REPORT ON CALCULATION AND ANALYSIS OF COSTING

PRODUCTS AND SERVICES

Management Accounting
Torrens University Australia
Lecturer: Lynelle Jenkins

Submitted By: Anusha K C

Student OD: 00292574T
Contents
Answer 1: Support Department Cost Allocation..........................................................................................3
i. Direct method..................................................................................................................................3
ii. Step-down Method..........................................................................................................................4
iii. Reciprocal method...........................................................................................................................5
Answer 2: Support Department Cost Allocation and Job Costing...............................................................7
Part A......................................................................................................................................................7
Part B.......................................................................................................................................................7
Answer 3 Process Costing...........................................................................................................................8
Part A......................................................................................................................................................8
Part B.....................................................................................................................................................12
Answer 4: Cost Volume and Profit Analysis.............................................................................................13
PART A: Calculation of Break-even points in units..............................................................................13
PART B: Calculation of operating profit of the company......................................................................14
PART C: Calculation of New-Breakeven points in units and Operating Income...................................16
PART D:................................................................................................................................................18
Answer 5: Planning Operational Budget...................................................................................................18
PART A.................................................................................................................................................18
PART B.................................................................................................................................................19
References.................................................................................................................................................20
Answer 1: Support Department Cost Allocation
i. Direct method
Allocation of support department costs to the manufacturing departments using the
direct method
Manufacturing
  Support Departments Departments  
Personne Workstatio
  Legal Laptop Total
l n
Overhead Costs before
any inter department
cost allocations 9,055 4,000 240,000 200,000 453,055
           
Allocation base:          

Legal hours 2 3 37 20 62

Personnel hours 40 30 200 160 430

           
Allocation:          

Legal department cost (9,055)   5,878 3,177 -

Personnel department costs   (4,000) 2,222 1,778 -

           
Total costs after
allocation - - 248,100 204,955 453,055

Workings:
Legal Department Cost
Laptop = 9055/ ((37+20) *37) = 5878
Workstation = 9055/ ((37+20) *20) = 3177

Personnel department cost

Laptop = 4000 / ((200+160) * 200) = 2222
Workstation = 4000 / ((200+160) *160) = 1778

Total cost after allocation

Laptop = 240000+5878+2222 = 248100
Workstation = 200000+3177+1778 = 204955
[CITATION Eld16 \l 1033 ]

ii. Step-down Method

Allocation of support department costs to the manufacturing departments using the step-
down method
Manufacturing
  Support Departments Departments  
Personne Workstatio
  Legal Laptop Total
l n
Overhead Costs before any
inter department cost
allocations 9,055 4,000 240,000 200,000 453,055
           
Allocation base:          

Legal hours 2 3 37 20 62

Personnel hours 40 30 200 160 430

           
Allocation:          

Legal department cost (9,055) 453 5,584 3,018 -

Personnel department costs   (4,453) 2,474 1,979 -

           
Total costs after
allocation - - 248,058 204,997 453,055

Workings:
Support Department:
Legal Department Cost
Personnel = 9055 / ((3+37+20) *3) = 453
Personnel Department cost
Personnel = -4000 – 453 = -4453

Manufacturing Department
Legal Department Cost:
Laptop = 9055 / (3+37+20) * 37 = 5584
Workstation = 9055 / (3+37+20) * 20 = 3018

Personnel Department cost

Laptop = 4453/ ((200+160) *200) = 2474
Workstation = 4453 / ((200+160) *160) = 1979

Total Cost after allocation

Laptop = 240000+ 5584+ 2474 = 248058
Workstation = 200000+ 3018+ 1979 = 204997

iii. Reciprocal method

Allocation of support department costs to the manufacturing departments using the
reciprocal method
Manufacturing
  Support Departments Departments  
Personne Workstatio
  Legal Laptop Total
l n
Overhead Costs before any
inter department cost
allocations 9,055 4,000 240,000 200,000 453,055
           
Allocation base:          

Legal hours 2 3 37 20 62

Personnel hours 40 30 200 160 430

           
Allocation:          

Legal department cost (9,502) 475 5,860 3,167 -

Personnel department costs 448 (4,475) 2,238 1,790 -

           
Total costs after
allocation 0 (0) 248,097 204,958 453,055
Workings
Calculation of Legal Department cost to be allocated to manufacturing Departments, using
reciprocal approach
We assumed the legal department cost to be X and Personnel Department cost to be Y
Legal Department Cost (X) = 9055+ (40/(40+200+160) * Y)
Personnel Department Cost (Y) = 4000 + (3/ (3+37+20) * X)

