SCENARIO: In Project 3, you will help LGI’s leadership move the company forward on a path toward a sustainable future. The company needs to restore the confidence of shareholders and other stakeholders by maintaining a satisfactory level of operating performance.
LGI, like all companies, needs robust earnings before interest, taxes, depreciation, and amortization (EBITDA). In other words, earnings must be sufficient to cover LGI’s investing activities, debt service, and taxes—with a healthy profit left for reinvestment and distributions to stockholders
Your Project 3 business report will focus on strengthening EBITDA. To do this, you will analyze LGI’s cost structure and determine how to increase productivity. These tasks are prerequisites for identifying a future investment (Project 4) and how to finance it (Project 5).
Complete the Analysis Calculation for Project 3
Your team has provided you with an Excel workbook containing LGI’s financials. You will use the workbook to
Determine how LGI can strengthen EBITDA
Discover ways for LGI to increase productivity
Perform cost calculations in the worksheetPrepare the Analysis Report for Project 3Complete the analysis report for the project: Project 3 Questions – Report Template
Instructions: Answer the five questions below. They focus entirely on improving the EBITDA
of Largo Global Inc. (LGI) based on the information provided in the Excel workbook. Support
your reasoning from the readings in Project 3, Step 1, and the discussion in Project 3, Step 3.
Be sure to cite your sources in APA 7th ed. style.
Provide a detailed response below each question. Use 12-point font and double spacing.
Maintain the existing margins in this document. Your final Word document, including the
questions, should be at most five pages. Include a title page in addition to the five pages.
Any tables and graphs you include are excluded from the five-page limit. Name your
document as follows: P3_Final_lastname_Report_date.
You must address all five questions and use the information on all tabs.
You are strongly encouraged to exceed the requirements by refining your analysis. Consider
other tools and techniques that were discussed in the required and recommended reading
for Project 3. This means adding an in-depth explanation of what happened in the year for
which data was provided to make precise recommendations to LGI.
Title Page
Name
Course and section number
Faculty name
Submission date
Questions:
1. How much of the fixed costs were allocated between the Standard and Deluxe Boxes based on the
Lumpsum Analysis Method? Is the CEO correct that the Deluxe Box is not contributing much to the
company’s operating profit? Please elaborate on your answer and include evidence from Tab 1 of
the Excel workbook.
[insert your answer here]
2. The intern suggested splitting the costs based on sales volumes, as you have done in the
calculations performed in Tab 2. Explain the impact of the calculation performed in Tab 2. In your
discussions, please explain why the answer has changed from the calculations you performed in Tab
1. It also indicates the benefit of accurate costing when trying to improve operating profit margins.
[insert your answer here]
3. Based on the calculations in Tab 3 using ABC, comment on the operating profits made for each
product. Explain in your report why operating profits have changed under ABC analysis. Also,
indicate which of the systems – the traditional systems (using lumpsum or volume-based cost
allocation in Tab 1 and Tab 2) or the ABC systems (Tab 3) provide the best answers for decisionmaking to improve cost management to improve operating profit.
[insert your answer here]
4. The sustainability manager is concerned about the Anti-Deluxe Action group’s impact on the
company and suggested changing the materials and process of making the Deluxe Boxes. As the
process of making the Sustainable Deluxe Boxes will be less intensive, a suggestion is made that the
selling price for the Sustainable Deluxe Boxes could be $23 per unit. Discuss whether changing the
price to $23 is viable for LGI. Provide evidence from the Excel workbook, Tab 4.
[insert your answer here]
5. If Largo Global Inc. decides to sell the Sustainable Deluxe Boxes at the price the CEO demands to
maintain the same profit percentage as Standard Boxes, do you think the new price calculated in Tab
4 is viable? Why is it essential for LGI to know what their Break-even quantity is? Also, indicate which
other (non-numerical information) should be considered when pursuing the Sustainable Deluxe Box
option.
[insert your answer here]
Project 3: Review and
Practice Guide
UMGC
MBA 620: Financial
Decision Making
Project 3: Review and
Practice Guide
Costing and Cost Allocations
Contents
Topic 1: Introduction to Managerial Accounting ……………………………………………………………………………… 3
Managerial Accounting …………………………………………………………………………………………………………….. 3
The Process …………………………………………………………………………………………………………………………….. 3
Information for Planning…………………………………………………………………………………………………………… 3
Managerial vs Financial Accounting……………………………………………………………………………………………. 4
Topic 2: Cost Terminology ……………………………………………………………………………………………………………. 5
Cost Behavior ………………………………………………………………………………………………………………………….. 5
Cost Terminology …………………………………………………………………………………………………………………….. 5
Variable Costs vs Fixed Costs …………………………………………………………………………………………………….. 6
Direct Labor…………………………………………………………………………………………………………………………….. 6
Mixed Costs …………………………………………………………………………………………………………………………….. 6
Step Costs……………………………………………………………………………………………………………………………….. 6
Identifying Types of Costs …………………………………………………………………………………………………………. 7
Topic 3: Cost-Volume-Profit Analysis ……………………………………………………………………………………………… 8
Uses for Cost-Volume-Price Analysis ………………………………………………………………………………………….. 8
Profit Equation & Breakeven …………………………………………………………………………………………………….. 8
Example ………………………………………………………………………………………………………………………………….. 8
Margin of Safety………………………………………………………………………………………………………………………. 8
Contribution Margin ………………………………………………………………………………………………………………… 9
What-If Analysis ………………………………………………………………………………………………………………………. 9
Assumptions in CVP Analysis …………………………………………………………………………………………………….. 9
Topic 4: Cost Allocation………………………………………………………………………………………………………………. 10
The Basics of Cost Allocation …………………………………………………………………………………………………… 10
1 – Purposes of Cost Allocation ………………………………………………………………………………………………… 10
2 – Process of Cost Allocation…………………………………………………………………………………………………… 10
3 – Direct and Indirect Costs ……………………………………………………………………………………………………. 11
Direct Method ……………………………………………………………………………………………………………………….. 11
Example: Boise Furniture …………………………………………………………………………………………………….. 11
Example: Boise Furniture (cont’d.) ……………………………………………………………………………………….. 12
Example: A Banking Organization …………………………………………………………………………………………. 12
4 – Problems With Cost Allocation ……………………………………………………………………………………………. 12
Unitized vs Lump-Sum Allocation …………………………………………………………………………………………….. 13
Production Volume and Overhead …………………………………………………………………………………………… 13
Topic 5: Activity-Based Costing ……………………………………………………………………………………………………. 14
Purpose of Activity-Based Costing ……………………………………………………………………………………………. 14
The ABC Steps ……………………………………………………………………………………………………………………….. 14
Benefits of ABC ……………………………………………………………………………………………………………………… 14
Limitations of ABC ………………………………………………………………………………………………………………….. 14
Problems/Exercises ……………………………………………………………………………………………………………………. 15
What to Do ……………………………………………………………………………………………………………………………. 15
Chapter 3: Practice Exercises …………………………………………………………………………………………………… 15
Exercise: Cost-Volume-Profit Analysis ………………………………………………………………………………………. 15
Solution to Exercise………………………………………………………………………………………………………………… 16
Chapter 7: Practice Exercises …………………………………………………………………………………………………… 17
Exercise: Traditional & Activity-Based Costing …………………………………………………………………………… 17
Solution to Exercise………………………………………………………………………………………………………………… 18
References ……………………………………………………………………………………………………………………………. 20
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 1: Introduction to Managerial Accounting
Managerial Accounting
Managerial accounting is designed for internal users for planning, control, and decision making.
The Process
Decision making, planning, and control are achieved through budgeting.
Plan
•Action taken to implement plan
Results
•Comparison of planned and actual results
Evaluation
•Decisions to reward or punish managers
•Decisions to change operations or revise plans
Based on information from Jiambalvo, 1994
Information for Planning
Budgets for planning
•
Profit budget
o Indicates planned income
•
Cash flow budget
o Indicates planned cash inflows and outflows
•
Production budget
o Indicates the planned quantity of production and expected costs
3
Project 3 Review and Practice Guide
Back to Table of Contents
Managerial vs Financial Accounting
Managerial
Financial
1. Users
Internal
External
2. GAAP
May deviate
Must comply
3. Information
More detailed, emphasis on Summary, emphasis on
segments
total company
presented
4. Nonmonetary
information
Emphasized
Not emphasized
5. Time focus
Future oriented
Generally historical
Based on information from Jiambalvo, 1994
4
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 2: Cost Terminology
Cost Behavior
The way costs impact a company and the way they are classified varies by the type of business.
Common types of costs
• Controllable vs. noncontrollable costs
• Sunk costs
• Opportunity costs
• Variable vs fixed costs
• Direct and indirect costs
• Mixed costs
• Step costs
Cost Terminology
Controllable & Noncontrollable Costs
• A manager can influence controllable costs but not noncontrollable costs.
• Manager should not be evaluated against noncontrollable costs.
Sunk Costs
• Costs incurred in the past
• Not relevant to present decisions
Opportunity Costs
• Values of benefits foregone when selecting one alternative over another
Variable vs Fixed Costs
• Variable costs change proportionately with changes in volume or activity; fixed costs do not.
Direct and Indirect Costs
• Direct costs are directly traceable to a product, activity, or department; indirect costs are not.
Based on information from Jiambalvo, 1994
5
Project 3 Review and Practice Guide
Back to Table of Contents
Variable Costs vs Fixed Costs
Fixed costs too high? Make them variable!
