Answer – 1

Equivalent cost of production

Particulars Unit Material Labour Overhead

% compl Unit % compl Unit % compl Unit
Opening - - - - - - -
WIP
Units 1400 100% 1400 100% 1400 100% 1400
transferred
Normal 100 - - - - - -
loss (5%)
Closing 460 100% 460 50% 230 50% 230
WIP
Abnormal 40 100% 40 100% 407 100% 40
loss
Total 2000 1900 1670 1670

Material cost = (60000+17000-100*10)/1900 = 76000/1900=40 Rs/Unit

Labour cost = 33400/1670=20 Rs/Unit
Overhead cost = 16700/1670 = 10 Rs/Unit
Process Account:

Particulars Unit Amount Particulars Unit Amount

To Opening WIP 2000 60000 By Normal Loss 100 1000
To Material 17000 By Abnormal Loss 40 2800
To Labour 33400 By Units transferred 1400 98000
To Overhead 16700 By Closing WIP 460 25300
Total 2000 127100 2000 127100

Abnormal loss = (40*40+40*20+40*10)=2800

Units transferred = 1400*(40+20+10) = 98000
Closing WIP = (460*40+230*20+230*10) = 25300
Answer – 2
1. Overhead application rate = 840,000/1600 = 525 Rs/Unit
2. Job 66:
Direct Material +Direct Labour + (Machine hr for Job 66/Total Machine Hr)*Total Overhead
= 44000+65000+(2000/4400)*(34000+60000+5000+139500)
= 217409

Job 67:
= 15000+8800+(500/4400)*(34000+60000+5000+139500)
= 50902

3. Increased. Earlier it was zero. It is now Job 64

Job 64: 21000+35000+(1200/4400)*(34000+60000+5000+139500)
= 121045
Answer – 3
Sell price: Rs 10/unit
Variable cost: Rs. 6/unit
Contribution: Rs (10-6)/unit = Rs. 4/unit
a) Break even sales unit = Fixed cost/ Contribution = 400/4 = 100 unit; Amount = 100*10= Rs
1000

b) Margin of safety = 1500-1000 Rs = 500 Rs; Margin of safety ratio = 500/1500=1/3

c) Break even unit = 80; Contribution = Fixed cost/Break even units = 400/80 = 5
Sell price = Contribution + Variable Cost = 5+6 = 11 Rs

Answer – 4
Variance Analysis for Brabham Enterprises for August 2017
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)

Units (tires) sold 2,800g 0 2,800 200 U 3,000g

Revenues $313,600a $308,000b $22,000 U $330,000c

$ 5,600 F

Variable costs 229,600d 22,400 U 207,200e 14,800 F 222,000f

Contribution 7,200
margin 84,000 16,800 U U
100,800 108,000

Fixed costs 50,000g 4,000 F 54,000g 0 54,000g

$
Operating income $ 34,000 $12,800 U 46,800 $ 7,200 U $ 54,000

$12,800 U $ 7,200 U
Total flexible-budget variance Total sales-volume variance
$20,000 U
Total static-budget variance
a
$112 × 2,800 = $313,600
b
$110 × 2,800 = $308,000
c
$110 × 3,000 = $330,000
d
Given. Unit variable cost = $229,600 ÷ 2,800 = $82 per tire
e
$74 × 2,800 = $207,200
f
$74 × 3,000 = $222,000
g
Given

2. The key information items are:

Actual Budgeted
Units 2,800 3,000
Unit selling price $ 112 $ 110
Unit variable cost $ 82 $ 74
Fixed costs $50,000 $54,000

The total static-budget variance in operating income is $20,000 U. There is both an unfavorable total
flexible-budget variance ($12,800) and an unfavorable sales-volume variance ($7,200).
The unfavorable sales-volume variance arises solely because actual units manufactured and
sold were 200 less than the budgeted 3,000 units. The unfavorable flexible-budget variance of $12,800
in operating income is due primarily to the $8 increase in unit variable costs. This increase in unit
variable costs is only partially offset by the $2 increase in unit selling price and the $4,000 decrease in
fixed costs.

