373 in-class 20140516

Inputs Static Analysis OutputVC1 80 Case 1 Case 2 0VC2 50 TPD mined 180 220 1TVC 130 Total tons 4500 5500 2Days/mo 25 TVC $ 585,000 $ 715,000 3

Fixed Costs FC $ 300,000 $ 450,000 4TPD FC TC $ 885,000 $ 1,165,000 5

100 150000 Unit Cost $ 196.67 $ 211.82 6200 300000 7300 450000 8

Output Levels (TPD) 9Case 1 180 10Case 2 220 11

Graphing Costs 12Increments 1 13

141516171819202122232425262728293031323334353637383940414243444546

A7

01234: Tons Per Day

B7

01234: Per Month

474849505152535455565758596061626364656667686970717273747576777879808182838485868788899091929394

9596979899

100101102103104105106107108109110111112113114115116117118119120121122123124125126127128129130131132133134135136137138139140141142

143144145146147148149150151152153154155156157158159160161162163164165166167168169170171172173174175176177178179180181182183184185186187188189190

191192193194195196197198199200201202203204205206207208209210211212213214215216217218219220221222223224225226227228229230231232233234235236237238

239240241242243244245246247248249250251252253254255256257258259260261262263264265266267268269270271272273274275276277278279280281282283284285286

287288289290291292293294295296297298299300

Vc FC TC VC/U FC/U TC/U0 150000 150000 #DIV/0! #DIV/0! #DIV/0!

130 150000 150130 130 150,000 150,130260 150000 150260 130 75,000 75,130390 150000 150390 130 50,000 50,130520 150000 150520 130 37,500 37,630650 150000 150650 130 30,000 30,130780 150000 150780 130 25,000 25,130910 150000 150910 130 21,429 21,559

1040 150000 151040 130 18,750 18,8801170 150000 151170 130 16,667 16,7971300 150000 151300 130 15,000 15,1301430 150000 151430 130 13,636 13,7661560 150000 151560 130 12,500 12,6301690 150000 151690 130 11,538 11,6681820 150000 151820 130 10,714 10,8441950 150000 151950 130 10,000 10,1302080 150000 152080 130 9,375 9,5052210 150000 152210 130 8,824 8,9542340 150000 152340 130 8,333 8,4632470 150000 152470 130 7,895 8,0252600 150000 152600 130 7,500 7,6302730 150000 152730 130 7,143 7,2732860 150000 152860 130 6,818 6,9482990 150000 152990 130 6,522 6,6523120 150000 153120 130 6,250 6,3803250 150000 153250 130 6,000 6,1303380 150000 153380 130 5,769 5,8993510 150000 153510 130 5,556 5,6863640 150000 153640 130 5,357 5,4873770 150000 153770 130 5,172 5,3023900 150000 153900 130 5,000 5,1304030 150000 154030 130 4,839 4,9694160 150000 154160 130 4,688 4,8184290 150000 154290 130 4,545 4,6754420 150000 154420 130 4,412 4,5424550 150000 154550 130 4,286 4,4164680 150000 154680 130 4,167 4,2974810 150000 154810 130 4,054 4,1844940 150000 154940 130 3,947 4,0775070 150000 155070 130 3,846 3,9765200 150000 155200 130 3,750 3,8805330 150000 155330 130 3,659 3,7895460 150000 155460 130 3,571 3,7015590 150000 155590 130 3,488 3,6185720 150000 155720 130 3,409 3,5395850 150000 155850 130 3,333 3,4635980 150000 155980 130 3,261 3,391

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VcFCTC

6110 150000 156110 130 3,191 3,3216240 150000 156240 130 3,125 3,2556370 150000 156370 130 3,061 3,1916500 150000 156500 130 3,000 3,1306630 150000 156630 130 2,941 3,0716760 150000 156760 130 2,885 3,0156890 150000 156890 130 2,830 2,9607020 150000 157020 130 2,778 2,9087150 150000 157150 130 2,727 2,8577280 150000 157280 130 2,679 2,8097410 150000 157410 130 2,632 2,7627540 150000 157540 130 2,586 2,7167670 150000 157670 130 2,542 2,6727800 150000 157800 130 2,500 2,6307930 150000 157930 130 2,459 2,5898060 150000 158060 130 2,419 2,5498190 150000 158190 130 2,381 2,5118320 150000 158320 130 2,344 2,4748450 150000 158450 130 2,308 2,4388580 150000 158580 130 2,273 2,4038710 150000 158710 130 2,239 2,3698840 150000 158840 130 2,206 2,3368970 150000 158970 130 2,174 2,3049100 150000 159100 130 2,143 2,2739230 150000 159230 130 2,113 2,2439360 150000 159360 130 2,083 2,2139490 150000 159490 130 2,055 2,1859620 150000 159620 130 2,027 2,1579750 150000 159750 130 2,000 2,1309880 150000 159880 130 1,974 2,104

10010 150000 160010 130 1,948 2,07810140 150000 160140 130 1,923 2,05310270 150000 160270 130 1,899 2,02910400 150000 160400 130 1,875 2,00510530 150000 160530 130 1,852 1,98210660 150000 160660 130 1,829 1,95910790 150000 160790 130 1,807 1,93710920 150000 160920 130 1,786 1,91611050 150000 161050 130 1,765 1,89511180 150000 161180 130 1,744 1,87411310 150000 161310 130 1,724 1,85411440 150000 161440 130 1,705 1,83511570 150000 161570 130 1,685 1,81511700 150000 161700 130 1,667 1,79711830 150000 161830 130 1,648 1,77811960 150000 161960 130 1,630 1,76012090 150000 162090 130 1,613 1,74312220 150000 162220 130 1,596 1,726

12350 150000 162350 130 1,579 1,70912480 150000 162480 130 1,563 1,69312610 150000 162610 130 1,546 1,67612740 150000 162740 130 1,531 1,66112870 150000 162870 130 1,515 1,64513000 150000 163000 130 1,500 1,63013130 300000 313130 130 2,970 3,10013260 300000 313260 130 2,941 3,07113390 300000 313390 130 2,913 3,04313520 300000 313520 130 2,885 3,01513650 300000 313650 130 2,857 2,98713780 300000 313780 130 2,830 2,96013910 300000 313910 130 2,804 2,93414040 300000 314040 130 2,778 2,90814170 300000 314170 130 2,752 2,88214300 300000 314300 130 2,727 2,85714430 300000 314430 130 2,703 2,83314560 300000 314560 130 2,679 2,80914690 300000 314690 130 2,655 2,78514820 300000 314820 130 2,632 2,76214950 300000 314950 130 2,609 2,73915080 300000 315080 130 2,586 2,71615210 300000 315210 130 2,564 2,69415340 300000 315340 130 2,542 2,67215470 300000 315470 130 2,521 2,65115600 300000 315600 130 2,500 2,63015730 300000 315730 130 2,479 2,60915860 300000 315860 130 2,459 2,58915990 300000 315990 130 2,439 2,56916120 300000 316120 130 2,419 2,54916250 300000 316250 130 2,400 2,53016380 300000 316380 130 2,381 2,51116510 300000 316510 130 2,362 2,49216640 300000 316640 130 2,344 2,47416770 300000 316770 130 2,326 2,45616900 300000 316900 130 2,308 2,43817030 300000 317030 130 2,290 2,42017160 300000 317160 130 2,273 2,40317290 300000 317290 130 2,256 2,38617420 300000 317420 130 2,239 2,36917550 300000 317550 130 2,222 2,35217680 300000 317680 130 2,206 2,33617810 300000 317810 130 2,190 2,32017940 300000 317940 130 2,174 2,30418070 300000 318070 130 2,158 2,28818200 300000 318200 130 2,143 2,27318330 300000 318330 130 2,128 2,25818460 300000 318460 130 2,113 2,243

18590 300000 318590 130 2,098 2,22818720 300000 318720 130 2,083 2,21318850 300000 318850 130 2,069 2,19918980 300000 318980 130 2,055 2,18519110 300000 319110 130 2,041 2,17119240 300000 319240 130 2,027 2,15719370 300000 319370 130 2,013 2,14319500 300000 319500 130 2,000 2,13019630 300000 319630 130 1,987 2,11719760 300000 319760 130 1,974 2,10419890 300000 319890 130 1,961 2,09120020 300000 320020 130 1,948 2,07820150 300000 320150 130 1,935 2,06520280 300000 320280 130 1,923 2,05320410 300000 320410 130 1,911 2,04120540 300000 320540 130 1,899 2,02920670 300000 320670 130 1,887 2,01720800 300000 320800 130 1,875 2,00520930 300000 320930 130 1,863 1,99321060 300000 321060 130 1,852 1,98221190 300000 321190 130 1,840 1,97021320 300000 321320 130 1,829 1,95921450 300000 321450 130 1,818 1,94821580 300000 321580 130 1,807 1,93721710 300000 321710 130 1,796 1,92621840 300000 321840 130 1,786 1,91621970 300000 321970 130 1,775 1,90522100 300000 322100 130 1,765 1,89522230 300000 322230 130 1,754 1,88422360 300000 322360 130 1,744 1,87422490 300000 322490 130 1,734 1,86422620 300000 322620 130 1,724 1,85422750 300000 322750 130 1,714 1,84422880 300000 322880 130 1,705 1,83523010 300000 323010 130 1,695 1,82523140 300000 323140 130 1,685 1,81523270 300000 323270 130 1,676 1,80623400 300000 323400 130 1,667 1,79723530 300000 323530 130 1,657 1,78723660 300000 323660 130 1,648 1,77823790 300000 323790 130 1,639 1,76923920 300000 323920 130 1,630 1,76024050 300000 324050 130 1,622 1,75224180 300000 324180 130 1,613 1,74324310 300000 324310 130 1,604 1,73424440 300000 324440 130 1,596 1,72624570 300000 324570 130 1,587 1,71724700 300000 324700 130 1,579 1,709

