91.50
118.95

9,000
42,000
51,000
74,250
49.50
64.35

use the Formulas|Trace


e Dependent options to
e connections between
g" diagram)

Keating & Associates


Inputs

2011
Numbers

Partners
Professionals

Budgeted
Hours/Person
Comp/Person
5
20

1600

104,000

Indirect costs, allocated based on labor hours


Total
Pool
Legal Support Costs

Hours
40000 $

Budgeted Direct Cost Rate per Professional Labor Hr


Budgeted Indirect Cost Rate per Professional Labor Hr

Job Costs
Richardson
Punch

Hrs

Richardson
Cost
100 $
150 $

12,000
18,000

$
$

Costs
2,200,000
65.00
55.00

Keating & Associates


Inputs

2011
Numbers

Partners
Professionals

Budgeted
Hours/Person
Comp/Person
5
1600 $
200,000
20
1,600 $
80,000

Indirect costs, allocated based on labor hours


Total
Pool
General Support
Secretarial Support

Hours
40000 $
8000 $

Partners
$
$
$

Budgeted Direct Cost Rate per Professional Labor Hr


Budgeted Indirect Cost Rate per Professional Labor Hr
Budgeted Total Cost per Labor Hour

Job Costs
Partner
Professional
Total

Hrs

Richardson
Cost
60 $
40 $
100 $

Costs
1,800,000
400,000

125
95
220
Punch

Hrs
13,200
3,800
17,000

30
120
150

Cost/hr
$
$

45
50

Professionals
$
50.00
$
45.00
$
95
Punch
Cost
$
$
$

6,600
11,400
18,000

reflection: what did we learn from Chapter 4 problems?

r 4 problems?

Variable vs. Absorption Costing

Having understood cost behavior (fixed or variable) and the nature of cost (direc
studied cost absorption i.e., the process by which indirect costs are assigned t
the way we noted that for our current purposes, we only are dealing with incurre
costs. We also noted that unit costs can be thought as a measure of the relative
resource consumption (i.e., the ratio of the costs and quantities of all kinds of pr
without which the output in question could not be produced).

Now we examine another important aspect of cost accounting: how the operatio
through two different lenses available to the cost accountant: variable vs. absor
systems. The key difference is that in variable costing systems, all fixed manufa
expensed in the year incurred, they are never inventoried. In obsorption costin
contrast, certain inventoriable fixed costs are also added to the cost of good m
consequently, inventoried for the purposes of creating product line income stat
moving the top line to units sold (vs. units manufactured) complicates the analy
this is the most "tricky" part of the computations

The key when working a problem is to note that under variable costing, when preparing in
fixed manufacturing costs are to be deducted "below the line," i.e., are to be excluded from
"contrbution margin." In absorption costing systems, by contrast, Fixed Manufacturing Co
Goods Sold, i.e., areto be treated as "above the line" cost items and adjusted for BEFORE o
Margin.

Costing

nature of cost (direct or indirect), we


osts are assigned to products. Along
dealing with incurred or out of pocket
asure of the relative total per unit
ies of all kinds of production inputs
.

g: how the operations of the firm look


: variable vs. absorption costing
ms, all fixed manufacturing costs are
In obsorption costing systems, by
o the cost of good manufactured and
ct line income statements. Notice how
mplicates the analysis. To many people

ng, when preparing income statements, all


are to be excluded from the computation of
xed Manufacturing Costs are part of Cost of
adjusted for BEFORE one computes Gross

Grunewald
Variable Cost Based Income Statement for 2011
Units Budgeted
Units produced
Units sold

20,000
18,000
17,500

Volume Variance
Increase (Decrease) in Ending Inventory

2000 U
500

Revenues
Variable Manufacturing Costs

DM
DL
MOH

Variable Marketing Costs


Total Variable Costs
Contribution Margin
Fixed Costs
Operating Income

Manuf
Admin
Mktg

Per Unit
Total
425
7,437,500
30
525,000
25
437,500
60
1,050,000
45
787,500
160
2,800,000
4,637,500
1,100,000
3,431,850
965,450
1,366,400
1,205,650

When done with the Absorption costing statement, unhide


rows 23 & 24

Absorption Cost Based Income Statement for 2011


Units Budgeted
Units produced
Units sold
Volume Variance
Increase (Decrease) in Ending Inventory
Units
Revenues
Beginning Inventory
Direct Materials
Direct Labor
MOH
Fixed MOH absorbed by output
Sub-total
PVV
Less Cost of Goods Inventoried
Cost of Goods Sold
Gross Margin

Per Unit
425

0
18000
18000
18000
18000

30
25
60
55

2000
500

55
170

or 2011
20,000
18,000
17,500
2000 U
500
Total
7,437,500
540,000
450,000
1,080,000
990,000
3,060,000
110,000
85,000
3,085,000
4,352,500

Grunewald
Variable Cost Based Income Statement for 2011
Units Budgeted
Units produced
Units sold

20,000
18,000
17,500

Volume Variance
Increase (Decrease) in Ending Inventory

2000 U
500

Revenues
Variable Manufacturing Costs

DM
DL
MOH

Variable Marketing Costs


Total Variable Costs
Contribution Margin
Fixed Costs
Operating Income

Manuf
Admin
Mktg

Per Unit
Total
425
7,437,500
30
525,000
25
437,500
60
1,050,000
45
787,500
160
2,800,000
4,637,500
1,100,000
3,431,850
965,450
1,366,400
1,205,650

Back of the envelope computation to get to Absorption Costing Income


FMC allocated to units produced and transferred to EI
55
27500
Absorption Cost OI
1,233,150

Note that Operating Income under Variable Costing (VC) differs from that under Absorption Costing (A
FMOH allocated to the portion of current year's production that is inventoried is NOT being sent to the
year's FMOH sent to inventory is being expenses this year. So if we want to "read off" AC Op Inc from
back in in last year's FMOH via beginning inventory -- and adjustment which will reduce Op Inc, the ot
have done above. This is the "backdoor" way to get AC Op Inc from the VC Op Inc computation your a
accountants will think you're a pretty hot job candidiate!

