chapter 19 - answer.doc

8/10/2019 Chapter 19 - Answer.DOC

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MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual

CHAPTER 19

RELEVANT COSTS FOR DECISION MAKING

I. Questions

1. Quantitative factors are those which may more easily be reduced in termsof pesos such as projected costs of materials, labor and overhead.Qualitative factors are those whose measurement in pesos is difficult andimprecise; yet a qualitative factor may be easily given more weight thanthe measurable cost savings. It can be seen that the accountants role in

maing decisions deals with the quantitative factors.!. "elevant costs are e#pected future costs that will differ between

alternatives. In view of the definition of relevant costs, historical costs arealways irrelevant because they are not future costs. $hey may be helpfulin predicting relevant costs but they are always irrelevant costs per se.

%. $he differential costs in any given situation is commonly defined as thechange in total cost under each alternative. It is not relevant cost, but it isthe algebraic difference between the relevant costs for the alternativesunder consideration.

&. 'nalysis(

)uture costs( Replace Rebuild*ew $ruc +1,!-ess( +roceeds from

disposal, net 1,+ ,! +/,0

'dvantage of rebuilding +

$he original cost of the old truc is irrelevant but its disposal value isrelevant. It is recommended that the truc should be rebuilt because itwill involve lesser cash outlay.

II. Exercises

Exercise 1 (Identi!in" #ele$ant Costs)

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C&a'ter 1% Relevant Costs for Decision Making

Case 1 Case 2

Item RelevantNot

Relevant RelevantNot

Relevanta. 2ales revenue................................... 3 3

b. 4irect materials............................... 3 3c. 4irect labor...................................... 3 3d. 5ariable manufacturing

overhead.......................................... 3 3e. 6oo value 7 8odel 9

machine........................................... 3 3f. 4isposal value 7 8odel 9

machine........................................... 3 3g. 4epreciation 7 8odel 9

machine........................................... 3 3

h. 8aret value 7 8odel )0machine :cost................................. 3 3

i. )i#ed manufacturingoverhead.......................................... 3 3

j. 5ariable selling e#pense.................. 3 3. )i#ed selling e#pense...................... 3 3l. 1, miles..........................................................+.%05ariable operating cost per mile................................................................................/'verage cost per mile...............................................................................................+.&%

= 4epreciation............................................................................................................+!,Insurance.................................................................................................................?


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Bost of maing :part 1........................................................................................................+!,00,

Cpportunity costDsegment margin forgone on apotential new product line................................................................................................ ?0,

$otal cost...............................................................................................................................+%,!, +%,,

4ifference in favor of purchasing from the outsidesupplier..............................................................................................................................+!,

$hus, the company should accept the offer and purchase the parts from the outsidesupplier.

Exercise (E$aluatin" S'ecial Order)

Cnly the incremental costs and benefits are relevant. In particular, only thevariable manufacturing overhead and the cost of the special tool are relevantoverhead costs in this situation. $he other manufacturing overhead costs arefi#ed and are not affected by the decision.

Per !otal

Unit 10 "ra#eletsIncremental revenue +%,&.0 +%&,0.Incremental costs(

5ariable costs(4irect materials 1,&%. 1&,%.4irect labor /?. /,?.5ariable manufacturing overhead . .2pecial filigree ?. ?.

$otal variable cost +!,&!. !&,!.)i#ed costs(

+urchase of special tool &,?0.$otal incremental cost !/./0.Incremental net operating income + ?.1&0.9ven though the price for the special order is below the companys regularprice for such an item, the special order would add to the companys netoperating income and should be accepted. $his conclusion would notnecessarily follow if the special order affected the regular selling price ofbracelets or if it required the use of a constrained resource.

Exercise . (Utili/ation o a Constrained #esource)

Requirement 1

$ % &

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Relevant Costs for Decision Making C&a'ter 1%

:1 Bontribution margin per unit................................................................................................+1/ +%? +!

:! 4irect labor cost per unit.......................................................................................................+1! +%! +1?:% 4irect labor rate per hour....................................................................................................../ / /

:& 4irect laborEhours required per unit :! > :%.......................................................................1.0 &. !.

