AFM112 Assignment 2 2011 Lana Roelandts 220032777 AFM112 Assignment 2 Question 1 a) An avoidable cost is a cost that management can

avoid paying by not performing a particular activity, for example, closing a production line for a particular product. Over the long term, all costs are avoidable.

In general, a variable cost is considered to be an avoidable cost, while a fixed cost is not considered to be an avoidable cost. In the very short term, many costs are considered to be fixed and therefore unavoidable.

The amount of the XIN5 production that is avoidable is the 40% of the fixed costs. 25 000 x 0.4 = 10 000

Therefore, $10 000 of the fixed support costs are avoidable.

b) Buy option = 11.20 x 10 000 = 112 000 Make option = direct materials + direct manufacturing labour + variable support costs = total costs. Make option = 45 000+ 15 000 + 35 000 = 95 000 Comparing these two options, it appears, based on financial factors alone, that Armidale Truck should not outsource XIN5.

c) Armidale Truck should also take strategic and qualitative factors into account before outsourcing any of the parts it currently manufactures. These include factors such as ethical considerations in relation to the community as well as the environment when making decisions... companies may consider the consequences to employees from shutting down operations.... (Horngren et al, 2011, p.127)

If Armidale Trucks elects to outsource production, then it is going to have a negative impact upon employee morale, as many employees involved in production will be made redundant.

AFM112 Assignment 2 2011 Lana Roelandts 220032777 Therefore, qualitative factors, not only financial factors need to be considered when making decisions regarding outsourcing and other major changes in production. Question 2 a) $20 000 + $60 000 = $80 000 total overhead costs. 650 + 150 = 800 direct labour hours ____650___ = 0.8125 800

$80 000 x 0.8125 = $65 000 for standard model.

b) ___150___ = 0.1875 800 $80 000 x 0.1875 = $15 000 for deluxe model.

c) 3 + 7 = 10 as total number of setups. __3__ = 0.3 10 $20 000 x 0.3 = 6000 setups. 30 + 50 = 80 as total number of components. __30__ = 0.375 80 $60 000 x 0.375 = 22 500 components.

6000 + 22 500 = $28 500 for standard model. d) __7__ = 0.7 10 $20 000 x 0.7 = 14 000 setups. __50__ = 0.625 80 60 000 x 0.625 = 37 500 components.

AFM112 Assignment 2 2011 Lana Roelandts 220032777

14 000 + 37 500 = 51 500 for deluxe model.

e) The traditional costing system uses only one cost driver, labour hours, and therefore lumps the overheads for setups and components together and divides these by the labour hours required for each model.

The ABC system assumes that the number of setups and the number of components are the cost drivers for the overheads, and therefore makes the overheads for each activity divisible by the number of setups and components required for each model. The ABC method appears to be a better estimate of costs as it takes into account more factors and more processes than traditional costing system, which only uses labour hours, and it provides more detail as to the amount of costs that are allocated to specific products.

Question 3 Tamworth Company Purchases Budget For the Quarter Ending June 31 20XX April 9 180 31 800 40 980 9 540 31 440 May 9810 30 600 40 410 9 180 31 230 June 9 450 32 700 42 150 9 810 32 340 Total Figures 28 440 95 100 123 540 28 530 95 010

Ending Inventory Budgeted Cost of Sales Total Requirements Beginning Inventory Required Purchases

AFM112 Assignment 2 2011 Lana Roelandts 220032777 Question 4 a) Minimum acceptable price = variable costs + relevant fixed costs.

Directs materials + direct labour +variable manufacturing support = total manufacturing costs.

130 + 125 + 60 = 315

Without markup of 60%, $315 is the minimum acceptable price of this one-time only special order. b) Other than price, Xangian Cabinets should also take into consideration the number of units to be produced. This is because the if not enough cabinets are to be produced, then the outcome could be that Xangian Cabinets could be operating at a loss, and therefore are not making enough profit to cover their overheads. c) With excess capacity, the firm is not operating at the optimal level of production. This means that accepting the one-time-only special order will not impact upon fixed costs of production, as these costs have to be paid whether the special order is accepted or not. If there was limited capacity, then this might cause problems because the firm would be operating at the optimal level of production, and opting to fulfil the one-time-only special order would either result in higher productions costs, or would result in less production of regular products in order to fulfil the special order. This could have negative impacts on customers for the regular product.

AFM112 Assignment 2 2011 Lana Roelandts 220032777 References http://www.accountingtools.com/questions-and-answers/what-is-an-avoidable-cost.html Accounting Tools ; Last accessed: 30/09/2011 Horngren, C., Datar, S., Foster, G., Rajan, M., Ittner, C., Wynder, M., Maguire, W., &Tan, R., 2011, Cost Accounting: A Managerial Emphasis, Pearson, 1st Australian Ed., Frenchs Forest