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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Variable costs and activity bases in decision making
Sales volume has been dropping at Pinnacle Publishing Company. During this time, however, the Shipping Department manager has been under severe financial constraints. The manager knows that most of the Shipping Department's effort is related to pulling inventory from the warehouse for each order and performing the paperwork. The paperwork involves preparing shipping documents for each order. Thus, the pulling and paperwork effort associated with each sales order is essentially the same, regardless of the size of the order. The Shipping Department manager has discussed the financial situation with senior management. Senior management has responded by pointing out that sales volume has been dropping, so that the amount of work in the Shipping Department should be dropping. Thus, senior management told the Shipping Department manager that costs should be decreasing in the department.
The Shipping Department manager prepared the following information:


Given this information, how would you respond to senior management?

To determine

Concept Introduction:

Variable cost:

The cost which is incurred with the production of the product is referred as variable cost. This cost is not fixed and changes as per the changes in the production level, i.e., increase with the increase in production level and decreases with the reduction in the production level.

Activity Costing:

Activity based costing is one of the costing method that identify the important activities in the organisation and accordingly identify their cost drivers. Then cost is allocated on the basis of activities used by each product.

The response to the senior management.

Explanation

The table showing the sales units and selling price per unit in each month:

    ParticularsNo. of customer orders
      (a)
    Sales units per order
      (b)
    Total number of sales units
      c=(a×b)
    Sales volume
      (d)
      ($)
    Selling price per unit
      e=(d/c)
      ($)
    January  1,400  250  350,000  500,000  1.43
    February  1,440  230  331,200  460,000  1.39
    March  1,460  220  321,200  440,000  1

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