on the Climbing Wall, and 10 on the canteen.The depreciation of the Centre is £121,000 per year and should beapportioned by size.The canteen is used by all employees in the surf and climbing centres andits cost should be re-apportioned on that basis.An external firm is used for maintenance of the equipment in the twocentres. In the past, the invoices from this firm have been charged as anoverhead cost. The invoice for this year was£43,000 for 75 hours work. One-third of this related to work on theClimbing Centre and the remainder related to the Surf Centre.Variable costs related to the Surf Centre were £600,000 and for theClimbing Centre were £110,000.Required(a) Apportion the overheads between the three departments. Clearly statethe basis used for apportioning each of the costs.(b) Re-apportion the canteen costs between the two centres.(c) Calculate the Contribution and Profit for the two centres.(d)Discuss the relative performance of the two centres in relation to the twomethods of assessment. Make a recommendation for how Mr Honnoldshould assess the two in the future. Wild Ways is a sports centre with two main centres: an artificial surf centre and anindoor climbing wall. The overall manager, Mr Honnold, uses contribution to assessthe performance of the two departments. Someone has suggested to him that heshould be using profits rather than contribution to assess performance and he hastherefore asked you to attach all of the fixed costs of the sports centre to the twodepartments so that he can compare profits as well as contribution for the last year.The climbing centre brought in revenue of £700,000 last year and the surfcentre £1,200,000.Apart from the two trading centres there is a staff canteen which should betreated as a separate cost centre.You have been given the following information:Size of departmentsSurf Centre100,000 m2Climbing Wall50,000 m2Canteen5,000 m2The electricity used by the centre for heating and lighting costs was£250,000 for the year.Qualified instructors are paid £30,000 each per year and are treated as anoverhead cost. Instructors are needed in both the surf centre and theclimbing wall. There must always be one instructor for every 10 assistants.The two departments employ as few instructors as they can.In addition to the qualified instructors, 29 assistants are employedby the surf centre and 52 by the climbing wall.The canteen employs supervisors who are equivalent to instructors:receiving £30,000 each per year and these costs are treated asoverheads. The canteen needs only one supervisor for every 100members of staff employed in the organisation as a whole (excludinginstructors).Each department has a manager (part-time manager in the canteen)who are paid as follows:Managers' paymentsSurf Centre£50,000Climbing Wall£40,000Canteen£15,000The cost of cleaning is £40,000 per year and the time taken in eachdepartment depends largely on the size.The cost of general administration is £105,000 and should be apportionedby reference to the time spent on working for each department by theaccountant. In a typical week she spends 10 hours on the Surf Centre, 15

Apportionment is the distribution of cost to a cost centre on a suitable basis.

on the Climbing Wall, and 10 on the canteen. The depreciation of the Centre is £121,000 per year and should be apportioned by size. The canteen is used by all employees in the surf and climbing centres and its cost should be re-apportioned on that basis. An external firm is used for maintenance of the equipment in the two centres. In the past, the invoices from this firm have been charged as an overhead cost. The invoice for this year was £43,000 for 75 hours work. One-third of this related to work on the Climbing Centre and the remainder related to the Surf Centre. Variable costs related to the Surf Centre were £600,000 and for the Climbing Centre were £110,000. Required (a) Apportion the overheads between the three departments. Clearly state the basis used for apportioning each of the costs. (b) Re-apportion the canteen costs between the two centres. (c) Calculate the Contribution and Profit for the two centres. (d) Discuss the relative performance of the two centres in relation to the two methods of assessment. Make a recommendation for how Mr Honnold should assess the two in the future.

on the Climbing Wall, and 10 on the canteen. The depreciation of the Centre is £121,000 per year and should be apportioned by size. The canteen is used by all employees in the surf and climbing centres and its cost should be re-apportioned on that basis. An external firm is used for maintenance of the equipment in the two centres. In the past, the invoices from this firm have been charged as an overhead cost. The invoice for this year was £43,000 for 75 hours work. One-third of this related to work on the Climbing Centre and the remainder related to the Surf Centre. Variable costs related to the Surf Centre were £600,000 and for the Climbing Centre were £110,000. Required (a) Apportion the overheads between the three departments. Clearly state the basis used for apportioning each of the costs. (b) Re-apportion the canteen costs between the two centres. (c) Calculate the Contribution and Profit for the two centres. (d) Discuss the relative performance of the two centres in relation to the two methods of assessment. Make a recommendation for how Mr Honnold should assess the two in the future.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter11: Strategic Cost Management

Section: Chapter Questions

Problem 4CE: Kagle design engineers are in the process of developing a new green product, one that will...

