• Assessment item 2
Costing and Control
Value: 15%
Due date: 22-Sep-2014
Return date: 13-Oct-2014
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Task
Costing and Control
The purpose of assessment item 2 continues to develop skills in costing and emphasises the role of control in managing the production of goods and services efficiently in the workplace. Each question builds on the knowledge gained through the first assessment to develop the capacity of managing control through costing. Each question uses realistic data and the professional practices similar to that found in workplaces.
Note all questions except for Question 9 are from the textbook: Fatseas, Victor & Williams, John, Cost Management (2013) 3rd edition, McGraw Hill
QUESTION 1 Must be spreadsheeted
P5-6 Weighted average cost: opening and closing WIP, and WIP ledger account
Paris Paints Company produces a single lacquer paint which passes through two production departments. The following information concerns the first of those production departments.
Direct materials are added at the beginning of the production process and conversion costs are incurred uniformly throughout the process. Total conversion costs are computed as direct labour costs, plus 50% of direct labour costs for the allocation of overhead costs.
The following information is available for May:
Opening work in process:
Number of units
Degree of completion
Material costs
Conversion costs
3 000
40%
$5 000
$7 200
May production:
Units started
Units completed and transferred to Process 2
Current material costs
Current direct labour costs
30 000
32 000
$65 000
$40 000
Closing work in process:
Degree of completion
80%
The company uses weighted average costing. There is no spoilage or wastage in the production process.
Required
(a) Prepare a Production Cost Report for May, showing the allocation of costs to closing work in process and to production transferred to the next department.
(b) Prepare the work-in-process T-account for the first production department for May.
QUESTION 2
Q6-8 Give three examples of industries in which joint costs are present. List some of the joint products found in each.
QUESTION 3 Must be spreadsheeted
P6-10 Joint cost allocation: additional processing beyond split-off point
Funbox Ltd produces three joint products, all of which require additional processing beyond the split-off point. There were no opening inventories at 1 April 20X8. Production and financial details for April are as follows:

Total joint processing costs for April were $60 000. Joint costs are allocated using the net realisable value method. The closing inventories have been through all processing and are ready for sale.
Required:
(a) Calculate the gross profit by products for the month of April.
(b) Product 101 can be further processed into Product 103 for an additional $3 per litre, and would sell for $6 per litre. Should Funbox produce Product 103, and what would be the effect on April's net profit of doing so?
QUESTION 4
Q7-7 Why is the material price variance extracted at the time of purchase of materials?
QUESTION 5 Must be spreadsheeted Use IF function
P7-10 Material and labour variances (straightforward)
Boralco Company manufactures aluminium beer cans. A unit of production is 10 dozen cans. The following standards apply.
Per Unit (10 dozen)
Direct materials: 3 kg @ $1/kg $3
Direct labour: ¼ hr @ $20 5
During the month 40 000 units were produced, 130 000 kilograms of material were purchased at $1.02 per kg and 124 000 kg of material were used. Direct labour costs were $215 000 for 10 500 hours worked.
Required:
(a) Calculate the materials price and usage variances and direct labour rate and efficiency variances, indicating whether they are favourable or unfavourable.
(b) Prepare journal entries to record the material purchases on credit, the usage of direct materials, and the direct labour liability and usage.
(c) Set up T-accounts and post the journal entries to the general ledger.
QUESTION 6
Q8-6 Under what conditions does absorption costing produce a higher profit than variable costing?
QUESTION 7 Must be spreadsheeted
P8-2 Income Statements under absorption and variable costing
The Choo Choo Company manufactures a single product which sells for $2.50 per unit. The following data relate to the first two years of the company's operations:

Any cost variances for the year are to be written off to Cost of Goods Sold for that year. For product costing under an absorption cost system, fixed factory overhead is allocated using a predetermined rate based on budgeted fixed factory costs of $750 per annum and practical capacity of 1500 units.
Required:
(a) Prepare income statements for each year based on absorption costing.
(b) Prepare income statements for each year based on variable costing.
(c) Prepare a reconciliation or explanation of the differences in profit for each year resulting from the use of these two costing methods.
QUESTION 8
Q9-8 What is meant by what if type questions in the context of the budgetary process? What is the purpose of asking this type of question? How are financial models used to answer them?
QUESTION 9 Must be spreadsheeted

