Trios college

Assignment 2
ACC209 – Managerial Accounting

Pooja Mistry ǁ Student ID: 21005693

Instructor Name: Professor Cecil Douglas
 Contents

Question 1 (Special Order)...........................................................................................................2

Question 2 (Make or Buy).............................................................................................................4

Question 3 (Retain or Replace Equipment)...................................................................................5

Question 4 (Eliminate Unprofitable Segment)...............................................................................6

Question 5 (Variable Costing).......................................................................................................7

Question 6 (Absorption Costing)...................................................................................................9

Question 7..................................................................................................................................10

Part “A”: Sales, Production, & Direct Materials Budget............................................................10

Part “B”: Budgeted Income Statement....................................................................................13

Pooja Mistry Version # 1 ACC209_Assignment 2_Alternate Page 2 of 13

 Question 1 (Special Order)
Vincent Company supplies schools with floor mattresses to use in physical education classes. Vincent
has received a special order from a large school district to buy 500 mats at $40 each. Acceptance of the
special order will not affect fixed costs but will result in $800 of shipping costs.
For the first 6 months of 2020, the company reported the following operating results while operating
at 80% capacity:

Sales (25,000 units) $1,250,000

Cost of goods sold 980,000
Gross profit 270,000
Operating expenses 170,000
Net income $ 100,000
Cost of goods sold was 80% variable and 20% fixed; operating expenses were 70% variable and
30% fixed.
Should Vincent Company accept the special order? Justify your answer. [5 marks]
Answer: If we accept the order then the revenue will be = 500*$40 = $20,000
The fixed cost will not be affected but there is variance in variable costs.
Cost of goods sold was 80% variable and operating expenses were 70% variable.
Therefore,
Cost of goods sold for 25,000 units = $980,000
So, cost of goods sold for 500 units = $980,000 * 500 ÷ 25,000 = $19,600
Cost of goods sold (Variable) = $19,600 * 80% = $15,680

Operating expenses for 25,000 units = $170,000

So, operating expenses for 500 units = $170,000 * 500 ÷ 25,000 = $3,400
Operating expenses (Variable) = $3,400 * 70% = $2,380

Therefore, Total Incremental cost will be

Particulars Amount
Cost of goods sold $15,680
Add: Operating expenses $2,380
Add: Shipping costs $800
Total incremental costs $18,860
Incremental analysis – Accept or Reject special order
Pooja Mistry Version # 1 ACC209_Assignment 2_Alternate Page 3 of 13
 Particulars Reject Accept Net Income Increase
(Decrease)

Revenue $0 $ 20,000 $ 20,000

Less: Costs $0 $ 18,860 $ 18,860

Net Income $0 $ 1,140 $ 1,140

The
analysis indicates that Net income increases by $1,140. So, Vincent Company should accept
this special order.

Pooja Mistry Version # 1 ACC209_Assignment 2_Alternate Page 4 of 13

 Question 2 (Make or Buy)
Escher Skateboards has been manufacturing its own wheels for its skateboards. The company is
currently operating at 100% capacity, and variable manufacturing overhead is charged to production at
the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the
wheels are $1.50 and $1.80, respectively. Normal production is 200,000 wheels per year.

A supplier offers to make the wheels at a price of $4 each. If the skateboard company accepts this offer,
all variable manufacturing costs will be eliminated, but the $42,000 of fixed manufacturing overhead
currently being charged to the skateboard wheels will have to be absorbed by other products.

Prepare an analysis to determine if Escher Skateboard should make or buy the wheels. [5 marks]
Answer:

Fixed cost will remain the same even if it is absorbed by other products as it is irrelevant cost.

Incremental analysis – Make or Buy

Particulars Make Buy Net Income Increase
(Per unit) (Per unit) (Decrease)
(Per unit)

Direct Materials $ 1.50 $0 $ 1.50

Direct Labour $ 1.80 $0 $ 1.80
Variable Manufacturing costs $ 0.54 $0 $ 0.54
($1.80 * 30%)
Purchase price $0 $4 ($ 4)
Total costs $ 3.84 $4 ($ 0.16)
This analysis indicates that the Escher Skateboard will incur $0.16 of additional costs if it buys the wheels of
Skateboards. Therefore, the company should not buy the wheels from outside. The company should make
the wheels.
 Question 3 (Retain or Replace Equipment)
Kinder Enterprises relies heavily on a copier machine to process its paperwork. Recently the copy clerk
has not been able to process all the necessary copies within the regular work week. Management is
considering updating the copier machine with a faster model.