24830 300000 324830 130 1,571 1,70124960 300000 324960 130 1,563 1,69325090 300000 325090 130 1,554 1,68425220 300000 325220 130 1,546 1,67625350 300000 325350 130 1,538 1,66825480 300000 325480 130 1,531 1,66125610 300000 325610 130 1,523 1,65325740 300000 325740 130 1,515 1,64525870 300000 325870 130 1,508 1,63826000 300000 326000 130 1,500 1,63026130 450000 476130 130 2,239 2,36926260 450000 476260 130 2,228 2,35826390 450000 476390 130 2,217 2,34726520 450000 476520 130 2,206 2,33626650 450000 476650 130 2,195 2,32526780 450000 476780 130 2,184 2,31426910 450000 476910 130 2,174 2,30427040 450000 477040 130 2,163 2,29327170 450000 477170 130 2,153 2,28327300 450000 477300 130 2,143 2,27327430 450000 477430 130 2,133 2,26327560 450000 477560 130 2,123 2,25327690 450000 477690 130 2,113 2,24327820 450000 477820 130 2,103 2,23327950 450000 477950 130 2,093 2,22328080 450000 478080 130 2,083 2,21328210 450000 478210 130 2,074 2,20428340 450000 478340 130 2,064 2,19428470 450000 478470 130 2,055 2,18528600 450000 478600 130 2,045 2,17528730 450000 478730 130 2,036 2,16628860 450000 478860 130 2,027 2,15728990 450000 478990 130 2,018 2,14829120 450000 479120 130 2,009 2,13929250 450000 479250 130 2,000 2,13029380 450000 479380 130 1,991 2,12129510 450000 479510 130 1,982 2,11229640 450000 479640 130 1,974 2,10429770 450000 479770 130 1,965 2,09529900 450000 479900 130 1,957 2,08730030 450000 480030 130 1,948 2,07830160 450000 480160 130 1,940 2,07030290 450000 480290 130 1,931 2,06130420 450000 480420 130 1,923 2,05330550 450000 480550 130 1,915 2,04530680 450000 480680 130 1,907 2,03730810 450000 480810 130 1,899 2,02930940 450000 480940 130 1,891 2,021

31070 450000 481070 130 1,883 2,01331200 450000 481200 130 1,875 2,00531330 450000 481330 130 1,867 1,99731460 450000 481460 130 1,860 1,99031590 450000 481590 130 1,852 1,98231720 450000 481720 130 1,844 1,97431850 450000 481850 130 1,837 1,96731980 450000 481980 130 1,829 1,95932110 450000 482110 130 1,822 1,95232240 450000 482240 130 1,815 1,94532370 450000 482370 130 1,807 1,93732500 450000 482500 130 1,800 1,93032630 450000 482630 130 1,793 1,92332760 450000 482760 130 1,786 1,91632890 450000 482890 130 1,779 1,90933020 450000 483020 130 1,772 1,90233150 450000 483150 130 1,765 1,89533280 450000 483280 130 1,758 1,88833410 450000 483410 130 1,751 1,88133540 450000 483540 130 1,744 1,87433670 450000 483670 130 1,737 1,86733800 450000 483800 130 1,731 1,86133930 450000 483930 130 1,724 1,85434060 450000 484060 130 1,718 1,84834190 450000 484190 130 1,711 1,84134320 450000 484320 130 1,705 1,83534450 450000 484450 130 1,698 1,82834580 450000 484580 130 1,692 1,82234710 450000 484710 130 1,685 1,81534840 450000 484840 130 1,679 1,80934970 450000 484970 130 1,673 1,80335100 450000 485100 130 1,667 1,79735230 450000 485230 130 1,661 1,79135360 450000 485360 130 1,654 1,78435490 450000 485490 130 1,648 1,77835620 450000 485620 130 1,642 1,77235750 450000 485750 130 1,636 1,76635880 450000 485880 130 1,630 1,76036010 450000 486010 130 1,625 1,75536140 450000 486140 130 1,619 1,74936270 450000 486270 130 1,613 1,74336400 450000 486400 130 1,607 1,73736530 450000 486530 130 1,601 1,73136660 450000 486660 130 1,596 1,72636790 450000 486790 130 1,590 1,72036920 450000 486920 130 1,585 1,71537050 450000 487050 130 1,579 1,70937180 450000 487180 130 1,573 1,703

37310 450000 487310 130 1,568 1,69837440 450000 487440 130 1,563 1,69337570 450000 487570 130 1,557 1,68737700 450000 487700 130 1,552 1,68237830 450000 487830 130 1,546 1,67637960 450000 487960 130 1,541 1,67138090 450000 488090 130 1,536 1,66638220 450000 488220 130 1,531 1,66138350 450000 488350 130 1,525 1,65538480 450000 488480 130 1,520 1,65038610 450000 488610 130 1,515 1,64538740 450000 488740 130 1,510 1,64038870 450000 488870 130 1,505 1,63539000 450000 489000 130 1,500 1,630

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Sweetum CandiesCurrent situation

Machine Capacity 4100 units MinMachine Cost $ 9,000 Max

Useful Life 10 years Cost of Goods ManufacturedMonthly

FMOH $ 1,200 monthly OutputDMC $ 0.30 unit Variable Manufacturing cost

DMC $ 1,140 Current volume 3800 units Total VMC

Fixed manufacturing costExpected growth 100% FMOH $ 1,200 Expected volume 7600 units Depreciation $ 75

Total FMCExpected discount 10% Total Cost

Unit cost

Relevant range of output

Current situation Projections0 Min 0

4100 Max 8200

Cost of Goods Manufactured Cost of Goods ManufacturedMonthly Annual Monthly Annual

3,800 45,600 Output 7,600Variable Manufacturing cost

$ 13,680 DMC $ 2,052 $ 24,624 $ 1,140 $ 13,680 Total VMC $ 2,052

Fixed manufacturing cost $ 14,400 FMOH $ 1,200 $ 14,400 $ 900 Depreciation $ 150 $ 1,800

$ 1,275 $ 15,300 Total FMC $ 1,350 $ 2,415 $ 28,980 Total Cost $ 3,402

$ 0.64 Unit cost


Projections

Cost of Goods ManufacturedAnnual

91,200

$ 24,624

$ 16,200 $ 40,824 $ 0.45

Sweetum CandiesCurrent situation

Machine Capacity 4100 units MinMachine Cost $ 9,000 Max

Useful Life 10 years Cost of Goods ManufacturedMonthly

FMOH $ 1,200 monthly Output 3,800DMC $ 0.30 unit Variable Manufacturing cost

DMC $ 1,140 Current volume 3800 units Total VMC $ 1,140

Fixed manufacturing costExpected growth 100% FMOH $ 1,200 Expected volume 7600 units Depreciation $ 75

Total FMC $ 1,275 Expected discount 10% Total Cost $ 2,415

Unit cost $ 0.64


Current situation Projections0 Relevant range of output Min

4100 Max

Cost of Goods Manufactured Cost of Goods ManufacturedAnnual Monthly

45,600 Output 7,600Variable Manufacturing cost

$ 13,680 DMC $ 2,052 $ 13,680 Total VMC $ 2,052

Fixed manufacturing cost $ 14,400 FMOH $ 1,200 $ 900 Depreciation $ 150

$ 15,300 Total FMC $ 1,350 $ 28,980 Cost] $ 3,402 $ 0.64 Unit cost $ 0.45

Projected Reduction in Unit Manufacturing Cost due to ExpansionCurrent Projected Δ Cost Explanation

Per unit cost $0.64 $0.45 ($0.19)Of whichDMC $0.30 $0.27 ($0.03) discount Monthly FMOH $0.32 $0.16 ($0.16) utilization Depreciation $0.02 $0.02 $0.00

The capacity expansion will increase Sweetum's capacity utilization as it will be processing double the volume in the same space. This will reduce unit fixed costs by 16 cents. Its material costs per unit wll also drop by 10%, .e., 3 cents..

