Solution manual managerial accounting by cabrera v2 chapter 19 answer

MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual CHAPTER 19 RELEVANT COSTS FOR DECISION MAKING I Questions Quantitative factors are those which may more easily be reduced in terms of pesos such as projected costs of materials, labor and overhead Qualitative factors are those whose measurement in pesos is difficult and imprecise; yet a qualitative factor may be easily given more weight than the measurable cost savings It can be seen that the accountant’s role in making decisions deals with the quantitative factors Relevant costs are expected future costs that will differ between alternatives In view of the definition of relevant costs, historical costs are always irrelevant because they are not future costs They may be helpful in predicting relevant costs but they are always irrelevant costs per se The differential costs in any given situation is commonly defined as the change in total cost under each alternative It is not relevant cost, but it is the algebraic difference between the relevant costs for the alternatives under consideration Analysis: Future costs: New Truck Less: Proceeds from disposal, net Replace P10,200 Rebuild 1,000 P 9,200 Advantage of rebuilding P8,500 P700 The original cost of the old truck is irrelevant but its disposal value is relevant It is recommended that the truck should be rebuilt because it will involve lesser cash outlay II Exercises 19-1 Chapter 19 Relevant Costs for Decision Making Exercise (Identifying Relevant Costs) Case a b c d e f g h i j k l Item Relevant Sales revenue X Direct materials X Direct labor X Variable manufacturing overhead X Book value – Model E7000 machine Disposal value – Model E7000 machine Depreciation – Model E7000 machine Market value – Model F5000 machine (cost) X Fixed manufacturing overhead Variable selling expense X Fixed selling expense X General administrative overhead X Case Not Relevant Relevant X Not Relevant X X X X X X X X X X X X X X X Exercise (Identification of Relevant Costs) Requirement Fixed cost per mile (P3,500* ÷ 10,000 miles) P0.35 Variable operating cost per mile 0.08 Average cost per mile P0.43 * Depreciation P2,000 Insurance 960 Garage rent 480 Automobile tax and license 60 Total P3,500 Requirement The variable operating costs would be relevant in this situation The depreciation would not be relevant since it relates to a sunk cost However, any decrease in the resale value of the car due to its use would be relevant The automobile tax and license costs would be incurred whether Ingrid 19-2 Relevant Costs for Decision Making Chapter 19 decides to drive her own car or rent a car for the trip during summer break and are therefore irrelevant It is unlikely that her insurance costs would increase as a result of the trip, so they are irrelevant as well The garage rent is relevant only if she could avoid paying part of it if she drives her own car Requirement When figuring the incremental cost of the more expensive car, the relevant costs would be the purchase price of the new car (net of the resale value of the old car) and the increases in the fixed costs of insurance and automobile tax and license The original purchase price of the old car is a sunk cost and is therefore irrelevant The variable operating costs would be the same and therefore are irrelevant (Students are inclined to think that variable costs are always relevant and fixed costs are always irrelevant in decisions This requirement helps to dispel that notion.) Exercise (Make or Buy a Component) Requirement Cost of purchasing Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, common Per Unit Differential Costs 15,000 units Make Buy Make Buy P200 P3,000,000 P 60 P 900,000 80 1,200,000 10 150,000 20 P170 Total costs 300,000 0 P200 P2,550,000 P3,000,000 Difference in favor of continuing to make the parts P30 P450,000 Only the supervisory salaries can be avoided if the parts are purchased The remaining book value of the special equipment is a sunk cost; hence, the P3 per unit depreciation expense is not relevant to this decision Based on these data, the company should reject the offer and should continue to produce the parts internally Requirement 19-3 Chapter 19 Relevant Costs for Decision Making Make Buy Cost of purchasing (part 1) P3,000,000 Cost of making (part 1) P2,550,000 Opportunity cost—segment margin forgone on a potential new product line 650,000 Total cost P3,200,000 P3,000,000 Difference in favor of purchasing from the outside supplier P200,000 Thus, the company should accept the offer and purchase the parts from the outside supplier Exercise (Evaluating Special Order) Only the incremental costs and benefits are relevant