Current Copier New Model

Original purchase cost $10,000 $20,000
Accumulated depreciation 8,000 —
Estimated operating costs (annual) 7,000 2,600
Useful life 5 years 5 years
If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its
useful life, the current machine would have zero salvage value. The new machine is expected to have
zero salvage value after five years.

Prepare an analysis to show whether the company should retain or replace the machine. [5 marks]
Answer:
Operating costs for Current Copier = $ 7,000 * 5 years = $35,000
Operating costs for New Model = $ 2,600 * 5 years = $13,000

Particulars Retain Machine Replace Machine Net Income Increase

(Decrease)

Operating costs $ 35,000 $ 13,000 $22,000

New Machine costs $0 $ 20,000 ($ 20,000)

Proceeds from sale $0 ($ 1,000) $ 1,000

of old machine

Total $ 35,000 $ 32,000 $ 3,000

The company should replace the Current copier and purchase the new machine because there will be an
increase in net income of $ 3,000 over the four-year life of the new machine.

Question 4 (Eliminate Unprofitable Segment)

Anheiser has three divisions: Bud, Wise, and ER. The results of May, 2020 are presented below:
 Bud Wise ER Total
Units sold 5,000 7,000 4,000 16,000
Revenue $80,000 $ 60,000 $30,000 $170,000
Less variable costs 37,000 42,000 14,000 93,000
Less direct fixed costs 15,000 25,000 13,000 53,000
Less allocated fixed costs 3,125 4,375 2,500 10,000
Net income $24,875 ($11,375) $ 500 $ 14,000
All of the allocated costs will continue even if a division is discontinued. Anheiser allocates indirect fixed
costs based on the number of units to be sold. Since the Wise Division has a net loss, Anheiser feels that
it should be discontinued. Anheiser feels if the division is closed, that sales at the Bud Division will
increase by 30%, and that sales at the ER Division will stay the same.

Prepare an analysis showing the effect of discontinuing the Wise Division. [5 marks]
Answer: As per the question, Bud Division will increase by 30%.
Therefore, Units sold (Bud) = 5000 × 130% = $6500
Revenue (Bud) = 80,000 × 130% = $104,000
Variable cost = 37,000 × 130% = $48,100
 Allocation of total allocated fixed cost of $10,000:
Bud: [6500/(6500 + 4000)] × 10,000 = $6,190.47
ER: [4000/ (6500 + 4000)] × 10,000 = $ 3,809.53
Incremental analysis – Eliminating an unprofitable segment
Particulars Bud ER Total
Revenue $104,000 $30,000 $134,000
Less: Variable costs $48,100 $14,000 $62,000
Less: Direct fixed costs $15,000 $13,000 $28,000
Less: Allocated fixed costs $6190.47 $3,809.53 $10,000

Net income $34,709.53 ($809.53) $33,900

Difference in Net income = $33,900 - $14,000 = $19,900

The company should eliminate the Wise Division, as the overall income increases by $19,900 if the company
discontinue the Wise Division.
 Question 5 (Variable Costing)
Momentum Bikes manufactures a basic road bicycle. Production and sales data for the most recent year
are as follows (no beginning inventory):

Variable production costs $85 per bike

Fixed production costs $530,000

Variable selling & administrative costs $17 per bike
Fixed selling & administrative costs $480,000
Selling price $195 per bike
Production 21,200 bikes

Sales 19,000 bikes

Prepare a brief income statement using variable costing. [5 marks]
Answer:
Calculations:
 Units sold = 19,000 bikes, Selling price per unit = $195 per bike
Therefore, Sales = Units sold * Selling price per unit
= 19000 * $195
= $3,705,000

 Units produced = 21,200 bikes, Variable production cost per unit = $85 per bike
Variable Production costs = Units produced * Variable production cost per unit
= 21,200 * $85
= $1,802,000