Absorption Cost Based Income Statement for 2011


Units Budgeted
Units produced
Units sold
Volume Variance
Increase (Decrease) in Ending Inventory
Units
Revenues
Beginning Inventory
Direct Materials
Direct Labor
MOH
Fixed MOH absorbed by output
Sub-total
PVV
Less Cost of Goods Inventoried
Cost of Goods Sold
Gross Margin
Marketing Costs - Variable
Marketing Costs - Fixed
Admin Costs
Operating Income

Per Unit
425

0
18000
18000
18000
18000

30
25
60
55

2000
500

55
170

17,500

45

sorption Costing (AC) because, under AC, part of the period's FMOH is "inventoried." Put another way the
OT being sent to the Income Statement this period. Likewise, if one has beginning inventory, part of last
off" AC Op Inc from a set of statements preapred under VC, we just have to make two adjustments: bring
duce Op Inc, the other is to remove from the VC Op Inc the amount of cost sent to EI under AC which I
computation your accountant has just given you. If you can do this off the top of your head, most

or 2011
20,000
18,000
17,500
2000 U
500
Total
7,437,500
540,000
450,000
1,080,000
990,000
3,060,000
110,000
85,000
3,085,000
4,352,500
787,500
1,366,400
965,450
1,233,150

d." Put another way the


inventory, part of last
two adjustments: bring
o EI under AC which I
your head, most

Helmsmart
Sales (units)
Revenues
Cost of goods sold
Beginning inventory
Production
Available for sale
Deduct ending inventory
Adjustment for production-volume variance
Cost of goods sold
Gross margin
Selling and administrative expenses (all fixed)
Operating income
Beginning inventory
Production (units)
Sales (units)
Ending inventory
Variable manufacturing cost per unit
Fixed manufacturing overhead costs
Fixed manuf. costs allocated per unit produced

2011
49,000
$1,960,000

2012
49,000
$1,960,000

0
0
1,764,000
2,116,800
1,764,000
2,116,800
0 (352,800)
0 (215,600)
1,764,000
1,548,400
196,000
411,600
196,000
196,000
$
0 $ 215,600
0
49,000
49,000
0
$
14
$1,078,000
$
22

0
58,800
49,000
9,800
$
14
$1,078,000
$
22

2013
58,800
$2,352,000

352,800
1,764,000
2,116,800
0
0
2,116,800
235,200
196,000
39,200
9,800
49,000
58,800
0
$
14
$1,078,000
$
22

By the end of the first sentence, we know where this is likely to be going (the last 4 words
"H uses standard costing"). We know from the previous problem (9-22) that this means
during the year, especially the production volume variance will be closed back to Cost of
(b) differences between production and sales will cause FMOH to "move" across years, p
performance measurement.

Quick check 1
Multiply Row 22 by Row 17
Actual FMOH (Row 21)
Over/under absorption (PVV)

2011
1,078,000
1,078,000
0

Quick check 2
Revenue per unit (Row 3/ Row 2)
Less VMC (Row 20)
CM/Unit
Output
Total CM
Total FC (Row 6 + Row 21)
Profit

40
(14)
26
49,000
1,274,000
(1,274,000)
0

Difference (H23 minus H11)


CM/Unit minus FMOH recovery rate
Divide H25/H26

going (the last 4 words of the sentence are


9-22) that this means (a) all variances
closed back to Cost of Goods sold, so that
"move" across years, potentially distorting

2012
1,293,600
1,078,000
215,600

40
(14)
26
58,800
1,528,800
(1,274,000)
254,800
39,200
4
9800

2013
1,078,000
1,078,000
Explains the 2012 "profit": we used the
0
production assets more intensively,

produced 58,800 units.


Was this good?
Maybe, may be not:
Ramping up for big sales campaign? Vs.
Cost of storing, obsolescence,
spoilage/damage,
40 change in taste ...

(14)
26
49,000
1,274,000
(1,274,000)
0

Exactly the number of units inventoried in 2012


for sale in 2013! The 2012 profit was the overrecovered FMOH associated with these units
and the 2013 profit is the remainder of the CM
from these units! "Problem" solved!! :)

Takeaway 3

Takeaway 2

Takeaway 1

Part 1: List (briefly) below your key takewaways from studying Absorption C
Problems 9-22 and 9-24?

Reflection on Absorption Costing

from studying Absorption Costing and working out

Part 2: Answer the following

Question 1: Can any absorption costing sys


you have observed in Problems 9-22 & 9-24

Question 2: What is the principal strength

Question 3: What factors would drive your


recovery rate in AC systems?

2: Answer the following questions in the space provided for each

absorption costing system avoid the kind of volume-driven distortions that


n Problems 9-22 & 9-24? What feature of AC systems drives this behavior?

the principal strength of absorption costing systems? Why are they used?

ctors would drive your choice of the capacity level used to compute the FMOH
systems?

National Savings Bank


Spread
Monthly Fee charge
Minimum Balance

3%
$22
$1,000

Activity
Deposit/withdrawal with teller
Deposit/withdrawal with ATM
Deposit/withdrawal on prearranged basis
Bank checks written
Foreign currency drafts
Inquiries
Balances
Below Minimum?

