3-15

The gross margin focuses on full cost, but the contribution margin focuses only on variable cost to measures how much  a company is making  for its products above the  costs of acquiring  or producing them. The contribution margin is the main focus of CVP analysis.

3-22

1a. Contribution margin

($80 per unit× 40% × 540,000 units)

1b. Sales ($80 per unit × 540,000 units)

Contribution margin (from above)

Variable costs

1c. Contribution margin (from above)

Fixed costs

Operating income

2a. Sales (from above)

Variable costs ($25,920,000 × 80%)

Contribution margin

2b. Contribution margin (from above)

Fixed costs ($2,100,000 + 3,800,000)

Operating income

$ 17,280,000

$43,200,000

17,280,000

$25,920,000

$17,280,000

2,100,000

$15,180,000

$43,200,000

20,736,000

$22,464,000

$22,464,000

5,900,000

$16,564,000

3.

If the production manager’s proposal is accepted, the operating income is expected to increase by $1,384,000 ($16,564,000 − $15,180,000).

The management would consider other factors before making the final decision. It is likely that product quality will improve as a result of the modernized production process. However, due to increased automation, many workers will probably have to be laid off. Simplex’s management will have to consider the impact of such an action on employee morale. In addition, the proposal increases the company’s fixed costs dramatically. This will increase the company’s operating leverage and risk.

3-28 CVP analysis, sensitivity analysis.

1)        SP = £3,500; or $6,300 @ 1.80 = £3,500.

VCU   = £3,000

CMU  = £500 per unit.

FC       = £10 million

Breakeven units = = 20,000 units

2)        Operating income = (CMU × Q) − FC (refer to Equation 2 of Contribution margin method) CMU  = £500

Q         = 25,000

Operating income = (£500 × 25,000 units) − £10million = £2.5million

3)        Lets assume that the selling price per unit is ‘£z’ CMU = £z − £3,000

Using the Contribution margin method (Equation 2),

Operating income = (CMU × Q) − FC

We can derive the selling price as:

£2.5million = (£z − £3,000) × 25,000 − £7million

£2.5million = 25,000z − £75million − £7million

£84.5million = 25,000z

Therefore: z = £3,380

This represents a 3.4% price reduction.

4)        Quantity of superbikes required to be sold= = = 30,000 units       To earn the target operating income of £5million, the company needs to sell 30,000 superbikes.

Proof:

Net income

Revenue, £3,500 per unit x 30,000 units         Variable costs, £3,000 per unit x 30,000 units Contribution margin

Fixed costs

Operating income

Income taxes, £5,000,000 x 0.25

£105,000,000

90,000,000

15,000,000

10,000,000

5,000,000

1,250,000

£3,750,000

CHAPTER 4

JOB COSTING

4-1

Cost pool––a grouping of individual indirect cost items.

Cost tracing––the assigning of direct costs to the chosen cost object.

Cost allocation––the assigning of indirect costs to the chosen cost object.

Cost-allocation base––a factor that links in a systematic way an indirect cost or group of indirect costs to cost objects.

4-9

Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates:

Direct-cost rates  Indirect-cost rates

Actual

Costing

Actual rates

Actual rates

Normal

Costing

Actual rates

Budgeted rates

Each costing method uses the actual quantity of the direct-cost input and the actual quantity of the cost-allocation base.

4-22

1. Budgeted manufacturing overhead rate = = $3,294,000 = 1.80 or 180%

$1,830,000

Actual manufacturing overhead rate =

= = 1.68 or 168%

2. Costs of Job 635 under actual and normal costing follow:

Actual  Costing

Normal

Costing

Direct materials

Direct manufacturing labour costs     Manufacturing overhead costs           $51,000 1.68; $51,000 1.80         Total manufacturing costs of Job 635

$ 73,500

51,000

85,680

$210,180

$ 73,500

51,000

91,800

$216,300

3. Total manufacturing overhead allocated under normal costing = Actual manufacturing labour costs × Budgeted overhead rate = $2,250,000 × 1.80

= $4,050,000

Overallocated manufacturing overhead

= Manufacturing overhead allocated – Actual manufacturing overhead costs = $4,050,000 − $3,780,000

= $270,000

There  is  no  under-  or  over-allocated  overhead  under  actual  costing  because  overhead  is allocated under actual costing by multiplying actual manufacturing labor costs and the actual manufacturing overhead rate. This, of course, equals the actual manufacturing overhead costs. All actual overhead costs are allocated to products. Hence, there is no under- or over-allocated overhead.

4. Managers at Carolin Chemicals might prefer to use normal costing because it enables them to use the budgeted manufacturing overhead rate determined at the beginning of the year to estimate the cost of a job as soon as the job is completed. Managers may want to know job costs for ongoing uses, including pricing jobs, monitoring and managing costs, evaluating the success ofthe job, learning about what did and did not work, bidding on new jobs, and preparing interim financial statements. Under actual costing, managers would only determine the cost of a job at the end of the year when they know actual manufacturing overhead costs.

4-31 (45 min) Job costing, journal entries.

Some instructors may wish to assign Problem 4-30. It demonstrates the relationships of journal entries, general ledger, subsidiary ledgers, and source documents.

1.      An overview of the product-costing system is

INDIRECT COST POOL

}

2.      Amounts in millions.

(1)          Materials Control                                                         154              Accounts Payable Control                                                              154

(2)          Work-in-Process Control                                             147              Materials Control                                                                 147

(3)          Manufacturing Overhead Control                                 19              Materials Control                                                                   19

(4)          Work-in-Process Control                                              90

Wages Payable Control                                                         90

(5)          Manufacturing Overhead Control                                 32

Wages Payable Control                                                         32

(6)          Manufacturing Overhead Control                                 26              Accumulated Depreciation                                                    26

(7)          Manufacturing Overhead Control                                 14

Various liabilities                                                                  14

(8)          Work-in-Process Control                                              84              Manufacturing Overhead Allocated                                      84

(9)          Finished Goods Control                                              295

Work-in-Process Control                                                    295

(10a)      Cost of Goods Sold                                                     293

Finished Goods Control                                                      293

(10b)      Accounts Receivable Control (or Cash )                    400

Revenues                                                                             400

NOT REQUIRED FROM HERE ON:

The posting of entries to T-accounts is as follows:

Work-in-Process Control

Bal.                   30

Cost of Goods Sold

(10b)

The ending balance of Work-in-Process Control is $30 million.

3.    (11) Manufacturing Overhead Allocated                          84 Cost of Goods Sold                                                     7

Manufacturing Department Overhead Control                 91

Entry posted to T-accounts in Requirement 2.

4.  Gross margin = Revenues − Cost of goods sold = $400 − $300 = $100.

Docks Transport’s gross margin of 25% ($100 ÷ $400) is relatively small, indicating Docks            Transport did not do particularly well in 2020. (Gross margins below 30% are generally considered small.) A company manufacturing prestige manufactured homes should have higher gross margins.