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Management accounting ACC00146 S3, 2014


Assignment 1 (20 marks)




Why are product costs sometimes called inventoriable costs? Describe the flow of such costs in a manufacturing company from point of incurrence until they finally become expenses on the income statement. You can use T accounts to show the flow of costs.            






Selected account balances for the year ended May 31, 20x1 are provided below for Super Cheapart:


Raw materials inventory, June 1, 20x0                      $ 40,000

Raw materials inventory, May 31, 20x1                       30,000

Purchases of raw materials                                         150,000

Insurance, factory                                                          12,000

Work in process, June 1, 20x0                                           ?

Utilities, factory                                                            25,000

Indirect labour                                                               60,000

Finished goods inventory, June 1, 20x0                       85,000

Direct labour                                                                    ?

Indirect materials                                                         30,000

Work in process, May 31, 20x1                                   48,000

Rent, factory building                                                120,000

Finished goods inventory, May 31, 20x1                         ?

Maintenance, factory                                                   16,000


The goods available for sale for the year totaled $635,000, the total manufacturing costs were $563,000, and the cost of goods sold totaled $560,000 for the year.



1. Prepare a schedule of cost goods manufactured in the form illustrated in Figure 2–8 in the textbook and a schedule of cost goods sold. (1 mark)

2. Assume that the dollar amounts given above are for the equivalent of 40,000 units produced during the year. Calculate the unit cost for direct materials. Calculate the unit cost for rent on the factory building. (1 mark)

3. Assume in 20x2 that the company produces 50,000 units. What would be the per unit and total cost that you would expect to be incurred for direct materials? For rent on the factory building?(1 mark)

4. As the manager in charge of production costs, explain to the president the reason for any difference in unit costs between (2) and (3) above. (2 marks)






The May 2014 income statement for Frutex Company is given below:

Sales (10,000 units)                $ 100,000

Less variable costs                      70,000


Contribution margin                    30,000

Less fixed costs                           24,000


Net income                                 $ 6,000


The Frutex Company has ample unused capacity and is studying various ways of improving profits.




Each of the situations below is independent of the other. Provide the information requested.

1. New equipment has come onto market that would allow Frutex Company to automate a portion of its operations. Variable costs could be reduced by $3 per unit. However, fixed costs would increase by $30,000 each month. Firstly, prepare two contribution-type income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased. Secondly, as a manager, what factors would be paramount in your mind in deciding whether to purchase the new equipment? Explain. (3 marks)

2. Refer to the original data. Frutex Company is thinking about changing its marketing method. Under the new method sales would increase by 15 percent each month, and net income would increase by one third. Fixed cost could be slashed to only $15,000 per month. Calculate the breakeven point for the company before and after the change in marketing method. (1 mark)

3. Refer to the original data. Due to a sudden and unprecedented surge in demand, the company’s sales increased by 25 percent during June 2014. During that month, net income increased by $3,000, or by 50 percent. By how much should net income have increased? Would you congratulate management for an outstanding performance, or would you chastise management for not doing its job well during the period? Explain. (1 mark)

















Lennox Company uses a job order costing system. The company uses predetermined overhead rates in applying manufacturing overhead costs to individual jobs. The predetermined overhead rate in Department A is based on machine-hours, and the rate in Department B is based on direct labor cost. At the beginning of 2014, the company’s management has made the following estimates for the year:


                                                                        Department A             Department B

Direct labour-hours                                        15,000                         30,000

Machine-hours                                               50,000                         12,000

Direct labour cost                                           $80,000                       $172,000

Manufacturing overhead                                162,500                         215,000


Job 145 was initiated into production on August 1 and completed on September 15. The company’s cost records show the following information on the job:


                                                                        Department A             Department B

Direct labour-hours                                        22                                40

Machine-hours                                               80                                20

Direct material used                                       $450                            $250

Direct labour cost                                             120                              180




  1. Compute the predetermined overhead rates that should be used during 2014 in Department A and B. (1 mark)
  2. Compute the total overhead cost applied to job 145. (1 mark)
  3. What would be the total cost of job 145? If the job contained 10 units, what would be the cost per unit? (1 mark)
  4. At the end of 2014, the records of Lennox Company reveal the following actual cost and operating data for all jobs work on during the year:

Department A             Department B

            Direct labour hours                            14,500                         32,000

            Machine-hours                                   48,000                         13,000

            Direct labour cost                               $78,000                       $174,000

            Manufacturing ovherhead                  160,000                       216,000


Compute the amount of underapplied or overapplied overhead in each department at the end of 2014 and explain most likely reasons why the underapplication or overapplication has taken place. (2 marks)

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