"Unit" cost
Holt
$
2.30
$
0.70
$
0.40
$
8.40
$
12.40
$
1.40

Units of Activity
Turner
42
48
7
19
0
13
11
1
4
2
12
20
1100
700
0
1

National Savings Bank Customer Profitability Analysis


Holt
Turner
Graham
Spread
33.00
21.00
738.00
Monthly Fees
264.00
Total Revenue
33.00
285.00
738.00
Less Costs
Deposit/withdrawal with teller
(96.60)
(110.40)
(11.50)
Deposit/withdrawal with ATM
(4.90)
(13.30)
(11.90)
Deposit/withdrawal on prearranged basis
(5.20)
(24.80)
Bank checks written
(92.40)
(8.40)
(25.20)
Foreign currency drafts
(49.60)
(24.80)
(74.40)
Inquiries
(16.80)
(28.00)
(12.60)
Total Costs
(260.30)
(190.10)
(160.40)
Customer Profitability
(227.30)
94.90
577.60
Answer to part 2

Answer to part 3

s of Activity
Graham
5
17
62
3
6
9
24600
0

Applew
Cost of Goods Manufactured (Single cost pool)
Units
Revenues
Costs
Direct Materials
Direct Manufacturing Labor
Machine Costs
Total Direct Costs
Manufacturing Overhead
Total COGS
SGA
Operating Income

Activity
Soldering (# points)
Spipments (#)
Quality control (# inspections)
Purchase orders (# orders)
Machine power (M/c hrs)
Machine setups (# setups)
Total MOH

Monarch
Regal
22,000
4,000
Total
Per Unit
Total
Per Unit
19,800,000
900
4,560,000
1,140
4,576,000
396,000
3,168,000
8,140,000
4,400,000
12,540,000
5,830,000
1,430,000

Cost
942,000
860,000
1,240,000
950,400
57,600
750,000
4,800,000

208
18
144
370
200
570
265
65

Total Activity
1,570,000
20,000
77,500
190,080
192,000
30,000

2,336,000
168,000
288,000
2,792,000
400,000
3,192,000
978,000
390,000

584
42
72
698
100
798
245
98

Monarch
Cost/Unit of
Activity
Driver
0.60
1,185,000
43.00
16,200
16.00
56,200
5.00
80,100
0.30
176,000
25.00
16,000

Answer part 3 here:

Answe

Applewood Electronics

Cost of Goods Manufactured (ABC)


Units
Revenues
Costs
Direct Materials
Direct Manufacturing Labor
Machine Costs
Total Direct Costs
Manufacturing Overhead
Total COGS
SGA
Operating Income

Monarch
22,000
Total
19,800,000
4,576,000
396,000
3,168,000
8,140,000
3,160,100
11,300,100
5,830,000
2,669,900
Answer part 2 here:

Monarch
Regal
Cost
Driver
Cost
711,000
385,000
231,000
696,600
3,800
163,400
899,200
21,300
340,800
400,500
109,980
549,900
52,800
16,000
4,800
400,000
14,000
350,000
3,160,100
1,639,900
Answer part 4 here:

Answer part 5 here:

Manufactured (ABC)
Monarch
22,000

Regal
4,000
Unit
900

r part 2 here:

r part 4 here:

208
18
144
370
144
514
265
121

Total
4,560,000
2,336,000
168,000
288,000
2,792,000
1,639,900
4,431,900
978,000
(849,900)

Unit
1,140
584
42
72
698
410
1,108
245
(212)

Takeaway 3

Takeaway 2

Takeaway 1

Part 1: List (briefly) below your key takewaways from studying Activity Base
out Problems 5-28 and 5-40?

Reflection on Activity Based Costing

from studying Activity Based Costing and working

Part 2: Answer the following

Question 1: What is new about ABC?

Question 2: What is the principal strength

Question 3: What factors would drive your

2: Answer the following questions in the space provided for each

new about ABC?

the principal strength of ABC? Its principal weakness?

ctors would drive your choice of whether to use ABC or not?

Sally Gunn
Actual airfare
Cabfare

$1,600
80

AIRFARE ALONE
Client
BWI
ORD
Total allocated

Client
BWI
ORD
Total

Allocation 1 (Standalone)
Standalone
Weight
Fare
$
1,200
60% $
$
800
40% $
$
2,000
100% $

960
640
1,600

Allocation 2-4 (Incremental, 2 ways + Shapley)


Designation Allocation 2 Designation Allocation 3 Shapley
P
$
1,200 I
$
800 $
1,000
I
$
400 P
$
800 $
600
$
1,600
$
1,600 $
1,600

AIRFARE + CABFARE
Client
BWI
ORD
Total allocated

Client
BWI
ORD
Total

Allocation 1 (Standalone)
Standalone
Weight
Fare
$
1,280
59% $
$
880
41% $
$
2,160
100% $

996
684
1,680

Allocation 2-4 (Incremental, 2 ways + Shapley)


Designation Allocation 2 Designation Allocation 3 Shapley
P
$
1,280 I
$
800 $
1,040
I
$
400 P
$
880 $
640
$
1,680
$
1,680 $
1,680

CABFARE ALONE
Client
BWI
ORD
Total allocated

Allocation 1 (Standalone)
Standalone
Weight
Fare
$
80
50% $
$
80
50% $
$
160
100% $

Client
BWI
ORD
Total

Allocation 2-4 (Incremental, 2 ways + Shapley)


Designation Allocation 2 Designation Allocation
P
$
80 I
$
I
$
- P
$
$
80
$

40
40
80

3
80
80

ey)
Shapley
$
40
$
40
$
80

Yves Parfum
Revenues
Standalone
Joint

Monaco
48
130

Innocence
112

Primary
Monaco
Innocence
Total

Standalone
39
91
130

I
48
82
130

Shapley
18
112
130

33
97
130

What is the Shapley value?


The Shapley value is the average of all possible incremental values
that could be assigned to each cost object. Here we have two cost
objects, Monaco and Innocence, and in columns C and D we have
enumerated the two possible cases (Primary = M and Primary = I).
The Shapley value (of the Revenue) to be assigned to M and I is the
average of the two cost allocations to M resulting from treating it as
the Primary and the Secondary, i.e., the values shown in columns C
and D.

