Management Accounting Assignment 1

Nguyễn Thị Kiều Anh - Snow - F05014

BANKING ACADEMY, HANOI
BTEC HND IN BUSINESS (Accounting)
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REGISTRATION NO.
UNIT TITLE
ASSIGNMENT TITLE
ASSIGNMENT NO
NAME OF ASSESSOR
SUBMISSION DEADLINE

Nguyễn Thị Kiều Anh - Snow
F05-014
Unit 9: Management Accounting: Costing and Budgeting
Cost Information Analysis
1 of 2
Mr. Jun Alejo Bathan
26th April 2013

I, ____Nguyễn Thị Kiều Anh_________ hereby confirm that this assignment is my own work and not
copied or plagiarized from any source. I have referenced the sources from which information is
obtained by me for this assignment.

________26 th April 2013________

___________________________
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Nguyễn Thị Kiều Anh - Snow - F05014
Unit Outcomes

Outcome

Evidence for
the criteria

Feedback

Assessor’s decision
First
attemp
t

Be able to
analyse cost
information
within a
business
LO1

Be able to
propose
methods to
reduce costs
and enhance
value within a
business

Classify
different types
of cost

1.1

Using different
costing methods

1.2

Calculate costs
using
appropriate
techniques

1.3

Analyse cost
data using
appropriate

techniques

1.4

Prepare and
analyse routine
cost reports

2.1

Use
performance
indicators to
identify potential
improvement

2.2

Suggest
improvements
to reduce costs,
enhance value
and quality

2.3

LO 2

Merit grades awarded

M1

M2

M3

Distinction grades awarded

D1

D2

D3

2

Rework

Internal
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Nguyễn Thị Kiều Anh - Snow - F05014

Outcome

Evidence for
the criteria

Feedback

Assessor’s decision

Assignment
( ) Well-structured; Reference is done properly / should be done (if any)
Overall, you’ve

Areas for improvement:

ASSESSOR SIGNATURE

DATE

/

/

DATE

/

/

NAME:.........................................................................................

(Oral feedback was also provided)
STUDENT SIGNATURE
NAME :..............................................................................
FOR INTERNAL USE ONLY
VERIFIED

YES
NO
DATE
: ...........................................................................
VERIFIED BY : ...........................................................................
NAME
: ...........................................................................

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Nguyễn Thị Kiều Anh - Snow - F05014

Management Accounting: Costing and Budgeting
Cost Information Analysis

Prepared for:
Lecturer, Mr. Jun Alejo Bathan
Unit 9: Management Accounting: Costing and Budgeting
Banking Academy, Hanoi
BTEC HND in Business (Finance)

Prepared by:
Nguyễn Thị Kiều Anh – Snow - F05A
Registration No: ITP F05-014
Submission date: 26th April 2013

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Nguyễn Thị Kiều Anh - Snow - F05014
TABLE OF CONTENT

EXECUTIVE SUMMARY
Management accounting is concerned with the provision of information to people within the
organization to help them make better decisions and improve the efficiency and effectiveness
of existing operations (Drury, 2006, p.7). This report will help the learners to understand
deeply about management accounting based on analyzing cost information and proposing
methods to reduce costs and enhance value within 2 companies; these are Binh An
Corporation, Hung Anh - division of Binh An Group and Manh Hung Company. This report
is divided into 3 tasks:
The first one is analyze the cost information within Binh An. In this task, it involves 4 parts:
•

Classify different types of cost incurred in Binh An company

•

Calculate costs using appropriate techniques

•

Use performance indicators to identify potential improvement

•

Suggest improvements to reduce costs, enhance value and quality

The second task is requiring evaluating the manager’s performance based on provided
information of Hung Anh company by absorption costing and variable costing income
statement. This task divided into 3 parts:
•

Calculate costs using appropriate techniques

•

Analyze cost data using appropriate techniques

•

Prepare and analyze routine cost reports

The last task mentions about the using of job costing and process costing method in Manh
Hung Company. This task is just makes to be more clearly for the following 2 parts:
•

Calculate costs using appropriate techniques

•

Analyze cost data using appropriate techniques

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Nguyễn Thị Kiều Anh - Snow - F05014

INTRODUCTION
Binh An Corporation is a family-owned enterprise that locates in Ha Tay province and
produces brass musical instruments for using by high school students. The company has been
in business for over 10 years and grown continuously in recently years. According to Mr.
Nguyen Minh, the owner of the Company thinks that there may be some problems in
controlling the cost in the company. Therefore, this report will help Binh An Corporation find
out the existing problems in controlling the cost of the company and also give some
suggestion to fix them and increase profits for this company.
Besides, in the case of Hung Anh Company - a division of Binh An Group which
manufactures and sells special chromed parts and Manh Hung Company which manufactures
bicycles and tricycles, based on production data and cost data, this report also helps the
learners know how to use appropriate techniques for calculating and analyzing problems
about cost as well as ways to solves it.

