Initial Investment cost $15,500,000

Annual Operations and maintenance cost, first year $500,000

Annual Operations and maintenance cost $1,500,000
Clean up cost, for each of the projects final three years $500,000
Annual Revenue $6,600,000
Estimated Economic Life (years) 5
Discount Rate, Interest Rate 7%
Loan Rate 12%
Tax Rate 30%
Repayment on loan $2,149,925.42

A key element of the manufacturing business is steel production. The

concern here is that steel is very volatile in price and they need to
ensure that the estimates and profitability of the business is accurate. If
they produce 28,000 units of steel, consider the following:

Actual cost of materials ($ per unit) $74.46

Budgeted cost of materials ($ per unit) $68.00

Actual hourly cost for labour ($ per hour) $33.00

Budgeted hourly labour cost ($ per hour) $32.50

Budgeted labour hours (hours) 100,000

Actual labour hours (hours) 95,000

Budgeted total materials per unit (kg) 14.00

Actual total materials per unit (kg) 15.00
 Rev Outflow Netflow
Initial Investment -$15,500,000.00
1 $6,600,000.00 -$500,000.00 $6,100,000.00
2 $6,600,000.00 -$1,500,000.00 $5,100,000.00
3 $6,600,000.00 -$2,000,000.00 $4,600,000.00
4 $6,600,000.00 -$2,000,000.00 $4,600,000.00
5 $6,600,000.00 -$2,000,000.00 $4,600,000.00
NPV $5,199,496.73

Discount Rate 0.07

Revenue Opp/Maint
Year
Initial -15,500,000.00
1 6,600,000.00 -500,000.00 6,100,000.00
2 6,600,000.00 -1,500,000.00 5,100,000.00
3 6,600,000.00 -2,000,000.00 4,600,000.00
4 6,600,000.00 -2,000,000.00 4,600,000.00
5 6,600,000.00 -2,000,000.00 4,600,000.00
0.00
7
8
9
10

NPV 5,199,496.73

ANPV $5,890,668.04
Initial Investment cost $15,500,000.00
Annual Operations and maintenance cost, first year $500,000.00
Annual Operations and maintenance cost $1,500,000.00
Clean up cost, for each of the projects final three years $500,000.00
Annual Revenue $6,600,000.00
Estimated Economic Life (years) 5
Discount Rate, Interest Rate 7.00%

Initial Investment Don’t forget '-'

Rate of invest
Loan $7,750,000.00
Rate Loan 12%
Period 5
-$2,149,925.42
Tax Rate 30%

Ratio (Assest : Debt) (X : 1) 2.00

Initial Investment cost $15,500,000.00

Estimated Economic Life (years) 5
Discount Rate, Interest Rate 7.00%
Loan Rate 12.00%
Tax Rate 30.00%
Repayment on loan $2,149,925.42
Correct
Period Beg. Balance Payment Interest Principal End. Bal
a b c d = b -c e=a-d
1 7,750,000.00 -2,149,925.42 -930,000.00 -1,219,925.42 6,530,074.58
2 6,530,074.58 -2,149,925.42 -783,608.95 -1,366,316.47 5,163,758.10
3 5,163,758.10 -2,149,925.42 -619,650.97 -1,530,274.45 3,633,483.65
4 3,633,483.65 -2,149,925.42 -436,018.04 -1,713,907.38 1,919,576.27
5 1,919,576.27 -2,149,925.42 -230,349.15 -1,919,576.27 0.00
6
7
8
9
10
-$10,749,627.11 -$2,999,627.11 -$7,750,000.00
Correct

ANSWER $10,749,627.11 $2,999,627.11 $7,750,000.00 $0.00

INT Tax Shield PV Factor PV Tax Shield
f= c* tax rate g = 1/(1+r)t h=f*g
-279,000.00 0.89 -249,107.14
-235,082.68 0.80 -187,406.48
-185,895.29 0.71 -132,316.60
-130,805.41 0.64 -83,129.20
-69,104.75 0.57 -39,211.89

-$899,888.13 -$691,171.31

$899,888.13 $0.00 $691,171.31

Actual cost of materials ($ per unit) 74.46 Actual
Budgeted cost of materials ($ per unit) 68.00 A
Ain x Ap
Actual hourly cost for labour ($ per hour) 33.00 Material
Budgeted hourly labour cost ($ per hour) 32.50 Qty 420,000.00
Price 74.46
Budgeted labour hours (hours) 100000.00 Total Material 31,273,200.00
Actual labour hours (hours) 95000.00
Labour
Budgeted total materials per unit (kg) 14.00 Qty 95,000.00
Actual total materials per unit (kg) 15.00 Price 33.00
Total Labour 3,135,000.00

