Ethiopian Civil Service University Department of Public Financial Management and Accounting Advanced Cost and Management Accounting

Work Sheet on Chapter I, II and III

General instruction: Attempt all of the following questions and submit your answer for even number questions individually and odd numbers in a group. Deadline for all assignments is end of April 2022.

Question 1:

(a) From the following information you are required to construct:

(i) a break-even chart, showing the break-even point and the margin of safety;

(ii) a chart displaying the contribution level and the profit level;

(iii) a profitvolume chart.

Sales

6000 units at Br.12 per unit = Br.72 000

Variable costs

6000 units at Br.7 per unit = Br.42 000

Fixed costs

= Br.20 000

(b) State the purposes of each of the three charts in (a) above.

(c) Outline the limitations of break-even analysis.

(d) What are the advantages of graphical presentation of financial data to executives?

Question 2:

A company produces and sells two products with the following costs:

	Product X	Product Y
Variable costs per Br. of sales	Br.0.45	Br.0.6
Fixed costs per period	Br.1 212 000	Br.1 212 000

Total sales revenue is currently generated by the two products in the following proportions:

Product X	70%
Product Y	30%

Required:

(a) Calculate the break-even sales revenue per period, based on the sales mix assumed above.

(b) Prepare a profitvolume chart of the above situation for sales revenue up to Br.4 000 000. Show on the same chart the effect of a change in the sales mix to product X 50%, product Y 50%. Clearly indicate on the chart the break-even point for each situation.

(c) Of the fixed costs Br.455 000 are attributable to product X. Calculate the sales revenue required on product X in order to recover the attributable fixed costs and provide a net

contribution of Br.700 000 towards general fixed costs and profit.

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Question 3:

M Ltd manufactures three products which have the following revenue and costs (Br. per unit).

	Product 1	2	3
Selling price	2.92	1.35	2.83
Variable costs	1.61	0.72	0.96
Fixed costs:
Product-specific	0.49	0.35	0.62
General	0.46	0.46	0.46

Unit fixed costs are based upon the following annual sales and production volumes (thousand units):

Product 1	2	3
98.2	42.1	111.8

Required:

(a) Calculate:

i. the break-even point sales (to the nearest Br. hundred) of M Ltd based on the current product mix;

ii. the number of units of Product 2 (to the nearest hundred) at the breakeven point determined in (i) above;

(b) Comment upon the viability of Product 2.

Question 4:

Keppel Manufacturing had a bad year in 2012, operating at a loss for the first time in its history.

The companys income statement showed the following results from selling 200,000 units of

product: net sales Br.2,000,000; total costs and expenses Br.2,120,000; and net loss Br.120,000.

Costs and expenses consisted of the following.

		Total	Variable		Fixed
Cost of goods sold	Br.1,295,000	Br. 975,000	Br.320,000
Selling expenses	575,000		325,000		250,000
Administrative expenses	250,000		100,000		150,000
	Br.2,120,000	Br.1,400,000	Br.720,000

Management is considering the following independent alternatives for 2013.

1. Increase unit selling price 30% with no change in costs and expenses.

2. Change the compensation of salespersons from fixed annual salaries totaling Br.170,000 to total salaries of Br.50,000 plus a 6% commission on net sales.

3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 40:60.

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Instructions

(a) Compute the break-even point in dollars for 2012.

(b) Compute the break-even point in dollars under each of the alternative courses of action. Which course of action do you recommend? (Round to the nearest dollar.)

Question 5:

McCune Corporation has collected the following information after its first year of sales. Net sales were Br.1,000,000 on 50,000 units; selling expenses Br.200,000 (30% variable and 70% fixed); direct materials Br.300,000; direct labor Br.170,000; administrative expenses Br.250,000 (30% variable and 70% fixed); manufacturing overhead Br.240,000 (20% variable and 80% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 20% next year.

Instructions

(a) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)

(b) Compute the break-even point in units and sales dollars for the current year.

(c) The company has a target net income of Br.187,000. What is the required sales in dollars for the company to meet its target?

(d) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?

(e) The company is considering a purchase of equipment that would reduce its direct labor

costs by Br.70,000 and would change its manufacturing overhead costs to 10% variable and 90% fixed (assume total manufacturing overhead cost is Br.240,000, as above).

It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 80% variable and 20% fixed (assume total selling expense is Br.200,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and (3) recompute the break-even point in sales dollars. Comment on the effect each of managements proposed changes has on the break-even point.

Question 6:

Lorge Corporation manufactures and sells three different models of exterior doors. Although the doors vary in terms of quality and features, all are good sellers. Lorge is currently operating at full capacity with limited machine time.

