LaiACCT500/Fall16 (answers to seminar 2)

ADA University School of Business

ACCT 500 Managerial Accounting, Fall Semester 2016
Answers to seminar 2 Costing.

Issue 1:
(a) Total hospital in-patient days = 25 x 10,000 = 250,000.
Total budgeted overheads = (6,000,000 + 2,000,000 + 1,500,000 + 1,000,000 +
1,000,000) = 11,500,000.
Hospital overhead absorption rate per in-patient day = 11,500,000 / 250,000
= 46 per in-patient day.

(b) General Geriatric

Direct costs
Consultants 2,000,000 500,000
Junior doctors 500,000 1,000,000
Nurses 2,000,000 3,000,000
Medical supplies 500,000 1,500,000
Total direct costs 5,000,000 6,000,000
In-patient days 50,000 20,000

Direct costs per in-patient day 100 300

Indirect costs at 46 per in-patient day 46 46
Total cost per in-patient day 146 346

Total in-patient days 50,000 20,000

Total indirect costs 2,300,000 920,000
Total costs 7,300,000 6,920,000

How could the cost information be used?

- cost comparison between departments and other hospitals.
- attention directing (cost variances relative to budget investigated).
- cost reduction.

Is geriatric treatment expected to be more expensive than general surgery?

Should all departments be allocated the same amount of overhead per in-patient
day?

Issue 2:
(a) Total machine hours = 60,000 hours.
Overhead absorption rate = 1,212,000 / 60,000 = 20.20 per machine hour.

Unit cost and selling price:

Pine Spruce Larch
Machine hours per unit 0.75 0.50 0.33

Direct cost 2.00 4.00 1.50
Overheads 15.15 10.10 6.73
Total cost 17.15 14.10 8.23
Mark-up (20%) 3.43 2.82 1.65
Selling price 20.58 16.92 9.88

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 LaiACCT500/Fall16 (answers to seminar 2)

(b) Total labour hours = 100,000 hours.

Overhead absorption rate = 1,212,000 / 100,000 = 12.12 per labour hour.

Unit cost and selling price:

Pine Spruce Larch
Labour hours per unit 0.80 0.90 0.83

Direct cost 2.00 4.00 1.50
Overheads 9.70 10.91 10.06
Total cost 11.70 14.91 11.56
Mark-up (20%) 2.34 2.98 2.31
Selling price 14.04 17.89 13.87

(c) Using machine hours as the absorption basis, Pine becomes significantly more
expensive than the others as it uses more machine hours. If labour hours are chosen,
Spruce becomes more costly than the others. However, using labour hours, the costs are
less widely dispersed, with 3.35 cost difference per unit between the products compared
with 8.92 for machine hours.

This example shows how the choice of overhead absorption basis can distort product costs
and selling prices. This method of pricing adopted by the company is called cost-based
pricing and it ignores the market demand and prices for the products.

Issue 3:
(a)
Department A B C UNDER ADMISS TOTAL
EXPENSE '000 '000 '000 '000 '000 '000
Allocated o/hs 42 65 88 28 38 261
Maint'ce Area 150 90 30 37.5 22.5 330
Insurance Area 20 12 4 5 3 44
No of
Comp Main comps 22.5 24 15 13.5 15 90
No of
Telephone phones 52.8 44 35.2 35.2 52.8 220
Depreciation Value 60 50 40 20 10 180
H&L Area 300 180 60 75 45 660
No of
Personnel people 49 84 28 28 42 231

Total Overheads 696.3 549 300.2 242.2 228.3 2,016

Apportion Undergrad 121.1 72.66 48.44 -242.2

Apportion Admissions 91.3 91.3 45.7 _____ -228.3

Total overheads 908.7 712.96 394.34 0 0 2,016

Lecturers Hours 2,200 1,800 1,000

Overhead Rate 413.05 396.09 394.34 per lecturer hour

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B)
Accountancy in business

Books & Handouts 120,000

Lecturer Paid
s Hours per hour
Accountancy 360 70 25,200
Business 150 50 7,500
Communications 100 60 6,000

Overheads
A 360 413.05 148,698
B 150 396.09 59,414
C 100 394.34 39,434

Total Cost 406,246

Number of students 40

Cost per student 10,156

Add 30% margin 4,353

FEE 14,509

(c) The fee is based on predicted numbers but no account is taken of the likely demand for
the course if the fee is set at over 14,509 (or less than 14,509). This method of pricing is
similar to cost plus pricing but it ignores the actual market place. The institution should
look at similar courses run in other universities and find out what fees are being charged
by them. It could be that the fee quoted above is too low or too high when comparisons are
made. If the price is vastly different we must be able to justify the price (if too high) or we
might be able to adjust upwards (if too low).

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 LaiACCT500/Fall16 (answers to seminar 2)

Issue 4:
(a) Assembly Polish Finish Stores QC Total Basis
Expense

Rent and Rates 15,000 6,000 6,000 3,000 2,000 32,000 Area 1.
Value of
Machine Insurance 7,500 3,125 2,500 1,250 625 15,000 Machines 1.
Telephone
Telephone 1,600 1,600 3,200 800 800 8,000 points 1.
Value of
Depreciation 22,500 9,375 7,500 3,750 1,875 45,000 Machines 1.
Heat and light 12,000 4,800 4,800 2,400 1,600 25,600 Area 1.
Prod'n Supervisors
Salaries 38,400 21,600 12,000 72,000 DLH 1.

Allocated 7,400 10,400 6,400 3,200 3,600 31,000 1m

14,40 10,50 228,60

Total allocated 104,400 56,900 42,400 0 0 0
Apportione
d
-
14,40
Stores (70:20:10) 10,080 2,880 1,440 0 1
-
10,50
QC (50:30:20) 5,250 3,150 2,100 0 1
228,60
TOTAL 119,730 62,930 45,940 0 0 0

(b) 12

Assembly Polish Finish

TOTAL 119,730 62,930 45,940
No of hours 3,200 1,800 1,000
per
Absorption Rate 37.42 34.96 45.94 DLH

Job
( c) 254
Direct costs
Materials 167
Labour
Assembly 5*12 60
Polish 4*13.80 55.2
Finish 3*10.80 32.4
Total Direct Costs 314.6
Overheads
187.1
Assembly 5*37.42 0

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 Polish 4*34.96 139.84
Finish 3*45.94 137.82
Total Costs 779.36

Total
(d) Cost = 779.36 (60% of Selling price)
Profit Margin = 40% of Selling price

Selling =779.36/0. =1,298.

price 6 93
Profit 519.57

Issue 5:
Work the answers out yourself and compare them with those of your classmates.

Issue 6:
Total overheads are 270,000 per month.
Total budgeted machine hours = [(600,000+800,000+ 400,000)/60] = 30,000 machine hours.
Overhead Absorption Rate = 270,000 / 30,000 = 9 per machine hour.