MBA 620 FINANCIAL DECISION MAKING

  • SCENARIO: In Project 3, you will help LGI’s leadership move the company forward on a path toward a sustainable future. The company needs to restore the confidence of shareholders and other stakeholders by maintaining a satisfactory level of operating performance.

    Save Time On Research and Writing
    Hire a Pro to Write You a 100% Plagiarism-Free Paper.
    Get My Paper

    LGI, like all companies, needs robust earnings before interest, taxes, depreciation, and amortization (EBITDA). In other words, earnings must be sufficient to cover LGI’s investing activities, debt service, and taxes—with a healthy profit left for reinvestment and distributions to stockholders

    Your Project 3 business report will focus on strengthening EBITDA. To do this, you will analyze LGI’s cost structure and determine how to increase productivity. These tasks are prerequisites for identifying a future investment (Project 4) and how to finance it (Project 5).

    Complete the Analysis Calculation for Project 3

    Your team has provided you with an Excel workbook containing LGI’s financials. You will use the workbook to

    Determine how LGI can strengthen EBITDA

    Save Time On Research and Writing
    Hire a Pro to Write You a 100% Plagiarism-Free Paper.
    Get My Paper

    Discover ways for LGI to increase productivity

    • Perform cost calculations in the worksheetPrepare the Analysis Report for Project 3
      Complete the analysis report for the project:

    Project 3 Questions – Report Template
    Instructions: Answer the five questions below. They focus entirely on improving the EBITDA
    of Largo Global Inc. (LGI) based on the information provided in the Excel workbook. Support
    your reasoning from the readings in Project 3, Step 1, and the discussion in Project 3, Step 3.
    Be sure to cite your sources in APA 7th ed. style.
    Provide a detailed response below each question. Use 12-point font and double spacing.
    Maintain the existing margins in this document. Your final Word document, including the
    questions, should be at most five pages. Include a title page in addition to the five pages.
    Any tables and graphs you include are excluded from the five-page limit. Name your
    document as follows: P3_Final_lastname_Report_date.
    You must address all five questions and use the information on all tabs.
    You are strongly encouraged to exceed the requirements by refining your analysis. Consider
    other tools and techniques that were discussed in the required and recommended reading
    for Project 3. This means adding an in-depth explanation of what happened in the year for
    which data was provided to make precise recommendations to LGI.
    Title Page
    Name
    Course and section number
    Faculty name
    Submission date
    Questions:
    1. How much of the fixed costs were allocated between the Standard and Deluxe Boxes based on the
    Lumpsum Analysis Method? Is the CEO correct that the Deluxe Box is not contributing much to the
    company’s operating profit? Please elaborate on your answer and include evidence from Tab 1 of
    the Excel workbook.
    [insert your answer here]
    2. The intern suggested splitting the costs based on sales volumes, as you have done in the
    calculations performed in Tab 2. Explain the impact of the calculation performed in Tab 2. In your
    discussions, please explain why the answer has changed from the calculations you performed in Tab
    1. It also indicates the benefit of accurate costing when trying to improve operating profit margins.
    [insert your answer here]
    3. Based on the calculations in Tab 3 using ABC, comment on the operating profits made for each
    product. Explain in your report why operating profits have changed under ABC analysis. Also,
    indicate which of the systems – the traditional systems (using lumpsum or volume-based cost
    allocation in Tab 1 and Tab 2) or the ABC systems (Tab 3) provide the best answers for decisionmaking to improve cost management to improve operating profit.
    [insert your answer here]
    4. The sustainability manager is concerned about the Anti-Deluxe Action group’s impact on the
    company and suggested changing the materials and process of making the Deluxe Boxes. As the
    process of making the Sustainable Deluxe Boxes will be less intensive, a suggestion is made that the
    selling price for the Sustainable Deluxe Boxes could be $23 per unit. Discuss whether changing the
    price to $23 is viable for LGI. Provide evidence from the Excel workbook, Tab 4.
    [insert your answer here]
    5. If Largo Global Inc. decides to sell the Sustainable Deluxe Boxes at the price the CEO demands to
    maintain the same profit percentage as Standard Boxes, do you think the new price calculated in Tab
    4 is viable? Why is it essential for LGI to know what their Break-even quantity is? Also, indicate which
    other (non-numerical information) should be considered when pursuing the Sustainable Deluxe Box
    option.
    [insert your answer here]
    Project 3: Review and
    Practice Guide
    UMGC
    MBA 620: Financial
    Decision Making
    Project 3: Review and
    Practice Guide
    Costing and Cost Allocations
    Contents
    Topic 1: Introduction to Managerial Accounting ……………………………………………………………………………… 3
    Managerial Accounting …………………………………………………………………………………………………………….. 3
    The Process …………………………………………………………………………………………………………………………….. 3
    Information for Planning…………………………………………………………………………………………………………… 3
    Managerial vs Financial Accounting……………………………………………………………………………………………. 4
    Topic 2: Cost Terminology ……………………………………………………………………………………………………………. 5
    Cost Behavior ………………………………………………………………………………………………………………………….. 5
    Cost Terminology …………………………………………………………………………………………………………………….. 5
    Variable Costs vs Fixed Costs …………………………………………………………………………………………………….. 6
    Direct Labor…………………………………………………………………………………………………………………………….. 6
    Mixed Costs …………………………………………………………………………………………………………………………….. 6
    Step Costs……………………………………………………………………………………………………………………………….. 6
    Identifying Types of Costs …………………………………………………………………………………………………………. 7
    Topic 3: Cost-Volume-Profit Analysis ……………………………………………………………………………………………… 8
    Uses for Cost-Volume-Price Analysis ………………………………………………………………………………………….. 8
    Profit Equation & Breakeven …………………………………………………………………………………………………….. 8
    Example ………………………………………………………………………………………………………………………………….. 8
    Margin of Safety………………………………………………………………………………………………………………………. 8
    Contribution Margin ………………………………………………………………………………………………………………… 9
    What-If Analysis ………………………………………………………………………………………………………………………. 9
    Assumptions in CVP Analysis …………………………………………………………………………………………………….. 9
    Topic 4: Cost Allocation………………………………………………………………………………………………………………. 10
    The Basics of Cost Allocation …………………………………………………………………………………………………… 10
    1 – Purposes of Cost Allocation ………………………………………………………………………………………………… 10
    2 – Process of Cost Allocation…………………………………………………………………………………………………… 10
    3 – Direct and Indirect Costs ……………………………………………………………………………………………………. 11
    Direct Method ……………………………………………………………………………………………………………………….. 11
    Example: Boise Furniture …………………………………………………………………………………………………….. 11
    Example: Boise Furniture (cont’d.) ……………………………………………………………………………………….. 12
    Example: A Banking Organization …………………………………………………………………………………………. 12
    4 – Problems With Cost Allocation ……………………………………………………………………………………………. 12
    Unitized vs Lump-Sum Allocation …………………………………………………………………………………………….. 13
    Production Volume and Overhead …………………………………………………………………………………………… 13
    Topic 5: Activity-Based Costing ……………………………………………………………………………………………………. 14
    Purpose of Activity-Based Costing ……………………………………………………………………………………………. 14
    The ABC Steps ……………………………………………………………………………………………………………………….. 14
    Benefits of ABC ……………………………………………………………………………………………………………………… 14
    Limitations of ABC ………………………………………………………………………………………………………………….. 14
    Problems/Exercises ……………………………………………………………………………………………………………………. 15
    What to Do ……………………………………………………………………………………………………………………………. 15
    Chapter 3: Practice Exercises …………………………………………………………………………………………………… 15
    Exercise: Cost-Volume-Profit Analysis ………………………………………………………………………………………. 15
    Solution to Exercise………………………………………………………………………………………………………………… 16
    Chapter 7: Practice Exercises …………………………………………………………………………………………………… 17
    Exercise: Traditional & Activity-Based Costing …………………………………………………………………………… 17
    Solution to Exercise………………………………………………………………………………………………………………… 18
    References ……………………………………………………………………………………………………………………………. 20
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 1: Introduction to Managerial Accounting
    Managerial Accounting
    Managerial accounting is designed for internal users for planning, control, and decision making.
    The Process
    Decision making, planning, and control are achieved through budgeting.
    Plan
    •Action taken to implement plan
    Results
    •Comparison of planned and actual results
    Evaluation
    •Decisions to reward or punish managers
    •Decisions to change operations or revise plans
    Based on information from Jiambalvo, 1994
    Information for Planning
    Budgets for planning

    Profit budget
    o Indicates planned income

    Cash flow budget
    o Indicates planned cash inflows and outflows

    Production budget
    o Indicates the planned quantity of production and expected costs
    3
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Managerial vs Financial Accounting
    Managerial
    Financial
    1. Users
    Internal
    External
    2. GAAP
    May deviate
    Must comply
    3. Information
    More detailed, emphasis on Summary, emphasis on
    segments
    total company
    presented
    4. Nonmonetary
    information
    Emphasized
    Not emphasized
    5. Time focus
    Future oriented
    Generally historical
    Based on information from Jiambalvo, 1994
    4
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 2: Cost Terminology
    Cost Behavior
    The way costs impact a company and the way they are classified varies by the type of business.
    Common types of costs
    • Controllable vs. noncontrollable costs
    • Sunk costs
    • Opportunity costs
    • Variable vs fixed costs
    • Direct and indirect costs
    • Mixed costs
    • Step costs
    Cost Terminology
    Controllable & Noncontrollable Costs
    • A manager can influence controllable costs but not noncontrollable costs.
    • Manager should not be evaluated against noncontrollable costs.
    Sunk Costs
    • Costs incurred in the past
    • Not relevant to present decisions
    Opportunity Costs
    • Values of benefits foregone when selecting one alternative over another
    Variable vs Fixed Costs
    • Variable costs change proportionately with changes in volume or activity; fixed costs do not.
    Direct and Indirect Costs
    • Direct costs are directly traceable to a product, activity, or department; indirect costs are not.
    Based on information from Jiambalvo, 1994
    5
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Variable Costs vs Fixed Costs
    Fixed costs too high? Make them variable!
    Examples:
    • Incentive compensation
    • Outsourcing
    Direct Labor
    Questions to consider
    Is direct labor always a variable cost?
    Are you willing to lay off workers when production declines?
    • What if the decline is temporary?
    • What if the decline is permanent?
    Does the degree of automation make a difference in whether direct labor is fixed or variable?
    Mixed Costs
    Mixed costs include both variable and fixed elements.
    Examples:
    Salesperson with base salary (fixed) and commission on sales (variable)


    Base salary included with fixed costs
    Commission included with variable costs
    Step Costs
    Step costs are fixed for a range of output but increase when the upper bound of a range is exceeded.

