Académique Documents
Professionnel Documents
Culture Documents
and Control
1.Lilac Flour Meal
2.Hospital Supply Inc.
3. Moti Hera Private Ltd.
Process costing
Process costing is a method of costing used mainly in manufacturing
where units are continuously mass-produced through one or more
processes.
Direct material
Direct labour
overheads
Direct material
Direct labour
overheads
Direct material
Direct labour
overheads
Process 1
Process 2
Process 3
Finished goods
Process A
Material 500
Labour 100
Overhead200
800
Process B
Process B
800
800
Process A800
Material 50
Labour 150
Overhead100
Process C
1100
Process C
Process B 1100
Material 80
Labour 110
Overhead 210
1500
1100
1100
Finished Goods
Process C 1500
1500
1500
1300
200
1500
Joint Costs
Seperable Costs
Total
Profit
Profit margin
1665000
55620
17,20,620
21,780
1.266%
Product
White flour
Suji
Wholemeal flour
Bran
Production Production
in %
in tons
60
10
10
20
Joint Cost
allocated
on the
Joint Cost
basis of
Per Ton
production (Rs.)
quantities
(Rs.)
540
999000
90
166500
90
166500
180
333000
900 16,65,000
1850
1850
1850
1850
1850
Separable
Total Cost Per
Costs per
Ton (Rs.)
Ton (Rs.)
78
84
34
16
1928
1934
1884
1866
Sales
Price per
Ton (Rs.)
2100
2480
2000
1140
Profit
Profit
(Loss) for
(Loss) per Total
ton (Rs.)
Output
(Rs.)
172
92880
546
49140
116
10440
-726 -130680
21780
Product
1665000
White flour
Selling Price per ton (Rs.)
Prodn in tons
Sales Value (Rs.)
Seperable Cost per ton (Rs.)
Total Separable Cost
NRV (Sales- Separable costs)
NRV weight
Jt Cost Allocation (NRV Approach)
Per Ton Joint Cost
2100
540
1134000
78
Suji
2480
90
223200
42120
84
7560
1091880
0.65
1077781
1996
215640
0.13
212856
2365
WholeMeal
2000
90
180000
34
Bran
1140
180
205200
Total
1742400
16
3060
2880
176940
0.10
174655
1941
202320
0.12
199708
1109
1686780
1665000
WholeMeal
2000
90
180000
0.10
172004
1911
Bran
1140
180
205200
0.12
196085
1089
Total
1742400
1665000
White flour
540
0.6
999000
1850
Suji
90
0.1
166500
1850
WholeMeal
90
0.1
166500
1850
Bran
180
0.2
333000
1850
Total
900
1665000
Prodn in tons
Weighted Average Method
Wheat Consumption weight
Weighted Output
Ratio
Joint Cost (Weighted Average)
White flour
540
Suji
90
WholeMeal
90
Bran
180
2160
0.77
1289032
270
0.10
161129
180
0.06
107419
180
0.06
107419
Total
900
2790
1665000
2100
2480
540
90
1134000 223200
0.65
0.13
1083626 213285
2007
2370
78
84
42120
7560
2000
90
180000
0.10
172004
1911
34
3060
1140
180
205200
0.12
196085
1089
16
2880
Profit
Profit Margin
Profit Margin (Selling price x profit margin)
Production Cost (Selling Price- Profit)
Joint Cost allocated/ton (Prod Cost - Seperable
Cost)
Total
1742400
55620
1665000
1720620
21780
1.25
26.25
2074
31
2449
25
1975
14.25
1126
1996
2365
1941
1110
MMC manufactures
Net Realizable Value
Step I
Sale Value
Memory Bits per chip
Step 2
Sperable Cost
NRV at Split Off Pt
Total NRV of Both
products at Spilt off Pt
Joint Cost
Given
Given
Given
Standard
Delux
Total
Units Price
Value
Units Price
Value
500 $8,500 $42,50,000 500 $25,000 $125,00,000 $167,50,000
500
1000
$1,000 $5,00,000
$7,500 $37,50,000
$1,500
$7,50,000
$23,500 $117,50,000 $155,00,000
$31,000
$24,000
Given
Weightege
Joint Cost allocated
Unit Jt Cost
Total Cost per Chip
24%
$5,806
$11.6
$6,806
76%
$18,194
$18.2
$19,694
Standard
$42,50,000
25.4%
$6,089.55
$1,000
$7,089.55
$12.18
Delux
$125,00,000
74.6%
$17,910.45
$1,500
$19,410.45
$17.91
Question 1
Question 1
Total fixed costs (TFC) = fixed costs per unit times normal volume =($660 + $770)*3,000 = $4,290,000.
