managerial accounting and control

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Managerial Accounting

and Control

1.Lilac Flour Meal

2.Hospital Supply Inc.

3. Moti Hera Private Ltd.



Introduction to Process cos



Process costing

Process costing is a method of costing used mainly in mwhere units are continuously mass-produced through on

processes.

In process costing, it is the process that is costed (unlikewhere each job is costed separately). The method used is to tcost of the process and average it over the units of production.

Process costing is adopted when there is mass productionsequence of several processes. Example include chemical, flomanufacturing



Process 1

Process 2

Process 3

Direct material

Direct labour

overheads

Finished goods Cost of

Direct material

Direct labour

overheads

Direct material

Direct labour

overheads



Process Cost Systems In a process cost system, costs are tracked through a series of co

manufacturing processes or departments; used for large volume uniform products

An accounting system used to apply costs:

• To similar products

• That are mass-produced

• In a continuous fashion

• Manufacturing process can be clearly segregated in to clearly id processes or departments.

Process costing is appropriate for industries: chemicals, food pro breweries, petroleum refining, metal manufacturing, steel makinindustry etc.

Process costing assumes a sequential flow of costs from one pro

as units of output passes through a specified production process



Process Cost Accounting System



Accounting for Process Costing

• Costs are accumulated by each process

• Each process maintains its process account• The process account is debited with the costs inc

credited with goods completed and transferred to othaccount

•When the goods are completed, they will be tranfinished goods account

• When the goods are sold, the amount will be transfecost of goods sold account



Process A

Material 500

Labour 100

Overhead200

Process B 800

800 800

Process B

Process A800

Material 50

Labour 150

Overhead100

Process C 1

1100 1

Process C

Process B 1100

Material 80

Labour 110

Overhead 210

Finished Gds 1500

1500 1500

Finished Goods

Process C 1500 Cost of GDs Sol

Bal c/d

1500



Lilac Flour Meal

Processed Wheat to produce White flour (60%), Suji (10%), WholemealBran (20%)

The purchase price of wheat and operating cost up to the point of se products were treated as Joint Costs.

Packing, Selling and distribution cost incurred after the sieving stage waindividual products and treated as Separable costs.

At Present: The average unit cost for each product

was arrived at by dividing the total joint costs by the

combined output of the four products.

Joint Costs

Seperable Costs

Total



Monthly Wheat Input = 900 tons

ProductProduction

in %

Production

in tons

Joint Cost

allocated

on the

basis of

production

quantities

(Rs.)

Joint Cost

Per Ton

(Rs.)

Separable

Costs per

Ton (Rs.)

Total Cost Per

Ton (Rs.)

Sales

Price per

Ton (Rs.)

White flour 60 540 999000 1850 78 1928 2100

Suji 10 90 166500 1850 84 1934 2480

Wholemeal flour 10 90 166500 1850 34 1884 2000

Bran 20 180 333000 1850 16 1866 1140

900 16,65,000 1850



Product Production

in %

Production

in tons

Sales Value

Per ton

(Rs.)

Total Sales

Value (Rs.)

% of Total

Sales

Value

Joint Cost

allocated on the

basis of Sales

Allocated

Cost Per

ton

Separable

Costs per

Ton (Rs.)

Tota

Per T

White flour 60 540 2100 1134000 65.08 1083780 2007 78 Suji 10 90 2480 223200 12.81 213300 2370 84

Wholemeal flour 10 90 2000 180000 10.33 172260 1914 34

Bran 20 180 1140 205200 11.78 195660 1087 16

900 1742400 100.00 1665000



Methods of allocating the Joint Cost

1. Net Realisable Value Method

2. Relative Sales Value Method3. Physical Unit Method

4. Weighted Average Method

5. Profit Method



Net Realisable Value (NRV) Method• It is based on the assumption that the processing co

subsequent to the split-off point contribute nothing to princrease in the products sales value is equal to the separable

Joint Costs 1665000

White flour Suji WholeMeal BranSelling Price per ton (Rs.) 2100 2480 2000 1140

Prodn in tons 540 90 90 180

Sales Value (Rs.) 1134000 223200 180000 2052

Seperable Cost per ton (Rs.) 78 84 34 16

Total Separable Cost 42120 7560 3060 28

NRV (Sales- Separable costs) 1091880 215640 176940 202320

NRV weight 0.65 0.13 0.10 0.12

Jt Cost Allocation (NRV Approach 1077781 212856 174655 1997

Per Ton Joint Cost 1996 2365 1941 11



Relative Sales Value Method

• As per this method the joint cost is allocated on the basis of tvalue of the products manufactured.