    When budgeting for a specific range, be sure to use the correct cost
    Example:
    A company adds third production shift. The cost increase includes a production supervisor’s salary.
    6
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Identifying Types of Costs
    Which type of cost is this?
    Fixed cost of a production facility: As the number of
    units produced increases, the fixed production cost
    remains constant.
    As the number of units produced increases, so
    does the variable production cost.
    Mixed cost: The total cost line intersects the yaxis at $100,000, representing the fixed
    component of the mixed cost
    Step costs are fixed over only a small range of
    activity.
    Based on information from Jiambalvo, 1994
    7
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 3: Cost-Volume-Profit Analysis
    Uses for Cost-Volume-Price Analysis
    CVP is the analysis of how costs and profit change when volume changes.
    It is used for:
    • Planning for next year—How much should be produced? What are the projected cost and
    profit?
    • Control—A production cost has increased unexpectedly. Why? Who should be responsible for
    controlling it?
    • Decision making—If the price of the product were decreased or increased, what would the
    profit be?
    Profit Equation & Breakeven
    The Profit Equation
    profit = (selling price × Q) − (variable cost × Q) − total fixed cost = (selling price − variable cost)
    × Q − total fixed cost
    Breakeven—the point at which costs and income are equal
    • Number of units (QBEP) sold allows a company to neither earn a profit nor incur a loss

    $0 = selling price × QBEP − variable cost × QBEP − total fixed cost
    Example
    Here are the price and costs related to a wedding cake business (Jiambalvo, 1994):
    • Each cake sells for $500.
    • The variable cost of baking the cakes is $200.
    • The fixed cost per month is $6,000.
    1. How many cakes must be sold to break even?
    number of cakes × $500 − (number of cakes × $200 + $6,000) = $0
    number of cakes = $6,000 / ($500 − $200) = 20 cakes
    2. How many cakes must be sold to earn a profit of $9,000?
    number of cakes × $500 − (number of cakes × $200 + $6,000) = $9,000
    number of cakes = ($9,000 + $6,000) / ($500 − $200) = 50 cakes
    Margin of Safety
    Margin of safety is a measurement of how close expected revenue is to the breakeven level.
    margin of safety = expected revenue − breakeven revenue
    Example:
    If the wedding cake business expects to sell 35 cakes per month, what is the margin of safety?
    8
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Answer:
    Expected revenue: $500 × 35 = $17,500
    Break-even revenue: $500 × 20 = $10,000
    Margin of safety: $17,500 − $10,000 = $7,500
    Contribution Margin
    The contribution margin is the incremental profit generated by selling one additional unit.
    • unit contribution margin = sales price per unit − variable cost per unit
    • total contribution margin = contribution margin per unit × quantity
    • contribution margin ratio = contribution margin per unit / sales price per unit
    The contribution margin ratio measures the amount of incremental profit generated by an additional
    dollar of sales.
    Wedding cake business example:

    Unit Contribution Margin
    sales price per unit − variable cost per unit = unit contribution margin
    $500 − $200 = $300

    Total Contribution Margin
    contribution margin per unit × quantity = total contribution margin
    $300 × Q = total contribution margin

    Contribution Margin Ratio
    contribution margin per unit / sales price per unit = contribution margin ratio
    $300 / $500 = contribution margin ratio
    What-If Analysis
    Use this equation to determine the impact of managerial decisions on profit:
    • profit = (selling price − variable cost) × Q − total fixed cost
    o Change in fixed and variable costs
    o Change in selling price
    Assumptions in CVP Analysis
    Assumptions affect the validity of the analysis:
    1. Costs can be separated into fixed and variable components
    2. Within a specific range of cost-driver activity, variable cost per unit and total fixed cost
    do not change (relevant range) (Lumen, n.d.)
    3. Multiproduct analysis assumes the product mix does not change
    With correct assumptions, CVP is useful.
    9
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 4: Cost Allocation
    The Basics of Cost Allocation
    1.
    2.
    3.
    4.
    Purpose of Cost Allocation
    Process of Cost Allocation
    Allocating Service Department Costs
    Problems with Cost Allocation
    1 – Purposes of Cost Allocation
    Companies allocate costs to
    • provide information for decision making
    • reduce frivolous use of common resources
    • encourage evaluation of internally provided services
    • calculate the “full cost” of products for GAAP reporting
    Allocated costs serve as charges or fees for use
    of internal resources or services.
    Ideally, allocated cost should
    measure the opportunity cost.
    (Jiambalvo, 1994)
    Provide full-cost information:
    • GAAP requires full costing for external reporting purposes.
    • Full-cost information is needed when the company has an agreement whereby revenue received
    depends upon the cost incurred, as in cost-plus contracts.
    2 – Process of Cost Allocation
    1. Identify the cost objectives.
    2. Form cost pools so that individual costs in the same cost pool are allocated using one allocation
    base.
    3. Select an allocation base to relate cost pools to the cost objective
    10
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Example of the cost-allocation process in action:
    UMGC Europe has several graduate programs. Imagine that you want to allocate costs to these
    programs to determine if
    1. Non-profitable programs should be shut down
    2. Resources are being used efficiently
    Cost pool
    Allocation base
    Cost objectives
    Salaries of the professors
    Salaries of the administrative staff
    Photocopying
    Computer lab
    Rent for the building
    Marketing
    Online course pages
    IT
    Number of students enrolled
    Number of hits per web page
    Number of Trouble Tickets
    fixed + variable × face-to-face
    hours
    MBA
    Cybersecurity
    Social Work
    Management
    3 – Direct and Indirect Costs


    Organizational units of manufacturing firms are classified as one of the following:
    o production department (direct)
    o service department (indirect)
    Cost pools
    o formed by service departments
    o allocated to production departments
    Direct Method
    Example: Boise Furniture
    Service department costs are allocated to production departments but not to other service departments
    Service Departments
    Production Departments
    Products
    Janitorial costs
    Assembly of chair
    Chair
    Personnel costs
    Finishing of table
    Table
    Based on information from Jiambalvo, 1994
    11
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Example: Boise Furniture (cont’d.)
    Allocate the janitorial cost of $100,000 as follows:
    • Allocation base: square feet
    o Assembly department: 20,000 square feet
    o Finishing department: 30,000 square feet
    • Calculate the allocation rate:
    o $100,000 / (20,000 + 30,000) = $2 / sq. ft.
    The resulting allocation to the production departments is as follows:
    o Assembly Dept: 20,000 sq. ft. x $2 = $40,000
    o Finishing Dept: 30,000 sq. ft. x $2 = $60,000
    Example: A Banking Organization
    Assume that a banking organization has these service departments:
    • Human Resources—hires employees and manages benefits
    • Duplicating—performs copy services
    • Janitorial—provides routine cleaning services
    • Accounting—provides accounting services
    • Graphic Design—designs forms)
    • Food Services—provides free breakfast and lunch to employees
    The services are used by the company’s two subsidiaries, Commercial Banking and Investment Banking.
    Suggest ways to allocate the service department costs to the two subsidiaries.
    Food Services are used by employees in the Human Resources department.
    Would a share of food service costs be allocated to Human Resources under the direct method of
    allocation?
    Use the following as the basis for allocating service department costs:
    • Human Resources—number of employees
    • Duplicating—number of pages copied
    • Janitorial—floor space
    • Accounting—number of sales transactions
    • Graphic Design—time spent on design work
    • Food Services—number of employees
    4 – Problems With Cost Allocation





    Allocation of costs that are not controllable
    Arbitrary allocations
    Allocation of fixed costs that make the fixed costs appear to be variable costs
    Allocation of manufacturing overhead to products using too few overhead cost pools
    Use of only volume-related allocation bases
    12
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Unitized vs Lump-Sum Allocation


    Unitized fixed costs
    o Fixed costs are stated on a per-unit basis and allocated as a variable cost.
    o The perception that costs are variable could alter decision making.
    Lump-sum allocations
    o A predetermined amount of fixed costs not affected by level of activity is allocated.
    o The allocation must appear to be fixed to managers of departments that receive the
    charge.
    Production Volume and Overhead
    Problem: Using measures of production volume to allocate overhead



    Typical allocation basis includes direct labor hours and machine hours
    Assumes all overhead costs are proportional to production volume
    What happens when overhead costs are not proportional to production volume?
    o High-volume products are over-costed
    o Low-volume products are under-costed
    ABC solves these problems.
    13
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 5: Activity-Based Costing
    Purpose of Activity-Based Costing



    Identifies major activities that cause overhead costs to be incurred
    Costs of resources consumed performing these activities are grouped into cost pools
    Costs are assigned to products using a measure of activity, i.e., cost driver
    The ABC Steps
    Step 1
    Identify major activities
    • Processing orders, packaging, delivery, customer service
    Step 2
    Group costs of activities into cost pools
    • Salary, vehicles, equipment, packaging materials
    Step 3
    Identify measures of activities—the cost
    drivers
    • Number of orders, number of phone calls, miles per day,
    labor hours
    Step 4
    Relate costs to products using the cost
    drivers
    • One-day service, same-day service, standard service
    Based on information from Jiambalvo, 1994
    Benefits of ABC


    Provides more accurate costing
    o Costs are allocated to products based on the amount of each resource used for the
    activities involved in producing the product.
    May lead to improvements in cost control
    o Understanding each activity that contributes to a product and the resources each one
    consumes enables a company to focus on those areas where efficiency could be
    improved.
    Limitations of ABC


