Section I : Cost-Volume-Profit Analysis Net Income Before Tax In year 2014, Hamp
ID: 2454204 • Letter: S
Question
Section I : Cost-Volume-Profit Analysis
Net Income Before Tax
In year 2014, Hampshire Company was expected to make and sold 60,000 of umbrellas quoted price $12.50 each. The company had fixed manufacturing costs of $126,000. It also had fixed costs for administration of $79,525. It also had fixed costs for administration of $79, 525.
Cost record of manufacturing umbrellas in year 2014 to produce 60,000 units:
Direct Materials $3.00
Direct Labor $1.50
Variable Manufacturing Overhead $0.40
Variable Selling Expenses $1.10
Variable Costs $6.00
c. The net income before tax of The Hampshire Company = $94,475.00
Units
Price
Totals
Sales
60,000
$12.50
$750,000
Variable Costs
60,000
$6.00
$360,000
Fixed Costs
$295,525
$295,525
Net Income
$94,475
Contribution Margin
Contribution Margin per Unit in Dollars = Selling Price – Variable Costs
$6.5 = $12.5 - $6
Contribution Margin Ratio = Contribution Margin/Selling Price
52% = $6.5 / $12.5
Break-Even Points in units = Fixed Costs / Contribution Margins
45,465 = $295,525 / $6.5
Break-Even Points Sales = Break-Even Points in units x Selling Price in units
$568,317 = 45,465 x $12.5
In conclusion, the company’s break-even point in total dollars of sales is $568,317. Therefore, the Hampshire Company is breaking-even.
Margin of Safety
a. In units
Margin of Safety in Units = Current Unit Sales – Break-Even Point in Unit Sales
14,534.62 = 60,000 – 45,465
b. In sales dollars
Margin of Safety in Dollars = Current Sales in Dollars – Break-Even Point Sales in Dollars
$181,683 = $750,000 - $568,317
c. As a percentage
Margin of Safety as a Percentage = Margin of Sales in Units / Current Unit Sales
24% = 14,535 / 60,000
Degree of Operating Leverage
Contribution Margin = Sales – Variable Costs
$390,000 = $750,000 - $360,000
Degree of Operating Leverage = Contribution Margin / Operating Income (Net Income)
4.1281 = $390,000 / $94,475
Before-Tax Income Increased by 20%
Sales increase = Current Sales + 20%
72,000 = 60,000 + 20%
Units
$ Per Unit
Totals
Sales
72,000
$12.50
$900,000
Variable Costs
72,000
$6.00
$432,000
Fixed Costs
$295,525
Net Income
$172,475
Operating Leverage = (Sales – Variable Costs) / Net Income
2.71343673 = ($900,000 - $432,000) / $172,475
Increasing = (Increasing Net Income – Prior Net Income) / Prior Net Income
82.56% = ($172,475 – $94,475) / $94,475
Prior Income
$94,475.00
From Part 1
Increase
82.56%
Prior Income X XX% Above
Total
$172,475.00
Targeted Income
Targeted Income = (Fixed Costs + Target Income) / Contribution Margin
Fixed Costs + Target Income
Divided by Contribution Margin
# of Units (Rounded)
Fixed Costs
$295,525
$6.50
45,465
Target Income
$150,000
$6.50
23077
Total
$445,525
$6.50
68,542
Proof for calculation
0
# of Units Above X $ Per Unit
Revenue
68542 x 12.50
$856,779
Variable Costs
68542 x 6.5
$411,254
Contribution Margin
$445,525
Fixed Costs
$295,525
Net Income
$150,000
Sales Mix
Variable Costs Specialty = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Variable Selling Expenses
$6.2 = $3 + $1.5 + $0.40 + $1.3
Current
Specialty
Total
Expected Sales Units
60,000
5,000
65,000
Revenue = Sales X Price
$750,000
$55,000
$805,000
Variable Costs X Units
$360,000
$31,000
$391,000
Contribution Margin
$390,000
$24,000
$414,000
Fixed Costs
$295,525
$15,000
$310,525
Operating Income
$103,475
Prior Net Income From Requirement 1
$94,475.00
Additional Operating Income
(Operating Income Above Less Prior Income)
$9,000.00
Decision:
Yes, the company should continue with the specialty sales as it will lead to increase in income of $9000
CVP Analysis Used For Management:
a. To determine the level of profit for a given level of sales.
Profit = Total Revenue – Total Variable Cost – Total Fixed Cost
$750,000 - $360,000 - $295,525 = $94,475
b. To determine the level of sales necessary to achieve a target profit.