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Sales and production information relevant to each model is shown below.

				Product
		Economy			Standard	Deluxe
Selling price	Br.270			Br.450		Br.650
Variable costs and expenses	Br.150		Br.261	Br.425
Machine hours required	0.6		0.9		1.2

Instructions

(a) Ignoring the machine time constraint, which single product should Lorge produce?

(b) What is the contribution margin per unit of limited resource for each product?

(c) If additional machine time could be obtained, how should the additional time be used?

Question 7:

The Cubbie Inn is a restaurant in DeKalb, Illinois. It specializes in deluxe sandwiches in a moderate price range. Bill Michael, the manager of Cubbie Inn, has determined that during the last 2 years the sales mix and contribution margin ratio of its offerings are as follows.

	Percent of		Contribution
	Total Sales		Margin Ratio
Appetizers	15%	60%
Main entrees	60%	25%
Desserts	10%	60%
Beverages	15%	80%

Bill is considering a variety of options to try to improve the profitability of the restaurant. His goal is to generate a target net income of Br.120,000. The company has fixed costs of Br.300,000 per year.

Instructions

(a) Calculate the total restaurant sales and the sales of each product line that would be necessary to achieve the desired target net income.

(a) Bill believes the restaurant could greatly improve its profitability by reducing the complexity and selling price of its entrees to increase the number of clients that it serves. It would then more heavily market its appetizers and beverages. He is proposing to reduce the contribution margin ratio on the main entrees to 10% by dropping the average

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selling price. He envisions an expansion of the restaurant that would increase fixed costs by 40%. At the same time, he is proposing to change the sales mix to the following.

	Percent of	Contribution
	Total Sales	Margin Ratio
Appetizers	25%	60%
Main entrees	40%	10%
Desserts	10%	60%
Beverages	25%	80%

Compute the total restaurant sales, and the sales of each product line that would be necessary to achieve the desired target net income.

(c) Suppose that Bill reduces the selling price on entrees and increases fixed costs as proposed in part (b), but customers are not swayed by the marketing efforts and the sales mix remains what it was in part (a). Compute the total restaurant sales and the sales of each product line that would be necessary to achieve the desired target net income. Comment on the potential risks and benefits of this strategy.

Question 8:

The following variable costing income statements are available for American Company and National Company.

	American Company		National Company
Sales	Br.1,000,000		Br.1,000,000
Variable costs		500,000				150,000
Contribution margin	500,000			850,000
Fixed costs		300,000				650,000
Net income		Br. 200,000		Br. 200,000

Instructions

(a) Compute the break-even point in dollars and the margin of safety ratio for each company.

(b) Compute the degree of operating leverage for each company and interpret your results.

(c) Assuming that sales revenue increases by 30%, prepare a variable costing income statement for each company.

(d) Assuming that sales revenue decreases by 30%, prepare a variable costing income statement for each company.

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(e) Discuss how the cost structure of these two companies affects their operating leverage and profitability.

Question 9:

Huber Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 15% of sales. The income statement for the year ending December 31, 2012, is as follows.

HUBER BEAUTY CORPORATION

	Income Statement
For the Year Ended December 31, 2012
Sales					Br.117,000,000
Cost of goods sold
Variable	Br.52,650,000
Fixed	12,915,000		65,565,000
Gross margin					51,435,000
Selling and marketing expenses
Commissions	Br.17,550,000
Fixed costs		12,825,000		30,375,000
Operating income					Br. 21,060,000

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and incur additional fixed costs of Br.11.7 million.

Instructions

(a) Under the current policy of using a network of sales agents, calculate the Huber Beauty Corporations break-even point in sales dollars for the year 2012.

(b) Calculate the companys break-even point in sales dollars for the year 2012 if it hires its own sales force to replace the network of agents.

(c) Calculate the degree of operating leverage at sales of Br.78 million if (1) Huber Beauty uses sales agents, and (2) Huber Beauty employs its own sales staff. Describe the advantages and disadvantages of each alternative.

(d) Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2012, regardless of whether Huber Beauty Corporation employs its own sales staff and pays them a 10% commission as well as

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North $ 300,000 $ 150,000 $1,000,000 13%

incurring additional fixed costs of Br.11.7 million, or continues to use the independent network of agents.

Question 10:

The West Division of Nieto Company reported the following data for the current year.

Sales	$3,000,000
Variable costs	1,950,000
Controllable fixed costs	600,000
Average operating assets	5,000,000

Top management is unhappy with the investment centers return on investment (ROI). It asks the

manager of the West Division to submit plans to improve ROI in the next year.

