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Revenue Budget and Standard Costing Assignment
Question 1: Budget
Required:
1. Prepare a revenue budget for the upcoming academic year
2. Determine the number of staff needed to cover classes.
3. Assume there is a shortage of full-time academic staff. List at least five actions that Resort Island might take to accommodate the growing student numbers.
4. You have been requested by the university's deputy vice chancellor (DVC) to construct budgets for other areas of operation (such as library, grounds, cafeteria, and maintenance). The DVC noted: 'The most important resource of the university is academic staff. Now that you know the number of staff needed, you can prepare the other budgets. Academic staff are indeed the key driver - without them we don't operate.' Does the DVC really understand the linkages with the budgeting process? Explain.
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Revenue Budget
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For the upcoming year:
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No of students
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15000
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No of subject
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60000
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Price per subject
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3500
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Revenue expected
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210,000,000.00
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Staff needed
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Total No of classes
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190
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No of teachers
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63
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3) In case of shortage of staff, resort island can
- Hire temporary teachers
- Tell Seniors to teach juniors
- Merge two classes of same teacher
- Make the classroom discussions online
- Current teacher can take alternative classes
4) No the DVC does not really understand the linkage between budgeting process, it involves us to know more details about what expenses are needed for respective sections.
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Question 2: Standard Costing (20 marks in total)
Required:
1. Calculate the number of standard clerical hours allowed in April, given the number of applications processed.
2. Explain why the company's flexible budget should be based on the number of clerical hours allowed rather than on the number of applications processed.
3. Using Excel, construct a formula flexible overhead budget for the company, and calculate the flexible budget for total overhead cost in April. Include both the formula view and results view of your spreadsheet in your Word document.
4. Prepare a short memorandum to the management of Good Health evaluating the benefits that standard costing systems can offer a business.
Sol:
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Type
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Standard hours per Application
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Multiply: Number of Application
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Standard hours allowed
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Health
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1.0
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375
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375
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Life
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1.5
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300
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450
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Automobile
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2.0
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150
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300
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Renter
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2.0
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600
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1,200
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Homeowner
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5.0
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300
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1,500
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Total Standard hours allowed in April
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3,825
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Flexible budget based on clerical hours rather than the number of application processed. Because of Each type of Application required the different number of labor hour per application of the process.
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Formula, Y = 6000 + 10X
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Where, X means Clerical hours
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Y means Total Overhead Cost
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Total Overhead cost using equation
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Y = 6000 + 10*3825
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Y = 6000 + 38250
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Y = 44250
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Total Overhead cost using Spread Sheet
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Total Standard hours allowed in April
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3,825
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Multiply: Variable overhead per hour
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$ 10
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Total Variable cost
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$ 38,250
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Add: Fixed Overhead Cost
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$ 6,000
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Total Overhead Cost
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$ 44,250
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Standard costing helps to management to check the efficiency of the resource of the business such as material, labor, and overhead.
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It also helps to cost control.
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It helps to measure the value of inventory based on standard cost.
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Helpful in Setting the price of the product.
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Helpful to allocate responsibility of the business. (Hint: Material price variance is unfavorable then Purchasing agent of the company will responsible for a variance.)
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Question 3: Activity based costing (20 marks in total)
Required
1. Calculate the total overhead that should be assigned to the order for development of chemicals.
2. What is the overhead cost per box of chemicals?
3. If Pix Photographic Supply wee to use a plant-wide predetermined overhead rate based on machine hours, calculate he rate per hour.
4. Under the approach in requirement 3, how much overhead would be assigned to the order for development chemicals:
1. in total
2. per box of chemical?
5. Explain why these two product costing systems result in such widely differing costs. Which system do you recommend? Why?
6. Calculate the unit cost of a production order for 100 specially coated plates used in film development. In addition to direct material costing $180 per plate and direct labour costing $60 per plate, the order requires the following:
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Machine setups
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2 setups
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Raw material
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800 kg
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Hazardous materials
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300 kg
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Inspections
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3 inspections
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Machine hours
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50 machine hours
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Ans:
1. Total overhead to be assigned to the order for film development : $ 65,625
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Activity
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Activity Rate
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Production Requirements
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Overhead Cost
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Machine Setup
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$ 3,000 per setup
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4 setups
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$ 12,000
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Materials Handling
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$ 3 per kg
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10,000 kgs.
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30,000
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Hazardous Waste Control
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$ 7.50 per kg
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2,000 kgs
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15,000
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Quality Control
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$ 112.50 per inspection
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10 inspections
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1,125
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Other Overhead Costs
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$ 15 per machine hour
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500 machine hours
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7,500
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Total Overhead Cost
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$ 65,625
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2. Overhead cost per box of chemicals = $ 65,625 / 1,000 boxes = $ 65.625
3. Plant-wide predetermined overhead rate = $ 937,500 / 20,000 machine hours = $ 46.875 per machine hour.
4. Overhead to be assigned to the order for development chemicals = $ 500 machine hours x $ 46.875 per machine hour = $ 23,437.50
5. The difference is due to multiple cost drivers and cost pools being used in activity based costing, as against a single cost driver and a single overhead cost pool in the plantwide method.