Projections0

8200

Cost of Goods ManufacturedAnnual

91,200

$ 24,624 $ 24,624

$ 14,400 $ 1,800

$ 16,200 $ 40,824 $ 0.45

Splash manufacturing Cost Per Unit Analysis By SeasonSeason Q1 Q2

Cost system Normal cost OutputAllocation base DMLHrs Direct CostsDemand Seasonal MaterialSeason Units Labor

Demand Schedule Total Direct Costs 0 0Q1 700 Indirect costsQ2 500 Variable MOHQ3 150 Fixed MOHQ4 150 Total Indirect Costs 0 0Annual 1500 Total Direct Costs 0 0

Input Usage Cost Per Unit #DIV/0! #DIV/0!Dir Manuf Labor 0.5 hrs/unit Price Per Unit #DIV/0! #DIV/0!

CostsDir Mat Cost $7.50 $/unit Step 1: Plan out the table.Dir Manuf Labor Rate $16 $/hrBud Var Manuf OH Rate $12 lab hourBud Fixed Manuf OH $10,500 $/quarter

Markup 30%

Cost Per Unit Analysis By SeasonQ3 Q4 Annual

0

00

0 0 0

00

0 0 00 0 0

#DIV/0! #DIV/0! #DIV/0!#DIV/0! #DIV/0! #DIV/0!

Step 1: Plan out the table.

Splash manufacturing

Step

2: P

opul

ate

the

key

cells

Cost Per Unit Analysis By SeasonSeason Q1

Cost system Normal cost Output 700Allocation base DMLHrs Direct CostsDemand Seasonal Material 5,250Season Units Labor 5,600

Demand Schedule Total Direct Costs 10,850Q1 700 Indirect costsQ2 500 Variable MOH 4,200Q3 150 Fixed MOH 10,500Q4 150 Total Indirect Costs 14,700Annual 1500 Total Direct Costs 25,550

Input Usage Cost Per Unit 36.50Dir Manuf Labor 0.5 hrs/unit Price Per Unit 47.45

CostsDir Mat Cost $7.50 $/unitDir Manuf Labor Rate $16 $/hrBud Var Manuf OH Rate $12 lab hourBud Fixed Manuf OH $10,500 $/quarter

Markup 30%

The substantial seasonal variation in production volume causes Splash Manufacturing's quarterly Fixed MOH per unit to fluctuate dramatically. This coupled with a fixed markup pricing explains the current volatility in its selling prices. By contrast, using a Fixed MOH recovery rate based on expected annual Fixed MOH (i.e., an annualized normal FMOH recovery rate), Splash will be recovering the same amount of overhead on all units produced during the year and its sales price volatility due to variations in seasonal cost of production will be eliminated. Splash may also want to decouple pricing from costs and charge a premium during the busy season while offering discounts during the slack season.

Cost Per Unit Analysis By Season

One

can

als

o us

e Ex

cel's

arr

ay fu

nctio

ns! Cost Per Unit Analysis By Season

Q2 Q3 Q4 Annual Season500 150 150 1,500 Line 1 Output

Direct Costs3,750 1,125 1,125 11,250 Line 2 Material4,000 1,200 1,200 12,000 Line 3 Labor7,750 2,325 2,325 23,250 Total Direct Costs

Indirect costs3,000 900 900 9,000 Line 4 Variable MOH

10,500 10,500 10,500 42,000 Line 5 Fixed MOH13,500 11,400 11,400 51,000 Total Indirect Costs21,250 13,725 13,725 74,250 Total Direct Costs

42.50 91.50 91.50 49.50 Cost Per Unit55.25 118.95 118.95 64.35 Automatic Price Per Unit

Sequence of operations

The substantial seasonal variation in production volume causes Splash Manufacturing's quarterly Fixed MOH per unit to fluctuate dramatically. This coupled with a fixed markup pricing explains the current volatility in its selling prices. By contrast, using a Fixed MOH recovery rate based on expected annual Fixed MOH (i.e., an annualized normal FMOH recovery rate), Splash will be recovering the same amount of overhead on all units produced during the year and its sales price volatility due to variations in seasonal cost of production will be eliminated. Splash may also want to decouple pricing from costs and charge a premium during the busy season while offering discounts during the slack season.

Don’t forget to use the Formulas|Trace Precedent / Trace Dependent options to better reveal the connections between cells (the "wiring" diagram)

Cost Per Unit Analysis By SeasonQ1 Q2 Q3 Q4 Annual

700 500 150 150 1,500

5,250 3,750 1,125 1,125 11,2505,600 4,000 1,200 1,200 12,000

10,850 7,750 2,325 2,325 23,250

4,200 3,000 900 900 9,00010,500 10,500 10,500 10,500 42,00014,700 13,500 11,400 11,400 51,00025,550 21,250 13,725 13,725 74,250

36.50 42.50 91.50 91.50 49.5047.45 55.25 118.95 118.95 64.35

Don’t forget to use the Formulas|Trace Precedent / Trace Dependent options to better reveal the connections between cells (the "wiring" diagram)

Keating & Associates2011

Inputs Numbers BudgetedHours/Person Comp/Person

Partners 5 1600 $ 104,000 Professionals 20

Indirect costs, allocated based on labor hours

PoolTotal

Hours CostsLegal Support Costs 40000 $ 2,200,000

Budgeted Direct Cost Rate per Professional Labor Hr $ 65.00 Budgeted Indirect Cost Rate per Professional Labor Hr $ 55.00

Job CostsRichardson

Hrs CostRichardson 100 $ 12,000 Punch 150 $ 18,000

Keating & Associates2011

Inputs Numbers BudgetedHours/Person Comp/Person

Partners 5 1600 $ 200,000 Professionals 20 1,600 $ 80,000

Indirect costs, allocated based on labor hours

PoolTotal Cost/hr

Hours CostsGeneral Support 40000 $ 1,800,000 $ 45 Secretarial Support 8000 $ 400,000 $ 50

Partners ProfessionalsBudgeted Direct Cost Rate per Professional Labor Hr $ 125 $ 50.00 Budgeted Indirect Cost Rate per Professional Labor Hr $ 95 $ 45.00 Budgeted Total Cost per Labor Hour $ 220 $ 95

Job CostsRichardson Punch

Hrs Cost Hrs CostPartner 60 $ 13,200 30 $ 6,600 Professional 40 $ 3,800 120 $ 11,400 Total 100 $ 17,000 150 $ 18,000

reflection: what did we learn from Chapter 4 problems?

Variable vs. Absorption Costing

Having understood cost behavior (fixed or variable) and the nature of cost (direct or indirect), we studied cost absorption i.e., the process by which indirect costs are assigned to products. Along the way we noted that for our current purposes, we only are dealing with incurred or out of pocket costs. We also noted that unit costs can be thought as a measure of the relative total per unit resource consumption (i.e., the ratio of the costs and quantities of all kinds of production inputs without which the output in question could not be produced).

Now we examine another important aspect of cost accounting: how the operations of the firm look through two different lenses available to the cost accountant: variable vs. absorption costing systems. The key difference is that in variable costing systems, all fixed manufacturing costs are expensed in the year incurred, they are never inventoried. In obsorption costing systems, by contrast, certain inventoriable fixed costs are also added to the cost of good manufactured and consequently, inventoried for the purposes of creating product line income statements. Notice how moving the top line to units sold (vs. units manufactured) complicates the analysis. To many people this is the most "tricky" part of the computations

The key when working a problem is to note that under variable costing, when preparing income statements, all fixed manufacturing costs are to be deducted "below the line," i.e., are to be excluded from the computation of "contrbution margin." In absorption costing systems, by contrast, Fixed Manufacturing Costs are part of Cost of Goods Sold, i.e., areto be treated as "above the line" cost items and adjusted for BEFORE one computes Gross Margin.

