Problem Solving Accounting: How to Solve Accounting Problems

Question 1 

(a)Calculate the total cost and the cost per unit for the XYX company order. 

Solution 

Department A- 

Direct materials = £29440, Direct Labor = £6800, Manufacturing Overhead= £7360 

Department B- 

Direct Materials= £3920, Direct Labor= £2560, Manufacturing Overhead= £4800 

Totals 

Direct Materials= Department A+ Department B= £29440+£3920 = £33360 

Direct Labor = Department A+ Department B= £6800+£2560 = £9360 

Manufacturing Overhead = Department A+ Department B= £7360+£4800 = £12160 

Therefore, Total Cost = Direct Materials + Direct Labor + Manufacturing Overheads 

Total Cost = £33360+£9360+£12160 = £54880 

Cost per Unit = Total Cost/Units Produced = 54880/4000 = 13.72 

(b) Was the selling price adequate? List the assumptions and/or computations upon which you based your answer. 

Solution 

The selling price can be considered adequate. Each unit sells for £14 and every cost is £13.72. The assumption is that the cost incurred is less than the selling price. Hence, very adequate selling price realized. 

(c) What suggestions would you make to Rita Ltd.’s management concerning the pricing of future orders? 

Solution 

Changes should be made as charges on cost incurred can be effective when it is a fixed percentage chargeable. A certain percentage can also be pegged on the cost to achieve an effective selling price. From the calculations above, direct labour hours used for either departments can work effectively and manufacturing overhead can be assigned accordingly. 

Question 2 

(a) Calculate total annual contribution and per unit for the year ending 31st December 2021. 

Solution 

Given the Sales Price as £25.00, Direct Expenses £3.00, Direct Labor £5.00, and Direct Materials £10.50. Contribution per Unit can be calculated as follows: 

Sales Price- (Direct Expenses+ Direct Labor+ Direct Materials) = £25.00-(£3.00+£5.00+£10.50) 

Contribution per Unit= £25.00-(£3.00+£5.00+£10.50) 

Contribution per Unit= £6.50 

Total Annual Contribution = £6.50 x £120,000 = £780,000 

(b) Calculate the break-even point (in unit terms and in sales revenue terms). 

Solution 

In Unit Terms, 

Break-even point = Fixed Costs Available Divided by Contribution per Unit 

Break-even point = (276000+192000)/ £6.50 

Break-even point = 72000 units 

In Sales Revenue Terms, 

To get the Contribution Margin Ratio = Contribution per Unit Divided by Unit Selling Price 

Contribution Margin Ratio = £6.50/£25.00 = 0.26 

Therefore, 

Break-even Point = Fixed Costs Divided by Contribution Margin Ratio 

Break-even Point = (276000+192000)/ 0.26 = £1,800,000 

(c) Recent international events have impacted on the supply of the direct materials. It is felt that these events will cause a 20% rise in direct material prices and Mr. Williams would like to know the potential effect of this rise on the breakeven point. Compute the adjusted breakeven point, and discuss the results. [6] 

Solution 

Adjusted Direct Materials = 1.20 x £10.50 = £12.60 

Given the Sales Price as £25.00, Direct Expenses £3.00, Direct Labor £5.00, and the Adjusted Direct Materials £12.60. Contribution per Unit can be calculated as follows: 

Sales Price- (Direct Expenses+ Direct Labor+ Direct Materials) = £25.00-(£3.00+£5.00+£12.60) 

Contribution per Unit= £25.00-(£3.00+£5.00+£12.60) 

Contribution per Unit= £4.40 

In Unit Terms, 

Adjusted Break-even point = Fixed Costs Available Divided by Contribution per Unit 

Adjusted Break-even point = (276000+192000)/ £4.40 

Adjusted Break-even point = 106364 units 

In Sales Revenue Terms, 

To get the New Contribution Margin Ratio = Contribution per Unit Divided by Unit Selling Price 

Adjusted Contribution Margin Ratio = £4.40/£25.00 = 0.176 

Therefore, 

Adjusted Break-even Point = Fixed Costs Divided by Contribution Margin Ratio 

Adjusted Break-even Point = (276000+192000)/ 0.176 = £2,659,090.91 

Due to the rise in the Materials Cost, the needed Break-even Point in both Sales Revenue and in Units shot up gradually. It is also noteworthy that the company will be profitable since the sales units (120000 units) are greater than the Break-even Point Units. The company needs to consider sales price increases or sales units to have similar profits prior to Material Cost increases. 

