Question 1: Process costing (20 marks in total)
Lake Surf Company uses an automated process to clean and polish its merchandise items. Normal spoilage is 5% of the goods units and is detected at the end of the process.
For March 2017, the company conducted the following activities:
|Beginning work in process inventory:||3,000 Items
|[Direct material – 100%]|
|[Conversion costs – 25%]|
|Units placed in production||12,000 units|
|Unites Completed||9,000 units|
|Ending work in process inventory:||5,000 units
|[Direct material – 100%]|
|[Conversion costs – 60%]|
|Cost of beginning work in process:|
|Direct materials||$ 2,100|
|Conversion costs||$ 485|
|Direct material costs, current||$ 9,000|
|Conversion costs, current||$ 10,045|
Using the weighted average method, determine the following:
1a. the number of equivalent units
1b. cost per equivalent unit
1c. ending work in process inventory
1d. cost of normal and abnormal spoilage
1e. cost of goods completed and transferred out during March, 2017
Question 2: Budget (20 marks in total)
Lulu Company has the following budgeted sales for the next six-month period:
Month Unit Sales
There were 69,000 units of finished goods in inventory at the beginning of January. Plans are to have an inventory of finished products that equals 100% of the following month sales plus 25% of the second month sales. Two kilograms of raw materials are required for each unit produced.
From January, each kilogram of material costs $20 (up from $18 in December last year). Inventory levels for materials are equal to 40% of the needs for the next month. Lulu Company uses a FIFO inventory method for both raw material and finished goods.
2a. Prepare a production budgets in units for January and February
2b. Prepare a materials usage budget in kilograms and dollars for January
2c. Prepare a materials purchases budget in kilograms and dollars for January
2d. List and explain some benefits to an organization of preparing an operating budget, use the relevant sources to support your answer
Question 3: Variance Analysis (20 marks in total)
The following standard cost data relate to the operation of Dragon Company for 2016. The standard cost per unit is based on the normal annual production of 15,000 units.
|Standard cost per unit
|Direct materials||4kg @ $5.00 per kg
|Direct labour||2hrs @ $12.50 per hr
|Variable overhead||2hrs @ $3.00 per hr
2 labour hrs @ $5.00 per hr
Actual production in 2016 was 10,000 units. The following data was obtained from Dragon
|Direct material purchases||45,000||Kilograms
|Cost of direct materials purchases||$ 202,500
|Actual direct labour hours||25,000||Hours
|Actual direct labour costs||$ 325,000
|Actual variable overhead costs||$ 100,000
|Actual fixed overhead||$ 125,000
3a. Calculate and show flexible budget variance for each cost item.
3b.Calculate the following variances and indicate whether they are favourable or unfavourable.
- Direct material price variance
- Direct material efficiency variance
- Direct labour price variance
- Direct labour efficiency variance
- Variable manufacturing overhead spending variance
- Variable manufacturing overhead efficiency variance
- Fixed manufacturing overhead spending variance
- Fixed manufacturing overhead efficiency variance
Question 4: Relevant Costs and Decision Making (20 marks in total)
Gordon Manufacturing is approached by a new customer to fulfill a 4,000 unit, one-time-only special order for a product similar to the one offered to existing customers. At present, the company has excess operating capacity. The following data apply to sales to existing customers:
|Direct materials||$ 100
|Direct labour||$ 50
|Manufacturing support||$ 90
|Marketing costs||$ 35
|Manufacturing support||$ 115
|Marketing costs||$ 40
|Targeted selling price||$ 500
4a. For Gordon Manufacturing, what is the total relevant cost of making this special order?
4b If the new customer is offering $350 per unit sold, should the company accept the special offer? Explain.
4c Suppose the company is already operating at capacity when the special order is received. What would be the relevant cost of accepting the special order?
4d. List and explain any TWO potential problems that should be avoided when conducting a relevant cost analysis. Use the textbook and other relevant sources to support your answer.
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