CLA2 Chapter 22: Performance Measurement and Responsibility Accounting Read problem 9-4B (Departmental Contribution to Income P3) and answer the questions that follow. Explain your work in detail and include stating the initial situation and the assumptions. Include in-text citations. At least five scholarly references are required, among them one should be the textbook as the source of data. Refer to the data about Phoenix Company presented in problem 8-1A (Preparing and Analyzing Flexible Budget P1 A1). 1. Based on the data identify fixed costs, unit variable costs, and unit price 2. Re-organize the income statement in variable costing format 3. Find sales volume at breakeven and prepare income statement at breakeven Explain your work in detail and state the initial situation and the assumptions. Include in-text citations. At least five scholarly references are required, among them one should be the textbook as the source of data. *Please refer to the Grading Criteria for Comprehensive Learning Assessments (CLAs) on page 11-12 of the syllabus for specific guidelines and expectations. CLA2 PPT In addition to your CLA2 report, please prepare a professional PowerPoint presentation summarizing your findings for CLA2. The presentation will consist of your major findings, analysis, and recommendations in a concise presentation of 15 slides (minimum). You should use content from your CLA2 report as material for your PowerPoint presentation. In addition, you should include learning outcomes from all your major assignments. This would include PA1, CLA1, PA2, and of course, CLA2 (unless otherwise specified by your Professor). An agenda, executive summary, and references slides should also be included. Please keep in mind that the university is moving towards a more digital footprint for our students. This means that your final CLA2 presentation may be recorded, so that you may include it in your “e-portfolio” (graduating students should have all of their CLA2 presentations on a flash-drive, in addition to student biography, resume, interests, and so forth). Students will present their PowerPoint during the last week of class in either the On-Campus Class Session or the online Virtual Class Session, as determined by the professor. Presentations should not exceed 15 minutes. Problem 9-4B Sadar Company operates a store with two departments: videos and music. Information about those departments follows. Videos Department Music Department Sales $370,500 $279,500 Cost of goods sold $320,000 $175,000 Salaries $35,000 $25,000 Maintenance $12,000 $10,000 Utilities $5,000 $4,500 Insurance $4,200 $3,700 Direct expenses The company also incurred the following indirect costs. Advertising $15,000 Salaries $27,000 Office expenses $3,200 Indirect costs are allocated as follows: advertising on the basis of sales; salaries on the basis of number of employees; and office expenses on the basis of square footage. Additional information about the departments follows. Department Square footage Number of employees Videos 5,000 3 Music 3,000 2 Required 1. For each department, determine the departmental contribution to overhead and the departmental net income. Combined Videos Department Music Department Sales $650,000 $370,500 $279,500 Cost of goods sold $495,000 $320,000 $175,000 Gross profit on slaes $155,000 $50,500 $104,500 Salaries $60,000 $35,000 $25,000 Maintenance $22,000 $12,000 $10,000 Utilities $9,500 $5,000 $4,500 Insurance $7,900 $4,200 $3,700 Total direct expenses $99,400 $56,200 $43,200 Departmental contribution $55,600 ($5,700) $61,300 Advertising $15,000 $8,550 $6,450 Salaries $27,000 $16,200 $10,800 Office expenses $3,200 $2,000 $1,200 Total indirect expenses $45,200 $26,750 $18,450 Net Income $10,400 ($32,450) $42,850 Direct expenses Indirect expenses 2. 