COMM 294 MIDTERM REVIEW SESSION QUESTIONS BY LINH VO

COMM 294 MIDTERM REVIEW SESSION QUESTIONS BY LINH VO

TABLE OF CONTENT I. Introduction II. Cost terms, concepts, classification and Cost Behaviour (Chap. 2, 3) III. Job-order Costing (Chap. 5) --------------BREAK-------------- IV. Activity Based Costing (Chap. 7) V. Cost-Volume-Profit (CVP) Analysis (Chap. 4) VI. General Tips and Tricks

I. INTRODUCTION Linh Vo 4 th year Accounting Sauder JDC West Competitor, 2017 PwC Tax Summer Associate, 2016

II. COST TERMS, CONCEPTS, CLASSIFICATION AND COST BEHAVIOUR Manufacturing Costs Nonmanufacturing Costs Prime Cost Direct Materials (DM) Direct Cost Selling Costs Direct Labour (DM) Administrative Costs Conversion Cost Manufacturing Overhead (MOH) Indirect Cost Period Cost Product Cost Manufacturing Costs: o Direct Materials: raw materials that can be traced directly from finished products (e.g. sugar, spice and everything nice for The Powerpuff Girls, or candies) o Direct Labour: wages paid to workers that can be easily traced to each unit of a product (e.g. professor Utonium, Willy Wonka) o Manufacturing Overhead: cannot be traced directly to each

unit of a product indirect labour (Mojo Jojo), indirect material (mixing bowls for candies), others (lab rental, electricity) = Product Costs o All costs incurred when acquiring or making the product o Recorded as Inventory when incurred Non-manufacturing Costs: o Selling Costs: costs to market and deliver the products (e.g. commission, advertising) o Administrative Costs: executive, organizational and clerical costs (e.g. wages for mayor s receptionist) = Period Costs o Selling, general and administrative costs o Recorded as Expense when incurred How about idle time and overtime premium? o If it can be traced to a product: direct labour cost o If not: manufacturing overhead Direct Costs: o Costs can be traced directly to a product o E.g. direct material, direct labour Non-Direct Costs o Costs cannot be traced directly to a product o E.g. manufacturing overhead Sunk vs. Opportunity costs:

Sunk Costs: costs incurred in the past and cannot be changed now. Ignore. (e.g. non-refundable purchases) Opportunity Costs: the potential benefit of the second option that you give up to choose the first option (e.g. potential wages if you don t work and go to school instead) Variable vs. Fixed vs. Mixed Costs Variable Costs: total variable costs increase exactly the same amount for each unit produced Fixed Costs: total fixed costs remain the same despite the number of unit produced

Step-fixed Costs: costs stay the same within a relevant range of units produced, but it will increase when you produce one more unit above that range Mixed Costs: costs that include both fixed and variable costs (e.g. cell phone plan) o To separate mixed costs into fixed and variable portions, we use Hi-Lo Method Note: Outlier should be eliminated

Question 1: Please classify these costs Product Costs Period Direct Indirect Costs Cost description VC FC DM DL MOH SG&A Opp. Sunk Wages of workers who assemble products Supervisor's salary to supervise multiple products Materials for producing bottles, at $5/unit Sale office rental, at $1,000/month Production building rental, at $5000/month Warehouse rental, $2000/month Depreciation of building, $7,000/year Shipping cost, $7/unit Income from investment, $5000/year Electricity cost, $4/unit Question 2: Powerpuff Girls decide to sell lemonade to raise money to send Mojo Jojo back to school. These are the financial data from a competing lemonade stand. Month Jars/Month Average Costs per Jar Total Costs March 15,000 $1.7 June 20,000 $1.4 September 10,000 $1.9 December 8,000 $2.5

a) Please help Powerpuff Girls predict the total cost if they want to sell 18,000 mason jars of lemonade 1. Convert Average Costs per Jar 2. Identify outlier: 3. Find the highest and lowest cost/activity levels: 4. Use Hi-Lo to estimated variable cost per jar: 5. Calculating fixed cost: 6. Estimating formula: 7. Predict the total cost at 18,000 jars: b) How about 22,000 jars?

III. JOB-ORDER COSTING Process Costing: assign the same average cost per unit for all units due to large volume of similar products (e.g. cokes) Job-order Costing: assign cost to each order due to the unique nature of each order (e.g. aircraft) Okay, but first Understanding Inventory account in the Balance Sheet Cost of Goods Available for Sale (Finished Goods) Beginning Inventory Cost of goods manufactured Ending Inventory Cost of goods sold Total Manufacturing Costs (New WIP) + WIP Beginning - WIP Ending = Cost of Goods Manufactured Direct Material + Direct Labour + Manufacturing Overhead = Total Manufacturing Costs (New WIP) Beginning Material + Purchases of Material - Ending Material = Direct Material used in Production

Question 3: Powerpuff lemonade is now a worldwide phenomenon. The company grows fast, so they hire you to advise on the costs and if the company should accept a new order. Buttercup, the controller, gives you the Balance Sheet February 28 th March 31 Raw Material 20,000? Other information: Sale revenue for March was $100,000 They sold 15,000 jars in March Profit margin is 25% on top of Cost of Good Sold It takes 10 minutes to make a jar of lemonade, and the wage is $10/hour Powerpuff applies overhead at a predetermined rate of 50% of direct labour cost Actual overhead incurred in March was $15,000, and overhead was over-applied by $2,500 Purchase of direct material was $40,000 Direct Material Used was $59,000 On February 28 th, the company has 1250 jars left to sell, at the unit cost of $6 per jar The company sells all of it product on March 31 Please calculate: COGS, Direct labour cost, COGM, End Inventory, End Direct Material.