See similar textbooks

Similar questions

Jim Salters, the COO of CryoDerm, has asked his cost management team for a product-line profitability analysis for his firm’s two products, Zderm and Bderm. The two skincare products require a large amount of research and development and advertising. After receiving the following statement fromCryoDerm’s costing team, Jim concludes that Zderm is the more profitable product and that perhaps cost-cutting measures should be applied to Bderm. Zderm Bderm Total Sales $3,000,000 $2,000,000 $5,000,000 Cost of Goods Sold ($1,900,000) ($1,600,000) ($3,500,000) Gross Profit $1,100,000 $ 400,000 $1,500,000 R&D (900,000) Selling expenses (100,000) Profit before taxes $ 500,000 Required:(i) Briefly explain why Jim may be wrong in his assessment of the relative performance of the twoproducts. (ii) Suppose that 80% of the R&D and selling expenses are traceable to Zderm. Prepare life-cycle income statements for each product. What does this indicate…
Horsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary. The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the…
Horsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary. The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the…
Horsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary. The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the…
Kagle design engineers are in the process of developing a new green product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed 550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit-and activity-based accounting information (made possible by a recent pilot study producing the activity-based data). Unit-based system: Variable conversion activity rate: 100 per direct labor hour Material usage rate: 20 per part ABC system: Labor usage: 15 per direct labor hour Material usage (direct materials): 20 per part Machining: 75 per machine hour Purchasing activity: 150 per purchase order Setup activity: 3,000 per setup hour Warranty activity: 500 per returned unit (usually requires extensive rework) Customer repair cost: 25 per repair hour (average) Required: 1. Select the lower-cost design using unit-based costing. Are logistical and post-purchase activities considered in this analysis? 2. Select the lower-cost design using ABC analysis. Explain why the analysis differs from the unit-based analysis. 3. What if the post-purchase cost was an environmental contaminant and amounted to 10 per unit for Design A and 40 per unit for Design B? Assume that the environmental cost is borne by society. Now which is the better design?
As manager of department B in MarIeys Manufacturing, based on the costs you identified in the previous exercise for further research, how does this impact the financial performance of your department, and what might be some questions you want to ask or solutions you might propose to Marleys management?
Ken Yalters, the COO of FreshSkin, asked his cost management team for a product line profitability analysis for his firm's two products - Askin and Bskin. The two products are skin care products that require a large amount of research and development and advertising. He received the report below. Ken concluded that Askin was the more profitable product, and that perhaps cost-cutting measures should be applied to the Bskin product. Askin Bskin Total Sales $ 4,011,000 $ 2,605,500 $ 6,616,500 Cost of goods sold (2,605,500 ) (2,111,000 ) (4,716,500 ) Gross profit $ 1,405,500 $ 494,500 $ 1,900,000 Research and development (1,181,000 ) Selling expenses (135,500 ) Profit before taxes $ 583,500 Seventy-five percent of the research and development and selling expenses were traceable to Askin.Profit before taxes for the Bskin product, per life-cycle income statements, is:
A chemical engineer working for a large chemical products company was asked to make a recommendation about which of three mutually exclusive revenue alternatives should be selected for improving the marketability of personal care products used for conditioning hair, cleansing skin, removing wrinkles, etc. The alternatives (X, Y, and Z) were ranked in order of increasing initial investment and then compared by incremental rate of return analysis. The rate of return on each increment of investment was less than the company’s MARR of 17% per year. The alternative to select is: (a) DN (b) Alternative X (c) Alternative Y (d) Alternative Z
San Juan, Incorporated, is considering two alternatives: A and B. The costs associated with the alternatives are listed below: Alternative A Alternative B Material costs $ 35,000 $ 57,000 Processing costs 36,000 57,000 Building costs 12,000 28,000 Equipment rental 19,000 19,000 Are the materials costs and processing costs differential in the choice between alternatives A and B? Multiple Choice Neither materials costs nor processing costs are differential. Both materials costs and processing costs are differential. Only processing costs are differential. Only materials costs are differential.
You work for Alphabet Holdings Plc as a junior management accountant. The board of directors are considering ways to improve the suboptimal performance of an investment in a manufacturing company called DEF products Ltd. As you can see from the table below the directors are considering closing products Bozon and Carbon in an effort to improve overall profitability. You spot that marginal costing would show the results differently and may affect the directors’ decision. Requirements for Question 2 Use your knowledge of management accounting and marginal costing to calculate the contribution of each product Use your findings from part (a) and appropriate academic references to explain whether the company should stop making product Bozon Use your findings from part (a) and appropriate academic references to explain whether the company should stop making product Carbon Discuss how and why marginal costing calculates contribution to pay overheads and why this is…
Kagle design engineers are in the process of developing a new “green” product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data). Unit-based system:Variable conversion activity rate: $100 per direct labor hourMaterial usage rate: $20 per partABC system:Labor usage: $15 per direct labor hourMaterial usage (direct materials): $20 per partMachining: $75 per machine hourPurchasing activity: $150 per purchase orderSetup activity: $3,000 per setup hourWarranty…
CleanTech manufactures equipment to mitigate the environmental effects of waste. (a) If Product A has fixed expenses of $15,000 per year and each unit of product has a $0.20 variable cost, and Product B has fixed expenses of $5000 per year and a $0.50 variable cost, at what number of units of annual production will A have the same overall cost as B? (b) As a manager at CleanTech what other data would you need to evaluate these two products?