A key element of the manufacturing business is steel

production. The concern here is that steel is very
volatile in price and they need to ensure that the
estimates and profitability of the business is accurate.
If they produce 28,000 units of steel, consider the
following:

Unit Produced 28,000.00

Example
Actual cost of materials ($ per unit) 74.46
Budgeted cost of materials ($ per unit) 64.27

Actual hourly cost for labour ($ per hour) 21.50

Budgeted hourly labour cost ($ per hour) 32.50

Budgeted labour hours (hours) 100,000.00

Actual labour hours (hours) 95,000.00

Budgeted total materials per unit (kg) 15.50

Actual total materials per unit (kg) 15.00

Unit Produced 25,000.00

Price Var Flexible Budget Eff Var Budget Total
A-B B B-C C Unfavourable
Ain x Bp Bin x Bp Favourable

420,000.00 392,000.00
68.00 68.00
28,560,000.00 26,656,000.00
-2,713,200.00 U -1,904,000.00 U -4,617,200.00 U

95,000.00 100,000.00
32.50 32.50
3,087,500.00 3,250,000.00
-47,500.00 U 162,500.00 F 115,000.00 F
Total Variance -4,502,200.00 U
U
F
 Question 1
Product A Product B
Units Produced 300,000 100,000
Selling Price per unit $80 $150

Manufacturing Details
Number of Production Runs 4 5
Number of Hours Per SetUp 15 5
Number of Setup Hours by Product 60 25

Raw Materials
Number of Components Per Unit 12 7
Cost Per Component $1.50 $3.50
Raw Materials cost per unit $18.00 $24.50

Direct Labour Hours per Unit 0.05 0.25

Direct Labour Cost / hour $65 $60
Direct Labour $ per Unit $3.25 $15.00

Machine Time Hours per Unit 0.25 0.66

Overhead Costs
Setup Labour
Machine Running Costs
Purchasing Dept Costs
Engineering Dept Costs

ABC Costing A B C

#Set ups per product 60 25 125

Allocate Set up Labour $ 51,428.57 $ 21,428.57 $ 107,142.86

Machine time per product (allocation driver 75000.00 66000.00 25000.00

Units 300000.00 100000.00 50000.00
Machine hours per unit 0.25 0.66 0.50

Allocate Machine Running Cost $ 790,662.65 $ 695,783.13 $ 263,554.22

#Compt by product 3600000 700000 450000

Units 300,000 100,000 50,000
# of comp 12 7 9
Allocate Purchasing Cost $ 341,052.63 $ 66,315.79 $ 42,631.58

# units produced 300,000 100,000 50,000

Allocated Eng Dpt Cost $ 433,333.33 $ 144,444.44 $ 72,222.22

Allocated OH $1,616,477.18 $ 927,971.93 $ 485,550.88

Allocated OH pu $ 5.39 $ 9.28 $ 9.71

Cost per unit
Material $ 18.00 $ 24.50 $ 31.50
Labour $ 3.25 $ 15.00 $ 7.00
OH $ 5.39 $ 9.28 $ 9.71
Cost by Product $ 26.64 $ 48.78 $ 48.21

Selling Price $ 80.00 $ 150.00 $ 145.00

Cost $ 26.64 $ 48.78 $ 48.21

CM $ 53.36 $ 101.22 $ 96.79

CM % 66.70% 67.48% 66.75%

$ 0.67 $ 0.67 $ 0.67

 Product C
50,000
$145

5
25
125

9
$3.50
$31.50

0.10
$70
$7.00

0.5

Overhead
$180,000
$1,750,000
$450,000
$650,000
$3,030,000

Total

210 Driver 1

$ 180,000.00 0
correct
166000.00
450000.00
1.41 Driver 2

$ 1,750,000.00 0
correct
4750000
450000
28
Driver 3
 Driver 3

$ 450,000.00 0
correct
450000.00
Driver 4
$ 650,000.00 0

$ 3,029,999.99 0 Total Driver

$ 24.38

`
$ 74.00
$ 25.25 Cost
$ 24.38
$ 123.63

$ 375.00
$ 123.63
Contribution Margin
$ 251.37

67.03%

67%
Steps

1 Write down OH cost in bottom right box of each driver (1-4

2 Transfer specific Allocation drivers from given information

3 Total each Allocation driver from Products A,B & C (30+50+105 = 185)
4 For each allocated cost repeat Allocated Driver*OH Cost/Total Allocated Driver
5 Grey Box Represents difference between answer and actual (should be 0), if ou
6 Repeat for drivers 2-4

7 DO NOT ROUND until all Overhead Allocations have been completed (only to 2 d.p.)
8 For any Variable Costs (i.e. per unit) multiply variable by # of units and write at
9 Sum OH cost for total OH cost
10 Sum each allocated overhead. These added together should equal your overhe
11 Determine allocated OH per unit by dividing sums by # of units
 Transfer costs
12
13 Sum cost with allocated OH per unit to work out total cost per unit
14 Transfer selling price

15 Contribution = Selling Price-Cost

16 CM% = Contribution Margin / Selling Price

17 Answer should be whole number answer percentage in the test

ABC
0+105 = 185)
Total Allocated Driver
ual (should be 0), if out by 1 cent, allocate to lowest value

mpleted (only to 2 d.p.)