    More costly to develop and maintain than a traditional costing system
    Used to develop full costs of products
    o Includes fixed costs
    o Lacks incremental information necessary for decision making
    14
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Problems/Exercises
    What to Do
    You are encouraged to complete all the practice exercises listed below. They will help you gain the
    knowledge and skills needed to fully participate in the group assignment in Step 3 and complete the
    final Project 2 deliverable. The answers are provided, so you can check your own work.
    Chapter 3: Practice Exercises
    (in Davis, 2015)
    • Unit 3.1 Practice Exercise
    • Unit 3.2 Practice Exercise
    • Unit 3.3 Practice Exercise
    • Unit 3.4 Practice Exercise
    (Practice exercises follow the Self Study questions.)
    Exercise: Cost-Volume-Profit Analysis
    Your company’s CEO is planning for next year. Prepare a contribution format income statement showing
    anticipated operating income. Consider each scenario independently. Last year’s income statement is as
    follows:
    Total
    Per Unit
    Sales
    $600,000
    $15.00
    Variable expenses
    320,000
    8.00
    Contribution margin
    280,000
    7.00
    Fixed expenses
    175,000
    Operating income
    $105,000
    Required
    A.
    B.
    C.
    D.
    E.
    The sales price increases by 12% and sales volume decreases by 4%.
    The sales price increases by 8% and variable cost per unit increases by 6%.
    The sales price decreases by 5% and sales volume increases by 15%.
    Fixed expenses increase by $40,000.
    The sales price increases by 12%, variable cost per unit increases by 15%, fixed expenses
    increase by $30,000, and sales volume decreases by 15%.
    15
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Solution to Exercise
    A. Current sales volume: $600,00/$15 = 40,000 units
    New sales volume: 40,000 × .96 = 38,400 units
    New sales price: $15.00 × 1.12 = $16.80
    Total
    Per Unit
    Sales
    $645,120
    $16.80
    Less variable expenses
    307,200
    8.00
    Contribution margin
    337,920
    $ 8.80
    Less fixed expenses
    175,000
    Operating income
    $162,920
    B. New sales price: $15.00 × 1.08 = $16.20 per unit
    New variable cost per unit: $8.00 × 1.06 = $8.48 per unit
    Total
    Per Unit
    Sales
    $648,000
    $16.20
    Less variable expenses
    339,200
    8.48
    Contribution margin
    308,800
    $ 7.72
    Less fixed expenses
    175,000
    Operating income
    $133,800
    C. New sales price: $15.00 × .95 = $14.25 per unit
    New sales volume: 40,000 × 1.15 = 46,000 units
    Total
    Per Unit
    Sales
    $655,500
    $14.25
    Less variable expenses
    368,000
    8.00
    Contribution margin
    287,500
    $ 6.25
    Less fixed expenses
    175,000
    Operating income
    $112,500
    16
    Project 3 Review and Practice Guide
    Back to Table of Contents
    D. New fixed expenses: $175,000 + $40,000 = $215,000
    Total
    Per Unit
    Sales
    $600,000
    $15.00
    Variable expenses
    320,000
    8.00
    Contribution margin
    280,000
    $ 7.00
    Fixed expenses
    215,000
    Operating income
    $ 65,000
    E. New sales price: $15.00 × 1.12 = $16.80
    New variable cost per unit: $8.00 × 1.15 = $9.20
    New fixed expenses: $175,000 + $30,000 = $205,000
    New sales volume: 40,000 × .85 = 34,000 units
    Total
    Per Unit
    Sales
    $571,200
    $16.80
    Variable expenses
    312,800
    9.20
    Contribution margin
    258,400
    $ 7.60
    Fixed expenses
    205,000
    Operating income
    $ 53,400
    Chapter 7: Practice Exercises
    (in Davis, 2015)
    • Unit 7.1 Practice Exercise
    • Unit 7.2 Practice Exercise
    • Unit 7.3 Practice Exercise
    (Practice exercises follow the Self Study questions.)
    Exercise: Traditional & Activity-Based Costing
    Determining Product Costs
    Your company produces Product A and Product B. Total overhead costs traditionally have been allocated
    based on direct labor hours. Here are the cost pools and cost drivers based on ABC. From now on,
    general costs will not be allocated to products.
    17
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Activity Pool
    Department Cost
    Binding
    297,000
    Printing
    955,500
    Design
    234,000
    General
    727,500
    Total overhead costs
    $2,214,000
    Cost Driver
    Number of units
    Machine hours
    Change orders
    None
    Other information is as follows:
    Units
    Direct materials cost per unit
    Direct labor cost per unit
    Direct labor hours
    Machine hours
    Change orders
    Produce A
    62,500
    3.00
    4.00
    30,000
    150,000
    1,500
    Product B
    20,000
    10.00
    8.00
    19,200
    144,000
    2,400
    Required
    A. Determine the unit product cost for Product A and Product B using the traditional costing
    system.
    B. Determine the unit product cost for Product A and Product B using the ABC system.
    C. Show that general cost is the difference between the total overhead costs allocated to products
    under the traditional system and the total cost allocated to products under ABC.
    Solution to Exercise
    A.
    Predetermined OH rate =
    $2,214,00
    (30,000 DLH + 19,200 DLH)
    Product A
    Direct Materials
    $3.00
    Direct Labor
    4.00
    Overhead 30,000DLH × $45/DLH=
    21.60
    62,500 Product A
    Total Unit Cost
    $28.60
    18
    = $45/DLH
    Product B
    $10.00
    8.00
    19,200DLH × $45/DLH=
    43.20
    20,000 Product B
    $61.20
    Project 3 Review and Practice Guide
    Back to Table of Contents
    B. ABC Rates
    Binding:
    Printing:
    Design:
    $297,000
    (62,500 + 20,000 Product A)
    $955,500
    (150,000 + 144,000) machine hours
    $234,000
    (1,500 + 2,400) change orders
    = $3.60/unit
    = $3.25/machine hour
    = $60/change order
    ABC overhead allocation
    Products A
    Binding
    Printing
    Design
    Total overhead
    Units produce
    Overhead per unit
    Products B
    Binding
    Printing
    Design
    Total overhead
    Units produced
    Overhead per unit
    62,500 tablet × $3.60/unit
    150,000 MH × $3.25/MH
    1,500 change orders × $60/change order
    $225,500
    487,500
    90,000
    802,500
     62,500
    $12.84
    20,000 books × $3.60/unit
    144,000 MH × $3.25/MH
    2,499 change orders × $60/change order
    $72,000
    468,000
    144,000
    684,000
     20,000
    $34.20
    ABC unit cost
    Direct Materials
    Direct Labor
    Overhead
    Total Unit Cost
    Product A
    $ 3.00
    $ 4.00
    12.84
    $19.84
    19
    Product B
    $ 10.00
    8.00
    34.20
    $ 52.20
    Project 3 Review and Practice Guide
    Back to Table of Contents
    C.
    OH allocated to Product A using traditional DLH
    $1,350,000
    (30,000 DLH × $45/DLH)
    OH allocated to Product B using traditional DLH
    (19,200 DLH × $45/DLH)
    864,000
    Total allocated OH using traditional DLH
    $2,214,000
    OH allocated to Product A using ABC
    802,500
    OH allocated to Product B using ABC
    684,000
    Total allocated OH using ABC
    1,486,500
    Difference in allocated overhead
    $ 727,500
    References
    Jiambalvo, J. (1994). Managerial accounting 4th ed. Wiley.
    Lumen Learning. (n.d.). Relevant range. Module 6: cost behavior patterns. Accounting for managers.
    Back to Table of Contents
    20
    Revised on 1/29/2024
    In Project 3 you will analyze managerial and costing information to improve the company’s EBITDA. You will use what you have
    based costing and cost-volume-profit analysis to make recommendations about LGI’s operational productivity.
    Step 1: Use the information you calculated in Project 2 Tab 3 Profit Maximization to populate has Columns C to H in Question
    Step 2: Assume the company operates for 12 months of the year convert the information you populated in Columns C to H to
    M for both the Standard and Deluxe Boxes.
    Step 3: Assume for this project that the only variable costs in this company are materials and labor. All other overhead costs w
    Note: The Total Fixed Cost of 156 is supposed to be constant for the production of total boxes including Standard Box and Delux
    fixed costs of 156 are allocated based on a lump sum method (arbitrarily using a monthly allocation basis). On Tab 2, the total fi
    volume (the number of boxes sold). On Tab 3, the total fixed costs of 156 are allocated based on the cost drivers.
    Question 1
    Standard boxes sold per month
    (millions)
    5
    5.5
    6
    6.5
    7
    7.5
    8
    8.5
    9
    9.5
    10
    10.5
    11
    11.5
    12
    12.5
    13
    13.5
    14
    Revenue (price x
    volume)
    Price
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    22.00
    21.60
    21.20
    20.80
    20.40
    20.00
    19.60
    19.20
    18.80
    18.40
    18.00
    17.60
    17.20
    16.80
    16.40
    16.00
    15.60
    15.20
    14.80
    $
    Variable Cost per
    Standard box
    110.00 $
    10.00
    Deluxe Boxes Profit Maximization ( Columns C to H obtain from Project 2)
    Deluxe boxes sold per month
    (millions)
    1
    1.2
    1.35
    1.5
    1.55
    1.6
    1.65
    1.7
    1.75
    1.8
    Revenue (price x
    volume)
    Price
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    30.00
    29.50
    29.00
    28.50
    28.00
    27.50
    27.00
    26.50
    26.00
    25.50
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    Variable Cost per
    Deluxe box
    30.00 $
    35.40
    39.15
    42.75
    43.40
    44.00
    44.55
    45.05
    45.50
    45.90
    20.00
    1.85
    1.9
    1.95
    2
    2.05
    2.1
    2.15
    2.2
    2.25
    $
    $
    $
    $
    $
    $
    $
    $
    $
    25.00
    24.50
    24.00
    23.50
    23.00
    22.50
    22.00
    21.50
    21.00
    $
    $
    $
    $
    $
    $
    $
    $
    $
    46.25
    46.55
    46.80
    47.00
    47.15
    47.25
    47.30
    47.30
    47.25
    Question 2
    The Company currently operates by selling 9 Million Standard Boxes and 1.5 Million Deluxe Boxes per month.
    The CEO is convinced that under the current cost allocation which allocates fixed costs on a lump sum method (arbitrarily using
    basis) , Deluxe boxes is not contributing much to company profit and with recent threats from environmental groups thinks th
    consider to no longer produce Deluxe Boxes.
    Required (place answers in the in the Grey Spaces provided)
    1)Calculate how much profit each product makes?
    2)Calculate the Profit percentage (based on sales)for each product.
    HINT Use the annual information calculated in Question 1 to complete Question 2
    Standard Boxes