By substituting Personnel Department cost in the equation

Legal Department (X) = 9055 + (40/ (40+200+160) * (4000+(3/(3+37+20) * X))
X = 9055 + (0.1 * (4000 + 0.05 *X))
X =9055 +400 + 0.005X
0.9947X = 9455
X = 9502.38

By substituting the value of X, calculating the value of Y

Personnel Department (Y) = 4000 + (3/ (3+37+20) *X)
Y = 4000 + (3/ (3+37+20) * 9502.38)
Y = 4475.19

Support Department:
Legal Department Cost: Personnel = 9502/ ((3+37+20) *3) = 475
Personnel Department Cost: Legal = 4475/ ((200+160+40) *40) = 448

Manufacturing Department:
Legal Department Cost:
Laptop = 9502/ ((3+37+20) *37) = 5860
Workstation = 9502/ ((3+37+20) *20) = 3167

Personnel Department Cost:

Laptop = 4475/ ((200+160+40) *200 = 2238
Workstation = 4475/ (200+160+40) *160 = 1790
Answer 2: Support Department Cost Allocation and Job Costing
Part A
Step 1:
Calculation of Overhead Rate
Particulars Machining Assembly
Reciprocal Method Cost 9000000 7000000
Machine Hour 200000 -
Direct Labor Hour - 35000
Overhead Rate 45 200
Per Machine Per Direct Labor
  Hour Hour

Step 2:
Calculation of cost of Job MT27
Particular Machining Assembly Total
Direct Material 36000 6710 42710
Direct Labor 1550 1650 3200
9450 14000
Overhead (210*45) (200*70) 23450

Total cost of Job 47000 22360 69360

Part B.
For deciding which method of allocation will be beneficial for the Machining Department
we have to calculate per hour rate of all from all three methods.
Calculate Per Hour Rate of all the three methods.
Particulars Direct Method Step Down Reciprocal Method
Overhead(A) 8650000 8500000 9000000
Basis of Rate Machine Hour Machine Hour Machine Hour
Machine Hours(B) 200000 200000 200000
     
Per hour Rate(A/B) 43.25 42.5 45

Here, the manager of Machining Department would prefer the step-down method. The direct
method results in a lower amount of support departments’ costs being allocated to the Machining
Department than the step-down method. This is clear from a comparison of the overhead rate,
per direct manufacturing labor-hour, for the Machining Department under the two methods. The
Step-down method shows the minimum manufacturing overhead rate per machining hour which
is beneficial. Although direct method is the easiest to calculate but the lack of focus on issue due
to the computer programs is a drawback of direct method and reciprocal method is accurate but
complicated to perform. [CITATION Eld16 \l 1033 ]

Answer 3 Process Costing

Part A.
WEIGHTED AVERAGE METHOD

Step-1: Calculation of total production costs      

%
  $ units complete

Work in process 1 June   70,000  

Direct material $36,550   70%
Conversion $13,500   40%
Balance in Work in process 1 June $50,050    
Units started in June   460,000  
Units completed in June and transferred out   450,000  
       
Work in process 30 June      
Direct material     75%
Conversion     25%
Costs incurred during June      
Direct material $391,850    
Conversion $287,300    
total production costs incurred in June $679,150    
 Total cost to account for $729,200    

Step-2: Analysis of physical flows of units and calculation of Equivalent Units

Physical
  unit % complete Equivalent units
wrt wrt conversio
Analysis of physical flows   material conversion DM n

Work in process 1 June 70,000 70% 40%    

Units started in June 460,000        

Total units to account for 530,000        

Units completed and transferred
out 450,000 100% 100% 450,000 450,000
Work in process 30 June 75% 25%
 80,000 60,000 20,000

Total equivalent units 530,000     510,000 470,000

Workings

Physical Units:
Total Units to Account for = 70000+460000 = 530000
Work in process 30 June = 530000-450000 = 80000
Total Equivalent units = 450000 + 80000 = 530000

Equivalent Units of Direct Material:

Units completed and transferred out = 450000 * 100% = 450000
Work in process 30 June = 80000 * 75% = 60000
Total equivalent units = 450000+ 60000 = 510000

Equivalent Units of Conversion

Units completed and transferred out = 450000 * 100% = 450000
Work in process 30 June = 80000 * 25% = 20000
Total equivalent units = 450000 + 20000 = 470000

Step-3: Calculation of cost per equivalent units

D
M Conversion
Work in process 1 June $50,050     $36,550 $13,500
$391,85
Costs incurred during June $679,150     0 $287,300
$428,40
Total costs to account for $729,200     0 $300,800