Contribution margin per unit = unit price minus unit variable costs = $4,350 - $2,070 = $2,280.
$4,290,000
1,882 units
$2,280
$4,350 - 2,070
Break even sales $4,290,000 /
$8,185,461
$4,350
Question 2
Recommendation:
Lowering
prices
reduces income. Other
factors, such as the
reduction of available
capacity
and
the
capacity and the impact
on market share, could
also affect the decision.
Impact:
Price
..................................................
Quantity
..................................................
Revenue
..................................................
Variable mfg.
costs
..................................................
Variable mktg.
costs
..................................................
Contribution
margin
...............................................
Fixed mfg.
costs
..................................................
Fixed mktg.
costs
..................................................
Income
............................................
Before Price
Reduction
$
4,350
After Price
Reduction
$
3,850
Difference
$
(500)
3,000
3,500
500
$13,050,000
$13,475,000
$ 425,000
( 5,385,000)
(6,282,500)
(897,500)
(825,000)
(962,500)
(137,500)
6,840,000
6,230,000
(610,000)
(1,980,000)
(1,980,000)
--
(2,310,000)
(2,310,000)
--
$ 2,550,000
$ 1,940,000
$(610,000)
Question 3
Question 4
Minimum price = variable mfg costs + shipping costs + order costs
= $1,795 + $410 + $22,000/1,000 = $2,227
At this price per unit, the $2,227,000 of differential costs caused by the 1,000-unit order will just be
uncovered. Some students solve for this price using the break-even formula (UR = unit revenue):
TCF
UR UVC Q
22,000
UR 2,205 1,000 units
$22,000 = 1,000UR - $2,205,000
$2,227,000 = 1,000UR
$2,227 = UR
Question 6
Total revenue
Total variable manufacturing costs
Income
All Production
In-house
$13,050,000
(5,385,000)
(825,000)
6,840,000
(1,980,000)
2,310,000
--
$ 2,550,000
1,000 Units
Contracted
$13,050,000
$3,590,000
$770,000
8,690,000
1,386,000
2,310,000
2,444,000
2,550,000
$4,994,000 - X = $2,550,000
X = $2,444,000 or $2,444 per unit
maximum purchase price
Question 7
All Production
In-house
Regular (In)
Total revenue
Total variable
manufacturing
costs
Total variable
marketing costs
Total
contribution
margin
Fixed
manufacturing
Fixed
marketing
Contractor
Income
$13,050,000
(5,385,000)
(825,000)
6,840,000
Regular (Out)
Modified
Total
$8,700,000 $4,350,000
$3,960,000 $17,010,000
(3,590,000)
(2,420,000) (6,010,000)
(550,000)
(220,000)
(440,000)
(1,210,000)
4,560,000
4,130,000
1,100,000
9,790,000
(1,980,000)
(1,980,000)
2,310,000
(2,310,000)
-$ 2,550,000
$2,950,000
$ 2,550,000
Example: ILAB manufactures design tables. ILAB has a policy of adding a 20% markup to full
costs and currently has excess capacity. Assume the cost driver for variable and fixed
manufacturing overhead costs is the number of output units. The following information pertains
to the company's normal operations per month:
Output units = 30,000 tables
Machine-hours = 8,000hours
Direct manufacturing labor-hours =10,000 hours
Direct materials per unit = Rs. 50
Direct manufacturing labor per hour = Rs. 6
Variable manufacturing overhead cos = Rs. 161,250 per month
Fixed manufacturing overhead costs = Rs. 600,000 per month
Product and process design costs = Rs. 450,000 per month
Marketing and distribution costs = Rs. 562,500 per month
ILAB is approached by an overseas customer to fill a one-time-only special order for 2,000 units. All
cost relationships remain the same except for a one-time setup charge of Rs. 20,000. No additional
design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit
on this one-time-only special order? For long-run pricing of the coffee tables, what price will most
likely be used by the company?
Direct materials
Direct manufacturing labor (Rs.6 x 10,000) / 30,000
Variable manufacturing (Rs.161,250 / 30,000)
Setup (Rs. 20,000 / 2,000)
Minimum acceptable bid
Rs.