Jim Dandy Auto Sales


[2012] Expected Cost

1,500,000
2011 Actuals

Location
E
W
N
S
T

Expected expe

# Cars
Expense
Per car
3,150 $
324,000 $
103
1,080 $
432,000 $
400
2,250 $
648,000 $
288
2,520 $
756,000 $
300
9,000 $ 2,160,000 $
240

$
$
$
$
$

# Cars
525,000
180,000
375,000
420,000
1,500,000

The incremental columns H+I show how the total planned cost in cell B2 can be allocated t
planned costs to the one of the divisions up to its limit (in this case the firm has chosen th
to be the as that location's prior year expense as shown in the range entitled Prioryear, i.e
next division up to its limit and so on till all of the planned cost is allocated.

The Shapley value is a generalization of the process shown in the Incremental columns (co
creating all possible orderings of the divisions (as exemplified in ROWS 25-68), (2) allocati
each division (as we have done in the columns entitled Allocation), then (3) outputing the
orderings in cells J6:J10 (cells D19:D22).

Location
E
N
S
W

# Cars
Expense
Shapley
3,150 $
324,000
223000
2,250 $
648,000
295000
2,520 $
756,000
439000
1,080 $
432,000
543000
1500000

Sort 1
S
N
W
E
Total
Check

Allocation
Sort 2
756000 S
648000 N
96000 E
0W
1500000 Total
OK Check

Allocation
756000
648000
96000
0
1500000
OK

Sort 3
S
W
N
E
Total
Check

Sort 5
S
E
W
N
Total
Check

Allocation
Sort 6
756000 S
324000 E
420000 N
0W
1500000 Total
OK Check

Allocation
756000
324000
420000
0
1500000
OK

Sort 7
N
S
E
W
Total
Check

Sort 9
N
W
S
E
Total
Check

Allocation
Sort 10
648000 N
432000 W
420000 E
0S
1500000 Total
OK Check

Allocation
648000
432000
324000
96000
1500000
OK

Sort 11
N
E
W
S
Total
Check

Sort 13
W
N
S
E
Total
Check

Allocation
Sort 14
432000 W
648000 N
420000 E
0S
1500000 Total
OK Check

Allocation
432000
648000
324000
96000
1500000
OK

Sort 15
W
S
N
E
Total
Check

Sort 17
W
E
N
S
Total
Check

Allocation
Sort 18
432000 W
324000 E
648000 S
96000 N
1500000 Total
OK Check

Allocation
432000
324000
744000
0
1500000
OK

Sort 19
E
W
S
N
Total
Check

Sort 21
E
N
S
W
Total
Check

Allocation
Sort 22
324000 E
648000 N
528000 W
0S
1500000 Total
OK Check

Allocation
324000
648000
432000
96000
1500000
OK

Sort 23
E
S
W
N
Total
Check

Expected expenses allocated by:


Incremental
Stand-alone
Rank
Allocation
Shapley
$
225,000
4 $
223,000
$
300,000
3 $
96,000
295,000
$
450,000
2 $
648,000
439,000
543,000
$
525,000
1 $
756,000
$ 1,500,000
$ 1,500,000 1,500,000

ll B2 can be allocated to Locations E, W, N, S by the


the firm has chosen the limit for each sales location
e entitled Prioryear, i.e., in cells A6:C9), then to the
llocated.

ncremental columns (cols H+I). It is computed by (1)


OWS 25-68), (2) allocating the costs ("planned") to
then (3) outputing the average for a division over all

Allocation
Sort 4
756000 S
432000 W
312000 E
0N
1500000 Total
OK Check

Allocation
756000
432000
312000
0
1500000
OK

Allocation
Sort 8
648000 N
756000 S
96000 W
0E
1500000 Total
OK Check

Allocation
648000
756000
96000
0
1500000
OK

Allocation
Sort 12 Allocation
648000 N
648000
324000 E
324000
432000 S
528000
96000 W
0
1500000 Total
1500000
OK Check
OK
Allocation
Sort 16 Allocation
432000 W
432000
756000 S
756000
312000 E
312000
0N
0
1500000 Total
1500000
OK Check
OK
Allocation
Sort 20 Allocation
324000 E
324000
432000 W
432000
744000 N
648000
0S
96000
1500000 Total
1500000
OK Check
OK
Allocation
Sort 24 Allocation
324000 E
324000
756000 S
756000
420000 N
420000
0W
0
1500000 Total
1500000
OK Check
OK

Castleford I
Service
Department
Maintenance
Info Systems
Total

Cost before
allocations M
6,300,000
1,452,150
7,752,150

Department Served
IS
Machining Assembly
20%
30%
50%
10%
80%
10%

Here we start by allocating service


department costs using the reciprocal
method for the Castleford problem(HDR
14ed pp. 550-551).

[8(1&
[8(@
452150
Or, in br
[][]=

[][]=
implies
[]=[]

Now let's extend th


following service pa

Setting up equations for the reciprocal method


The total, reciprocated, costs of the two systems will be
M
=
6,300,000
IS
=
1,452,150

+
+

10%
20%

Which can be rewritten more usefully for our purposes as:


M
IS

10%
20%

IS
M

=
=

Which can be expressed, in matrix notation as

[8(1&0.1@0.2&1)]
[8(@)]=[8(6300000@1
452150)]
Or, in brief,
[][]=[]

This system can be solved for M and IS which, respectively, will be "reciprocated costs" of the Mainten
departments. These reciprocated costs have the interesting interpretation of being the "true cost" of
services of the other department had to be purchased externally. Conceptually, the way forward is to

[][]=[]
implies
[]=[]^(1) []
where [W]-1 is the matrix inverse of [W].
To solve this in excel, we can proceed as follows:
Step 1

Set up the matrix of allocation weights, W by entering the numbers in a 2x2 array:
1
-20%

-10%
1

Note that each service departme


i.e, row 1 column 1, row 2 colum
costs are in the other two cells.

