Business Decision Case James Alvarez, an engineer, needs some accounting advice.
ID: 2525862 • Letter: B
Question
Business Decision Case James Alvarez, an engineer, needs some accounting advice. In their spare time during the past year, Alvarez and his college-aged son, Robert, have manufactured a small weed-trimming sickle in a rented building near their home. Robert, who has had one accounting course in college, keeps the books. Alvarez is pleased about the results of their first year's operations. He asks you to look over the following income report prepared by Robert before they leave on a well-deserved vacation to Hawaii, after which they plan to expand their business significantly.Explanation / Answer
1. Advertisemnet Costs,Sales Commissions and Delivery of Products to Customers are atrributable to the Units Sold and Not to Units Produced .By Considering The Above Mentioned as Period Costs and allocating to the units produced will not Reflect true profit and as a result the closing stock will be valued more.The Above Mentioned Costs are only atrributable to units sold.
2.Calculation of Cost of Production Per Unit:-
Materials:
Precast Blades $ 57,000 ( Considering the waste of 3000 Blades as Normal)
preturned Handles $ 40,000 ( Considering the Waste of 5000 Handles as Normal As no Specific Information Given About wastage)
Labour Cost :
Hired Assemblers $ 26,600
Hired painters $ 33,000
Overheads Fixed and Variable: Absorption Costing and Actual Quantity prodeuced as Normal Capacity
Rent on Building $14,900
Rent on Machinery $ 7,100
Utilities for Production $ 8,000
Other Production Costs $11,900
Total Cost of Production $1,98,500
Cost Per Unit Produced=(198500/35000)= $5.671
Calculation of Profit per the Period:
Sales Revenue for 34,000 Units $340000
Less;Cost of Goods Sold ($192828)
(34000*5.6710)
Advertisement ,Sales Comm and Transportation ($76,250)
Net Profit for the Period $ 70,922
3.James should consider the overhead and operating capacity of the plant at full production and reduce the waste costs and utilise the Resources to the maximum and to estimate the market capability to absord the quantity other wise it will lead to block age of funds.
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