Rs. 50.00
2
5.375
10
Rs. 67.38
Direct materials
Direct manufacturing labor ($6 x 10,000)/30,000
Variable manufacturing ($161,250/30,000)
Fixed manufacturing ($600,000/30,000)
Product and process design costs ($450,000/30,000)
Marketing and distribution ($562,500/30,000)
Full cost per unit
Markup (20%)
Estimated selling price
50.00
2
5.375
20
15
18.75
111.125
22.225
133.35
355230.92
Less B-PO-2
107621.19
Equals B-PO-3
247609.73
Less B-PO-4A
96155.16
Less B-PO-4B
89651.49
Equals B-PO-5
61803.08
206261.48
Less B-PA-2
72305.19
Equals B-PA-3
133956.29
Less B-PA-4A
32343.98
Less B-PA-4B
51502.33
Equals B-PA-5
50109.98
81361.56
Less B-C-2
54718.73
Equals B-C-3
26642.83
Less B-C-4A
--
Less B-C-4B
2299.83
Equals B-C-5
24343.00
99898.50
Less D-PO-2
40619.18
Equals D-PO-3
59279.32
Less D-PO-4A
13608.73
Less D-PO-4B
15937.68
Equals D-PO-5
29732.91
23318.21
Less D-PA-2
3866.94
Equals D-PA-3
19451.27
Less D-PA-4A
4068.32
Less D-PA-4B
5517.93
Equals D-PA-5
9865.02
14514.51
Less D-C-2
9883.79
Equals D-C-3
4630.72
Less D-C-4A
--
Less D-C-4B
591.66
Equals D-C-5
4039.06
Mumbai Location
Moti Heera Analysis
Alternative Choice Decisions: Differencial Costs
Mumbai
Income
Variable Cost
Contribution to Mumbai Fixed OH
Sunk Cost
Escapable Fixed Cost
Total Fixed Cost
Contributin to Local Company OH
Mumbai OH
Contribution to Company OH and Profits
Fixed Cost to Sales
Break Even
Location Cont./ Sales Ratio
Cont to Sales (P/v Ratio)
Poster
Paint
Commercial
Location Total
EX 3
EX 4
EX 5
3,55,231
2,06,261
81,363
6,42,855
1,07,621
72,305
54,719
2,34,645
2,47,610
1,33,956
26,644
4,08,210
96,155
32,344
1,28,499
89,651
51,502
2,300
1,43,453
1,85,806
83,846
2,300
2,71,952
61,804
50,110
24,344
1,36,258
89,482
46,776
0.52
2,66,565
0.17
0.70
0.41
1,29,103
0.24
0.65
0.03
7,024
0.30
0.33
0.42
4,28,274
0.21
0.63
Delhi Location
Delhi
Income
Variable Cost
Contribution to Delhi Fixed OH
Sunk Cost
Escapable Fixed Cost
Total Fixed Cost
Contributin to Local Company OH
Delhi OH
Contribution to Company OH and Profits
Poster
Paint
Commercial
EX 6
EX 7
EX 8
99,899
23,318
14,516
40,619
3,867
9,884
59,280
19,451
4,632
13,608
4,068
15,938
5,518
592
29,546
9,586
592
29,734
9,865
4,040
1,37,733
54,370
83,363
17,676
22,048
39,724
43,639
31,011
12,628
Company OH
Company Profit/Loss
Fixed Cost to Sales
Break Even
Location Cont./ Sales Ratio
Cont to Sales (P/v Ratio)
0.30
49,791
0.30
0.59
0.41
11,492
0.42
0.83
0.04
1,855
0.28
0.32
0.29
65,632
0.32
0.61
Mumbai
Income
Variable Cost
Contribution to Mumbai Fixed OH
Sunk Cost
Escapable Fixed Cost
Total Fixed Cost
Contributin to Local Company OH
Mumbai OH
Contribution to Company OH and Profits
Fixed Cost to Sales
Break Even
Location Cont./ Sales Ratio
Cont to Sales (P/v Ratio)
Delhi
Income
Variable Cost
Contribution to Delhi Fixed OH
Sunk Cost
Escapable Fixed Cost
Total Fixed Cost
Contributin to Local Company OH
Delhi OH
Contribution to Company OH and Profits
Poster
Paint
Commercial
Location Total Company TOTAL
EX 3
EX 4
EX 5
3,55,231
2,06,261
81,363
6,42,855
1,07,621
72,305
54,719
2,34,645
2,47,610
1,33,956
26,644
4,08,210
96,155
32,344
1,28,499
89,651
51,502
2,300
1,43,453
1,85,806
83,846
2,300
2,71,952
61,804
50,110
24,344
1,36,258
89,482
46,776
0.52
2,66,565
0.17
0.70
Poster
EX 6
99,899
40,619
59,280
13,608
15,938
29,546
29,734
0.41
1,29,103
0.24
0.65
Paint
EX 7
23,318
3,867
19,451
4,068
5,518
9,586
9,865
0.03
7,024
0.30
0.33
Commercial
EX 8
14,516
9,884
4,632
592
592
4,040
0.42
4,28,274
0.21
0.63
1,37,733
54,370
83,363
17,676
22,048
39,724
43,639
31,011
12,628
Company OH
Company Profit/Loss
Fixed Cost to Sales
Break Even
Location Cont./ Sales Ratio
Cont to Sales (P/v Ratio)
7,80,588
2,89,015
4,91,573
1,46,175
1,65,501
1,79,897
1,20,493
59,404
1,00,061
(40,657)
0.30
49,791
0.30
0.59
0.41
11,492
0.42
0.83
0.04
1,855
0.28
0.32
0.29
65,632
0.32
0.61
0.53
Relevant Costing
When making a particular decision-relevant costs are those that may change,