Variable vs. Absorption Costing

Having understood cost behavior (fixed or variable) and the nature of cost (direct or indirect), we are assigned to products. Along the

way we noted that for our current purposes, we only are dealing with incurred or out of pocket relative total per unit

resource consumption (i.e., the ratio of the costs and quantities of all kinds of production inputs

Now we examine another important aspect of cost accounting: how the operations of the firm look through two different lenses available to the cost accountant: variable vs. absorption costing systems. The key difference is that in variable costing systems, all fixed manufacturing costs are

inventoried. In obsorption costing systems, by fixed costs are also added to the cost of good manufactured and

statements. Notice how moving the top line to units sold (vs. units manufactured) complicates the analysis. To many people

The key when working a problem is to note that under variable costing, when preparing income statements, all fixed from the computation of "contrbution

margin." In absorption costing systems, by contrast, Fixed Manufacturing Costs are part of Cost of Goods Sold, i.e., areto be

Grunewald

Variable Cost Based Income Statement for 2011Units Budgeted 20,000 Units produced 18,000 Units sold 17,500

Volume Variance 2000 U Increase (Decrease) in Ending Inventory 500

Per Unit TotalRevenues 425 7,437,500

Variable Manufacturing CostsDM 30 525,000DL 25 437,500MOH 60 1,050,000

Variable Marketing Costs 45 787,500Total Variable Costs 160 2,800,000Contribution Margin 4,637,500

Fixed CostsManuf 1,100,000

3,431,850Admin 965,450Mktg 1,366,400

Operating Income 1,205,650

When done with the Absorption costing statement, unhide rows 23 & 24

Absorption Cost Based Income Statement for 2011Units Budgeted 20,000 Units produced 18,000 Units sold 17,500


Units Per Unit TotalRevenues 425 7,437,500Beginning Inventory 0Direct Materials 18000 30 540,000Direct Labor 18000 25 450,000MOH 18000 60 1,080,000Fixed MOH absorbed by output 18000 55 990,000Sub-total 3,060,000PVV 2000 55 110,000Less Cost of Goods Inventoried 500 170 85,000Cost of Goods Sold 3,085,000Gross Margin 4,352,500

Grunewald







3,431,850Admin 965,450Mktg 1,366,400


Back of the envelope computation to get to Absorption Costing IncomeFMC allocated to units produced and transferred to EI 55 27500Absorption Cost OI 1,233,150

Note that Operating Income under Variable Costing (VC) differs from that under Absorption Costing (AC) because, under AC, part of the period's FMOH is "inventoried." Put another way the FMOH allocated to the portion of current year's production that is inventoried is NOT being sent to the Income Statement this period. Likewise, if one has beginning inventory, part of last year's FMOH sent to inventory is being expenses this year. So if we want to "read off" AC Op Inc from a set of statements preapred under VC, we just have to make two adjustments: bring back in in last year's FMOH via beginning inventory -- and adjustment which will reduce Op Inc, the other is to remove from the VC Op Inc the amount of cost sent to EI under AC which I have done above. This is the "backdoor" way to get AC Op Inc from the VC Op Inc computation your accountant has just given you. If you can do this off the top of your head, most accountants will think you're a pretty hot job candidiate!

C24

01234: Why positive?



Units Per Unit TotalRevenues 425 7,437,500Beginning Inventory 0Direct Materials 18000 30 540,000Direct Labor 18000 25 450,000MOH 18000 60 1,080,000Fixed MOH absorbed by output 18000 55 990,000Sub-total 3,060,000PVV 2000 55 110,000Less Cost of Goods Inventoried 500 170 85,000Cost of Goods Sold 3,085,000Gross Margin 4,352,500Marketing Costs - Variable 17,500 45 787,500Marketing Costs - Fixed 1,366,400Admin Costs 965,450Operating Income 1,233,150

Note that Operating Income under Variable Costing (VC) differs from that under Absorption Costing (AC) because, under AC, part of the period's FMOH is "inventoried." Put another way the FMOH allocated to the portion of current year's production that is inventoried is NOT being sent to the Income Statement this period. Likewise, if one has beginning inventory, part of last year's FMOH sent to inventory is being expenses this year. So if we want to "read off" AC Op Inc from a set of statements preapred under VC, we just have to make two adjustments: bring back in in last year's FMOH via beginning inventory -- and adjustment which will reduce Op Inc, the other is to remove from the VC Op Inc the amount of cost sent to EI under AC which I have done above. This is the "backdoor" way to get AC Op Inc from the VC Op Inc computation your accountant has just given you. If you can do this off the top of

Helmsmart2011 2012 2013

Sales (units) 49,000 49,000 58,800Revenues $1,960,000 $1,960,000 $2,352,000Cost of goods sold Beginning inventory 0 0 352,800 Production 1,764,000 2,116,800 1,764,000 Available for sale 1,764,000 2,116,800 2,116,800 Deduct ending inventory 0 (352,800) 0 Adjustment for production-volume variance 0 (215,600) 0 Cost of goods sold 1,764,000 1,548,400 2,116,800Gross margin 196,000 411,600 235,200Selling and administrative expenses (all fixed) 196,000 196,000 196,000Operating income $ 0 $ 215,600 $ 39,200

Beginning inventory 0 0 9,800Production (units) 49,000 58,800 49,000Sales (units) 49,000 49,000 58,800Ending inventory 0 9,800 0Variable manufacturing cost per unit $ 14 $ 14 $ 14Fixed manufacturing overhead costs $1,078,000 $1,078,000 $1,078,000Fixed manuf. costs allocated per unit produced $ 22 $ 22 $ 22

Quick check 1 2011 2012 2013Multiply Row 22 by Row 17 1,078,000 1,293,600 1,078,000Actual FMOH (Row 21) 1,078,000 1,078,000 1,078,000Over/under absorption (PVV) 0 215,600 0

Quick check 2Revenue per unit (Row 3/ Row 2) 40 40 40 Less VMC (Row 20) (14) (14) (14)CM/Unit 26 26 26 Output 49,000 58,800 49,000 Total CM 1,274,000 1,528,800 1,274,000 Total FC (Row 6 + Row 21) (1,274,000) (1,274,000) (1,274,000)Profit 0 254,800 0

39,200 4

Divide H25/H26 9800

By the end of the first sentence, we know where this is likely to be going (the last 4 words of the sentence are "H uses standard costing"). We know from the previous problem (9-22) that this means (a) all variances during the year, especially the production volume variance will be closed back to Cost of Goods sold, so that (b) differences between production and sales will cause FMOH to "move" across years, potentially distorting performance measurement.

Difference (H23 minus H11)CM/Unit minus FMOH recovery rate

Explains the 2012 "profit": we used the production assets more intensively, produced 58,800 units.Was this good?Maybe, may be not:Ramping up for big sales campaign? Vs. Cost of storing, obsolescence, spoilage/damage, change in taste ...

Exactly the number of units inventoried in 2012 for sale in 2013! The 2012 profit was the over-recovered FMOH associated with these units and the 2013 profit is the remainder of the CM from these units! "Problem" solved!! :)

H11

Explains the 2012 "profit": we used the production assets more intensively, produced 58,800 units. Was this good? Maybe, may be not: Ramping up for big sales campaign? Vs. Cost of storing, obsolescence, spoilage/damage, change in taste ...

H25


Explains the 2012 "profit": we used the production assets more intensively, produced 58,800 units.Was this good?Maybe, may be not:Ramping up for big sales campaign? Vs. Cost of storing, obsolescence, spoilage/damage, change in taste ...


Reflection on Absorption Costing

Take

away

1Ta

keaw

ay 2

Take

away

3Part 1: List (briefly) below your key takewaways from studying Absorption Costing and working out Problems 9-22 and 9-24?


Part 2: Answer the following questions in the space provided for each

Question 2: What is the principal strength of absorption costing systems? Why are they used?

Part 1: List (briefly) below your key takewaways from studying Absorption Costing and working out

Question 1: Can any absorption costing system avoid the kind of volume-driven distortions that you have observed in Problems 9-22 & 9-24? What feature of AC systems drives this behavior?

Question 3: What factors would drive your choice of the capacity level used to compute the FMOH recovery rate in AC systems?



Question 2: What is the principal strength of absorption costing systems? Why are they used?

Question 1: Can any absorption costing system avoid the kind of volume-driven distortions that you have observed in Problems 9-22 & 9-24? What feature of AC systems drives this behavior?

Question 3: What factors would drive your choice of the capacity level used to compute the FMOH recovery

National Savings Bank

Spread 3%Monthly Fee charge $22 Minimum Balance $1,000

Units of ActivityActivity "Unit" cost Turner Graham Deposit/withdrawal with teller $ 2.30 42 48 5 Deposit/withdrawal with ATM $ 0.70 7 19 17 Deposit/withdrawal on prearranged basis $ 0.40 0 13 62Bank checks written $ 8.40 11 1 3Foreign currency drafts $ 12.40 4 2 6 Inquiries $ 1.40 12 20 9Balances 1100 700 24600Below Minimum? 0 1 0

National Savings Bank Customer Profitability AnalysisTurner Graham

Spread 33.00 21.00 738.00 Monthly Fees - 264.00 - Total Revenue 33.00 285.00 738.00 Less Costs Deposit/withdrawal with teller (96.60) (110.40) (11.50) Deposit/withdrawal with ATM (4.90) (13.30) (11.90) Deposit/withdrawal on prearranged basis - (5.20) (24.80)Bank checks written (92.40) (8.40) (25.20)Foreign currency drafts (49.60) (24.80) (74.40) Inquiries (16.80) (28.00) (12.60)Total Costs (260.30) (190.10) (160.40)Customer Profitability (227.30) 94.90 577.60

Answer to part 2

Answer to part 3

Holt

Holt

Applewood Electronics

Cost of Goods Manufactured (Single cost pool)

Monarch RegalUnits 22,000 4,000

Total Per Unit Total Per Unit Revenues 19,800,000 900 4,560,000 1,140 CostsDirect Materials 4,576,000 208 2,336,000 584 Direct Manufacturing Labor 396,000 18 168,000 42 Machine Costs 3,168,000 144 288,000 72 Total Direct Costs 8,140,000 370 2,792,000 698 Manufacturing Overhead 4,400,000 200 400,000 100 Total COGS 12,540,000 570 3,192,000 798 SGA 5,830,000 265 978,000 245 Operating Income 1,430,000 65 390,000 98

