1.
|
Proposal 1 |
|
|
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 |
As per the above proposal net income can be increased up to $ 375,000 and can go up by 25% if the price for sales is increased. Increase in the advertising cost will increase the burden on the company. As per Jan Rossie sales can be increased by Approx 8% as compared to last year if the advertising cost and selling price is increased.
|
Proposal 2 |
|
|
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 above proposal the company can increase the sales by 25% if the selling price remains same. However, improving the quality can be effective for generating the sales but chances are there that company will not earn profit more than 1st proposal. Moreover, increasing the cost of manufacturing and incurring the advertisement cost will increase the income by $ 75,000.
|
Proposal 3 |
||
|
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 above proposal company can increase the income by 33% and the company can earn the sales for next 9 months to $ 182,000. Therefore, promotional campaign will be beneficial for the company.
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 |
Under case 1, the company can increase the profit by 48% and as per the 2nd case it can generate profit by 36%. Therefore, in case 1 the sales level is higher as compared to case 2.
3.
|
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 |
|
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 |
|
Cost of special order after employing the new machine |
|
|
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 |
|
Minimum price per trailer |
|
|
Total cost |
$ 58,257.76 |
|
Total unit |
350 |
|
Minimum cost per unit |
$ 166.45 |
Segmented overhead cost – it can be effective for analysis of the total overhead cost associated with the machine set up, material purchase, testing, clearing or packaging. Therefore, the cost pool can be helpful for identification of the cost driver that is useful to know the unit cost and total cost
4.There is no appropriate way to allocate the overhead to specific job and as per the nature the overheads do not relate to the particular job directly. As far as the used method is acceptable to the company the method is appropriate. The main objective is to provide the useful information for the decision makers (Shephard 2012). Therefore the most appropriate method for allocating the overheads is that one which provides the most useful information though it may be difficult to analyse. However, the basis in which the overheads are allocated to the jobs shall remain constant. If different methods are applied for different jobs then the jobs may be overcharged with the overheads or the overheads will be undercharged to the jobs (Nekarda and Ramey 2013). Thus, the full costing objectives that is, to allocate the overheads fully to the jobs will not be fulfilled. Therefore, if the selling prices are fixed on the basis of the full costs, the product will be mispriced as the company will not have enough amounts to cover all the costs.
Segmentation of overhead is the crucial aspect to allocate the overhead cost as it delivers support for identifying the associated costs with the material purchase, setting up, inspection and operation (Xu et al. 2013). For instance, Toyota adopted the segmenting procedure for allocation the overhead costs for improving the efficiency of costing practice in the company (Toyota.com 2018). Various cost related to overheads involves administrative overhead, indirect overheads, manufacturing overheads and selling overheads. It is a crucial to recognize the kinds of cash properly and categorize these costs properly. For example, while any business firm focuses on the segregation of various office supplies and it shall be taken into account under the administrative overhead. Further, the wages associated with the production supplies, material handling and utility of equipments that will be considered as variable overhead (Drury 2013). Accounting and legal expenses, office expenditures, auditing and audit fees shall be segregated as indirect overhead cost. Therefore, segmenting the overhead costs contributes to the reduction of risk associated with overhead cost and undertakes costing procedure efficiently.
Segmenting the overhead costs assists the managers to evaluate entire overhead cost and the source of cost. As per the ABC method, cost pools are important for recognizing the indirect cost drivers and costs of direct material (Özkan and Karaibrahimo?lu 2013). therefore, the allocation of cost through the cost pool will assist the companies realizing which division of the entity incurring higher cost and what measures can be taken for reducing the costs with regard to earn profit and high level of cash flows (Öker and Ad?güzel 2016). Further, the allocation of overhead is important for the organizations that have more than one activity or product or operating division. It also enables the managers in profit calculation of particular product and determining the economic effect of alternative business plans and policies. Moreover, overhead allocation also assists in charging the overheads particularly to the divisions for which the costs are actually incurred.
References
Drury, C.M., 2013. Management and cost accounting. Springer.
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.
Toyota.com., 2018. New Cars, Trucks, SUVs & Hybrids | Toyota Official Site. [online] Available at: https://www.toyota.com/ [Accessed 7 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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