•Assumption is: if a product is having higher sales price it cos

produce and hence market value is the basis to allocate joint c

Joint Costs 1665000 White flour Suji WholeMeal BSelling Price per ton (Rs.) 2100 2480 2000

Prodn in tons 540 90 90

Sales Value (Rs.) 1134000 223200 180000

Sales weight 0.65 0.13 0.10Jt Cost on Sales Value (SalesValueWt X Jt Cost) 1083626 213285 172004 1

Per Ton Cost 2007 2370 1911



Physical Unit Method

• On the basis of units manufactured

White flour Suji WholeMeal Bra

Prodn in tons 540 90 90 180


Output Proportion 0.6 0.1 0.1 0.2

Joint Cost on PU 999000 166500 166500

Per Ton Jt Cost 1850 1850 1850

Joint Costs 1665000

W i ht d A M th d



Weighted Average Method• When Products are heterogeneous, the weighted average approach can

• This method by logic superior to the physical unit method as it assignsindividual product and thus recognises the unique importance of each p

• The weight factor may be the time required to process the units, procedure, Sale price, Amount of prime cost ( direct labour and directfor each product etc.

Joint Costs 1665000

White flour Suji WholeMeal

Prodn in tons 540 90 90

Weighted Average MethodWheat Consumption weight 4 3 2

Weighted Output 2160 270 180

Ratio 0.77 0.10 0.06

Joint Cost (Weighted Average) 1289032 161129 107419

Assuming Each Product is unique



Profit Margin Method

• This method is based on the assumption that profits are earntotal cost incurred and not on the joint cost only.

White flour Suji WholeMeal BraSelling Price per ton (Rs.) 2100 2480 2000 1Prodn in tons 540 90 90

Sales Value (Rs.) 1134000 223200 180000 205

Sales weight 0.65 0.13 0.10 0

Jt Cost on Sales Value (SalesValueWt X Jt Cost) 1083626 213285 172004 196

Per Ton Cost 2007 2370 1911 1

Seperable Cost per ton (Rs.) 78 84 34

Total Separable Cost 42120 7560 3060 2

Joint Cost

Total Cost

Profit

Profit Margin

Profit Margin (Selling price x profit margin) 26.25 31 25 14.2

Production Cost (Selling Price- Profit) 2074 2449 1975 112

Joint Cost allocated/ton (Prod Cost - Seperable

Cost) 1996 2365 1941 111

Example: MMC manufactures memory modules in two step p



Example: MMC manufactures memory modules in two step p

fabrication and module assembly. In chip fabrication, each b

silicon wafers yields 500 standard chips and 500 deluxe chip

classified as standard and deluxe on the basis of their density

memory bits on each chip). Standard chips have 500 memory

and deluxe chips have 1000 memory bits per chip. Joint cos

each batch are $24000.

In module assembly each batch of standard chips is converted i

memory modules at a separately identified cost of $1000 and

$8500. Each batch of deluxe chips is converted into deluxe mem

at a separately identified cost of $1500 and then sold for $25000

Q1. Allocate joint costs of each batch.

Q2. Which method should MMC use?

Q3. MMC can further process each batch to 500 standard memory modul

400 DRAM products at an additional costs of $1600. The selling price pe

product will be $26.

