6. Mukriz Motors is a small motor supply outlet that sells motors to companies t
ID: 2337346 • Letter: 6
Question
6. Mukriz Motors is a small motor supply outlet that sells motors to companies that make various small motorized appliances. The fixed operating costs of the company are RM300,000 per year. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the motors and wants to review the company status on a quarterly basis. The shareholder is trying to determine whether the costs should be allocated each quarter based on the 25% of the annual fixed operating costs (RM75,000) or by using an annual forecast budget to allocate the costs. The following information is provided for the operations of the company (in units) Forecast Actual 5,000 4,850 Sales for Second Quarter 8,000 7,900 8,000 8,125 3,000 3,125 Sales for First Quarter Sales for Third Quarter Sales for Fourth Quarter Required: (a) Compute the amount of fixed operating costs that are assigned to each motor by quarter when actual sales are used as the allocation base and RM75,000 is allocated 8 marks] (b) Compute the amount of fixed cost which is recovered each quarter under requirement (a). 4 marks] (c) Identify the amounts of fixed operating costs are assigned to each motor by quarter when forecast sales are used as the allocation base and the rate is calculated annually as part of the budgetary process. 4 marks (d) Compute the amount of fixed cost which is recovered each quarter under requirement (c).Explanation / Answer
Solution:-
(a).Actual sales:-
Actual sales for Quarter 1 = 75,000 / 4,850
= 15.4639
Actual sales for Quarter 1 = 15.4639
Actual sales for Quarter 2 = 75,000 / 7,900
= 9.4936
Actual sales for Quarter 2 = 9.4936
Actual sales for Quarter 3 = 75,000 / 8,125
= 9.2307
Actual sales for Quarter 3 = 9.2307
Actual sales for Quarter 4 = 75,000 / 3,125
= 24.0
Actual sales for Quarter 4 = 24.0
(b). Compute the amount of fixed cost which is recovered each quarter under
requirement (a).
Fixed cost for quarter 1 = $75,000
Fixed cost for quarter 2 = $75,000
Fixed cost for quarter 3 = $75,000
Fixed cost for quarter 4 = $75,000
(c). Identify the amounts of fixed operating costs are assigned to each motor by
quarter when forecast sales are used as the allocation base and the rate is
calculated annually as part of the budgetary process:-
Total forecast sales = 5,000 + 8,000 + 8,000 + 3,000
= 24,000
Total forecast sales = 24,000
Recovery per motor = fixed operating cost / total forecast cost
= 300,000 / 24,000
= 12.5
Recovery per motor =12.5
(d).Compute the amount of fixed cost which is recovered each quarter under
requirement (c):-
Recovery per quarter 1 = 12.5 * 5,000
= 62,500
Recovery per quarter 1 = 62,500
Recovery per quarter 2 = 12.5 * 8,000
= 100,000
Recovery per quarter 2 = 100,000
Recovery per quarter 3 = 12.5 * 8,000
= 100,000
Recovery per quarter 3 = 100,000
Recovery per quarter 4 = 12.5 * 3,000
= 37,500
Recovery per quarter 4 = 37,500
(e) .Between requirement (a) and (c), identify with explanations which method seems
more appropriate in this case:-
e) The requirement under a) where in genuine deals are utilized as bases for division is a more reasonable and down to earth technique.
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