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Nguyễn Thị Kiều Anh - Snow - F05014

Task 1: A report of cost and control the cost in Binh An company
1. Classification of cost incurred in Binh An company
Cost classification involves arranging costs into groupings of similar items in order to make
stock valuation, profit management, planning, decision making and control easier (BPP,
2010).
We can classify the costs incurred in Binh An company into 3 types of cost:
- Manufacturing costs (Product Costs)
- Non-manufacturing costs (Period Costs)
- Group of fixed costs, variable costs and Semi-variable Costs (Mixed costs)
1.1 Manufacturing costs

Manufacturing costs are the costs necessary to convert raw materials into products. The
resulting units costs are used for inventory valuation on the balance sheet and for the
calculation of the cost of goods sold on the income statement (Averkamp, n.d.).
Manufacturing costs are tupically divided into 3 categories: direct materials, direct labour,
and factory overhead (manufacturing overhead).
a)

Direct materials

Direct materials is cost of the materials which become part of the finished product
(Averkamp, n.d.). For Binh An company, they produces brass musical instruments, direct
materials is therefore brass sheet metal and brass tubing.
According to scenario:
•

Requisitions No. 112: 250 square feet of brass sheet metal at $5 per square foot (for

•

job number T81)
 Direct material for T81= 250 × $5 = $1,250
Requisitions No. 113: 1000 pounds of brass tubing, at $10 per pound (for job number
C40)
 Direct material for C40 = 1000 × $10 = $10,000

The total of direct materials is $1,250 + $10,000 = $11,250
b)

Direct labour

Direct labour is the cost of the wages of the individuals who are physically in converting raw
materials into a finished product (Averkamp, n.d.).
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Nguyễn Thị Kiều Anh - Snow - F05014
According to scenario:
•
•

Direct labor: Job T81, 800 hours at $20/hour
 Direct labor for T81 = 800 × $20 = $16,000
Direct labor: Job C40, 900 hours at $20/hour
 Direct labor for C40 = 900 × $20 = $18,000

For Binh An company, the total direct labour is therefore $16,000 + $18,000 = $34,000
c)

Factory overhead or manufacturing overhead

Factory overhead refers to all other costs incurred in the manufacturing activity which
cannot be directly traced physical units in an economically feasible way. Factory overhead is
also described as indirect manufacturing costs (Averkamp, n.d.). This types is divided into 7
smaller types of cost below.
•

Indirect material: Indirect materials are materials used in the production process,
but which cannot be linked to a specific product or job (Citibanker, 2013).
For the case of Binh An company, Indirect materials is lubricant so the cost of
indirect marterial is $100 (10 gallons × $10).

•

Indirect labor: Indirect labor is the cost of any labor that supports the production
process, but which is not directly involved in the active conversion of materials into
finished products (Citibanker, 2013).
For the case of Binh An company, Indirect labour included general factory cleanup $4,000 and factory supervisory salaries - $9,000. The total indirect labour is

•

therefore $13,000 ($4,000 + $9,000).
Depreciation: Depreciation of the factory building and equipment of Binh An

•

company during 1st quarter amounted to $12,000.
Rent expense: Rent paid in cash for warehouse space usage of Binh An Company

•

during 1st quarter was $1,200.
Utility costs: For Binh An Company, utility cost incurred during 1 st quarter amounted

•

to $2,100.
Property taxes: According to scenario, property taxes on Binh An Company were

•

paid in cash, $2,400
Insurance: For Binh An Company, the insurance cost covering factory operations for
the quarter was $3,100

1.2 Non - manufacturing cost (Period cost)
Non-manufacturing costs are costs that are not related to the production of goods; they are
also referred as period costs. These costs have two components - Selling costs and
Administrative costs (Houston, n.d.).
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Nguyễn Thị Kiều Anh - Snow - F05014
According to scenario:
•

The cost of salaries and fringe benefit for sales and administrative personnel paid

•
•

in cash during quarter amounted to $8,000.
Depreciation on administrative office equipment and space amounted to $4,000.
Other selling and administrative expenses paid in cash during quarter amounted

to $1,000.
The total of period cost is therefore $13,000 ($8,000 + $4,000 + $1,000).
1.3 Fixed costs, variable costs and semi-variable
•

Fixed costs

Fixed costs are costs which are incurred for a particular period of time and which,
within certain activity levels, in unaffected by changes in the level of activity (BPP,
n.d.). Fixed costs include some costs: rent, depreciation and administrative salaries.

