THE UNIVERSITY OF THE WEST INDIES

OPEN CAMPUS ST AUGUSTINE 310100111 MELISSA GUEVARA ACCT2017 Management Accounting E-tutor Craig Thomas Group 03 Semester 2, 2011-2012
STRUCTURED SHORT ANSWER QUIZ (10%)

1) Average Costing Method Versus FIFO Costing Method: a) What is the difference between average costing method and FIFO costing method when they are used in process costing system?

When used in the process costing system the average costing method and the FIFO method differ by how they process beginning work in process inventory cost. The average costing method mixes the prior period and current period units and costs together so that a departments equivalent units of production are the total number of units transferred to the next department of finished goods plus the equivalent units in the departments ending work in process. The FIFO costing method, however, keeps prior period units and costs separate from current period units and costs so that identification of the current period unit cost originating in a department is easier.
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b) What are advantages and disadvantages of Average and FIFO costing method? Advantages of the Average Costing method are It simplifies the calculation of unit costs as it merges the prior period and current period units and costs together so that all equivalent units in beginning work in process belong to the same time period. It saves time, is less expensive and functional. It allocates the same accounting values to identical items. It is not necessary to track inventory.

Disadvantages of the Average Costing method are

It increases the chances of errors occurring as it merges beginning work in process costs with current-period costs. It makes comparison of the actual costs of the current period with the budgeted or standard costs for the period difficult. It hides changes in current replacement costs because these costs are averaged with older costs. Neither the valuation of ending inventory nor the cost of goods sold quickly reflects changes in the current replacement costs of stock.

Advantages of the FIFO Costing method are It reduces errors as it doesnt merge beginning work in process costs with currentperiod costs. It makes comparison of the actual costs of the current period with the budgeted or standard costs for the period is possible. It is a logical method as it issues materials in order of purchase so materials which are received first are utilized first. It moves materials in a continuous, logical and systematic manner consistent with efficient materials control so that perishable materials do not deteriorate and long storage of stock does not affect quality and style changes of stock. The cost of jobs is correctly determined as materials are issued at the purchase price so the cost price of the materials is effectively recovered. It values closing stock of materials at the market price as this stock consists of recent material purchases.

Disadvantages of the FIFO Costing method are Additional computations are required when several costs are used simultaneously which can sometimes lead to inaccurate calculations. If there is a price increase, the issue price would not reflect the market price as materials which are received first are utilized first. In this regard, the charge to production is low because the replacement cost of the material consumed will be higher than the price of issue. It doesnt match current costs against current revenues. The oldest costs are charged against the more current revenue which distorts gross profit and net income. It realizes higher revenues which lead to higher tax payments. The cost of replacing inventory at higher prices is ignored. It is not appropriate for frequent purchases at different prices or if units from several purchases are on hand at the same time.

2) Quick bites has a restaurant that is opened all day. Fixed costs total $450,000 per year. Service varies from a cup of coffee to full meals. The average sales per customer is $8.00. The average cost of food and other variable costs for each customer is $3.20. The Income Tax rate is 30%. Target Net Income is $105,000. (a) Compute the revenues needed to earn the target net income. Revenues needed = Fixed Cost + Target Income 1 Tax Rate Unit Contribution Margin 450,000 + 105,000 1 0.30 4.8 450,000 + 150,000 4.8 600,000 4.8 125,000 units x Selling Price 125,000 units x $8.00 $1,000,000.00

= = = = =

Therefore revenues needed to earn the target net income = $1,000,000.00

(b) (i) How many customers are needed to break-even? Breakeven = Fixed Cost Unit Contribution Margin = 450,000 4.8 = 93,750 customers

Therefore customers are needed to break-even = 93,750.

(ii) How many customers are needed to earn a net Income of $105,000? Customers needed = Fixed Cost + Target Income + Income Taxes Unit Contribution Margin = 450,000 + 105,000 + 45,000 (150,000 x .30) 4.8 = 600,000 4.8 = 125,000 customers

3) Tropical Paradise produces Juices. The company expects to produce 1,500,000 bottles in 2008. The company purchases empty glass bottles from a supplier. Its target ending Inventory of such bottles is 50000; Beginning inventory is 20000. Compute the number of bottles to be purchased in 2008? (Ignore breakages).

Tropical Paradise Inventory Purchases Budget For the period ending December 31, 2008 Budgeted unit sales Add target ending inventory Total required units Less beginning inventory Units to be purchased 1,500,000 50,000 1,550,000 20,000 1,530,000

Therefore the number of bottles to be purchased in 2008 is 1,530,000.