Question 3 

(a) Calculate the monthly shortfall in machine hours. [4] 

Solution 

	Product T	Product R	Product S
Machining Time per Unit	75	40	54
Maximum Monthly Demand	3000	9000	6000
Total Machining Time	(75x3000)=225,000 minutes	(40x9000) = 360,000 minutes	(54x6000) = 324,000 minutes
Hours in Machining	225000/60 = 3,750 hours	360000/60 = 6,000 hours	324,000/60 = 5,400 hours

Total Machining Time = 3,750+6,000+5,400 = 15,150 hours 

Available Machining Time = 10,500 hours 

Monthly Shortfall= 15,150 hours - 10,500 hours = 4,650 hours. 

(b) What is the maximum contribution for Buttercup Ltd. for the Month? [6] 

Solution 

	Product T	Product R	Product S
Unit Machining Minute  (Contribution)	0.28	0.30	0.33
Machining Time	75	40	54
Contribution per Unit	21	12	18
Variable Cost per Unit	63	48	57
Selling Price per Unit	84	60	75
Ranking	3	2	1
Ranking based Machine Hours	0	(10500-5400)=5,100	(6000x54/60)= 5,400
Units Produced	0	(5100x60/40)= 7,650	(5400x60/54)= 6,000
Individual Contribution	0	12	18
Total Contribution	0	91,800	108,000

Maximum Contribution = 108,000+91,800+0 = 199,800 

Question 4 

Calculate the labour rate and efficiency variances for the month of December and give a possible cause of each variance. [6] 

Solution 

	Standard Rate	Actual Rate
Standard Hours/Actual Hours	(15400x4.5)= 69,300 hours	70,840 hours
Standard Rate/Actual Rate	8.4	8.65
Total	69300x8.4 = 582,120	70840x8.65 = 612,766

Labour rate variance = Actual Hours x (Standard Rate-Actual Rate) 

Labour rate variance = 70840 x (8.4-8.65) = -17710 (Possible cause- Due to rising rate per hour, 0.25 for hours worked). 

Labour efficiency variance = Standard Rate x (Standard hours – Actual hours) 

Labour efficiency variance = 8.4 x (69300-70840) = -12936 (Possible cause- Due to the rising labor hours to produce 15400 units). 

Question 5 

You are required to prepare a revised cost estimate using a relevant cost approach. Cleary explain your rationale for each cost. State whether you consider that the revised calculations can provide support for a quotation below £100,000. [12] 

Solution 

Cost Estimate 

Supervisory	£1000
Subcontract Work	£20,000
Depreciation	£0
Cutting Press, £500- 4 weeks	£2,000
Skilled Staff	£12,000
Direct Material to be purchased	£12,000
Direct Material Y, £130- 100 units	£13,000
Direct Material X	£20,000
Administrative Cost	£0
Estimating Department	£0
Total	£80,000

Since the total cost is £80,000, the quotation range can be between £80,000-£100,000. 

Cost Element	State or Nature	Rationale
Supervisory	Relevant	Irrespective of the contract, normal salary is still observed.
Subcontract Work	Relevant	Relevant cost due to the costs being specific.
Depreciation	Irrelevant	Irrelevant cost due to decision making.
Cutting Press	Relevant	Hire charge losses is considered relevant cost due to revenue loss being the company’s costs.
Skilled Staff	Relevant	Additional salary for workers will be relevant cost due to other workers considered permanent staffs irrespective of the contract.
Direct Material Y	Relevant	Current replacement cost is considered relevant costs because often materials are used, hence, purchased when needed.
Direct Material X	Relevant	Relevant cost includes net resale value due to no current use.
Administrative Cost	Irrelevant	Irrelevant cost included allocated fixed overhead.
Estimating Department	Irrelevant	Irrelevant cost in this case is the past cost due to irreversibility.

(b) Comment on the use of relevant costing: 

(i) For decision making [4] 

(ii) For cost control [4] 

Solution 

(i) For decision making [4] 

Relevant cost is used in different decision-making processes in any organization. No decisions can be made by checking total costs alone due to some costs being considered fixed which will be incurred. Other costs are sunk costs as well. In the given scenario in the previous question, administrative costs are considered allocated costs and not relevant due to how they are incurred. (ii) For cost control [4] 

Relevant cost helps in comprehending retirement and relevancy in any organization. If, say, any cost is not needed, it can be scraped off by the organization or even used in another platform to earn additional revenue. For instance, if labor is not fully utilized, labor in a different department can be used. Relevant cost aids in doing right and making effective decisions. For instance, in buy or make a decision, any firm might purchase some component from another firm and it relocates to in-house production given reduced production cost. If production is higher, then an organization cuts its costs to save.