Targeted Income = (Fixed Costs + Target Income) / Contribution Margin
($295,525 + 150,000) / $6.5 = 68,542 units
Section II : Inventory Management
Requirement 1
Hampshire Company
Variable Costing Income Statement
Units
$
Sales
60,000
$12.50
$750,000.00
Variable Cost of Goods Sold:
Beginning Inventory
0
$0
Direct Materials
80,000
$3.00
$240,000.00
Direct Labor
80,000
$1.50
$120,000.00
Manufacturing Overhead
80,000
$0.40
$32,000.00
Total Variable Costs
$392,000.00
Cost of Good Available for Sale
$392,000.00
Deduct Ending Inventory
20,000
$4.90
$98,000.00
Variable Costs of Goods Sold
$294,000.00
Variable Selling Costs
60,000
$1.10
$66,000.00
$66,000.00
Contribution Margin
$390,000.00
Fixed Costs:
Fixed Manufacturing Costs
$216,000
Fixed Administrative Costs
$79,525
Operating Income
$94,475.00
Requirement 2
Hampshire Company
Absorption Costing Income Statement
Units
$
Sales
60,000
$12.50
$750,000.00
Variable Cost of Goods Sold:
Beginning Inventory
$0
Direct Materials
80,000
$3.00
$240,000.00
Direct Labor
80,000
$1.50
$120,000.00
Manufacturing Overhead
80,000
$0.40
$32,000.00
Total Variable Costs
$392,000.00
Allocated Fixed Manufacturing Costs
80,000
$2.70
$216,000.00
Cost of Good Available for Sale
$608,000.00
Deduct Ending Inventory
20,000
$7.60
$152,000.00
Costs of Goods Sold
$456,000.00
Gross Margin
$294,000.00
Fixed Costs:
Variable Selling Costs
60,000
$1.10
$66,000
Fixed Administrative Costs
$79,525
Operating Income
$148,475.00
Section III : Benchmarking
Requirement 1
Price Variances:
(Actual Price – Standard Price) X Actual Quantity
Actual
Standard
Actual Quantity
Variance
Favorable or Unfavorable
Cloth
$1.25
$1.15
128,000
$12,800
Unfav
Handle Assembly
$0.99
$1.05
80,808
-$4,848
Fav
Labor Price Variance
$7.62
$7.50
15,748
$1,890
Unfav
Requirement 2
Efficiency Variances:
(Actual Quantity of Input Used – Standard Quantity of Input Allowed for Actual Output) X Budgeted Price of Input
Actual
Standard
Standard Price
Variance
Favorable or Unfavorable
Cloth
128,000
120,000
$1.15
$9,200
Unfav
(1.5 Yards per Unit)
Handle Assembly
80,808
80,000
$1.05
$848
Unfav
(1 per Unit)
Labor
15,748
16,000
$7.50
-$1,890
Fav
(.20 per Unit)
Section IV : Alternative Costing Method
Cost Information From Instructions
Stick
Collapsible
Units Sold
60,000
3,000
Selling Price
$12.50
$14.00
Direct Material Cost Per Unit
$3.00
$3.10
Direct Labor Cost Per Hour
$7.50
$8.00
Variable MO
$0.40
$0.40
Variable Selling Costs
$1.10
$1.10
Labor Hours Per Unit
0.2
0.2
Sales Orders
120
1
Purchase Orders
50
3
Production Runs
45
6
Material Moves
86
10
Machine Setups
130
6
Machine Hours
525
32
Inspections
200
10
Shipments
60
3
Activity Information from Instructions
Activity
Activity Cost
Activity Cost Driver
Order Processing
$35,000
Number of Sales Orders
Purchasing
$36,000
Number of Purchase Orders
Material Handing
$28,000
Material Moves
Machine Setup
$14,000
Machine Setups
Production
$99,000
Production Runs
Assembly
$80,000
Machine Hours
Inspecting
$11,000
Number of Inspections
Shipping
$7,500
Number of Shipments
Requirement 1
Activity
Total Costs
Quantity of Cost Allocation Base
Overhead Allocation Rate
Order Processing
$35,000
121
$289
Purchasing
$36,000
53
$679
Material Handing
$28,000
96
$292
Machine Setup
$14,000
136
$103
Production
$99,000
51
$1,941
Assembly
$80,000
557
$144
Inspecting
$11,000
210
$52
Shipping
$7,500
63
$119
Requirement 2
Traditional Costing
Stick Umbrella
Collapsible Umbrella
Total
Revenues
$750,000
$42,000
$792,000
Direct Materials
$180,000
$9,300
$189,300
Direct Labor
$90,000
$4,800
$94,800
Variable Overhead
$24,000
$1,200
$25,200
Variable Selling Costs
$66,000
$3,300
$69,300
Allocated Fixed Overhead
$295,200
$14,760
$309,960
Total Costs
$655,200
$33,360
$688,560
Operating Income
$94,800
$8,640
$103,440
Operating Income %
13%
21%
13%
Per Unit Operating Income
$1.58
$2.88
Requirement 3
Activity-Based Costing
Stick Umbrella
Collapsible Umbrella
Total
Revenues
$750,000
$42,000
$792,000
Direct Materials
$180,000
$9,300
$189,300
Direct Labor
$90,000
$4,800
$94,800
Variable Overhead
$24,000
$1,200
$25,200
Variable Selling Costs
$66,000
$3,300
$69,300
Order Processing Costs
$34,680
$289
$34,969
Purchasing Costs
$33,950
$2,037
$35,987
Material Handing Costs
$25,112
$2,920
$28,032
Machine Setup Costs
$13,390
$618
$14,008
Production Costs
$87,345
$11,646
$98,991
Assembly Costs
$75,600
$4,608
$80,208
Inspecting Costs
$10,400
$520
$10,920
Shipping Costs
$7,140
$357
$7,497
Total Costs
$647,617
$41,595
$689,212
Operating Income
$102,383
$405
$102,788
Operating Income %
14%
1%
13%