    Deluxe Boxes
    Total
    $ (in millions)
    $ (in millions)
    $ (in millions)
    Number Of Boxes (in Millions
    per month )
    Volume per year ( millions)
    Revenue
    Less: Variable Costs
    Equals: Contribution Margin
    Less: Fixed Costs
    Equals: Operating Profit
    Contribution Margin Ratio %
    Operating Profit % (based on
    revenue)
    e company’s EBITDA. You will use what you have learned about cost behavior and apply activityLGI’s operational productivity.
    on to populate has Columns C to H in Question 1.
    nformation you populated in Columns C to H to annual information and populate Columns I to
    materials and labor. All other overhead costs will be assumed to be fixed.
    of total boxes including Standard Box and Deluxe Box on Tabs 1, 2, and 3. On Tab 1, the total
    a monthly allocation basis). On Tab 2, the total fixed costs of 156 are allocated based on the sales
    ocated based on the cost drivers.
    Annual information (
    Variable Cost
    Total Cost
    Fixed cost per
    Monthly Profit (revenue Annual Revenue
    (cost per unit x
    (Fixed +
    month (millions)
    all costs)
    (millions)
    volume)
    Variable)
    $
    50.00 $
    10.00 $
    60.00 $
    50.00
    Annual information (
    Variable Cost
    Total Cost
    Fixed cost per
    Monthly Profit (revenue Annual Revenue
    (cost per unit x
    (Fixed +
    month (millions)
    all costs)
    (millions)
    volume)
    Variable)
    $
    20.00 $
    3.00 $
    23.00 $
    7.00
    lion Deluxe Boxes per month.
    d costs on a lump sum method (arbitrarily using a monthly allocation
    nt threats from environmental groups thinks that they should
    on 2
    Annual information ( for 12 Months)
    Annual VC
    (millions)
    Annual FC
    (millions)
    Annual Total Costs
    (millions)
    Annual Profit
    Annual information ( for 12 Months)
    Annual VC
    (millions)
    Annual FC
    (millions)
    Annual Total Costs Annual Profit
    (millions)
    (millions)
    Question 1
    A new intern thinks that the profit for Deluxe Boxes are higher than those calculated using the lump sum method (as in Tab1).
    profits using an allocation method for fixed costs based on sales volume( the number of boxes sold) to split the Fixed Costs b
    Boxes.
    Required: (Complete the grey spaces):
    1) First calculate the percentage portion each product has of the total sales volume
    1) How much fixed costs are allocated to each product based on the sales volume method suggested by the intern?
    2) Also calculate the new operating profit percentage (based on sales) for each product.
    Standard Boxes
    Volumes (per Month)
    Volumes per year ( millions)
    Calculate the portion of Sales Volume (percentage sales volume)
    Calculate how much fixed costs are allocated to each product.
    New Profit
    Revenue
    Less VC
    Contribution Margin
    Less Fixed Costs
    Equals: Operating Profit
    Operating Profit % (based on Revenue)
    9
    108
    Standard Boxes
    ($Millions)
    ated using the lump sum method (as in Tab1). The intern suggests calculating the
    umber of boxes sold) to split the Fixed Costs between the Standard and Deluxe
    me
    e method suggested by the intern?
    roduct.
    Deluxe Boxes
    Total
    1.5
    18
    Deluxe Boxes
    ($Millions)
    10.5
    126
    Total Boxes($
    Millions)
    Question 1
    LGI’s production managers think that the profit on Deluxe Boxes are much lower than the Intern suggested after recently atten
    ABC costing. They propose allocating the total fixed costs between Standard and Deluxe boxes based on this method . They col
    break up of the total costs in Table 1 below. How much overhead would be allocated to Standard and Deluxe Boxes ( in total an
    calculations. Complete the grey spaces
    Table 1
    Manufacturing overhead
    $ Amount (millions)
    Cost driver
    Depreciation
    $47.00
    Square feet
    7,000
    Maintenance
    $50.00
    Direct Labor Hours
    1,000
    Purchase order processing
    $9
    Number of purchases
    orders
    500
    Inspection
    $34
    Number of employees
    1,000
    Indirect Materials
    Supervision
    $5.00
    $7.00
    Labor Hours
    #of inspections
    1,000
    200
    Supplies
    $4.00
    Units manufactured
    1,000
    Total Allocated costs
    $156.00
    Number of boxes per year
    Standard Box
    108
    Allocated Cost per Box
    Question 1
    Standard Boxes
    Revenue
    Subtract: Variable Costs
    Equals: Contribution
    Subtract: Fixed Costs
    Equals: Operating Profit
    Operating Profit % (based
    on Revenue)
    Deluxe Boxes
    Total
    than the Intern suggested after recently attending a course at UMGC where they learned about
    Deluxe boxes based on this method . They collected information about the cost drivers and the
    ated to Standard and Deluxe Boxes ( in total and per unit) using this method? Show all supporting
    Deluxe Box
    80,000
    9,000
    4,500
    6000
    9,000
    800
    9,000
    18
    Totals of Drivers
    Cost for Standard
    Boxes
    Total Cost Check (must
    Cost of Deluxe Boxes
    agree to Column
    B7:B14)
    Question 1
    The sustainability manager is concerned about the long term sustainability implications of Deluxe Boxes on the environment an
    of a Sustainable Deluxe Box. If the company switches the current quantity of Deluxe Boxes sold, to Sustainable Deluxe Boxes,
    1)The Sustainable Deluxe Boxes could be made cheaper, and the sustainability manager believes that the company could sell the
    substantially higher profit than they ever did on the Deluxe Boxes. Based on knowledge of price elasticity of demand s/he/the
    volumes. The marketing manager believes that a lower selling price will also entice current Deluxe Box customers to accept th
    2)The new Sustainable Deluxe Boxes will still attract 60% of the fixed costs allocated to the old Deluxe Box under the ABC metho
    3)The number of boxes sold will not currently be affected by this new selling price, as this is a very select group of customers for
    4)The Standard Box costs and revenue will remain the same as that calculated under the ABC method
    5)In order to help overall profit, the variable costs per sustainable Deluxe box will be reduced to $11 per box vice the original $2
    Required (complete the grey spaces)
    1)Determine the profit and profit percentage for the Standard and Sustainable Deluxe Boxes
    Quantity
    Selling price per unit
    Revenue
    Subtract: Variable Costs
    Equals: Contribution Margin
    Subtract: Fixed Costs
    Equals: Operating Profit
    Operating Profit % (based on revenue)
    Contribution Margin %
    $
    Sustainable Deluxe Boxes
    Standard Boxes
    108.00
    18.00
    18.80 $
    23.00
    Question 2
    The CEO is not convinced and still thinks that no form of a Deluxe Box, sustainable or not should be produced. The CEO indicat
    Sustainable Deluxe Boxes will only be considered if it can achieve at least the same operating profit percentage for the Sustain
    indicated under the ABC costing method for Standard Boxes (See Tab 3) .
    Required (Complete the grey spaces).
    1)How much additional operating profit (in percentage) will be required from the Sustainable Deluxe Boxes to meet the same p
    Using Operating Profit %
    Using Gross Profit %
    Required profit
    Subtract: Existing profit
    Equals: Difference in additional profit
    required
    Question 3
    Required: Work out the percentage that the company should mark up on the costs of Sustainable Deluxe Boxes to achieve the
    the grey spaces)
    Revenue %
    Subtract: Required Operating Profit
    Equals: Cost %
    Using Operating Profit %
    100%
    Using Gross Profit %
    Question 4
    Assume the company can still sell the same quantity of the Sustainable Deluxe Boxes as for the Deluxe Boxes
    Required (Complete the grey spaces)
    Use the percentage calculated in Question 3 to determine at which price the company should sell the Sustainable Deluxe Boxes
    Standard Boxes.
    Total ($)
    Using Contribution Margin %
    Total ($)
    Variable Costs
    Plus : Fixed Costs
    Equals: Total Costs
    Determine Revenue
    Units sold (per year)
    Sales Price per unit
    Question 5
    Required: Prove that your calculation in Q 4 is correct. Complete the grey boxes.
    Proof:
    Revenue
    Subtract: Variable Costs
    Total ($)
    Using Contribution Margin %
    Total ($)
    Equals: Contribution Margin
    Subtract: Fixed Costs
    Operating Profit
    Operating Profit %
    Question 6
    The marketing manger is concerned that the change could have a significant impact on sales as customers may see the sustainab
    inferior product for which they still have to pay only a little bit less than the original price of the Deluxe Boxes. How many boxe
    company have to sell to break even on the new Sustainable Deluxe Boxes based on the new selling price? Complete the grey bo
    $ Per unit Sustainable
    Deluxe Boxes
    Selling price
    Less: Variable costs
    Unit Contribution Magin
    Fixed Costs
    Breakeven Quantity
    Break-even Value
    Using Gross Profit %
    of Deluxe Boxes on the environment and suggests changing to sustainable materials for the production
    oxes sold, to Sustainable Deluxe Boxes, there will be some cost implications.
    believes that the company could sell the Sustainable Deluxe Boxes for $23 per box and end up making
    e of price elasticity of demand s/he/they suggest that it may in time even result in much higher sales
    rrent Deluxe Box customers to accept the switch over to the Sustainable Deluxe Box.
    he old Deluxe Box under the ABC method used in tab 3.
    is is a very select group of customers for LGI.
    ABC method
    duced to $11 per box vice the original $20 per box.
    oxes
    Total
    126.00
    ot should be produced. The CEO indicates that consideration of the production of a
    erating profit percentage for the Sustainable Deluxe Boxes as the operating profit percentage
    nable Deluxe Boxes to meet the same percentage as the Standard Boxes are generating,
    See Question 1
    See Q 1 above
    ustainable Deluxe Boxes to achieve the same profit % as for the Standard boxes. (Complete
    for the Deluxe Boxes
    hould sell the Sustainable Deluxe Boxes to reach the same profit percentage as for the
    ales as customers may see the sustainable boxes as an
    ce of the Deluxe Boxes. How many boxes would the
    new selling price? Complete the grey boxes.
    Project 3 Questions – Report Template
    Instructions: Answer the five questions below. They focus entirely on improving the EBITDA