If the plantwide method is used, the company would be getting orders no doubt, but at the cost of compromised profitability, as the system is obviously resulting in undercosting of its products, and consequent underpricing. Therefore, the company should follow the activity based costing system.
5. Overhead cost per box of chemical : $ 23,437.50 / 1,000 boxes = $ 23.4375 per box.
6. Unit cost of specially coated plate: $ 327.375
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Machine Setup
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$ 3,000
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Material Handling
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2,400
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Hazardous Waste Control
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2,250
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Quality Control
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337.50
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Other Overhead
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750
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Total Overhead
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8,737.50
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Number of plates
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100
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Overhead cost per plate
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87.375
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Direct Materials
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180
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Direct Labor
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60
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Unit Cost
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$ 327.375
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Question 4: Relevant information for decisions
Required
1. Write a letter providing an analysis and a recommendation with respect to whether the banolide should be sold at split off or processed further. Also include in this letter the key issues that the management should consider when making the outsourcing decision.
Ans:
The decision rule to make discussion of wheather to sell at split off point or to further process is if the incremental revenue is more than incremental cost of further processing, then it is better to further process else its better to sell at split off point, if it has a sales value at split off.
Ltrs
GSX
10000 litres
XeniteBanolide
7000 litres 3000 litres
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Particulars
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Split off
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Further processing
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Incremental
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Sales Value($)
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5000
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20000
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15000
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Cost:
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Further processing cost
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0
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26200
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26200
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Profit/Loss
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5000
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-6200
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-11200
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So here it is clearly seen that the company is getting into losses if it chooses to further process, it is better to sell at split off point
Joint costs are irrelevant for decision making, as this cost will be same weather we sell at split off or after further processing
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Question 5: Variable costing
Required
1. Prepare an income statement for Slumberworld for the current year using:
1. absorption costing
2. variable costing
2. Which costing method, absorption costing or variable costing, shows a higher operating profit? Why?
3. What would be Slumberworld's finished goods inventory cost on 31 December, under:
1. absorption costing
2. variable costing
4. Which costing method, variable or absorption, would you recommend to Slumberworld's management? Why
Answer 1
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Absorption Costing
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Direct Material
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1,20,000
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Direct Labour
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60,000
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Fixed Manufacturing Overhead
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75,000
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Variable Manufacturing Overhead
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36,000
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2,91,000
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Units Manufactured
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15,000
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Cost Per Unit
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19.40
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INCOME STATEMENT - ABSORPTION COSTING METHOD
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PARTICULARS
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AMOUNT
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Sales
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8,10,000
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Less: Cost of Goods Sold
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2,61,900
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(13500 X 19.4)
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Gross Profit
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5,48,100
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Fixed Selling and Admin Expenses
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90,000
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Variable Selling and Admin Expenses
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13,500
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Net Income
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4,44,600
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Variable Costing Method
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Direct Material
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1,20,000
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Direct Labour
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60,000
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Variable Manufacturing Overhead
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36,000
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2,16,000
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Units Manufactured
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15,000
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Cost Per Unit
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14.40
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INCOME STATEMENT - VARIABLE COSTING METHOD
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PARTICULARS
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AMOUNT
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Sales
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8,10,000
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Less: Cost of Goods Sold
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1,94,400
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(13500 X 14.4)
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Fixed Manufacturing Overhead
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75,000
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Gross Profit
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5,40,600
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Fixed Selling and Admin Expenses
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90,000
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Variable Selling and Admin Expenses
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13,500
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Net Income
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4,37,100
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Answer 2
The Absorption Costing method shows higher amount of profit. This is solely due to fixed manufacturing overhead treatment. In absorption costing, Fixed Manufacturing Overhead is apportioned over the units produced hence $75000 is allocated among 15000 Units, per unit cost of same comes down to $5 per unit. Total units sold are 13500 hence total fixed manufacturing overhead charged in absorption costing method is $5 * 13500 Units = $67500. Hence Fixed cost charged as per variable cost method is $7500 more thanthat charged in absorption costing method.
Answer 3
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Absorption Costing
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Finished Stock (Units)
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1,500
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Cost Per Unit
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19.40
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Finished Goods Inventory
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29,100
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Variable Costing
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Finished Stock (Units)
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1,500
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Cost Per Unit
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14.40
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Finished Goods Inventory
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21,600
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Answer 4
If management wants to state higher profit in the books then they should use the absorption costing method and otherwise.
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