CAMELBACK COMMUNICATIONS

Management Accounting

2008

..................................................................................................................................................9 ..............................................................................................................................................................5 What is going on? ..........7 Modified Cost System II............................................................. 7 Modified Cost system I........6 Differentiation between variable and fixed costs and maximization of contribution......................................................... 3 Answers...................................................................................................Contents Contents........................................................ 4 Charges for 40% mark on and Product to be dropped............ 2 Synopsis:......................................................................................................4 Recalculation of allocation rates if additional products are to be dropped.................................................

1 for FM & other for TV • • • Last 5 years. Budgeted Variable + Fixed Overheads Number of Direct Labour Hours Burden Rate = Standard Cost = Direct Labour Cost + Direct Material Cost (Direct Labour Hours * Burden Rate) To illustrate the problem to the management he developed a Four Product Model. a management consultant’s observations about the company’s cost system: • • Existing cost system is simple.Camelback communications Synopsis: About the company: • Manufactures radio & television antennas • 4 distinct product lines 1. President Lincoln McDowell concerned about its ability to cost products accurately. Rotators for the dipole line. Rabbit ear antennas 2. • Glenn Peterzon. . 2 electronic antennas. Cost accounting system at fault. Some products profitable whereas others impossible to manufacture at a profit. expanded the production facility twice & recently introduced the electronic antenna line. doubled the number of products offered. Dipole antennas for FM & TV reception 3. 4. It used a single burden rate for all overhead costs.

Of Units Hours Total ($) 1 7. On comparing the industry prices to the firm’s costs profitability was determined. selling price was calculated on the basis of 40% mark-on. The products with a mark-on of less than 25% were discontinued. Industry selling prices were different as they were established using the actual production costs & a 40% mark-on. Because of this the resulting product mix differed from the starting mix which led to recalculation of allocation rate per hour to determine if it had been affected.5 1000 2000 7500 7000 27500 27500 45000 72500 7000 10.5 2000 2000 15000 3 5 1000 3000 5000 2 7. • • • • • Answers Charges for 40% mark on and Product to be dropped Variable Product Overhea d B C D Total New Alocatio n Rate: Variable Overhea d Fixed Overhea d Total Labour Hours Allocatio n Rate/Ho ur Labour Variable Total Hours Per Overhead Labour Unit Per Unit No. After computing the standard cost.36 .• He calculated the direct labour allocation rate that the existing single burden rate cost system would generate assuming the production to be maximum possible & taking direct labour hour cost to be $5.

43 78.07 22.71 35.29 37.71 14.50 D 5 10 20.50 C 10 15 31.5 3.11 35 14 49 13.29 50. Of Units Hours Total ($) 1 7.14 89.36 8.5 17 59.5 3000 3000 22500 2 7.Product Material Labour Allocate d Cost Standard Cost 40% Mark On Selling Price Standard Cost Mark On Standard Selling Price Profit % Markup B 5 5 10.12 42.07 56.14 28.5 11 38.43 6.36 20.5 18.00 27.5 1000 2000 7500 5000 30000 30000 45000 .20 Hence Product C will be discontinued Recalculation of allocation rates if additional products are to be dropped Variable Product Overhea d B D Total New Alocatio n Rate: Variable Overhea d Fixed Overhea d Labour Variable Total Hours Per Overhead Labour Unit Per Unit No.

00 18. C and D. Now this method of calculating the allocation rate is incorrect because • Fixed overhead per product is fixed irrespective of the labour hours . B.00 25.89 Hence product D is to be discontinued.00 63.5 11 35 14 38.00 45.Total Labour Hours Allocatio n Rate/Ho ur 75000 5000 15.00 D 5 10 30.5 13. Camelback Communications is calculating the allocation rate by adding together all the fixed and the variable cost for all the products together and then dividing them by the total labour hours.00 35.00 8.00 27.00 49 4.00 10.50 54. What is going on? Table A in the case gives the actual cost incurred during the production of the items A.00 Product Material Labour Allocate d Cost Standard Cost 40% Mark On Selling Price Standard Cost 40% Mark On Standard Selling Price Profit % Markup B 5 5 15.

the variable overhead that is calculated in this method is not correct because the variable overhead per unit is different for different products. Therefore the products whose costs are getting increased due to the wrong allocation are showing less than desirable profits although there mark up is the same. we seem to get a lower mark up of 15% which leads to an equally profitable product being discontinued. we find that certain products are gaining because the costs that should be truly attributed to them are being given to other products and vice versa. Eg.• Fixed overhead is being divided between the 4 products in a faulty way because of including it in the allocation rate. but due to the faulty cost system a cost of $85 is getting attributed to it. Consequences of this costing system are as follows: Because of wrong allocation of costs. Now the Selling price calculated based on the industry standard remains the same and hence although the mark up is 40%. Variable Product Overhea d A B C D Total New Alocatio n Rate: Labour Hours Per Unit 6 1 3 2 No. Of Units 1000 2000 1000 1000 Total Labour Hours 6000 1000 3000 2000 12000 . Differentiation between variable and fixed costs and maximization of contribution Modified Cost system I If fixed costs are allocated using the current costing system and variable costs are correctly attributed then. • Hence we can see the variation between the industry selling prices and that given by the costing system in place. The actual cost that should be attributed to A is $70. Also.

5 B 5 5 7.50 Standar d Cost 40% Mark On Selling Price Standard Cost Mark On Standar d Selling Price Profit % Markup 82.25 16. it is clearly evident from this that the wrong allocation of variable cost has .75 41.5 29.25 81. Also.25 8.75 C 10 15 5 11.5 21.5 11 42.5 18.25 44.75 Product Material Labour Variable overhea d Allocate d Cost A 15 30 15 22.Fixed Overhea d Labour Hours Allocatio n Rate/Ho ur 45000 12000 3.5 33 115.5 17 35 14 98 15.1764705 9 59. we can see that there is very little change in the balancing of the costs of the product and even in this case product A would get discontinued.5 7.33333 333 From the above.2424242 4 49 19 63.78787 879 38.5 57.5 3.75 30 12 42 70 28 27.25 D 5 10 7.5 17.5 18.

a much greater hand in the deviation of the costs from their true value as compared to fixed costs. Modified Cost System II .

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