    of Largo Global Inc. (LGI) based on the information provided in the Excel workbook. Support
    your reasoning from the readings in Project 3, Step 1, and the discussion in Project 3, Step 3.
    Be sure to cite your sources in APA 7th ed. style.
    Provide a detailed response below each question. Use 12-point font and double spacing.
    Maintain the existing margins in this document. Your final Word document, including the
    questions, should be at most five pages. Include a title page in addition to the five pages.
    Any tables and graphs you include are excluded from the five-page limit. Name your
    document as follows: P3_Final_lastname_Report_date.
    You must address all five questions and use the information on all tabs.
    You are strongly encouraged to exceed the requirements by refining your analysis. Consider
    other tools and techniques that were discussed in the required and recommended reading
    for Project 3. This means adding an in-depth explanation of what happened in the year for
    which data was provided to make precise recommendations to LGI.
    Title Page
    Name
    Course and section number
    Faculty name
    Submission date
    Questions:
    1. How much of the fixed costs were allocated between the Standard and Deluxe Boxes based on the
    Lumpsum Analysis Method? Is the CEO correct that the Deluxe Box is not contributing much to the
    company’s operating profit? Please elaborate on your answer and include evidence from Tab 1 of
    the Excel workbook.
    [insert your answer here]
    2. The intern suggested splitting the costs based on sales volumes, as you have done in the
    calculations performed in Tab 2. Explain the impact of the calculation performed in Tab 2. In your
    discussions, please explain why the answer has changed from the calculations you performed in Tab
    1. It also indicates the benefit of accurate costing when trying to improve operating profit margins.
    [insert your answer here]
    3. Based on the calculations in Tab 3 using ABC, comment on the operating profits made for each
    product. Explain in your report why operating profits have changed under ABC analysis. Also,
    indicate which of the systems – the traditional systems (using lumpsum or volume-based cost
    allocation in Tab 1 and Tab 2) or the ABC systems (Tab 3) provide the best answers for decisionmaking to improve cost management to improve operating profit.
    [insert your answer here]
    4. The sustainability manager is concerned about the Anti-Deluxe Action group’s impact on the
    company and suggested changing the materials and process of making the Deluxe Boxes. As the
    process of making the Sustainable Deluxe Boxes will be less intensive, a suggestion is made that the
    selling price for the Sustainable Deluxe Boxes could be $23 per unit. Discuss whether changing the
    price to $23 is viable for LGI. Provide evidence from the Excel workbook, Tab 4.
    [insert your answer here]
    5. If Largo Global Inc. decides to sell the Sustainable Deluxe Boxes at the price the CEO demands to
    maintain the same profit percentage as Standard Boxes, do you think the new price calculated in Tab
    4 is viable? Why is it essential for LGI to know what their Break-even quantity is? Also, indicate which
    other (non-numerical information) should be considered when pursuing the Sustainable Deluxe Box
    option.
    [insert your answer here]
    Revised on 1/29/2024
    In Project 3 you will analyze managerial and costing information to improve the company’s EBITDA. You will use what you have
    based costing and cost-volume-profit analysis to make recommendations about LGI’s operational productivity.
    Step 1: Use the information you calculated in Project 2 Tab 3 Profit Maximization to populate has Columns C to H in Question
    Step 2: Assume the company operates for 12 months of the year convert the information you populated in Columns C to H to
    M for both the Standard and Deluxe Boxes.
    Step 3: Assume for this project that the only variable costs in this company are materials and labor. All other overhead costs w
    Note: The Total Fixed Cost of 156 is supposed to be constant for the production of total boxes including Standard Box and Delux
    fixed costs of 156 are allocated based on a lump sum method (arbitrarily using a monthly allocation basis). On Tab 2, the total fi
    volume (the number of boxes sold). On Tab 3, the total fixed costs of 156 are allocated based on the cost drivers.
    Question 1
    Standard boxes sold per month
    (millions)
    5
    5.5
    6
    6.5
    7
    7.5
    8
    8.5
    9
    9.5
    10
    10.5
    11
    11.5
    12
    12.5
    13
    13.5
    14
    Revenue (price x
    volume)
    Price
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    22.00
    21.60
    21.20
    20.80
    20.40
    20.00
    19.60
    19.20
    18.80
    18.40
    18.00
    17.60
    17.20
    16.80
    16.40
    16.00
    15.60
    15.20
    14.80
    $
    Variable Cost per
    Standard box
    110.00 $
    10.00
    Deluxe Boxes Profit Maximization ( Columns C to H obtain from Project 2)
    Deluxe boxes sold per month
    (millions)
    1
    1.2
    1.35
    1.5
    1.55
    1.6
    1.65
    1.7
    1.75
    1.8
    Revenue (price x
    volume)
    Price
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    30.00
    29.50
    29.00
    28.50
    28.00
    27.50
    27.00
    26.50
    26.00
    25.50
    $
    $
    $
    $
    $
    $
    $
    $
    $
    $
    Variable Cost per
    Deluxe box
    30.00 $
    35.40
    39.15
    42.75
    43.40
    44.00
    44.55
    45.05
    45.50
    45.90
    20.00
    1.85
    1.9
    1.95
    2
    2.05
    2.1
    2.15
    2.2
    2.25
    $
    $
    $
    $
    $
    $
    $
    $
    $
    25.00
    24.50
    24.00
    23.50
    23.00
    22.50
    22.00
    21.50
    21.00
    $
    $
    $
    $
    $
    $
    $
    $
    $
    46.25
    46.55
    46.80
    47.00
    47.15
    47.25
    47.30
    47.30
    47.25
    Question 2
    The Company currently operates by selling 9 Million Standard Boxes and 1.5 Million Deluxe Boxes per month.
    The CEO is convinced that under the current cost allocation which allocates fixed costs on a lump sum method (arbitrarily using
    basis) , Deluxe boxes is not contributing much to company profit and with recent threats from environmental groups thinks th
    consider to no longer produce Deluxe Boxes.
    Required (place answers in the in the Grey Spaces provided)
    1)Calculate how much profit each product makes?
    2)Calculate the Profit percentage (based on sales)for each product.
    HINT Use the annual information calculated in Question 1 to complete Question 2
    Standard Boxes
    Deluxe Boxes
    Total
    $ (in millions)
    $ (in millions)
    $ (in millions)
    Number Of Boxes (in Millions
    per month )
    Volume per year ( millions)
    Revenue
    Less: Variable Costs
    Equals: Contribution Margin
    Less: Fixed Costs
    Equals: Operating Profit
    Contribution Margin Ratio %
    Operating Profit % (based on
    revenue)
    e company’s EBITDA. You will use what you have learned about cost behavior and apply activityLGI’s operational productivity.
    on to populate has Columns C to H in Question 1.
    nformation you populated in Columns C to H to annual information and populate Columns I to
    materials and labor. All other overhead costs will be assumed to be fixed.
    of total boxes including Standard Box and Deluxe Box on Tabs 1, 2, and 3. On Tab 1, the total
    a monthly allocation basis). On Tab 2, the total fixed costs of 156 are allocated based on the sales
    ocated based on the cost drivers.
    Annual information (
    Variable Cost
    Total Cost
    Fixed cost per
    Monthly Profit (revenue Annual Revenue
    (cost per unit x
    (Fixed +
    month (millions)
    all costs)
    (millions)
    volume)
    Variable)
    $
    50.00 $
    10.00 $
    60.00 $
    50.00
    Annual information (
    Variable Cost
    Total Cost
    Fixed cost per
    Monthly Profit (revenue Annual Revenue
    (cost per unit x
    (Fixed +
    month (millions)
    all costs)
    (millions)
    volume)
    Variable)
    $
    20.00 $
    3.00 $
    23.00 $
    7.00
    lion Deluxe Boxes per month.
    d costs on a lump sum method (arbitrarily using a monthly allocation
    nt threats from environmental groups thinks that they should
    on 2
    Annual information ( for 12 Months)
    Annual VC
    (millions)
    Annual FC
    (millions)
    Annual Total Costs
    (millions)
    Annual Profit
    Annual information ( for 12 Months)
    Annual VC
    (millions)
    Annual FC
    (millions)
    Annual Total Costs Annual Profit
    (millions)
    (millions)
    Question 1
    A new intern thinks that the profit for Deluxe Boxes are higher than those calculated using the lump sum method (as in Tab1).
    profits using an allocation method for fixed costs based on sales volume( the number of boxes sold) to split the Fixed Costs b
    Boxes.
    Required: (Complete the grey spaces):
    1) First calculate the percentage portion each product has of the total sales volume
    1) How much fixed costs are allocated to each product based on the sales volume method suggested by the intern?
    2) Also calculate the new operating profit percentage (based on sales) for each product.
    Standard Boxes
    Volumes (per Month)
    Volumes per year ( millions)
    Calculate the portion of Sales Volume (percentage sales volume)
    Calculate how much fixed costs are allocated to each product.
    New Profit
    Revenue
    Less VC
    Contribution Margin
    Less Fixed Costs
    Equals: Operating Profit
    Operating Profit % (based on Revenue)
    9
    108
    Standard Boxes
    ($Millions)
    ated using the lump sum method (as in Tab1). The intern suggests calculating the
    umber of boxes sold) to split the Fixed Costs between the Standard and Deluxe
    me
    e method suggested by the intern?
    roduct.
    Deluxe Boxes
    Total
    1.5
    18
    Deluxe Boxes
    ($Millions)
    10.5
    126
    Total Boxes($
    Millions)
    Question 1
    LGI’s production managers think that the profit on Deluxe Boxes are much lower than the Intern suggested after recently atten
    ABC costing. They propose allocating the total fixed costs between Standard and Deluxe boxes based on this method . They col
    break up of the total costs in Table 1 below. How much overhead would be allocated to Standard and Deluxe Boxes ( in total an
    calculations. Complete the grey spaces
    Table 1
    Manufacturing overhead
    $ Amount (millions)
    Cost driver
    Depreciation
    $47.00
    Square feet
    7,000
    Maintenance
    $50.00
    Direct Labor Hours
    1,000
    Purchase order processing
    $9
