Value Chains

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 expense5,000Interest expense5,000
Sales travel expense1,530Machinery maintenance250
Depreciation – factory machinery1,600Office Salaries5,000
Depreciation – office machinery600Rates – factory1,400
Direct Labour6,000Raw materials inventory 1/7/194,800
Factory power150Raw materials inventory 31/7/195,200
Factory rent9,195Raw materials purchases53,200
Factory supplies4,800Sales revenue158,500
Finished goods 1/7/1911,200Sales salaries4,780
Finished goods 31/7/1910,500Telephone500
Freight inwards materials730Work in process 1/7/192,250
Indirect labour2,000Work in process 31/7/192,500

Required:

  1. 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.
  2. What was the company’s cost of sales for the month ended 31 July 2019?
  3. What was the company’s gross profit for the month ended 31 July 2019?
  4. 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 costsMaterials HandlingResearchAdministrationSheep DrenchCattle Drench
Materials & Labour120,000300,000250,000620,000780,000
Indirect costs15,00050,00010,00025,00025,000
Allocation base
No. of material movements30150120
No. of employees22321

Required

  1. Allocate the support department costs to the operating departments using the direct method.
  2. 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.
  3. 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
Research overhead50,000
Direct labour cost225,000
Direct labour hours3840

During March, the cost record for the Gargantua job shows the following:

ResearchProduction of Gargantua
Direct materials requisitioned$10,500$163,000
Direct labour cost$20,000$5,500
Direct labour hours25030

Required

  1. What is the estimated overhead allocation rate that should be used in the Research department?
  2. What is the total overhead allocated to job Gargantua?
  3. The Gargantua job was for 150 units. What is the unit cost for this job?
  4. Actual overhead for the Gargantua job was $18,500. Calculate the over or under application of overhead.
  5. Prepare the journal entries to record the allocation of overhead and the over or under application of overhead.
  6. 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 DrenchCattle Drench
Opening Inventory:
15000 units30% complete25000 units25% complete
Material cost60,00080,000
Conversion cost5,0007,500
Closing Inventory:
7500 units1/3 complete15000 units20% complete
Current costs:
Materials85,00090,000
Conversion10,000$15,000

Required

  1. 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.
  2. 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.
  3. Explain the difference between the costs calculated using the weighted average cost method and the FIFO method.

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