depending on the decision taken. Therefore, any increase or decrease in future cash
flows as a result of a decision is an indication of relevant cost.
(iii). Non-Cash Expenses: Non-cash expenses such as depreciation and amortisation are not
relevant because they do not affect the cash flows of a business.
(iv). General Overheads: If any general and administrative overheads which are not affected by
the decisions under consideration can be ignored. It depends to the situation and nature of the
business operation.
Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buy
the motors from Jinx Motors for Rs.1,250 each. South westerns plant can manufacture
the motors for the following costs per unit:
Direct materials
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
Rs 500
Rs 250
Rs 200
Rs 350
Rs 1,300
If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead
applied will not be avoided.
Required:
Should the company make or buy the motors?
Revenue
Cost of goods sold
Gross margin
Selling and administrative expenses
Net Loss
Rs.
950,760
861840
88920
136800
(47,880)
Factory overhead accounts for 35 percent of cost of goods sold and is one third fixed.
These data are believed to reflect conditions in the immediate future.
Revenue
Variable costs of goods sold:
Total cost of
sales
Rs.950,760
861,840
100,548
761,292
Rs.189,468
Tamex Company is presently making a part that is used in one of its products. The unit product cost
is:
Direct materials .......................................................
Rs. 9
Direct labor
5
Variable manufacturing overhead ...........................
1
Depreciation of special equipment ..........................
(The special equipment has no resale value.)
3
Supervisors salary ..................................................
2
General factory overhead ........................................
(Common costs allocated on the basis of direct labor-hours)
10
Total unit product cost.............................................
Rs. 30
The costs above are based on 20,000 parts produced each year. An outside supplier has offered to
provide the 20,000 parts for only Rs. 25 per part. Should this offer be accepted?
Dimond Company needs 10,000 engines for the cars they are producing; they can either buy these
engines from outside suppliers or make them themselves. Here are the traditional costs for making
the product internally.
Per Unit (Rs.)
Total (Rs.)
Material
Labour
Applied Variable Costs
Total
200
100
100
400
2,000,000
1,000,000
1,000,000
4,000,000
it costs the company Rs. 400 per engine to make, however they could in fact buy the engines from
a supplier at a cost of Rs. 420 per unit. Making seems to be the best option. However, if the company
buy in the engines it can use the staff and facilities to produce another product which gives us a
contribution of Rs.50. Whether the Dimond Company should manufacture the product or should it
buy from the outsider.
Due to the declining popularity of digital watches, Sweiz Companys digital watch line has not
reported a profit for several years. An income statement for last year follows:
Segment Income StatementDigital Watches
Sales ......................................................................
Less variable expenses:
Variable manufacturing costs ............................
Variable shipping costs ......................................
Commissions .....................................................
Contribution margin ..............................................
Less fixed expenses:
General factory overhead*.................................
Salary of product line manager ..........................
Depreciation of equipment** ............................
Product line advertising .....................................
Rentfactory space*** ....................................
General administrative expense* .......................
Net operating loss ..................................................
