Cost Accounting-Apply accounting manufacturing concepts to an actual product

| January 30, 2017

Question
Objectives:
1.

Apply accounting manufacturing concepts to an actual product to solidify the learning
process.

2.

Learn how all the numbers fit together.

3.

Develop decision making analysis techniques.

Manufacturing Questions Instructions:
1. This project should stand by itself. Include the questions with your submission–not just
the answers. Identify all numbers. Points will be deducted if I can’t understand what you
are answering.
2. You may use Excel to complete tables and/or answer questions. Just make sure you label
your work and turn the Excel file in.
3. You may discuss this project with classmates. A discussion board will be set up for this
project. Try to get help from classmates first. Your professor will only provide limited
individual help.

1

Your information:
1. Your company produces a basic potato chip. There are three main processes used in the
chips. The first process washes and peels the potatoes. The second process slices and
fries the potatoes. The third process seasons and packages the chips. The potato chips
are sold in 12 oz bags (1 bag is a unit)
2. Information on the direct materials is listed in table 1. Consider this information the
standard.
3.

Direct labor information given in Table 2. Consider this information the standard.

4. Annual overhead information is given in Table 3. Overhead is allocated based direct
labor hours. Estimated annual direct labor hours are 12,500. Calculate a predetermined
OH rate (round to two decimal places if needed). Use this rate when you need to apply
OH.
5. Table 4 gives you the information for the last two months on the overhead cost. Use this
information to determine the fixed and variable portions of the cost. (You will need this
information to complete Table 5). Machine hours have been determined as the best cost
driver for separating mixed cost into their fixed and variable portions. It takes
approximately 12 minutes of total machine time for each bag of chips (or 1/5 a machine
hour per bag of chips).
6. Table 5 is where you will list all your production cost, separated into their fixed and
variable components.
7. Cost-Volume-Profit (CVP) Relationships
a. Selling Price: You sell a bag of chips for $4.80
b. Breakeven point: Calculate the breakeven point. Be sure to include the fixed
component of mixed cost in your fixed costs and the variable component in the
variable cost. Show your breakeven in Sales units and in Sales Dollars
c. Profit Planning: Determine the number of units you must sell to make an annual pretax profit using 3 assumptions concerning your net income (profit), both in sales units
and sales dollars.
i. Aggressive Profit ($100,000)
ii. Conservative Profit ($25,000)
iii. Average Profit ($66,500)

2

8. Budgeting:
a.
Create a sales budget using the information for earning an average profit for
the year. You will break the budget down into the four quarters for the year.
(Sales tend to be consistent each quarter, you can only sale a whole unit so
round-up if necessary) Use table 6 to complete the sales budget.
b.
Create a production budget for each quarter of the year (keep it in quarters;
you do not need to break it down by month). You desire to keep 10% of next
quarter’s sales in ending inventory. Sales for Qtr 1 the following year are
expected to be 30,000 bags of chips. There is not any beginning finished
goods inventory for quarter one. Use table 7 to complete the production
budget.
9. Running quarter one — Weighted-average process costing. Table 8 presents the
information for the packaging department. Complete the questions under table 8.
10. Actuals are in for quarter one. You sold 25% more units than you budgeted for, but price
per unit was only $4.5.
a.
b.

Calculate revenue
Compute the cost of goods sold (total and per unit) before adjusting for actual
OH cost
11. Actual potato usage for quarter one was 68,000 pounds at a price of $0.45 per pound.
Actual equivalent units of production (bags of chips) completed through the first process
(where the potatoes are added) was 29,520. Calculate the direct materials variances for
the potatoes (price, usage, and total) and indicate if these variances are favorable or
unfavorable.
12. Actual direct labor hours for the quarter were 4,830 at an average rate of $12.15 per hour.
For actual production you expected to use 4,200 direct labor hours. Calculate the direct
labor variances (rate, efficiency and total) and indicate if these variances are favorable or
unfavorable.
13. For next quarter you have been asked to supply a special order of you potato chips. The
non-profit organization requesting this order would like a special bag that will cost $0.20
instead of the normal $0.10 per bag. The request is for 10,000 bags of chips. Based on
your projections you have the capacity for this order. What is the minimum price per unit
and total price you would be willing to accept on this order? (You cannot afford to take
this offer at a loss, but you are fine with accepting it at cost).
14. Determine over- or under-applied overhead and close to cost of goods sold. Actual OH
cost are given in table 14 (look at #12 for actual DL hours used to apply OH). Determine
the new cost of goods sold amount.