Examples:
• Incentive compensation
• Outsourcing
Direct Labor
Questions to consider
Is direct labor always a variable cost?
Are you willing to lay off workers when production declines?
• What if the decline is temporary?
• What if the decline is permanent?
Does the degree of automation make a difference in whether direct labor is fixed or variable?
Mixed Costs
Mixed costs include both variable and fixed elements.
Examples:
Salesperson with base salary (fixed) and commission on sales (variable)
•
•
Base salary included with fixed costs
Commission included with variable costs
Step Costs
Step costs are fixed for a range of output but increase when the upper bound of a range is exceeded.
•
When budgeting for a specific range, be sure to use the correct cost
Example:
A company adds third production shift. The cost increase includes a production supervisor’s salary.
6
Project 3 Review and Practice Guide
Back to Table of Contents
Identifying Types of Costs
Which type of cost is this?
Fixed cost of a production facility: As the number of
units produced increases, the fixed production cost
remains constant.
As the number of units produced increases, so
does the variable production cost.
Mixed cost: The total cost line intersects the yaxis at $100,000, representing the fixed
component of the mixed cost
Step costs are fixed over only a small range of
activity.
Based on information from Jiambalvo, 1994
7
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 3: Cost-Volume-Profit Analysis
Uses for Cost-Volume-Price Analysis
CVP is the analysis of how costs and profit change when volume changes.
It is used for:
• Planning for next year—How much should be produced? What are the projected cost and
profit?
• Control—A production cost has increased unexpectedly. Why? Who should be responsible for
controlling it?
• Decision making—If the price of the product were decreased or increased, what would the
profit be?
Profit Equation & Breakeven
The Profit Equation
profit = (selling price × Q) − (variable cost × Q) − total fixed cost = (selling price − variable cost)
× Q − total fixed cost
Breakeven—the point at which costs and income are equal
• Number of units (QBEP) sold allows a company to neither earn a profit nor incur a loss
•
$0 = selling price × QBEP − variable cost × QBEP − total fixed cost
Example
Here are the price and costs related to a wedding cake business (Jiambalvo, 1994):
• Each cake sells for $500.
• The variable cost of baking the cakes is $200.
• The fixed cost per month is $6,000.
1. How many cakes must be sold to break even?
number of cakes × $500 − (number of cakes × $200 + $6,000) = $0
number of cakes = $6,000 / ($500 − $200) = 20 cakes
2. How many cakes must be sold to earn a profit of $9,000?
number of cakes × $500 − (number of cakes × $200 + $6,000) = $9,000
number of cakes = ($9,000 + $6,000) / ($500 − $200) = 50 cakes
Margin of Safety
Margin of safety is a measurement of how close expected revenue is to the breakeven level.
margin of safety = expected revenue − breakeven revenue
Example:
If the wedding cake business expects to sell 35 cakes per month, what is the margin of safety?
8
Project 3 Review and Practice Guide
Back to Table of Contents
Answer:
Expected revenue: $500 × 35 = $17,500
Break-even revenue: $500 × 20 = $10,000
Margin of safety: $17,500 − $10,000 = $7,500
Contribution Margin
The contribution margin is the incremental profit generated by selling one additional unit.
• unit contribution margin = sales price per unit − variable cost per unit
• total contribution margin = contribution margin per unit × quantity
• contribution margin ratio = contribution margin per unit / sales price per unit
The contribution margin ratio measures the amount of incremental profit generated by an additional
dollar of sales.
Wedding cake business example:
•
Unit Contribution Margin
sales price per unit − variable cost per unit = unit contribution margin
$500 − $200 = $300
•
Total Contribution Margin
contribution margin per unit × quantity = total contribution margin
$300 × Q = total contribution margin
•
Contribution Margin Ratio
contribution margin per unit / sales price per unit = contribution margin ratio
$300 / $500 = contribution margin ratio
What-If Analysis
Use this equation to determine the impact of managerial decisions on profit:
• profit = (selling price − variable cost) × Q − total fixed cost
o Change in fixed and variable costs
o Change in selling price
Assumptions in CVP Analysis
Assumptions affect the validity of the analysis:
1. Costs can be separated into fixed and variable components
2. Within a specific range of cost-driver activity, variable cost per unit and total fixed cost
do not change (relevant range) (Lumen, n.d.)
3. Multiproduct analysis assumes the product mix does not change
With correct assumptions, CVP is useful.
9
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 4: Cost Allocation
The Basics of Cost Allocation
1.
2.
3.
4.
Purpose of Cost Allocation
Process of Cost Allocation
Allocating Service Department Costs
Problems with Cost Allocation
1 – Purposes of Cost Allocation
Companies allocate costs to
• provide information for decision making
• reduce frivolous use of common resources
• encourage evaluation of internally provided services
• calculate the “full cost” of products for GAAP reporting
Allocated costs serve as charges or fees for use
of internal resources or services.
Ideally, allocated cost should
measure the opportunity cost.
(Jiambalvo, 1994)
Provide full-cost information:
• GAAP requires full costing for external reporting purposes.
• Full-cost information is needed when the company has an agreement whereby revenue received
depends upon the cost incurred, as in cost-plus contracts.
2 – Process of Cost Allocation
1. Identify the cost objectives.
2. Form cost pools so that individual costs in the same cost pool are allocated using one allocation
base.
3. Select an allocation base to relate cost pools to the cost objective
10
Project 3 Review and Practice Guide
Back to Table of Contents
Example of the cost-allocation process in action:
UMGC Europe has several graduate programs. Imagine that you want to allocate costs to these
programs to determine if
1. Non-profitable programs should be shut down
2. Resources are being used efficiently
Cost pool
Allocation base
Cost objectives
Salaries of the professors
Salaries of the administrative staff
Photocopying
Computer lab
Rent for the building
Marketing
Online course pages
IT
Number of students enrolled
Number of hits per web page
Number of Trouble Tickets
fixed + variable × face-to-face
hours
MBA
Cybersecurity
Social Work
Management
3 – Direct and Indirect Costs
•
•
Organizational units of manufacturing firms are classified as one of the following:
o production department (direct)
o service department (indirect)
Cost pools
o formed by service departments
o allocated to production departments
Direct Method
Example: Boise Furniture
Service department costs are allocated to production departments but not to other service departments
Service Departments
Production Departments
Products
Janitorial costs
Assembly of chair
Chair
Personnel costs
Finishing of table
Table
Based on information from Jiambalvo, 1994
11
Project 3 Review and Practice Guide
Back to Table of Contents
Example: Boise Furniture (cont’d.)
Allocate the janitorial cost of $100,000 as follows:
• Allocation base: square feet
o Assembly department: 20,000 square feet
o Finishing department: 30,000 square feet
• Calculate the allocation rate:
o $100,000 / (20,000 + 30,000) = $2 / sq. ft.
The resulting allocation to the production departments is as follows:
o Assembly Dept: 20,000 sq. ft. x $2 = $40,000
o Finishing Dept: 30,000 sq. ft. x $2 = $60,000
Example: A Banking Organization
Assume that a banking organization has these service departments:
• Human Resources—hires employees and manages benefits
• Duplicating—performs copy services
• Janitorial—provides routine cleaning services
• Accounting—provides accounting services
• Graphic Design—designs forms)
• Food Services—provides free breakfast and lunch to employees
The services are used by the company’s two subsidiaries, Commercial Banking and Investment Banking.
Suggest ways to allocate the service department costs to the two subsidiaries.
Food Services are used by employees in the Human Resources department.
Would a share of food service costs be allocated to Human Resources under the direct method of
allocation?
Use the following as the basis for allocating service department costs:
• Human Resources—number of employees
• Duplicating—number of pages copied
• Janitorial—floor space
• Accounting—number of sales transactions
• Graphic Design—time spent on design work
• Food Services—number of employees
4 – Problems With Cost Allocation
•
•
•
•
•
Allocation of costs that are not controllable
Arbitrary allocations
Allocation of fixed costs that make the fixed costs appear to be variable costs
Allocation of manufacturing overhead to products using too few overhead cost pools
Use of only volume-related allocation bases
12
Project 3 Review and Practice Guide
Back to Table of Contents
Unitized vs Lump-Sum Allocation
•
•
Unitized fixed costs
o Fixed costs are stated on a per-unit basis and allocated as a variable cost.
o The perception that costs are variable could alter decision making.
Lump-sum allocations
o A predetermined amount of fixed costs not affected by level of activity is allocated.
o The allocation must appear to be fixed to managers of departments that receive the
charge.
Production Volume and Overhead
Problem: Using measures of production volume to allocate overhead
•
•
•
Typical allocation basis includes direct labor hours and machine hours
Assumes all overhead costs are proportional to production volume
What happens when overhead costs are not proportional to production volume?
o High-volume products are over-costed
o Low-volume products are under-costed
ABC solves these problems.
13
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 5: Activity-Based Costing
Purpose of Activity-Based Costing
•
•
•
Identifies major activities that cause overhead costs to be incurred
Costs of resources consumed performing these activities are grouped into cost pools
Costs are assigned to products using a measure of activity, i.e., cost driver
The ABC Steps
Step 1
Identify major activities
• Processing orders, packaging, delivery, customer service
Step 2
Group costs of activities into cost pools
• Salary, vehicles, equipment, packaging materials
Step 3
Identify measures of activities—the cost
drivers
• Number of orders, number of phone calls, miles per day,
labor hours
Step 4
Relate costs to products using the cost
drivers
• One-day service, same-day service, standard service
Based on information from Jiambalvo, 1994
Benefits of ABC
•
•
Provides more accurate costing
o Costs are allocated to products based on the amount of each resource used for the
activities involved in producing the product.