Equivalent units       510,000 470,000

Cost per equivalent unit $1.48     $0.84 $0.64
Workings
Overall total cost to account for = $50050 + $679150 = $729200
Direct Material (DM)
Total cost to account for = $36500 + $391850 = $428400
Cost per equivalent unit = 428400/510000 = $0.84

Conversion
Total Cost to account for = $13500 + $287300 = $300800
 Cost per equivalent unit = 300000/470000 = $0.64

i. FIFO METHOD

Step-1: Calculation of total production costs

  $ units % complete

Work in process 1 June 2020   70,000  

Direct material $36,550   70%
Conversion $13,500   40%
Balance in Work in process 1 June $50,050    

Units started in June   460,000  

Units completed in June and transferred out   450,000  

       
Work in process 30 June      
Direct material     75%
Conversion     25%
       
Costs incurred during June      
Direct material $391,850    
Conversion $287,300    
total production costs incurred in June $679,150    
  $729,200    
Workings
Balance work in 1 June = 36500 + 13500 = 50050
Total production cost incurred in June = 391850 + 287300 = 679150
Step-2: Analysis of physical flows of units and calculation of Equivalent Units
Physical
  unit % complete Equivalent units
wrt wrt conversio
Analysis of physical flows   material conversion DM n
           

Work in process, 1 June 70,000 70% 40%    

Units started in June 460,000        

Total units to account for 530,000        

Units completed and transferred out 450,000 100% 100% 450,000 450,000

Work in process, 30 June 80,000 75% 25% 60,000 20,000

Total equivalent units 530,000     510,000 470,000

Less: Units in opening Work in process 70,000 70% 40% 49,000 28,000

Work done this month 460,000     461,000 442,000

Workings

Total Units to account for = 70000 + 460000 = 530000

Work in process 30 June = 530000 – 450000 = 80000
Work done this month = 530000 – 70000 = 460000

Equivalent units of Direct Materials

Units completed and transferred out = 450000 * 100% = 450000
Work in process 30 June = 80000 * 75% = 60000
Total equivalent units = 60000 + 450000 = 510000
Units in opening work in process = 70000 * 70% = 49000
Work done this month = 510000 – 49000 = 461000

Equivalent units of Conversion

Units completed and transferred out = 450000 * 100% = 450000
Work in process 30 June = 80000 * 25% = 20000
Total equivalent units = 450000 + 20000 = 470000
Units in opening work in process = 70000 * 40% = 28000
Work done this month = 470000 – 28000 = 442000

Step-3: Calculation of cost per equivalent units

DM
Conversion
Work in process, 1 June $50,050     $36,550 $13,500
$391,85
Costs incurred during June $679,150     0 $287,300
$428,40
Total costs to account for $729,200     0 $300,800
Cost per equivalent unit for work done this
month $729,200     $0.85 $0.65
Workings
Total costs to account for = 50050+679150 = 729200
Direct Material
Total cost to account for = 36500 + 391850 = 428400
Cost equivalent unit for work done this month = 300800/442000 = $0.65

Conversion
Total cost to account for = 13500 + 287300 = 300800
Cost equivalent unit for work done this month = 391850/461000 = $0.85

Part B
Weighted Average  
Cost of units completed and transferred out to Packaging
Department $666,000
Cost in Work in process  
DM $50,400
Conversion $12,800
Total cost in Work in process 30 June $63,200
Workings
Cost of units completed and transferred out to Packaging Department = 450000 * (0.84+0.64) =
$666000
Direct Material = Work process in June * cost per equivalent unit = 60000*0.84 = $50400
Conversion = work process in June * cost per equivalent unit = 20000*0.64 = $12800
Total cost in work in process 30 June = 50400 + 12800 = $63200
FIFO      
Direct Conversio
  Material n Total
Cost in Work in process 30 June $51,000 $13,000 $64,000
Cost of units completed and transferred out to Packaging $665,20
Department $377,400 $287,800 0
$729,20
Total costs accounted for $428,400 $300,800 0
Workings
Direct Material
Cost in work in process 30 June: =60000 * 0.85 = $51000
Cost of units completed and transferred out to Packaging Department = Total cost accounted for
– cost work in process 30 June
 = 428400 – 51000 = 377400

Conversion
Cost of work in process in 30 June =20000 * 0.65 = $13000
Cost of units completed and transferred out to Packaging Department = Total cost accounted for
– cost work in process 30 June
= 300800 – 13000 = 287800

Answer 4: Cost Volume and Profit Analysis

PART A: Calculation of Break-even points in units

Calculation of contribution margin

TPU
Particulars   PC case S case case Total

Selling price per unit a 50 65 90 205

Variable cost per unit b 45 61 87 193

(205
(50-45) = (65-61) = (90-87) = -193)
Contribution margin per unit c=a-b 5 4 3 = 12

