Storm Inc

Different costs
Basic level
10 mn

Storm inc. operates a large book store in Manchester, specialized in school and university
books. It is organized by study field and in particular has a Management section selling
marketing, accounting and strategy books.
Classify each of the following costs items as:
1°) Direct or Indirect costs (D / I) with respect to the Management section
2°) Variable of Fixed costs (V/F) with respect to the number of books sold (if in doubt, select
the cost type on the basis of whether the cost will change substantially if a large number of films
are sold).

List of costs:
Electricity costs of Storm inc. (single bill covers entire store)
Cost of books purchased for sale
Subscription to Business Books for leaders magazine
Leasing of computer software used for accounting and financial budgeting at Storm
Income of Storm global manager
Bonus on sales for the Management section director
Cost of the bookmarks offered to the clients (one per client)
Cost of Storm advertising at the nearest metro station
Fire insurance policy
Cost of merchandising for the launch of Innovative Strategies

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 Photocop

Different costs, cost per unit, decision

Intermediary level
20 mn

You are hired at the famous consulting group BRAIN & KIDNEY. Your first mission consists in
analyzing the costs of the reprography center of the company.

With this goal in mind, you gather the following information:

 The reprography department is 50 square meters large. 40 sq.m are used for photocopiers and
10 for photocomposition material; the real estate manager of the company informs you that the
average price for the premises is 450€/sq.m/year, including rent, maintenance, insurance and
cleaning;

 The reprography center possesses 5 identical photocopiers, bought at 7,200€/unit and with a 4
years estimated lifetime; each machine is covered by a maintenance contract costing 2,000 €/year;

 The electric consumption is not directly estimated for the reprography center; the premises
manager estimates this consumption at 4,000 € per year for photocopiers but you doubt the quality
of this estimation;

 Paper and other consumables taken into account amount to 26,000 € for 2015;

 Wages and payroll costs of the reprography department amount to 70,000€ for 2015;

 Monthly activity volumes for 2015 fluctuate from one month to the other and the annual
number of copies amounts 3,000,000 in 2015.

Questions :

1. Among these different costs, which are the variable, fixed, direct and indirect costs ?

2. You decide to calculate the cost of photocopies; do you have the necessary information to do
it ? (if not, make reasonable hypotheses about the information you think is missing) What is
the average cost of one copy ? Given the total volume of copies made each year, how much
would it cost to run 100 more copies ?

3. An external service provider proposes to run your copies for 0.03 € per unit with acceptable
time and quality conditions; what do you suggest to do ?

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 Biscuit Factory

Full cost calculation

Intermediary level
20 minutes

Biscuit Factory produces and markets biscuits sold in many British tourist sites. The company
has three product lines: cookies (20,000 kg over the period concerned), shortbreads (70,000
kg) and pound cakes (10,000 kg). The cookies and shortbreads are packaged in decorated tin
boxes. The pound cake is sold in individual wrap.

The direct costs of the products include purchases of materials (flour, butter, eggs, sugar,
yeast, lemon, flavorings, etc.), purchases of packaging, depreciation allowances for specific
equipment. Indirect purchases include staff salaries, depreciation allowances for common
machinery and equipment; the costs of electricity, water, so-called general expenses,
including the rent of the Biscuit factory.

For the past period, here are the following data:

Volume (kg) Selling price (per Direct costs Indirect Costs

kg)
Cookies 20 000 10 70 000 €
Shortbreads 70 000 6 200 000 €
Pound cakes 10 000 6 30 000 €
TOTAL 100 000 300 000 € 147 000 €

Indirects costs are imputed to the products, in proportion to the direct costs.

Question: Calculate the full costs and results for each product. What do you think of the
results obtained? How could we improve the method?

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 Immoservices

Job-costing systems
Intermediary level
20 minutes
Immoservices is a recently formed services company, specialized in real estate management
consultancy for small and medium-size firms. On the last period, Immoservices had two clients,
Morges and PainBis.
Mrs Racine, the managing partner of Immoservices, has just finished a tense telephone call with Mr
Pascal, President of Morges. Mr Pascal complained about the price Immoservices charged for some
survey completed for Morges (conveyancing and lease transfer). He requested a breakdown of the
charges. He also indicated that a competing firm has contacted him and that Immoservices would be
challenged and would have to bid for a lease transfer job next month. Mr Pascal ended the call by
saying that if Immoservices would bid a price similar to the one charged this month, Immoservices
would not be hired for next month’s job.
Mrs Racine is dismayed by the telephone call. She is also puzzled because she believes that
Immoservices has much expertise and is highly efficient in lease transfer. The Morges telephone
call is the bad news of the week. The good news is that yesterday Mrs Racine received an e-mail
from Immoservices’ other client, PainBis Ltd, saying that they were very pleased woth both the
quality and the price charged on its most recent survey.
Mrs Racine decides to collect data on the Morges and PainBis cases. Immoservices uses a cost-
based approach to billing each case, pricing the cost of the case plus a 30% margin. Currently, it
uses a single direct-cost category, for professional labor time, and a single indirect-cost pool:
general support. Indirect costs are allocated to cases on the basis of professional labor-hours per
cases. The cases files show the following:

Morges PainBis

Professional labor time 104 hours 96 hours

Professional labor time costs €70 an hour. Total indirect costs for the last period were €21,000.