May lead to improvements in cost control
o Understanding each activity that contributes to a product and the resources each one
consumes enables a company to focus on those areas where efficiency could be
improved.
Limitations of ABC
•
•
More costly to develop and maintain than a traditional costing system
Used to develop full costs of products
o Includes fixed costs
o Lacks incremental information necessary for decision making
14
Project 3 Review and Practice Guide
Back to Table of Contents
Problems/Exercises
What to Do
You are encouraged to complete all the practice exercises listed below. They will help you gain the
knowledge and skills needed to fully participate in the group assignment in Step 3 and complete the
final Project 2 deliverable. The answers are provided, so you can check your own work.
Chapter 3: Practice Exercises
(in Davis, 2015)
• Unit 3.1 Practice Exercise
• Unit 3.2 Practice Exercise
• Unit 3.3 Practice Exercise
• Unit 3.4 Practice Exercise
(Practice exercises follow the Self Study questions.)
Exercise: Cost-Volume-Profit Analysis
Your company’s CEO is planning for next year. Prepare a contribution format income statement showing
anticipated operating income. Consider each scenario independently. Last year’s income statement is as
follows:
Total
Per Unit
Sales
$600,000
$15.00
Variable expenses
320,000
8.00
Contribution margin
280,000
7.00
Fixed expenses
175,000
Operating income
$105,000
Required
A.
B.
C.
D.
E.
The sales price increases by 12% and sales volume decreases by 4%.
The sales price increases by 8% and variable cost per unit increases by 6%.
The sales price decreases by 5% and sales volume increases by 15%.
Fixed expenses increase by $40,000.
The sales price increases by 12%, variable cost per unit increases by 15%, fixed expenses
increase by $30,000, and sales volume decreases by 15%.
15
Project 3 Review and Practice Guide
Back to Table of Contents
Solution to Exercise
A. Current sales volume: $600,00/$15 = 40,000 units
New sales volume: 40,000 × .96 = 38,400 units
New sales price: $15.00 × 1.12 = $16.80
Total
Per Unit
Sales
$645,120
$16.80
Less variable expenses
307,200
8.00
Contribution margin
337,920
$ 8.80
Less fixed expenses
175,000
Operating income
$162,920
B. New sales price: $15.00 × 1.08 = $16.20 per unit
New variable cost per unit: $8.00 × 1.06 = $8.48 per unit
Total
Per Unit
Sales
$648,000
$16.20
Less variable expenses
339,200
8.48
Contribution margin
308,800
$ 7.72
Less fixed expenses
175,000
Operating income
$133,800
C. New sales price: $15.00 × .95 = $14.25 per unit
New sales volume: 40,000 × 1.15 = 46,000 units
Total
Per Unit
Sales
$655,500
$14.25
Less variable expenses
368,000
8.00
Contribution margin
287,500
$ 6.25
Less fixed expenses
175,000
Operating income
$112,500
16
Project 3 Review and Practice Guide
Back to Table of Contents
D. New fixed expenses: $175,000 + $40,000 = $215,000
Total
Per Unit
Sales
$600,000
$15.00
Variable expenses
320,000
8.00
Contribution margin
280,000
$ 7.00
Fixed expenses
215,000
Operating income
$ 65,000
E. New sales price: $15.00 × 1.12 = $16.80
New variable cost per unit: $8.00 × 1.15 = $9.20
New fixed expenses: $175,000 + $30,000 = $205,000
New sales volume: 40,000 × .85 = 34,000 units
Total
Per Unit
Sales
$571,200
$16.80
Variable expenses
312,800
9.20
Contribution margin
258,400
$ 7.60
Fixed expenses
205,000
Operating income
$ 53,400
Chapter 7: Practice Exercises
(in Davis, 2015)
• Unit 7.1 Practice Exercise
• Unit 7.2 Practice Exercise
• Unit 7.3 Practice Exercise
(Practice exercises follow the Self Study questions.)
Exercise: Traditional & Activity-Based Costing
Determining Product Costs
Your company produces Product A and Product B. Total overhead costs traditionally have been allocated
based on direct labor hours. Here are the cost pools and cost drivers based on ABC. From now on,
general costs will not be allocated to products.
17
Project 3 Review and Practice Guide
Back to Table of Contents
Activity Pool
Department Cost
Binding
297,000
Printing
955,500
Design
234,000
General
727,500
Total overhead costs
$2,214,000
Cost Driver
Number of units
Machine hours
Change orders
None
Other information is as follows:
Units
Direct materials cost per unit
Direct labor cost per unit
Direct labor hours
Machine hours
Change orders
Produce A
62,500
3.00
4.00
30,000
150,000
1,500
Product B
20,000
10.00
8.00
19,200
144,000
2,400
Required
A. Determine the unit product cost for Product A and Product B using the traditional costing
system.
B. Determine the unit product cost for Product A and Product B using the ABC system.
C. Show that general cost is the difference between the total overhead costs allocated to products
under the traditional system and the total cost allocated to products under ABC.
Solution to Exercise
A.
Predetermined OH rate =
$2,214,00
(30,000 DLH + 19,200 DLH)
Product A
Direct Materials
$3.00
Direct Labor
4.00
Overhead 30,000DLH × $45/DLH=
21.60
62,500 Product A
Total Unit Cost
$28.60
18
= $45/DLH
Product B
$10.00
8.00
19,200DLH × $45/DLH=
43.20
20,000 Product B
$61.20
Project 3 Review and Practice Guide
Back to Table of Contents
B. ABC Rates
Binding:
Printing:
Design:
$297,000
(62,500 + 20,000 Product A)
$955,500
(150,000 + 144,000) machine hours
$234,000
(1,500 + 2,400) change orders
= $3.60/unit
= $3.25/machine hour
= $60/change order
ABC overhead allocation
Products A
Binding
Printing
Design
Total overhead
Units produce
Overhead per unit
Products B
Binding
Printing
Design
Total overhead
Units produced
Overhead per unit
62,500 tablet × $3.60/unit
150,000 MH × $3.25/MH
1,500 change orders × $60/change order
$225,500
487,500
90,000
802,500
62,500
$12.84
20,000 books × $3.60/unit
144,000 MH × $3.25/MH
2,499 change orders × $60/change order
$72,000
468,000
144,000
684,000
20,000
$34.20
ABC unit cost
Direct Materials
Direct Labor
Overhead
Total Unit Cost
Product A
$ 3.00
$ 4.00
12.84
$19.84
19
Product B
$ 10.00
8.00
34.20
$ 52.20
Project 3 Review and Practice Guide
Back to Table of Contents
C.
OH allocated to Product A using traditional DLH
$1,350,000
(30,000 DLH × $45/DLH)
OH allocated to Product B using traditional DLH
(19,200 DLH × $45/DLH)
864,000
Total allocated OH using traditional DLH
$2,214,000
OH allocated to Product A using ABC
802,500
OH allocated to Product B using ABC
684,000
Total allocated OH using ABC
1,486,500
Difference in allocated overhead
$ 727,500
References
Jiambalvo, J. (1994). Managerial accounting 4th ed. Wiley.
Lumen Learning. (n.d.). Relevant range. Module 6: cost behavior patterns. Accounting for managers.
Back to Table of Contents
20
Revised on 1/29/2024
In Project 3 you will analyze managerial and costing information to improve the company’s EBITDA. You will use what you have
based costing and cost-volume-profit analysis to make recommendations about LGI’s operational productivity.
Step 1: Use the information you calculated in Project 2 Tab 3 Profit Maximization to populate has Columns C to H in Question
Step 2: Assume the company operates for 12 months of the year convert the information you populated in Columns C to H to
M for both the Standard and Deluxe Boxes.
Step 3: Assume for this project that the only variable costs in this company are materials and labor. All other overhead costs w
Note: The Total Fixed Cost of 156 is supposed to be constant for the production of total boxes including Standard Box and Delux
fixed costs of 156 are allocated based on a lump sum method (arbitrarily using a monthly allocation basis). On Tab 2, the total fi
volume (the number of boxes sold). On Tab 3, the total fixed costs of 156 are allocated based on the cost drivers.
Question 1
Standard boxes sold per month
(millions)
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
10.5
11
11.5
12
12.5
13
13.5
14
Revenue (price x
volume)
Price
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
22.00
21.60
21.20
20.80
20.40
20.00
19.60
19.20
18.80
18.40
18.00
17.60
17.20
16.80
16.40
16.00
15.60
15.20
14.80
$
Variable Cost per
Standard box
110.00 $
10.00
Deluxe Boxes Profit Maximization ( Columns C to H obtain from Project 2)
Deluxe boxes sold per month
(millions)
1
1.2
1.35
1.5
1.55
1.6
1.65
1.7
1.75
1.8
Revenue (price x
volume)
Price
$
$
$
$
$
$
$
$
$
$
30.00
29.50
29.00
28.50
28.00
27.50
27.00
26.50
26.00
25.50
$
$
$
$
$
$
$
$
$
$
Variable Cost per
Deluxe box
30.00 $
35.40
39.15
42.75
43.40
44.00
44.55
45.05
45.50
45.90
20.00
1.85
1.9
1.95
2
2.05
2.1
2.15
2.2
2.25
$
$
$
$
$
$
$
$
$
25.00
24.50
24.00
23.50
23.00
22.50
22.00
21.50
21.00
$
$
$
$
$
$
$
$
$
46.25
46.55
46.80
47.00
47.15
47.25
47.30
47.30
47.25
Question 2
The Company currently operates by selling 9 Million Standard Boxes and 1.5 Million Deluxe Boxes per month.
