ARBA MINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTIMENT OF ACCOUNTING AND FINANCE
POST GRADUATE PROGRAM

ASSIGNMENT OF ADVANCED COST MANAGMENT

ACCOUNTING
PREPARED BY ID NO. PRBE//13

Submitted to: Tamirat G. (PhD)

January, 2021
ArbaMinch, Ethiopia.

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Question 1:
(a) From the following information you are required to construct:
(i) a break-even chart, showing the break-even point and the margin of
safety;
(ii) a chart displaying the contribution level and the profit level; (iii) a
Profit–volume chart.

Sales 6000 units at Br.12 per unit = Br.72 000

Variable costs 6000 units at Br.7 per unit = Br.42 000
Fixed costs = Br.20 000
(b) State the purposes of each of the three charts in (a) above.
(c) Outline the limitations of break-even analysis.
(d) What are the advantages of graphical presentation of financial data to
executives?
Solution:-
Q1.[A] from the f0llwing information you are required to construct=
TFC br 20000
BEP in Birr = CM ratio = .42 = Br 47619

CM= SP-VC/uinit = Br12- Br7 = Br5

CM /UNIT br 5
CMR = SPU = br 12 = 42%

TFC br 20000
BEP in units = CM per unit = br 5 = 4000 units

Margin of Safety in Birr(MOS)=actual sales –BE sales

MOS in Brr= Br 72000- Br47619 = Br24381
MOS in unit =AS in unit-BE sales in unit = 6000unit – 4000unit=
2000unit

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 Cost
in ●Sales line
Birr Profit area
Units of
Total cost
production & sales
Graph A)
Breakeven Breakeven point
Chart

Variable cost
Cost
Loss area margin of safety
in ●Sales line
Birr Profit area

Total cost
Fixed cost

fixed cost
Breakeven point

Loss area ●
●

Variable cost

Units of production & sales

Graph B) Contribution chart

Profit area
Breakeven point
Profit in Birr
Loss area

Unit of sale

Loss in Birr

Graph C) profit level

(c) The major limitations are:

 Costs and revenue may only be linear within a certain output range.
 In practice, it is difficult to separate fixed and variable costs and the
calculations will represent an approximation.
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  It is assumed that profits are calculated on a variable costing basis.
 Analysis assumes a single product is sold or a constant sales mix is
maintained.
(d) The advantages are:
 The information can be engaged at a momentary look without the need for
detailed figures.
 Essential features are emphasized.
 The graphical presentation can be easily understood by non-accountants

 Question 2:
A company produces and sells two products with the following costs:
Product X Product Y
Variable costs per Br. of sales Br.0.45 Br.0.6
Fixed costs per period Br.1 212,000 Br.1, 212 000
Total sales revenue is currently generated by the two products in the following proportions:
Product X 70%
Product Y 30%
Required:
(a) Calculate the break-even sales revenue per period, based on the sales mix assumed above.
(b) Prepare a profit–volume chart of the above situation for sales revenue up to Br.4, 000 000.
Show on the same chart the effect of a change in the sales mix to product X 50%, product Y 50%. Clearly
indicate on the chart the break-even point for each situation.
(c) Of the fixed costs Br.455 000 are attributable to product
Calculate the sales revenue required on product X in order to recover the attribute able fixed costs and
provide a net contribution of Br.700 000 towards general fixed costs and profit.
\

(a) Break-even point = fixed costs = Br1 212 000 = Br2 400 000
average contribution per Br of sales Br0.505
Average contribution per Br of sales = [0.7 _ (Br1 _ Br0.45)] _ [0.3 _ (Br1 _ Br0.6)]
=Br 0.505

Zero activity: loss = Br1 212 000 (fixed costs)

Br4, 000,000 existing sales: (Br4000,000 _ Br0.505) _ Br1 212 000
= Br808 000 profit
Br4, 000,000 revised sales: (Br4000000 _ Br0.475) _ Br1 212 000
= Br688 000 profit
Existing break-even point: Br2 400 000
Revised break-even point = Br1 212 000 = Br2 551 579
Br0.475
Revised contribution per Br of sales = (0.5 _ Br0.55) _ (0.5 _ Br0.40) = Br0.475

(b) The graph plot is based on the above calculations:

1000

750 (£808 000 profit)

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 £688 000 profit
Profit
(£000)

Break-even point
500 (existing)
Break-even point
revised)

1000 2000 3000 400

250 Sales
revenue
0
250

500
Loss
(£000)
750

1000

1250

 Question 3 (4):
Keppel Manufacturing had a bad year in 2012, operating at a loss for the first time in its history. The
company’s income statement showed the following results from selling 200,000 units of product: net sales
Br.2, 000,000; total costs and expenses Br.2, 120,000; and net loss Br.120, 000.