MMC manufactures



Net Realizable Value Standard Delux

Step I Units Price Value Units Price Value

Sale Value Given 500 $8,500 $42,50,000 500 $25,000 $125,00,

Memory Bits per chip Given 500 1000

Step 2Sperable Cost Given $1,000 $5,00,000 $1,500 $7,50,

NRV at Split Off Pt $7,500 $37,50,000 $23,500 $117,50,

Total NRV of Both

products at Spilt off Pt

Joint Cost Given

Weightege 24% 7Joint Cost allocated $5,806 $18,

Unit Jt Cost $11.6 $1

Total Cost per Chip $6,806 $19,

MMC manufactures




Physical Meausres of Total Production 500

Weightage 33%

Joint Cost Alloted $8,000

Total Cost $9,000

Unit Jt cost divide/no of units $16.0

Standard Delux



Sales Value Method

Standard

Sales Value $42,50,000

Sales Value Proportion 25.4%

Joint Cost Allocaiton $6,089.55

Seperable Cost $1,000

Total Cost $7,089.55

Jt Cost per unit $12.18



Hospital Supply Inc



Hospital Supply Inc

Q ti 1



Question 1

Total fixed costs (TFC) = fixed costs per unit times normal volume =($660 + $770)*3

Contribution margin per unit = unit price minus unit variable costs = $4,350 - $2,07

units 1,882280,2$

$4,290,000meeven voluBreak

461,185,8$

350,4$

2,070-$4,350/$4,290,000sales

even Break

(actually, 1,882 *$4,350 = $8,186,

Question 1

Q ti 2 Before Pri ce Af ter



Question 2 Impact: Reduction Redu

Price ..................................................

$ 4,350 $

Quantity ..................................................

3,000

Revenue ..................................................

$13,050,000 $13

Variable mfg.costs ..................................................

( 5,385,000) (6,

Variable mktg.costs ..................................................

(825,000) (

Contributionmargin

...............................................

6,840,000 6

Fixed mfg.costs ..................................................

(1,980,000) (1,

Fixed mktg.costs ..................................................

(2,310,000) (2,

Income

............................................

$ 2,550,000 $ 1

Recommendation:

Lowering pricesreduces income. Other

factors, such as the

reduction of available

capacity and the

capacity and the impacton market share, could

also affect the decision.

Q ti 3 R d i D '



Question 3 Recommendation: Don't accept contract

Government revenue = (500 * $1,795) +.125 ($1,980,000) + $275,000 = $1,420,000,

assuming the government's "share" of March fixed manufacturing costs is .125 (500/4

Q ti 4



Minimum price = variable mfg costs + shipping costs + order costs= $1,795 + $410 + $22,000/1,000 = $2,227

At this price per unit, the $2,227,000 of differential costs caused by the 1,000-ununcovered. Some students solve for this price using the break-even formula (UR =

QUVCUR

TCF

units 1,0002,205UR

22,000

$22,000 = 1,000UR - $2,205,000

$2,227,000 = 1,000UR

$2,227 = UR

Question 4

Question 6 All Production

1,0



QIn-house

Total revenue $13,050,000

Total variable manufacturing costs (5,385,000)

Total variable marketing costs (825,000)

Total contribution margin 6,840,000

Total fixed manufacturing costs (1,980,000)

Total fixed marketing costs 2,310,000

Payment to contractor --

Income $ 2,550,000

,

Co

$

$4,994,000 - X = $2,550

X = $2,444,000 or $2,44

maximum purchase pric

Question 7All Production

Contract 1,000 Regular H

P d 800 M dif i d



Question 7 In-house

Total revenue $13,050,000

Total variable

manufacturing

costs

(5,385,000)

Total variable

marketing costs(825,000)

Total

contribution

margin

6,840,000

Fixedmanufacturing

(1,980,000)

Fixed

marketing

2,310,000

Contractor --

Income $ 2,550,000

Produce 800 Modif ied

Regular (I n) Regular (Out) Modifie

$8,700,000

(3,590,000)

(550,000)

4,560,000

$4,350,000

(220,000)

4,130,000

$3,960

(2,420,

(440,0

1,100,0

Example: ILAB manufactures design tables. ILAB has a policy of adding a 20%d l h i A h d i f



costs and currently has excess capacity. Assume the cost driver for var

manufacturing overhead costs is the number of output units. The following info

to the company's normal operations per month:

Output units = 30,000 tables

Machine-hours = 8,000hoursDirect manufacturing labor-hours =10,000 hours

Direct materials per unit = Rs. 50

Direct manufacturing labor per hour = Rs. 6

Variable manufacturing overhead cos = Rs. 161,250 per month

Fixed manufacturing overhead costs = Rs. 600,000 per month

Product and process design costs = Rs. 450,000 per monthMarketing and distribution costs = Rs. 562,500 per month

ILAB is approached by an overseas customer to fill a one-time-only special order f

cost relationships remain the same except for a one-time setup charge of Rs. 20,0

design, marketing, or distribution costs will be incurred. What is the minimum acce

on this one-time-only special order? For long-run pricing of the coffee tables, wh

likely be used by the company?

