Cost Formulas, Single and Multiple Cost Drivers For the past 5 years, Garner Company has had a policy of producing to meet customer demand. As a result, finished goods inventory is minimal, and for the most part, units produced equal units sold. Recently, Garner's industry entered a recession, and the company is producing well below capacity (and expects to continue doing so for the coming year). The president is willing to accept orders that at least cover its variable costs so that the company can keep its employees and avoid layoffs. Also, any orders above variable costs will increase overall profitability of the company. Toward that end, the president of Garner Company implemented a policy that any special orders will be accepted if they cover the costs that the orders cause. To help implement the policy, Garner's controller developed the following cost formulas: Direct Materials Usage = $94X, R2 = 0.90 Direct Labor Usage = $16X, R2 = 0.92 Overhead = $350,000 + $80X, R2 = 0.56 Selling Costs = $50,000 + $7X, R2 = 0.86 where X = Direct Labor Hours. Required: Compute the total unit variable cost. Suppose that Garner has an opportunity to accept an order for 20,000 units at a sales price of $212 per unit. Each unit uses 1 direct labor hour for production. Should Garner accept the order? (The order would not displace any of Garner's regular orders.) Explain the significance of the coefficient of determination measures for the cost formulas. Did these measures have a bearing on your answer in Requirement 1? Should they have a bearing? Why? Suppose that a multiple regression equation is developed for overhead costs: Y = $100,000 + $85X + $5,000S + $300E where X = Direct Labor Hours, S = Number of Setups, and E = Engineering Hours. The coefficient of determination for the equation is 0.89. Assume that the order of 20,000 units requires 12 setups and 600 engineering hours. Given this new information, should the company accept the special order referred to in Requirement 1? Is there any other information about cost behavior that you would like to have? Explain.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Cost Formulas, Single and Multiple Cost Drivers
For the past 5 years, Garner Company has had a policy of producing to meet customer demand. As a result, finished goods inventory is minimal, and for the most part, units produced equal units sold.
Recently, Garner's industry entered a recession, and the company is producing well below capacity (and expects to continue doing so for the coming year). The president is willing to accept orders that at least cover its variable costs so that the company can keep its employees and avoid layoffs. Also, any orders above variable costs will increase overall profitability of the company. Toward that end, the president of Garner Company implemented a policy that any special orders will be accepted if they cover the costs that the orders cause.
To help implement the policy, Garner's controller developed the following cost formulas:
Direct Materials Usage = $94X, R2 = 0.90
Direct Labor Usage = $16X, R2 = 0.92
Overhead = $350,000 + $80X, R2 = 0.56
Selling Costs = $50,000 + $7X, R2 = 0.86
where X = Direct Labor Hours.
Required:
- Compute the total unit variable cost. Suppose that Garner has an opportunity to accept an order for 20,000 units at a sales price of $212 per unit. Each unit uses 1 direct labor hour for production. Should Garner accept the order? (The order would not displace any of Garner's regular orders.)
- Explain the significance of the coefficient of determination measures for the cost formulas. Did these measures have a bearing on your answer in Requirement 1? Should they have a bearing? Why?
- Suppose that a multiple regression equation is developed for overhead costs:
Y = $100,000 + $85X + $5,000S + $300E
where X = Direct Labor Hours, S = Number of Setups, and E = Engineering Hours.
The coefficient of determination for the equation is 0.89. Assume that the order of 20,000 units requires 12 setups and 600 engineering hours. Given this new information, should the company accept the special order referred to in Requirement 1? Is there any other information about cost behavior that you would like to have? Explain.
Variable Cost
Variable cost which is considered to be the important part in the cost determination of the business as well. Variable cost which is comprises of direct material cost direct labor cost and overhead and selling cost as well. Here below given the details related to this as well.
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