2.
3. The management of the company emphasis more on quality of the products over past few years due to which the total cost has decreased from 15 to 14. Although, the company reduces its costs but on overall basis the company has a pathetic distribution of quality costs. Majority of costs either in the form of traceable or external failure costs. Moreover, the tendency of companys management is more on prevention and appraisal. During the last year, the internal failure costs rises due to the defective goods, amelioration on goods before shipped to the customers, etc. External failure which is in the form of Cost of field servicing, Warranty repairs and Product recalls are declined sharply from 6.9m to 2.7m. If the management of the company focuses more on prevention then its total costs will continue decline in years to come. Moreover, the management should take preemptive measures in order to reduce its internal failure costs by designing a quality product that reduces the probability of internal failure costs.
PROBLEM 2-22
COSTCOSTCurrent Year of Total Production Cost of Total Quality CostsPrevious Year of Total Production Cost of Total Quality CostsPrevention costsMachine maintenance1202.5020.34701.6710.45Training suppliers100.211.6900.000.00Quality circles200.423.3900.000.00Total prevention costs 1503.1325.42701.6710.45Appraisal costsIncoming inspection400.836.78200.482.99Final testing901.8815.25801.9011.94Total appraisal costs1302.7122.031002.3814.93Internal failure costsRework 1302.7122.03501.197.46Scrap701.4611.86400.955.97Total internal failure costs2004.1733.90902.1413.43External failure costsWarranty repairs300.635.08902.1413.43Customer returns801.6713.563207.6247.76Total external failure costs1102.2918.644109.7661.19Total quality cost59012.29100.0067015.95100.00Total production cost4,8004,200
After the computations and assessments it is clearly indicated that the program of Mercury, Inc.s has been successful because
Total quality costs (TQC) declines from 15.95 to 12.29.
External failure costs also declined from 9.76 to 2.29. This is a great achievement of the companys management because the current decline in external failure costs will certainly improves the sales in years to come.
Internal failure costs uplift due to the rise in the defective unit on frequent basis before the unit shipped to the customers. In addition, prevention costs also increases which is fair enough for the companys future perspective.
In addition, appraisal costs also rise from 2.38 to 2.71.
EXERCISE 5-3
1.
Occupancy Days Electrical Costs
High activity level (August) 2,406 5,148
Low activity level (October) 124 1,588
Change 2,282 3,560
Variable cost Change in cost Change in activity
3,560 2,282
1.56 per occupancy-day
Total cost (August) 5,148
Variable cost element (1.56 per occupancy-day 2,406 occupancy-days) 3,753
Fixed cost element 1,395
2. Electrical cost varies due to seasonal variation. In real sense, the electrical cost at its peak in the season of winter rather than summer because less natural light is available in winter. In addition, fixed cost will also impact due to the number of days in a month. One thing should take into consideration that cost of light is variable because of number of days in a month but on contrary cost of light is fixed because of occupancy of rooms during the month. Other factor like wastage of electricity also makes an impression on the electrical cost of the company.
PROBLEM 5-16
1. Depreciation expense Fixed
Advertising expense Fixed
Insurance expense Fixed
Cost of goods sold Variable
Salaries Commission Mixed
Shipping Expense Mixed
2.
Units Salaries Commission Exp. Shipping Exp.
High activity level 5,000 90,000 38,000
Low activity level 4,000 78,000 34,000
Change 1,000 12,000 4,000
Variable cost (Salaries Commission Expense) Change in cost Change in activity
12,000 1,000 units
12 per unit
Variable cost (Shipping Expense) Change in cost Change in activity
4,000 1,000 units
4 per unit
Salaries Commission Exp. Shipping Exp.