 Units sold = 19,000 bikes, Variable selling and administrative cost per unit = $17 per bike
Variable selling and administrative cost = Units sold * Variable selling & administrative cost per unit
= 19,000 * $17
= $323,000
 As per the question,
Fixed production costs = $530,000
Fixed selling and administrative costs = $480,000
Using these figures now we will prepare the income statement using variable costing.
 Variable Costing Income Statement
Momentum Bikes
Income statement
Variable Costing
Sales $ 3,705,000
Variable cost of goods sold
Beginning inventory $0
Add: Variable production costs $1,802,000
Cost of goods available for sale $1,802,000
Less: Inventory at the end (2200*$85) $187,000
Variable cost of goods sold $1,615,000
Add: Variable selling & administrative $323,000 $1,938,000

expenditure
Contribution margin $1,767,000
Less: Fixed production cots $530,000
Less: Fixed selling and administrative costs $480,000
Net Income $757,000

Question 6 (Absorption Costing)

Conan Company produces sporting equipment. In 2019, the first year of operations, Conan produced
25,000 units and sold 18,000 units. In 2020, the production and sales results were exactly reversed. In
each year, selling price was $100, variable manufacturing costs were $40 per unit, variable selling
expenses were $8 per unit, fixed manufacturing costs were $540,000, and fixed administrative expenses
were $200,000.

Prepare an income statement for 2019 using absorption costing. [5 marks]

Answer: Calculations:
 Sales = Units sold * Selling price= (18000 units * $100) = $1,800,000
 Fixed manufacturing cost per unit = Fixed manufacturing costs/Units produced = ($540,000/25,000)
= $21.6 per unit
 Cost of goods manufactured = Units produced*Variable manufacturing cost per unit + Fixed
manufacturing costs = (25,000*$40) + $540,000= $1,540,000
 Inventory at the end = (Unit produced – Unit sold) = (25,000 – 18,000) = 7,000
Therefore, (Ending inventory*Variable cost per unit) + (Ending inventory*Fixed cost per unit)
= (7000*$40) + (7000*$21.6) = ($280,000 + $151,200) = $ 431,200

Absorption-costing Income statement

Conan Company
Income statement for year 2019
Absorption costing
Sales $1,800,000
Cost of goods sold
Beginning inventory $0
Add: Cost of goods manufactured $1,540,000
Cost of goods available for sale $1,540,000
Less: Inventory at the end $431,200
Cost of goods sold $1,108,800
Gross profit $691,200
Less: Variable selling & administrative expenses $144,000
(18,000*$8)
Less: Fixed selling & administrative expenses $200,000
Net Income $347,200
Question 7
Part “A”: Sales, Production, & Direct Materials Budget
Oak Creek Company is preparing its master budget for 2020. Relevant data pertaining to its sales,
production, and direct materials budgets are as follows.
  Sales: Sales for the year are expected to total 1 million units. Quarterly sales are 20%, 25%, 25%,
and 30%, respectively. The sales price is expected to be $80 per unit for the first three quarters
and $45 per unit beginning in the fourth quarter. Sales in the first quarter of 2021 are expected
to be 10% higher than the budgeted sales for the first quarter of 2020.
 Production: Management desires to maintain the ending finished goods inventories at 20% of
the next quarter's budgeted sales volume.
 Direct materials: Each unit requires 3 kg of raw materials at a cost of $15 per kilogram.
Management desires to maintain raw materials inventories at 10% of the next quarter's
production requirements. Assume the production requirements for the first quarter of 2021
are 500,000 kg.
Instructions
Prepare the sales, production, and direct materials budgets by quarters for 2020. [10 marks]
Answer: (1) The sales budget is prepared by multiplying the expected sales volume in units for each
product by its anticipated selling price per unit. For Oak Creek company sales volume
are expected to total 1 million units for the year of which quarterly sales are 20%, 25%,
25%, and 30% respectively.