Costs and expenses consisted of the following.

Total Variable Fixed

Cost of goods sold Br.1,295,000 Br. 975,000 Br.320,000

Selling expenses 575,000 325,000 250,000
Administrative expenses 250,000 100,000 150,000
Birr 2,120,000 Birr1, 400,000 Birr,720, 000
Management is considering the following independent alternatives for 2013.
1. Increase unit selling price 30% with no change in costs and expense

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2. Change the compensation of salespersons from fixed annual salaries totaling Br.170, 000 to total
salaries of Br.50, 000 plus a 6% commission on net sales.

3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed
cost of goods sold to 40:60.
Instructions
(a) Compute the break-even point in dollars for 2012.

(b) Compute the break-even point in dollars under each of the alternative courses of action. Which course
of action do you recommend? (Round to the nearest dollar.)

Solution for Question 4//

TFC
a) BEP in dollars = CM ratio

The CM ratio is equal to the CM /sales. The CM is calculated as sales less VC

CM = S – VC

CM = 2,000,000 – 1,400,000 = 600,000

CM 600,000
CMR = = =0.3 ≈ 30%
Sales 2,000,000

720,000
BEP in dollars (birr) = = 2,400,000 Birr
30 %

Break-even point in birr is 2,400,000

 First we have calculate the original USP ( unit selling price )

T sales 2,000,000
USP = = = 10 per unit
U Sold 200,000

 Second we have calculated the increase in the unit selling price increase in unit selling price =
USP x increase percent
= 10 x 30%
= 3 birr per unit
 Finally we calculate the new units selling price
New unit selling price = USP + increase in unit selling price
= 10 per unit + 3 per unit
= 13 birr per unit

The new sales in dollar = unit sold x selling price per unit
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 = 200,000 x 13= 2,600,000 birr

Since there is no change to the costs of expenses the contribution margin is ;-

CM = 2,600,000 – 1,400,000= 1,200,000

CMR =
1,200,000
2,600,000
=
= 0.46 46%

720,000
Break – even point in sales dollars = = 1,565,217
46 %

If the company increases its unit selling price by 30% the BEP in dollars is 1,565,217

2) Decrease in fixed cost = old fixed annual sales – new fixed annual sales

= 170,000 – 50,000

= 120,000 birr

Now we calculate the new total fixed costs

TFC = old TFC – decrease in fixed cost

TFC = 720,000 - 120,000

TFC= 600,000 birr

The commission is VC so we have to calculate the increase in VC

Increase in VC = net sales x commission percent

= 2,000,000 x 6%

= 120,000 birr

Now, we calculate the new total variable cost

TVC = old VC + increase in VC

= 1, 400, 0000 + 120,000

= 1,520,000 birr

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Since there is no change to sales the new CM is;-

CM = 2,000,000 – 1,520,000

= 480,000 birr

480,000
CMR = = 0.24 = 24%
2,000,000

600,000
BEP in sales = = 2,500,000 birr
0.24

 If the company decrease in fixed sales persons salaries and increase its variable commission , its
break-even point in dollars are $ 2,500,000

3) First we have to calculate the new variable and fixed cost of GS

VC of GS = TC GS x 40%

= 1,295,000 x 40% = 518,000 birr

FCGS = 1,295,000 x 60% = 777,000 birr

Now, we can calculate the new total variable and fixed cost

Total Variable Fixed

Cost of goods sold 1,295,000 518,000 777,000
Selling expenses 575,000 325,000 250,000
Administrative expense 250,000 100,000 150,000
Totals 2,120,000 943,000 1,177,000
Since there is no change to sales the new CM is;

CM = 2,000,000 – 943,000

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 = 1,057,000 birr

1,057,000
CMR = = 0.5285 ≈ 52.85%
2,000,000

1,177,00
BEP in sales dollar = = 2,227,058 birr
0.5285

If the company changes the proportion of variable and fixed cost of GS to 40:60, the BEP in sales dollar is
2,227,058

1. Increase selling price ------------------------------- 1,565,217

2. Change compensation ------------------------------ 2,500,000
3. Purchase machinery -------------------------------- 2,227,058
 Which course of action do you recommend?
 I recommend the first alternative increase in selling price b/c it results in the lowest break-
even point in sales dollars, which means the company has to selling price less break-even.