    Number of purchases
    orders
    500
    Inspection
    $34
    Number of employees
    1,000
    Indirect Materials
    Supervision
    $5.00
    $7.00
    Labor Hours
    #of inspections
    1,000
    200
    Supplies
    $4.00
    Units manufactured
    1,000
    Total Allocated costs
    $156.00
    Number of boxes per year
    Standard Box
    108
    Allocated Cost per Box
    Question 1
    Standard Boxes
    Revenue
    Subtract: Variable Costs
    Equals: Contribution
    Subtract: Fixed Costs
    Equals: Operating Profit
    Operating Profit % (based
    on Revenue)
    Deluxe Boxes
    Total
    than the Intern suggested after recently attending a course at UMGC where they learned about
    Deluxe boxes based on this method . They collected information about the cost drivers and the
    ated to Standard and Deluxe Boxes ( in total and per unit) using this method? Show all supporting
    Deluxe Box
    80,000
    9,000
    4,500
    6000
    9,000
    800
    9,000
    18
    Totals of Drivers
    Cost for Standard
    Boxes
    Total Cost Check (must
    Cost of Deluxe Boxes
    agree to Column
    B7:B14)
    Question 1
    The sustainability manager is concerned about the long term sustainability implications of Deluxe Boxes on the environment an
    of a Sustainable Deluxe Box. If the company switches the current quantity of Deluxe Boxes sold, to Sustainable Deluxe Boxes,
    1)The Sustainable Deluxe Boxes could be made cheaper, and the sustainability manager believes that the company could sell the
    substantially higher profit than they ever did on the Deluxe Boxes. Based on knowledge of price elasticity of demand s/he/the
    volumes. The marketing manager believes that a lower selling price will also entice current Deluxe Box customers to accept th
    2)The new Sustainable Deluxe Boxes will still attract 60% of the fixed costs allocated to the old Deluxe Box under the ABC metho
    3)The number of boxes sold will not currently be affected by this new selling price, as this is a very select group of customers for
    4)The Standard Box costs and revenue will remain the same as that calculated under the ABC method
    5)In order to help overall profit, the variable costs per sustainable Deluxe box will be reduced to $11 per box vice the original $2
    Required (complete the grey spaces)
    1)Determine the profit and profit percentage for the Standard and Sustainable Deluxe Boxes
    Quantity
    Selling price per unit
    Revenue
    Subtract: Variable Costs
    Equals: Contribution Margin
    Subtract: Fixed Costs
    Equals: Operating Profit
    Operating Profit % (based on revenue)
    Contribution Margin %
    $
    Sustainable Deluxe Boxes
    Standard Boxes
    108.00
    18.00
    18.80 $
    23.00
    Question 2
    The CEO is not convinced and still thinks that no form of a Deluxe Box, sustainable or not should be produced. The CEO indicat
    Sustainable Deluxe Boxes will only be considered if it can achieve at least the same operating profit percentage for the Sustain
    indicated under the ABC costing method for Standard Boxes (See Tab 3) .
    Required (Complete the grey spaces).
    1)How much additional operating profit (in percentage) will be required from the Sustainable Deluxe Boxes to meet the same p
    Using Operating Profit %
    Using Gross Profit %
    Required profit
    Subtract: Existing profit
    Equals: Difference in additional profit
    required
    Question 3
    Required: Work out the percentage that the company should mark up on the costs of Sustainable Deluxe Boxes to achieve the
    the grey spaces)
    Revenue %
    Subtract: Required Operating Profit
    Equals: Cost %
    Using Operating Profit %
    100%
    Using Gross Profit %
    Question 4
    Assume the company can still sell the same quantity of the Sustainable Deluxe Boxes as for the Deluxe Boxes
    Required (Complete the grey spaces)
    Use the percentage calculated in Question 3 to determine at which price the company should sell the Sustainable Deluxe Boxes
    Standard Boxes.
    Total ($)
    Using Contribution Margin %
    Total ($)
    Variable Costs
    Plus : Fixed Costs
    Equals: Total Costs
    Determine Revenue
    Units sold (per year)
    Sales Price per unit
    Question 5
    Required: Prove that your calculation in Q 4 is correct. Complete the grey boxes.
    Proof:
    Revenue
    Subtract: Variable Costs
    Total ($)
    Using Contribution Margin %
    Total ($)
    Equals: Contribution Margin
    Subtract: Fixed Costs
    Operating Profit
    Operating Profit %
    Question 6
    The marketing manger is concerned that the change could have a significant impact on sales as customers may see the sustainab
    inferior product for which they still have to pay only a little bit less than the original price of the Deluxe Boxes. How many boxe
    company have to sell to break even on the new Sustainable Deluxe Boxes based on the new selling price? Complete the grey bo
    $ Per unit Sustainable
    Deluxe Boxes
    Selling price
    Less: Variable costs
    Unit Contribution Magin
    Fixed Costs
    Breakeven Quantity
    Break-even Value
    Using Gross Profit %
    of Deluxe Boxes on the environment and suggests changing to sustainable materials for the production
    oxes sold, to Sustainable Deluxe Boxes, there will be some cost implications.
    believes that the company could sell the Sustainable Deluxe Boxes for $23 per box and end up making
    e of price elasticity of demand s/he/they suggest that it may in time even result in much higher sales
    rrent Deluxe Box customers to accept the switch over to the Sustainable Deluxe Box.
    he old Deluxe Box under the ABC method used in tab 3.
    is is a very select group of customers for LGI.
    ABC method
    duced to $11 per box vice the original $20 per box.
    oxes
    Total
    126.00
    ot should be produced. The CEO indicates that consideration of the production of a
    erating profit percentage for the Sustainable Deluxe Boxes as the operating profit percentage
    nable Deluxe Boxes to meet the same percentage as the Standard Boxes are generating,
    See Question 1
    See Q 1 above
    ustainable Deluxe Boxes to achieve the same profit % as for the Standard boxes. (Complete
    for the Deluxe Boxes
    hould sell the Sustainable Deluxe Boxes to reach the same profit percentage as for the
    ales as customers may see the sustainable boxes as an
    ce of the Deluxe Boxes. How many boxes would the
    new selling price? Complete the grey boxes.
    Project 3: Review and
    Practice Guide
    UMGC
    MBA 620: Financial
    Decision Making
    Project 3: Review and
    Practice Guide
    Costing and Cost Allocations
    Contents
    Topic 1: Introduction to Managerial Accounting ……………………………………………………………………………… 3
    Managerial Accounting …………………………………………………………………………………………………………….. 3
    The Process …………………………………………………………………………………………………………………………….. 3
    Information for Planning…………………………………………………………………………………………………………… 3
    Managerial vs Financial Accounting……………………………………………………………………………………………. 4
    Topic 2: Cost Terminology ……………………………………………………………………………………………………………. 5
    Cost Behavior ………………………………………………………………………………………………………………………….. 5
    Cost Terminology …………………………………………………………………………………………………………………….. 5
    Variable Costs vs Fixed Costs …………………………………………………………………………………………………….. 6
    Direct Labor…………………………………………………………………………………………………………………………….. 6
    Mixed Costs …………………………………………………………………………………………………………………………….. 6
    Step Costs……………………………………………………………………………………………………………………………….. 6
    Identifying Types of Costs …………………………………………………………………………………………………………. 7
    Topic 3: Cost-Volume-Profit Analysis ……………………………………………………………………………………………… 8
    Uses for Cost-Volume-Price Analysis ………………………………………………………………………………………….. 8
    Profit Equation & Breakeven …………………………………………………………………………………………………….. 8
    Example ………………………………………………………………………………………………………………………………….. 8
    Margin of Safety………………………………………………………………………………………………………………………. 8
    Contribution Margin ………………………………………………………………………………………………………………… 9
    What-If Analysis ………………………………………………………………………………………………………………………. 9
    Assumptions in CVP Analysis …………………………………………………………………………………………………….. 9
    Topic 4: Cost Allocation………………………………………………………………………………………………………………. 10
    The Basics of Cost Allocation …………………………………………………………………………………………………… 10
    1 – Purposes of Cost Allocation ………………………………………………………………………………………………… 10
    2 – Process of Cost Allocation…………………………………………………………………………………………………… 10
    3 – Direct and Indirect Costs ……………………………………………………………………………………………………. 11
    Direct Method ……………………………………………………………………………………………………………………….. 11
    Example: Boise Furniture …………………………………………………………………………………………………….. 11
    Example: Boise Furniture (cont’d.) ……………………………………………………………………………………….. 12
    Example: A Banking Organization …………………………………………………………………………………………. 12
    4 – Problems With Cost Allocation ……………………………………………………………………………………………. 12
    Unitized vs Lump-Sum Allocation …………………………………………………………………………………………….. 13
    Production Volume and Overhead …………………………………………………………………………………………… 13
    Topic 5: Activity-Based Costing ……………………………………………………………………………………………………. 14
    Purpose of Activity-Based Costing ……………………………………………………………………………………………. 14
    The ABC Steps ……………………………………………………………………………………………………………………….. 14
    Benefits of ABC ……………………………………………………………………………………………………………………… 14
    Limitations of ABC ………………………………………………………………………………………………………………….. 14
    Problems/Exercises ……………………………………………………………………………………………………………………. 15
    What to Do ……………………………………………………………………………………………………………………………. 15
    Chapter 3: Practice Exercises …………………………………………………………………………………………………… 15
    Exercise: Cost-Volume-Profit Analysis ………………………………………………………………………………………. 15
    Solution to Exercise………………………………………………………………………………………………………………… 16
    Chapter 7: Practice Exercises …………………………………………………………………………………………………… 17
    Exercise: Traditional & Activity-Based Costing …………………………………………………………………………… 17
    Solution to Exercise………………………………………………………………………………………………………………… 18
    References ……………………………………………………………………………………………………………………………. 20
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 1: Introduction to Managerial Accounting
    Managerial Accounting
    Managerial accounting is designed for internal users for planning, control, and decision making.
    The Process
    Decision making, planning, and control are achieved through budgeting.
    Plan
    •Action taken to implement plan
    Results
    •Comparison of planned and actual results
    Evaluation
    •Decisions to reward or punish managers
    •Decisions to change operations or revise plans
    Based on information from Jiambalvo, 1994
    Information for Planning
    Budgets for planning