The CEO is convinced that under the current cost allocation which allocates fixed costs on a lump sum method (arbitrarily using
basis) , Deluxe boxes is not contributing much to company profit and with recent threats from environmental groups thinks th
consider to no longer produce Deluxe Boxes.
Required (place answers in the in the Grey Spaces provided)
1)Calculate how much profit each product makes?
2)Calculate the Profit percentage (based on sales)for each product.
HINT Use the annual information calculated in Question 1 to complete Question 2
Standard Boxes
Deluxe Boxes
Total
$ (in millions)
$ (in millions)
$ (in millions)
Number Of Boxes (in Millions
per month )
Volume per year ( millions)
Revenue
Less: Variable Costs
Equals: Contribution Margin
Less: Fixed Costs
Equals: Operating Profit
Contribution Margin Ratio %
Operating Profit % (based on
revenue)
e company’s EBITDA. You will use what you have learned about cost behavior and apply activityLGI’s operational productivity.
on to populate has Columns C to H in Question 1.
nformation you populated in Columns C to H to annual information and populate Columns I to
materials and labor. All other overhead costs will be assumed to be fixed.
of total boxes including Standard Box and Deluxe Box on Tabs 1, 2, and 3. On Tab 1, the total
a monthly allocation basis). On Tab 2, the total fixed costs of 156 are allocated based on the sales
ocated based on the cost drivers.
Annual information (
Variable Cost
Total Cost
Fixed cost per
Monthly Profit (revenue Annual Revenue
(cost per unit x
(Fixed +
month (millions)
all costs)
(millions)
volume)
Variable)
$
50.00 $
10.00 $
60.00 $
50.00
Annual information (
Variable Cost
Total Cost
Fixed cost per
Monthly Profit (revenue Annual Revenue
(cost per unit x
(Fixed +
month (millions)
all costs)
(millions)
volume)
Variable)
$
20.00 $
3.00 $
23.00 $
7.00
lion Deluxe Boxes per month.
d costs on a lump sum method (arbitrarily using a monthly allocation
nt threats from environmental groups thinks that they should
on 2
Annual information ( for 12 Months)
Annual VC
(millions)
Annual FC
(millions)
Annual Total Costs
(millions)
Annual Profit
Annual information ( for 12 Months)
Annual VC
(millions)
Annual FC
(millions)
Annual Total Costs Annual Profit
(millions)
(millions)
Question 1
A new intern thinks that the profit for Deluxe Boxes are higher than those calculated using the lump sum method (as in Tab1).
profits using an allocation method for fixed costs based on sales volume( the number of boxes sold) to split the Fixed Costs b
Boxes.
Required: (Complete the grey spaces):
1) First calculate the percentage portion each product has of the total sales volume
1) How much fixed costs are allocated to each product based on the sales volume method suggested by the intern?
2) Also calculate the new operating profit percentage (based on sales) for each product.
Standard Boxes
Volumes (per Month)
Volumes per year ( millions)
Calculate the portion of Sales Volume (percentage sales volume)
Calculate how much fixed costs are allocated to each product.
New Profit
Revenue
Less VC
Contribution Margin
Less Fixed Costs
Equals: Operating Profit
Operating Profit % (based on Revenue)
9
108
Standard Boxes
($Millions)
ated using the lump sum method (as in Tab1). The intern suggests calculating the
umber of boxes sold) to split the Fixed Costs between the Standard and Deluxe
me
e method suggested by the intern?
roduct.
Deluxe Boxes
Total
1.5
18
Deluxe Boxes
($Millions)
10.5
126
Total Boxes($
Millions)
Question 1
LGI’s production managers think that the profit on Deluxe Boxes are much lower than the Intern suggested after recently atten
ABC costing. They propose allocating the total fixed costs between Standard and Deluxe boxes based on this method . They col
break up of the total costs in Table 1 below. How much overhead would be allocated to Standard and Deluxe Boxes ( in total an
calculations. Complete the grey spaces
Table 1
Manufacturing overhead
$ Amount (millions)
Cost driver
Depreciation
$47.00
Square feet
7,000
Maintenance
$50.00
Direct Labor Hours
1,000
Purchase order processing
$9
Number of purchases
orders
500
Inspection
$34
Number of employees
1,000
Indirect Materials
Supervision
$5.00
$7.00
Labor Hours
#of inspections
1,000
200
Supplies
$4.00
Units manufactured
1,000
Total Allocated costs
$156.00
Number of boxes per year
Standard Box
108
Allocated Cost per Box
Question 1
Standard Boxes
Revenue
Subtract: Variable Costs
Equals: Contribution
Subtract: Fixed Costs
Equals: Operating Profit
Operating Profit % (based
on Revenue)
Deluxe Boxes
Total
than the Intern suggested after recently attending a course at UMGC where they learned about
Deluxe boxes based on this method . They collected information about the cost drivers and the
ated to Standard and Deluxe Boxes ( in total and per unit) using this method? Show all supporting
Deluxe Box
80,000
9,000
4,500
6000
9,000
800
9,000
18
Totals of Drivers
Cost for Standard
Boxes
Total Cost Check (must
Cost of Deluxe Boxes
agree to Column
B7:B14)
Question 1
The sustainability manager is concerned about the long term sustainability implications of Deluxe Boxes on the environment an
of a Sustainable Deluxe Box. If the company switches the current quantity of Deluxe Boxes sold, to Sustainable Deluxe Boxes,
1)The Sustainable Deluxe Boxes could be made cheaper, and the sustainability manager believes that the company could sell the
substantially higher profit than they ever did on the Deluxe Boxes. Based on knowledge of price elasticity of demand s/he/the
volumes. The marketing manager believes that a lower selling price will also entice current Deluxe Box customers to accept th
2)The new Sustainable Deluxe Boxes will still attract 60% of the fixed costs allocated to the old Deluxe Box under the ABC metho
3)The number of boxes sold will not currently be affected by this new selling price, as this is a very select group of customers for
4)The Standard Box costs and revenue will remain the same as that calculated under the ABC method
5)In order to help overall profit, the variable costs per sustainable Deluxe box will be reduced to $11 per box vice the original $2
Required (complete the grey spaces)
1)Determine the profit and profit percentage for the Standard and Sustainable Deluxe Boxes
Quantity
Selling price per unit
Revenue
Subtract: Variable Costs
Equals: Contribution Margin
Subtract: Fixed Costs
Equals: Operating Profit
Operating Profit % (based on revenue)
Contribution Margin %
$
Sustainable Deluxe Boxes
Standard Boxes
108.00
18.00
18.80 $
23.00
Question 2
The CEO is not convinced and still thinks that no form of a Deluxe Box, sustainable or not should be produced. The CEO indicat
Sustainable Deluxe Boxes will only be considered if it can achieve at least the same operating profit percentage for the Sustain
indicated under the ABC costing method for Standard Boxes (See Tab 3) .
Required (Complete the grey spaces).
1)How much additional operating profit (in percentage) will be required from the Sustainable Deluxe Boxes to meet the same p
Using Operating Profit %
Using Gross Profit %
Required profit
Subtract: Existing profit
Equals: Difference in additional profit
required
Question 3
Required: Work out the percentage that the company should mark up on the costs of Sustainable Deluxe Boxes to achieve the
the grey spaces)
Revenue %
Subtract: Required Operating Profit
Equals: Cost %
Using Operating Profit %
100%
Using Gross Profit %
Question 4
Assume the company can still sell the same quantity of the Sustainable Deluxe Boxes as for the Deluxe Boxes
Required (Complete the grey spaces)
Use the percentage calculated in Question 3 to determine at which price the company should sell the Sustainable Deluxe Boxes
Standard Boxes.
Total ($)
Using Contribution Margin %
Total ($)
Variable Costs
Plus : Fixed Costs
Equals: Total Costs
Determine Revenue
Units sold (per year)
Sales Price per unit
Question 5
Required: Prove that your calculation in Q 4 is correct. Complete the grey boxes.
Proof:
Revenue
Subtract: Variable Costs
Total ($)
Using Contribution Margin %
Total ($)
Equals: Contribution Margin
Subtract: Fixed Costs
Operating Profit
Operating Profit %
Question 6
The marketing manger is concerned that the change could have a significant impact on sales as customers may see the sustainab
inferior product for which they still have to pay only a little bit less than the original price of the Deluxe Boxes. How many boxe
company have to sell to break even on the new Sustainable Deluxe Boxes based on the new selling price? Complete the grey bo
$ Per unit Sustainable
Deluxe Boxes
Selling price
Less: Variable costs
Unit Contribution Magin
Fixed Costs
Breakeven Quantity
Break-even Value
Using Gross Profit %
of Deluxe Boxes on the environment and suggests changing to sustainable materials for the production
oxes sold, to Sustainable Deluxe Boxes, there will be some cost implications.
believes that the company could sell the Sustainable Deluxe Boxes for $23 per box and end up making
e of price elasticity of demand s/he/they suggest that it may in time even result in much higher sales
rrent Deluxe Box customers to accept the switch over to the Sustainable Deluxe Box.
he old Deluxe Box under the ABC method used in tab 3.
is is a very select group of customers for LGI.
