1.
|
Proposal 1- view of Jan Rossi |
|
|
Particulars |
Amount |
|
Sales |
$ 2,800,000.00 |
|
Less: Costs |
|
|
Variable cost |
$ 1,000,000.00 |
|
Fixed cost |
$ 400,000.00 |
|
Fixed selling and administrative cost |
$ 425,000.00 |
|
Variable selling and administrative costs |
$ 600,000.00 |
|
Total costs |
$ 2,425,000.00 |
|
Profit |
$ 375,000.00 |
It can be identified from the above calculation that the profit of Bonza Handtools can go up to the amount of $ 375,000 that is increase by 25%. Further, if the advertising cost is increased it will increase the financial burden on the company (Horngren, Datar and Rajan 2012). As per Jan Rossi, sales can go up by 8% approximately as compared to the last year if the advertising cost as well as the selling price is increased.
|
Proposal 2 – view of Tom Tune |
|
|
Particulars |
Amount |
|
Sales |
$ 3,250,000.00 |
|
Less: Costs |
|
|
Variable cost |
$ 1,375,000.00 |
|
Fixed cost |
$ 400,000.00 |
|
Fixed selling and administrative cost |
$ 300,000.00 |
|
Variable selling and administrative costs |
$ 750,000.00 |
|
Advertising cost |
$ 50,000.00 |
|
Total costs |
$ 2,875,000.00 |
|
Profit |
$ 375,000.00 |
As per the view of Tom Tune, the company can increase their sales by 25% if the selling price is maintained at same price that is $ 130. However, it is found from the above calculation that improving the quality of the product may generate higher level of sales but the profit will not be more than the proposal of Jan Rossi. In fact the profit will be at the same level. On the contrary, if the advertising cost and per unit cost for variable manufacturing is increased, the profit can go up by $ 75,000.
|
Proposal 3 – View of Mary Watson |
||
|
Particulars |
For 1st 3 months |
For rest of the time |
|
Sales |
$ 1,200,000.00 |
$ 1,820,000.00 |
|
Less: Costs |
||
|
Variable cost |
$ 500,000.00 |
$ 700,000.00 |
|
Fixed selling and administrative cost |
$ 300,000.00 |
|
|
Variable selling and administrative costs |
$ 300,000.00 |
$ 420,000.00 |
|
Fixed manufacturing cost |
$ 400,000.00 |
|
|
Total costs |
$ 1,500,000.00 |
$ 1,120,000.00 |
|
Profit |
$ (300,000.00) |
$ 700,000.00 |
|
Total profit |
$ 400,000.00 |
As per the proposal of Mary Watson the company can increase the profit by 33% and it can increase sales for the rest 9 months by $ 182,000. Thus, among the all 3 proposals, promotional campaign is beneficial for Bonza Handtools.
2.
|
Particulars |
Amount |
|
Sales (units) |
150000 |
|
Selling price (per unit) |
$ 15.00 |
|
Revenue |
$ 2,250,000.00 |
|
Total cost (per unit) |
$ 12.50 |
|
Total cost |
$ 1,875,000.00 |
|
Profit |
$ 375,000.00 |
|
Situation 1 |
||
|
Particulars |
Existing |
Additional |
|
Sales (units) |
150000 |
40000 |
|
Selling price (per unit) |
$ 15.00 |
$ 15.00 |
|
Revenue |
$ 2,250,000.00 |
$ 600,000.00 |
|
Total cost (per unit) |
$ 12.50 |
$ 10.50 |
|
Total cost |
$ 1,875,000.00 |
$ 420,000.00 |
|
Profit |
$ 375,000.00 |
$ 180,000.00 |
|
Total profit |
$ 555,000.00 |
|
Situation 2 |
||
|
Particulars |
Existing |
Additional |
|
Sales (units) |
150000 |
30000 |
|
Selling price (per unit) |
$ 15.00 |
$ 15.00 |
|
Revenue |
$ 2,250,000.00 |
$ 450,000.00 |
|
Total cost (per unit) |
$ 12.50 |
$ 10.50 |
|
Total cost |
$ 1,875,000.00 |
$ 315,000.00 |
|
Profit |
$ 375,000.00 |
$ 135,000.00 |
|
Total profit |
$ 510,000.00 |
It can be seen from the above calculation that under case 1, the company can enhance the profit by 48% while in the 2nd case it cam increase the profit by 36%. Therefore, the profit in 1st case is more as compared to 2nd.