In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation The other manufacturing overhead costs are fixed and are not affected by the decision Per Unit P3,499.50 Total 10 bracelets P34,995.00 Incremental revenue Incremental costs: Variable costs: Direct materials 1,430.00 14,300.00 Direct labor 860.00 8,600.00 Variable manufacturing overhead 70.00 700.00 Special filigree 60.00 600.00 Total variable cost P2,420.00 24,200.00 Fixed costs: Purchase of special tool 4,650.00 Total incremental cost 28.850.00 Incremental net operating income P 6.145.00 Even though the price for the special order is below the company’s regular price for such an item, the special order would add to the company’s net operating income and should be accepted This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource Exercise (Utilization of a Constrained Resource) 19-4 Relevant Costs for Decision Making Chapter 19 Requirement (1) (2) (3) (4) X Y Z Contribution margin per unit P18 P36 P20 Direct labor cost per unit P12 P32 P16 Direct labor rate per hour 8 Direct labor-hours required per unit (2) ÷ (3) 1.5 4.0 2.0 Contribution margin per direct labor-hour (1) ÷ (4) P12 P 9 P10 Requirement The company should concentrate its labor time on producing product X: Contribution margin per direct labor-hour X P12 × 3,000 P36,000 Direct labor-hours available Total contribution margin Y P9 × 3,000 P27,000 Z P10 × 3,000 P30,000 Although product X has the lowest contribution margin per unit and the second lowest contribution margin ratio, it has the highest contribution margin per direct labor-hour Since labor time seems to be the company’s constraint, this measure should guide management in its production decisions Requirement The amount Jaycee Company should be willing to pay in overtime wages for additional direct labor time depends on how the time would be used If there are unfilled orders for all of the products, Jaycee would presumably use the additional time to make more of product X Each hour of direct labor time generates P12 of contribution margin over and above the usual direct labor cost Therefore, Jaycee should be willing to pay up to P20 per hour (the P8 usual wage plus the contribution margin per hour of P12) for additional labor time, but would of course prefer to pay far less The upper limit of P20 per direct labor hour signals to managers how valuable additional labor hours are to the company If all the demand for product X has been satisfied, Jaycee Company would then use any additional direct labor-hours to manufacture product Z In that case, the company should be willing to pay up to P18 per hour (the P8 usual wage plus the P10 contribution margin per hour for product Z) to manufacture more product Z 19-5 Chapter 19 Relevant Costs for Decision Making Likewise, if all the demand for both products X and Z has been satisfied, additional labor hours would be used to make product Y In that case, the company should be willing to pay up to P17 per hour to manufacture more product Y Exercise (Sell or Process Further) Sales value after further processing Sales value at split-off point Incremental revenue Cost of further processing Incremental profit (loss) Product A P80,000 50,000 30,000 35,000 P(5,000) Product B P150,000 90,000 60,000 40,000 20,000 Product C P75,000 60,000 15,000 12,000 3,000 Products B and C should be processed further, but not Product A III Problems Problem (Accept or Reject an Order) Selling price per unit Less Variable costs/unit: Materials Labor Factory overhead (25%) Contribution margin/unit Multiplied by number of units to be sold Total contribution margin Product A P1.20 Product B P1.40 0.50 0.20 0.10 0.80 P0.40 21,000 units P8,400 0.70 0.24 0.14 1.08 P0.32 30,000 units P9,600 Product B should be accepted because its total contribution margin is higher than that of Product A Problem (Eliminate or Retain a Product Line) Requirement No, production and sale of the round trampolines should not be discontinued Computations to support this answer follow: Contribution margin lost if the round trampolines are discontinued Less fixed costs that can be avoided: 19-6 P(80,000) Relevant Costs for Decision Making Chapter 19 Advertising – traceable Line supervisors’ salaries Decrease in net operating income for the company as a whole P41,000 6,000 47,000 P(33,000) The depreciation of the special equipment represents a sunk cost, and therefore it is not relevant to the decision The general factory overhead is allocated and will presumably continue regardless of whether or not the round trampolines are discontinued; thus, it is not relevant Requirement If management wants a clear picture of the profitability of the segments, the general factory overhead should not be allocated It is a common