ACCT 2146 Assignment #2

CVP, Job Costing, Process Costing,

Theory Based Question (10 marks) – Decision Making

Why is there often decision-making disorder in organizations?

Davenport gave several reasons why firms lack a good decision-making process.
Traditionally, decision making has been left up to senior executives. Furthermore, the
decisions these executives make are more based on personal opinion rather than a
strategic process. There is no process to decision making, no control and no review as
well. Another reason is that decision making itself has not been paid special attention.
He claims firms typically do not analyze their decision-making process.

Even though businessmen are reading the research and material, which would help
them to understand how to make better decisions instead of poor ones, very few have
adopted it and implemented the necessary systems.

Discuss Davenport’s four-step process for improving decisions.

After pinpointing the reasons of poor decision making in firms Davenport suggests a
framework that firms can use to improve themselves. He discusses four steps:
identification, inventory, intervention and institutionalization.
Inventory; Companies must first start with prioritizing their decision-making subjects.
The managers need to first identify the decisions they possibly may need to make. Then
they can rank those possible decision areas in order of prioritization. This way they can
ensure the proper focus and resources are allotted to the important decisions.
Inventory; After prioritizing the decisions which need to be made one must identify the
factors and resources which are needed to make those decisions. These factors include
all the possible inputs which are needed to make the decision, such as who makes the
decisions and the roles they play, the information that is needed and so forth.
Intervention; After prioritizing the decisions and identify the factors which are needed
to make those decisions one may now layout the model of a better decision process.
The factors, systems and roles are designed which will improve the decision making and
in return, hopefully, improve the decision-making outcomes.
Institutionalization; Finally, after designing the firms must institutionalize the process.
Firms must give those who need to make decisions the support and assistance they
need to make those decisions. Furthermore, the decisions must be reviewed both from
a business outcome and rom a look at the decision making itself. Just because ROI was
increased, supposedly, from a “good” decision doesn’t necessitate it was a good
decision. A manager may have relied on fault information and luckily the company
didn’t suffer.

Discuss the intervention of analytics/automation/data in the decision-making process

With the advent of modern technology companies can now employ an array of
analytical tools and automation. With big data and analytical software decision making
can be made with hard statistics and even automated to work in real-time. However,
businesses must be careful because these systems must be constantly controlled or
these systems may cause havoc. There are several things which can go wrong with
analytics and automation, all the way from the wrong data inputs to the changing
external environment. Decision criteria must be reviewed and updated as needed.
Companies must make sure they understand the analytical models and tools they use to
ensure they are working properly and to ensure they are not handicapping the
organization and risking the future.
Question 1 (25 marks)

1. Prepare two contribution format income statements, one showing current

operations and one showing how operations would appear if the new equipment
is purchased.

Current Contribution Income Statements

Amount Per Unit % of Sales

Sales (30,000 units) $ 900,000 $ 30 100%
Less: Variable expenses 630,000 21 70%
Contribution Margin 270,000 9 30%
Less: Fixed expenses 180,000
Net Operating Income 90,00

Proposed Contribution Income Statement

Amount Per Unit % of Sales

Sales (30,000 units) $ 900,000 $ 30 100%
Less: Variable expenses 360,000 12 40%
Contribution Margin 540,000 18 60%
Less: Fixed expenses 450,000
Net Operating Income 90,000

2. For both current operations and the proposed new operations, compute

(a) the degree of operating leverage,

Current Operations Proposed Operations

270,000/90,000 540,000/90,000
Operating leverage of 3 Operating leverage of 6

(b) the break-even point in dollars.

Fixed expense (costs) / CM Ratio

Current Operations Proposed Operations
180,000/30% 450,000/60%
600,000 750,000
 3. As a manager, what factor(s) would be paramount in your mind in deciding
whether to purchase the new equipment?
The greatest factor I would consider is what part of the economical cycle is the company
operating in.
The fixed costs are extremely high for the proposed operations. Therefore, if current sales
are expected to remain constant or even fall it is safer to stay with current operations
because the break-even point is lower. However, if sales are expected to increase then the
proposed operations are a better idea because the operating leverage is higher. Therefore,
an increase in sales will increase net operating income much more.
Question 2 (20 marks)
What is the company’s overall break-even point in total sales dollars?

Frog Minnow Worm Total

Sales 200,000 280,000 240,000 720,000
Variable Ex. 120,000 160,000 150,000 550,000
CM 80,000 120,000 90,000 290,000
(40.2777%)

282,000/40.28% = $700,099.30

What is the break-even point in units for each product?