As the management accountant for Realistic Inc. you have just been approached by the CEO who is concerned about the continuing prospects of the company’s only product. He has specifically requested that you produce forward estimates of future income for the next 5 years, 2015-2019. These tasks are similar to those that would be carried out in the workplace and use similar data.
You have decided that the best approach would be to develop a financial model in Excel, all calculations being performed by the computer. By properly separating the data from the model this would allow you to explore the implications of some variations in pricing policy which might be helpful to the CEO.
You have gathered together the following information to assist you in your endeavours:
In 2014 sales were 40 000 units and volume is expected to increase by 7% each year (compound) to a maximum of 52 000 units per year.
Unit selling price in the years 2015, 2016, 2017 is expected to equal the unit cost of purchases made in the year, marked up by 30% whilst in 2018 and 2019 the mark-up is expected to be 35% on purchase cost.
Unit purchase costs for the 5 years are estimated at 20X2 $5.10, 20X3 $5.36, 20X4 $5.68, 20X5 $6.02, 20X6 $6.50.
Closing inventory is to be 15% of estimated sales units for the following year. Closing inventory for 2014, however, was only 3600 units valued at $17 640. Assume a FIFO cost flow.
General and administrative expenses are expected to equal 14% of sales revenue in each year.
The tax rate is expected to remain unchanged at 30%.
Dividends equal to 65% of after tax profit are to be provided for.
Retained earnings at the end of 2014 amounted to $3500.
Required:
1. Produce the financial model for the CEO. Before worrying about the numbers you have prepared the following template of your model. Now you have to insert all the data and the formulas to complete the forecasts. Make sure that there is no data at all in the model itself, only formulas.
Paste two copies of the spreadsheet file into your Word document, one showing the output and a second showing formula view. Both printouts should show the grid, that is, row and column headings.
2. The CEO has also asked for the implications of increasing the markup each year another 3% You consult the marketing manager who forecasts that such an increase in price would have a twofold effect: first it would restrict the rate of increase in sales units to 5% instead of 7%, and second the maximum sales would decrease from 52,000 pa to 45,000 pa.
Make these changes to your financial model to determine the likely results.
Paste two copies of the spreadsheet file into your Word document, one showing the output and a second showing formula view. Both printouts should show the grid, that is, row and column headings.
3. Write a report to the CEO on the results in 1 above and the effects of the strategy in 2 above. Your report should be properly set out with the date, and addressed to the CEO, and signed off by you. (Word limit 250 words). If you need information on business report writing consider searching the Internet. Here is one useful reference:
http://www.canberra.edu.au/studyskills/writing/reports
4. Follow these procedures in your model (as opposed to the data input):
a. Round sales units and inventory units to whole units (normal rounding). Use the ROUND function.
b. In the sales units calculations also include either an IF function or a MIN function to restrict sales units to the maximum indicated.
c. All numbers to be formatted to whole numbers. No decimal places to be shown.
d. Be sparing in your use of $ signs – do not clutter up the output with dollar signs everywhere. Restrict their use to the first and last lines of the financial statements plus the inventory valuations in rows 29 and 30. Use FORMAT/CELLS/CURRENCY etc., not the short-cuts on the HOME ribbon.
e. All other figures to be formatted as numbers with comma separators. Use FORMAT/CELLS/NUMBER – zero decimal places and 1000 separator.

Rationale
Rationale and suggested approach
This assignment is designed to assess your application of knowledge, understanding and skills in certain topic areas of the subject. In order to receive a high mark your assignment will be complete (with no significant omissions), will have answered the discussion questions from your own thinking, and, in the case of practical and spreadsheet questions, will show well structured and correct solutions.
For spreadsheet problems good answers will comply with the spreadsheet requirements including the separation of data entry and report/solution areas and the inclusion of a normal view and a formula view both with row and column headings.
Review the examples in the Spreadsheet Advice section provided online in Interact.

Marking criteria
The criteria described below will not apply to all parts of all questions but describe the standards expected where the question requirements are appropriate. It is expected that all students will complete their own work with no collusion with other students.

Criteria High Distinction Distinction Credit Pass
Analysis of scenario to apply costing processes Analysis of the scenario identifies and applies an appropriate costing process with evaluation and justification for selection with appropriate examples where required Analysis of the scenario identifies and applies an appropriate costing process with justification for selection with examples where required Analysis of the scenario identifies and applies an appropriate costing process with description a process with examples where required Analysis of the scenario identifies and applies an appropriate costing process with identification a process
Comparison and analysis of achievement of an organisation’s planning Analyse and discuss the effects of strategy on achievement of control supported by correct and relevant data Analyse and describe the effects of strategy on achievement of control supported by correct and relevant data Review and describe the effects of strategy on achievement of control supported by partially correct and relevant data Identify and list the effect of strategy on the achievement of control supported by data
Recognise and apply appropriate systems tools including double entry accounting with accuracy to achieve control Spreadsheets and/or modelling is well designed according to the criteria and be complete without any omissions and correct application of double entry accounting systems Spreadsheets and/or modelling is well designed according to the criteria and be mostly complete without any omissions and mostly correct application of double entry accounting systems Spreadsheets and/or modelling is designed according to the criteria and be mostly complete without significant omissions and application of double entry accounting systems Spreadsheets and/or modelling omits some requirements and the design reflects minimal required elements
Referencing include complete references and acknowledgement of all sources used include most references and acknowledgement of sources used include references, acknowledging most sources used include some references and acknowledge most sources used
Presentation Professional presentation with correct spelling and grammar with written tasks that are logical and supported by academic sources include most references and acknowledgement of sources used
be neat and legibly presented with very few spelling and grammatical errors include references, acknowledging most sources used and
be neat and legibly presented with few spelling and grammatical errors include some references and acknowledge most sources used
be legibly presented
Presentation
Assignment presentation