R



R

Direct materials Rs. 5

Direct manufacturing labor (Rs.6 x 10,000) / 30,000 2

Variable manufacturing (Rs.161,250 / 30,000) 5.3

Setup (Rs. 20,000 / 2,000) 1

Minimum acceptable bid Rs. 6

Direct materials 50

Direct manufacturing labor ($6 x 10,000)/30,000 2

Variable manufacturing ($161,250/30,000) 5.3

Fixed manufacturing ($600,000/30,000) 2Product and process design costs ($450,000/30,000) 1

Marketing and distribution ($562,500/30,000) 18

Full cost per unit 111

Markup (20%) 22.2

Estimated selling price 133



Moti and Heera (Private) Limited (A)



Moti and Heera (Private) Limited (A)

Bombay Poster Plant



Rs.

B-Po-1 355230.92

Less B-PO-2 107621.19

Equals B-PO-3 247609.73

Less B-PO-4A 96155.16

Less B-PO-4B 89651.49

Equals B-PO-5 61803.08

Bombay Paint Plant



Rs.

B-PA-1 206261.48

Less B-PA-2 72305.19

Equals B-PA-3133956.29

Less B-PA-4A 32343.98

Less B-PA-4B 51502.33

Equals B-PA-5 50109.98

Bombay Commercial Department



Rs.

B-C-1 81361.56

Less B-C-2 54718.73

Equals B-C-3 26642.83

Less B-C-4A --

Less B-C-4B 2299.83

Equals B-C-5 24343.00

Delhi Poster Plant



Rs.

D-Po-1 99898.50

Less D-PO-2 40619.18

Equals D-PO-3 59279.32

Less D-PO-4A 13608.73

Less D-PO-4B 15937.68

Equals D-PO-5 29732.91

Delhi Paint Plant



Rs.

D-PA-1 23318.21

Less D-PA-2 3866.94

Equals D-PA-3 19451.27

Less D-PA-4A 4068.32

Less D-PA-4B 5517.93

Equals D-PA-5 9865.02

Delhi Commercial Department



Rs.

D-C-1 14514.51

Less D-C-2 9883.79

Equals D-C-3 4630.72

Less D-C-4A --

Less D-C-4B 591.66

Equals D-C-5 4039.06

Mumbai Location



Moti Heera Analysis

Alternative Choice Decisions: Differencial Costs

Mumbai Poster Paint Commercial

EX 3 EX 4 EX 5

Income 3,55,231 2,06,261 81,363

Variable Cost 1,07,621 72,305 54,719 Contribution to Mumbai Fixed OH 2,47,610 1,33,956 26,644