Name these four cells "Weights" this is the matrix W. Excel is smart enough to treat contiguous blo
when the user invokes matrix functions such as "minverse", (short for "m(atrix) inverse"), and "mmul

Then all we have to do is compute W-1 as follows: pick a 2x2 area (as we do below) and type (while the
"=minverse(Weights)" and hit Ctl+Shift+Enter . If you by chance hit enter, Excel will show an error, b
again, hit F2, then hit Ctl+Shift+Enter. (This next step is purely for convenience) Name this 2x2 range

1.0204081633 0.10204082
0.2040816327 1.02040816

Next, name the range B5:B6, "Costs" and then, in a 2 x1 (2 rrows 1 column) area type "=mmult(Winv,

6576750
2767500
These are the "fully reciprocated" costs of the Maintenance and Information Systems Departments
These costs can be allocated as follows

Service Department
Maintenance
Information Systems
Total
To Production

Reciprocated
Cost
M
6,576,750
2,767,500
9,344,250

Department Served
IS
Machining
1,315,350
1,973,025
276,750
2,214,000
276,750
1,315,350
4,187,025
7,752,150

Note that each Department's reciprocated cost is the sum of its Direct (Unreciprocated) costs plus tha
amount of the other service department's reciprocated costs that reflect the department's usage of th
other service department. As a result the sum of the reciprocated costs (here $9,344,250 )reflects the
value of the services provided by the two departments. Also note that the total amount allocated to t
two production departments is the sum of the original, unreciprocated service costs (here, $ 7,752,15

et's extend the problem by adding a third, cafeteria, departm


ng service pattern:

Service Department
Maintenance
Cafeteria Services
Info Systems
Total

Department Served
Cost before
allocations
Maintenance Cafeteria
IS
6,300,000
15%
20%
2,200,000
20%
18%
1,452,150
10%
10%
7,752,150

What is the W matrix in this case? How many rows and columns? Create the weight matrix in the are
highlighted in yellow in rows 102-106:
do not peek ahead if you can help it

Compute the reciprocated costs of the three service departments and allocate them as you
fit, below on this tab. When you are done, go to the next tab

IS
M

6,300,000
1,452,150

Which is to be read as "The number in row 1,


column 1 of matrix W times the element in the
first row of matrix D plus the number in row 1
column 2 of matrix W times the element in the
second row of matrix D equals the element in the
first row of matrix C" and so on

rocated costs" of the Maintenance and Information Services


n of being the "true cost" of operating the two departments if the
ptually, the way forward is to note that

e that each service department's "own" cost in the main diagonal,


row 1 column 1, row 2 column 2 etc., while the "other" department's
ts are in the other two cells.

nough to treat contiguous blocks of numbers (arrays) as matrices


m(atrix) inverse"), and "mmult" (short for "m(atrix) mult(iply)").

do below) and type (while the entire four cell array is selected
er, Excel will show an error, but nothing is lost: select the 2x2 area
enience) Name this 2x2 range "Winv".

mn) area type "=mmult(Winv,Costs)" and hit Ctl+Shift+Enter"

on Systems Departments

erved
Assembly
3,288,375
276,750
3,565,125
7,752,150

Total
6,576,750
2,767,500
9,344,250

nreciprocated) costs plus that


the department's usage of that
here $9,344,250 )reflects the "true"
e total amount allocated to the
rvice costs (here, $ 7,752,150)!

eteria, department and the

erved
Machining
Assembly
25%
40%
30%
32%
70%
10%

the weight matrix in the area

s and allocate them as you see

Castleford II

Continuing where we left off on the


preceding tab

The case facts are as follows:


Department Served
Cost before
allocations
Maintenance Cafeteria
IS
6,300,000
15%
20%
2,200,000
20%
18%
1,452,150
10%
10%
9,952,150

Service Department
Maintenance
Cafeteria Services
Info Systems
Total

The weight matrix for this problem is:


1
-15%
-20%

-20%
1
-18%

-10%
-10%
1

Leading to the following reciprocated costs:


7,392,692
3,667,997
3,590,928
Which can be allocated as:

Service Department
Maintenance
Cafeteria Services
Info Systems
Total
To Production

Department Served
Reciprocated
Costs
Maintenance Cafeteria
IS
7,392,692
1,108,904
1,478,538
3,667,997
733,599
660,239
3,590,928
359,093
359,093
14,651,617
1,092,692
1,467,997
2,138,778

Note that in this case, the reciprocated costs of the Maintenance & I/S departments (7392692 and 359
higher than their reciprocated costs when there were only two departments (6300000 and 1452150),
of them is also consuming Cafeteria Services.
Finally, consider the following analysis:
Excess of reciprocated costs over unreciporcated in the two department Scenario
Excess of reciprocated costs over unreciprocated in the three department Scenario
Increase in reciprocated costs by adding the cafeteria department
Unreciprocated costs of the cafeteria department
Net increase in reciprocated costs created by adding cafeteria department

This analysis shows that the difference between the reciprocated costs by adding a department (i.e.,
department to the three department scenario) exceeds the unreciprocated cost of the third deparrtme
mean?

This analysis shows that the difference between the reciprocated costs by adding a department (i.e.,
department to the three department scenario) exceeds the unreciprocated cost of the third deparrtme
mean?

ment Served
Machining
Assembly
25%
40%
30%
32%
70%
10%

ment Served
Machining
Assembly
1,848,173
2,957,077
1,100,399
1,173,759
2,513,649
359,093
5,462,221
4,489,929
9,952,150

Total
7,392,692
3,667,997
3,590,928
14,651,617

partments (7392692 and 3590928) are both


nts (6300000 and 1452150), in part because each

Scenario

1,592,100
4,699,467
3,107,367
2,200,000
907,367

y adding a department (i.e., going from the two


d cost of the third deparrtment. What does this

Castleford III
Recall the three department scenario:
Service Department
Maintenance
Cafeteria Services
Info Systems
Total