Per Unit Operating Income
$1.71
$0.14
Requirement 4
Costs per Unit
Stick Umbrella
Collapsible Umbrella
Traditional
$10.92
$11.12
ABC
$10.79
$13.87
Difference
$0.13
-$2.75
Requirement 5
ABC is a better method of cost allocation as it helps in proper allocation of the cost as per the use of the fixed overhead cost for a particular product
Memo to Management
Your memo to management should serve as a summary of your quantitative analysis, reviewing the key points and recommendations that you feel management should be aware of.
A. Describe the overall findings of your analysis, including key elements that management should be aware of.
B. Make a recommendation to management based on your cost accounting analysis that will enhance business planning.
C. Recommend a performance tool to management based on your cost accounting analysis that will improve business operations.
Section V : Memo to Management
TO: John Doe, Accountant Executive
FROM: Jane Doe, Accountant Research Assistant
DATE: November 23, 2015
SUBJECT:
Units
Price
Totals
Sales
60,000
$12.50
$750,000
Variable Costs
60,000
$6.00
$360,000
Fixed Costs
$295,525
$295,525
Net Income
$94,475
Explanation / Answer
The Company uses Cost Volume Profit analysis to find the contribution income towards meeting the Fixed costs and the resultant net income. This analysis helps the company to fix a target income and also to see the results of a change in sales-mix. Contribution analysis has helped the management a. To determine the level of profit for a given level of sales. b. To determine the level of sales necessary to achieve a target profit. c. To determine whether the company should continue with the specialty sales mix or not and its profitablilty. d. To know its margin of safety levels of sales-ie. How much above the break-even point - e. degree of Operating leverage. Inventory Valuation As per variable Costing Income statement Cost of Good Available for Sale Deduct Ending Inventory Variable Costs of Goods Sold Operating Income As per Absorption(Full)Costing Income statement Cost of Good Available for Sale Deduct Ending Inventory Costs of Goods Sold Operating Income The Company has been able to work out the actual profits, by employing the Full costing method- wherein inventory is valued including fixed manufacturing overheads.Fixed costs are deferred in closing stock . Hence , Operating income is higher under Full costing method. Variance analysis Analysis has been done to earmark variances with the standard Variance ip prices due to material & labour show both favourable and unfavourable variances. Same is the case with efficiency variances - with regard to quantity of materials ued and no.of labour hrs. spent. Activity based Costing(ABC) & Traditional costing approaches ABC method first assigns indirect costs to activities and then assigns the costs to products based on the products’ usage of the activities. Cost per unit for both the products , Stick & Collapsible umbrellas have been computed under both methods. Though ABC is a complex process it is more accurate ,as it has provided more precise breakdown of OH costs. Ohs have been allocated based on cost drivers developed for various activity pools and hence costing of product is the more accurate one of the two. Traditional costing systems are simpler and easier to implement than ABC systems. However, traditional costing systems are not as accurate as ABC systems. Traditional costing systems can also result in significant under-costing and over-costing. Based on the given figures ,the following points may be recommended for an effective and efficient costing system: 1. Identification and awareness of variable and fixed costs & controllable and uncontrollable costs for accuracy of cost fixing and product pricing as also to fix responsibility to managers for variances and control.For example ,we can ask explanation from managers responsible for unfavourable variances. 2. Adopting full costing method- which is also GAAP compliant and required for tax purposes-is the most recommended even though variable costing is necessary for internal operational efficiency. 3. Variance anslysis should have as its main purpose - fixing responsibility to analyse variance and set in motion , timely corrective measures 4. Adoption of ABC should be cost effective & warranted. As ,in the case of Collapsible umbrellas , there is a wide difference in the profit margin ,under both methods. Hence, ABC type of analysis will be a helpful pointer.
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