1. Costs of Good Sold 2. Direct labour cost 3. COGM 4. Ending balance of inventory 5. End DM

Estimated Cost of a New order = Direct Material + Direct Labour + Manufacturing Overhead How do we apply Manufacturing Overhead to a new order? 1. Set a predetermined overhead rate (PDOHR) ü Determine what drives overhead cost (e.g. direct labour hour, machine hour, batch, customer) ü Determine the estimated total overhead for the upcoming period 2. Apply MOH based on the actual activity (e.g. actual direct labour hour that was used in the period) Applied OH = PDOHR x Actual Activity 3. Compare with actual overhead cost in the period to determine if the MOH is over-applied or under-applied If over-applied (MOH incurred < Applied OH), if immaterial (<5%), then decrease COGS if material, then decrease COGS, Inventory, WIP proportionately If under-applied (MOH incurred > Applied OH), if immaterial (<5%), then increase COGS if material, then increase COGS, Inventory, WIP proportionately

Question 4: Buttercup accidentally lost the applied manufacturing overhead record. Please help her determine the applied MOH and advise her what to do if it s over/under-applied. MOH is applied based on the number of hours used to squeeze lemonade and package it. Buttercup estimated that in March, we will need 4000 hours. The MOH budget is $20,000 Total hour used in March is 3500 hours Indirect labour in March is $4,000, indirect material is $5,000, balance of MOH at the beginning of March is $2,000 Amortization: $1,000; Electricity: $500; Insurance: $1,000; Maintenance: $1,500

IV. ACTIVITY-BASED COSTING Activity-based costing: assigns costs (MOH) based on activity, rather than order or department. The allocation base may differ based on the nature of the activities (e.g. manufacturing line MOH based on machine hour; assembly line MOH based on labour hour) Question 5: Buttercup finally found the breakdown of different overhead that Powerpuff incurred: Shipment to Victoria via ferry: $2,000 (5 ferry trips) Personalized messages on jars: $500 (100 orders with messages) Hiring and training employees: $5,000 (10 new employees) Direct material: $300, Direct labour: $10 Should Powerpuff agree to a personalized order to Victoria at $550? 1. Identify the activities 2. Identify the cost driver for each of the activity 3. Calculate the rate per activity 4. Allocate the overhead cost based on the rate calculated 5. Use the cost breakdown for decision making

V. COST-VOLUME-PROFIT ANALYSIS Contribution Margin Sales Variable Costs = Contribution Margin or Selling price per unit Variable Cost per unit = CM per unit Contribution Ratio Contribution Margin Sales Break-Even Analysis 1 CVP Graph 2 Equation Method Target Profits = Sales Variable Costs Fixed Costs = 0

3 Contribution Margin Method Break-even in unit sold KLMNO PQRSRT UVWXNS YWQZLS P[ \NW ]^LS Break-even in total sales dollars KLMNO PQRSRT UVWXNS YWQZLS P[ WVSLQ Amount of Time to Break-even KLMNO PQRS5 P[ \NW SLmN \NWLQO (onvw,nsq) Margin of Safety in Dollars = Sales Break-even Sales in % = Operating Leverage 123456 7842964:4; 12345 12345 Degree of Operating Leverage = <=;>8?@A>?=; B28C?; D4> EF482>?;C G;H=I4 Question 7: Powerpuff wants to expand their operation to Calgary. Sales is predicted to be 20,000 jars a year at $10 per jar. They predict the cost: - Factory rental: $1,600/month - Labour cost: $2/jar - Material cost: $3/jar - Variable overhead: $2.5/jar

a. How long does it take to break even? b. How much sales do they make to get $2,000 profit? c. What is the profit for Powerpuff if they can increase sell by 1,000 more jars by spending $3,000 on advertising? d. Calculate margin of safety and operating leverage

Sales Mix Break-even Analysis Sales mix: give the ratio of products that the company sells. Sales mix is not constant. CM Ratio = CM of all products in the mix / Total Sales Question 8: Powerpuff now wants to offer homemade rice krispies with lemonade jars. Fixed cost is $16,500. Buttercup already calculates the CM per unit: - Rice krispies: $3 (price at $5/each) - Lemonade: $5 (price at $10/each) For every lemonade jar sold, they can sell two rice krispies. What is the break-even in sale $?

VI. TIPS AND TRICKS 1) Useful Formulas to remember: - Manufacturing Cost =DM + DL + MOH - Begin WIP + Manufacturing Cost = Total WIP - Total WIP Ending WIP = Cost of Goods Manufactured - Begin Finished Good + COGM = COG Available for Sale - COG Available for Sale Ending Finished Good = COGS - Total Product Margin = Sales Cost - Customer Margin = Sales Costs Costs related to customer - Contribution Margin Ratio = CM/Sales = Unit CM/Unit Price - Margin of Safety = (Total Sale Breakeven Sale)/Total Sales - Degree of Operating leverage = CM/Net Income - POHR = Estimated total MOH / estimated unit - Applied OH = POHR x Actual Activity 2) Practice makes perfect! - Practice midterms - Assignments and in-class questions - Textbook exercises - 2016 CMP Review Package: Question Answer 3) Relax, eat well, and get enough sleep!