•

Variable costs
Variable costs are costs which vary with the level of activity (BPP, n.d.). There are
some costs are determined as the variable costs: sales commission, advertising costs,
and machine lubricants.

•

Mixed costs (Semi - variable)
Mixed costs are costs which contain both fixed and variable components and so are
partly affected by changes in the level of activity (BPP, n.d.). Some mixed costs are
electricity and gas bill, sales representative salary.

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Nguyễn Thị Kiều Anh - Snow - F05014

Product cost
Name of cost

Variable

Fixed

cost

cost




Direct material
Direct labor

Period
Direct

Direct

Manufacturing

material

Labor

overhead

$11,250
$34,000

Indirect material
Indirect labor
Depreciation on




$100
$13,000

factory building



$12,000



$1,200





$2,100
$2,400
$3,100

and equipment
Rent expense for
warehouse
Utility cost
Property taxes
Insurance

Cost of salaries
and fringe

cost



$8,000



$4,000



$1,000

benefits
Depreciation on
equipment and
space
Other selling and
administrative
expenses
Total

$11,250 $34,000

$33,900

Table 1: The different types of costs incurred in Binh An Company

2. Calculation manufacturing overhead cost absorbed to jobs in the period
Predetermined overhead rate is calculated by formula:
Budgeted yearly total factory overhead costs
10

$13,00
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Nguyễn Thị Kiều Anh - Snow - F05014
Predetermined overhead rate =
Budgeted yearly activity (direct labor -hours, ect.)
According to the scenario, the company has estimated that the company’s budget for the
current year included budgeted total manufacturing overhead would be $426,300 and
budgeted total direct labor hours would be 20,300.

 Predetermined overhead rate =
= = $21 per direct labor hour
•

Overhead absorbed
Overhead absorbed is formula as follow:
Overhead absorbed = Predetermined overhead rate × Direct labor hours

 Manufacturing overhead absorbed T81 = $21 × 800 = 16,800
Manufacturing overhead absorbed C40 = $21 × 900 = 18,900

 Total manufacturing overhead absorbed = 16,800 + 18,900 = 35,700

•

Actual manufacturing overhead = $33,900 (table 1)
Table 2: Valuation of absorbed overhead
Overhead incurred (actual)
Overhead absorbed
Over-absorption of overhead

$33,900
$35,700
$1,800

As can be seen in the table above, the actual overhead is lower than the overhead absorbed.
Therefore, manufacturing overhead is over-absorption. To account the over-absorption
overhead, Binh Minh should debit it to actual manufacturing overhead cost and credit to the
Cost of goods sold.

3. Prepare income statement for the period
3.1 Income statement
Binh An Corporation
Income statement for the period
1st quar.200x
30,400
17,025

Items
Sales
Cost of goods sold
11

4th quar. 200x-1
28,300
14,100


Nguyễn Thị Kiều Anh - Snow - F05014
+/- Under/Over absorbed cost
Gross Margin
Operating cost (Administrative and selling
cost)
Net Income
a)

(1,800)
15,175

14,200

13,000

13,200

2,175

1,000

1st quar.200x
For Job number T81
•

Sales
According to scenario, in the quarter, half of the trombones in job number T81 were
sold on account for $800 each
 Sales = × $800 = 30,400

•

Cost of goods sold
Direct material = 250 × $5 = $1,250
Direct labor = 800 × $20 = $16,000
Manufacturing overhead = 800 × $21 = $16,800
 Total manufacturing cost = $1,250 + $16,000 + $16,800 = $34,050
According to scenario, during the first quarter of 200X, the firm worked on Job
number T81, consisting of 76 trombones

•

 Manufacturing cost per unit = = 448.026
 Cost of goods sold = 448.026 × = 17,025
Over absorbed cost = (1,800) (Table 2)

