You are on page 1of 27

Management accounting iii

Tutorial 2

Q1. What are some different managerial uses of cost information? ( 3-1, pg
121 )

• The uses of cost information is pervasive throughout decisionmaking situations.
• Pricing, organizations use cost information in the pricing
decision in two ways. In markets where the organization faces a
market-determined price, the organization will use product cost
information to decide whether its cost structure will allow it to
compete profitability. For markets where the organization can set
its price, organizations will often set a price that is an increment
of its product cost. This approach is known as cost plus pricing.

Budgets are important in planning. managers compare the actual results from the budget period with expectations that were reflected in the budget to assess how well the organization did in light of its expectations. It provide the basis for earnings forecasts that senior executives issue to the stock market. • Budgeting. which sets the organization’s direction for the budget period. organizations use a tool called target costing to focus efforts in product and process design on developing a product that has a good profit potential in view of market requirements. • Performance Evaluation. .• Product Planning. which is a management accounting tool that projects or forecasts costs for various level of production and sales activity. the most widespread in used.

. Why should decision makers focus only on the relevant costs for decision making? ( 3-9. pg 121 ) • This is because relevant costs are those future costs and revenues that will be changed due to a result of some decisions.Q1. • By focusing only on relevant cost. it can reduce distraction to the decision maker.

variable costs are $30 per unit.000. pg 123 ) Required a. $ Sales Revenue 50 Variable costs 30 Contribution margin 20 Contribution margin ratio = 20/50 x 100% = 40% . Patterson Parkas Company’s sales revenue is $50 per unit. ( 3-28. Compute Patterson’s contribution margin per unit and contribution margin ratio.Q2. and fixed costs are $180.

$ Sales Revenue 50 Variable costs 30 Contribution margin 20 Breakeven point = fixed cost / contribution = $180. Determine the number of units Patterson must sell to break even.000 / $20 = 9.Required b.000 units .

2x 0.000 x = $ 900.2x / 0.000 . Determine the sales revenue required to earn (pretax) income equal to 20% of the revenue.000 + 0.4 0.Required c.2x = 180.000 + 0.4x = $180. Target sales (value) = FC + Profit / Contribution margin ratio x = $180.

of units = $380.000/ (1-0.000 + 200.4) = $200. How many units must Patterson sell to generate an after-tax profit of $120.000 units .Required d.000 Target sales (unit) = 180.000 units No.000/ $20 = 19.000 if the tax rate is 40% ? Profit before tax = 120.000 / $20 = 19.

how much of an increase in sales units is necessary from expanded advertising to justify this expenditure (generate an incremental contribution margin of $40. Patterson is considering increasing its advertising expenses by $40.000 / $ 20 = 2.000.000) ?  Increase in Sales units = = $ 40.000 units .Required e.

Fixed costs are $1.Q3) 3-31 Florida Favourites Company produces toy allogator and toy dolphins.290. Sales revenue and variable costs per unit are as follow: Alligator Dolphin Selling price $20 $25 Variable costs 8 10 .000 per year.

9 .6 Contribution margin 12 8.000 dolphins per year.000 60.(a) Suppose the company currently sells 140.5 Variable costs 8 5.5 12. how many alligators and dolphins must the company sell to break even per year? a) Alligator Dolphin Total Unit sold per year 140.3 1 Ratio Selling price $20 $14 $25 $7.000 0. Assuming the sales mix stays constant.5 $21.000 200.4 15 4.6 10 3 8.7 0.000 alligators per year and 60.

•   .

5 14.4 Contribution margin 12 3.7 1 Unit sold per year Ratio Selling price $20 $6 $25 $17.5 $23.000 0.3 0. how many alligators and dolphins must the company sell to break even per year? b) Alligator Dolphin Total 60.000 dolphins per year.4 10 7 9.000 alligators per year and 140.(b) Suppose the company currently sells 60.6 15 10.1 .000 140. Assuming the sales mix stays constant.5 Variable cost 8 2.000 200.

•   .