    Profit budget
    o Indicates planned income

    Cash flow budget
    o Indicates planned cash inflows and outflows

    Production budget
    o Indicates the planned quantity of production and expected costs
    3
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Managerial vs Financial Accounting
    Managerial
    Financial
    1. Users
    Internal
    External
    2. GAAP
    May deviate
    Must comply
    3. Information
    More detailed, emphasis on Summary, emphasis on
    segments
    total company
    presented
    4. Nonmonetary
    information
    Emphasized
    Not emphasized
    5. Time focus
    Future oriented
    Generally historical
    Based on information from Jiambalvo, 1994
    4
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 2: Cost Terminology
    Cost Behavior
    The way costs impact a company and the way they are classified varies by the type of business.
    Common types of costs
    • Controllable vs. noncontrollable costs
    • Sunk costs
    • Opportunity costs
    • Variable vs fixed costs
    • Direct and indirect costs
    • Mixed costs
    • Step costs
    Cost Terminology
    Controllable & Noncontrollable Costs
    • A manager can influence controllable costs but not noncontrollable costs.
    • Manager should not be evaluated against noncontrollable costs.
    Sunk Costs
    • Costs incurred in the past
    • Not relevant to present decisions
    Opportunity Costs
    • Values of benefits foregone when selecting one alternative over another
    Variable vs Fixed Costs
    • Variable costs change proportionately with changes in volume or activity; fixed costs do not.
    Direct and Indirect Costs
    • Direct costs are directly traceable to a product, activity, or department; indirect costs are not.
    Based on information from Jiambalvo, 1994
    5
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Variable Costs vs Fixed Costs
    Fixed costs too high? Make them variable!
    Examples:
    • Incentive compensation
    • Outsourcing
    Direct Labor
    Questions to consider
    Is direct labor always a variable cost?
    Are you willing to lay off workers when production declines?
    • What if the decline is temporary?
    • What if the decline is permanent?
    Does the degree of automation make a difference in whether direct labor is fixed or variable?
    Mixed Costs
    Mixed costs include both variable and fixed elements.
    Examples:
    Salesperson with base salary (fixed) and commission on sales (variable)


    Base salary included with fixed costs
    Commission included with variable costs
    Step Costs
    Step costs are fixed for a range of output but increase when the upper bound of a range is exceeded.

    When budgeting for a specific range, be sure to use the correct cost
    Example:
    A company adds third production shift. The cost increase includes a production supervisor’s salary.
    6
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Identifying Types of Costs
    Which type of cost is this?
    Fixed cost of a production facility: As the number of
    units produced increases, the fixed production cost
    remains constant.
    As the number of units produced increases, so
    does the variable production cost.
    Mixed cost: The total cost line intersects the yaxis at $100,000, representing the fixed
    component of the mixed cost
    Step costs are fixed over only a small range of
    activity.
    Based on information from Jiambalvo, 1994
    7
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 3: Cost-Volume-Profit Analysis
    Uses for Cost-Volume-Price Analysis
    CVP is the analysis of how costs and profit change when volume changes.
    It is used for:
    • Planning for next year—How much should be produced? What are the projected cost and
    profit?
    • Control—A production cost has increased unexpectedly. Why? Who should be responsible for
    controlling it?
    • Decision making—If the price of the product were decreased or increased, what would the
    profit be?
    Profit Equation & Breakeven
    The Profit Equation
    profit = (selling price × Q) − (variable cost × Q) − total fixed cost = (selling price − variable cost)
    × Q − total fixed cost
    Breakeven—the point at which costs and income are equal
    • Number of units (QBEP) sold allows a company to neither earn a profit nor incur a loss

    $0 = selling price × QBEP − variable cost × QBEP − total fixed cost
    Example
    Here are the price and costs related to a wedding cake business (Jiambalvo, 1994):
    • Each cake sells for $500.
    • The variable cost of baking the cakes is $200.
    • The fixed cost per month is $6,000.
    1. How many cakes must be sold to break even?
    number of cakes × $500 − (number of cakes × $200 + $6,000) = $0
    number of cakes = $6,000 / ($500 − $200) = 20 cakes
    2. How many cakes must be sold to earn a profit of $9,000?
    number of cakes × $500 − (number of cakes × $200 + $6,000) = $9,000
    number of cakes = ($9,000 + $6,000) / ($500 − $200) = 50 cakes
    Margin of Safety
    Margin of safety is a measurement of how close expected revenue is to the breakeven level.
    margin of safety = expected revenue − breakeven revenue
    Example:
    If the wedding cake business expects to sell 35 cakes per month, what is the margin of safety?
    8
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Answer:
    Expected revenue: $500 × 35 = $17,500
    Break-even revenue: $500 × 20 = $10,000
    Margin of safety: $17,500 − $10,000 = $7,500
    Contribution Margin
    The contribution margin is the incremental profit generated by selling one additional unit.
    • unit contribution margin = sales price per unit − variable cost per unit
    • total contribution margin = contribution margin per unit × quantity
    • contribution margin ratio = contribution margin per unit / sales price per unit
    The contribution margin ratio measures the amount of incremental profit generated by an additional
    dollar of sales.
    Wedding cake business example:

    Unit Contribution Margin
    sales price per unit − variable cost per unit = unit contribution margin
    $500 − $200 = $300

    Total Contribution Margin
    contribution margin per unit × quantity = total contribution margin
    $300 × Q = total contribution margin

    Contribution Margin Ratio
    contribution margin per unit / sales price per unit = contribution margin ratio
    $300 / $500 = contribution margin ratio
    What-If Analysis
    Use this equation to determine the impact of managerial decisions on profit:
    • profit = (selling price − variable cost) × Q − total fixed cost
    o Change in fixed and variable costs
    o Change in selling price
    Assumptions in CVP Analysis
    Assumptions affect the validity of the analysis:
    1. Costs can be separated into fixed and variable components
    2. Within a specific range of cost-driver activity, variable cost per unit and total fixed cost
    do not change (relevant range) (Lumen, n.d.)
    3. Multiproduct analysis assumes the product mix does not change
    With correct assumptions, CVP is useful.
    9
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 4: Cost Allocation
    The Basics of Cost Allocation
    1.
    2.
    3.
    4.
    Purpose of Cost Allocation
    Process of Cost Allocation
    Allocating Service Department Costs
    Problems with Cost Allocation
    1 – Purposes of Cost Allocation
    Companies allocate costs to
    • provide information for decision making
    • reduce frivolous use of common resources
    • encourage evaluation of internally provided services
    • calculate the “full cost” of products for GAAP reporting
    Allocated costs serve as charges or fees for use
    of internal resources or services.
    Ideally, allocated cost should
    measure the opportunity cost.
    (Jiambalvo, 1994)
    Provide full-cost information:
    • GAAP requires full costing for external reporting purposes.
    • Full-cost information is needed when the company has an agreement whereby revenue received
    depends upon the cost incurred, as in cost-plus contracts.
    2 – Process of Cost Allocation
    1. Identify the cost objectives.
    2. Form cost pools so that individual costs in the same cost pool are allocated using one allocation
    base.
    3. Select an allocation base to relate cost pools to the cost objective
    10
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Example of the cost-allocation process in action:
    UMGC Europe has several graduate programs. Imagine that you want to allocate costs to these
    programs to determine if
    1. Non-profitable programs should be shut down
    2. Resources are being used efficiently
    Cost pool
    Allocation base
    Cost objectives
    Salaries of the professors
    Salaries of the administrative staff
    Photocopying
    Computer lab
    Rent for the building
    Marketing
    Online course pages
    IT
    Number of students enrolled
    Number of hits per web page
    Number of Trouble Tickets
    fixed + variable × face-to-face
    hours
    MBA
    Cybersecurity
    Social Work
    Management
    3 – Direct and Indirect Costs


    Organizational units of manufacturing firms are classified as one of the following:
    o production department (direct)
    o service department (indirect)
    Cost pools
    o formed by service departments
    o allocated to production departments
    Direct Method
    Example: Boise Furniture
    Service department costs are allocated to production departments but not to other service departments
    Service Departments
    Production Departments
    Products
    Janitorial costs
    Assembly of chair
    Chair
    Personnel costs
    Finishing of table
    Table
    Based on information from Jiambalvo, 1994
    11
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Example: Boise Furniture (cont’d.)
    Allocate the janitorial cost of $100,000 as follows:
    • Allocation base: square feet
    o Assembly department: 20,000 square feet
    o Finishing department: 30,000 square feet
    • Calculate the allocation rate:
    o $100,000 / (20,000 + 30,000) = $2 / sq. ft.
    The resulting allocation to the production departments is as follows:
    o Assembly Dept: 20,000 sq. ft. x $2 = $40,000
    o Finishing Dept: 30,000 sq. ft. x $2 = $60,000
    Example: A Banking Organization
    Assume that a banking organization has these service departments:
    • Human Resources—hires employees and manages benefits
    • Duplicating—performs copy services
    • Janitorial—provides routine cleaning services
    • Accounting—provides accounting services
    • Graphic Design—designs forms)
    • Food Services—provides free breakfast and lunch to employees
    The services are used by the company’s two subsidiaries, Commercial Banking and Investment Banking.
    Suggest ways to allocate the service department costs to the two subsidiaries.
    Food Services are used by employees in the Human Resources department.
    Would a share of food service costs be allocated to Human Resources under the direct method of
    allocation?
    Use the following as the basis for allocating service department costs:
    • Human Resources—number of employees
    • Duplicating—number of pages copied
    • Janitorial—floor space
    • Accounting—number of sales transactions
    • Graphic Design—time spent on design work
    • Food Services—number of employees
    4 – Problems With Cost Allocation