2. Should the video department be eliminated? Explain. Yes. Problem 8-1A Phoenix Company’s 2015 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units. PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2015 15,000 units Sales $3,150,000 Cost of goods sold Direct materials Direct labor Machinery repairs (variable cost) $930,000 210,000 45,000 Depreciation-plant equipment (straight-line) 315,000 Utilities ($30,000 is variable) 210,000 Plant management salaries 210,000 Gross profit 1,920,000 1,230,000 Selling expenses Packaging 90,000 Shipping 90,000 Sales salary (fixed annual amount) 235,000 415,000 General and administrative expenses Advertising expense 100,000 Salaries 241,000 Entertainment expense 85,000 Income from operations 426,000 $389,000 1. Based on the data identify fixed costs, unit variable costs, and unit price 1) Fixed costs Fixed expenses Fixed manufacturing costs Depreciation-plant equipment (straight-line) Utilities Plant management salaries 315,000 180,000 210,000 Fixed selling and administrative expenses Sales salary Advertising expense Salaries Entertainment expense Total fixed expenses 235,000 100,000 241,000 85,000 1,366,000 2) Unit variable costs Variable expenses Variable production costs Direct materials 62 Direct labor 14 Machinery repairs 3 Utilities 2 Variable selling and administrative expenses Packaging 6 Shipping 6 Total variable expenses 93 3) Unit price Sales $210 2. Re-organize the income statement in variable costing format PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2015 Variable Amount Per Unit Sale s Total Fixed Cost Unit Sales of 15,000 $210 $3,150,000 Direct materials 62 930,000 Direct labor 14 210,000 Machinery repairs 3 45,000 Utilities 2 30,000 Packaging 6 90,000 Shipping 6 90,000 93 1,395,000 Variable expenses Variable production costs Variable selling and administrative expenses Total variable expenses Contribution margin 117 1,755,000 Fixed expenses Fixed manufacturing costs Depreciation-plant equipment (straight-line) 315,000 Utilities 180,000 Plant management salaries 210,000 Fixed selling and administrative expenses Sales salary 235,000 Advertising expense 100,000 Salaries 241,000 Entertainment expense 85,000 Total fixed expenses 1,366,000 Net income $389,000 3. Find sales volume at breakeven and prepare income statement at breakeven Break-even point in units = Fixed cost / Contribution margin per unit 11675.21368 PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2015 Variable Amount Per Unit Sales $210 Total Fixed Cost Unit Sales of 11,676 $2,451,96 Variable expenses Variable production costs Direct materials 62 723,91 Direct labor 14 163,46 Machinery repairs 3 35,02 Utilities 2 23,35 Packaging 6 70,05 Shipping 6 70,05 Total variable expenses 93 1,085,86 117 1,366,09 Variable selling and administrative expenses Contribution margin Fixed expenses Fixed manufacturing costs Depreciation-plant equipment (straight-line) 315,000 Utilities 180,000 Plant management salaries 210,000 Fixed selling and administrative expenses Sales salary 235,000 Advertising expense 100,000 Salaries 241,000 Entertainment expense Total fixed expenses Net income • Budget for Unit Sales of 14,000, 15,000 and 16,000 85,000 1,366,000 $9 Fixed Budget Report For Year Ended December 31, 2015 Variable Amount Per Unit Sales Total Fixed Cost Budget for Unit Sales of 14,000 $210 $2,940,000 Direct materials 62 868,000 Direct labor 14 196,000 Machinery repairs 3 42,000 Utilities 2 28,000 Packaging 6 84,000 Shipping 6 84,000 Total variable expenses 93 1,302,000 117 1,638,000 Variable expenses Variable production costs Variable selling and administrative expenses Contribution margin Fixed expenses Fixed manufacturing costs Depreciation-plant equipment (straight-line) 315,000 Utilities 180,000 Plant management salaries 210,000 Bud Uni 15,0 Fixed selling and administrative expenses Sales salary 235,000 Advertising expense 100,000 Salaries 241,000 Entertainment expense Total fixed expenses Net income 85,000 1,366,000 $272,000 Managerial Accounting Concepts and Principles Identifying Cost Behavior - Fixed Costs - Variable Costs - Mixed Costs - Step-wise Costs and Relevant Range - Curvilinear Costs Contribution Margin and Break-Even Analysis - Contribution Margin and Its Measures - Computing the Break-Even Point - Computing the Margin of Safety Variable Costing and Analysis Profit Centers - Direct and Indirect Expenses - Allocation of Indirect Expenses - Departmental Income Stastements - Departmental Contribution to Overhead CLA2 PRESENTATION BUS535 Managerial Accounting, Dr. Ali Saad Haram Lee Jorge Melia Contents Conclusion MANAGERIAL ACCOUNTING • Providing information for decision making and planning. • Assisting managers in directing and controlling activities. • Motivating managers and other employees towards organization’s goals. • Measuring performance of