...Index Cost Classification…………………………………………………………………2 Cost Volume Profit analysis……………………………………………………….2 Contribution Margin……………………………………………………………….2 Gross Margin and Contribution Margin…………………………………………...3 CVP Relationship in Graphic Form……………………………………………….3 CM Ratio. …………………………………………………………………………3 Application of CVP Concepts……………………………………………………..4 Importance of CM…………………………………………………………………4 Break-even Analysis………………………………………………………………4 Target Profit Analysis…………………………………………………………….5 The Margin of Safety……………………………………………………………..6 Degree of Operating Leverage…………………………………………………....6 Major Assumptions of CVP Analysis…………………………………………….7 Difference between Variable Costing and Absorption Costing………………………………………………………………7 Cost-Volume-Profit Relationship A. Cost Classification: 1. Variable Costs--variable costs are those costs that vary proportionately with changes in the level of activity (such as direct materials, direct labor, salesmen’s commissions, etc.) a) Relevant Range--even though variable cost per unit may vary throughout the entire range of possible activity, the variable cost per unit is assumed to remain constant over the range of activity over which the business expects to operate. 2. Fixed Costs--fixed costs are those costs that do not change with changes in the level of activity (such as depreciation, property taxes, executive salaries, etc.) a) Relevant Range-even though fixed costs...
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...Statement, The Contribution Margin Approach ACC403-Principles of Accounting Module 2 - CASE 1. Prepare income statements under variable (contribution margin) and traditional (absorption) costing for the year ended December 31, 2008. The E Company Income statement for year ending December 31, 2008 Absorption / Contribution Product Information: | | | | | | Units Produced | 400,000 | | Units Sold | 345,000 | | Selling Price per Unit | $19.00 | | Direct Material Cost per Unit | $3.50 | | Direct Labor Cost per Unit | $1.40 | | Variable Selling Costs per Unit | $1.20 | | Fixed Manufacturing Costs | $1,600,000 | | Fixed Selling & Administrative Costs | $1,200,000 | | | | | | | | Absorption (GAAP) Income | | | | | Revenues (Sales) | | $6,555,000 | Cost of Goods Sold (Cost of Sales) | | 3,070,500 | Gross Profit (Gross Margin) | | $3,484,500 | Selling & Administrative Expenses | | 1,614,000 | Operating Income | | $1,870,500 | | | | | | | Contribution Margin Income Statement | | | | | Revenues (Sales) | | $6,555,000 | Variable Costs: | | | Direct Material | $1,207,500 | | Direct Labor Cost | 483,000 | | Variable Selling Expenses | 414,000 | | Total Variable Costs | | $2,104,500 | Contribution Margin | | 4,450,500 | Fixed Costs | | 2,800,000 | Operating Income | | $1,650,500 | | | | 2. What are E's contribution margin ratio, gross profit ratio...
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...problem The main problem of a Sippican corporation was a low pre-tax operating income (1.8%). To solve that problem, a cause had to be found. Sippican reported gross margins of 35% on valves, 5% on pumps and 38% on flow controllers. After looking at a gross margins of the three product lines, one would think that pumps were an issue to work on, and a main cause for a low operating income, because the pump sales accounted for 47,36% of a total sales in March with just 5% operating margin. However, the method of measuring the product profitability had to be questioned. To be more accurate, the method of assigning the overhead costs to each product line was the reason for inaccurate gross margins of the Sippican´s product lines. Exhibit 1 – Result of a wrong overhead cost assignment Wrong assignment of overhead costs Innacurate product profitability Inappropriate product pricing strategy Lower operating income The method of calculating the manufacturing overhead used by Sippican would be accurate if every of their three product lines was of the same or similar complexity. More complex products require more indirect work so one cannot simply assign the overhead costs to the products proportionally to direct labor working hours on each of them. However, that was exactly what Sippican was doing and what resulted in overvaluing the flow controllers (the most complex product line of Sippican), and undervaluing the pumps and valves. Moreover, that created the...