•

Gross Margin = Sales – Cost of goods sold - Over absorbed cost
 Gross Margin = 30,400 - 17,025 - (1,800) = 15,175

•

Operating cost (Administrative & Selling cost) = 13,000 (table 1)

•

Net income = Gross margin - Operating cost
 Net income = 15,165 - 13,000 = 2,175

b)

4th quar. 200x-1
According to scenario
- Sales = 28,300
- Cost of goods sold = 14,100
- Operating cost (selling and administrative cost) = 13,200
•

Gross Margin = Sales - Cost of goods sold
 Gross Margin = 28,300 - 14,100 = 14,200

•

Net income = Gross Margin - Operating cost
 Net income = 14,200 - 13,200 = 1,000
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Nguyễn Thị Kiều Anh - Snow - F05014
3.2 Calculate and evaluate indicator of productivity, efficiency and effectiveness
In order to understand about the productivity and efficiency and effectiveness within Binh An
Company, need to calculate and evaluate 3 ratios; these are Profit margin, Gross Margin, and
COGS to sales.
1st quar.200x

Ratios

4th quar. 200x-1

Net Profit Margin =

= 7.15%

= 3.53%

Gross Profit =

= 49.92 %

= 50.18 %

= 50.08 %

= 49.82%

COGS to sales =

Table 3: Calculation ratios of two period
Chart 1: The comparison of net profit margin, gross profit, and COGS to sales in the period 1 st quar.
200X and 4th quar. 200X -1
•

Net profit margin: In the period 4th quar.200X-1, net profit margin = 3.53%. It
means that the company has a net income of $3.53 for each dollar of sales. As can be

seen from chart above, net profit margin increase 3.62% (7.15% - 3.53 %), this is also
positive change for this company although profit is not high.

•

Gross profit margin: Gross profit margin decrease 0.26% (50.18% - 49.92%) from
4th quar. 200X- 1 to 1st quar. 200X. This is a negative change for Binh An Company.
It can be said that, Binh An do not have an effective strategies in using materials and
labour in production process. Therefore, Binh An should improve in the management
of material and labor to reduce costs incurred in production process.

•

Cost of goods sold to sales: COGS to sales increase 0.26% (50.08% - 49.82%). It
increases 0.52% compared with the last year (0.26/49.82 × 100% = 0.52%). It is very
easy to recognize that COGS to sale have an increase but it only increases with small
ratio. Therefore, this still has effect not good on company. The company need have
solutions to increase sales and reduce cost.

In brief, in the period 1st quar.200X, sales is higher than the period 4th quar.200X-1 but
operating cost decrease, moreover profit is not high. Therefore, the company’s managers
should find out ways to control and continue reducing the cost to increase more profit and
revenue for company. Besides, managers can improve working methods and reassessing
sources of finance to recognize shortcomings to improve it better and better.

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Nguyễn Thị Kiều Anh - Snow - F05014
3.3 Some possible standard and control measures on the utilization of materials, labor

and other manufacturing expenses.
In order to increase profit and revenue for the company, Binh An should control the costs
of goods sold, proposes some standard and control measures to reduce costs and reduce
level of wastage based on the utilization of materials, labor, and other manufacturing
expenses, for example:
a)

Material
-

Replace lower cost materials but still ensure product’s quality and without
harming production.

-

By identifying the important element of product which motivate and attract
customers, the company can eliminate unnecessary product features to reduce
cost.

-

By negotiating with suppliers about price and quality of materials, the company
can perceived reasonable price for material costs. Besides, the company can build
good relationship with suppliers and become close customers to be received
discount.

b)

Labor
-

Machines or modern technology can be used instead of manual labor to cut labour
costs

-

By hiring the right worker for the right job training and educating staff will
increase productivity and efficiency in working and reducing labor costs

4. Quality improvement and value enhancement for reducing cost
4.1 Quality
Quality means the degree of excellence of a thing – how well made it is, or how well it is
performed if it is a service, how well it serves its purpose, and how it measures up against
its rival (BPP, n.d.)
From the point of view of the customers, they evaluate product’s quality based on the
characteristics, function of product compared to other company’s product. For company
view, quality’s product is evaluated based on levels of customer’s satisfaction to product.
•

Cost of quality

The cost of quality has two main components: the costs of good quality (or the cost of
conformance) including Prevention costs, Appraisal costs and the cost of poor quality (or

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Nguyễn Thị Kiều Anh - Snow - F05014
the cost of non – conformance) including Internal failure cost and External failure costs
(Crosby, 1979).