Rs. 500,000
Rs. 120,000
5,000
75,000
60,000
90,000
50,000
100,000
70,000
30,000
200,000
300,000
400,000
Rs. (100,000)
* Allocated common costs that would be redistributed to other product lines if digital
watches were dropped.
** This equipment has no resale value and does not wear out through use.
*** The digital watches are manufactured in their own facility.
Should the company retain or drop the digital watch line?
First, was the first quarter of the year representative enough of longer
term results to consider discontinuing the TVD?
And second, would discontinuing TVD cause a drop in sales in the other
two departments?
One manager however stated that even if the quarter was typical and
other sales would not be hurt, I am still not convinced that we would be
better off by dropping the TVD.
1,96,384
$
6,454
Tipton one stop decorators sells paint and paint supplies, carpets, and wallpapers at a single store location in
Mumbai. Al though the company has been very profitable over the years, management has seen a significant
decline in wallpaper sales and earnings. Recent figures are presented below.
Particulars
Sales
Variable Costs
Fixed Costs
Total Costs
Operating Income
Carpets (Rs)
4,60,000
3,22,000
75,000
3,97,000
63,000
Wallpaper (Rs)
1,40,000
1,12,000
45,000
1,57,000
(17,000) Loss
Tipton is studying whether to drop wallpaper business because of the changing market and accompanying loss. If
the wallpaper business is dropped, the following changes are expected to occur:
a). The vacated space will be remodelled at a cost of Rs 12,400 and will be devoted to an expanded line of highend carpet business. The sales of carpet are expected to increase by Rs 1,20,000, and the lines overall contribution
margin ratio will rise by 5%.
b). Tipton can cut wallpapers fixed cost by 40%. The remaining fixed cost will continue to be incurred.
c). Customers who purchased wallpaper often bought paint and paint supplies; hence sales of paint and paint
supplies are expected to fall by 20%.
d). The firm will increase advertising expenditure by Rs. 25,000 to promote the expanded carpet business.
Sales..
Less: Variable costs.
Existing Contribution margin.
If wallpaper is closed, then:
Paint and
Supplies
Carpeting
Wallpaper
Rs 380,000
228,000
Rs 152,000
Rs 460,000
322,000
Rs 138,000
Rs 140,000
112,000
Rs 28,000
Rs (28,000)
(12,400)
65,000
18,000
(30,400)
(25,000)
Rs (12,800)
* The current contribution margin ratio for carpeting is 30% (Rs138,000 Rs460,000). This ratio
will increase to 35%, producing a new contribution for the line of Rs 203,000 [(Rs 460,000 + Rs
120,000) x 35%]. The end result is that carpetings contribution margin will rise by Rs 65,000 (Rs
203,000 - Rs138,000), boosting firm profitability by the same amount.
Jamestown Candle works has just received a request from the Williamsburg Foundation for 800 candles
to be used in a special event for major donors. The candles will be used as the only illumination in the
reception room and will be given out as gifts to the donors as they leave. The candles will be imprinted
with the Williamsburg Foundation logo. This sale will have no effect on the companys normal sales to
retail outlets. The normal selling price of a candle of about the size and weight of the special candles is
$3.95 and its unit product cost is $2.30, as shown below:
Direct materials
Direct labor
Manufacturing overhead
Unit product cost
$1.35
0.15
0.80
$2.30
The variable portion of the manufacturing overhead is $0.05 per candle; the other $0.75
represents fixed manufacturing costs that would not be affected by this special order.
Jamestown Candle works would have to order a special candle mold in which the
Williamsburg Foundation logo is inscribed. Such a mold would cost $800. In addition, the
Williamsburg Foundation wants a special wick containing gold-like thread that would add
$0.20 to the cost of each candle. Because of the large size of the order and the charitable
nature of the work, the Williamsburg Foundation has asked to pay only $2.95 each for this
candle. If accepted, what effect would this order have on the companys net operating income?
Per Unit
$2.95
1.35
0.15
0.05
0.20
$1.75
1,080
120
40
160
1,400
800
2,200
$ 160
Ensign Company makes two products, X and Y. The current constraint is Machine
N34. Selected data on the products follow:
X
$60
36
$24
40%
2,000
Y
$50
35
$15
30%
2,200
1.0 minute
0.5 minute
Machine N34 is available for 2,400 minutes per week, which is not enough
capacity to satisfy demand for both product X and product Y. Should the company
focus its efforts on product X or product Y?