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...unting systems? What roles do management accountants perform? Explain and give examples of a management accountant's scorekeeping, attentiondirecting and problem solving functions. What guidelines do management accountants use? What do we mean by different costs for different purposes? Cost Terms (Behaviors) and Purposes – What are direct costs? Indirect costs? What is the difference between cost tracing and cost allocation? Discuss the factors that affect direct/indirect cost classifications. What is a cost driver? What is the relevant range, and what is its relationship to the various types of costs? How does a fixed cost behave in total and on a per unit basis? How does a variable cost behave in total and on a per unit basis? How do these costs (in total and per unit) appear on a graph? What about a mixed cost? How do changes in the activity level affect these costs? Be able to determine cost behavior from graphical presentations. What is the gross margin? the contribution margin? Take a factual situation and calculate the gross margin percentage and the contribution margin percentage. Explain these margins in layman’s terms. Be able to prepare a simple income statement. How do you calculate average cost per unit? What is the danger of making decisions based on an average cost per unit calculation? What are conversion costs? Prime costs? Period costs? What is an inventoriable cost? Define the types of inventory. What are...
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...Wilkerson Company Analysis June 30th, 2014 1. If Wilkerson were to cut prices, based on contribution margin, to just cover short-term variable costs, what consequences could it experience? Contribution margin-based pricing attempts to maximize profit generated from the sale of each unit of product by maximizing the difference between that product’s price and variable costs, or contribution margin. Under this pricing strategy, only variable costs, which increase with a higher sales volume and decrease with a lower sales volume, are considered; fixed costs are assumed to be constant over a range of sales levels and are thereby not factored in when determining prices. Since Wilkerson manufactures and sells three different products, we can use a sales-mix approach break-even analysis to determine the effect that this strategy would have on the company’s sales. In our analysis, we have assumed constant fixed costs and sales mix. Using the predetermined sales mix (calculated by individual product sales as a percentage of total sales) presented in Wilkerson’s operating results and statistics, we are able to calculate a weighted combined contribution margin of 66.12% and fixed costs of $1,365,650 (shown above). This yields a break-even sales revenue of $1,365,650/66.12%=$2,065,387 (see below). Using the sales mix, we can calculate break-even sales units and sales revenue for each product: Based on the break-even operating results above, Wilkerson’s sales revenue will be...
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...1. What is the competitive situation faced by Wilkerson? There is a different competitive level in every Wilkerson product line. Pumps, the major commodity product line is facing a very stiff price competition, which is behind the decline in the company profits and actual gross margin to less than 20%, compared to 35% planned gross margin. Consequently, the Wilkerson company needs to reduce the price every month to maintain the market leader position. Wilkerson produces high quality products such as Valves, as well. Here Wilkerson gained very strong customer base and its competition seems to be moderate now. The firm also succeeded to maintain the actual gross margin around 35%. On the other hand, in the long run the company should be prepared to face strong price competition. Additionally, there is a very inelastic demand in the Flow Controllers product. The company has recently raised the price by more than 10% with no apparent effect on demand. We assume that the competition is not very intense yet. 2. Given some of the apparent problems with Wilkerson’s cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not? The problem Wilkerson is facing due to its cost system is that the real manufacturing cost of each product includes very high proportion of overheads (52.5% of the total costs). This cost system distorts the real...
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...CASE : WILKERSON COMPANY Table des matières What is the competitive situation faced by Wilkerson ? 3 Given some of the apparent problems with Wilkerson’s cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense ? Why or why not ? 3 How does Wilkerson’s existing cost system operate ? Develop a diagram to show how costs flow from factory expense accounts to products. 4 Develop and diagram an activity-based cost model using the information in the case. Provide your best estimates about the cost and profitability of Wilkerson’s three product lines. What difference does your assignment have reported product costs and profitability ? What causes any shifts in cost and profitability ? 4 Based on your analysis for Question 4, what actions might Wilkerson’s management team consider to improve the company’s profitability ? 6 What concerns, if any, do you have with the cost estimates you prepared in the answer to Question 4 ? What other information or analysis would you want for better cost and profitability estimates ? 7 Wilkerson has been compensating salespersons with comissions on their gross sales volumes (less returns). Parker wonders whether the company should change this incentive system. 7 What is the competitive situation faced by Wilkerson ? The competitive situation is different between the products. Pumps are commodity products, produced...