Question 4 (6)

Lorge Corporation manufactures and sells three different models of exterior doors. Although the doors
vary in terms of quality and features, all are good sellers. Lorge is currently operating at full capacity with
limited machine time.

Sales and production information relevant to each model is shown below.

Product

Economy Standard Deluxe

Selling price Br. 270 Br. 450 Br. 650

Variable cost and expense Br. 150 Br. 261 Br. 425

Machine hours required 0.6 0.9 1.2

A. Ignoring the machine time constraint, which single product should longe product?
B. What is the contribution margin per unit of limited resource for each product?
C. If additional machine time could be obtained, how should the additional time be used?

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Given Product

Economy Standard Deluxe

Economy standard deluxe

Selling price Br. 270 Br. 450 Br. 650

Variable cost and expense Br. 150 Br. 261 Br. 425

Machine hours required 0.6 0.9 1.2

Required

A, Ignoring the machine time constraint, which single product should lorge produced

Solution for Question 6/

Economy standard deluxe

CM = SP-VC CM = SP-VC CM = SP-VC

=270-150 =450-261 =650-425

= 120 =189 =225

Lorge Corporation should produce product Deluxe which has greater contribution margin than the other
product as shown above.

B. what is the contribution margin per unit of limited resource for each product?

Solution for B

Economy Standard Deluxe

CM/machine /hour CM/m.h 120/0.6=200 189/0.9 =210 225/1.2=187.5

C, If additional machine time could be obtained large corporation should use to produce standard. The
potential of the buyer in market is very high because product standard has greater Contribution margin
machine hours than the product.

 Question 5 (9)
Huber Beauty corporation manufactures cosmetic products that are sold through a net work of sales
agents. The agents are paid a commission of 15% of sales. The income statement for the year ending
December 31, 2012, is as follows.

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 HUBER BEAUTY CORPORATION

Income statement

For the year ended December 31, 2012

Sales Br 117,000,000

Cost of goods sold

Variable Br, 52,650,000

Fixed cost Br, 12, 915, 000 65,565,000

Gross margin 51,435,000

Selling and marketing expense

Commissions Br, 17,550,000

Fixed cost Br, 12,825,000 30,375,000

Operating income Br. 21,060,000

The company is considering hiring its own sales staff to replace the net work of agents. It will pay its sales
people a commission of 10% and incur additional fixed costs of Br. 11.7 million.

Instructions

A) Under the current policy of using a network of sales agents, calculate the Huber Beauty
corporations’ Break-even point in sales dollars for the year 2012.
B) Calculate the company’s break-even point in sales dollars for the year 2012 if if it hires its own
sales force to replace the network of agents.
C) Calculate the degree of operating leverage at sales of Br. 78 million if (1) Huber beauty uses sales
agents. And (2) Huber Beauty employ its own sales staff. Describe the advantages and
disadvantages of each alternative.
D) Calculate the estimated sales volume in sales dollars that would generate an identical net income
for the year ending December 31, 2012, regardless of whether Huber Beauty Corporation employs
its own sales staff and pays them a 10% commission as well as incurring additional fixed cost of
Br. 11.7 million or continues to use the independent network of agents .
Given
Sale---------------------------------------------------------------117,000,000
Variable cost ---------------- (52,650,000+17,550,000) = 70,200,000
Contribution margin-------------------------------------------46,800,000
Fixed cost --------------------------------------------------------25,740,000
Operating income----------------------------------------------21,060,000

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 Required

A) Calculate Break Even point (in sales) of 2012.