Note: Management insists that Richards separately calculate the break-even
point for each product using its CM per unit and only the fixed expenses that
relate directly to that product.

Frog Minnow Worm

Unit Selling Price $ 2.00 $ 1.40 $ 0.80
Less: Variable expenses 1.20 0.80 0.50
Contribution Margin 0.80 0.60 0.30
Fixed expenses $ 18,000 $ 96,000 $ 60,000
Break-even point in units 18,000/0.80 96,000/0.60 60,000/0.3
= 22,500 = 160,000 =200,000

If the company sells exactly the break-even quantity of each product calculated in (a),
calculate the overall profit of the company.

Frog Minnow Worm Total

Unit sales for breakeven 22,500 160,000 200,00 382,500
Sales in $ 45,000 224,000 160,000 429,000
Less: Variable expenses 27,000 128,000 100,00 255,000
Contribution Margin 18,000 96,000 60,000 174,000
Fixed expenses $ 18,000 $ 96,000 $ (+ neglected 108,00)
60,000 282,000
Net Operating Income 0 0 0 -108,000
Explain this result to management.

The company would be at a loss of $108,000 because the breakeven quantity of product
will yield 0 profits and there were common fixed costs, which are $108,000, were
neglected in our per product breakeven calculations.

Calculate the company’s overall break-even point in units using the weighted-average
CM approach.

174,000/382,500 = 0.45490196
0.45490196x – 282,000
X = 619,914 units

How many units of each product must be sold at the break-even level?

Frog Minnow Worm

282,000/0.80 282,000/.60 282,000/.30
=352,500 =470,000 =940,000

Comment on any significant differences you see between these results and those of (a)
above.

The difference is staggering. If one does not take into account all fixed cost and
restricts the equation only to direct costs of the product, he will not find the true
number of products he needs to sell to breakeven.
Question 3 (10 marks)
Inventory Balances:
January 1st
Raw Materials $16,000
Work in Process $10,000
Finished Goods $30,000

Date Description Debit Credit

Raw materials 200,000
Accounts Payable 200,000
Work in Process 152,000
Manufacturing 38,000
overhead
Raw material 190,000
inventory
Work in process 160,00
Manufacturing 27,000
overhead
Salaries and wages 187,000
payable
Sales commission 36,000
expense
Sales commission 36,000
Payable
Admin. Salaries 80,000
expense
Admin. Salaries 80,000
payable
Manufacturing 42,000
Overhead
Heat, power and 42,000
water
Manufacturing 9,000
overhead
Insurance expense 1,000 9,000
Prepaid insurance 10,000

Advertising 50,000
expense
Accounts payable 50,000
Manufacturing 51,000
overhead
Depreciation 9,000
expenses
Accumulated 60,000
depreciation
Work in process 40,000
Manufacturing 40,000
overhead
Finished goods 480,000
Work in process 480,000

Accounts receivable 700,000

Sales 700,000
Costs of goods sold 475,000
Finished goods 475,000
inventory
Question 4 (30 marks)
1.Compute the predetermined overhead rate for the year.

248,000/40,000 = 6.2

2. Compute the amount of under applied or over applied overhead for the year. How is
over applied (under applied) overhead disposed of at year-end?

POHR * Actual activity (

248,000 – (6.2*42,000) = 260,400
Therefore, overhead is underapplied and cost of goods sold should be debited and
manufacturing overhead credited.

3.Prepare a schedule of cost of goods manufactured for the year.

Beginning raw materials 21,000

Purchase of raw materials 133,000
less Ending raw materials 16,000
138,000
Direct labour 80,000
Manufacturing overhead 264,000
Total manufacturing costs 482,000
Add beginning work in 44,000
process
526,000
Less ending work in process 40,000
Cost of goods manufactured $486,000

4. Compute the cost of goods sold for the year. (Do not include any under applied or
over applied overhead in your cost of goods sold figure.)
68,000 + 486,000 – 60,000 = $ 494,000
Question 5 (10 marks)
Process Costing Journal Entries
Prepare journal entries to record items (a) through (f) above.

Debit Credit
Work in process, molding 38,000
department

Work in process, firing 7,000

depart.
Raw materials 45,000
Work in process, molding 20,000
dept.
Working in process, firing 8,000
dept.
Wages payable 28,000
Work in process, molding 26,000
dept.
Work in process, firing 39,000
dept.
Manufacturing overhead 65,000

Work in process, firing dept 77,000

Work in process, modling 77,000

dept.
Finished goods 118,000
Work in process, firing 118,000
dept.
Cost of goods sold 126,000
Finished goods 160,000