Camelback: Standard Cost

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Contents
Synopsis:3
Answers4
Charges for 40% mark on and Product to be dropped4
Recalculation of allocation rates if additional products are to be dropped5 What is going on?6
Differentiation between variable and fixed costs and maximization of contribution7 Modified Cost system I7
Modified Cost System II8

Camelback communications
Synopsis:

About the company:
Manufactures radio & television antennas
4 distinct product lines
1.Rabbit ear antennas
2.Dipole antennas for FM & TV reception
3.Rotators for the dipole line.
4.2 electronic antennas;1 for FM & other for TV
Last 5 years, doubled the number of products offered, expanded the production facility twice & recently introduced the electronic antenna line. •President Lincoln McDowell concerned about its ability to cost products accurately. •Some products profitable whereas others impossible to manufacture at a profit. •Cost accounting system at fault.

Glenn Peterzon, a management consultant’s observations about the company’s cost system: •Existing cost system is simple.
It used a single burden rate for all overhead costs.
Budgeted Variable + Fixed Overheads Burden Rate = Number of Direct Labour Hours
Standard Cost = Direct Labour Cost + Direct Material Cost
(Direct Labour Hours * Burden Rate)

To illustrate the problem to the management he developed a Four Product Model. •He calculated the direct labour allocation rate that the existing single burden rate cost system would generate assuming the production to be maximum possible & taking direct labour hour cost to be $5. •After computing the standard cost, selling price was calculated on the basis of 40% mark-on. •Industry selling prices were different as they were established using the actual production costs & a 40% mark-on. •On comparing the industry prices to the firm’s costs profitability was determined. •The products with a mark-on of less than 25% were discontinued. •Because of this the resulting product mix differed from the starting mix which led to recalculation of allocation rate per hour to determine if it had been affected. Answers

Charges for 40% mark on and Product to be dropped
Variable Product OverheadLabour Hours Per UnitVariable Overhead Per UnitNo. Of UnitsTotal Labour HoursTotal ($) B17.52000200015000
C35100030005000
D27.5100020007500
Total 700027500

New Alocation Rate:
Variable Overhead27500
Fixed Overhead45000
Total72500
Labour Hours7000

Allocation Rate/Hour10.36

ProductBCD
Material5105
Labour51510
Allocated Cost10.3631.0720.71
Standard Cost20.3656.0735.71
40% Mark On8.1422.4314.29
Selling Price28.5078.5050.00

Standard Cost27.542.535
Mark On111714
Standard Selling Price38.559.549

Profit18.143.4313.29
% Markup89.126.1137.20

Hence Product C will be discontinued

Recalculation of allocation rates if additional products are to be dropped

Variable Product OverheadLabour Hours Per UnitVariable Overhead Per UnitNo. Of UnitsTotal Labour HoursTotal ($) B17.53000300022500
D27.5100020007500
Total 500030000

New Alocation Rate:
Variable Overhead30000
Fixed Overhead45000
Total75000
Labour Hours5000

Allocation Rate/Hour15.00

ProductBD
Material55
Labour510
Allocated Cost15.0030.00
Standard Cost25.0045.00
40% Mark On10.0018.00
Selling Price35.0063.00

Standard Cost27.535
40% Mark On1114
Standard Selling Price38.549

Profit13.504.00
% Markup54.008.89

Hence product D is to be discontinued.

What is going on?
Table A in the case gives the actual cost incurred during the...
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