Workings
As shown above to clear the workings, we assume
a = selling price per unit
b= Variable cost per unit
c= Contribution margin per unit

To find the contribution margin per unit we calculate by (a-b)

Calculation of sales mix

TPU Total
Particulars   PC case S case case units

Units   2,500 10,000 5,000 17,500

Sales mix d 14% 57% 29% 100%
Weighted average contribution
margin e=c*d 0.71 2.29 0.86 3.86
Workings:
(d) = sales mix
Total units = 17500
Sales mix (d) = units/total units*100%
Weighted average contribution margin(e)= c*d

Sales mix (d)

PC Case = 2500/17500*100% = 14%
S Case = 10000/17500*100% = 57%
TPU Case = 5000/17500*100% = 29%

Weighted Average contribution margin (e)

PC Case = 5*14% = 0.71
S Case = 4*57% = 2.29
TPU Case = 3*29% = 0.86
Total Units = 0.71+2.29+0.86 = 3.86

Calculation of breakeven point in units

Fixed Costs / Contribution Margin

Breakeven point in units (f) = (e)

Breakeven point in units = 35,100/3.86

Breakeven point in units = 9,100

Calculation of breakeven point in unit’s product wise = (f*d)

PC case = 9100*14% = 1,300

S case = 9100*57% = 5,200
TPU case = 9100*29% = 2,600

PART B: Calculation of operating profit of the company

TPU
Particulars   PC case S case case Total

Units sold a 2,500 10,000 5,000 17,500

Selling price per unit b 50 65 90 205

c=a*
Total sales b 125,000 650,000 450,000 1,225,000
           

Variable cost per unit d 45 61 87 193

e=a*
Total variable cost d 112,500 610,000 435,000 1,157,500
           

Contribution Margin f=c-e 12,500 40,000 15,000 67,500

Less: Fixed costs         35,100

           

Operating Profit         32,400

Workings:

Units sold = a
Selling price per unit = b
Total sales = c
Variable cost per unit = d
Total variable cost = e
Contribution margin = f

Calculation
Total units sold = 2500+10000+5000= 17500
Total selling price per unit = 50+65+90 = 205

Sales (c)

PC case = 2500*50 = 125000

S case = 10000*65 = 650000
TPU case = 5000*90 = 450000
Total Sales = 125000+650000+450000 = 1225000

Variable cost (e)

PC case = 2500*45 = 112500

S case = 10000*61 = 610000
TPU case = 5000*87 = 435000
Total variable cost = 112500+610000+435000 = 1157500

Contribution margin (f)

PC case = 125000-112500 = 12500

S case = 650000-610000 = 40000
TPU case = 450000-435000 = 15000
Total contribution margin = 12500+40000+15000 = 67500

Operating Profit = 67500-35100 = 32400

PART C: Calculation of New-Breakeven points in units and Operating Income

Calculation of contribution margin

TPU
Particulars   PC case S case case Total

Selling price per unit a 50 65 90 205

Variable cost per unit b 45 61 87 193

(50-45) = (65-61) = (90-97) (205-193)

Contribution margin per unit c=a-b 5 4 =3 = 12

Workings: Same as part A

Calculation of sales mix

TPU
Particulars   PC case S case case Total

Units   2,500 7,500 7,500 17,500

Sales mix d 14% 43% 43% 100%
Weighted average contribution
margin e=c*d 0.71 1.71 1.29 3.71

Workings:
(d) = sales mix
Total units = 17500
Sales mix (d) = units/total units*100%
Weighted average contribution margin(e)= c*d

Sales mix (d)

PC Case = 2500/17500*100% = 14%
S Case = 7500/17500*100% = 43%
TPU Case = 7500/17500*100% = 43%

Weighted Average contribution margin (e)

PC Case = 5*14% = 0.71
S Case = 4*43% = 1.71
TPU Case = 3*43% = 1.29
Total Units = 0.71+1.71+1.29 = 3.71

Calculation of breakeven point in units

Breakeven points in units (f) = Fixed Costs / Contribution Margin(e)

Breakeven points in units = 35100/3.71 = 9450

Calculation of breakeven point in unit’s product wise

PC case = 9450*14% = 1350
S case = 9450*43% = 4050
TPU case = 9450*43% = 4050

Calculation of operating income of the company

TPU
Particulars   PC case S case case Total

Units sold a 2,500 7,500 7,500 17,500

Selling price per unit b 50 65 90 205

c=a*
Total sales b 125,000 487,500 675,000 1,287,500
           

Variable cost per unit d 45 61 87 193

e=a*
Total variable cost d 112,500 457,500 652,500 1,222,500
           

Contribution Margin f=c-e 12,500 30,000 22,500 65,000

Less: Fixed costs         35,100

           