ABC method
duced to $11 per box vice the original $20 per box.
oxes
Total
126.00
ot should be produced. The CEO indicates that consideration of the production of a
erating profit percentage for the Sustainable Deluxe Boxes as the operating profit percentage
nable Deluxe Boxes to meet the same percentage as the Standard Boxes are generating,
See Question 1
See Q 1 above
ustainable Deluxe Boxes to achieve the same profit % as for the Standard boxes. (Complete
for the Deluxe Boxes
hould sell the Sustainable Deluxe Boxes to reach the same profit percentage as for the
ales as customers may see the sustainable boxes as an
ce of the Deluxe Boxes. How many boxes would the
new selling price? Complete the grey boxes.
Project 3 Questions – Report Template
Instructions: Answer the five questions below. They focus entirely on improving the EBITDA
of Largo Global Inc. (LGI) based on the information provided in the Excel workbook. Support
your reasoning from the readings in Project 3, Step 1, and the discussion in Project 3, Step 3.
Be sure to cite your sources in APA 7th ed. style.
Provide a detailed response below each question. Use 12-point font and double spacing.
Maintain the existing margins in this document. Your final Word document, including the
questions, should be at most five pages. Include a title page in addition to the five pages.
Any tables and graphs you include are excluded from the five-page limit. Name your
document as follows: P3_Final_lastname_Report_date.
You must address all five questions and use the information on all tabs.
You are strongly encouraged to exceed the requirements by refining your analysis. Consider
other tools and techniques that were discussed in the required and recommended reading
for Project 3. This means adding an in-depth explanation of what happened in the year for
which data was provided to make precise recommendations to LGI.
Title Page
Name
Course and section number
Faculty name
Submission date
Questions:
1. How much of the fixed costs were allocated between the Standard and Deluxe Boxes based on the
Lumpsum Analysis Method? Is the CEO correct that the Deluxe Box is not contributing much to the
company’s operating profit? Please elaborate on your answer and include evidence from Tab 1 of
the Excel workbook.
[insert your answer here]
2. The intern suggested splitting the costs based on sales volumes, as you have done in the
calculations performed in Tab 2. Explain the impact of the calculation performed in Tab 2. In your
discussions, please explain why the answer has changed from the calculations you performed in Tab
1. It also indicates the benefit of accurate costing when trying to improve operating profit margins.
[insert your answer here]
3. Based on the calculations in Tab 3 using ABC, comment on the operating profits made for each
product. Explain in your report why operating profits have changed under ABC analysis. Also,
indicate which of the systems – the traditional systems (using lumpsum or volume-based cost
allocation in Tab 1 and Tab 2) or the ABC systems (Tab 3) provide the best answers for decisionmaking to improve cost management to improve operating profit.
[insert your answer here]
4. The sustainability manager is concerned about the Anti-Deluxe Action group’s impact on the
company and suggested changing the materials and process of making the Deluxe Boxes. As the
process of making the Sustainable Deluxe Boxes will be less intensive, a suggestion is made that the
selling price for the Sustainable Deluxe Boxes could be $23 per unit. Discuss whether changing the
price to $23 is viable for LGI. Provide evidence from the Excel workbook, Tab 4.
[insert your answer here]
5. If Largo Global Inc. decides to sell the Sustainable Deluxe Boxes at the price the CEO demands to
maintain the same profit percentage as Standard Boxes, do you think the new price calculated in Tab
4 is viable? Why is it essential for LGI to know what their Break-even quantity is? Also, indicate which
other (non-numerical information) should be considered when pursuing the Sustainable Deluxe Box
option.
[insert your answer here]
Revised on 1/29/2024
In Project 3 you will analyze managerial and costing information to improve the company’s EBITDA. You will use what you have
based costing and cost-volume-profit analysis to make recommendations about LGI’s operational productivity.
Step 1: Use the information you calculated in Project 2 Tab 3 Profit Maximization to populate has Columns C to H in Question
Step 2: Assume the company operates for 12 months of the year convert the information you populated in Columns C to H to
M for both the Standard and Deluxe Boxes.
Step 3: Assume for this project that the only variable costs in this company are materials and labor. All other overhead costs w
Note: The Total Fixed Cost of 156 is supposed to be constant for the production of total boxes including Standard Box and Delux
fixed costs of 156 are allocated based on a lump sum method (arbitrarily using a monthly allocation basis). On Tab 2, the total fi
volume (the number of boxes sold). On Tab 3, the total fixed costs of 156 are allocated based on the cost drivers.
Question 1
Standard boxes sold per month
(millions)
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
10.5
11
11.5
12
12.5
13
13.5
14
Revenue (price x
volume)
Price
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
22.00
21.60
21.20
20.80
20.40
20.00
19.60
19.20
18.80
18.40
18.00
17.60
17.20
16.80
16.40
16.00
15.60
15.20
14.80
$
Variable Cost per
Standard box
110.00 $
10.00
Deluxe Boxes Profit Maximization ( Columns C to H obtain from Project 2)
Deluxe boxes sold per month
(millions)
1
1.2
1.35
1.5
1.55
1.6
1.65
1.7
1.75
1.8
Revenue (price x
volume)
Price
$
$
$
$
$
$
$
$
$
$
30.00
29.50
29.00
28.50
28.00
27.50
27.00
26.50
26.00
25.50
$
$
$
$
$
$
$
$
$
$
Variable Cost per
Deluxe box
30.00 $
35.40
39.15
42.75
43.40
44.00
44.55
45.05
45.50
45.90
20.00
1.85
1.9
1.95
2
2.05
2.1
2.15
2.2
2.25
$
$
$
$
$
$
$
$
$
25.00
24.50
24.00
23.50
23.00
22.50
22.00
21.50
21.00
$
$
$
$
$
$
$
$
$
46.25
46.55
46.80
47.00
47.15
47.25
47.30
47.30
47.25
Question 2
The Company currently operates by selling 9 Million Standard Boxes and 1.5 Million Deluxe Boxes per month.
The CEO is convinced that under the current cost allocation which allocates fixed costs on a lump sum method (arbitrarily using
basis) , Deluxe boxes is not contributing much to company profit and with recent threats from environmental groups thinks th
consider to no longer produce Deluxe Boxes.
Required (place answers in the in the Grey Spaces provided)
1)Calculate how much profit each product makes?
2)Calculate the Profit percentage (based on sales)for each product.
HINT Use the annual information calculated in Question 1 to complete Question 2
Standard Boxes
Deluxe Boxes
Total
$ (in millions)
$ (in millions)
$ (in millions)
Number Of Boxes (in Millions
per month )
Volume per year ( millions)
Revenue
Less: Variable Costs
Equals: Contribution Margin
Less: Fixed Costs
Equals: Operating Profit
Contribution Margin Ratio %
Operating Profit % (based on
revenue)
e company’s EBITDA. You will use what you have learned about cost behavior and apply activityLGI’s operational productivity.
on to populate has Columns C to H in Question 1.
nformation you populated in Columns C to H to annual information and populate Columns I to
materials and labor. All other overhead costs will be assumed to be fixed.
of total boxes including Standard Box and Deluxe Box on Tabs 1, 2, and 3. On Tab 1, the total
a monthly allocation basis). On Tab 2, the total fixed costs of 156 are allocated based on the sales
ocated based on the cost drivers.
Annual information (
Variable Cost
Total Cost
Fixed cost per
Monthly Profit (revenue Annual Revenue
(cost per unit x
(Fixed +
month (millions)
all costs)
(millions)
volume)
Variable)
$
50.00 $
10.00 $
60.00 $
50.00
Annual information (
Variable Cost
Total Cost
Fixed cost per
Monthly Profit (revenue Annual Revenue
(cost per unit x
(Fixed +
month (millions)
all costs)
(millions)
volume)
Variable)
$
20.00 $
3.00 $
23.00 $
7.00
lion Deluxe Boxes per month.
d costs on a lump sum method (arbitrarily using a monthly allocation
nt threats from environmental groups thinks that they should
on 2
Annual information ( for 12 Months)
Annual VC
(millions)
Annual FC
(millions)
Annual Total Costs
(millions)
Annual Profit
Annual information ( for 12 Months)
Annual VC
(millions)
Annual FC
(millions)
Annual Total Costs Annual Profit
(millions)
(millions)
Question 1
A new intern thinks that the profit for Deluxe Boxes are higher than those calculated using the lump sum method (as in Tab1).
profits using an allocation method for fixed costs based on sales volume( the number of boxes sold) to split the Fixed Costs b
Boxes.
Required: (Complete the grey spaces):
1) First calculate the percentage portion each product has of the total sales volume
1) How much fixed costs are allocated to each product based on the sales volume method suggested by the intern?
2) Also calculate the new operating profit percentage (based on sales) for each product.
Standard Boxes
Volumes (per Month)
Volumes per year ( millions)
Calculate the portion of Sales Volume (percentage sales volume)
Calculate how much fixed costs are allocated to each product.
New Profit
Revenue
Less VC
Contribution Margin
Less Fixed Costs
Equals: Operating Profit
Operating Profit % (based on Revenue)
9
108
Standard Boxes
($Millions)
ated using the lump sum method (as in Tab1). The intern suggests calculating the
umber of boxes sold) to split the Fixed Costs between the Standard and Deluxe
me
e method suggested by the intern?
roduct.