Sales Budget
A B C D E F
1 Oak Creek Company
Sales Budget
For the year ending December 31 ,2020

2 Quarter
3 1 2 3 4 Year
4 Expected unit sales $200,000 $250,000 $250,000 $300,000 1,000,000
5 Unit selling price × $80 × $80 × $80 × $45 -
6 Total Sales $16,000,000 $20,000,000 $20,000,000 $13,500,000 $69,500,000
 Production Budget
A B C D E F
1 Oak Creek Company
Production Budget
For the year ending December 31, 2020
2 Quarter
3 1 2 3 4 Year
4 Expected units sales 200,000 250,000 250,000 300,000
5 Add: Desired ending finished good units 50,000*st 50,000 60,000 44,000*nd
6 Total required units 250,000 300,000 310,000 344,000
rd
7 Less: Beginning finished good units 40,000* 50,000 50,000 60,000
8 Required production units 210,000 250,000 260,000 284,000 1,004,000
st
9 (a) * Ending finished goods inventories at 20% of next quarter’s unit sales.
10 (b) *nd Estimated first quarter 2021 sales units = 200,000+(200,000 × 10%) = 220,000; 220,000*20%.
11 (c) *rd 20% of estimated first quarter 2020 sales units (200,000 × 20%) = 40,000.

Formulas used for the calculation of Production budget are:

1. Required production sales = (Expected sales unit) + (Desired ending finished goods units)
(Beginning finished good units)

Formulas used for the calculation of Direct material budget are:

1. Direct Materials Units required for production = (Units to be produced) * (Direct Materials
per Unit produced)

2. Required Direct Materials unit to be purchased = (Direct Material units required for
production) + (Desired ending direct material units) – (Beginning Direct Material Units)

3. Cost of Direct Material Purchases = (Direct Materials unit to be purchased) * (Cost per Direct
materials Unit)

Direct Materials Budget

A B C D E F
1 Oak Creek Company
 Sales Budget
For the year ending December 31, 2020
2 Quarter
3 1 2 3 4 Year
4 Units to be produced 210,000 250,000 260,000 284,000
5 Direct materials per unit ×3 ×3 ×3 ×3
6 Total kilograms needed for 630,000 750,000 780,000 852,000
production
7 Add: Desired ending direct 75,000*st 78,000 85,200 50,000*nd
materials (kilograms)
8 Total materials required 705,000 828,000 865,200 902,000
9 Less: Beginning direct 63,000*rd 75,000 78,000 85,200
materials (kilograms)
10 Direct materials purchases 642,000 753,000 787,200 816,800
11 Cost per kilogram × $15 × $15 × $15 × $15
12 Total cost of direct materials $ 9,630,000 $ 11,295,000 $11,808,000 $ 12,252,000 $ 44,985,000
purchases
13 (a) *st Ending finished goods inventories at 10% of the next quarter's production requirements.
14 (b) *nd Estimated first quarter 2021 production requirements = 500,000 × 10% = 50,000.
15 (c) *rd 10% of estimated first-quarter kilograms needed for production = 630,000 × 10% = 63,000

Part “B”: Budgeted Income Statement

Oak Creek Company is preparing its budgeted income statement for 2020. Relevant data
pertaining to
its sales, production, and direct materials budgets are found in Part “A” above.

In addition, Oak Creek budgets 0.45 hours of direct labour per unit, labour costs at $12 per
hour, and manufacturing overhead at $30 per direct labour hour. Its budgeted selling and
administrative expenses for 2020 are $9 million.
Instructions
 a) Calculate the budgeted total unit cost. [2 marks]
b) Prepare the budgeted income statement for 2020. [3 marks]
Answer:

(a) Calculation of budgeted total unit cost:

Cost Element Quantity Unit Cost Total

Direct Material 3 kg $15 $45.00

Direct Labour 0.45 hours $12 $5.40
Manufacturing 0.45 hours $30 $13.5
overhead
Total Unit Cost - - $63.90

(b) Budgeted income statement for 2020.

From Part “A”, Total sales = $69,500,000

Oak Creek Company

Budgeted Income Statement
For the year ending December 31, 2020
Sales (1,000,000 units from sales budget of Part “A”.) $69,500,000
Less: Cost of goods sold (1,000,000 × $63.90/unit) 63,900,000
Gross profit 5,600,000
Less: Selling & Administrative expenses 9,000,000
Net income (3,400,000)