# of units and write at top. This will be your new allocation driver

uld equal your overhead cost

Labour Costs A B C Total
# of units $ 300,000.00 $ 100,000.00 $ 50,000.00 $ 450,000.00
sellings costs $ 80.00 $ 150.00 $ 145.00

Direct Labour costs per unit $ 3.25 $ 15.00 $ 7.00

Allocation Driver $ 975,000.00 $ 1,500,000.00 $ 350,000.00 $ 2,825,000.00
$ 3,030,000.00

Costs p/u
Raw Materials Cost per unit $ 18.00 $ 24.50 $ 31.50
Direct Labour cost p/u $ 3.25 $ 15.00 $ 7.00
OH based on Labour costs $ 3.49 $ 16.09 $ 7.51
Costs by Product $ 24.74 $ 55.59 $ 46.01

Selling price $ 80.00 $ 150.00 $ 145.00

cost $ 24.74 $ 55.59 $ 46.01
CM $ 55.26 $ 94.41 $ 98.99
CM% 69% 63% 68%

Machine Time costs: A B C Total

# of units $ 300,000.00 $ 100,000.00 $ 50,000.00
sellings costs $ 80.00 $ 150.00 $ 145.00

Machine Time hours costs per unit $ 0.25 $ 0.66 $ 0.50

Allocation Driver $ 75,000.00 $ 66,000.00 $ 25,000.00 $ 166,000.00
$ 3,030,000.00

Costs p/u
Raw Materials Cost per unit $ 18.00 $ 24.50 $ 31.50
Direct Labour cost p/u $ 3.25 $ 15.00 $ 7.00
OH based on Machine hours 4.5625 12.045 9.125
Costs by Product $ 25.81 $ 51.55 $ 47.63

Selling price $ 80.00 $ 150.00 $ 145.00

cost $ 25.81 $ 51.55 $ 47.63
CM $ 54.19 $ 98.46 $ 97.38
CM% 68% 66% 67%
$ 1.07 MAKE SURE TO CHOP THE VALUE HERE!
1.0725

$3,780,305.76

$ 18.25 MAKE SURE TO CHOP THE VALUE HERE!