Deluxe Boxes
Total
1.5
18
Deluxe Boxes
($Millions)
10.5
126
Total Boxes($
Millions)
Question 1
LGI’s production managers think that the profit on Deluxe Boxes are much lower than the Intern suggested after recently atten
ABC costing. They propose allocating the total fixed costs between Standard and Deluxe boxes based on this method . They col
break up of the total costs in Table 1 below. How much overhead would be allocated to Standard and Deluxe Boxes ( in total an
calculations. Complete the grey spaces
Table 1
Manufacturing overhead
$ Amount (millions)
Cost driver
Depreciation
$47.00
Square feet
7,000
Maintenance
$50.00
Direct Labor Hours
1,000
Purchase order processing
$9
Number of purchases
orders
500
Inspection
$34
Number of employees
1,000
Indirect Materials
Supervision
$5.00
$7.00
Labor Hours
#of inspections
1,000
200
Supplies
$4.00
Units manufactured
1,000
Total Allocated costs
$156.00
Number of boxes per year
Standard Box
108
Allocated Cost per Box
Question 1
Standard Boxes
Revenue
Subtract: Variable Costs
Equals: Contribution
Subtract: Fixed Costs
Equals: Operating Profit
Operating Profit % (based
on Revenue)
Deluxe Boxes
Total
than the Intern suggested after recently attending a course at UMGC where they learned about
Deluxe boxes based on this method . They collected information about the cost drivers and the
ated to Standard and Deluxe Boxes ( in total and per unit) using this method? Show all supporting
Deluxe Box
80,000
9,000
4,500
6000
9,000
800
9,000
18
Totals of Drivers
Cost for Standard
Boxes
Total Cost Check (must
Cost of Deluxe Boxes
agree to Column
B7:B14)
Question 1
The sustainability manager is concerned about the long term sustainability implications of Deluxe Boxes on the environment an
of a Sustainable Deluxe Box. If the company switches the current quantity of Deluxe Boxes sold, to Sustainable Deluxe Boxes,
1)The Sustainable Deluxe Boxes could be made cheaper, and the sustainability manager believes that the company could sell the
substantially higher profit than they ever did on the Deluxe Boxes. Based on knowledge of price elasticity of demand s/he/the
volumes. The marketing manager believes that a lower selling price will also entice current Deluxe Box customers to accept th
2)The new Sustainable Deluxe Boxes will still attract 60% of the fixed costs allocated to the old Deluxe Box under the ABC metho
3)The number of boxes sold will not currently be affected by this new selling price, as this is a very select group of customers for
4)The Standard Box costs and revenue will remain the same as that calculated under the ABC method
5)In order to help overall profit, the variable costs per sustainable Deluxe box will be reduced to $11 per box vice the original $2
Required (complete the grey spaces)
1)Determine the profit and profit percentage for the Standard and Sustainable Deluxe Boxes
Quantity
Selling price per unit
Revenue
Subtract: Variable Costs
Equals: Contribution Margin
Subtract: Fixed Costs
Equals: Operating Profit
Operating Profit % (based on revenue)
Contribution Margin %
$
Sustainable Deluxe Boxes
Standard Boxes
108.00
18.00
18.80 $
23.00
Question 2
The CEO is not convinced and still thinks that no form of a Deluxe Box, sustainable or not should be produced. The CEO indicat
Sustainable Deluxe Boxes will only be considered if it can achieve at least the same operating profit percentage for the Sustain
indicated under the ABC costing method for Standard Boxes (See Tab 3) .
Required (Complete the grey spaces).
1)How much additional operating profit (in percentage) will be required from the Sustainable Deluxe Boxes to meet the same p
Using Operating Profit %
Using Gross Profit %
Required profit
Subtract: Existing profit
Equals: Difference in additional profit
required
Question 3
Required: Work out the percentage that the company should mark up on the costs of Sustainable Deluxe Boxes to achieve the
the grey spaces)
Revenue %
Subtract: Required Operating Profit
Equals: Cost %
Using Operating Profit %
100%
Using Gross Profit %
Question 4
Assume the company can still sell the same quantity of the Sustainable Deluxe Boxes as for the Deluxe Boxes
Required (Complete the grey spaces)
Use the percentage calculated in Question 3 to determine at which price the company should sell the Sustainable Deluxe Boxes
Standard Boxes.
Total ($)
Using Contribution Margin %
Total ($)
Variable Costs
Plus : Fixed Costs
Equals: Total Costs
Determine Revenue
Units sold (per year)
Sales Price per unit
Question 5
Required: Prove that your calculation in Q 4 is correct. Complete the grey boxes.
Proof:
Revenue
Subtract: Variable Costs
Total ($)
Using Contribution Margin %
Total ($)
Equals: Contribution Margin
Subtract: Fixed Costs
Operating Profit
Operating Profit %
Question 6
The marketing manger is concerned that the change could have a significant impact on sales as customers may see the sustainab
inferior product for which they still have to pay only a little bit less than the original price of the Deluxe Boxes. How many boxe
company have to sell to break even on the new Sustainable Deluxe Boxes based on the new selling price? Complete the grey bo
$ Per unit Sustainable
Deluxe Boxes
Selling price
Less: Variable costs
Unit Contribution Magin
Fixed Costs
Breakeven Quantity
Break-even Value
Using Gross Profit %
of Deluxe Boxes on the environment and suggests changing to sustainable materials for the production
oxes sold, to Sustainable Deluxe Boxes, there will be some cost implications.
believes that the company could sell the Sustainable Deluxe Boxes for $23 per box and end up making
e of price elasticity of demand s/he/they suggest that it may in time even result in much higher sales
rrent Deluxe Box customers to accept the switch over to the Sustainable Deluxe Box.
he old Deluxe Box under the ABC method used in tab 3.
is is a very select group of customers for LGI.
ABC method
duced to $11 per box vice the original $20 per box.
oxes
Total
126.00
ot should be produced. The CEO indicates that consideration of the production of a
erating profit percentage for the Sustainable Deluxe Boxes as the operating profit percentage
nable Deluxe Boxes to meet the same percentage as the Standard Boxes are generating,
See Question 1
See Q 1 above
ustainable Deluxe Boxes to achieve the same profit % as for the Standard boxes. (Complete
for the Deluxe Boxes
hould sell the Sustainable Deluxe Boxes to reach the same profit percentage as for the
ales as customers may see the sustainable boxes as an
ce of the Deluxe Boxes. How many boxes would the
new selling price? Complete the grey boxes.
Project 3: Review and
Practice Guide
UMGC
MBA 620: Financial
Decision Making
Project 3: Review and
Practice Guide
Costing and Cost Allocations
Contents
Topic 1: Introduction to Managerial Accounting ……………………………………………………………………………… 3
Managerial Accounting …………………………………………………………………………………………………………….. 3
The Process …………………………………………………………………………………………………………………………….. 3
Information for Planning…………………………………………………………………………………………………………… 3
Managerial vs Financial Accounting……………………………………………………………………………………………. 4
Topic 2: Cost Terminology ……………………………………………………………………………………………………………. 5
Cost Behavior ………………………………………………………………………………………………………………………….. 5
Cost Terminology …………………………………………………………………………………………………………………….. 5
Variable Costs vs Fixed Costs …………………………………………………………………………………………………….. 6
Direct Labor…………………………………………………………………………………………………………………………….. 6
Mixed Costs …………………………………………………………………………………………………………………………….. 6
Step Costs……………………………………………………………………………………………………………………………….. 6
Identifying Types of Costs …………………………………………………………………………………………………………. 7
Topic 3: Cost-Volume-Profit Analysis ……………………………………………………………………………………………… 8
Uses for Cost-Volume-Price Analysis ………………………………………………………………………………………….. 8
Profit Equation & Breakeven …………………………………………………………………………………………………….. 8
Example ………………………………………………………………………………………………………………………………….. 8
Margin of Safety………………………………………………………………………………………………………………………. 8
Contribution Margin ………………………………………………………………………………………………………………… 9
What-If Analysis ………………………………………………………………………………………………………………………. 9
Assumptions in CVP Analysis …………………………………………………………………………………………………….. 9
Topic 4: Cost Allocation………………………………………………………………………………………………………………. 10
The Basics of Cost Allocation …………………………………………………………………………………………………… 10
1 – Purposes of Cost Allocation ………………………………………………………………………………………………… 10
2 – Process of Cost Allocation…………………………………………………………………………………………………… 10
3 – Direct and Indirect Costs ……………………………………………………………………………………………………. 11
Direct Method ……………………………………………………………………………………………………………………….. 11
Example: Boise Furniture …………………………………………………………………………………………………….. 11
Example: Boise Furniture (cont’d.) ……………………………………………………………………………………….. 12
Example: A Banking Organization …………………………………………………………………………………………. 12
4 – Problems With Cost Allocation ……………………………………………………………………………………………. 12
Unitized vs Lump-Sum Allocation …………………………………………………………………………………………….. 13
Production Volume and Overhead …………………………………………………………………………………………… 13
Topic 5: Activity-Based Costing ……………………………………………………………………………………………………. 14
Purpose of Activity-Based Costing ……………………………………………………………………………………………. 14
The ABC Steps ……………………………………………………………………………………………………………………….. 14
Benefits of ABC ……………………………………………………………………………………………………………………… 14
Limitations of ABC ………………………………………………………………………………………………………………….. 14
Problems/Exercises ……………………………………………………………………………………………………………………. 15
What to Do ……………………………………………………………………………………………………………………………. 15
Chapter 3: Practice Exercises …………………………………………………………………………………………………… 15
Exercise: Cost-Volume-Profit Analysis ………………………………………………………………………………………. 15
Solution to Exercise………………………………………………………………………………………………………………… 16
Chapter 7: Practice Exercises …………………………………………………………………………………………………… 17
Exercise: Traditional & Activity-Based Costing …………………………………………………………………………… 17
Solution to Exercise………………………………………………………………………………………………………………… 18
References ……………………………………………………………………………………………………………………………. 20
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 1: Introduction to Managerial Accounting
Managerial Accounting
Managerial accounting is designed for internal users for planning, control, and decision making.
