Cost and Management Accounting for Profitability

Many companies that previously applied costs to final products based on direct-labor hours have changed to another cost drivers. What are these other cost drivers and why has there been this shift?

"I cannot be bothered with setting up my monthly budget on a spreadsheet. It just takes too long to be worth the effort." Comment.

Cavaliers Company manufactures two sizes of its frying pan, a Tiny and a Huge model. Three activities have been identified as cost drivers and the related costs pooled together to arrive at the following information:

Required:

Assuming activity‑based costing is used, allocate each cost pool to each model.

There are two major reasons why unit costs should be analyzed with care in decision making. What are they?

Total manufacturing costs or full costs are far more widely used in practice than the contribution margin approach. Why?

Texas Company produces and sells 22,000 units of a single product. Costs associated with this level of production are as follows:

Direct materials $15

Direct manufacturing labor 45

Variable manufacturing overhead 25

Fixed manufacturing overhead 40

Total $125

The product normally sells for $160 per unit. Texas Company has received a special order to sell 2,000 units at $120 per unit. Texas Company has excess production capacity.

Required:

Compute the amount by which the operating income of Texas Company would change if the order were accepted.

A one-time-only special order decision

• has no role in segregating special and regular customers

• must involve unused plant capacity to avoid lost profits on regularly priced items

• allows a company to sell products at prices that only cover fixed costs

• involves selling products at a percentage over retail price due to the short time period involved

Ziya Company has a current production capacity level of 200,000 units per month. At this level of production, variable costs are $0.90 per unit and fixed costs are $0.50 per unit. Current monthly sales are 164,500 units. Diyya Company has contacted Ziya Company about purchasing 20,000 units at $2.00 each. Current sales would not be affected by the special order and no additional fixed costs would be incurred on the special order.

Showing your working clearly, advise Ziya whether they should accept the order or not

Which of the statements below is false regarding special order decisions?

• A fixed‑cost element of an identical amount that is common among all alternatives is essentially irrelevant.

• Fixed cost per unit is equal to total fixed costs divided by a selected volume level.

• The contribution approach offers more detailed information than does the absorption approach.

• Fixed cost per unit is a necessary piece of information in the decision‑making process.

Last year Gilligan Company sold 9,000 units that cost $40,000 to produce. This cost included $3,000 in fixed computer resource cost, $10,000 in fixed labor cost, and communications resource cost at $3.00 per unit. Resource costs are expected to be the same next year. Gilligan expects to sell 18,000 units. The sales manager predicts that next year’s cost will be $80,000.

Required: Comment on the sales manager’s cost prediction.