QUESTIONS

1. Why is it important for Immoservices to understand the costs associated with individual
cases? Present an overview diagram of the existing job-costing system.
2. Calculate the cost of the Morges and PainBis cases.
3. With the view to improve Immoservices’ cost-pricing system, Mrs Racine would like to split
the general support pool in two pools. An analysis of the overhead costs shows that administrative
costs amounts €7,000, and Reference costs (for subscription to databases, surveys and reviews)
amounts to €14,000. Administrative costs are now grouped in a pool called Administration. The
cost driver is the professional labor time. Reference costs are grouped in a second pool and the cost
driver is the number of requests made to the library. Morges case needed 2 requests, Painbis needed
8 requests? What would have been the cost and the billing of these cases with the new system?

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 Montvert

Cost Volume profit and simulation

Intermediary level
20 minutes

A mid-sized manufacturer of pens, Montvert, learned about your competencies in cost management
and management control.

Montvert manufactures and sells pens. In Year N, sales turnover was 20 millions euros. Given the
high-quality of its products, Montvert is able to sell its pens at 2€ per unit.

Montvert’s owner and director general asks you for your help in further analyzing the economic
situation of the firm:

1. What is the present operating profit? The break-even point in sales? In revenues?

2. Calculate the new operating profit for each of the following changes :

a. An increase in raw material cost will increase by €0.16 the unit variable cost.

b. An advertising campaign would increase fixed costs by €360,000 but could also increase sales by
10 percent.

c. A promotional sale (a 20 percent discount on the usual selling price) could increase sales output
by 40 percent and decrease variable costs by 10 percent.

d. A higher-end positioning of the product would allow raising sales prices by 10 percent yet would
equally increase fixed costs by about €80,000.

To help you in your analysis, she provides you with some additional information on the cost
situation: according to her records, annual fixed costs amount €3,600,000 and variable costs per unit
are €1.20.

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 Puyricard

Full costs – partial costs – relevant costs

Advanced level
45 minutes level
Puyricard is one of main French producers of craft candy. Based in Vaucluse, the company makes
three types of products: chocolates, “marron glacés” and fruit jellies.

Products are sold in Puyricard stores, either in Paris or in the rest of France. The company also has an
internet site which sends products all over the world.

Management is now analyzing contributions, full costs and profits for each type of products. The
company has cost accounting system based on cost centers, and each of these centers corresponds to
the main departments of the firm.

For year N, direct costs were the following:

- Costs of raw materials: 14€ / kg for chocolates; 7€ / kg for marron glacé; 3€ / kg for fruit jellies;
- Costs of direct work: one hour of work is needed for each kg of chocolate. The production of marron
glacé requires more work, because more supervision is needed and each package has to be prepared
manually. Thus, working time is 2 hours for each kg of marron glacé. Finally, fruit jellies need only
half an hour for each kg. Hourly salary (including all social costs) is 16 euros per hour.

- Other direct costs (mainly the machine depreciation) is 30 000-€ for chocolates; 15 000 € for marron
glacés; 10 000 € for fruit jellies.

Other expenses are considered in the following centers:

- General services had expenses of 300 000 € during N. These include salaries for the recruitment
manager, the accountant, and the administrative and financial officer. These expenses are recorded
in the same center and then distributed 40 % to the manufacturing shop and 60 % to the marketing
department. These expenses are then added to the following centers:

- The manufacturing shop had expenses of 584 000 € during N (mostly indirect work,
depreciations and costs of machines). In order to allocate these costs to products, the
allocation unit is K€ of direct work;
-The department marketing, which manages all the stores and the online sales. The allocation
unit is K€ of sales. The department had expenses of 1 486 000 € during N.

During N, sales were the following:

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 Selling price per Kg Volumes produced and sold (Kg)

Chocolate 55 70 000

Marron glacé 70 10 000

Fruit jellies 35 40 000

Questions:

1. Calculate total cost and total cost per kg for each product, using cost pools method. Which is the
result for each of the products and for the firm?
2. Calculate the gross and net contribution (respectively margin on variable costs and margin on
direct variable and fixed costs) for each one of the three products (Puyricard calculate these
contributions without taking into consideration indirect costs). Check you find the same result for the
firm than question 1.
3. Propose some indicators to analyze the performance of each product.
4. The managing director meets with the production manager, the sales manager and the financial
director. They consider three alternatives:
Proposal A: stop producing marron glacé. In this hypothesis, direct costs of production would be
eliminated and indirect costs would decrease from 584 000 € to 500 000 euros. However, commercial
indirect costs and general services costs would remain the same.

Proposal B: the production manager suggests buying a new machine which would improve
manufacturing costs of marron glace. (This machine would be added to the other existing machines).
The cost of raw material would be 6 euros per kilo and the company would save 10 % of working time.
Depreciation of the machine would amount to 10 000 euros/year.

Proposal C: the sales manager received a call from a large network of labor unions. This network
suggests including Puyricard marron glace on its Christmas catalog if a 30 % discount is offered. The
sales manager estimates that sales could reach 3 000 kg per year. Current production structure would
be able to manage this surplus activity and there would be no additional administrative costs.

Analyze each of these proposals and their possible combinations, both from a financial and
strategical point of view. Which proposition/s would you suggest to the company to adopt? Why?

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