Solution

Break-even point =FC/SP-VC

=25,740,000/117,000,000-70,200,000
=25,740,000/46,800,000
= 0.55

Break-even point (in sales) =FC/CM

=25,740,000/0.55
=468,000,000 birr

B) Calculate the company's break-even point in sales dollars for the year 2012, if it hires its own sales
force to replace the network of agents.

Solution

Variable cost =70,200,000-17,550,000+11,700,000 =64,350,000

Fixed cost = 25,740,000+11,700,000 =37,440,000
Contribution margin=SP-VC=117,000,000-64,350,000 = 52,650,000
CMR=CM/SP=52,650,000/117,000,000=0.45
Break-even point (in sales) =FC/CMR
=37,440,000/0.45
=83,200,000

C) Calculate degree of operating leverage at sales 0f 78,000,000

1. If Huber beauty uses sales agents, and
2. If Huber beauty employs its own sales staff

Solution

1st

Sales ---------------------------------------------------------------78,000,000

VC------------------------------------------------------------------70,200,000

CM------------------------------------------------------------------7,800,000

FC------------------------------------------------------------------ (25,740,000)
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 OI ----------------------------------------------------------------- 17,940,000

Degree of operating leverage =Cm/-------------------------------7,800,000/17,940,000=0.43

2nd sales ---------------------------------------------------------------78,000,000

VC--------------------------------------------------------------------60,450,000

CM------------------------------------------------------------------17,550,000

FC------------------------------------------------------------------- (37,440,000)

OL -------------------------------------------------------------------(19,890,000)

D) Estimated sales volume =ESB/CMR=25,740/38,610,000/0.4=160,875,000

 Question 6 (14)
Jomit plc has budgeted for the following overhead costs for period 6.

Material receipt cost Br, 31,200

Power costs 39,000

Material handling 27,300

The company produces 3 products, P, Q, and R for which the following budgeted information is available
for period 6,

Product P Q R

Output (unit) 4,000 3,000 1,600

Material batches 20 10 32

Per Unit

Direct material (kg) 4 6 3

Direct material (Br) 6 5 9

Direct labour (hours) 0.2 0.5 1.0

Number of power operations 6 3 2

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Direct labour rate per hour Br. 8 Br, 8 Br.8

Currently the overhead costs are each absorbed using a rate per direct labour hour.

However, the company is considering applying overhead using an ABC approach and has identified
drivers for the activities as follows;

Material receipts costs number of batches of material

Power costs number of power operations

Material handling costs kg of material handled

You are required to calculate:-

a) The total cost per unit for each product using the current overhead absorption method.
b) The total cost per unit for each product using the ABC method.

Given
Budget at costs
Material receipts-------------------------------------31,200
Power cost----------------------------------------------39,000
Material handling------------------------------------27,300
97,500
Product P Q R
Output (unit) 4,000 3,000 1,600
Material batches 20 10 32
Per Unit
Direct material (kg) 4 6 3
Direct material (Br) 6 5 9
Direct labour (hours) 0.2 0.5 1.0
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Number of power operations 6 3 2
Direct labour rate per hour Br. 8 Br, 8 Br.8
Solution
=Excepted overhead/Direct labour hour
=97,500/0.2(4,000) +0.5(3,000) +1(1,600)
=97,500/3900= 25 unit
Manufacturing cost
Product

P Q R
Direct material 4×6=24 6×5=30 3×9=27
Direct labour 0.2×8=1.6 0.5×8=4 1×8=8
Overhead cost 0.2×25unit=5 0.5×25=12.5 1×25=25
Total unit cost 30.5 46.5 60

B) Given
Cost pool cost driver
Material receipt ----------31,200 -------------------------
Power cost -----------------39,000 --------------------------
Material handling cost-----27,300 ---------------------------
Expected use of cost driver proactively

Cost pool cost driver

Material receipt no. batch of material 20+10+32=62

Power cost = (6×4,000) + (3×3,000) + (2×1600) =36,200

Material handling cost------------- (4×4,000) + (6×3,000) + (3×1600) =38,800

Expected use of cost driver per product

Cost pool cost driver P Q R

Material cost No. batch 20 10 32

Power cost No. power opera 24,000 9,000 3200

Material handling No. 16,000 18,000 4800

ABOH=Estimated over head rate/Expected use of cost driver

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Cost pool cost driver ABOR

Material receipt 31,200/62 = 503.23

Power cost 39,000/36,200= 1.077

Material handling 27,300/38,800= 0.70s

Cost Assigned =Expected use of cost per product × ABOR

Product

Cost pool PQR

Material receipt 20(503.23) 10(503.23) 32(503.23)

10,064.6 5,032.23 16,103.36

Power cost 24,000(1.077) 9,000(1.077) 3200(1.077) ?