The Process
Decision making, planning, and control are achieved through budgeting.
Plan
•Action taken to implement plan
Results
•Comparison of planned and actual results
Evaluation
•Decisions to reward or punish managers
•Decisions to change operations or revise plans
Based on information from Jiambalvo, 1994
Information for Planning
Budgets for planning
•
Profit budget
o Indicates planned income
•
Cash flow budget
o Indicates planned cash inflows and outflows
•
Production budget
o Indicates the planned quantity of production and expected costs
3
Project 3 Review and Practice Guide
Back to Table of Contents
Managerial vs Financial Accounting
Managerial
Financial
1. Users
Internal
External
2. GAAP
May deviate
Must comply
3. Information
More detailed, emphasis on Summary, emphasis on
segments
total company
presented
4. Nonmonetary
information
Emphasized
Not emphasized
5. Time focus
Future oriented
Generally historical
Based on information from Jiambalvo, 1994
4
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 2: Cost Terminology
Cost Behavior
The way costs impact a company and the way they are classified varies by the type of business.
Common types of costs
• Controllable vs. noncontrollable costs
• Sunk costs
• Opportunity costs
• Variable vs fixed costs
• Direct and indirect costs
• Mixed costs
• Step costs
Cost Terminology
Controllable & Noncontrollable Costs
• A manager can influence controllable costs but not noncontrollable costs.
• Manager should not be evaluated against noncontrollable costs.
Sunk Costs
• Costs incurred in the past
• Not relevant to present decisions
Opportunity Costs
• Values of benefits foregone when selecting one alternative over another
Variable vs Fixed Costs
• Variable costs change proportionately with changes in volume or activity; fixed costs do not.
Direct and Indirect Costs
• Direct costs are directly traceable to a product, activity, or department; indirect costs are not.
Based on information from Jiambalvo, 1994
5
Project 3 Review and Practice Guide
Back to Table of Contents
Variable Costs vs Fixed Costs
Fixed costs too high? Make them variable!
Examples:
• Incentive compensation
• Outsourcing
Direct Labor
Questions to consider
Is direct labor always a variable cost?
Are you willing to lay off workers when production declines?
• What if the decline is temporary?
• What if the decline is permanent?
Does the degree of automation make a difference in whether direct labor is fixed or variable?
Mixed Costs
Mixed costs include both variable and fixed elements.
Examples:
Salesperson with base salary (fixed) and commission on sales (variable)
•
•
Base salary included with fixed costs
Commission included with variable costs
Step Costs
Step costs are fixed for a range of output but increase when the upper bound of a range is exceeded.
•
When budgeting for a specific range, be sure to use the correct cost
Example:
A company adds third production shift. The cost increase includes a production supervisor’s salary.
6
Project 3 Review and Practice Guide
Back to Table of Contents
Identifying Types of Costs
Which type of cost is this?
Fixed cost of a production facility: As the number of
units produced increases, the fixed production cost
remains constant.
As the number of units produced increases, so
does the variable production cost.
Mixed cost: The total cost line intersects the yaxis at $100,000, representing the fixed
component of the mixed cost
Step costs are fixed over only a small range of
activity.
Based on information from Jiambalvo, 1994
7
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 3: Cost-Volume-Profit Analysis
Uses for Cost-Volume-Price Analysis
CVP is the analysis of how costs and profit change when volume changes.
It is used for:
• Planning for next year—How much should be produced? What are the projected cost and
profit?
• Control—A production cost has increased unexpectedly. Why? Who should be responsible for
controlling it?
• Decision making—If the price of the product were decreased or increased, what would the
profit be?
Profit Equation & Breakeven
The Profit Equation
profit = (selling price × Q) − (variable cost × Q) − total fixed cost = (selling price − variable cost)
× Q − total fixed cost
Breakeven—the point at which costs and income are equal
• Number of units (QBEP) sold allows a company to neither earn a profit nor incur a loss
•
$0 = selling price × QBEP − variable cost × QBEP − total fixed cost
Example
Here are the price and costs related to a wedding cake business (Jiambalvo, 1994):
• Each cake sells for $500.
• The variable cost of baking the cakes is $200.
• The fixed cost per month is $6,000.
1. How many cakes must be sold to break even?
number of cakes × $500 − (number of cakes × $200 + $6,000) = $0
number of cakes = $6,000 / ($500 − $200) = 20 cakes
2. How many cakes must be sold to earn a profit of $9,000?
number of cakes × $500 − (number of cakes × $200 + $6,000) = $9,000
number of cakes = ($9,000 + $6,000) / ($500 − $200) = 50 cakes
Margin of Safety
Margin of safety is a measurement of how close expected revenue is to the breakeven level.
margin of safety = expected revenue − breakeven revenue
Example:
If the wedding cake business expects to sell 35 cakes per month, what is the margin of safety?
8
Project 3 Review and Practice Guide
Back to Table of Contents
Answer:
Expected revenue: $500 × 35 = $17,500
Break-even revenue: $500 × 20 = $10,000
Margin of safety: $17,500 − $10,000 = $7,500
Contribution Margin
The contribution margin is the incremental profit generated by selling one additional unit.
• unit contribution margin = sales price per unit − variable cost per unit
• total contribution margin = contribution margin per unit × quantity
• contribution margin ratio = contribution margin per unit / sales price per unit
The contribution margin ratio measures the amount of incremental profit generated by an additional
dollar of sales.
Wedding cake business example:
•
Unit Contribution Margin
sales price per unit − variable cost per unit = unit contribution margin
$500 − $200 = $300
•
Total Contribution Margin
contribution margin per unit × quantity = total contribution margin
$300 × Q = total contribution margin
•
Contribution Margin Ratio
contribution margin per unit / sales price per unit = contribution margin ratio
$300 / $500 = contribution margin ratio
What-If Analysis
Use this equation to determine the impact of managerial decisions on profit:
• profit = (selling price − variable cost) × Q − total fixed cost
o Change in fixed and variable costs
o Change in selling price
Assumptions in CVP Analysis
Assumptions affect the validity of the analysis:
1. Costs can be separated into fixed and variable components
2. Within a specific range of cost-driver activity, variable cost per unit and total fixed cost
do not change (relevant range) (Lumen, n.d.)
3. Multiproduct analysis assumes the product mix does not change
With correct assumptions, CVP is useful.
9
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 4: Cost Allocation
The Basics of Cost Allocation
1.
2.
3.
4.
Purpose of Cost Allocation
Process of Cost Allocation
Allocating Service Department Costs
Problems with Cost Allocation
1 – Purposes of Cost Allocation
Companies allocate costs to
• provide information for decision making
• reduce frivolous use of common resources
• encourage evaluation of internally provided services
• calculate the “full cost” of products for GAAP reporting
Allocated costs serve as charges or fees for use
of internal resources or services.
Ideally, allocated cost should
measure the opportunity cost.
(Jiambalvo, 1994)
Provide full-cost information:
• GAAP requires full costing for external reporting purposes.
• Full-cost information is needed when the company has an agreement whereby revenue received
depends upon the cost incurred, as in cost-plus contracts.
2 – Process of Cost Allocation
1. Identify the cost objectives.
2. Form cost pools so that individual costs in the same cost pool are allocated using one allocation
base.
3. Select an allocation base to relate cost pools to the cost objective
10
Project 3 Review and Practice Guide
Back to Table of Contents
Example of the cost-allocation process in action:
UMGC Europe has several graduate programs. Imagine that you want to allocate costs to these
programs to determine if
1. Non-profitable programs should be shut down
2. Resources are being used efficiently
Cost pool
Allocation base
Cost objectives
Salaries of the professors
Salaries of the administrative staff
Photocopying
Computer lab
Rent for the building
Marketing
Online course pages
IT
Number of students enrolled
Number of hits per web page
Number of Trouble Tickets
fixed + variable × face-to-face
hours
MBA
Cybersecurity
Social Work
Management
3 – Direct and Indirect Costs
•
•
Organizational units of manufacturing firms are classified as one of the following:
o production department (direct)
o service department (indirect)
Cost pools
o formed by service departments
o allocated to production departments
Direct Method
Example: Boise Furniture
Service department costs are allocated to production departments but not to other service departments
Service Departments
Production Departments
Products
Janitorial costs
Assembly of chair
Chair
Personnel costs
Finishing of table
Table
Based on information from Jiambalvo, 1994
11
Project 3 Review and Practice Guide
Back to Table of Contents
Example: Boise Furniture (cont’d.)
Allocate the janitorial cost of $100,000 as follows:
• Allocation base: square feet
o Assembly department: 20,000 square feet
o Finishing department: 30,000 square feet
• Calculate the allocation rate:
o $100,000 / (20,000 + 30,000) = $2 / sq. ft.
The resulting allocation to the production departments is as follows:
o Assembly Dept: 20,000 sq. ft. x $2 = $40,000
o Finishing Dept: 30,000 sq. ft. x $2 = $60,000
Example: A Banking Organization
Assume that a banking organization has these service departments:
• Human Resources—hires employees and manages benefits
• Duplicating—performs copy services
• Janitorial—provides routine cleaning services
• Accounting—provides accounting services
• Graphic Design—designs forms)
• Food Services—provides free breakfast and lunch to employees
The services are used by the company’s two subsidiaries, Commercial Banking and Investment Banking.
Suggest ways to allocate the service department costs to the two subsidiaries.