•

Quality improvement for Binh An Company (Potential improvement)
Binh An can follow total quality management (TQM) to improve quality:
Benefit of TQM
-

Reduce of defects

-

Ease of problem solving

-

Continuous improvements

-

Lead to customer’s satisfaction

-

Generate good reputation for the company

-

Cost saving and profitability improvement (BPP, n.d.)

When Binh An Company use TQM, it will reduce costs of poor quality, however, the

cost of good quality will increase because one of basic principles in using TQM is that
of cost of preventing mistakes is less than the cost of correcting them. Thus, it is very
important for the company is that the company should ensure that the addition costs
will never outweigh the cost savings.
4.2 Value
Value of a product or service to a customer can therefore be considered in terms of its
fitness for purpose and the prestige or esteem attached
•

•

The value of a product has 4 distinct aspects:
-

Cost value: is the cost of producing and selling an item/providing a service

-

Exchange value: is the market value of the product or service

-

Use value: is what the product or service does, the purpose is fulfills

-

Esteem value: is the prestige the customer attaches to a product (BPP, n.d.).

Enhancing value for Binh An Company
-

Components and material costs: find a cheaper substitute material and eliminate
unnecessary material to reduce cost of producing and selling product to attract
customers.

-

Product benefits: is used to increase the value of products because product’s values
often go with benefits that it brings to customers.

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Nguyễn Thị Kiều Anh - Snow - F05014
-

Prices: Product prices can higher than the competitors’ prices but high prices
usually are equivalent to better quality.

-

Brand: Create and build beautiful image for the brand is the most ways to enhance
value for product and the company as well.

-

Warranty: Warranty will increase customer’s belief after buying goods because it
ensures that product will use good for time period which is written in warranty.

-

Loyalty card (for discount): Give loyalty card for close customers to keep a good
relationship with existing customers and bring and attract new customers.

Task 2: The income statement in Hung Anh Company
Task 2a: Absorption and marginal costing
1. Absorption costing income statement for 2 options (producing 200,000 units or
250,000)
Hung Anh Company
Absorption costing income statement

Sales (200,000 × $8)
Less cost of goods sold
Beginning inventory
Add cost of goods
manufactured
Goods available for sales

Produce 200,000 units

Produce 250,000 units

1,600,00
0

1,600,00
0

1,080,00
0

1,080,00
0

Ending inventory
Gross Margin
Less selling and administrative
expense
Variable expenses
Fixed expense

1,080,00
0
520,000

-

$100,00
0
12,000

984,000
616,000

$100,000
112,000
$408,00
0

Net Income
•

1,230,00
0
1,230,00
0
246,000

12,000

112,000
$504,00
0

Sales
According to scenario, expected sales in units is 200,000 and selling price per unit is $8
 Sales = Expected sales in units × selling price unit
= 200,000 × $8 = $1,600,000

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Nguyễn Thị Kiều Anh - Snow - F05014
•

Beginning inventory = 0

a) Calculation
•

of producing 200, 000 units

Cost of goods sold
-

Cost of goods manufactured
Manufacturing overhead cost per unit = Variable cost per unit + Fixed cost per unit
= 3 + = $5.4
Cost of goods manufactured = Manufactured units × Manufacturing overhead cost
per unit
= 200,000 × $5.4 = $1,080,000

-

Goods available for sale = Beginning inventory + Cost of goods manufactured
= 0 + 1,080,000 = $1,080,000

-

Ending inventory = (200,000 - 200,000) × $5.4 = $0

 Cost of goods sold = Good available for sale - Ending inventory
= 1,080,000 - 0 = $1,080,000
•

Gross Margin = Sales - Cost of goods sold
= 1,600,000 - 1,080,000 = $520,000

•

Selling and administrative expense

-

Variable expense = Variable Selling and administrative expenses per unit × Unit
sales
= 200,000 × $0.50 = $100,000

-

Fixed expense = 12,000 (according to scenario)

 Selling and administrative expenses = Variable expense + Fixed expense
= 100,000 + 12,000 = $112,000
•

Net income = Gross Margin - Selling and administrative expense
= 520,000 - 112,000 = $408,000

b) Calculation
•

of producing 250,000 units

Cost of goods sold
-

Cost of goods manufactured
Manufacturing overhead cost per unit = Variable cost per unit + Fixed cost per unit
= 3 + = $4.92
Cost of goods manufactured = Manufactured units × Manufacturing overhead cost
per unit

