4
Managerial Accounting
Question A
Objective: To describe how products flow through various departments and how costs flow through accounts.
Any product must always flow through any two or more departments, and the costs must also be accumulated in any manufacturing operation of a given company using a process costing. Generally, it is easy to identify the stage when materials enter production (Jiambalvo, 2016) . For instance, chemicals are added at the start of the process in the mixing departments in the chemical production company. Determining the exact time that one needs to add labor and overhead to the process is more complicated. That is because labor and overhead are often grouped and known as conversion costs. Such costs are assumed to be evenly added throughout the process.
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On the other hand, the product cost accumulated in the process costing system is the exact cost considered in job-order costing. These include manufacturing overhead, direct labor, and direct material. Besides, the processing department may have a transferred-in cost which is the cost that the company incurs within a particular process department transferred to the following process department (Jiambalvo, 2016) . For example, the cost incurred in the mixing department of a chemical manufacturing company is transferred to the department of packaging. That means the cost that is transferred in from mixing now becomes a material cost added to the packaging. However, the cost is referred to as the transferred-in cost.
Question B
PROBLEM 3-4. Production Cost Report
Lancer Audio Company
Production cost report
August
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Units in beg WIP (100% material, 70% labor and overhead) 7,000
Unit started in August 34,000
Unit to account for 41,000
Units completed and transferred to packaging 0.0000
Units in ending WIP (100% material, 50% conversion costs) 8,000
Units accounted for 8,000
Cost per equivalent unit calculation
Material Labor Manufacturing overhead Total
Cost
Beginning WIP ($) 6,000 2,000 2,500 10,500
Cost added ($) 26,390 12,430 14,520 53,340
Total ($) 32,390 14,430 17,020 63840
Question C
Learning objective 3: Operating leverage
Operating leverage is a concept that relates to the level of fixed versus variable cost in the cost structure of a firm. The firms that may relatively have higher fixed costs are considered to be having operating leverage. For instance, a specific firm may direct its investments in an automated production system that uses robotics (Jiambalvo, 2016) . Therefore, it reduces labor cost, which is a variable cost, while increasing its fixed cost. The operating leverage level is essential because it affects the change in the profit whenever there is a change in sales. Firms with high operating leverage are considered riskier since they tend to have more significant profit fluctuations whenever there are fluctuations in sales.
However, if the company management is confident that their company's sales will increase, in that case, they will need higher operating leverage since the expected large positive fluctuation in sales will result in a sizeable positive change in profit. It is, however, unfortunate that many of the company managements do not have confidence that the sales of their firms will only have an increase. Due to the fixed cost in the cost structure, whenever there is an increase in sales by ten percent, the profit will also have an increase of more than ten percent (Jiambalvo, 2016) . The only time that one may expect an increase in profit by the same percentage as sales are when all the cost are variable. In that case, profit will vary in proportion to sales.
Question D
PROBLEM 4-2. Account Analysis
Fixed and variable cost
Fixed cost per month ($)
Supplies 2,500
Rent 2,300
Supervisor salary 5,600
Advertisement 2,600
Administrative costs 15,000
Total fixed cost $ 28,000
Variable cost per DVD player ($)
Total variable cost = total output quantity X variable cost per unit
Total variable cost = Total cost – Fixed cost
= $126,930 – 28,000
= $98,930
98930 = 150 X Variable cost per unit
Variable cost per unit = 98930/150
659.53
Total cost for august
Total cost = Fixed cost + Variable cost
= 28,000 + (659.53 X 175)
= 28,000 + 115418
= $143,418
Contribution margin per DVD player
Contribution Margin = Selling price per DVD player − Variable Costs per DVD player
= 1,300 - 659.53
= 640.47
Total profit if 175 units are produced and sold
Total profit = Contribution margin X number of units
= 640.47 X 175
= $112,082.25
The new variable cost = 98930/120
= 824.42
New contribution margin = 1,050 – 824.42
= 225.58
Total new profit for the company = new contribution margin X 120 DVD players
= 225.58 X 120
= $ 27,068.6
Compared to the original contribution margin, the total profit for selling 120 DVD players would have been;
Total profit = 640.47 X 120
= $76,856.4
That means the company’s profit would severely decrease if it accepts the deal.
References
Jiambalvo, J. (2016). Managerial accounting (pp. 89-162). Wiley.