Bontribution margin per direct laborEhour :1 > :&.............................................................+1! + +1

Requirement 2

$he company should concentrate its labor time on producing product 3(

$ % &Bontribution margin per direct laborEhour

+1! + +14irect laborEhours available F %, F %, F %,

$otal contribution margin +%?, +!, +%,

'lthough product 3 has the lowest contribution margin per unit and thesecond lowest contribution margin ratio, it has the highest contribution marginper direct laborEhour. 2ince labor time seems to be the companys constraint,this measure should guide management in its production decisions.

Requirement 3

$he amount Gaycee Bompany should be willing to pay in overtime wages foradditional direct labor time depends on how the time would be used. If thereare unfilled orders for all of the products, Gaycee would presumably use theadditional time to mae more of product 3. 9ach hour of direct labor timegenerates +1! of contribution margin over and above the usual direct laborcost. $herefore, Gaycee should be willing to pay up to +! per hour :the +/usual wage plus the contribution margin per hour of +1! for additional labortime, but would of course prefer to pay far less. $he upper limit of +! perdirect labor hour signals to managers how valuable additional labor hours areto the company.

If all the demand for product 3 has been satisfied, Gaycee Bompany wouldthen use any additional direct laborEhours to manufacture product H. In thatcase, the company should be willing to pay up to +1/ per hour :the +/ usualwage plus the +1 contribution margin per hour for product H to manufacturemore product H.

-iewise, if all the demand for both products 3 and H has been satisfied,additional labor hours would be used to mae product . In that case, thecompany should be willing to pay up to +1 per hour to manufacture more

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product .

Exercise 0 (Sell or rocess 2urt&er)

Pro'u#t ( Pro'u#t B Pro'u#t C2ales value after further processing +/, +10, +0,2ales value at splitEoff point 0, , ?,Incremental revenue %, ?, 10,Bost of further processing %0, &, 1!,Incremental profit :loss +:0, !, %,

+roducts 6 and B should be processed further, but not +roduct '.

III. Problems

ro3le, 1 (Acce't or #e4ect an Order)

Pro'u#t ( Pro'u#t B2elling price per unit +1.! +1.&-ess 5ariable costsJunit(

8aterials .0 .-abor .! .!&)actory overhead :!0K .1 .1&

./ 1./

Bontribution marginJunit +.& +.%!8ultiplied by number of units to be sold !1, units %, units$otal contribution margin +/,& +,?

+roduct 6 should be accepted because its total contribution margin is higherthan that of +roduct '.

ro3le, (Eli,inate or #etain a roduct Line)

Requirement 1

*o, production and sale of the round trampolines should not be discontinued.Bomputations to support this answer follow(

Bontribution margin lost if the round trampolinesare discontinued.................................. ... .... ... . +:/,

-ess fi#ed costs that can be avoided(

'dvertising 7 traceable.................................. +&1,-ine supervisors salaries............................... ?, &,

4ecrease in net operating income for thecompany as a whole....................................... +:%%,

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$he depreciation of the special equipment represents a sun cost, andtherefore it is not relevant to the decision. $he general factory overhead isallocated and will presumably continue regardless of whether or not the roundtrampolines are discontinued; thus, it is not relevant.

Requirement 2

If management wants a clear picture of the profitability of the segments, thegeneral factory overhead should not be allocated. It is a common cost andtherefore should be deducted from the total productEline segment margin. 'more useful income statement format would be as follows(

!ram)oline

!otal Roun' Re#tan*ular +#ta*onal 2ales.................................. .... +1,, +1&, +0, +%?,-ess variable e#penses.......... &1, ?, !, 10,Bontribution margin ............. 0, /, %, !1,-ess fi#ed e#penses(

'dvertising 7 traceable..... !1?, &1, 11, ?0,4epreciation of special

equipment...................... 0, !, &, %0,-ine supervisors

salaries........................... 1, ?, , ?,$otal traceable fi#ed

e#penses............................ %%, ?, 10, 1?,+roductEline segment

margin............................... !?, + 1%, +1&%, +1&,-ess common fi#ede#penses............................ !,

*et operating income:loss.................................. + ?,

ro3le, (roduct Mix)

Requirement 1Pro'u#t ine

( B C D2elling price per unit +% +!0 +1 +/5ariable cost per unit !0 1 0 &

Bontribution margin J unit +0 +10 + 0 +&4ivided by no. of hours requiredfor each unit 0 hrs. 1 hrs. & hrs. 1 hr.