Department Served
Cost before
allocations
Maintenance
Cafeteria
Info Systems
6,300,000
15%
20%
2,200,000
20%
18%
1,452,150
10%
10%
9,952,150

From which we can compute both the


Weight matrix
1
-20%
-15%
1
-20%
-18%

Reciprocated
Costs
-10%
-10%
1

and the

7,392,692
3,667,997
3,590,928

leading to the allocations:

Service Department
Maintenance
Cafeteria Services
Info Systems
Total
To Production

Department Served
Reciprocated
Costs
Maintenance
Cafeteria
Info Systems
7,392,692
1,108,904
1,478,538
3,667,997
733,599
660,239
3,590,928
359,093
359,093
14,651,617
1,092,692
1,467,997
2,138,778

Can you modify the numbers


nt Served
shown in this table of cost and
Machining
Assembly
25%
40% service patterns to replicate
30%
32% the analysis of the two
70%
10%
department scenario?
Hint: you have to zero out only
3 numbers in cells C6:G8! :)

nt Served
Machining
Assembly
1,848,173
2,957,077
1,100,399
1,173,759
2,513,649
359,093
5,462,221
4,489,929
9,952,150

Total
7,392,692
3,667,997
3,590,928
14,651,617

What happens if you


zero out only B7?
Why?
If you zero out only D6
and D8? Why?
If you zero out C7, C9,
D6 and D8?
What do the zeroing out exercises teach us?

Manes Company
Usage Table
Used by
Department
A
B

X
100

500

Y
250
100

150
400

Total
Usage Total Cost
500
100000
1000
40000

Direct

A
B

Relative Usage
A
B
63%
38%
20%
80%

Cost Allocated
X
Y
62500
37500
8000
32000

Total
100000
40000

Step Down A first


Allocated to
Department Cost
B
X
Y
A
100000
20000
50000
B
60000
12000
Total to Production departments
62000

30000
48000
78000

Total
100000
60000
140000

Step Down B first


Allocated to
Department Cost
A
X
Y
B
40000
20000
4000
A
120000
75000
Total to Production departments
79000

Total
16000
40000
45000
120000
61000
140000

Reciprocal Method
Step 1 Compute reciprocated costs
Service
Department
Matrix1
A
1
B
-0.2
Step 2 Allocate reciprocated costs

"Reciprocated"
costs
-0.5 $
133,333
1 $
66,667

Allocated to
Service
"Reciprocated"
Department
costs
A
B
X
A
133,333
(26,667)
(66,667)
B
66,667
(33,333)
(6,667)
Total
200,000
(73,333)
Total Service Department costs allocated to X and Y only

(140,000)

ated to
Y
(40,000)
(26,667)
(66,667)
(140,000)

Total
(133,333)
(66,667)
(200,000)

W&B

W
B
Total

Standalone Rental Costs


Hours
Rate
Cost
800
40000
50
200
10000
1000
50
50000

W
B
Total

Joint rental cost


Hours
Rate
Cost
800
800
1000
42
42000

Standalone Allocation
Company
Share
Cost
W
80%
33,600
B
20%
8,400
Total
100%
42,000

Allocations based on Incremental values


Company Order
Cost
Order
Cost
Shapley
W
P
40,000 S
32,000
36,000
B
S
2,000 P
10,000
6,000
Total
42,000
42,000
42,000

MaxSystems Inc.

Standalone
Bundle

Item
Tower
Monitor
Printer
Total

Units

Price
1
1
1
3
1

Cost
840
280
480
1600
1200

300
180
270
750
750

Item
Tower
Monitor
Printer
Total

Stan
Based on revenue
Share
52.5%
17.5%
30.0%
100.0%

Standalone revenue allocation


Based on revenue
Based on cost
Based on units
Allocation
Share
Allocation
Share
Allocation
630
40%
480
33%
400
210
24%
288
33%
400
360
36%
432
33%
400
1200
100.0%
1200
100%
1200

Milk
12,000g

Butter

Buttermilk
108,000 Cups
36,000 quarts
$1.20/quart

36,000 Cups
18,000 lbs
$2.20/lb

Canola
oil

Butter

6,000 Cups
8,000 lbs
$2.20/lb

$1.60/lb
Spreadable
Butter
36,000 tubs
$2.30/tub

Yield
Butter yield
Buttermilk yield
Sbutter
Milk Input
Cost
Processing Costs
Sbutter Processing

Quantity
Revenues
Further Processing Costs
NRV
Gross Margin
Joint cost allocation
Using Physical units
Using Sales Value @ Split
Using NRV
Using Constant GM NRV
Gross Margin
Gross Margin Pct
Product Profitability
Using Physical units
Using Sales Value @ Split
Using NRV
Using Constant GM NRV

3 cups/gallon
9 cups/gallon
6 tubs/gallon
12000 gallons
$22,500
$9,430
$1.60 lb

$
$
$

Butter
18000 lbs
39,600.00
39,600.00

Price
$2.20
$1.20
$2.30

$
$
$

unit
lb
quart
tub

Sbutter
36000 tubs
82,800.00 $
(28,800.00) $
54,000.00 $

Bmilk
27000
32,400.00
32,400.00

$
$
$
$

(7,982.50)
(17,561.50)
(19,956.25)
(14,849.69)

$
$
$
$

(23,947.50)
(14,368.50)
(11,973.75)
(17,080.31)

$
$
$
$

46,017.50
36,438.50
34,043.75
39,150.31

$
$
$
$

8,452.50
18,031.50
20,426.25
15,319.69

$
$
$

$
$
$
$

$
$
$
$

Bmilk
quarts
32,400.00
32,400.00

$
$
$

(23,947.50)
(14,368.50)
(11,973.75)
(17,080.31)

($31,930)
$

47%
8,452.50
18,031.50
20,426.25
15,319.69

Total
115,200.00
(28,800.00)
86,400.00

54,470.00

Milk
12,000g
Baking
Buttermilk

Buttermilk
108,000 Cups
36,000 quarts

72,000 pints
$1.20/quart
$0.75/pint Further processing of buttermilk is undesirable since the net realizabl

pint, or $0.80 per quart which is less than the $1.20 per quart that we
How we allocate joint costs is irrelevant for the decision to further pr
or not" decision is made, the joint costs are already incurred, i.e., a

Butter

36,000 Cups
18,000 lbs
$2.20/lb

Canola
oil

$1.60/lb
Spreadable
Butter
36,000 tubs
$2.30/tub

le since the net realizable value per pint is $0.40 ($0.75-$0.35) per
e $1.20 per quart that we can get for selling unrepackaged buttermilk
the decision to further process buttermilk: when the "process further
e already incurred, i.e., are "sunk costs."