= 250,000 × $4.92 = $1,230,000
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Nguyễn Thị Kiều Anh - Snow - F05014
-

Goods available for sale = Beginning inventory + Cost of goods manufactured
= 0 + 1,230,000 = $1,230,000

-

Ending inventory = (250,000 - 200,000) × $4.92 = $246,000

 Cost of goods sold = Goods available for sales - Ending inventory
= 1,230,000 - 246,000 = $984,000
•

Gross Margin = Sales - Cost of goods sold = 1,600,000 - 984,000 = $616,000

•

Selling and administrative expense
-

Variable expense = Variable Selling and administrative expenses per unit × Unit
sales
= 200,000 × $0.50 = $100,000

-

Fixed expense = 12,000 (according to scenario)

 Selling and administrative expenses = Variable expense + Fixed expense
= 100,000 + 12,000 = $112,000
•

Net income = Gross Margin - Selling and administrative expense
= 616,000 - 112,000 = $504,000

2. Marginal costing income statement for 2 options (producing 200,000 units or 250,000)
Hung Anh Company
Marginal costing income statement
Produce 200,000 units
Sales (200,000 × $8)
Less variable expenses
Beginning inventory
Add cost of goods manufactured
Goods available for sale
Less ending inventory
Variable COGS
Variable selling and administrative
expense
Contribution Margin
Less fixed expenses
Manufacturing overhead
Selling and administrative expense

1,600,00
0

600,000
600,000
600,000
100,000

750,000
750,000
150,000
600,000
100,000

$480,00
0
12,000

492,000
$408,00
0

$480,00
0
12,000

Manufacturing overhead cost per unit = variable cost per unit = $3
18

700,000
900,000

900,000

Net Income
•

700,000

Produce 250,000
units
1,600,00
0

492,000
$408,00
0


Nguyễn Thị Kiều Anh - Snow - F05014
Sales = Expected sales in units × Selling price per unit

•

= 200,000 × $8 = $1,600,000
Beginning inventory = 0

•

a)

Calculation of producing 200,000 units
Variable expenses

•
-

Cost of goods manufactured = Manufactured units × Manufacturing overhead cost
per unit
= 200,000 × $3 = $600,000

-

Goods available for sale = Beginning inventory + Cost of goods manufactured
= 0 + 600,000 = $600,000

-

Variable cost of goods sold = Good available for sale - Ending inventory
= 600,000 - (200,000 - 200,000) × $3 = $600,000

-

Variable selling and administrative expense = Variable selling and administrative
expense per unit × Unit sales
= 200,000 × $0.50 = $100,000

 Variable expense = Variable cost of goods sold + Variable selling and administrative
expense
= 600,000 + 100,000 = $700,000
Contribution Margin = Sales - Variable expense

•

= 1,600,000 - 700,000 = $900,000
Fixed expense = Fixed manufacturing overhead + Fixed selling and administrative

•

expense
= 480,000 + 12,000 = $492,000
Net income = Contribution Margin - Selling and administrative expense

•

= 900,000 - 492,000 = $408,000
b) Calculation of producing 250,000 units
Variable expenses

•
-

Cost of goods manufactured = Manufactured units × Manufacturing overhead cost
per unit
= 250,000 × $3 = $750,000

-

Goods available for sale = Beginning inventory + Cost of goods manufactured
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Nguyễn Thị Kiều Anh - Snow - F05014

= 0 + 750,000 = $750,000
Variable cost of goods sold = Good available for sale - Ending inventory

-

= 750,000 - (250,000 - 200,000) × $3 = $600,000
Variable selling and administrative expense = Variable selling and administrative

-

expense per unit × Unit sales
= 200,000 × $0.50 = $100,000
 Variable expense = Variable cost of goods sold + Variable selling and administrative
expense
= 600,000 + 100,000 = $700,000
•

Contribution Margin = Sales - Variable expense
= 1,600,000 - 700,000 = $900,000

•

Fixed expense = Fixed manufacturing overhead + Fixed selling and administrative
expense
= 480,000 + 12,000 = $492,000

•

Net income = Contribution Margin - Selling and administrative expense
= 900,000 - 492,000 = $408,000

