JOB COSTING Job costing, accounting for manufacturing overhead, budgeted rates.

The Lynn Company uses a job-costing system at its Minneapolis plant. The plant has a Machining Department and an Assembly Department. Its job- costing system has two direct cost categories ( direct materials and direct manufacturing labour) and two manufacturing overhead cost pools (the Machining Department overhead, allocated to jobs based on actual machine hours, and the Assembly Department overhead, allocated to jobs on actual direct manufacturing labor cost). The 2007 budget for the plant is : Machining Assembly Department Department Manufacturing overhead $1,80,000 $3,600,000 Direct manufacturing labor cost $1,40,000 $2,000,000 Direct manufacturing labor-hours 1,00,000 2,00,000 Machine -hours 50,000 2,00,000 1. Present an overview diagram of Lynns job-costing system. Compute the budgeted manufacturing overhead rate for each department. 2. During February, the job-cost record for Job 494 contained the following: Machining Assembly Department Department Direct materials used $45,000 $70,000 Direct manufacturing labor cost $14,000 $15,000 Direct manufacturing labor-hours 1,000 1,500 Machine -hours 2,000 1,000 Compute the total manufacturing overhead costs allocated to job 494. 3. At the end of 2007, the actual manufacturing overhead costs were $2,100,000 in Machining and $3,700,000 in Assembly. Assume that 55,000 actual machine-hours were used in Machining and that actual direct manufacturing lobor costs in Assembly were $ 2,200,000. Compute the over-or underallocated manufacturing overhead for each department.

ABC COSTING Q.2. ABC, product costing at banks, cross subsidization. First International Bank (FIBI) is examining the profitability of its Premier Accounts, a combined savings and checking accounts. Depositors receive a 7% annual interest rate on their average deposit. FIB earns an interest rate spread of 3% (the difference between the rate at which it lends money and the rate it pays depositors) by lending money for home loan purpose at 10%. Thus, FIB would gain $60 on the interest spreads if a depositor had an average Premier Account balance of $2,000 in 2005 ($2,000 x 3% = $60). The Premier account allows depositors unlimited use of services such as depositors, withdrawals, checking accounts, and foreign currency drafts. Depositors with Premier Account balances of $1,000 or more receive unlimited free use of services. Depositors with minimum balances of less than $1,000 pay a $20-a- month services fee for their Premier Account. FIB recently conducted an activity based costing study of its services. It assessed the following costs for six individual services. The use of these services in 2005 by three customers is as follows: Activity Based Accounts Usage Cost per Robinson Skerrett Farrel Transaction Deposit/withdrawal with teller $ 2.50 40 50 5 Deposit/withdrawal with automatic 0.80 10 20 16 teller machine (ATM) Deposit/withdrawal on prearranged 0.50 0 12 60 monthly basis Banks checks written 8.00 9 3 2 Foreign currency drafts 12.00 4 1 6 Inquiries about account balance 1.50 10 18 9 Average Premier Account balance for $1,100 $800 $25,000 2005 Assume Robinson and Farrel always maintain a balance above $1,000, whereas Skerrett always has a balance below $1,000. 1. Compute the 2005 profitability of the Robinson, Skerrett, and Farrel Premier Accounts at FIB. 2. What evidence is there of cross-subsidization among the Premier Accounts? Why might FIB worry about this cross-subsidization if the Premier Account product offering is profitability as a whole? 3. What changes would you recommend for FIBs Premier Account? (11 Marks)

CVP ANALYSIS A person is selling ID cards. His purchase price (VCU Variable cost per unit ) is Rs. 7/- and selling price ( SPU Selling price per unit ) is Rs. 12/- . Thus Contribution margin per unit i.e CMU is Rs 5/-. His fixed cost in this venture is 3000/Q.1 How many I cards he has to sell to break even. Q.2 How many I cards he has to sell to make a before tax profit of Rs 1000/Q.3 How many I cards he has to sell to make an after tax profit of Rs 1000/- if the tax rate is 35%. Q.4 If the supplier increases the price by 10% then how many additional I cards he has to sell to make the same profit in situation 3. Q.5 On the other hand instead of calculating additional units to be sold by how much percent the selling price has to be increased to maintain the same level of after tax profit of situation 3.

Solution A.1 ( 3000 / 5 ) = 600 A.2 ( 3000 + 1000 ) / 5 = 800 A.3 ( 3000 + ( 1000 / 1 tax rate ) ) / 5 = ( 3000 + ( 1000 / 0.65) ) / 5 = ( 3000 + 1538.46 ) / 5 = 907.69 or 908 I cards. A.4 New purchase price = 7.7 new contribution margin = 4.3 i.e 12 7.7 = 4.3 ( 3000 + ( 1000 / 0.65 ) / 4.3 = 4538.46 / 4.3 = 1055.45 or 1056 I cards. Additional I cards 1056 908 = 148. A. 5 Approach 1 .7 / 12 100 5.83 % B. Approach 2 908 = ( 3000 + ( 1000 / 0.65 )) / ( New SPU 7.7 ) 908 ( New SPU 7.7 ) = ( 3000 + ( 1000 / 0.65 )) Or 908 new SPU 6991.6 = 3000 + 1538.46 Or 908 new SPU = 3000 + 1538.46 + 6991.6 Or new SPU = 11530.06 / 908 Or new SPU = 12.69 or 12.70

Income statement

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