Yield
Butter yield
Buttermilk yield
Sbutter
Milk Input
Cost
Processing Costs
Sbutter Processing

Quantity
Revenues
Further Processing Costs
NRV
Gross Margin
Joint cost allocation
Using Physical units
Using Sales Value @ Split
Using NRV
Using Constant GM NRV
Gross Margin
Gross Margin Pct
Product Profitability
Using Physical units
Using Sales Value @ Split
Using NRV
Using Constant GM NRV

3 cups/gallon
9 cups/gallon
6 tubs/gallon
12000 gallons
$22,500
$9,430
$1.60 lb

$
$
$

Butter
18000 lbs
39,600.00
39,600.00

Price
$2.20
$1.20
$2.30

$
$
$

unit
lb
quart
tub

Sbutter
72000 tubs
165,600.00 $
(57,600.00) $
108,000.00 $

Bmilk
27000
32,400.00
32,400.00

$
$
$
$

(7,982.50)
(17,561.50)
(24,561.54)
(17,279.64)

$
$
$
$

(23,947.50)
(14,368.50)
(7,368.46)
(14,650.36)

$
$
$
$

100,017.50
90,438.50
83,438.46
90,720.36

$
$
$
$

8,452.50
18,031.50
25,031.54
17,749.64

$
$
$

$
$
$
$

$
$
$
$

Bmilk
quarts
Total
32,400.00 $ 198,000.00
$ (57,600.00)
32,400.00 $ 140,400.00

(23,947.50)
(14,368.50)
(7,368.46)
(14,650.36)

($31,930)
$ 108,470.00

55%
8,452.50
18,031.50
25,031.54
17,749.64

Mat Place
Input
Output
Floor mats (FM)
Car mats (CM)
Shreds
May Actuals
Input
"Net" Manufacturing Cost
FM
CM
Shreds

Input-Ouput ratios
100 tires
Qty
units
Price/Unit
25 pcs
$
12.00
75 pcs
$
6.00
40 lb
$
0.70
Production and Costs
Tires
Cost
125,000 $
600,000
$
565,000
Produced Sold
EI
31250
25,000
6,250
93750
85,000
8,750
50000
43,000
7,000

Inventory Valuation using the Sales Value @ Splitoff + Byproduct Value @ Production Meth
Output
Produced "Cost"
End Inv
Value
FM
31250 $
226,000
6,250 $
45,200
CM
93750 $
339,000
8,750 $
31,640
Shreds
50000 $
35,000
7,000 $
4,900
Total
$
600,000
$
81,740
May Income Statement (Production Method)
Product
Qty
Sale Price
COGS
Gross
FM
25,000 $
300,000 $ (180,800) $
CM
85,000 $
510,000 $ (307,360) $
Total
110000 $
810,000 $ (488,160) $

Margin
119,200
202,640
321,840

Inventory Valuation using the Sales Value @ Splitoff + Byproduct Value @ Sales Method
Output
Produced "Cost"
End Inv
Value
FM
31250 $
240,000
6250 $
48,000
CM
93750 $
360,000
8750 $
33,600
Shreds
50000 $
7000 $
Total
$
600,000
$
81,600
May Income Statement (Sales Method)
Product
Qty
Sale
FM
25000 $
CM
85000 $
Shreds
43000 $
Total
153000 $

Price
300,000
510,000
30,100
840,100

COGS
Gross
$ (192,000) $
$ (326,400) $
$
$ (518,400) $

Margin
108,000
183,600
30,100
321,700

alue @ Production Method


Check
OK
OK
?
OK

alue @ Sales Method


Check
OK
OK
OK

Sonnet Inc.
Actual output as fraction of budget
Item
Production
Sales
Price
Direct Material
Direct Labor Rate
Labor Productivity
Direct Marketing Cost
FOH
Market Size
Market Share
Budgeted CM/Unit

Budget /
Standard
1,500,000
1,500,000
6.00
1.50
12.00
300
0.30
800,000
7,500,000
0.20
4.16

95%
Actual
1,425,000
1,425,000
6.10
1.60
12.20
250
0.25
810,000
8,906,250
0.16

Budgeted and Actual Operating Income, Sonnet Inc., fo

Line item
Revenue
COGS
Direct material
Direct labor
Less Ending Inventory
Gross Margin
Direct Marketing
Fixed Overhead
Operating Income

Static (Master) Budget


9,000,000
(2,250,000)
(60,000)
-

Sales Volume
variance
(450,000) U
112,500 F
3,000 F

(2,310,000)
6,690,000
(450,000)
(800,000)
5,440,000

Flexible Budget

(2,137,500)
(57,000)
-

22,500 F
(312,000) U
(312,000.00) U
Static Budget Variance
Market size variance
Market share variance

ncome, Sonnet Inc., for the month of May


Flexible Budget Variance
Flexible Budget
8,550,000

(142,500) U
(1,140) U
(2,194,500)
6,355,500
(427,500)
(800,000)
5,128,000

et Variance

ce

Price Variances
142,500 F

71,250 F
(10,000) U
60,110 F
48,710 F
(263,290)