Answer - 5
The simple costing system reports the following:

Baked Milk & Fruit Frozen

Total
Goods Juice Products
Revenues $63,000 $68,500 $54,000 $185,500
Costs
Cost of goods sold 39,000 52,000 36,000 127,000
Store support (30% of
11,700 15,600 10,800 38,100
COGS)
Total costs 50,700 67,600 46,800 165,100
Operating income $12,300 $900 $7,200 $20,400
Operating income ÷
19.52% 1.31% 13.33% 11.00%
Revenues
1. The ABC system reports the following:
Baked Milk & Frozen
Total
Goods Fruit Juice Products
Revenues $63,000 $68,500 $54,000 $185,500
Costs
Cost of goods sold 39,000 52,000 36,000 127,000
Ordering ($104 × 21; 18; 13) 2,184 1,872 1,352 5,408

Delivery ($80 × 88; 32; 26) 7,040 2,560 2,080 11,680

Shelf-stocking ($22 × 185; 176; 38) 4,070 3,872 836 8,778

Customer support
($0.25 × 12,200; 16,400; 7,600) 3,050 4,100 1,900 9,050

Total costs 55,344 64,404 42,168 161,916

Operating income $7,656 $4,096 $11,832 $23,584

Operating income ÷ Revenues 12.15% 5.98% 21.91% 12.71%

These activity costs are based on the following:

Activity Cost Allocation Rate Baked Milk & Frozen
Goods Fruit Juice Products
Ordering $104 per purchase order 21 18
13
Delivery $80 per delivery 88 32
26
Shelf-stocking $22 per hour 185 176
38
Customer support $0.25 per item sold 12,200 16,400
7,600

2. The rankings of products in terms of relative profitability are:

Simple Costing System ABC System

1. Baked goods 19.52% Frozen products 21.91%

2. Frozen products 13.33% Baked goods 12.15%
3. Milk & fruit juice 1.31% Milk & fruit juice 5.98%
The percentage revenue, COGS, and activity costs for each product line are:
Baked Goods Milk & Fruit Juice Frozen Products
Total
Revenues 33.96% 36.93% 29.11% 100
COGS 30.71% 40.94% 28.35% 100
 Activity areas:
Ordering 40.38% 34.62% 25.00% 100
Delivery 60.27% 21.92% 17.81% 100
Shelf-stocking 46.37% 44.11% 9.52% 100
Customer support 33.70% 45.30% 20.99% 100

The baked goods line drops sizably in profitability when ABC is used. Although it constitutes
30.71% of COGS, it uses a higher percentage of total resources in each activity area,
especially the high-cost delivery activity area. In contrast, frozen products draw a much lower
percentage of total resources used in each activity area than its percentage of total COGS.
Hence, under ABC, frozen products are much more profitable.
Henderson Supermarkets may want to explore ways to increase sales of frozen
products. It may also want to explore price increases on baked goods.

Answer - 6

1.
Actual Quantity
Actual Price
 Budgeted Efficiency Flexible
May 2017 Results Variance Price Variance Budget
(1) (2) = (1)–(3) (3) (4) = (3) – (5) (5)
Lots 325 325
Direct
materials $31,525.00 $1,190.00 U $30,335.00a $3,132.50 U $27,202.50b
Direct labor $ 9,009.00 $ 71.50 U $ 8,937.50c $812.50 F $9,750.00d
Total price
variance $1,261.50 U
Total
efficiency
variance $2,320.00 U

a
6,500 yards × $4.65 per yard = $30,225
b
325 lots × 18 yards per lot × $4.65 per yard = $27,202.50
c
715 hours × $12.50 per hour = $8,937.50
d
3250 lots × 2.4 hours per lot × $12.50 per hour = $9,750.00

Total flexible-budget variance for both inputs = $1,261.50 U + $2,320.00 U = $3,581.50U

Total flexible-budget cost of direct materials and direct labor = $27,202.50 + $9,750.00 = $36,952.50
Total flexible-budget variance as % of total flexible-budget costs = $3,581.50 ÷ $36,952.50 = 9.69%

2. It is unclear whether the excess use of materials will continue, or whether it was indeed a result of
workers getting accustomed to the new fabric. The time required was indeed lower as predicted, but
not nearly enough to overcome the unfavorable direct material efficiency variance. However, direct
labor usage will probably decline even further as workers gain experience in working with the new
material. The unfavorable direct labor price variance is insignificant and unlikely to be related to the
change of material. Rugged Life may wish to continue to use the new material, especially in light of
its superior quality and feel, but it may want to keep the following points in mind:

 The new material costs substantially more than the old ($4.85 versus $4.65 per yard). Its
price is unlikely to come down even more within the coming year. Standard material price
should be reexamined and possibly changed.
 Rugged Life should continue to work to reduce direct materials and direct manufacturing
labor usage.