25,848 9,693 3,464

Material head cost 16,000(.7) 18,000(0.7) 4,800(0.7)

11,257.731 2,664.93 377.33 ?

Total cost Assigned 47,178.6 27,393.3 22,928

4,000 3,000 1,600

Over Head unit

Product cost = TC/TP 11.8 9.13 14.33

Manufacturing cost Product

P Q R

Direct material 24 30 27

Direct labour 1.6 4 8

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Over Head 11.8 9.13 14.33

Total cost/unit 37.4 43.13 49.33

 Question 7 ( 15),
Your company currently produces a range of three products D, E and F to which the following details
relate for period 2

D E F

Production (units) 1,500 2,500 14,000

Material cost per unit Br.18 Br, 10 Br.20

Labour hours per unit 1 3 2

Machine hours per unit 3 2 6

Labour costs are Br.8 per hour and product overheads are currently absorbed in the conventional system
by reference to machine hours. Total production overheads for period 2 have analyzed as follows.

Set-up costs Br. 327,250

Handling costs 187,000

Machining costs 140,250

Inspection costs 280,500

935,000

A) Calculate the cost per unit for each product using conventional methods.

The introduction of an ABC is being considered and to that end the following volume of activities has been
identified with the current output levels.

D E F
Number of set ups 90 138 576
Number of material issues 16 28 116

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 Number of inspection 180 216 804
B) Calculate the cost per unit for each product using the ABC approach.

Given

Product

D E F

Production (units) 1,500 2,500 14,000

Material cost per unit Br.18 Br, 10 Br.20

Labour hours per unit 8 24 16

Machine hours per unit 3 2 6

Labour cost 8 8 8

Total production over head

Set-up costs Br. 327,250

Handling costs 187,000

Machining costs 140,250

Inspection costs 280,500

= 935,000

Required

A) Calculate the cost per unit for each product using conventional method //use machine hours//s.
Solution
/
POR= Estimated OH Expected use of cost order (machine hour)
=935,000/93,500 =10 units

Manufacturing Product
Cost D E F
Direct material 18 10 20
Direct labour 1(8) =8 3(8) =24 2(8) =16
Over Head 3(10) =2(10)=20 = 6(10) =60
Total cost per unit 56 54 96
Cost assigned =Expected use of cost per unit ×ABOR

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 Cost pool product
D E F
Set up cost 90(407) 138(407) 576(407)
36, 630 56,166 234,432
Handling cost 16(1,168, 75) 28(1,668.75) 116(1,168.75)
18,700 32,725 135,575
Machine cost 4,500(1.5) 5,000(1.5) 84,000(1.5)
6,750 7,500 126,000
Inspection cost 180(233.75) 216(233.75) 804(233.75)
42,075 50,490 187,935

Total cost Assigned 104,157.47/1,500 50,490/2,500 683,957.7/14,000

69.40 58.75 ? 48.85

Manufacturing cost Product

D E F

Direct material 18 10 20

Direct labour 8 24 16

Over head 69.4 58.75 48.85

Total cost per unit =95.4 =92.75 = 84.85

B) Calculate the cost per unit for each product ABC Approach
Solution
Cost pool Cost Driver Estimated OH
Set up cost No set up 327,250
Handling cost No material issues 187,000
Machine cost machine hours 140,250
Inspection cost No inspection 280, 500
Total cost 935,000
Expected use of cost driver per activities
Setup cost 90+138+576 =804
Handling cost 16+28+116 =160
Machine.c 4,500+5,000+84,000=93,500
Insc 180+216+804=1200

ABOR=Expected OH/Expected cost driver activity

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Cost pool

Set up cost 327,250/804=407

Handling cost 187,000/160=1,168.75

Machine cost 140250/93500=1.5

Inspection cost 280,500/1200=233.75

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