1,170,000 F
(1,482,000) U

Efficiency
Variances

(11,400) U

(11,400) U

Actual Results
8,692,500
(2,280,000)
(69,540)
-

(2,349,540)
6,342,960
(356,250)
(810,000)
5,176,710

Day

11 May 5/6
12 May 7/8
13 May 12/13
14 May 14/15
15 May 19/20
16 May 21/22

Exercise/Problem
4 2-22 & 2-23
5 2-4, 4-22 & 4-32/33
6 9-22 & 9-24
7 5-28 & 5-40
8 Continue
9 Continue
10 15-24, 15-31, 15-32
15-33; 16-30/31
TBA
7-39, (also 7-23?), 8-39
continue ...
12-18, 25, 35
11-31, 39

Comments

Review PVV

Day

Exercise/Problem

Comments

4 2-22 & 2-23


5 2-4, 4-22 & 4-32/33
6 9-22 & 9-24
7 5-28 & 5-40
8 Continue
9 Continue
15-24, 15-31, 15-32 & Presentation
10 Planning + Exam discussion (if
needed)
11 15-33; 16-30/31
12 TBA
13 TBA
14 TBA
15 TBA
16 TBA

Review PVV

Grunewald
Variable Cost Based Income Statement for 2011
Units Budgeted
Units produced
Units sold

A student asked me to help them understand 20,000


what was go
18,000
operations.
17,500

that
this i
Volume Variance My first thought upon reading the problem was
2000
U
the first year is identical to 9-22 in the
Increase (Decrease)specifically,
in Ending Inventory
500 sense
reveals that at budgeted production
500 units, FMOH i
Per Unit of Total
costs are $13,000 per unit. Actual Sales
less than u
Revenues
425 were
7,437,500
DM of year 1's 30
525,000
This MUST mean that part
FMOH has
beeen de
Variable Manufacturing
DL
25
437,500
like. Costs
MOH
60
1,050,000
Variable Marketing
Costs
45
Inn the seond year what I have to keep track787,500
of is FMOH c
Total Variable Costs
160
2,800,000
ending inventory ... so this is a very good practice problem
Contribution Margin
4,637,500
Manuf
1,100,000
I grab the worksheet from
9-22 and
go to work
... I literall
Fixed Costs
3,431,850
Admin
965,450
adjustment into the statement
I 1,366,400
had prepared for Grunew
Mktg
Operating Income
1,205,650

You can remove th

Back of the envelope computation to get to Absorption Costing Income


FMC allocated to units produced and transferred to EI
55
27500
Absorption Cost OI
1,233,150

Note that Operating Income under Variable Costing (VC) differs from that under Absorption Costing (A
FMOH allocated to the portion of current year's production that is inventoried is NOT being sent to the
year's FMOH sent to inventory is being expenses this year. So if we want to "read off" AC Op Inc from
back in in last year's FMOH via beginning inventory -- and adjustment which will reduce Op Inc, the ot
have done above. This is the "backdoor" way to get AC Op Inc from the VC Op Inc computation your a
accountants will think you're a pretty hot job candidiate!

Absorption Cost Based Income Statement for 2011

Units Budgeted
d what was going
on in Problem 9-16, especially in the second year.of
Units produced
Units sold

was that this is Volume


a "known"
Varianceproblem that we already have solved. More
2 in the sense that
there
is noinbeg.
inventory.
A quick computation
Increase
(Decrease)
Ending
Inventory
units, FMOH is recovered at the rate of $4,000 Units
per unit.PerVariable
Unit
re less than units
produced, which has led to an inventory buildup.
Revenues
425
Beginning
has beeen deferred
toInventory
year 2. Here we work out what0year 2 looks

Direct Materials
18000
30
Direct Labor
18000
25
MOH
18000
60
k of is FMOH comig in via Beginning inventory and going out via
18000
55
actice problemFixed
... MOH absorbed by output
Sub-total
PVV
2000
55
ork ... I literallyLess
amCost
going
to incroporate a beginning 500
inventory
of Goods Inventoried
170
ed for Grunewald
which
already
had an ending inventory adjustment
Cost
of Goods
Sold
Gross Margin
can remove this
text box
Marketing
Costsnow!
- Variable
17,500
45
Marketing Costs - Fixed
Admin Costs
Operating Income

sorption Costing (AC) because, under AC, part of the period's FMOH is "inventoried." Put another way the
OT being sent to the Income Statement this period. Likewise, if one has beginning inventory, part of last
off" AC Op Inc from a set of statements preapred under VC, we just have to make two adjustments: bring
duce Op Inc, the other is to remove from the VC Op Inc the amount of cost sent to EI under AC which I
computation your accountant has just given you. If you can do this off the top of your head, most

Partial Solution to 9-16 (second year only)

or 2011

econd year.of20,000
18,000
17,500

solved. More
2000 U
mputation
500
Variable
Total
y buildup. 7,437,500
ear 2 looks

540,000
450,000
1,080,000
out via
990,000
3,060,000
110,000
ntory
85,000
adjustment
3,085,000
4,352,500
787,500
1,366,400
965,450
1,233,150

d." Put another way the


inventory, part of last
two adjustments: bring
o EI under AC which I
your head, most

Vmanuf
Vmarketing
FOH/unit
Budgeted
Produced
Sold
Sale price per Unit
Sales
Beginning Inventory
Variable Cost BI
FOH
Total Cost of BI
Add COGM
VC
FOH
Less cost of EI
VC
FOH
PVV
COGS
Gross Income
Less Fixed Marketing Cost
Operating Income

150 Units
13,000
1,950,000
4,000
600,000
400 Units
13,000
5,200,000
4,000
1,600,000
30 Units
13,000
(390,000)
4,000
(120,000)

(second year only)


10000
3000
4000
500
400
520
24000
12,480,000

2,550,000

6,800,000

(510,000)

(8,840,000)
(400,000)
(9,240,000)
3,240,000
(600,000)
2,640,000