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...products entirely and adopt a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not? Answer: Consider Sippican is a manufacturer company with multiple products, using simple cost accounting system that directly allocate factory overhead to unit of product entirely through one single allocation base (i.e. 185 % of production run direct labor cost in this case) is although an inexpensive way while is sometimes distort actual contribution of the product. To our understanding from reading the article, Sippican is spending more on overhead than on either direct material or direct labor. Further, Sippican has considerable diversity in its product mix. Each product may contain different degree of spending on indirect or supporting resources, and high variety on product and consumer characteristics. As such, activity-based cost system is considered to be a more accurate costing of present resource that will enable Sippican to project its future resource demands more effectively. 2. Calculate the practical capacity and the capacity cost rates for each of Sippican’s resources: production and setup employees, machines, receiving and production control employees, shipping and packaging employees, and engineers. Answer: See the Q2 worksheet. 3. Use these capacity cost rates and the production data in Exhibits 3 and 4 to calculate revised costs and profits for Sippican’s three product lines. What difference does your cost assignment...
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...CHAPTER 9 INVENTORY COSTING AND CAPACITY ANALYSIS 9-1 No. Differences in operating income between variable costing and absorption costing are due to accounting for fixed manufacturing costs. Under variable costing, only variable manufacturing costs are included as inventoriable costs. Under absorption costing, both variable and fixed manufacturing costs are included as inventoriable costs. Fixed marketing and distribution costs are not accounted for differently under variable costing and absorption costing. 9-2 The term direct costing is a misnomer for variable costing for two reasons: a. Variable costing does not include all direct costs as inventoriable costs. Only variable direct manufacturing costs are included. Any fixed direct manufacturing costs and any direct nonmanufacturing costs (either variable or fixed) are excluded from inventoriable costs. b. Variable costing includes as inventoriable costs not only direct manufacturing costs but also some indirect costs (variable indirect manufacturing costs). 9-3 No. The difference between absorption costing and variable costs is due to accounting for fixed manufacturing costs. As service or merchandising companies have no fixed manufacturing costs, these companies do not make choices between absorption costing and variable costing. 9-4 The main issue between variable costing and absorption costing is the proper timing of the release of fixed manufacturing costs as costs of the period: a. at the time of incurrence...
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...The competitive situation faced by your company varies with each of its product lines. It is important that the firm be able to draw distinctions between each of its products’ markets in order to make decisions that will keep the company profitable yet competitive. Pumps are a commodity which means that there is demand for the product but it is not unique; there are no major qualitative distinctions to push consumers to prefer pumps your company over those any other pump manufacturer. The existence of numerous competitors in the pumps market means that you company is a price-taker - if the firm wants to continue to stay relevant in this area, the firm must be able to match competitors’ prices. Considering that pumps are your company’s major product line, an understanding of the costs of producing them is necessary in order to maintain your place as a major pump supplier. From the time that the company invented a unique design for high-quality valves, it has enjoyed a loyal customer base; however, your company’s leadership recognizes that competitors are now capable of producing valves of equal quality and that they will eventually begin to chip away at the significant market share that Wilkerson has enjoyed for quite some time. In order to stave off competition, a reevaluation of the costs of producing valves can help the firm to determine the best ways to maintain its current market share. Flow controllers represent your company’s most unique product line. There is a...
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... | | | | | | | |PROBLEMS | | |LO1: Discriminate between | |23,30,37,38 |49,50,51,54,57 |66 | |relevant and irrelevant | | | | | |information for making decisions.| | | | | |LO2: Apply the decision process | |28,29,39 | | | |to make business decisions. | | | | | |LO3: Construct absorption and |A1,B1 |24,31,32,33, 34,35 |48 | | |contribution-margin income | | | | | |statements and identify their | | | |...