activities, managers, and other employees. • Assessing the organization’s competitive position. Introduction Direct costs-The costs can be defined as costs which can be accurately traced to a cost object with little effort (Hilton, & Platt, 2013). Cost object may be a product, a department, a project, etc. Direct costs typically benefit a single cost object therefore the classification of any cost either as direct or indirect is done by taking the cost object into perspective. A particular cost may be direct cost for one cost object but indirect cost for another cost object. Indirect costs -Costs which cannot be accurately attributed to specific cost objects are called indirect costs. These typically benefit multiple cost objects and it is impracticable to accurately trace them to individual products, activities or departments etc. Problem 22-4B • Here is the information about Department Video and Music • Sales are $370,000 and $279,000 respectively • Cost of goods sold are $320,000 and $175,000 respectively • Direct costs are divided into 1.Salaries Indirect costs are divided into 1.Salaries 2.insurance 2.Insurance 3.Utilities 3.Office expenses 4.Depreciation 4.Depreciation 5. Maintenance Problem 22-4B Sadar Company operates a store with two departments: videos and music. The company also incurred the following indirect cost. Information about those departments follows. Videos Department Music Department Sales $370,500 $279,500 Cost of goods sold $320,000 $175,000 Salaries $35,000 $25,000 Maintenance $12,000 $10,000 Utilities $5,000 $4,500 Insurance $4,200 $3,700 Direct expenses Advertising Salaries Office expenses $15,000 $27,000 $3,200 Indirect costs are allocated as follows: advertising on the basis of sales; salaries on the basis of number of employees; and office expenses on the basis of square footage. Additional information about the departments follows. Department Videos Music Square footage Number of employees 5,000 3 3,000 2 Problem 22-4B For each department, determine the departmental contribution to overhead and the departmental net income. Sales Cost of goods sold Gross profit on slaes Direct expenses Salaries Maintenance Utilities Insurance Total direct expenses Departmental contribution Indirect expenses Advertising Salaries Office expenses Total indirect expenses Net Income Combined Videos Department Music Department $650,000 $370,500 $279,500 $495,000 $320,000 $175,000 $155,000 $50,500 $104,500 $60,000 $22,000 $9,500 $7,900 $99,400 $55,600 $35,000 $12,000 $5,000 $4,200 $56,200 ($5,700) $25,000 $10,000 $4,500 $3,700 $43,200 $61,300 $15,000 $27,000 $3,200 $45,200 $10,400 $8,550 $16,200 $2,000 $26,750 -$32,450 $6,450 $10,800 $1,200 $18,450 $42,850 Problem 22-4B • The sales and the costs of goods are calculated as combining the video department and the music department. • Gross profit on sales(video department ) =Sales (video ) -Costs of goods sold (video). • Gross profit on sales (music department)= Sales (music)-Costs of goods sold (Music). • Total gross profits on sales is calculated as combining the video and the music departments gross profits. Video department Music department Total Sales $370,500 $279,500 $650,00 Costs of goods sold $320,000 $175,000 $495,000 $104,500 $155,000 Gross profits on sales $50,500 Problem 22-4B • Direct expenses(salaries ,maintainance ,utilities and insurances of both video and the music department together 1.Salaries =$35,000 + $25,000 = $60,000 2.Maintenance=$12,000 + $10,000 = $22,000 3.Utilities = $5,000 + $4,500 = $9,500 4.Insurance =$4,200 + $ 3,700 = $ 7,900 5.Total direct expenses are combining together for their specific department $56,000 and $43,000 respectively. 6.Departmental contribution is calculated = total direct expense - gross profit Video department =$56,000- $50,500 = $5,700 Music department = $ 43,000 -$104,500 = $ 61,000 Problem 22-4B PROBLEM 22-4B • Problem 22-4B PROBLEM 22-4B Advertising(video department )=$370,500/650000*15000=8,550 Advertising(music department)=$279,500/650,000*15,000=$6,450 Salaries(video department ) = 3/5*27,000 =$16,875 Salaries (music department )=2/5*27,000= $10,125 Office expenses (video)=5/8*3,200 =$1920 Salaries (music department )=3/8*3,200=$1,280 Problem 22-4B PROBLEM 22-4B • Total indirect expenses are calculated by combining the salaries ,advertising and office expenses