Activity CostMonarch

Driver CostSoldering (# points) 942,000 1,570,000 0.60 1,185,000 711,000 Spipments (#) 860,000 20,000 43.00 16,200 696,600 Quality control (# inspections) 1,240,000 77,500 16.00 56,200 899,200 Purchase orders (# orders) 950,400 190,080 5.00 80,100 400,500 Machine power (M/c hrs) 57,600 192,000 0.30 176,000 52,800 Machine setups (# setups) 750,000 30,000 25.00 16,000 400,000 Total MOH 4,800,000 3,160,100

Answer part 3 here:

Answer part 5 here:

Total Activity

Cost/Unit of Activity

Applewood Electronics

Cost of Goods Manufactured (ABC)

Monarch RegalUnits 22,000 4,000

Total Unit Total Unit Revenues 19,800,000 900 4,560,000 1,140 CostsDirect Materials 4,576,000 208 2,336,000 584 Direct Manufacturing Labor 396,000 18 168,000 42 Machine Costs 3,168,000 144 288,000 72 Total Direct Costs 8,140,000 370 2,792,000 698 Manufacturing Overhead 3,160,100 144 1,639,900 410 Total COGS 11,300,100 514 4,431,900 1,108 SGA 5,830,000 265 978,000 245 Operating Income 2,669,900 121 (849,900) (212)

Answer part 2 here:Regal

Driver Cost 385,000 231,000 3,800 163,400 21,300 340,800 109,980 549,900 16,000 4,800 14,000 350,000

1,639,900

Answer part 4 here:

Answer part 5 here:

Reflection on Activity Based Costing

Take

away

1Ta

keaw

ay 2

Take

away

3Part 1: List (briefly) below your key takewaways from studying Activity Based Costing and working out Problems 5-28 and 5-40?



Question 1: What is new about ABC?

Question 2: What is the principal strength of ABC? Its principal weakness?

Question 3: What factors would drive your choice of whether to use ABC or not?

Part 1: List (briefly) below your key takewaways from studying Activity Based Costing and working out



Question 1: What is new about ABC?

Question 2: What is the principal strength of ABC? Its principal weakness?

Question 3: What factors would drive your choice of whether to use ABC or not?

Sally Gunn

Actual airfare $1,600 Cabfare 80

AIRFARE ALONEAllocation 1 (Standalone)

Client Standalone Weight FareBWI $ 1,200 60% $ 960 ORD $ 800 40% $ 640 Total allocated $ 2,000 100% $ 1,600

Allocation 2-4 (Incremental, 2 ways + Shapley)Client Designation Allocation 2 Designation Allocation 3 ShapleyBWI P $ 1,200 I $ 800 $ 1,000 ORD I $ 400 P $ 800 $ 600 Total $ 1,600 $ 1,600 $ 1,600

AIRFARE + CABFAREAllocation 1 (Standalone)

Client Standalone Weight FareBWI $ 1,280 59% $ 996 ORD $ 880 41% $ 684 Total allocated $ 2,160 100% $ 1,680

Allocation 2-4 (Incremental, 2 ways + Shapley)Client Designation Allocation 2 Designation Allocation 3 ShapleyBWI P $ 1,280 I $ 800 $ 1,040 ORD I $ 400 P $ 880 $ 640 Total $ 1,680 $ 1,680 $ 1,680

CABFARE ALONEAllocation 1 (Standalone)

Client Standalone Weight FareBWI $ 80 50% $ 40 ORD $ 80 50% $ 40 Total allocated $ 160 100% $ 80

Allocation 2-4 (Incremental, 2 ways + Shapley)Client Designation Allocation 2 Designation Allocation 3 ShapleyBWI P $ 80 I $ - $ 40 ORD I $ - P $ 80 $ 40 Total $ 80 $ 80 $ 80

Yves Parfum

Revenues Monaco InnocenceStandalone 48 112Joint 130

StandalonePrimary

ShapleyM IMonaco 39 48 18 33Innocence 91 82 112 97Total 130 130 130 130

What is the Shapley value?

The Shapley value is the average of all possible incremental values that could be assigned to each cost object. Here we have two cost objects, Monaco and Innocence, and in columns C and D we have enumerated the two possible cases (Primary = M and Primary = I). The Shapley value (of the Revenue) to be assigned to M and I is the average of the two cost allocations to M resulting from treating it as the Primary and the Secondary, i.e., the values shown in columns C and D.

http://en.wikipedia.org/wiki/Shapley_value

Jim Dandy Auto Sales[2012] Expected Cost 1,500,000

Location

2011 Actuals Expected expenses allocated by:Incremental

# Cars Expense Per car # Cars Stand-alone RankE 3,150 $ 324,000 $ 103 $ 525,000 $ 225,000 4W 1,080 $ 432,000 $ 400 $ 180,000 $ 300,000 3N 2,250 $ 648,000 $ 288 $ 375,000 $ 450,000 2S 2,520 $ 756,000 $ 300 $ 420,000 $ 525,000 1T 9,000 $ 2,160,000 $ 240 $ 1,500,000 $ 1,500,000

Location # Cars Expense ShapleyE 3,150 $ 324,000 223000N 2,250 $ 648,000 295000S 2,520 $ 756,000 439000W 1,080 $ 432,000 543000

1500000

Sort 1 Allocation Sort 2 Allocation Sort 3 Allocation Sort 4S 756000 S 756000 S 756000 SN 648000 N 648000 W 432000 WW 96000 E 96000 N 312000 EE 0 W 0 E 0 NTotal 1500000 Total 1500000 Total 1500000 TotalCheck OK Check OK Check OK Check

Sort 5 Allocation Sort 6 Allocation Sort 7 Allocation Sort 8S 756000 S 756000 N 648000 NE 324000 E 324000 S 756000 SW 420000 N 420000 E 96000 WN 0 W 0 W 0 ETotal 1500000 Total 1500000 Total 1500000 TotalCheck OK Check OK Check OK Check

Sort 9 Allocation Sort 10 Allocation Sort 11 Allocation Sort 12N 648000 N 648000 N 648000 NW 432000 W 432000 E 324000 E

The incremental columns H+I show how the total planned cost in cell B2 can be allocated to Locations E, W, N, S by the planned costs to the one of the divisions up to its limit (in this case the firm has chosen the limit for each sales location to be the as that location's prior year expense as shown in the range entitled Prioryear, i.e., in cells A6:C9), then to the next division up to its limit and so on till all of the planned cost is allocated.

The Shapley value is a generalization of the process shown in the Incremental columns (cols H+I). It is computed by (1) creating all possible orderings of the divisions (as exemplified in ROWS 25-68), (2) allocating the costs ("planned") to each division (as we have done in the columns entitled Allocation), then (3) outputing the average for a division over all orderings in cells J6:J10 (cells D19:D22).

S 420000 E 324000 W 432000 SE 0 S 96000 S 96000 WTotal 1500000 Total 1500000 Total 1500000 TotalCheck OK Check OK Check OK Check

Sort 13 Allocation Sort 14 Allocation Sort 15 Allocation Sort 16W 432000 W 432000 W 432000 WN 648000 N 648000 S 756000 SS 420000 E 324000 N 312000 EE 0 S 96000 E 0 NTotal 1500000 Total 1500000 Total 1500000 TotalCheck OK Check OK Check OK Check

Sort 17 Allocation Sort 18 Allocation Sort 19 Allocation Sort 20W 432000 W 432000 E 324000 EE 324000 E 324000 W 432000 WN 648000 S 744000 S 744000 NS 96000 N 0 N 0 STotal 1500000 Total 1500000 Total 1500000 TotalCheck OK Check OK Check OK Check

Sort 21 Allocation Sort 22 Allocation Sort 23 Allocation Sort 24E 324000 E 324000 E 324000 EN 648000 N 648000 S 756000 SS 528000 W 432000 W 420000 NW 0 S 96000 N 0 WTotal 1500000 Total 1500000 Total 1500000 TotalCheck OK Check OK Check OK Check

Expected expenses allocated by:Incremental

ShapleyAllocation $ - 223,000 $ 96,000 295,000 $ 648,000 439,000 $ 756,000 543,000 $ 1,500,000 1,500,000

Allocation756000432000312000

01500000

OK

Allocation648000756000

960000

1500000OK

Allocation648000324000

The incremental columns H+I show how the total planned cost in cell B2 can be allocated to Locations E, W, N, S by the planned costs to the one of the divisions up to its limit (in this case the firm has chosen the limit for each sales location to be the as that location's prior year expense as shown in the range entitled Prioryear, i.e., in cells A6:C9), then to the next division up to its limit