Sunk Cost 96,155 32,344

Escapable Fixed Cost 89,651 51,502 2,300

Total Fixed Cost 1,85,806 83,846 2,300

Contributin to Local Company OH 61,804 50,110 24,344

Mumbai OH

Contribution to Company OH and Profits

Fixed Cost to Sales 0.52 0.41 0.03

Break Even 2,66,565 1,29,103 7,024

Location Cont./ Sales Ratio 0.17 0.24 0.30

Cont to Sales (P/v Ratio) 0.70 0.65 0.33

Delhi Location



Delhi Poster Paint Commercial

EX 6 EX 7 EX 8

Income 99,899 23,318 14,516 1,3

Variable Cost 40,619 3,867 9,884 5

Contribution to Delhi Fixed OH 59,280 19,451 4,632 8

Sunk Cost 13,608 4,068 1 Escapable Fixed Cost 15,938 5,518 592 2

Total Fixed Cost 29,546 9,586 592 3

Contributin to Local Company OH 29,734 9,865 4,040 4

Delhi OH 3

Contribution to Company OH and Profits 1

Company OH

Company Profit/Loss

Fixed Cost to Sales 0.30 0.41 0.04

Break Even 49,791 11,492 1,855 6

Location Cont./ Sales Ratio 0.30 0.42 0.28

Cont to Sales (P/v Ratio) 0.59 0.83 0.32

Moti Heera Analysis

Alternative Choice Decisions: Differencial Costs

Mumbai Poster Paint Commercial Location Total Company

EX 3 EX 4 EX 5



3 5

Income 3,55,231 2,06,261 81,363 6,42,855

Variable Cost 1,07,621 72,305 54,719 2,34,645

Contribution to Mumbai Fixed OH 2,47,610 1,33,956 26,644 4,08,210

Sunk Cost 96,155 32,344 1,28,499

Escapable Fixed Cost 89,651 51,502 2,300 1,43,453

Total Fixed Cost 1,85,806 83,846 2,300 2,71,952

Contributin to Local Company OH 61,804 50,110 24,344 1,36,258

Mumbai OH 89,482

Contribution to Company OH and Profits 46,776

Fixed Cost to Sales 0.52 0.41 0.03 0.42

Break Even 2,66,565 1,29,103 7,024 4,28,274

Location Cont./ Sales Ratio 0.17 0.24 0.30 0.21

Cont to Sales (P/v Ratio) 0.70 0.65 0.33 0.63

Delhi Poster Paint Commercial

EX 6 EX 7 EX 8

Income 99,899 23,318 14,516 1,37,733 7

Variable Cost 40,619 3,867 9,884 54,370 2

Contribution to Delhi Fixed OH 59,280 19,451 4,632 83,363 4

Sunk Cost 13,608 4,068 17,676 1

Escapable Fixed Cost 15,938 5,518 592 22,048 1

Total Fixed Cost 29,546 9,586 592 39,724

Contributin to Local Company OH 29,734 9,865 4,040 43,639 1

Delhi OH 31,011 1

Contribution to Company OH and Profits 12,628

Company OH 1

Company Profit/Loss

Fixed Cost to Sales 0.30 0.41 0.04 0.29

Break Even 49,791 11,492 1,855 65,632

Location Cont./ Sales Ratio 0.30 0.42 0.28 0.32

Cont to Sales (P/v Ratio) 0.59 0.83 0.32 0.61



Relevant Costing

Relevant cost for Decision Making



A relevant cost is a cost that differs between alternatives. Relevant

accounting, refers to the incremental and avoidable cost of implementi

decision.

An avoidable cost can be eliminated in whole or in part, by choosing o

over another.

Avoidable costs are relevant costs. Unavoidable costs are irrelevant cost

Relevant costs are also known as differential, or incremental costs.

When making a particular decision-relevant costs are those that

depending on the decision taken. Therefore, any increase or decrease i

flows as a result of a decision is an indication of relevant cost.

g

Examples: Types of Non-Relevant (irrelevant) Costs:



(i). Sunk Cost: Sunk cost is expenditure which has already been incurred in the

do not affect future costs and cannot be changed by any current or future action

costs are irrelevant in decision making. Sunk cost is irrelevant because it does

future cash flows of a business.

(ii). Committed Costs: Committed costs are costs that will occur in the future,

changed. Future costs that cannot be avoided are not relevant because they wil

irrespective of the business decision being considered.

(iii). Non-Cash Expenses: Non-cash expenses such as depreciation and amortisrelevant because they do not affect the cash flows of a business.

(iv). General Overheads: If any general and administrative overheads which ar

the decisions under consideration can be ignored. It depends to the situation an

business operation.



Relevant Costs for Decision Making: Following alternative deci

can be explored further in the context of Relevant Costing.

1. Make or buy decision/ To produce or to purchase?2. Drop or retain a segment.

3. Utilization of constrained resources.

4. Special order.

Southwestern Company needs 1,000 motors in its manufacture of automobile



p y

the motors from Jinx Motors for Rs.1,250 each. South western’s plant can m

the motors for the following costs per unit:

Direct materials Rs 500

Direct manufacturing labor Rs 250Variable manufacturing overhead Rs 200

Fixed manufacturing overhead Rs 350

Total Rs 1,300

If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing

applied will not be avoided.

Required:

Should the company make or buy the motors?

Should the production line be dropped?



Vulcan swimming cloth pvt. ltd. Is considering to drop one of

line. A recent product income statement for the product line is

Rs.