3. Explanation for difference raised
Through 2 income statement above, it is easy to recognize that both of two costing
methods have the same net income is $408,000 in the case of producing 200,000 units.
However, in the case of producing 250,000 units, there is a difference in the number of net
income.
•

In absorption costing, the net income = $504,000

•

In marginal costing, the net operating income = $408,000

To explain this difference, there is a comparison between some data of the cost of goods
sold, ending inventory, and period expense.
Cost of goods
sold
Absorption costing
Variable manufacturing
costs
Fixed manufacturing costs
Total
Marginal costing
Variable manufacturing
costs
Fixed manufacturing costs

Ending
inventory

Period
expenses

Total

600,000

150,000

-

750,000

384,000
984,000

96,000
246,000

-

480,000
1,230,000

600,000

150,000

-

750,000

-

-

480,000

480,000

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Nguyễn Thị Kiều Anh - Snow - F05014
Total

600,000

150,000

480,000

1,230,000

Table 4: Comparing between two income statement of two method

Variable costing net operating income

408,000

Absorption costing net income

504,000

= = 1.92

96,000

Add: Fixed manufacturing overhead costs deferred in inventory (50,000 × 1.92)
Table 5: The different in net income of 2 income statement

The table shows that there are differences in the fixed manufacturing costs from the two
methods. In absorption costing, there is an absorbed fixed overhead cost of $96,000 which is
incurred in the ending inventory. This makes the difference between the two methods.
4. Discussion the relative usefulness of the variable costing income statements versus the
absorption costing income statements for decision making and for evaluating the
manager’s performance
Variable costing is also called marginal costing method.

It is usually compared with

absorption costing method. Variable costing is a costing technique where only variable cost
or direct cost will be charged to the cost unit produced. Variable costing also shows the effect
on profit of changes in volume and type of output by differentiating between fixed & variable
costs. Variable cost is charged to product and treated as a product cost while fixed cost
treated as period cost and written off to the profit and loss account (Audra, n.d.). The
advantage of variable costing
•

Cost control: By avoiding arbitrary allocation of fixed overhead, efforts can be
concentrated on maintaining a uniform and consistent marginal cost useful to the
various levels of management

•

Simplicity: Marginal costing is simple to understand and operate, can be combined
with other forms of costing such as standard costing, budgetary costing without
difficulty

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Nguyễn Thị Kiều Anh - Snow - F05014
•

Elimination of varying charge per unit: fixed overheads are not charged to the cost of
production due to this the effect of varying charges per unit is avoided (Hub, 2009)

Task 2b: Overhead apportionment
1. Preparation a cost distribution sheet using the sequential (step-down) method to
apportion the cost the service departments to 2 main production departments
a)

Definition of Step-Down method

The step-down method, widely used, allocates costs of service departments to both
production and service departments. It is a method for allocating service department costs
that recognizes that some service departments support the activities in other service
departments as well as those in operating departments. The sequence typically starts with the

service department that provides the greatest amount of service to other departments (chegg,
n.d.)
b)

Calculation

Factory overhead
Maintenance (3,207.70)
After apportion maintenance overhead
Power (2,995.81)
Overhead of production department after
reapportionment
•

Stamping

Plating

Power

9,768.40
1,727.99
11,496.39
1,497.91

6,559.80
697.99
7,257.79
1,497.91

2,214.10
781.71
2,995.81
0

12,994.3

8,755.7

Total square = Stamping department + Plating department + Power department
= 19,500 + 7,875 + 8,820 = 36,195

•

Stamping department = × 100% = 53.87%

•

Plating department = × 100% = 21.76%

•

Power department = × 100% = 24.37%

•

Total expense of maintaining department = $3,207.70

•

Maintenance

Maintenance costs are apportioned using the percentages given so 53.87% goes on stamping,
21.76% to plating, and 24.37% to power.
Stamping

3,207.70 × 53.87% =1,727.99
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Nguyễn Thị Kiều Anh - Snow - F05014
Plating

3,207.70 × 21.76% = 697.99

Power

3,207.70 × 24.37% = 781.71

 After apportion maintenance overhead
Stamping

9,768.40 + 1,727.99 = 11,496.39

Plating

6,559.80 + 697.99 = 7,257.79

Power

2,214.10 + 781.71 = 2,995.81

•

Power

According to scenario, the power department expenses are then allocated equally to the
stamping and plating departments.
Stamping = Plating = = 1,497.91
 Overhead of production department reapportionment
Stamping