Bontribution per hour +1 +1.0 +1.!0 +&

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+roduct raning(1. 4 !. 6 %. B &. '

6ased on the above analysis, first priority should be given to +roduct 4. $hecompany should use &, out of the available ?, hrs. to produce &,units of product 4. $he remaining !, hrs. should be used to produce,! units of +roduct 6. @ence, the best product combination is &, unitsof +roduct 4 and ,! units of +roduct 6.

Requirement 2

If there were no maret limitations on any of the products, the companyshould use all the available ?, hours in producing ?, units of product4 only.

$he difference in profit between the two alternatives is computed as follows(

Bontribution margin of combination :1+roduct 4 :&, # + &. + 1?,+roduct 6 :,! # +10. 1%/,

$otal contribution margin of 4 and 6 +10&,-ess contribution margin of 4 only

:?, # +& %/&,4ifference, e#cess over profit in combination :1 +!%,

ro3le, (Acce't or #e4ect a S'ecial Order)

Requirement 1

$he company should accept the special order of &, L +1 each becausethis selling price is still higher than the additional variable cost to be incurred.Ahether or not variable mareting e#penses will be incurred, the decision isstill to accept the order.

Supporting computations

:a 'ssume no additional variable mareting cost will be incurred.

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2elling price per unit +1.

-ess variable manufacturing costs(4irect materials +0.4irect labor %.5ariable overhead .0 /.0

Bontribution marginJunit + 1.!08ultiplied by number of units of order &, units$otal increase in profit +0,

:b 'ssume additional variable mareting cost will be incurred.

2elling price per unit +1.-ess variable costs :+/.0 M +.!0 .Bontribution margin J unit + 1.8ultiplied by number of units of order &, units$otal increase in contribution margin +&,

Requirement 2

+/.0, the total variable manufacturing cost.

Requirement 3

4irect materials +0.4irect labor %.5ariable factory overhead .0$otal cost of inventory under direct costing +/.0

Requirement -

+resent contribution marginN1, units # :+10 E +O +?,

-ess proposed contribution marginN:+1& E + # 11, unitsO 00,

4ecrease in contribution margin + 0,

$he company should not reduce the selling price from +10 to +1& even ifvolume will go up because total contribution margin will decrease.

ro3le, . (CV Anal!sis used or 7ecision Ma*in")

Requirement .a/

Units sol' )er mont No of monts Pro"a"ilit

&, ? !K

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0, 10 0K

?, %K% 1K

Requirement ."/Pro'u#tion

-,000 units 5,000 units ,000 units

2ales :&, # +& +1?, +1?, +1?,-ess variable costs

+roduction cost L +!0 1, 1!0, 10,+urchase cost L +&0 E

E E

$otal +1, +1!0, +10,

Bontribution margin + ?, + %0, + 1,

2ales :0, # +& +!, +!, +!,-ess variable costs

+roduction cost L +!0 1, 1!0, 10,+urchase cost L +&0 &0, E E

$otal +1&0, +1!0, +10,

Bontribution margin + 00, + 0, + 0,

2ales :?, # +& +!&, +!&, +!&,

-ess variable costs+roduction cost L +!0 1, 1!0, 10,+urchase cost L +&0 , &0,

$otal +1, +1, +10,Bontribution margin + 0, + , + ,

Requirement .#/

ales +r'er Contri"ution Mar*in Pro"a"ilit 4)e#te' 6alue

&, +%0, .! + ,0, 0, .0 %,0?, , .% !1,

'verage Bontribution 8argin +?0,0

ro3le, 0 (ricin")

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Requirement (7

2005 200

+)eratin*Result at 8ull

Ca)a#it2ales + 1, + &, + &/,-ess 5ariable cost 1%, 0!, ?!&,Bontribution margin :+ %, :+1!, :+1&&,-ess )i#ed cost &, &, &,*et income :loss :+ , :+1?, :+1/&,

$he company had been operating at a loss because the product had beenselling with a negative contribution margin. @ence, the more units are sold,the higher the loss will be.

Requirement B7 +?.1&

Requirement C7 +&.!

Requirement D7 +0?.0/

ro3le, 5 (Ma*e or +u!)