    Allocation of costs that are not controllable
    Arbitrary allocations
    Allocation of fixed costs that make the fixed costs appear to be variable costs
    Allocation of manufacturing overhead to products using too few overhead cost pools
    Use of only volume-related allocation bases
    12
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Unitized vs Lump-Sum Allocation


    Unitized fixed costs
    o Fixed costs are stated on a per-unit basis and allocated as a variable cost.
    o The perception that costs are variable could alter decision making.
    Lump-sum allocations
    o A predetermined amount of fixed costs not affected by level of activity is allocated.
    o The allocation must appear to be fixed to managers of departments that receive the
    charge.
    Production Volume and Overhead
    Problem: Using measures of production volume to allocate overhead



    Typical allocation basis includes direct labor hours and machine hours
    Assumes all overhead costs are proportional to production volume
    What happens when overhead costs are not proportional to production volume?
    o High-volume products are over-costed
    o Low-volume products are under-costed
    ABC solves these problems.
    13
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Topic 5: Activity-Based Costing
    Purpose of Activity-Based Costing



    Identifies major activities that cause overhead costs to be incurred
    Costs of resources consumed performing these activities are grouped into cost pools
    Costs are assigned to products using a measure of activity, i.e., cost driver
    The ABC Steps
    Step 1
    Identify major activities
    • Processing orders, packaging, delivery, customer service
    Step 2
    Group costs of activities into cost pools
    • Salary, vehicles, equipment, packaging materials
    Step 3
    Identify measures of activities—the cost
    drivers
    • Number of orders, number of phone calls, miles per day,
    labor hours
    Step 4
    Relate costs to products using the cost
    drivers
    • One-day service, same-day service, standard service
    Based on information from Jiambalvo, 1994
    Benefits of ABC


    Provides more accurate costing
    o Costs are allocated to products based on the amount of each resource used for the
    activities involved in producing the product.
    May lead to improvements in cost control
    o Understanding each activity that contributes to a product and the resources each one
    consumes enables a company to focus on those areas where efficiency could be
    improved.
    Limitations of ABC


    More costly to develop and maintain than a traditional costing system
    Used to develop full costs of products
    o Includes fixed costs
    o Lacks incremental information necessary for decision making
    14
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Problems/Exercises
    What to Do
    You are encouraged to complete all the practice exercises listed below. They will help you gain the
    knowledge and skills needed to fully participate in the group assignment in Step 3 and complete the
    final Project 2 deliverable. The answers are provided, so you can check your own work.
    Chapter 3: Practice Exercises
    (in Davis, 2015)
    • Unit 3.1 Practice Exercise
    • Unit 3.2 Practice Exercise
    • Unit 3.3 Practice Exercise
    • Unit 3.4 Practice Exercise
    (Practice exercises follow the Self Study questions.)
    Exercise: Cost-Volume-Profit Analysis
    Your company’s CEO is planning for next year. Prepare a contribution format income statement showing
    anticipated operating income. Consider each scenario independently. Last year’s income statement is as
    follows:
    Total
    Per Unit
    Sales
    $600,000
    $15.00
    Variable expenses
    320,000
    8.00
    Contribution margin
    280,000
    7.00
    Fixed expenses
    175,000
    Operating income
    $105,000
    Required
    A.
    B.
    C.
    D.
    E.
    The sales price increases by 12% and sales volume decreases by 4%.
    The sales price increases by 8% and variable cost per unit increases by 6%.
    The sales price decreases by 5% and sales volume increases by 15%.
    Fixed expenses increase by $40,000.
    The sales price increases by 12%, variable cost per unit increases by 15%, fixed expenses
    increase by $30,000, and sales volume decreases by 15%.
    15
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Solution to Exercise
    A. Current sales volume: $600,00/$15 = 40,000 units
    New sales volume: 40,000 × .96 = 38,400 units
    New sales price: $15.00 × 1.12 = $16.80
    Total
    Per Unit
    Sales
    $645,120
    $16.80
    Less variable expenses
    307,200
    8.00
    Contribution margin
    337,920
    $ 8.80
    Less fixed expenses
    175,000
    Operating income
    $162,920
    B. New sales price: $15.00 × 1.08 = $16.20 per unit
    New variable cost per unit: $8.00 × 1.06 = $8.48 per unit
    Total
    Per Unit
    Sales
    $648,000
    $16.20
    Less variable expenses
    339,200
    8.48
    Contribution margin
    308,800
    $ 7.72
    Less fixed expenses
    175,000
    Operating income
    $133,800
    C. New sales price: $15.00 × .95 = $14.25 per unit
    New sales volume: 40,000 × 1.15 = 46,000 units
    Total
    Per Unit
    Sales
    $655,500
    $14.25
    Less variable expenses
    368,000
    8.00
    Contribution margin
    287,500
    $ 6.25
    Less fixed expenses
    175,000
    Operating income
    $112,500
    16
    Project 3 Review and Practice Guide
    Back to Table of Contents
    D. New fixed expenses: $175,000 + $40,000 = $215,000
    Total
    Per Unit
    Sales
    $600,000
    $15.00
    Variable expenses
    320,000
    8.00
    Contribution margin
    280,000
    $ 7.00
    Fixed expenses
    215,000
    Operating income
    $ 65,000
    E. New sales price: $15.00 × 1.12 = $16.80
    New variable cost per unit: $8.00 × 1.15 = $9.20
    New fixed expenses: $175,000 + $30,000 = $205,000
    New sales volume: 40,000 × .85 = 34,000 units
    Total
    Per Unit
    Sales
    $571,200
    $16.80
    Variable expenses
    312,800
    9.20
    Contribution margin
    258,400
    $ 7.60
    Fixed expenses
    205,000
    Operating income
    $ 53,400
    Chapter 7: Practice Exercises
    (in Davis, 2015)
    • Unit 7.1 Practice Exercise
    • Unit 7.2 Practice Exercise
    • Unit 7.3 Practice Exercise
    (Practice exercises follow the Self Study questions.)
    Exercise: Traditional & Activity-Based Costing
    Determining Product Costs
    Your company produces Product A and Product B. Total overhead costs traditionally have been allocated
    based on direct labor hours. Here are the cost pools and cost drivers based on ABC. From now on,
    general costs will not be allocated to products.
    17
    Project 3 Review and Practice Guide
    Back to Table of Contents
    Activity Pool
    Department Cost
    Binding
    297,000
    Printing
    955,500
    Design
    234,000
    General
    727,500
    Total overhead costs
    $2,214,000
    Cost Driver
    Number of units
    Machine hours
    Change orders
    None
    Other information is as follows:
    Units
    Direct materials cost per unit
    Direct labor cost per unit
    Direct labor hours
    Machine hours
    Change orders
    Produce A
    62,500
    3.00
    4.00
    30,000
    150,000
    1,500
    Product B
    20,000
    10.00
    8.00
    19,200
    144,000
    2,400
    Required
    A. Determine the unit product cost for Product A and Product B using the traditional costing
    system.
    B. Determine the unit product cost for Product A and Product B using the ABC system.
    C. Show that general cost is the difference between the total overhead costs allocated to products
    under the traditional system and the total cost allocated to products under ABC.
    Solution to Exercise
    A.
    Predetermined OH rate =
    $2,214,00
    (30,000 DLH + 19,200 DLH)
    Product A
    Direct Materials
    $3.00
    Direct Labor
    4.00
    Overhead 30,000DLH × $45/DLH=
    21.60
    62,500 Product A
    Total Unit Cost
    $28.60
    18
    = $45/DLH
    Product B
    $10.00
    8.00
    19,200DLH × $45/DLH=
    43.20
    20,000 Product B
    $61.20
    Project 3 Review and Practice Guide
    Back to Table of Contents
    B. ABC Rates
    Binding:
    Printing:
    Design:
    $297,000
    (62,500 + 20,000 Product A)
    $955,500
    (150,000 + 144,000) machine hours
    $234,000
    (1,500 + 2,400) change orders
    = $3.60/unit
    = $3.25/machine hour
    = $60/change order
    ABC overhead allocation
    Products A
    Binding
    Printing
    Design
    Total overhead
    Units produce
    Overhead per unit
    Products B
    Binding
    Printing
    Design
    Total overhead
    Units produced
    Overhead per unit
    62,500 tablet × $3.60/unit
    150,000 MH × $3.25/MH
    1,500 change orders × $60/change order
    $225,500
    487,500
    90,000
    802,500
     62,500
    $12.84
    20,000 books × $3.60/unit
    144,000 MH × $3.25/MH
    2,499 change orders × $60/change order
    $72,000
    468,000
    144,000
    684,000
     20,000
    $34.20
    ABC unit cost
    Direct Materials
    Direct Labor
    Overhead
    Total Unit Cost
    Product A
    $ 3.00
    $ 4.00
    12.84
    $19.84
    19
    Product B
    $ 10.00
    8.00
    34.20
    $ 52.20
    Project 3 Review and Practice Guide
    Back to Table of Contents
    C.
    OH allocated to Product A using traditional DLH
    $1,350,000
    (30,000 DLH × $45/DLH)
    OH allocated to Product B using traditional DLH
    (19,200 DLH × $45/DLH)
    864,000
    Total allocated OH using traditional DLH
    $2,214,000
    OH allocated to Product A using ABC
    802,500
    OH allocated to Product B using ABC
    684,000
    Total allocated OH using ABC
    1,486,500
    Difference in allocated overhead
    $ 727,500
    References
    Jiambalvo, J. (1994). Managerial accounting 4th ed. Wiley.
    Lumen Learning. (n.d.). Relevant range. Module 6: cost behavior patterns. Accounting for managers.
    Back to Table of Contents
    20

    Still stressed from student homework?
    Get quality assistance from academic writers!

    Order your essay today and save 25% with the discount code LAVENDER