11,496.39 + 1,497.91 = 12,994.3

Plating

7,257.79 + 1,497.91 = 8,755.7

2. Comment on the possible distortions can arise from overhead apportionment
Possible distortions can arise from overhead apportionment such as: Allocation of overhead
of the maintenance floor space can become less reasonable (broken machinery, shortage of
materials) lead to deviation overhead of two production department, and calculate wrong
level of activities. Therefore, the apportionment cannot be said to be fully logical or scientific
and the result of such apportionments are the best only approximations (Bhar, 2008)
Task 3: Using the job costing and process costing method in Manh Hung Company
1. Calculation costs using appropriate techniques
a) Computation of the equivalent unit of production for materials and conversion
Units completed and transferred out to the next
department
Ending work in process:

Materials: 800 units @ 100% complete
Conversion: 800 units @ 25% complete
Equivalent units of production in during the
month of May

Materials

Conversion

1,200

1,200

800
200
2,000

1,400

The equivalent units of production is the sum of units transferred out and the equivalent units
of ending work in process
•

Units transferred out

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Nguyễn Thị Kiều Anh - Snow - F05014
According to data from scenario: Work in process units, May 1 (Beginning work in

process) is 500 units; Units started into production is 1,500 units and work in process
units, May 31 (Ending work in process) is 800 units. Because units transferred out to
the next department is calculated by formula:
Units transferred out to the next department = Units in beginning work
in process + Units started into production - Units ending work in
process
Therefore, units transferred out to the next department is 1,200 units (500 units +
1,500 units - 800 units)
•

Ending work in process
Ending work in process of materials is 800 units (800 units x 100 % compete) and
ending work in process of conversion is 200 units (800 units x 25% complete).

Thus, the equivalent units of production for materials are 2,000 (1,200 units + 800 units) and
the equivalent units of production for conversion is 1,400 units (1,200 units + 200 units).
b) Computation of the cost per equivalent unit
Cost to be accounted for

Cost

Beginning work in process (May 1)
Costs added during May
Total cost (a)

$33,000
$102,00
0
$135,00
0

Equivalent units of production (b)
Cost per equivalent unit, (a) ÷ (b)

$82.50

Materials
cost
$15,000
50,000

Conversion
costs
$ 18,000
52,000

$
65,000

$ 70,000

2,000

1,400

$ 32.5

$ 50

Cost per equivalent unit is calculated by following formula:

Cost of beginning
work in process
inventory

+

Costs added during the
period

Cost per equivalent unit =
Equivalent units of production
•

Materials cost
According to data from scenario, beginning work in process of materials is $15,000
and added during month of materials cost is $50,000. The total cost is therefore

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Nguyễn Thị Kiều Anh - Snow - F05014
$65,000. As calculated in parts above, equivalent units of production of materials is
2,000 units.
Thus, cost per equivalent unit of materials cost is $32.5 ($65,000 ÷ 2,000 units).
•

Conversion costs
According to data from scenario, beginning work in process of conversion is $18,000.
Because conversion cost is calculated by formula:
Conversion cost = Direct labor + Manufacturing overhead

Added during month of conversion cost is therefore $52,000 ($18,320 + $33,680)
with direct labor is $18,320 and manufacturing overhead is $33,680. The total cost is
$70,000. As calculated in parts above, equivalent units of production of conversion is
1,400 units.
Thus, cost per equivalent unit of conversion cost is $50 ($70,000 ÷ 1,400 units).

c) Determine the total cost of ending work in process inventory and the total cost of
units transferred to the next department
Materials
Ending work in process
inventory:
Equivalent units of production
Cost per equivalent unit
Cost of ending work in process
inventory
Units completed and transferred out:
Units transferred to the next
department
Cost per equivalent unit
Cost of units transferred out
•

Conversion

Total

800
$32.5

200

$50

$26,000

$10,000

$36,000

1,200
$32.5
$39,000

1,200
$50
$60,000

$99,000

The total costs of ending work in process inventory
As calculated parts above equivalent units of WIP Closing Balance of materials is 800
units and that of conversion is 200 units. Besides, cost per equivalent unit of materials
is $32.5 and that of conversion is $50. The cost of ending work in process inventory
of materials therefore is $26,000 (800 units x $32.5) and that of conversion is $
10,000 (200 units x $50).
Thus, the total cost of ending work in process inventory is $36,000 ($26,000 +
$10,000).

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