Question 1: Value Chains
You have used value chain analysis to help other businesses. Prepare a report for David that explains how value chain analysis will help him to make decisions about his growing business. Information on report writing is in the Resources section of this subject site.
Question 2 Cost of Manufacturing Statement
David has asked for a Cost of Goods Manufacturing Statement and Income Statement for the month of July. Use the following information taken from the books that David has been keeping to prepare the statement.
Advertising expense 5,000 Interest expense 5,000
Sales travel expense 1,530 Machinery maintenance 250
Depreciation – factory machinery 1,600 Office Salaries 5,000
Depreciation – office machinery 600 Rates – factory 1,400
Direct Labour 6,000 Raw materials inventory 1/7/19 4,800
Factory power 150 Raw materials inventory 31/7/19 5,200
Factory rent 9,195 Raw materials purchases 53,200
Factory supplies 4,800 Sales revenue 158,500
Finished goods 1/7/19 11,200 Sales salaries 4,780
Finished goods 31/7/19 10,500 Telephone 500
Freight inwards materials 730 Work in process 1/7/19 2,250
Indirect labour 2,000 Work in process 31/7/19 2,500
Prepare a cost of goods manufactured statement for the month ended 31 July 2019. This must be prepared in Excel and cut and pasted into your Word document. Include the data above in your data section of the spreadsheet.
What was the company’s cost of sales for the month ended 31 July 2019?
What was the company’s gross profit for the month ended 31 July 2019?
Write a short explanation for David about the limitations of a cost of goods manufactured statement for decision making.
Question 3 Cost Allocation
FOL has 2 production departments, Sheep Drench and Cattle Drench, and 3 support departments, Administration, Materials Handing and Research. You have estimated that the Research department costs $350,000 pa to run and that 30% of the total cost of running this department is related to refining the Sheep (15%) and Cattle (15%) drenches. The remaining 70% is spent on developing new products. The Materials handling costs are allocated on the basis of the number of material movements. the Administration department costs are allocated on the basis of the number of employees. Allocate the support department costs in the following order; Administration, Materials Handling and Research.
Direct costs Materials Handling Research Administration Sheep Drench Cattle Drench
Materials & Labour 120,000 300,000 250,000 620,000 780,000
Indirect costs 15,000 50,000 10,000 25,000 25,000
No. of material movements 30 150 120
No. of employees 2 2 3 2 1
Allocate the support department costs to the operating departments using the direct method.
Allocate the support department costs to the operating departments using the step down method. Allocate first the costs for the support department having the largest direct costs.
Allocate the support department costs to the operating departments using the reciprocal method. Use either simultaneous equations or Excel Solver. Cut and paste your spreadsheet results and formula view into your word document.
Question 4 Job Costing
FOL have been asked to prepare a special spray to eliminate an insect pest, Gargantua, recently identified at one orchard. David Scott has developed a special spray that kills the Gargantua insects. This will be a special job and will be made in the laboratory.
FOL budgeted the following for the Research department. Overhead in the Research department is allocated on the basis of direct labour hours.
Research overhead 50,000
Direct labour cost 225,000
Direct labour hours 3840
During March, the cost record for the Gargantua job shows the following:
Research Production of Gargantua
Direct materials requisitioned $10,500 $163,000
Direct labour cost $20,000 $5,500
Direct labour hours 250 30
What is the estimated overhead allocation rate that should be used in the Research department?
What is the total overhead allocated to job Gargantua?
The Gargantua job was for 150 units. What is the unit cost for this job?
Actual overhead for the Gargantua job was $18,500. Calculate the over or under application of overhead.
Prepare the journal entries to record the allocation of overhead and the over or under application of overhead.
Gargantua was sold at the end of March to the Orchardists’ Association for $350,000. What is the total profit and the profit per unit on the sale.
Question 5 Process Costing
The following information relates to the operation of a Cattle Drench and Sheep Drench departments of FOL for February:
Sheep Drench Cattle Drench
15000 units 30% complete 25000 units 25% complete
Material cost 60,000 80,000
Conversion cost 5,000 7,500
7500 units 1/3 complete 15000 units 20% complete
Materials 85,000 90,000
Conversion 10,000 $15,000
Using a spreadsheet, calculate the cost of goods transferred out of each department using the weighted average cost method and the FIFO method. Copy and paste both the results and formula versions of the spreadsheet into your Word document.
Prepare the journal entries to record the production costs for February. Assume that the costs of the two production departments are charged to separate work in process inventory accounts.
Explain the difference between the costs calculated using the weighted average cost method and the FIFO method.