The manager believes it is feasible to consider the following independent courses of action.

1. Increase sales by $320,000 with no change in the contribution margin percentage.

2. Reduce variable costs by $100,000.

3. Reduce average operating assets by 4%.

Instructions:

(a) Compute the return on investment (ROI) for the current year.

(b) Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round to one decimal.)

Question 11:

Presented below is selected information for three regional divisions of Medina Company.

Contribution margin Controllable margin Average operating assets Minimum rate of return

Instructions

Divisions
West	South
$ 500,000	$ 400,000
$ 400,000	$ 225,000
$2,000,000	$1,500,000
16%	10%

(a) Compute the return on investment for each division.

(b) Compute the residual income for each division.

(c) Assume that each division has an investment opportunity that would provide a rate of return of 19%.

(1) If ROI is used to measure performance, which division or divisions will probably make the additional investment?

(2) If residual income is used to measure performance, which division or divisions will probably make the additional investment?

Question 12:

Presented below is selected financial information for two divisions of Yono Brewing.

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		Lager	Lite Lager
Contribution margin	$500,000	$ 300,000
Controllable margin	200,000	(c)
Average operating assets	(a)	$1,000,000
Minimum rate of return	(b)	13%
Return on investment	25%	(d)
Residual income	$ 90,000	$ 200,000

Instructions

Supply the missing information for the lettered items.

Question 13

Your company currently produces and sells 4 products, Alpha, Beta, Gamma and Delta. The following information relates to Period 3.

	Alpha	Beta	Gamma	Delta
Production (units)	180	150	120	180
Costs per unit:
Direct material	Br. 46	Br. 58	Br. 35	Br. 70
Direct labour	Br. 21	Br. 14	Br. 7	Br. 14
Machine hours per unit	4	3	2	3
Number of production runs	6	5	4	6
Number of requisitions raised	30	30	30	30
Number of orders completed	18	15	12	18

Currently the production overhead is absorbed by the machine-hour rate method and the following are the total production overhead costs for Period 3. Machine Department Br. 24,540

Set-up costs	6,300
Receiving costs	7,200
Inspection costs	3,150
Despatch costs	7,560
	48,750

Set-up costs Number of production runs

Stores receiving Number of requisitions raised

Inspection Number of production runs

Despatch Number of orders completed

You are required to calculate:

(a) (i) The machine-hour rate currently used to absorb the production overhead.

(ii) The total cost per unit for each product if overheads are absorbed by the method in (a)(i).

(b) The cost per unit for each product using an ABC approach.

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Question 14:

Jomit plc has budgeted for the following overhead costs for Period 6.

Material receipt costs Br. 31,200

Power costs 39,000

Material handling costs 27,300

The company produces 3 products, P, Q and R for which the following budgeted information is available for Period 6.

Product		P	Q	R
Output (units)	4,000	3,000	1,600
Material batches	20	10	32
Per Unit
Direct material (kg)	4	6	3
Direct material (Br. )	6	5	9
Direct labour (hours)	0.2	0.5	1.0
Number of power operations	6	3	2
Direct labour rate per hour	Br. 8	Br. 8	Br. 8

Currently the overhead costs are each absorbed using a rate per direct labour hour.

However, the company is considering applying overheads using an ABC approach and has identified drivers for the activities as follows:

Material receipt costs

Power costs

Material handling costs

number of batches of material

number of power operations

kg of material handled

You are required to calculate:

(a) The total cost per unit for each product using the current overhead absorption method.

(b) The total cost per unit for each product using the ABC method.

Question 15:

Your company currently produces a range of three products, D, E and F to which the following details relate for Period 2.

D E F

Production (units)

1,500

2,500

14,000

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Material cost per unit	Br. 18	Br. 10	Br. 20
Labour hours per unit	1	3	2
Machine hours per unit	3	2	6

Labour costs are Br. 8 per hour and production overheads are currently absorbed in the conventional system by reference to machine hours. Total production overheads for Period 2 have been analysed as follows:

Set-up costs	Br. 327,250
Handling costs	187,000
Machining costs	140,250
Inspection costs	280,500
	935,000

(a) Calculate the cost per unit for each product using conventional methods.

The introduction of an ABC is being considered and to that end the following volume of activities have been identified with the current output levels.

	D	E	F
Number of set-ups	90	138	576
Number of material issues	16	28	116
Number of inspections	180	216	804

(b) Calculate the cost per unit for each product using the ABC approach.

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