The following data refer to Nani’s Fashions for the current year:
|Work in process inventory, 31 December||15,000|
|Work in process inventory, 1 January||20,000|
|Selling and administrative expenses||75,000|
|Income tax expense||45,000|
|Purchase of raw materials||90,000|
|Raw materials inventory, 31 December||12,500|
|Raw material inventory. 1 January||20,000|
|Depreciation plant and equipment||30,000|
|Finished goods inventory, 31 December||25,000|
|Finished goods inventory, 1 January||10,000|
|Other manufacturing overhead||40,000|
- Prepare the schedule of cost of goods manufactured for Nani’s fashion.
- Prepare the schedule of cost of goods sold for Nani’s Fashions and explain the information provided by the schedule of cost of goods sold.
- Prepare an income statement for the current year.
Brisbane Indoor Sports, a sporting complex, has opening hours that fluctuate from month to month. The electricity costs and hours of operation for past six months is listed below:
|Month||Total hours of operation||Total electricity cost|
- Use the high-low method to estimate the cost behaviour for the complex’s electricity costs, assuming that the variable costs vary in proportion to the hours of operation. Express the total cost behaviour in formula form (Y = a + bx). What is the variable electricity cost per hour of operation?
- During July, the complex will open for 570 hours. Predict the complex’s total electricity costs for July using the cost estimation method employed in above requirement a).
- What is the main drawback of the high-low method of cost estimation?
Toys World started and finished job number A26, a batch of 1,000 cuddly koalas, during March 2020. The job required $4,850 of direct material and 32 hours of direct labour at $20 per hour. The predetermined overhead rate is $10.50 per direct labour hour. On 31st March, 900 of the cuddly koalas were shipped to a local toy shop.
- Prepare journal entries to record the incurrence of production costs, completion of job number A26 and the shipment of 900 cuddly koalas to local toy shop.
- Calculate the cost per cuddly koala for job number A26.
- How might the managers at Toys World use this information?
Rigby Ltd accumulates costs for its single product using process costing. Direct material is added at the beginning of the production process, and conversion activity occurs uniformly throughout the process. The following is a partially completed production report for May.
|Production report, May|
|Physical||Percentage of||Equivalent units|
|Work in process, 1 May||25,000||40%|
|Units started during May||30,000|
|Units completed and||35,000||35,000||35,000|
|transferred out during May|
|Work in process, 31 May||20,000||80%||20,000||16,000|
|Total units accounted for||55,000|
|Work in process, 1 May||$143,000||$474,700||$617,700|
|Costs incurred during May||$165,000||$2,009,000||$2,174,000|
|Total costs to account for||$308,000||$2,483,700||$2,791,700|
1. Complete the following process costing steps using the weighted average method:
- Calculation of equivalent units.
- Calculation of unit costs.
- Analysis of total costs.
2. Prepare a journal entry to record the transfer of the cost of goods completed and transferred out during May.
Mel Snow is the manager of a firm, Taxation Matters, which specialises in the preparation of income tax returns. The firm offers two basic products: the preparation of income tax returns for wage and salary earners, and the preparation of income tax returns for small businesses. Any clients requiring more complex services are referred to Snow’s brother Roger, who is a partner in a large firm of chartered accountants.
The processing of wage and salary tax returns is quite straightforward, and the firm uses a software package to process data and print the return. A software package is also used to prepare returns for small businesses, although more information is required, particularly about business expenses.
Snow has only recently joined Taxation Matters and he is concerned about the firm’s pricing policy, which sets flat fees of $60 per return for wage and salary clients and $300 for small businesses. He decides to use activity-based costing to estimate the costs of providing each of these services.
At the end of the year, Snow reviewed the firm’s total costs and activities, resulting in the following list:
|Activity||Activity cost||Activity driver||Quantity of activity driver|
|Interview salaried client||$60,000||No. of salaried clients||8,000|
|Interview business client||75,000||No. of business clients||2,000|
|Obtain missing data||600,000||No. of follow-up calls||8,000|
|Input data||120,000||No. of data entries||400,000|
|Print return||90,000||No. of returns||10,000|
|Verify return with client||180,000||No. of hours||6,000|
|Rectify errors||90,000||No. of errors||6,000|
|Submit return||30,000||No. of returns||10,000|
|Total costs||$1 245,000|
In identifying the activities required for each type of return, Snow noted the following:
Clients are interviewed only once per return.
- All follow-up calls to obtain missing data relate to business returns; on average, each business tax return requires four follow-up calls.
- Processing a wage and salary tax return requires 20 data entries, whereas a business return requires 120 data entries.
- On average, it takes 22.5 minutes to verify a wage and salary tax return, whereas it takes one and a half hours to verify a business return.
- All errors relate to business returns; on average, there are 3 errors per business return.
1. Use activity-based costing to estimate the cost of preparing:
- A wage and salary tax return.
- A business tax return.
2. In the light of your answers to requirement 1, evaluate the firm’s pricing policy.
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