together of their specific departments. • Net income = gross profits - Direct costs and indirect costs • Net income (video)= $50,500 - $56,200+$26,750= -32,450 • Net Income (Music)=$104,000-$43,200 +$18,450=$42,850 Problem 22-4B Conclusion -Music department has a profit of $42,850 it is good to continue with it. -Video Department is in loss of $32,450. -Total Net Income of Vortex company is $10,400 -So the conclusion is video Department has produced loses than Profit. And so It’s correct to eliminate Video department. Problem 21-1A Phoenix Company’s 2015 master budget included the following fixed budget report. PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2015 It is based on an expected production and sales 15,000 units $3,150,000 volume of 15,000 units. Sales Cost of goods sold Direct materials Direct labor Machinery repairs (variable cost) Depreciation-plant equipment (straightline) Utilities ($30,000 is variable) Plant management salaries Gross profit Selling expenses Packaging Shipping Sales salary (fixed annual amount) General and administrative expenses Advertising expense Salaries Entertainment expense Income from operations $930,000 210,000 45,000 315,000 210,000 210,000 1,920,000 1,230,000 90,000 90,000 235,000 100,000 241,000 85,000 415,000 426,000 $389,000 Problem 21-1A Introduction Fixed costs are costs which remain constant within a certain level of output or sales. This certain limit where fixed costs remain constant regardless of the level of activity is called relevant range. For example, depreciation on fixed assets, etc. Variable costs are costs which change with a change in the level of activity. Examples include direct materials, direct labor, etc. It is useful to create an income statement in the variable costing format when you want to determine that proportion of expenses that truly varies directly with revenues. In many businesses, the contribution margin will be substantially higher than the gross margin, because such a large amount of its production costs are fixed, and very few of its selling and administrative expenses are variable. A variable income statement varies from a normal income statement in three respects: 1. All fixed production costs are aggregated lower in the statement, after the contribution margin; 2. All variable selling and administrative expenses are grouped with variable production costs, so that they are a part of the calculation of the contribution margin; 3. Gross margin is replaced by the contribution margin Problem 21-1A Based on the data identify fixed costs, unit variable costs, and unit price 1) Fixed costs 2) Unit variable costs Fixed expenses Fixed manufacturing costs Depreciation-plant equipment (straight-line) Utilities Plant management salaries Fixed selling and administrative expenses Sales salary Advertising expense Salaries Entertainment expense Total fixed expenses 3) Unit price Sales 315,000 180,000 210,000 235,000 100,000 241,000 85,000 1,366,000 Variable Amount Per Unit $210 Variable Amount Per Unit Variable expenses Variable production costs Direct materials Direct labor Machinery repairs Utilities Variable selling and administrative expenses Packaging Shipping Total variable expenses 62 14 3 2 6 6 93 Fixed expenses Fixed manufacturing costs -Depreciation plant equipment (stright line )= given amont=$315,000 -Utilities are calculated as 210,000-30,000=$180,000 -Plant management salaries =given salaries=$210,000 Fixed selling and administrative expenses -Sales salary=given fixed=235,000 -Advertising expense =Given value=100,000 -Salaries = given value =241,000 -Entertainment expence=Given value=85,000 Total fixed are combining all the above values =1,366,000 Fixed expenses Fixed manufacturing costs Depreciation-plant equipment (straight-line) Utilities Plant management salaries Fixed selling and administrative expenses Sales salary Advertising expense Salaries Entertainment expense Total fixed expenses 315,000 180,000 210,000 235,000 100,000 241,000 85,000 1,366,000 Variable amount per unit Variable Amount Per Unit -The unit Variable costs can be calculated as -Direct materials =given total direct material /units=$930,000/15000=62 -Direct labor =direct labor/units=210,000/15000=14 -Machinery repairs = given machinery repairs/units =45,000/15000=3 -utilities = given variable