The Shapley value is a generalization of the process shown in the Incremental columns (cols H+I). It is computed by (1) creating all possible orderings of the divisions (as exemplified in ROWS 25-68), (2) allocating the costs ("planned") to each division (as we have done in the columns entitled Allocation), then (3) outputing the average for a division over all orderings in cells J6:J10 (cells

5280000

1500000OK

Allocation432000756000312000

01500000

OK

Allocation324000432000648000

960001500000

OK

Allocation324000756000420000

01500000

OK

Castleford I

Department ServedM IS Machining Assembly

Maintenance 6,300,000 20% 30% 50%Info Systems 1,452,150 10% 80% 10%Total 7,752,150

Service Department

Cost before allocations

Here we start by allocating service department costs using the reciprocal method for the Castleford problem(HDR 14ed pp. 550-551). [■8(1&−0.1@−0.2&1)][■8(𝑀@𝐼𝑆)]=[■8(6300000@1452150)]

Or, in brief,[ ][ ]=[ ]𝑊 𝐷 𝐶[ ][ ]=[ ]𝑊 𝐷 𝐶implies[ ]=[ ]𝐷 𝑊 ^(−1) [ ]𝐶

Now let's extend the problem by adding a third, cafeteria, department and the following service pattern:

Setting up equations for the reciprocal methodThe total, reciprocated, costs of the two systems will be

M = 6,300,000 + 10% ISIS = 1,452,150 + 20% M

Which can be rewritten more usefully for our purposes as:

M - 10% IS = 6,300,000 IS - 20% M = 1,452,150

Which can be expressed, in matrix notation as

To solve this in excel, we can proceed as follows:

Step 1Set up the matrix of allocation weights, W by entering the numbers in a 2x2 array:

1 -10%

Which is to be read as "The number in row 1, column 1 of matrix W times the element in the first row of matrix D plus the number in row 1 column 2 of matrix W times the element in the second row of matrix D equals the element in the first row of matrix C" and so on

This system can be solved for M and IS which, respectively, will be "reciprocated costs" of the Maintenance and Information Services departments. These reciprocated costs have the interesting interpretation of being the "true cost" of operating the two departments if the services of the other department had to be purchased externally. Conceptually, the way forward is to note that

where [W]-1 is the matrix inverse of [W].

Note that each service department's "own" cost in the main diagonal, i.e, row 1 column 1, row 2 column 2 etc., while the "other" department's costs are in the other two cells.

[■8(1&−0.1@−0.2&1)][■8(𝑀@𝐼𝑆)]=[■8(6300000@1452150)]Or, in brief,[ ][ ]=[ ]𝑊 𝐷 𝐶[ ][ ]=[ ]𝑊 𝐷 𝐶implies[ ]=[ ]𝐷 𝑊 ^(−1) [ ]𝐶

-20% 1

1.02040816327 0.102040820.20408163265 1.02040816

Next, name the range B5:B6, "Costs" and then, in a 2 x1 (2 rrows 1 column) area type "=mmult(Winv,Costs)" and hit Ctl+Shift+Enter"

65767502767500

These are the "fully reciprocated" costs of the Maintenance and Information Systems Departments

These costs can be allocated as follows

Service DepartmentDepartment Served

TotalM IS Machining AssemblyMaintenance 6,576,750 1,315,350 1,973,025 3,288,375 6,576,750 Information Systems 2,767,500 276,750 2,214,000 276,750 2,767,500 Total 9,344,250 276,750 1,315,350 4,187,025 3,565,125 9,344,250 To Production 7,752,150


MaintenanceCafeteria IS Machining AssemblyMaintenance 6,300,000 15% 20% 25% 40%Cafeteria Services 2,200,000 20% 18% 30% 32%Info Systems 1,452,150 10% 10% 70% 10%


Name these four cells "Weights" … this is the matrix W. Excel is smart enough to treat contiguous blocks of numbers (arrays) as matrices when the user invokes matrix functions such as "minverse", (short for "m(atrix) inverse"), and "mmult" (short for "m(atrix) mult(iply)").

Then all we have to do is compute W-1 as follows: pick a 2x2 area (as we do below) and type (while the entire four cell array is selected "=minverse(Weights)" and hit Ctl+Shift+Enter . If you by chance hit enter, Excel will show an error, but nothing is lost: select the 2x2 area again, hit F2, then hit Ctl+Shift+Enter. (This next step is purely for convenience) Name this 2x2 range "Winv".

Reciprocated Cost

Note that each Department's reciprocated cost is the sum of its Direct (Unreciprocated) costs plus that amount of the other service department's reciprocated costs that reflect the department's usage of that other service department. As a result the sum of the reciprocated costs (here $9,344,250 )reflects the "true" value of the services provided by the two departments. Also note that the total amount allocated to the two production departments is the sum of the original, unreciprocated service costs (here, $ 7,752,150)!

Now let's extend the problem by adding a third, cafeteria, department and the following service pattern:


Total 7,752,150

do not peek ahead if you can help it …

What is the W matrix in this case? How many rows and columns? Create the weight matrix in the area highlighted in yellow in rows 102-106:

Compute the reciprocated costs of the three service departments and allocate them as you see fit, below on this tab. When you are done, go to the next tab …

Which is to be read as "The number in row 1, column 1 of matrix W times the element in the first row of matrix D plus the number in row 1 column 2 of matrix W times the element in the second row of matrix D equals the element in the first row of matrix C" and so on

This system can be solved for M and IS which, respectively, will be "reciprocated costs" of the Maintenance and Information Services departments. These reciprocated costs have the interesting interpretation of being the "true cost" of operating the two departments if the services of the other department had to be purchased externally. Conceptually, the way forward is to note that


Next, name the range B5:B6, "Costs" and then, in a 2 x1 (2 rrows 1 column) area type "=mmult(Winv,Costs)" and hit Ctl+Shift+Enter"


Name these four cells "Weights" … this is the matrix W. Excel is smart enough to treat contiguous blocks of numbers (arrays) as matrices when the user invokes matrix functions such as "minverse", (short for "m(atrix) inverse"), and "mmult" (short for "m(atrix) mult(iply)").

as follows: pick a 2x2 area (as we do below) and type (while the entire four cell array is selected "=minverse(Weights)" and hit Ctl+Shift+Enter . If you by chance hit enter, Excel will show an error, but nothing is lost: select the 2x2 area again, hit F2, then hit Ctl+Shift+Enter. (This next step is purely for convenience) Name this 2x2 range "Winv".

Now let's extend the problem by adding a third, cafeteria, department and the following

Castleford II

Continuing where we left off on the preceding tab …

The case facts are as follows:


MaintenanceCafeteria IS Machining AssemblyMaintenance 6,300,000 15% 20% 25% 40%Cafeteria Services 2,200,000 20% 18% 30% 32%Info Systems 1,452,150 10% 10% 70% 10%Total 9,952,150

The weight matrix for this problem is:

1 -20% -10%-15% 1 -10%-20% -18% 1

Leading to the following reciprocated costs:

7,392,692 3,667,997 3,590,928

Which can be allocated as:


MaintenanceCafeteria IS Machining AssemblyMaintenance 7,392,692 1,108,904 1,478,538 1,848,173 2,957,077 Cafeteria Services 3,667,997 733,599 660,239 1,100,399 1,173,759 Info Systems 3,590,928 359,093 359,093 2,513,649 359,093 Total 14,651,617 1,092,692 1,467,997 2,138,778 5,462,221 4,489,929 To Production 9,952,150

Finally, consider the following analysis:

Excess of reciprocated costs over unreciporcated in the two department ScenarioExcess of reciprocated costs over unreciprocated in the three department ScenarioIncrease in reciprocated costs by adding the cafeteria departmentUnreciprocated costs of the cafeteria departmentNet increase in reciprocated costs created by adding cafeteria department


Reciprocated Costs

Note that in this case, the reciprocated costs of the Maintenance & I/S departments (7392692 and 3590928) are both higher than their reciprocated costs when there were only two departments (6300000 and 1452150), in part because each of them is also consuming Cafeteria Services.

This analysis shows that the difference between the reciprocated costs by adding a department (i.e., going from the two department to the three department scenario) exceeds the unreciprocated cost of the third deparrtment. What does this mean?

Total 7,392,692 3,667,997 3,590,928 14,651,617

1,592,100 4,699,467 3,107,367 2,200,000 907,367

Note that in this case, the reciprocated costs of the Maintenance & I/S departments (7392692 and 3590928) are both higher than their reciprocated costs when there were only two departments (6300000 and 1452150), in part because

This analysis shows that the difference between the reciprocated costs by adding a department (i.e., going from the two department to the three department scenario) exceeds the unreciprocated cost of the third deparrtment. What does

Castleford III

Recall the three department scenario:


Maintenance Cafeteria Info Systems MachiningMaintenance 6,300,000 15% 20% 25%Cafeteria Services 2,200,000 20% 18% 30%Info Systems 1,452,150 10% 10% 70%Total 9,952,150

From which we can compute both theWeight matrix

1 -20% -10% 7,392,692 -15% 1 -10% and the 3,667,997 -20% -18% 1 3,590,928

leading to the allocations:


Maintenance Cafeteria Info Systems MachiningMaintenance 7,392,692 1,108,904 1,478,538 1,848,173 Cafeteria Services 3,667,997 733,599 660,239 1,100,399 Info Systems 3,590,928 359,093 359,093 2,513,649 Total 14,651,617 1,092,692 1,467,997 2,138,778 5,462,221 To Production 9,952,150


Reciprocated Costs

Reciprocated Costs

Department ServedAssembly

40%32%10%

Department ServedTotalAssembly

2,957,077 7,392,692 What do the zeroing out exercises teach us? 1,173,759 3,667,997 359,093 3,590,928 4,489,929 14,651,617

9,952,150

Can you modify the numbers shown in this table of cost and service patterns to replicate the analysis of the two department scenario?