cost and therefore should be deducted from the total product-line segment margin A more useful income statement format would be as follows: Total Sales P1,000,000 Less variable expenses 410,000 Contribution margin 590,000 Less fixed expenses: Advertising – traceable 216,000 Depreciation of special equipment 95,000 Line supervisors’ salaries 19,000 Total traceable fixed expenses 330,000 Product-line segment margin 260,000 Less common fixed expenses 200,000 Net operating income (loss) P 60,000 Trampoline Round Rectangular P140,000 P500,000 60,000 200,000 80,000 300,000 Octagonal P360,000 150,000 210,000 41,000 110,000 65,000 20,000 40,000 35,000 6,000 7,000 6,000 67,000 157,000 106,000 P 13,000 P143,000 P104,000 Problem (Product Mix) Requirement Selling price per unit Variable cost per unit A P30 25 19-7 Product Line B C P25 P10 10 D P8 Chapter 19 Relevant Costs for Decision Making Contribution margin / unit Divided by no of hours required for each unit Contribution per hour Product ranking: D B P5 P15 P 5 hrs P1 10 hrs P1.5 hrs P1.25 C P4 hr P4 A Based on the above analysis, first priority should be given to Product D The company should use 4,000 out of the available 96,000 hrs to produce 4,000 units of product D The remaining 92,000 hrs should be used to produce 9,200 units of Product B Hence, the best product combination is 4,000 units of Product D and 9,200 units of Product B Requirement If there were no market limitations on any of the products, the company should use all the available 96,000 hours in producing 96,000 units of product D only The difference in profit between the two alternatives is computed as follows: Contribution margin of combination (1) Product D (4,000 x P 4.00) Product B (9,200 x P15.00) Total contribution margin of D and B Less contribution margin of D only (96,000 x P4) Difference, excess over profit in combination (1) P 16,000 138,000 P154,000 384,000 P230,000 Problem (Accept or Reject a Special Order) Requirement The company should accept the special order of 4,000 @ P10 each because this selling price is still higher than the additional variable cost to be 19-8 Relevant Costs for Decision Making Chapter 19 incurred Whether or not variable marketing expenses will be incurred, the decision is still to accept the order Supporting computations: (a) Assume no additional variable marketing cost will be incurred Selling price per unit Less variable manufacturing costs: Direct materials Direct labor Variable overhead Contribution margin/unit Multiplied by number of units of order Total increase in profit P10.00 P5.00 3.00 0.75 8.75 P 1.25 4,000 units P5,000 (b) Assume additional variable marketing cost will be incurred Selling price per unit Less variable costs (P8.75 + P0.25) Contribution margin / unit Multiplied by number of units of order Total increase in contribution margin P10.00 9.00 P 1.00 4,000 units P4,000 Requirement P8.75, the total variable manufacturing cost Requirement Direct materials Direct labor Variable factory overhead Total cost of inventory under direct costing P5.00 3.00 0.75 P8.75 Requirement Present contribution margin [10,000 units x (P15 - P9)] Less proposed contribution margin [(P14 - P9) x 11,000 units] Decrease in contribution margin P60,000 55,000 P 5,000 The company should not reduce the selling price from P15 to P14 even if volume will go up because total contribution margin will decrease 19-9 Chapter 19 Relevant Costs for Decision Making Problem (CVP Analysis used for Decision Making) Requirement (a) Units sold per month 4,000 5,000 6,000 No of months 15 30 Probability 20% 50% 30% 100% Requirement (b) 4,000 units P160,000 Production 5,000 units P160,000 6,000 units P160,000 100,000 - 125,000 - 150,000 - Total Contribution margin P100,000 P 60,000 P125,000 P 35,000 P150,000 P 10,000 Sales (5,000 x P40) Less variable costs Production cost @ P25 Purchase cost @ P45 P200,000 P200,000 P200,000 100,000 45,000 125,000 - 150,000 - Total Contribution margin P145,000 P 55,000 P125,000 P 75,000 P150,000 P 50,000 Sales (6,000 x P40) Less variable costs Production cost @ P25 Purchase cost @ P45 Total Contribution margin P240,000 P240,000 P240,000 100,000 90,000 P190,000 P 50,000 125,000 45,000 P170,000 P 70,000 150,000 P150,000 P 90,000 Sales (4,000 x P40) Less variable costs Production cost @ P25 Purchase cost @ P45 Requirement (c) Sales Order 4,000 Contribution Margin P35,000 19-10 Probability 0.20 Expected Value P 7,000 Relevant Costs for Decision Making Chapter 19 5,000 75,000 6,000 70,000 Average Contribution Margin 0.50 0.30 37,500 21,000 P65,500 Problem (Pricing) Requirement A: Sales Less Variable cost Contribution margin Less Fixed cost Net income (loss) 2005 P 100,000 130,000 (P 30,000) 40,000 (P 70,000) 2006 P 