3.
|
1. Over allocation rate estimation |
|
|
Particulars |
Amount |
|
Labour hour rate |
$ 12.70 |
|
Indirect cost |
$ 98,400.00 |
|
Labour cost |
$ 17,780.19 |
|
Material cost |
$ 33,810.00 |
|
Other cost |
$ 6,667.57 |
|
Overhead allocation rate |
$ 5.53 |
|
2. Total cost of special order |
|
|
Particulars |
Amount |
|
Labour cost |
$ 17,780.19 |
|
Material cost |
$ 33,810.00 |
|
Other cost |
$ 6,667.57 |
|
Total cost |
$ 58,257.76 |
|
3. Cost of special order after using machine time as overhead |
|
|
Particulars |
Amount |
|
Overhead rate per hour |
$ 10.00 |
|
Material cost |
$ 33,810.00 |
|
Labour cost |
$ 14,000.00 |
|
Other cost |
$ 5,250.00 |
|
Total cost |
$ 53,060.00 |
|
4. Minimum price per trailer |
|
|
Total cost |
$ 58,257.76 |
|
Total unit |
350 |
|
Minimum cost per unit |
$ 166.45 |
ABC and segmented overhead cost
The segmented costs pools for overheads can be useful for total cost analysis of the overhead costs that can be associated with the material purchase, packaging, machine setup, cleaning, testing and maintenance (Xu et al. 2013). Thus, the costs pool is helpful for identification of the cost drivers that can be used for analysing the unit cost and total cost for each of the cost drivers like containers, purchase orders and tests. On the other hand, after analysis of the cost per unit, the activity cost shall be assigned to each product so that the activity based costing can be used (Shephard 2012). Moreover, while cost can be determined as per the ABC method, then the overhead cost per unit can be projected that can be assigned to each of the product. Thus, this method can be used for identifying per unit cost of each product that will assist in generating higher levels of sales and profit (Fenrick and Getachew 2012).
4.No specific rules are there for overhead allocation and each company allocates its overhead in the way that suits it the most. However, the allocation method shall be consistently applied by the company (Nekarda and Ramey 2013). The reason behind this is that if the company uses different methods for different jibs, then some of the jobs will be overcharged with the overhead costs and some of the jobs will be undercharged with regard to overheads. Overhead segmentation is the important part for overhead allocation as it helps in recognizing the cost associated with each job like material handling cost, material purchase cost, product inspection cost (Özkan and Karaibrahimo?lu 2013). Segmenting also assists in analysing the entire costs and sources for the same and it identifies the division that incurs the highest cost and the division with lowest cost (Drury 2013). It also recognize the most profitable division and it assists the accountant to identify the particular overhead that can make the changes to the profit of the product either in positive way or negative way (University.uog.edu 2015). Overheads can segregated based on different expense which in turn helps in determining cost for particular services or jobs as follows –
|
Variable overhead |
Administrative overhead |
Manufacturing overhead |
Indirect overhead |
|
Ø Production supplies and equipment utilities Ø Wages for the handling of material |
Ø Administration and sales utilities Ø Audit fees and outside legal fees Ø Commission or wages Ø Expenses for front office Ø Office supplies |
Ø Factory utilities Ø Rent for factory building Ø Property taxes Ø Wages for junior staffs Ø Salaries for maintenance personnel and managers |
Ø Administrative salaries Ø Accounting and auditing expenses Ø Office and telephone expenses Ø Research and the development |
The segmentation of overheads can be explained through the example of Melbourne Private Hospital, Australia. It is found that in case of the hospital, the treatment time was ordered by physicians through the computer system at the station of the nurses. The orders for the treatment and materials were requisitioned and various charges and costs were recorded on the basis of the patient’s staying duration in hospital (Melbourneprivatehospital.com.au 2018). Further, the associated costs for meals of the patient, bed charges, X-Ray report and medicine were considered while the total costs were calculated. Therefore, after the patients gets cured authorities send the bills that were inclusive of medicine charges, fees of the doctors and other indirect as well as direct overhead costs (Öker and Ad?güzel 2016). Therefore, the costs were properly recorded under the subsidiary ledger that includes the episode number and medical number of the patient
References
Drury, C.M., 2013. Management and cost accounting. Springer.
Fenrick, S. and Getachew, L., 2012. Cost and reliability comparisons of underground and overhead power lines. Utilities Policy, 20(1), pp.31-37.
Horngren, C., Datar, S. and Rajan, M., 2012. Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.
Melbourneprivatehospital.com.au., 2018. Melbourneprivatehospital.com.au. [online] Available at: https://www.melbourneprivatehospital.com.au/ [Accessed 9 Jan. 2018].
Nekarda, C.J. and Ramey, V.A., 2013. The cyclical behavior of the price-cost markup (No. w19099). National Bureau of Economic Research.
Öker, F. and Ad?güzel, H., 2016. Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.
Özkan, S. and Karaibrahimo?lu, Y.Z., 2013. Activity-based costing approach in the measurement of cost of quality in SMEs: a case study. Total Quality Management & Business Excellence, 24(3-4), pp.420-431.
Shephard, R.W., 2012. Cost and production functions (Vol. 194). Springer Science & Business Media.
University.uog.edu., 2015. Understanding, Allocating, and Controlling Overhead Costs. [online] Available at: https://university.uog.edu/cals/people/pubs/mgt/f217.pdf [Accessed 9 Jan. 2018].
Xu, C., Song, L., Han, Z., Zhao, Q., Wang, X., Cheng, X. and Jiao, B., 2013. Efficiency resource allocation for device-to-device underlay communication systems: A reverse iterative combinatorial auction based approach. IEEE Journal on Selected Areas in Communications, 31(9), pp.348-358.
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