4) Caribo Ltd developed standard costs for direct material and direct labour. In 2009, Caribo estimated the following standard costs for one of their major products, the 20-gallon plastic container. Budgeted quantity Direct materials Direct labour Budgeted price $30 per pound $15 per hour

0.10 pounds 0.05 hours

During June, Caribo produced and sold 5,000 containers using 490 pounds of direct materials at an average cost per pound of $32 and 250 direct manufacturing labor-hours at an average wage of $15.25 per hour. Required : Calculate the material price and quantity variance and the labour rate and efficiency variances. Material Price Variance = (Actual quantity Actual price) (Actual quantity Standard price) = (490 x 32) (490 x 30) = 15680 14700 = 980 unfavorable Material Price Variance is 980 unfavorable which indicates that actual material price is higher than the standard price.

Material Quantity Variance = (Actual quantity Standard price) (Standard quantity allowed Standard price) = (490 x 30) [(5000 x .10) x 30] = 14700 (500 x 30) = 14700 15000 = 300 favourable Material Quantity Variance is 300 favorable which indicates that actual material used is less than material allowed by standards.

Labour Rate Variance = (Actual hours Actual rate) (Actual hours worked Standard rate) = (250 x 15.25) (250 x 15) = 3812.50 3750 = 62.5 unfavourable Labour Rate Variance is 62.5 unfavourable which indicates that the actual rate of labour is higher than the standard amount allowed.

Labour Efficiency Variance = (Actual hours Standard rate) (Standard hours allowed Standard rate) = (250 x 15) [(5000 x .05) x 15] = 3750 (250 x 15) = 3750 3750 =0 Labour Efficiency Variance is 0 which indicates that there is no variance as actual labour rate is equal to the standard labour rate.

5) Selected data concerning the past years operations of the Altek Manufacturing Company are as follows: Inventories ($) Raw materials Work in Process Finished Goods Other Data: Direct Materials Used ---------------------------------------- $ 326,000 Total Manufacturing Costs Charged to production during the year (includes direct material, direct labour, and manufacturing overhead applied at a rate of 60% of direct-labour cost) ----------------------------$ 686,000 Cost of Goods Available for Sale ----------------------------$ 826,000 Selling and Administration Expenses ------------------------ $ 31,500 Beginning 71,000 80,000 90,000 Ending 81,000 30,000 110,000

Required: i. What was the cost of raw materials purchased during the year? Direct Materials Used = Beginning Raw Materials + Purchases Ending Raw Materials Direct Materials Used Ending Raw Materials Less Beginning Raw Materials Raw Materials purchased during year 326,000 81,000 407,000 71,000 336,000

Cost of raw materials purchased during the year was $336,000.

ii. What was the direct-labour cost charged to production during the year? Total manufacturing costs = Direct Materials Used + Direct Labour + Manufacturing Overhead (60% of Direct Labour cost) Total Manufacturing Costs 686,000 Less Direct Materials Used 326,000 Direct labour & Manufacturing Overhead 360,000 If Manufacturing Overhead is applied at a rate of 60% of Direct Labour costs, Then Direct Labour + 60% Direct Labour = 360,000 So 160% Direct Labour = 360,000 Therefore Direct Labour = 360,000 / 160% = 225,000 The direct-labour cost charged to production during the year was $225,000.

iii. What was the cost of goods manufactured during the year? Cost of Goods Manufactured = Beginning Work In Process + Total Manufacturing Costs Ending Work In Process Beginning Work In Process 80,000 Total Manufacturing Costs charged to production during the year 686,000 766,000 Less Ending Work In Process 30,000 Cost of Goods Manufactured 736,000 The cost of goods manufactured during the year was $736,000.

iv What was the cost of goods sold during the year? Cost of Goods Sold = Beginning Finished Goods + Cost of Goods Manufactured Ending Finished Goods Beginning Finished Goods Cost of Goods Manufactured Cost of Goods Available for Sale Less Ending Finished Goods Cost of Goods Sold 90,000 736,000 826,000 110,000 716,000

The cost of goods sold during the year was $716,000.

THE UNIVERSITY OF THE WEST INDIES

Undergraduate Coursework Accountability Statement (To be completed by student)

ACADEMIC YEAR: ___2011/2012______ SEMESTER: ______2_______________________ COURSE CODE: __ACCT2017________ TITLE: __Management Accounting______________ NAME: ___MELISSA GUEVARA________ ID: ___310100111________________________

1. I hereby certify that I am the author of the attached item of coursework and that all materials from reference sources have been properly acknowledged. 2. I understand what plagiarism is and what penalties may be imposed on students found guilty of plagiarism. 3. I certify that this paper contains no plagiarised material. 4. I certify that this is my own work and that I did not receive any unfair assistance from others (including unauthorized collaboration) in its preparation. 5. I certify that this paper has not previously been submitted either in its entirety or in part within the UWI system or to any other educational institution. 6. In the case of group work: a. I certify that the individual work of each member of the group has been clearly indicated; b. that where no such indication has been given, I take the responsibility for the work as if it were the section of the paper for which I am solely responsible; and c. that I have not collaborated with any members of the group to breach the Universitys regulations.

Signature: Melissa Guevara. Date: 26/03/2012.