400,000 520,000 (P120,000) 40,000 (P160,000) Operating Result at Full Capacity P 480,000 624,000 (P144,000) 40,000 (P184,000) The company had been operating at a loss because the product had been selling with a negative contribution margin Hence, the more units are sold, the higher the loss will be Requirement B: P60.14 Requirement C: P74.29 Requirement D: P56.58 Problem (Make or Buy) Cost of Making Outside purchase Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead* Total cost P15,000 30,000 10,000 15,000 P70,000 Cost of Buying P90,000 P90,000 * 1/3 x P45,000 = P15,000 Therefore, the annual advantage to make the parts is P20,000 IV Multiple Choice Questions C 11 D 21 19-11 D 31 A Chapter 19 Relevant Costs for Decision Making 10 C B B A B C B A B 12 13 14 15 16 17 18 19 20 A D A D C A C B C 22 23 24 25 26 27 28 29 30 A D E B D D C A A 32 33 34 35 D C A C Supporting computations for nos 16 - 29: 16 Sales [(100,000 x 90%) x (P5.00 x 120%)] Less: Variable costs (P300,000 x 90%) Contribution margin Less: Fixed costs Operating income P540,000 270,000 P270,000 150,000 P120,000 17 Direct materials Direct labor Overhead Selling cost Minimum selling price per unit P P14 18 Relevant cost to make (10,000 x P24) Purchase cost Less: Savings in manufacturing cost Avoidable fixed overhead Net purchase price Difference in favor of “buy” alternative P240,000 P300,000 P45,000 50,000 19 Increase in sales (60,000 x P3) Less: Increase in variable cost (60,000 x P2.50) Net increase in income 20 Sales (10,000 x P20) Less: Variable costs R (P12 x 10,000) S (P x 10,000) T (P x 10,000) R P200,000 95,000 P205,000 P 35,000 P180,000 150,000 P 30,000 S P200,000 T P200,000 120,000 80,000 40,000 19-12 Relevant Costs for Decision Making Chapter 19 Contribution margin 21 Sales (P16 x 15,000) Less: Variable costs R (P12 x 15,000) S (P x 15,000) T (P x 15,000) Contribution margin Less: Fixed costs Operating income P 80,000 P120,000 P160,000 R P240,000 S P240,000 T P240,000 180,000 120,000 60,000 P 60,000 40,000 P 20,000 P120,000 80,000 P 40,000 22 Old operating income: Contribution margin Less: Fixed cost P180,000 120,000 P 60,000 P80,000 40,000 P40,000 20,000 P20,000 New operating income Difference - decrease 23 Sales Less: Variable costs Direct materials Direct labor Factory overhead Marketing expenses Administrative expenses Contribution margin Less: Fixed costs Factory overhead Marketing expenses Administrative expenses Increase in fixed costs Profit 19-13 P1,200,000 P300,000 400,000 80,000 70,000 50,000 P 50,000 30,000 20,000 10,000 900,000 P 300,000 110,000 P 190,000 Chapter 19 Relevant Costs for Decision Making 24 Sales Less: Variable costs Direct materials Direct labor Factory overhead Marketing expenses Administrative expenses Contribution margin Less: Fixed costs Factory overhead Marketing expenses Administrative expenses Decrease in fixed costs (P25,000 ÷ 4) Profit P1,200,000 P275,000 375,000 80,000 70,000 50,000 P 50,000 30,000 20,000 (6,250) 25 Direct materials (P2 x 5,000) Direct labor (P8 x 5,000) Variable overhead (P4 x 5,000) Total variable costs P70,000 Add: Avoidable fixed overhead Total 26 Avoidable fixed overhead Direct materials Direct labor Variable overhead Total Multiplied by: Number of units to be produced Total relevant costs to make the part 27 Purchase cost (P1.25 x 10,000) Variable costs to make Savings of making the blade 28 Selling price per unit Less: Variable costs of goods sold per unit ([P320,000 - P80,000] ÷ 20,000 units) 19-14 850,000 P 350,000 93,750 P 256,250 P10,000 40,000 20,000 10,000 P80,000 P 4 16 18 P42 20,000 P840,000 P12,500 10,000 P 2,500 P17 12 Relevant Costs for Decision Making Chapter 19 Contribution margin per unit Multiplied by units to be sold under Special Order Increase in operating income 29 Budgeted operating income: Contribution margin (P2,000,000 x 30%) Less fixed costs Net operating income Operating income under the proposal: Sales P2,000,000 Less Variable costs ([70% x P2,000,000] x 80%) 1,120,000 Contribution margin P 880,000 Less fixed costs 520,000 Increase in budgeted operating profit 19-15 P 2,000 P10,000 P600,000 400,000 P200,000 360,000 P160,000 ... unit Variable cost per unit A P30 25 1 9- 7 Product Line B C P25 P10 10 D P8 Chapter 19 Relevant Costs for Decision Making Contribution margin / unit Divided by no of hours required for each unit... P20,000 IV Multiple Choice Questions C 11 D 21 1 9- 11 D 31 A Chapter 19 Relevant Costs for Decision Making 10 C B B A B C B A B 12 13 14 15 16 17 18 19 20 A D A D C A C B C 22 23 24 25 26 27 28... Increase in fixed costs Profit 1 9- 13 P1,200,000 P300,000 400,000 80,000 70,000 50,000 P 50,000 30,000 20,000 10,000 900,000 P 300,000 110,000 P 190 ,000 Chapter 19 Relevant Costs for Decision