Revenue 950,760

Cost of goods sold 861840

Gross margin 88920

Selling and administrative expenses 136800

Net Loss (47,880)

Factory overhead accounts for 35 percent of cost of goods sold and is one th

These data are believed to reflect conditions in the immediate future.

Contribution Margin Analysis

R R 9



Revenue Rs.9

Variable costs of goods sold:

Total cost of

sales

861,840

Less: Fixed costs

(861,840 x 35% x 1/3 =

100,548)

100,548 7

Contribution margin (over variable and

fixed

costs)

Rs.

Tamex Company is presently making a part that is used in one of its products. The



p y p y g p p

is:

Direct materials ....................................................... Rs.

Direct labor

Variable manufacturing overhead ........................... Depreciation of special equipment ..........................

(The special equipment has no resale value.)

Supervisor’s salary ..................................................

General factory overhead ........................................

(Common costs allocated on the basis of direct labor-hours) 1

Total unit product cost............................................. Rs. 3

The costs above are based on 20,000 parts produced each year. An outside supplie

provide the 20,000 parts for only Rs. 25 per part. Should this offer be accepted?

Dimond Company needs 10,000 engines for the cars they are producing; they cani f id li k h h l h di i l



engines from outside suppliers or make them themselves. Here are the traditional

the product internally.

Per Unit (Rs.) TotaMaterial 200 2,00

Labour 100 1,00Applied Variable Costs 100 1,00

Total 400 4,00

it costs the company Rs. 400 per engine to make, however they could in fact buy

a supplier at a cost of Rs. 420 per unit. Making seems to be the best option. Howeve

buy in the engines it can use the staff and facilities to produce another product contribution of Rs.50. Whether the Dimond Company should manufacture the pro

buy from the outsider.

Due to the declining popularity of digital watches, Sweiz Company’s digital watch line has notreported a profit for several years. An income statement for last year follows:



Segment Income Statement — Digital Watches

Sales ...................................................................... Rs. 500,000

Less variable expenses:

Variable manufacturing costs ............................ Rs. 120,000

Variable shipping costs ...................................... 5,000

Commissions ..................................................... 75,000 200,000Contribution margin .............................................. 300,000

Less fixed expenses:

General factory overhead*................................. 60,000

Salary of product line manager .......................... 90,000

Depreciation of equipment** ............................ 50,000

Product line advertising ..................................... 100,000

Rent — factory space*** .................................... 70,000

General administrative expense* ....................... 30,000 400,000

Net operating loss .................................................. Rs. (100,000)

* Allocated common costs that would be redistributed to other product lines if digital

watches were dropped.

** This equipment has no resale value and does not wear out through use.

*** The digital watches are manufactured in their own facility.

Should the company retain or drop the digital watch line?

Case 26-1: Import Distributors, Inc.



Import Distributors, Inc. (IDI) imported appliances and distrib

retail appliance stores in the Rocky Mountain States. IDI carrie

lines of merchandise: audio equipment , television equipment

appliances. Each three lines accounted for about one third of trevenues. Although each line was referred to by IDI ma

“department”, until 1994 the company did not prepare departm

statements.

In late 1993, departmental accounts were set-up in anticipationquarterly income statements by department starting 1994. Alth

quarter of 1994, IDI had earned net income amounting to 4.

sales, the television department (TVD) has shown gross marg

small to cover the department’s operating expenses:



The TVD’s poor performance prompted the company’s acc

suggest that perhaps the department should be discontin



suggest that perhaps the department should be discontin

suggestion led to much discussion among the managem

particularly concerning two issues:

First, was the first quarter of the year representative enough

term results to consider discontinuing the TVD?

And second, would discontinuing TVD cause a drop in sales

two departments?

One manager however stated that “ even if the quarter was

other sales would not be hurt, I am still not convinced that w

better off by dropping the TVD.

