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ACCT-322 Final Review

Chapter 11

Decision Making and Relevant Information

Relevant Costs for Make/Buy Decision

Approach:

  1. Identify all relevant costs for two alternatives
  2. List all and only relevant costs for two alternatives
  3. Total relevant costs for each alternative
  4. Compare total costs and decide which one is more cost saving

Example:

The expected cost data for a manufacturing company to produce 10,000 units of parts as follows:

Direct materials                                                                               $ 80,000

Direct manufacturing labour                                                                 10,000

Variable manufacturing overhead costs                                                 40,000

Mixed overhead costs of purchasing, receiving, and setups                      20,000

Fixed overhead cost of plant amortization, insurance, and amortization    30,000

Total manufacturing costs                                                                 $180,000

 

Another manufacturer offers to sell this company 10,000 units of identical parts for $16

Per unit. Should the company make parts or buy from this supplier?

Solution:

 

 

Total Relevant Costs

Per-Unit Relevant

Relevant Items

Make

Buy

Make

Buy

Outside Purchase

 

$160,000

 

$16

Direct Materials

$80,000

 

$8

 

Direct Manufacturing labour

10,000

 

1

 

Variable factory Overhead

40,000

 

4

 

Fixed Factory Overhead

20,000

 

2

 

Total Relevant Costs

$150,000

$160,000

$15

$16

Difference in favour of making

$10,000

$1

 

 

 

 

 

 

 

 

Chapter 12

Pricing Decisions and Cost Management

Costing and Pricing for the Short Run:

(One-Time-Only Special Order)

 

Underlying Assumption

Acceptance or rejection of the order will not affect the revenues (units sold or the selling price per unit) from existing sales outlets. The customer is unlikely to place any future sales orders.

Costing Approach

 Systematically analyzing the costs in each business function of the value chain, taking all relevant variable and fixed costs into account, as well as opportunity cost if there is capacity constraint.

Pricing Strategy

Identifying the minimum price to break even, and biding as high a price as possible above the minimum price while remaining lower than other competing bids.

Costing and Pricing for the Long Run

Target Costing for Target Pricing

  1. Target sales revenue = target selling price * target sales in units
  2. Target operating income = target gross profit percentage * target sales revenue
  3. Target costs = target sales revenue - target operating income
  4. Unit target cost = total target costs / target sales in units

Cost-Plus Pricing

Cost base                              $X

Markup component                 Y

Prospective selling price         $X + Y

 

Note: (1) Markup component = markup percentage * full product cost.

          (2) Mark up percentage is often determined by earning a target rate of return investment.

 

Chapter 14

 

Cost Allocation: Support Department Costs

Allocating Costs from One Department to Another

 

Single - Rate Method

1.      Pooling all costs in one cost pool

2.      Calculating a single allocation rate

3.      Allocating costs to individual departments using the same rate.

 

Dual - Rate Method

1.      Classifying all costs into two sub pools: variable-cost-sub-pool and fixed-cost-sub-pool.

2.      Calculating allocation rate for each sub pool

3.      Allocating costs to individual departments using different allocation rate for variable costs and fixed costs

 

Allocating Costs of Support Departments

 

Direct Allocation Method

 Ignore any service rendered by one support department to another; allocate each support department's total cost directly to the operating departments

 

Step-Down Allocation Method

1.      Rank support departments on either the percentage or total dollars of service provided to other support departments;

2.      Allocate the first-ranked support department costs to other support and operating departments, then the second-ranked, and so on, until the costs in the last-ranked support department cost have been allocated to the operating departments.

Note: Under the step-down method, once a support department's costs have been allocated, no subsequent support department costs are allocated or circulate back to it.

 

Reciprocal Allocation Method

1.      Express support department costs and reciprocal relationships in linear equation form.

2.      Solve the equations to obtain the complete reciprocal costs of each support department.

3.      Allocate the complete reciprocal costs of each support department to all other departments.

Example:        The three methods are illustrated base on the following cost data:

 

 

Support Departments

Operating Departments

 

Plant Maintenance

Information Systems

Machining

Assembly

Total

Costs Incurred

$600,000

$116,000

$400,000

$200,000

$1,316,000

Support Work Finished

 

 

 

 

 

By Plant Maintenance

--------

20%

30%

50%

100%

By Information Systems

10%

-------

80%

10%

100%

 

Direct Allocation Method

 

 

 

 

 

 

 

Plant Maintenance

Information Systems

Machining

Assembly

Total

Costs Incurred

$600,000

$116,000

$400,000

$200,000

$1.316.000

Allocation of Plant Maintenance (3/8, 5/8)

(600,000)

 

225,000

375,000

 

 

$0

 

 

 

 

Allocation of Information Systems (8/9, 1/9)

 

(116,000)

103,111

12,889

 

 

$0

 

 

 

Total Costs of Operating Departments

 

 

$728,111

587,889

$1,316,000

 

Step-Down Allocation Method 

 

 

Support Departments

 

Operating Departments

 

 

 

Plant Maintenance

Information Systems

Machining

Assembly

Total

Costs incurred

$600,000

$116,000

$400,000

$200,000

$1,316,000

Allocation of Plant Maintenance (3/8, 5/8)

$600,000

120,000

180,000

300,000

 

 

$0

236,000

 

 

 

Allocation of Information Systems (8/9, 1/9)

 

(236,000)

209,778

26,222

 

 

 

$0

 

 

 

Total Costs of Operating Departments

 

 

$789,778

526,222

$1,316,000

 

 

 

Reciprocal Allocation Method

Step 1:            Express the data as follows:

PM = $600,000 + 0.1IS  (1)

IS   = $116,000 + 0.2 PM (2)

Step 2:            Solve the equations:

PM = $600,000 + 0.1($116,000 + 0.2PM)

PM = $624,082

IS = $116,000 + 0.2 ($624,082) = $240,816

Step 3:            Allocate the complete reciprocal costs of PM and IS as follows:

  

 

Support Departments

Operating Departments

 

Plant Maintenance

Information Systems

Machining

Assembly

Total

 

Costs Incurred

$600,000

$116,000

$400,000

$200,000

$1,316,000

Allocation of Plant Maintenance (2/10, 3/10, 5/10)

(624,000)

124,816

187,225

312,041

 

 

(24,082)

240,816

 

 

 

Allocation of Information Systems (1/10, 8/10, 1/10)

24,082

(240,816)

192,652

24,082

 

$0

$0

 

 

 

Total Costs of Operating Departments

 

 

$779,877

$536,123

$1,316,000

  

Chapter 15

Cost Allocation: Joint Products

Sales Value at Splitoff Method

Allocate joint costs based on the relative sales value of each product.

Physical Measure Method

Allocate joint costs based on the relative proportions of each product, using a common physical measure such as weight or volume.

Estimated NRV Method

Allocate joint costs based on the relative estimated net realizable value(expected final sales   value minus expected separable costs)

Constant Gross Margin Percentage NRV Method

Allocate joint costs in such a way that the overall gross margin percentage is identical for all the individual products.

 

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