Professional Documents
Culture Documents
1. Main Street Books and Café (MSBC) is a large city bookstore that sells books and music CDs and
has a café. MSBC operates at capacity and allocates selling, general, and administration (S, G & A)
costs to each product line using the cost of merchandise of each product line. MSBC wants to
optimize the pricing and cost management of each product line. MSBC is wondering if its accounting
system is providing it with the best information for making such decisions.
Main Street Books and Café incurs the following selling, general, and administration costs:
Calculate:
A. Suppose MSBC uses cost of merchandise to allocate all S, G & A costs. Prepare product
line and total company income statements. (3
marks)
B. Allocate S, G & A costs using ABC to the three product lines and prepare ABC income
statement for products and company. (7 marks)
C. Based on A. and B., write a memo to MSBC management describing how the ABC system
might be useful for managing the store. (3 marks)
(Hint: Identify activity cost pools, calculate activity cost drivers, and allocate costs to the
products)
2. Taylor & Associates, a consulting firm, has the following condensed budget for 2014:
($) ($)
Revenues 20,000,000
Total costs:
Direct costs
Professional Labor 5,000,000
Indirect costs
Client support 13,000,000 18,000,000
Operating income 2,000,000
Taylor has a single direct-cost category (professional labor) and a single indirect-cost pool (client
support). If indirect costs are allocated to jobs on the basis of professional labor costs:
A. Calculate the 2014 budgeted indirect-cost rate for Taylor & Associates. (1
mark)
Taylor is bidding on a consulting job for Tasty Street, a fast-food chain specializing in street foods. The
following break-up of budgeted Professional Labour charges is given to you:
B. Calculate the budgeted cost of the Tasty Street job. How much will Taylor bid for the job if it is
to earn its target operating income of 10% of revenues? (4 marks)
3. Superclass Co. Ltd. Has three production departments, melting, molding & polishing, and two
service departments, stores & utilities. The following estimated figures for a certain period have been
provided to you.
Additional Information:
The other expenses are allocated as per direct wages.
You must calculate the following
a) Calculate the overhead absorption rate per hour concerning the three production departments. (7
Marks)
b) What will be the total cost of a product with a material cost of ₹80 and direct labor cost of ₹40
passing through melting, molding & polishing for 2,3 & 4 hrs, respectively? (3
Marks)
4. A Company manufactures and sells a single product. The company's sales and expenses for last
month were:
a. Calculate the monthly break-even point in units sold and in sales rupee (Using the Contribution
margin method) (2
Marks)
b. How many units would be sold monthly to earn a minimum target net income of ₹60,000? (1 Marks)
c. Refer to the original data above. Compute the company's margin of safety in both rupees and
percentages. (2 Marks)
d. Refer to the original data above.
I. What is the company's Contribution Margin Ratio? (1 Marks)
II. If monthly sales increase by ₹25,000 and there is no change in fixed expenses, how much would
net income be expected to increase? (1
Marks)
e. Refer to the original data above. What would be the new monthly break-even point in units and sales
rupee if the company could reduce its variable expenses by ₹1 per unit? (1 Marks)
Compute the company's degree of operating leverage. If sales increase by 10%, how much should net
income increase?
5. Differentiate between cost tracing and cost allocation. (2
marks)