Operating Profit         29,900

Workings:
Units sold = a
Selling price per unit = b
Total sales = c
Variable cost per unit = d
Total variable cost = e
Contribution margin = f

Calculation

Total units sold = 2500+10000+5000= 17500

Total selling price per unit = 50+65+90 = 205

Sales (c)

PC case = 2500*50 = 125000

S case = 7500*65 = 487500
TPU case = 7500*90 = 675000
Total Sales = 125000+487500+675000 = 1287500

Variable cost (e)

PC case = 2500*45 = 112500

S case = 7500*61 = 457500
TPU case = 7500*87 = 652500
Total variable cost = 112500+457500+652500 = 1222500

Contribution margin (f)

PC case = 125000-112500 = 12500

S case = 487500-457500 = 30000
TPU case = 675000-652500 = 22500
Total contribution margin = 12500+30000+22500 = 65000

Operating Profit = 65000-35100 = 29900

PART D:

No, it is not always better to choose the sales mix with the lowest breakeven point because this
calculation ignores the demand for the various products.

The company should look to and sell as much of each of the 3 products as it can to maximize
operating income even if this means that this sales mix results in a higher breakeven point.
No, sales mixes with the lowest breakthrough point are not necessarily preferable because
calculation lacks demand for the different goods. The organization can see to sell and optimize
operating income for each of the three goods, even though this sales combination leads to a
higher departure. [ CITATION Eld161 \l 1033 ]

Answer 5: Planning Operational Budget

PART A
If John provides underestimate data, the company will not be able to meet the consumer demand.
In effect, there is a risk of missing revenue when the commodity is not available. It would have a
detrimental impact on the company's image, performance and sales. In the case of COVID, the
loss of revenue due to the shortage of stock would not be a positive indication of the firm of any
business enterprise facing several challenges. It not only impacts the company's performance, but
also the cash flow that is very critical in the present situation. Consumers are faced with the
unavailability and thus lack of faith in the business of the commodity they seek. They could
switch your demand to another alternative.
The immoral nature of the firm often has a serious impact, especially in the global pandemic
where any chance of cash inflow will transform the business's existence. Since an incentive
scheme is linked to expected sales results and actual revenues, it is possible for the managers to
obtain an undervalued revenue data from the sales manager. The variance of the projected sales
data from the actual data is large, which will lead to higher bonuses for the sales manager if such
underestimated information is given.
Further, due to a global pandemic, the organization still faces the issue of slowing down the
operation. In such a case, John might overestimate revenue data in the sense of a global
pandemic based on previous years. This could lead to smaller or no incentives, as the real profits
could not surpass the projected sales for the following year. There is then a detrimental impact
on the decision-making process for management if John suppliers the under-estimated revenue
results. It could negatively impact the future bonus if it offers details dependent on past years.
[ CITATION Eld162 \l 1033 ]

PART B
John unethically behavior could lead to disruption in business. In order to satisfy the demand of
the consumers, businesses would not be able to order the quantity of goods. As a consequence of
the product's not available, there would be a risk of market failure. This will negatively affect the
company's image, profitability and profits. In the case of COVID, the loss of revenue due to the
shortage of stock would not be a positive indication of the firm of any business enterprise facing
several challenges. In addition to impacting the viability of the business, the cash inflow, which
is very critical in the present case, would also be affected. The consumer faces the unavailability
and thus loses the confidence in the business of the good it needs. They could choose another
alternative. Unethical behavior often has a big impact on the business, particularly in the global
pandemic where any possibility of cash inflow will change the company's lives. [ CITATION Eld162
\l 1033 ]
References
Eldenburg, L. (2016). A costing framework and cost allocation. In Management accounting (3 ed., pp. 84-
93). Wiley. Retrieved from https://ebookcentral-proquest-com.ezproxy.laureate.net.au

Eldenburg, L. (2016). Cost Volume Profit analysis. In Management Accounting (3 ed., pp. 125-130).
Wiley. Retrieved from https://ebookcentral-proquest-
com.ezproxy.laureate.net.au/lib/think/reader.action?docID=4748111

Eldenburg, L. (2016). Operational Budgets. In Management Accounting (3 ed., pp. 208-218). Wiley.
Retrieved from https://ebookcentral-proquest-
com.ezproxy.laureate.net.au/lib/think/reader.action?docID=4748111