What happens if you zero out only B7? Why?

Hint: you have to zero out only 3 numbers in cells C6:G8! :) If you zero out only D6

and D8? Why?

If you zero out C7, C9, D6 and D8?

What do the zeroing out exercises teach us?

What happens if you zero out only B7? Why?

If you zero out only D6 and D8? Why?

If you zero out C7, C9, D6 and D8?

Manes Company

Usage TableUsed by

Total CostDepartment A B X YA 100 250 150 500 100000B 500 100 400 1000 40000

DirectRelative Usage Cost Allocated

TotalA B X YA 63% 38% 62500 37500 100000B 20% 80% 8000 32000 40000

Step Down A first Reciprocal MethodAllocated to Step 1 Compute reciprocated costs

Department Cost B X Y TotalA 100000 20000 50000 30000 100000B 60000 12000 48000 60000 ATotal to Production departments 62000 78000 140000 B

Step 2 Allocate reciprocated costsStep Down B first

Allocated toDepartment Cost A X Y Total AB 40000 20000 4000 16000 40000 BA 120000 75000 45000 120000 TotalTotal to Production departments 79000 61000 140000 Total Service Department costs allocated to X and Y only

Total Usage

Service Department

Service Department

Reciprocal MethodStep 1 Compute reciprocated costs

Matrix11 -0.5 $ 133,333

-0.2 1 $ 66,667 Step 2 Allocate reciprocated costs

Allocated toA B X Y Total

133,333 (26,667) (66,667) (40,000) (133,333) 66,667 (33,333) - (6,667) (26,667) (66,667) 200,000 (73,333) (66,667) (200,000)

Total Service Department costs allocated to X and Y only (140,000)

"Reciprocated" costs

"Reciprocated" costs

W&B

Standalone Rental Costs Standalone Allocation Allocations based on Incremental valuesHours Rate Cost Company Share Cost Company

W 800 50 40000 W 80% 33,600 WB 200 10000 B 20% 8,400 BTotal 1000 50 50000 Total 100% 42,000 Total

Joint rental costHours Rate Cost

W 800B 800Total 1000 42 42000

Allocations based on Incremental valuesOrder Cost Order Cost ShapleyP 40,000 S 32,000 36,000S 2,000 P 10,000 6,000

42,000 42,000 42,000

MaxSystems Inc.

Item Units Price Cost Standalone revenue allocationTower 1 840 300 Based on revenueMonitor 1 280 180 Item Share AllocationPrinter 1 480 270 Tower 52.5% 630Total 3 1600 750 Monitor 17.5% 210

Bundle 1 1200 750 Printer 30.0% 360Total 100.0% 1200

Stand-alone

Standalone revenue allocationBased on cost Based on units

Share Allocation Share Allocation40% 480 33% 40024% 288 33% 40036% 432 33% 400

100.0% 1200 100% 1200

Milk

12,000g

Butter

Buttermilk36,000 Cups18,000 lbs108,000 Cups

36,000 quarts $2.20/lb$1.20/quart

SpreadableButter

Yield PriceButter yield 3 cups/gallon $2.20 Buttermilk yield 9 cups/gallon $1.20 Sbutter 6 tubs/gallon $2.30 Milk Input 12000 gallonsCost $22,500 Processing Costs $9,430 Sbutter Processing $1.60 lb

Butter SbutterQuantity 18000 lbs 36000Revenues $ 39,600.00 $ 82,800.00 Further Processing Costs $ - $ (28,800.00)NRV $ 39,600.00 $ 54,000.00 Gross MarginJoint cost allocationUsing Physical units $ (7,982.50)Using Sales Value @ Split $ (17,561.50)Using NRV $ (19,956.25)Using Constant GM NRV $ (14,849.69)Gross MarginGross Margin PctProduct ProfitabilityUsing Physical units $ 46,017.50 Using Sales Value @ Split $ 36,438.50 Using NRV $ 34,043.75 Using Constant GM NRV $ 39,150.31

SpreadableButter

36,000 tubs$2.30/tub

Canola oil

$1.60/lb

unitlbquarttub

Sbutter BmilkTotaltubs 27000 quarts

$ 82,800.00 $ 32,400.00 $ 115,200.00 $ (28,800.00) $ - $ (28,800.00) $ 54,000.00 $ 32,400.00 $ 86,400.00

$ (7,982.50) $ (23,947.50)

($31,930) $ (17,561.50) $ (14,368.50) $ (19,956.25) $ (11,973.75) $ (14,849.69) $ (17,080.31)

$ 54,470.00 47%

$ 46,017.50 $ 8,452.50 $ 36,438.50 $ 18,031.50 $ 34,043.75 $ 20,426.25 $ 39,150.31 $ 15,319.69

Milk

12,000g

Butter

36,000 Cups18,000 lbs

$2.20/lb

Buttermilk

108,000 Cups36,000 quarts

$1.20/quart

BakingButtermilk

72,000 pints$0.75/pint

X$0.35/pint

Further processing of buttermilk is undesirable since the net realizable value per pint is $0.40 ($0.75-$0.35) per pint, or $0.80 per quart which is less than the $1.20 per quart that we can get for selling unrepackaged buttermilk

How we allocate joint costs is irrelevant for the decision to further process buttermilk: when the "process further or not" decision is made, the joint costs are already incurred, i.e., are "sunk costs."

Yield PriceButter yield 3 cups/gallon $2.20 Buttermilk yield 9 cups/gallon $1.20 Sbutter 6 tubs/gallon $2.30 Milk Input 12000 gallonsCost $22,500 Processing Costs $9,430 Sbutter Processing $1.60 lb

Butter SbutterQuantity 18000 lbs 72000Revenues $ 39,600.00 $ 165,600.00 Further Processing Costs $ - $ (57,600.00)NRV $ 39,600.00 $ 108,000.00 Gross MarginJoint cost allocationUsing Physical units $ (7,982.50)Using Sales Value @ Split $ (17,561.50)Using NRV $ (24,561.54)Using Constant GM NRV $ (17,279.64)Gross MarginGross Margin PctProduct ProfitabilityUsing Physical units $ 100,017.50 Using Sales Value @ Split $ 90,438.50 Using NRV $ 83,438.46 Using Constant GM NRV $ 90,720.36

Butter

36,000 Cups18,000 lbs Spreadable

Butter

36,000 tubs$2.30/tub

Canola oil

$1.60/lb

Further processing of buttermilk is undesirable since the net realizable value per pint is $0.40 ($0.75-$0.35) per pint, or $0.80 per quart which is less than the $1.20 per quart that we can get for selling unrepackaged buttermilk

How we allocate joint costs is irrelevant for the decision to further process buttermilk: when the "process further or not" decision is made, the joint costs are already incurred, i.e., are "sunk costs."

unitlbquarttub

Sbutter BmilkTotaltubs 27000 quarts

$ 165,600.00 $ 32,400.00 $ 198,000.00 $ (57,600.00) $ - $ (57,600.00) $ 108,000.00 $ 32,400.00 $ 140,400.00

$ (7,982.50) $ (23,947.50)

($31,930) $ (17,561.50) $ (14,368.50) $ (24,561.54) $ (7,368.46) $ (17,279.64) $ (14,650.36)

$ 108,470.00 55%

$ 100,017.50 $ 8,452.50 $ 90,438.50 $ 18,031.50 $ 83,438.46 $ 25,031.54 $ 90,720.36 $ 17,749.64

Mat Place

Input-Ouput ratiosInput 100 tiresOutput Qty units Price/UnitFloor mats (FM) 25 pcs $ 12.00 Car mats (CM) 75 pcs $ 6.00 Shreds 40 lb $ 0.70

Production and CostsMay Actuals Tires CostInput 125,000 $ 600,000 "Net" Manufacturing Cost $ 565,000

Produced Sold EIFM 31250 25,000 6,250 CM 93750 85,000 8,750 Shreds 50000 43,000 7,000

Inventory Valuation using the Sales Value @ Splitoff + Byproduct Value @ Production MethodOutput Produced "Cost" End Inv Value CheckFM 31250 $ 226,000 6,250 $ 45,200 OKCM 93750 $ 339,000 8,750 $ 31,640 OKShreds 50000 $ 35,000 7,000 $ 4,900 ?Total $ 600,000 $ 81,740 OK

May Income Statement (Production Method)Product Qty Sale Price COGS Gross MarginFM 25,000 $ 300,000 $ (180,800) $ 119,200 CM 85,000 $ 510,000 $ (307,360) $ 202,640 Total 110000 $ 810,000 $ (488,160) $ 321,840

Inventory Valuation using the Sales Value @ Splitoff + Byproduct Value @ Sales MethodOutput Produced "Cost" End Inv Value CheckFM 31250 $ 240,000 6250 $ 48,000 OKCM 93750 $ 360,000 8750 $ 33,600 OKShreds 50000 $ - 7000 $ - Total $ 600,000 $ 81,600 OK

May Income Statement (Sales Method)Product Qty Sale Price COGS Gross MarginFM 25000 $ 300,000 $ (192,000) $ 108,000 CM 85000 $ 510,000 $ (326,400) $ 183,600 Shreds 43000 $ 30,100 $ 30,100 Total 153000 $ 840,100 $ (518,400) $ 321,700

F22

01234: What would be a good check to ensure this # "articulates" with the others?