utilities/units=30,000/15000=2 -packaging =given packaging/units=90,000/15000=6 -shipping =given shipping /units=90,000/15000=6 -Total variable expenses is calculated by combining all the above variable expenses is 93 Variable expenses Variable production costs Direct materials Direct labor Machinery repairs Utilities Variable selling and administrative expenses Packaging Shipping Total variable expenses 62 14 3 2 6 6 93 Sales per unit -The sale per unit is calculated by dividing the total sales with total number of units. -Sales =Total sales/total units=$3,150,000/15,000=210. -By the above caluclations the sales per unit is at 210. Variable Amount Per Unit Sales $210 Contribution margin per unit The contribution margin id calculated as by eliminating the variable expenses from the sales per unit. Contribution margin = Sales per unit the total variable expenses=210-93=117. -So the contribution margin for this company is 117. Problem 21-1A PHOENIX COMPANY Re-organize the income statement in variable costing format. Fixed Budget Report For Year Ended December 31, 2015 Variable Budget Budget Budget Amount Per Total Fixed for Unit Sales for Unit Sales for Unit Sales Unit Cost of 14,000 of 15,000 of 16,000 Sales $210 $2,940,000 $3,150,000 $3,360,000 Direct materials 62 868,000 930,000 992,000 Direct labor 14 196,000 210,000 224,000 Machinery repairs 3 42,000 45,000 48,000 Utilities 2 28,000 30,000 32,000 6 84,000 90,000 96,000 Variable expenses -Here is the final caluclations for the phoenix company with variable costing format Variable production costs Variable selling and administrative expenses Packaging Shipping -The given numbers are for 15,000 and taken numbers are for the 14,000 and 16,000 units Total variable expenses Contribution margin 6 84,000 90,000 96,000 93 1,302,000 1,395,000 1,488,000 117 1,638,000 1,755,000 1,872,000 $272,000 $389,000 $506,000 Fixed expenses Fixed manufacturing costs Depreciation-plant equipment (straight-line) 315,000 Utilities 180,000 Plant management salaries 210,000 Fixed selling and administrative expenses Sales salary 235,000 Advertising expense 100,000 Salaries 241,000 Entertainment expense Total fixed expenses Net income 85,000 1,366,000 Problem 21-1A PHOENIX COMPANY • Break-even analysis: a calculation of the Fixed Budget Report For Year Ended December 31, 2015 point where unit volume and sales combine to create neutral revenue, neither a profit Sales Per Total Fixed Unit Sales Cost of 15000 $210 $3,150,000 Direct materials 62 9,30,000 Direct labor 14 210,000 Machinery repairs 3 45,000 Utilities 2 30,000 6 90,000 Variable expenses Variable production costs nor a loss. • Break even point=fixed cost /contribution Variable selling and administrative expenses margin per unit Packaging Shipping 1,366,000 /117 = 11675.21 Total variable expenses Contribution margin • At 11675 the company will be neither loss or the profit ,so the breakeven point is at 11675. Break-even point in units = Fixed cost / Contribution margin per unit Variable Amount Unit 11675.21368 6 90,000 93 1,395,000 117 1,755,000 Fixed expenses Fixed manufacturing costs Depreciation-plant equipment (straight-line) 315,000 Utilities 180,000 Plant management salaries 210,000 Fixed selling and administrative expenses Sales salary 235,000 Advertising expense 100,000 Salaries 241,000 Entertainment expense Total fixed expenses Net income 85,000 1,366,000 $389,000 Fixed budget report for 14000 units PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2015 Variable Amount Per Total Fixed Unit Sales Unit Cost of 14000 Sales $210 $2,940,000 Variable expenses Variable production costs By gathering the data from the 15000 units ,we have calculated for the 14,000 units. Direct materials 62 868,000 Direct labor 14 1,96,000 Machinery repairs 3 42,000 Utilities 2 28,000 6 84,000 Variable selling and administrative expenses Packaging Shipping Total variable expenses Contribution margin 6 84,000 93 1,302,000 117 1,638,000 Fixed expenses Fixed manufacturing costs -The net income for the company with the 14000 units is $272,000 Depreciation-plant equipment (straight-line) 315,000 Utilities 180,000 Plant management salaries 210,000 Fixed selling and administrative expenses Sales salary 235,000 Advertising expense 100,000 Salaries 241,000 Entertainment expense Total fixed expenses Net income 85,000 