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
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
New Alocation Rate:
40% Mark On8.1422.4314.29
Standard Selling Price38.559.549
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
New Alocation Rate:
40% Mark On10.0018.00
40% Mark On1114
Standard Selling Price38.549
Hence product D is to be discontinued.
What is going on?
Table A in the case gives the actual cost incurred during the...