Managerial Accounting
Answers
EXERCISE 1-16. Incremental Analysis) The incremental cost associated with the
order for 10,000 gallons from Canada is likely to be less than $50,000 because the
fixed costs, such as equipment and overhead, have already been covered by the
production of the initial 200,000 gallons. Therefore, the additional cost will mainly
involve variable costs like raw materials and labour, which are proportionate to the
additional production. Since the order is relatively small compared to the total
production capacity, the incremental cost will be significantly lower than the total cost
of production.
ÉXERCISE 1-17. Incremental Analysis) a. Three production costs likely to increase
because of adding a second production shift are:
1. Labour costs: Additional wages and benefits for employees working the
second shift.
2. Utility costs: Increased usage of electricity, water, and other utilities during
extended operating hours.
3. Overhead costs: Expenses related to maintaining and operating machinery,
facilities, and support services during the extended shift.
b. Direct material costs most likely will not increase when the second shift is added,
as they are typically dependent on the level of production rather than the number of
shifts operating.
PROBLEM 1-1 Budgets in Managerial Accounting)
a. Budget for May:
Production Costs Budget for May 2011
Production: 30,000 Jars of Salsa
Ingredient cost (variable): $25,000
Labour cost (variable): ($20 per hour x additional labour hours)
Rent (fixed): $5,000
Depreciation (fixed): $6,000
Other (fixed): $1,000
Total: $25,000 (ingredient cost) + (Labor cost) + $5,000 (rent) + $6,000
(depreciation) + $1,000 (other) = Total cost
b. The budget suggests additional workers are needed. Additional labour hours
needed can be calculated as follows:
Additional labour hours = (Labor cost increase) / (Wage rate)
Additional labour hours = (May labour cost - April labour cost) / $20 per hour
If management does not anticipate the need for additional labour, production might
suffer due to understaffing, leading to delays or decreased productivity.
c. Cost per unit:
- Actual cost per unit in April: Total cost / Jars produced
- Budgeted cost per unit in May: Total budgeted cost / Jars planned for May
The cost per unit is expected to decrease in May due to economies of scale, as fixed
costs are spread over a larger production volume.
PROBLEM 1-2. Incremental Analysis) a. The incremental cost associated with
producing an extra 50,000 jars of salsa is the variable cost per unit multiplied by the
additional units produced. In Problem 1-1, the variable cost per unit is $1.80. So, the
incremental cost would be $1.80 * 50,000 = $90,000.
b. The incremental revenue associated with the price reduction of $0.40 per jar
can be calculated by multiplying the price reduction per jar by the additional units
sold. The price reduction is $0.40, and the additional units sold are 50,000. So, the
incremental revenue would be $0.40 * 50,000 = $20,000.
c. Yes, Santiago's should lower the price of its salsa since the incremental
revenue of $20,000 from increased sales exceeds the incremental cost of $90,000
from producing additional jars, resulting in a net positive impact on profitability.
Review Problem 1)
To find the cost of the job, we need to calculate the total direct costs (labour and
materials) and add the overhead costs allocated based on labour hours.
a. Cost of the Job:
1. Direct Labour Cost:
Total labour hours = 36 hours
Average wage rate per hour = $35
Total direct labour cost = 36 hours * $35/hour = $1,260
2. Material Cost:
Material cost = $7,500
Total direct cost = Direct labour cost + Material cost
Total direct cost = $1,260 + $7,500
Total direct cost = $8,760
3. Overhead Cost Allocation:
Total estimated overhead = $35,000 + $25,000 + $5,000 + $150,000 + $20,000 =
$235,000
Overhead allocated per labour hour = Total estimated overhead / Total estimated
labour hours
Overhead allocated per labour hour = $235,000 / 11,520 hours ≈ $20.39/hour
Overhead cost for this job = Overhead allocated per labour hour * Labour hours for
this job
Overhead cost for this job = $20.39/hour * 36 hours ≈ $734.04
Total Cost of the Job = Total direct cost + Overhead cost
Total Cost of the Job = $8,760 + $734.04
Total Cost of the Job ≈ $9,494.04
b. Profit on the Job:
Markup on direct costs = 30%
Total direct costs = Direct labour cost + Material cost
Total direct costs = $1,260 + $7,500
Total direct costs = $8,760
Markup amount = Total direct costs * Markup percentage
Markup amount = $8,760 * 0.30
Markup amount = $2,628
Total revenue = Total direct costs + Markup amount
Total revenue = $8,760 + $2,628
Total revenue = $11,388
Profit on the Job = Total revenue - Total Cost of the Job
Profit on the Job = $11,388 - $9,494.04
Profit on the Job ≈ $1,893.96
ÉXERCISE 2-10. Overhead Allocation Bases
To calculate the overhead allocation rates based on direct labour hours, direct labour
cost, and machine time, we need to divide the total manufacturing overhead by each
respective allocation base.
1. Overhead Allocation Rate based on Direct Labour Hours:
[ {Overhead Allocation Rate based on Direct Labour Hours} = {Total
Manufacturing Overhead}{Total Direct Labor Hours}]
2. Overhead Allocation Rate based on Direct Labor Cost:
[ {Overhead Allocation Rate based on Direct Labor Cost} = {Total
Manufacturing Overhead}{Total Direct Labor Cost}]
3. Overhead Allocation Rate based on Machine Time:
[ {Overhead Allocation Rate based on Machine Time} = {Total
Manufacturing Overhead} {Total Machine Run Time}]
Given:
- Total manufacturing overhead = $800,000
- Total direct labour hours = 50,000 hours
- Total direct labour cost = $1,600,000 - Total machine run time = 25,000 hours Let's
calculate each allocation rate:
1. Overhead Allocation Rate based on Direct Labour Hours:
\[ {Overhead Allocation Rate based on Direct Labour Hours} = {\$800,000}{50,000 {
hours}} = $16 \text{ per hour} ]
2. Overhead Allocation Rate based on Direct Labor Cost:
\[ {Overhead Allocation Rate based on Direct Labor Cost} =
{\$800,000}{\$1,600,000} = 0.5 ]
3. Overhead Allocation Rate based on Machine Time:
\[ {Overhead Allocation Rate based on Machine Time} = {\$800,000}{25,000
{ hours}} = \$32 \text{ per hour} \]
So, the overhead allocation rates are:
- \$16 per direct labour hour
- 0.5 (or 50%) of direct labour cost
- \$32 per machine hour