Food Services are used by employees in the Human Resources department.
Would a share of food service costs be allocated to Human Resources under the direct method of
allocation?
Use the following as the basis for allocating service department costs:
• Human Resources—number of employees
• Duplicating—number of pages copied
• Janitorial—floor space
• Accounting—number of sales transactions
• Graphic Design—time spent on design work
• Food Services—number of employees
4 – Problems With Cost Allocation
•
•
•
•
•
Allocation of costs that are not controllable
Arbitrary allocations
Allocation of fixed costs that make the fixed costs appear to be variable costs
Allocation of manufacturing overhead to products using too few overhead cost pools
Use of only volume-related allocation bases
12
Project 3 Review and Practice Guide
Back to Table of Contents
Unitized vs Lump-Sum Allocation
•
•
Unitized fixed costs
o Fixed costs are stated on a per-unit basis and allocated as a variable cost.
o The perception that costs are variable could alter decision making.
Lump-sum allocations
o A predetermined amount of fixed costs not affected by level of activity is allocated.
o The allocation must appear to be fixed to managers of departments that receive the
charge.
Production Volume and Overhead
Problem: Using measures of production volume to allocate overhead
•
•
•
Typical allocation basis includes direct labor hours and machine hours
Assumes all overhead costs are proportional to production volume
What happens when overhead costs are not proportional to production volume?
o High-volume products are over-costed
o Low-volume products are under-costed
ABC solves these problems.
13
Project 3 Review and Practice Guide
Back to Table of Contents
Topic 5: Activity-Based Costing
Purpose of Activity-Based Costing
•
•
•
Identifies major activities that cause overhead costs to be incurred
Costs of resources consumed performing these activities are grouped into cost pools
Costs are assigned to products using a measure of activity, i.e., cost driver
The ABC Steps
Step 1
Identify major activities
• Processing orders, packaging, delivery, customer service
Step 2
Group costs of activities into cost pools
• Salary, vehicles, equipment, packaging materials
Step 3
Identify measures of activities—the cost
drivers
• Number of orders, number of phone calls, miles per day,
labor hours
Step 4
Relate costs to products using the cost
drivers
• One-day service, same-day service, standard service
Based on information from Jiambalvo, 1994
Benefits of ABC
•
•
Provides more accurate costing
o Costs are allocated to products based on the amount of each resource used for the
activities involved in producing the product.
May lead to improvements in cost control
o Understanding each activity that contributes to a product and the resources each one
consumes enables a company to focus on those areas where efficiency could be
improved.
Limitations of ABC
•
•
More costly to develop and maintain than a traditional costing system
Used to develop full costs of products
o Includes fixed costs
o Lacks incremental information necessary for decision making
14
Project 3 Review and Practice Guide
Back to Table of Contents
Problems/Exercises
What to Do
You are encouraged to complete all the practice exercises listed below. They will help you gain the
knowledge and skills needed to fully participate in the group assignment in Step 3 and complete the
final Project 2 deliverable. The answers are provided, so you can check your own work.
Chapter 3: Practice Exercises
(in Davis, 2015)
• Unit 3.1 Practice Exercise
• Unit 3.2 Practice Exercise
• Unit 3.3 Practice Exercise
• Unit 3.4 Practice Exercise
(Practice exercises follow the Self Study questions.)
Exercise: Cost-Volume-Profit Analysis
Your company’s CEO is planning for next year. Prepare a contribution format income statement showing
anticipated operating income. Consider each scenario independently. Last year’s income statement is as
follows:
Total
Per Unit
Sales
$600,000
$15.00
Variable expenses
320,000
8.00
Contribution margin
280,000
7.00
Fixed expenses
175,000
Operating income
$105,000
Required
A.
B.
C.
D.
E.
The sales price increases by 12% and sales volume decreases by 4%.
The sales price increases by 8% and variable cost per unit increases by 6%.
The sales price decreases by 5% and sales volume increases by 15%.
Fixed expenses increase by $40,000.
The sales price increases by 12%, variable cost per unit increases by 15%, fixed expenses
increase by $30,000, and sales volume decreases by 15%.
15
Project 3 Review and Practice Guide
Back to Table of Contents
Solution to Exercise
A. Current sales volume: $600,00/$15 = 40,000 units
New sales volume: 40,000 × .96 = 38,400 units
New sales price: $15.00 × 1.12 = $16.80
Total
Per Unit
Sales
$645,120
$16.80
Less variable expenses
307,200
8.00
Contribution margin
337,920
$ 8.80
Less fixed expenses
175,000
Operating income
$162,920
B. New sales price: $15.00 × 1.08 = $16.20 per unit
New variable cost per unit: $8.00 × 1.06 = $8.48 per unit
Total
Per Unit
Sales
$648,000
$16.20
Less variable expenses
339,200
8.48
Contribution margin
308,800
$ 7.72
Less fixed expenses
175,000
Operating income
$133,800
C. New sales price: $15.00 × .95 = $14.25 per unit
New sales volume: 40,000 × 1.15 = 46,000 units
Total
Per Unit
Sales
$655,500
$14.25
Less variable expenses
368,000
8.00
Contribution margin
287,500
$ 6.25
Less fixed expenses
175,000
Operating income
$112,500
16
Project 3 Review and Practice Guide
Back to Table of Contents
D. New fixed expenses: $175,000 + $40,000 = $215,000
Total
Per Unit
Sales
$600,000
$15.00
Variable expenses
320,000
8.00
Contribution margin
280,000
$ 7.00
Fixed expenses
215,000
Operating income
$ 65,000
E. New sales price: $15.00 × 1.12 = $16.80
New variable cost per unit: $8.00 × 1.15 = $9.20
New fixed expenses: $175,000 + $30,000 = $205,000
New sales volume: 40,000 × .85 = 34,000 units
Total
Per Unit
Sales
$571,200
$16.80
Variable expenses
312,800
9.20
Contribution margin
258,400
$ 7.60
Fixed expenses
205,000
Operating income
$ 53,400
Chapter 7: Practice Exercises
(in Davis, 2015)
• Unit 7.1 Practice Exercise
• Unit 7.2 Practice Exercise
• Unit 7.3 Practice Exercise
(Practice exercises follow the Self Study questions.)
Exercise: Traditional & Activity-Based Costing
Determining Product Costs
Your company produces Product A and Product B. Total overhead costs traditionally have been allocated
based on direct labor hours. Here are the cost pools and cost drivers based on ABC. From now on,
general costs will not be allocated to products.
17
Project 3 Review and Practice Guide
Back to Table of Contents
Activity Pool
Department Cost
Binding
297,000
Printing
955,500
Design
234,000
General
727,500
Total overhead costs
$2,214,000
Cost Driver
Number of units
Machine hours
Change orders
None
Other information is as follows:
Units
Direct materials cost per unit
Direct labor cost per unit
Direct labor hours
Machine hours
Change orders
Produce A
62,500
3.00
4.00
30,000
150,000
1,500
Product B
20,000
10.00
8.00
19,200
144,000
2,400
Required
A. Determine the unit product cost for Product A and Product B using the traditional costing
system.
B. Determine the unit product cost for Product A and Product B using the ABC system.
C. Show that general cost is the difference between the total overhead costs allocated to products
under the traditional system and the total cost allocated to products under ABC.
Solution to Exercise
A.
Predetermined OH rate =
$2,214,00
(30,000 DLH + 19,200 DLH)
Product A
Direct Materials
$3.00
Direct Labor
4.00
Overhead 30,000DLH × $45/DLH=
21.60
62,500 Product A
Total Unit Cost
$28.60
18
= $45/DLH
Product B
$10.00
8.00
19,200DLH × $45/DLH=
43.20
20,000 Product B
$61.20
Project 3 Review and Practice Guide
Back to Table of Contents
B. ABC Rates
Binding:
Printing:
Design:
$297,000
(62,500 + 20,000 Product A)
$955,500
(150,000 + 144,000) machine hours
$234,000
(1,500 + 2,400) change orders
= $3.60/unit
= $3.25/machine hour
= $60/change order
ABC overhead allocation
Products A
Binding
Printing
Design
Total overhead
Units produce
Overhead per unit
Products B
Binding
Printing
Design
Total overhead
Units produced
Overhead per unit
62,500 tablet × $3.60/unit
150,000 MH × $3.25/MH
1,500 change orders × $60/change order
$225,500
487,500
90,000
802,500
62,500
$12.84
20,000 books × $3.60/unit
144,000 MH × $3.25/MH
2,499 change orders × $60/change order
$72,000
468,000
144,000
684,000
20,000
$34.20
ABC unit cost
Direct Materials
Direct Labor
Overhead
Total Unit Cost
Product A
$ 3.00
$ 4.00
12.84
$19.84
19
Product B
$ 10.00
8.00
34.20
$ 52.20
Project 3 Review and Practice Guide
Back to Table of Contents
C.
OH allocated to Product A using traditional DLH
$1,350,000
(30,000 DLH × $45/DLH)
OH allocated to Product B using traditional DLH
(19,200 DLH × $45/DLH)
864,000
Total allocated OH using traditional DLH
$2,214,000
OH allocated to Product A using ABC
802,500
OH allocated to Product B using ABC
684,000
Total allocated OH using ABC
1,486,500
Difference in allocated overhead
$ 727,500
References
Jiambalvo, J. (1994). Managerial accounting 4th ed. Wiley.
Lumen Learning. (n.d.). Relevant range. Module 6: cost behavior patterns. Accounting for managers.
Back to Table of Contents
20
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