F

Impact of Discontinuing Television Department



Forgone gross

margin$(189,930)

Cost savings:

Personnel $10 140Department 12,393

Inventor taxes 37,274

Delivery costs 32,248

Sales commissions 80,621

Interest costs 23,708

Total savings 1,96,384

Impact on

operating profit$ 6,454

Tipton one stop decorators sells paint and paint supplies, carpets, and wallpapers at a siMumbai. Al though the company has been very profitable over the years, management

decline in wallpaper sales and earnings. Recent figures are presented below.



p p g g p

Particulars Paint & Paint Supplies (Rs) Carpets (Rs) Wallpape

Sales 3,80,000 4,60,000 1,40,0

Variable Costs 2,28,000 3,22,000 1,12,0

Fixed Costs 56,000 75,000 45,00Total Costs 2,84,000 3,97,000 1,57,0

Operating Income 96,000 63,000 (17,000)

Tipton is studying whether to drop wallpaper business because of the changing market and a

the wallpaper business is dropped, the following changes are expected to occur:

a). The vacated space will be remodelled at a cost of Rs 12,400 and will be devoted to an exend carpet business. The sales of carpet are expected to increase by Rs 1,20,000, and the line’

margin ratio will rise by 5%.

b). Tipton can cut wallpaper’s fixed cost by 40%. The remaining fixed cost will continue to b

c). Customers who purchased wallpaper often bought paint and paint supplies; hence sale

supplies are expected to fall by 20%.

d). The firm will increase advertising expenditure by Rs. 25,000 to promote the expanded car

Paint and

Supplies Carpeting Wall



Sales…………………….. Rs 380,000 Rs 460,000 Rs 14

Less: Variable costs…. 228,000 322,000 1

Existing Contribution margin…. Rs 152,000 Rs 138,000 Rs

If wallpaper is closed, then:

Loss of wallpaper contribution margin…... Rs (28

Remodeling……………………………………. (12

Added profitability from carpet sales*…… 6

Fixed cost savings (Rs45,000 x 40%)………. 1

Decreased contribution margin from paint and supplies

(Rs152,000 x 20%)…………….. (30

Increased advertising……………………….. (25Income (loss) from closure………………… Rs (12

* The current contribution margin ratio for carpeting is 30% (Rs138,000 ÷ Rs460,000)

will increase to 35%, producing a new contribution for the line of Rs 203,000 [(Rs 46

120,000) x 35%]. The end result is that carpeting’s contribution margin will rise by Rs

203,000 - Rs138,000), boosting firm profitability by the same amount.

Jamestown Candle works has just received a request from the Williamsburg Foundatto be used in a special event for major donors. The candles will be used as the only

reception room and will be given out as gifts to the donors as they leave. The candle



p g g y

with the Williamsburg Foundation logo. This sale will have no effect on the compan

retail outlets. The normal selling price of a candle of about the size and weight of th

$3.95 and its unit product cost is $2.30, as shown below:

Direct materials $1.35

Direct labor 0.15

Manufacturing overhead 0.80

Unit product cost $2.30

The variable portion of the manufacturing overhead is $0.05 per candle;

represents fixed manufacturing costs that would not be affected by this specia

Jamestown Candle works would have to order a special candle molWilliamsburg Foundation logo is inscribed. Such a mold would cost $800

Williamsburg Foundation wants a special wick containing gold-like thread

$0.20 to the cost of each candle. Because of the large size of the order a

nature of the work, the Williamsburg Foundation has asked to pay only $2

candle. If accepted, what effect would this order have on the company’s net o

Tot



Per Unit C

Incremental revenue ............................................ $2.95

Incremental costs:

Variable costs:Direct materials ........................................... 1.35

Direct labor .................................................. 0.15

Variable manufacturing overhead ............... 0.05

Special wick ................................................ 0.20

Total variable cost............................................ $1.75

Fixed cost:Special mold ................................................

Total incremental cost .........................................

Incremental net operating income .......................

Ensign Company makes two products, X and Y. The current constraint is

N34 Selected data on the products follow:



N34. Selected data on the products follow:

X Y

Selling price per unit $60 $50

Less variable expenses per unit 36 35Contribution margin $24 $15

Contribution margin ratio 40% 30%

Current demand per week (units) 2,000 2,200

Processing time required on

Machine N34 per unit 1.0 minute 0.5 minute

Machine N34 is available for 2,400 minutes per week, which is not

capacity to satisfy demand for both product X and product Y. Should the c

focus its efforts on product X or product Y?

managerial accounting and control

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