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...targets for return on invested capital (ROIC) and sales growth. Even though the company was partly vertically integrated, division managers were allowed to source their components from external suppliers if they so chose. In August 2002, a pricing dispute arose between the managers of 3 of the divisions of Zumwald AG: Imaging Systems Division (ISD), the Heidelberg Division (Heidelberg), and the Electronic Components Division (ECD). The case describes a transfer pricing issue that is common in decentralized, divisionalized firms. The case raises issues about internal pricing and, more generally, the operation of a decentralized management structure. Analysis 1: If we see the facts that came out in ensuing the discussion: [pic] It is obvious why ISD take Display tech as their supplier, a total cost difference of € 39,500. Thus, Heidelberg price would result in ISD negative gross margin. Even though if we look in terms of contribution margin, ISD will still get positive numbers if they took the display monitor from Heidelberg, but looking at the objective of having the X73 as the next best thing in a competitive market, longer term it would not be viable for ISD to continue having a negative gross margin. Analysis 2: Now if we try to...
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...administrative salaries -Paid $35,000 cash for factory wages -Recognized depreciation on factory equipment, $5,000 -Collected $160,000 cash on sales made during 2012 -Recognized depreciation on office furniture, $3,500. Fardohnya makes all sales for cash. There are no credit sales. What is the total product cost?(110,000)* Product costs consist of materials used, labor applied, and overhead. Fardohnya, therefore, has a total product cost of $110,000 ($70,000 + $35,000 + $5,000).4. Fardohnya Industries, Inc. reports the following information at 12/31/2012: -Acquired $75,000 cash by issuing common stock -Paid $70,000 cash for materials used in the manufacture of 200 units of product -Paid $16,000 cash for administrative salaries -Paid $35,000 cash for factory wages -Recognized depreciation on factory equipment, $5,000 -Collected $160,000 cash on sales made during 2012 -Recognized depreciation on office furniture, $3,500. Fardohnya makes all sales for cash. There are no credit sales. If 15 of the 200 units produced during 2012 are still on hand at 12/31/2012, what will be the gross margin for 2012? (58,250). If the average cost per unit is $550, then cost of goods sold is equal to $101,750 ($550 x 185 units). Gross profit of $58,250 is equal to...
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... $24 – $18 – $12 – $6 – – – – – 0 1 2 3 4 5 Volume (Thousands of passengers) Total Fixed Cost Total fixed costs remain unchanged when activity changes. Your monthly basic telephone bill probably does not change when you make more local calls. Monthly Basic Telephone Bill Number of Local Calls Mixed Costs • Contain fixed portion that is incurred even when facility is unused & variable portion that increases with usage. • Example: monthly electric utility charge – Fixed service fee – Variable charge per kilowatt hour used Mixed Costs Total Utility Cost Variable Utility Charge Fixed Monthly Utility Charge Activity (Kilowatt Hours) Relevant Range... …is a band of volume in which a specific relationship exists between cost and volume. • Outside the relevant range, the cost either increases or decreases. • A fixed cost is fixed only within a given relevant range and a given time span. Relevant Range $160,000 – Fixed Costs $120,000 – $80,000 – $40,000 Relevant Range – – 0 5,000 10,000 15,000...
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...Table of Contents Introduction 2 1.1 Sources of fund and income 2 1.2 Contribution made by the methods of generating income 4 2.1. Elements of cost 5 Instructions for gross profit margin 6 3. Just In Time 7 4. Economic Order Quantity 7 2.2 The Best Methods for Controlling the Cash Flow 7 3.1 Sources of trial Balance 8 The main sources of trial balance are- 8 Journal entries 8 Ledger 8 Closing entries 8 Adjusting entries 8 3.1 Structure of a Trial Balance 9 3.2 Accounts: 10 Adjustments 10 Notes 10 Credit note 10 3.3.4 Budgetary control 11 The Purposes of Budgetary control: 12 Analysis of Budgeted versus Actual figures 12 4.1 Ratio analysis 13 4.2 Future suggestions for management 14 5.1 Types of Costs 14 5.2 Cost Volume Profit Analysis 15 Contribution Margin (CM) 16 Unit Contribution Margin (Unit CM) 16 Contribution Margin Ratio (CM Ratio) 17 Break-even point 17 5.3 Justification of management decision based on profit-loss potentials 17 Conclusion 18 References 18 Introduction This assignment has been prepared considering the assessment requirements that include different learning objectives. We have explained several sources of funding and methods that contribute in income generation for business and service industries. We have also clarified elements of cost, selling price for products and gross profit percentages. Next unit includes assessment of source & structure of trial balance, evaluation...
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