Cost High activity level 90,000 38,000
Less Variable cost
(5,000 units x 12) (60,000)
(5,000 units x 4) (20,000)
ELEMENT OF FIXED COST 30,000 18,000
Cost formula for Salaries Commission Expense 30,000A12
Cost formula for Shipping Expense 18,000A4
3. INCOME STATEMENT
Sales (5,000 units x 100 per unit) 500,000
Less Variable expenses
Salaries Commission Expense (5,000 units x 12per unit) 20,000
Shipping Expense (5,000 units x 4per unit) 60,000
Cost of goods sold (5,000 units x 60per unit) 300,000
Contribution Margin 120,000
Less Fixed expenses
Depreciation expense 15,000
Salaries Commission Expense 30,000
Shipping Expense 18,000
Advertising Expense 21,000
Insurance Expense 6,000
NET OPERATING INCOME 30,000
EXERCISE 6-10
1. Sales Variable expenses Fixed expenses Profits
30Q 12Q 216,000 0
18Q 216,000
Q 216,000 18 per unit
Q 12,000 units, or at 30 per unit, 360,000
2. The contribution margin break even is 216,000.
3. Sales Variable expenses Fixed expenses Profits
30Q 12Q 216,000 90,000
30Q - 12Q 306,000
18Q 306,000
Q 306,00018
Q 17,000
4. Margin of safety (in dollars) Total Sales Breakeven sales
450,000 - 360,000
90,000
Margin of safety (in percentage) Margin of safety (in dollars)Total Sales x 100
90,000450,000 x 100
20
5. CM ratio 510,000306,000 x 100
60
Expected total CM (500,000 x 60) 300,000
Current total CM (450,000 x 60) 270,000
Increment in Contribution Margin 30,000
EXERCISE 6-13
A.
CASE 1Per UnitCASE 2Per UnitCASE 3Per UnitCASE 4Per UnitNumber of units sold15,0004,00010,0006,000Sales 180,00012100,00025200,00020300,00050Less Variable expenses120,000860,0001570,0007210,00035Contribution margin60,000440,00010130,0001390,00015Less fixed expenses50,00032,000118,000100,000Net operating income10,0008,00012,000-10,000
B.
CASE 1Avg.CASE 2Avg.CASE 3Avg.CASE 4Avg.Sales 500,000100400,000100250,000100600,000100Less Variable expenses400,00080260,00065100,00040420,00070Contribution margin100,00020140,00035150,00060180,00030Less fixed expenses50,000100,000130,000185,000Net operating income7,00040,00020,000-5,000
EXERCISE 8-20
1. COMPUTATION OF UNIT PRODUCT COST AS PER THE CURRENT COSTING SYSTEM
Rascon Parcel Total
No. of units produced (I) 20,000 80,000
Direct labor hours (per unit) (II) 0.40 0.20
Total Direct labor hours (I x II) 8,000 16,000 24,000
Total manufacturing OH (I) 576,000
Total Direct labor hours (II) 24,000
Predetermined OH rate (I II) 24 Direct Labor hours
Rascon Parcel
Direct material 13 22
Direct Labor 6 3
Manufacturing OH applied
0.40 Direct Labor hours per unit x 24 Direct Labor hours 9.60
0.20 Direct Labor hours per unit x 24 Direct Labor hours 4.80
Unit product Cost 28.60 29.80
2.
Activity rate (labor related) OH cost Expected Activity
288,000 24,000 DLH
12 DLH
Activity rate (Engineering design) OH cost Expected Activity
288,000 6,000 Engineering hours
48 Engineering hours
Total overhead cost 576,000 split equally in 288,000 and 288,000.
RASCON PARCEL
EXPECTED ACTIVITY AMOUNT EXPECTED ACTIVITY AMOUNT
DL hours 12 8,000 96,000 16,000 192,000
Engineering hours 48 3,000 144,000 3,000 144,000
Total assigned OH cost (I) 240,000 336,000
No. of units produced (II) 20,000 80,000
OH cost per unit (I II) 12 4.20
SUMMARY OF UNIT PRODUCT COST
Rascon Parcel
Direct material 13 22
Direct Labor 6 3
Manufacturing OH applied 12 4.20
Unit product Cost 31 29.80
3. It is clearly noted that on one hand unit product cost of Parcel dip with 29.80 and on the other hand unit product cost of Rascon incline with 31.The sole reason behind this difference is engineering design hours which is half applied instead of DL hours. In general, when OH is applied on the basis of DL hour majority of OH makes a reflection on high volume product whereas when OH is applied on the basis of engineering hours most of the OH cost makes reflection on the low volume of product. Moreover, the activity of engineering hours is a product level activity so higher volume reported lower unit cost and vice versa.
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