Discount Rate 0.08
Compounding 0.08
Project A
Year CapEx Revenue Op&Main FCF NPV
0 -$40,000,000 -$40,000,000 $21,001,106.94
1 $2,500,000 $750,000 $1,750,000
2 $2,700,000 $750,000 $1,950,000 IRR
3 $2,916,000 $750,000 $2,166,000 11%
4 $3,149,280 $750,000 $2,399,280
5 $3,401,222 $750,000 $2,651,222
6 $3,673,320 $750,000 $2,923,320
7 $3,967,186 $750,000 $3,217,186
8 $4,284,561 $750,000 $3,534,561
9 $4,627,326 $750,000 $3,877,326
10 $4,997,512 $750,000 $4,247,512
11 $5,397,312 $750,000 $4,647,312
12 $5,829,097 $750,000 $5,079,097
13 $6,295,425 $750,000 $5,545,425
14 $6,799,059 $750,000 $6,049,059
15 $7,342,984 $750,000 $6,592,984
16 $7,930,423 $750,000 $7,180,423
17 $8,564,857 $750,000 $7,814,857
18 $9,250,045 $750,000 $8,500,045
19 $9,990,049 $750,000 $9,240,049
20 $10,789,253 $750,000 $10,039,253
21 $11,652,393 $750,000 $10,902,393
22 $12,584,584 $750,000 $11,834,584
23 $13,591,351 $750,000 $12,841,351
24 $14,678,659 $750,000 $13,928,659
25 $15,852,952 $750,000 $15,102,952
26 $17,121,188 $750,000 $16,371,188
27 $18,490,883 $750,000 $17,740,883
28 $19,970,154 $750,000 $19,220,154
29 $21,567,766 $750,000 $20,817,766
30 $23,293,187 $750,000 $22,543,187
Discount Rate 0.08
Compounding 0.08
Project B
Year CapEx Revenue Op&Main FCF NPV
0 -$25,000,000 -$25,000,000 $16,975,689.62
1 $2,500,000 $500,000 $2,000,000
2 $2,700,000 $500,000 $2,200,000 IRR
3 $2,916,000 $500,000 $2,416,000 12%
4 $3,149,280 $500,000 $2,649,280
5 $3,401,222 $500,000 $2,901,222
6 $3,673,320 $500,000 $3,173,320
7 $3,967,186 $500,000 $3,467,186
8 $4,284,561 $500,000 $3,784,561
9 $4,627,326 $500,000 $4,127,326
10 $4,997,512 $500,000 $4,497,512
11 $5,397,312 $500,000 $4,897,312
12 $5,829,097 $500,000 $5,329,097
13 $6,295,425 $500,000 $5,795,425
14 $6,799,059 $500,000 $6,299,059
15 -$65,000,000 $7,342,984 $500,000 -$58,157,016
16 $7,930,423 $1,000,000 $6,930,423
17 $8,564,857 $1,000,000 $7,564,857
18 $9,250,045 $1,000,000 $8,250,045
19 $9,990,049 $1,000,000 $8,990,049
20 $10,789,253 $1,000,000 $9,789,253
21 $11,652,393 $1,000,000 $10,652,393
22 $12,584,584 $1,000,000 $11,584,584
23 $13,591,351 $1,000,000 $12,591,351
24 $14,678,659 $1,000,000 $13,678,659
25 $15,852,952 $1,000,000 $14,852,952
26 $17,121,188 $1,000,000 $16,121,188
27 $18,490,883 $1,000,000 $17,490,883
28 $19,970,154 $1,000,000 $18,970,154
29 $21,567,766 $1,000,000 $20,567,766
30 $23,293,187 $1,000,000 $22,293,187
Rate of Invest
Loan $7,750,000
Rate Loan 12%
Period 5 Beg. Balance Payment Interest
-2149925.42 a b c
1 $7,750,000.00 $2,149,925.42 $930,000.00
Tax Rate 30% 2 $6,530,074.58 $2,149,925.42 $783,608.95
3 $5,163,758.10 $2,149,925.42 $619,650.97
4 $3,633,483.65 $2,149,925.42 $436,018.04
5 $1,919,576.27 $2,149,925.42 $230,349.15
$10,749,627.11 $2,999,627.11
Correct

Correct
Principal End.Bal Int Tax shield PV Factor PV Tax Shield
d=b-c e=a-d f=c*tax rate g = 1/(1+r)t h=f*g
$1,219,925.42 $6,530,074.58 $279,000.00 $0.89 $249,107.14
$1,366,316.47 $5,163,758.10 $235,082.68 $0.80 $187,406.48
$1,530,274.45 $3,633,483.65 $185,895.29 $0.71 $132,316.60
$1,713,907.38 $1,919,576.27 $130,805.41 $0.64 $83,129.20
$1,919,576.27 $0.00 $69,104.75 $0.57 $39,211.89
$7,750,000.00 $899,888.13 $691,171.31
ABC costing A B C TOTAL

# Setup hours per product 45 45 150 240 230.20833

allocate setup Labour 10359.38 10359.38 34531.25 55,250 55250.01

Machine time by product 25000 19800 25000 69800

units 100,000 30,000 50000
Machine hour per unit 0.25 0.66 0.5
Allocate machine running cost 268624.64 212750.72 268624.64 750000 750000
$268,624.64 $212,750.72 $268,624.64 900000 750000

Comptonent by product 600000 210000 450000 1260000

units 100,000 30,000 50,000 3.6
number of components per uni 6 7 9
Allocate purchasing cost 166666.67 58333.33 125000 350,000 350000
Allocate purchasing cost $166,666.67 $58,333.33 $125,000.00 350000

#units produced 100,000 30,000 50,000 180,000

Allocated Eng Dept Cost $ 222,222.22 $ 66,666.67 $ 111,111.11 400000 400000
.
Allocated OH 667,872.91 348,110.10 539,267.00 1555250.009
Allocated OH per unit 6.68 11.6 10.79 29.07

Cost Per Unit

Material 30 70 36
labour 9.5 23.75 16
OH 6.68 11.6 10.79
Cost by Product 46.18 105.35 62.79
Selling price 80 150 145
cost 46.18 105.35 62.79
CM 33.82 44.65 82.21
CM% 42% 30% 57%

summary: A B C differece:
Labour 27% 15% 33% 1%
Materials 26% 29% 13%
ABC Costing 42% 30% 57%

therefore ABC Costing is better with accuracy and more expensive

between labour anc materials costing, materials is better because there is less spread differenc
 check if the values are equal to one another

must change values

may have to change if rounding occurs

rounded values

answer

rounding:
1. if two values are the same, round the different one
2. round the lowest value one

Do it urself and see if it equals the total overhead cost

-14% 20% 7%

ecause there is less spread difference

nd the different one

variance question
advisdory question
ABC costing question