Cost of Making Cost of !u"ingCutside purchase +,4irect materials +10,4irect labor %,

5ariable manufacturing overhead 1,)i#ed manufacturing overhead= 10,

$otal cost +, +,

= 1J% # +&0, P +10,

$herefore, the annual advantage to mae the parts is +!,.

I5. Multiple C#oice Questions

1. B 11. 4 !1. 4 %1. '!. B 1!. ' !!. ' %!. 4%. 6 1%. 4 !%. 4 %%. B&. 6 1&. ' !&. 9 %&. '0. ' 10. 4 !0. 6 %0. B?. 6 1?. B !?. 4. B 1. ' !. 4

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/. 6 1/. B !/. B

. ' 1. 6 !. '1. 6 !. B %. '

Supporting computations for nos$ 1% & 2'

1?. 2ales N:1, # K # :+0. # 1!KO +0&,-ess( 5ariable costs :+%, # K !,Bontribution margin +!,-ess( )i#ed costs 10,Cperating income +1!,

1. 4irect materials + &4irect labor 0Cverhead !2elling cost %8inimum selling price per unit +1&

1/. "elevant cost to mae :1, # +!& +!&,+urchase cost +%,-ess( 2avings in manufacturing cost +&0,

'voidable fi#ed overhead 0, 0,*et purchase price +!0,4ifference in favor of buyR alternative + %0,

1. Increase in sales :?, # +% +1/,-ess( Increase in variable cost :?, # +!.0 10,*et increase in income + %,

!. R S (2ales :1, # +! +!, +!, +!,-ess( 5ariable costs

" :+1! # 1, 1!,2 :+ / # 1, /,$ :+ & # 1, &,

Bontribution margin + /, +1!, +1?,

!1. R S (2ales :+1? # 10, +!&, +!&, +!&,

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-ess( 5ariable costs

" :+1! # 10, 1/,2 :+ / # 10, 1!,$ :+ & # 10, ?,

Bontribution margin + ?, +1!, +1/,-ess( )i#ed costs &, /, 1!,Cperating income + !, + &, + ?,

!!. Cld operating income(Bontribution margin +/,-ess( )i#ed cost &,

+&,*ew operating income !,4ifference E decrease +!,

!%. 2ales +1,!,-ess( 5ariable costs

4irect materials +%,4irect labor &,

)actory overhead /,8areting e#penses ,'dministrative e#penses 0, ,

Bontribution margin + %,-ess( )i#ed costs

)actory overhead + 0,8areting e#penses %,'dministrative e#penses !,Increase in fi#ed costs 1, 11,

+rofit + 1,

!&. 2ales +1,!,-ess( 5ariable costs

4irect materials +!0,4irect labor %0,)actory overhead /,8areting e#penses ,

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'dministrative e#penses 0, /0,

Bontribution margin + %0,-ess( )i#ed costs

)actory overhead + 0,8areting e#penses %,'dministrative e#penses !,4ecrease in fi#ed costs

:+!0, & :?,!0 %,0

+rofit + !0?,!0

!0. 4irect materials :+! # 0, +1,

4irect labor :+/ # 0, &,5ariable overhead :+& # 0, !,$otal variable costs +,'dd( 'voidable fi#ed overhead 1,

$otal +/,

!?. 'voidable fi#ed overhead + &4irect materials &4irect labor 1?5ariable overhead 1/

$otal +&!8ultiplied by( *umber of units to be produced !,$otal relevant costs to mae the part +/&,

!. +urchase cost :+1.!0 # 1, +1!,05ariable costs to mae 1,2avings of maing the blade + !,0

!/. 2elling price per unit +1-ess( 5ariable costs of goods sold per unit

:N+%!, E +/,O !, units 1!

Bontribution margin per unit + 08ultiplied by units to be sold under 2pecial Crder !,Increase in operating income +1,

!. 6udgeted operating income(Bontribution margin :+!,, # %K +?,-ess fi#ed costs &,

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*et operating income +!,

Cperating income under the proposal(2ales +!,,-ess 5ariable costs

:NK # +!,,O # /K 1,1!,Bontribution margin + //,-ess fi#ed costs 0!, %?,

Increase in budgeted operating profit +1?,

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chapter 19 - answer.doc

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