1,366,000 $272,000 Fixed budget report for 16000 units PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2015 Variable Amount Per Total Fixed Unit Sales Unit Cost of 16000 Sales $210 $3,360,000 Direct materials 62 992,000 Direct labor 14 224,000 Machinery repairs 3 48,000 Utilities 2 32,000 6 96,000 Variable expenses Variable production costs By gathering the data from the 15000 units ,we have calculated for the 16,000 units. Variable selling and administrative expenses Packaging Shipping Total variable expenses Contribution margin 6 96,000 93 1,488,000 117 1,872,000 Fixed expenses Fixed manufacturing costs -The net income for the company with the 16000 units is $506,000 Depreciation-plant equipment (straight-line) 315,000 Utilities 180,000 Plant management salaries 210,000 Fixed selling and administrative expenses Sales salary 235,000 Advertising expense 100,000 Salaries 241,000 Entertainment expense Total fixed expenses Net income 85,000 1,366,000 $506,000 Fixed budget report for 18000 units PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2015 Variable Amount Per Total Fixed Unit Sales Unit Cost of 18000 Sales $210 $3,780,000 Direct materials 62 1,116,000 Direct labor 14 252,000 Machinery repairs 3 54,000 Utilities 2 36,000 6 108,000 Variable expenses Variable production costs By gathering the data from the 15000 units ,we have calculated for the 18,000 units. Variable selling and administrative expenses Packaging Shipping Total variable expenses Contribution margin 6 108,000 93 1,674,000 117 2,106,000 Fixed expenses Fixed manufacturing costs -The net income for the company with the 18000 units is $704,000 Depreciation-plant equipment (straight-line) 315,000 Utilities 180,000 Plant management salaries 210,000 Fixed selling and administrative expenses Sales salary 235,000 Advertising expense 100,000 Salaries 241,000 Entertainment expense Total fixed expenses Net income 85,000 1,366,000 $740,000 Operating income TO BE SOLVED: OPERATING INCOME OPERATING INCOME : Operating is the net income after excluding all the costs from the sources of income. It is thus obtained by deducting total Indirect expenses from the Contribution to Overhead. -For units 14000 is 1,638,000 - 1,366,000=$272,000 -For units 15000 is 1,755,000 -1,366,000 =$389,000 -For units 16000 is 1,872,000 - 1,366,000= $506,000 Conclusion Main other concepts Activity-based costing (ABC) is an accounting method that identifies and assigns costs to overhead activities and then assigns those costs to products. An activity-based costing (ABC) system recognizes the relationship between costs, overhead activities, and manufactured products, and through this relationship, it assigns indirect costs to products less arbitrarily than traditional methods. Job order costing or job costing is a system for assigning manufacturing costs to an individual product or batches of products. Generally, the job order costing system is used only when the products manufactured are sufficiently different from each other. (When products are identical or nearly identical, the process costing system will likely be used.) Conclusion -Considering managerial accounting is focused on an internal manager, in this class, I learned a lot about how much it is important for managers in deciding every decision based on accounting. An organization's final goal is a creating maximum profit within limited resources. -So, in this class, understanding what is managerial accounting is for, and more detail, Classification of production cost into fixed and variable, a difference of costing method (Activity-based costing, Job order costing) made me think about what method is suitable for my current company. -Also, a manager in each department should understand, have the skill to adapt right accounting method based on each department's character. By using the right method at the right department will be helpful for reducing expenses and increasing profits. Conclusion References • Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education. • Wild, J. Shaw. (2016). Managerial Accounting. Columbia. Univ. of MI. ISBN-13: 978-1-25917649-4 • http://www.referenceforbusiness.com/encyclopedia/Man-Mix/Managerial- Accounting.html#ixzz5PLPMzU4ihttps://accountingexplained.com/managerial/costs/ Thank you
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