3

Table 1: Direct Materials
Material
Potatoes
Seasoning
Packaging

Quantity
per unit
1.5 lbs
0.1 ounces
1 bag
1/12 box

Cost
$0.50
$0.50
$0.10
$0.48

TOTAL

Total
per unit
$0.75
$0.05
$0.10
$0.04
$0.94

Table 2: Direct Labor

Job Description
Potato Washer & Peeler

Hours
Per Bag
of chips
.1

Rate
$12.00

Total Cost
$1.20

Slicer & Fryer
Packager

.04
.05

$12.00
$12.00

$0.48
$0.60

Total

0.19

$2.28

Table 3: YEARLY OVERHEAD COSTS
Cost Description
Total Cost
Indirect Materials
$6,600
Indirect Labor
61,200
Machine Maintenance
4,030
Electricity
3,430
Depreciation
6,340
Quality Testing
10,150
TOTAL
$91,750
Predetermined OH rate: 91,750/12,500 = 7.34
4

Table 4 – Actual Overhead cost for the last two months
Indirect Material
Indirect Labor
Machine Maintenance
Electricity
Depreciation
Quality Testing

Month 1
$550
$5100
$250
$200
$528.33
$630

Month 2
$550
$5100
$290
$240
$528.33
$730

Machine Hours*

1000

1200

*12 minutes of machine time per bag of chips (1/5 hour = 1 unit)
Complete any calculations here:
High Activity
Low Activity
Cost Change to activity
High level activity
Low level activity
High level cost associated
Low level cost associated

Machine Hours
1,200
1,000
200
140/200 =
TVC=$0.70(1,200)=
TVC=$0.70(1,000)=
a=1,020-840=
a=88-700=
y=$180+$0.70x

Cost
1020
880
140
$0.70
$840
$700
180
180
(x=machine hours)

5

Table 5: Variable and Fixed Costs
COSTS Description

VARIABLE Cost per unit

Direct Material (DM)

0.94

Direct Labor (DL)

2.28
6,340

Depreciation
Electricity
Quality Testing & Machine
Maintenance

0.2

0.7

180

6,600

Indirect material

61,200

Indirect labor

TOTAL

FIXED Cost per Year

4.12

74,320

If a cost is mixed, put the fixed amount in the fixed column and the variable
amount in the variable column.
CVP Calculations:
Fixed Cost: 74,320
Variable cost: 4.12
Price per unit: 4.80
Breakeven Point in Sales Units(x)
=Fixed price/(Price per unit-variable cost)
=74,320 / (4.80-4.12)
= 109,295 units
Breakeven Point in Sales Dollars = 109,295*4.80 = 524,616
Profit Planning
i. Aggressive Profit (74,320+100,000) / (4.80-4.12) = 256,353
6

ii. Conservative Profit (71,292+25,000)/(4.80-4.12)= 146,059
iii. Average Profit (74,320+66,500) / (4.80-4.12)= 207,088

Table 6 – Sales Budget
Qtr 1
Sales forecast

Price

Sales Budget

Qtr 2

Qtr 3

Qtr 4

Total

51,772

51,772

51,772

51,772

207,088

4.80

4.80

4.80

4.80

4.80

248,505.60

248,505.60

248,505.60

248,505.60

994,022.40

Table 7 – Production Budget
Qtr 1
Sales
Des End Inv
Needs

Qtr 3

Qtr 4

51,772

51,772

51,772

51,772

5177

5177

5177

3,000

56,949

56,949

56,949

54,772

5177

5177

5177

51,772

51,772

49,595

Beg Inv
Production

Qtr 2

56,949

7

Process Costing – Packaging Department
Direct materials are added 70% at the beginning of the process and the remaining
30% are added when the chips are 50% complete with the packaging process.
Direct labor and overhead are added evenly throughout the process.
Table 8 – Unit and cost information

Beg WIP
Transferred
In
End WIP

Physical
TransferredUnits
in
1,000 (40% $6,500
complete)
30,000
$63,250

Cost
Direct
Direct
Materials
Labor
$110.40
$1931.85

Overhead
$1152.95

2,200 (30%
complete)

Added during Qtr 1:
Direct Materials — $4,835.02
Direct Labor – 1,580 hrs @ $12.15 per hour
Overhead – OH is applied based on predetermined OH rate and actual DL hours
1. Determine the number of units completed during quarter 1.
28,000 units completed
2. Compute the equivalent units using the weighted average method
29,460 equivalent units
3. Compute the cost per equivalent unit using the weighted average method
2.37 cost per equivalent unit
4. Compute the cost of goods transferred to finished goods inventory
66,360
5. Compute the ending balance in WIP, Packaging
1564.20

8

Table 10 – Actual Results (calculate revenue and COGS)
Units sold
51772*1.25=64,715

Sales Price
4.5

Revenue
291,217

Units sold
64,715

Cost per unit
2.37

COGS
153,374

Table 11 – DM Variances (potatoes only)
Price Variance
Usage Variance
Total Variance
Calculations

Table 12 – Direct Labor Variances
Rate Variance
Efficiency Variance
Total Variance

9

#13 Calculations (Minimum price on special order)

Table 14 – Actual OH cost for Quarter 1
Description
Cost
Indirect Materials
$1,780
Indirect Labor
$17,250
Machine Maintenance
$1,552
Electricity
$1325
Depreciation
$1,585
Quality Testing
$4,615
Amount of applied OH:

Amount of actual OH:

Under or Over- Applied Amount:

New COGS amount:

10

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