Total contribution margin in part (b) ($14.c) Explain why the total number of toys needed to break even in part (a) is the same as or different from the number in part (b). Answer: The total number of toys needed to break even from both part is different because of the sales mix.1) is higher than part (a) ($12. .90) and thus result in different break even units.

(Q4) 3-33 Healthy Hearth specializes in lunches for health-conscious people.000 meals per month. . The company produces a small selection of lunch offerings each day. The menu selections vary from day to day. Healthy Hearth currently sells 5. but Healthy Hearth charges the same price per menu selection because it adjusts the portion sizes according to the cost of producing the selection.

A government agency has recently proposed that Healthy Hearth provide 1. What will be the impact on Healthy Hearth’s operating income if it accepts this order? .50 per meal. (a) Suppose Healthy Hearth has sufficient idle capacity to accommodate the government order for next month.000 meals next month for senior citizens at $3. Volunteers will deliver the meals to the senior citizens at no charge.

50 .a) Contribution margin per meal = $3.$3 = $0.50 Additional operating income = $0.50 x 1000 = $ 500 .

to accommodate the government order for next month.50 each. at a price of $4. What will be the impact on Healthy Hearth’s operating income if it accepts the government order? .(b) Suppose that Healthy Hearth would have to give up regular sales of 500 meals.

50 .50 Reduction in operating income = $750 Loss in operating income = $200 = $1.50 per meal Contribution margin per meal = $4.50 x 500 = $500 .$3 = $1.b) Opportunity cost : 500 meals @ $4.$750 .

000 Overhaul of Old Grinding Machine: • Cost of overhaul RM35.000 • Annual operating costs RM8.000 . 3-36 a) List out the relevant costs: Old Grinding Machine: • Current salvage value RM6.000 • Annual operating cost after overhaul RM13.000 New Grinding Machine: • Cost RM60.Q5.

b) Which is the sunk costs? • • • Original cost of the machine Accumulated depreciation Annual operating costs RM60.000 .000 RM48.000 RM20.

000 $100.000 $35.000) - $96. . thus the plant manager should buy a new machine.000 $65.c) What should the plant manager do? Costs Annual operating costs: -$8000 x 5 Years -$13000 x 5 Years Current salvage value Buying an new machine Overhaul the old machine $60.000 $40.000 ($6.000 Since the cost of overhaul the old machine is more expensive than buying an new machine.

000 8.700.000 8.750.Q6.000 1.000.000 7. 3-38 a) Smartphone ($140 x 50000 units) Components: Internal : $35 x 50000 units Make Buy 7.700.750.000.000 .000 Outsource $34 x 50000 units Total relevant cost (take the lowest) 1.

000 8.000 .000.700.000 Outsource $34 x 50000 units Total relevant cost (take the lowest) 1.000.500.000 1.500.700.000 8.b) Smartphone ($140 x 50000 units) Components: Internal : $30 x 50000 units Make Buy 7.000 7.

000 Wood to make the shelves 50.000 Depreciation for office equipment Total contribution – Fixed 10.500 units RM 600.60 .000 (SP-VC)x – 940.000 (70-31.Q7 3-49 (pg.4x = 1.6)x – 940.440.0 00 =15800 00/5000 0 =31.000 = = 37.000 450.130) Fixed Cost Sales staff salaries Office & showroom rental Depreciation on carpentry equipment RM Variable Cost 80.000 350.000 Variable cost per unit  Unit need to be sold = Cost = Net Profit Total Fixed Cost 940.000 Carpenter labor 150.000 = 500.580.000 Sales commission based on units sold Advertising 200.000 180.000 1.000 = 500.000 Miscellaneous variable O/H Miscellaneous fixed O/H 150.000 Total Variable Cost Rent for building 300.000 38.

000 Net increase $8.000 (c) New order profit (480-450)*600chips $18.133) (a) Practical capacity profit =(SP-VC)2000chips – FC =($500-$450)2000 – $75.000 .000 (b) Estimate change in profit =($480-$450) * 200chips = $6.Q8 3-57 (pg.000 Opportunity cost (500-450)*200 -$10.000 =$25.