A26

01234: Note that Byproduct sales are NOT shown in the Statement even though the entire estimated byproduct revenue has been deducted from the COGS computation for the items that are shown. This makes it hard to articulate the value of EI of the byproduct with the Monthly IS

F35

01234: This is not tracked under the Sales Method of accounting for byproducts

Sonnet Inc.

Actual output as fraction of budget 95%

Item ActualProduction 1,500,000 1,425,000 Sales 1,500,000 1,425,000 Price 6.00 6.10 Direct Material 1.50 1.60 Direct Labor Rate 12.00 12.20 Labor Productivity 300 250 Direct Marketing Cost 0.30 0.25 FOH 800,000 810,000 Market Size 7,500,000 8,906,250 Market Share 0.20 0.16 Budgeted CM/Unit 4.16

Budget / Standard

Budgeted and Actual Operating Income, Sonnet Inc., for the month of May

Line item Static (Master) Budget Flexible BudgetRevenue 9,000,000 (450,000) U 8,550,000 COGSDirect material (2,250,000) 112,500 F (2,137,500)Direct labor (60,000) 3,000 F (57,000)Less Ending Inventory - (2,310,000) - (2,194,500)Gross Margin 6,690,000 6,355,500 Direct Marketing (450,000) 22,500 F (427,500)Fixed Overhead (800,000) - (800,000)Operating Income 5,440,000 (312,000) U 5,128,000

(312,000.00) U

Static Budget Variance

Market size varianceMarket share variance

Sales Volume variance

Budgeted and Actual Operating Income, Sonnet Inc., for the month of MayFlexible Budget Variance

Actual ResultsPrice Variances 142,500 F 8,692,500

(142,500) U - (2,280,000) (1,140) U (11,400) U (69,540)

- (2,349,540) 6,342,960

71,250 F (356,250) (10,000) U (810,000) 60,110 F (11,400) U 5,176,710

48,710 F

(263,290) U

1,170,000 F (1,482,000) U

Efficiency Variances

Day Exercise/Problem Comments

4

5

6 Review PVV

7

8 Continue

9 Continue

10 15-24, 15-31, 15-32

11 May 5/6 15-33; 16-30/31

12 May 7/8

13 May 12/13

14 May 14/15

15 May 19/20

16 May 21/22

2-22 & 2-23

2-4, 4-22 & 4-32/33

9-22 & 9-24

5-28 & 5-40

TBA

7-39, (also 7-23?), 8-39

continue ...

12-18, 25, 35

11-31, 39

Day Exercise/Problem Comments

4

5

6 Review PVV

7

8 Continue

9 Continue

10

11 15-33; 16-30/31

12

13

14

15

16

2-22 & 2-23

2-4, 4-22 & 4-32/33

9-22 & 9-24

5-28 & 5-40

15-24, 15-31, 15-32 & Presentation Planning + Exam discussion (if needed)

TBA

TBA

TBA

TBA

TBA

Grunewald







3,431,850Admin 965,450Mktg 1,366,400


Back of the envelope computation to get to Absorption Costing IncomeFMC allocated to units produced and transferred to EI 55 27500Absorption Cost OI 1,233,150

Note that Operating Income under Variable Costing (VC) differs from that under Absorption Costing (AC) because, under AC, part of the period's FMOH is "inventoried." Put another way the FMOH allocated to the portion of current year's production that is inventoried is NOT being sent to the Income Statement this period. Likewise, if one has beginning inventory, part of last year's FMOH sent to inventory is being expenses this year. So if we want to "read off" AC Op Inc from a set of statements preapred under VC, we just have to make two adjustments: bring back in in last year's FMOH via beginning inventory -- and adjustment which will reduce Op Inc, the other is to remove from the VC Op Inc the amount of cost sent to EI under AC which I have done above. This is the "backdoor" way to get AC Op Inc from the VC Op Inc computation your accountant has just given you. If you can do this off the top of your head, most accountants will think you're a pretty hot job candidiate!

A student asked me to help them understand what was going on in Problem 9-16, especially in the second year.of operations.

My first thought upon reading the problem was that this is a "known" problem that we already have solved. More specifically, the first year is identical to 9-22 in the sense that there is no beg. inventory. A quick computation reveals that at budgeted production of 500 units, FMOH is recovered at the rate of $4,000 per unit. Variable costs are $13,000 per unit. Actual Sales were less than units produced, which has led to an inventory buildup. This MUST mean that part of year 1's FMOH has beeen deferred to year 2. Here we work out what year 2 looks like.

Inn the seond year what I have to keep track of is FMOH comig in via Beginning inventory and going out via ending inventory ... so this is a very good practice problem ...

I grab the worksheet from 9-22 and go to work ... I literally am going to incroporate a beginning inventory adjustment into the statement I had prepared for Grunewald which already had an ending inventory adjustment

You can remove this text box now!

C24

01234: Why positive?



Units Per Unit TotalRevenues 425 7,437,500Beginning Inventory 0Direct Materials 18000 30 540,000Direct Labor 18000 25 450,000MOH 18000 60 1,080,000Fixed MOH absorbed by output 18000 55 990,000Sub-total 3,060,000PVV 2000 55 110,000Less Cost of Goods Inventoried 500 170 85,000Cost of Goods Sold 3,085,000Gross Margin 4,352,500Marketing Costs - Variable 17,500 45 787,500Marketing Costs - Fixed 1,366,400Admin Costs 965,450Operating Income 1,233,150

Note that Operating Income under Variable Costing (VC) differs from that under Absorption Costing (AC) because, under AC, part of the period's FMOH is "inventoried." Put another way the FMOH allocated to the portion of current year's production that is inventoried is NOT being sent to the Income Statement this period. Likewise, if one has beginning inventory, part of last year's FMOH sent to inventory is being expenses this year. So if we want to "read off" AC Op Inc from a set of statements preapred under VC, we just have to make two adjustments: bring back in in last year's FMOH via beginning inventory -- and adjustment which will reduce Op Inc, the other is to remove from the VC Op Inc the amount of cost sent to EI under AC which I have done above. This is the "backdoor" way to get AC Op Inc from the VC Op Inc computation your accountant has just given you. If you can do this off the top of

A student asked me to help them understand what was going on in Problem 9-16, especially in the second year.of operations.

My first thought upon reading the problem was that this is a "known" problem that we already have solved. More specifically, the first year is identical to 9-22 in the sense that there is no beg. inventory. A quick computation reveals that at budgeted production of 500 units, FMOH is recovered at the rate of $4,000 per unit. Variable costs are $13,000 per unit. Actual Sales were less than units produced, which has led to an inventory buildup. This MUST mean that part of year 1's FMOH has beeen deferred to year 2. Here we work out what year 2 looks like.

Inn the seond year what I have to keep track of is FMOH comig in via Beginning inventory and going out via ending inventory ... so this is a very good practice problem ...

I grab the worksheet from 9-22 and go to work ... I literally am going to incroporate a beginning inventory adjustment into the statement I had prepared for Grunewald which already had an ending inventory adjustment

You can remove this text box now!

Partial Solution to 9-16 (second year only)Vmanuf 10000Vmarketing 3000FOH/unit 4000Budgeted 500Produced 400Sold 520Sale price per Unit 24000

Sales 12,480,000 Beginning Inventory 150 Units Variable Cost BI 13,000 1,950,000 FOH 4,000 600,000 Total Cost of BI 2,550,000 Add COGM 400 Units VC 13,000 5,200,000 FOH 4,000 1,600,000 6,800,000 Less cost of EI 30 Units VC 13,000 (390,000)FOH 4,000 (120,000) (510,000) (8,840,000)PVV (400,000)COGS (9,240,000)Gross Income 3,240,000 Less Fixed Marketing Cost (600,000)Operating Income 2,640,000

373 in-class 20140516

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