ASHESI UNIVERSITY

DEPARTMENT OF BUSINESS ADMINISTRATION

MANAGERIAL ACCOUNTING

DISCUSSION SET 2
Question 1
Explain any five differences between process costing and Job costing.
1. Nature of Work:
Process Costing: It is used when products are produced in a continuous and
repetitive manner, such as in industries like oil refining, chemical
manufacturing, or food processing. The production process is continuous, and
the products are similar.
Job Costing: It is used when products or services are unique or customized,
such as in construction projects, consulting services, or custom-made
furniture. Each job or project is distinct and has its own specifications.
2. Cost Accumulation:
Process Costing: Costs are accumulated by departments or processes. The total
costs incurred by each department/process are allocated to the units produced
during a particular period. The focus is on the cost per unit.
Job Costing: Costs are accumulated by individual jobs or projects. The costs
incurred for each specific job are tracked separately, including direct materials,
direct labor, and overhead costs.
3. Unit Cost:
Process Costing: Unit cost are computed by department on the department
production report.
Job Costing: Unit cost are computed by job on the job cost sheet.
4. Documentation
Job Costing: Job costing utilizes a job sheet or job cost record for each
individual job or project. The job sheet contains detailed information about the
job, including materials used, labor hours worked, and other direct costs
incurred. It serves as a primary document for accumulating costs and tracking
the progress of each job.
Process Costing: Process costing relies on a department production report. This
report summarizes the production and cost information for a particular
department or process over a specific period. It includes data on the units
started and completed, the total costs incurred, and the unit costs.
5. Complexity and Traceability of Costs:
Process Costing: The cost accumulation process is relatively straightforward
and less complex since the costs are accumulated by departments or
processes. It may be challenging to trace the specific costs to individual units
due to the homogeneity of products.
Job Costing: The cost accumulation process is more intricate and detailed
since the costs are directly allocated to specific jobs or projects. It allows for
better cost traceability and facilitates accurate job costing analysis.

Question 2
West African Hardware Décor manufactures cement for the construction
industry in Ghana. Provide below are data relating to kilograms of cement
processed through the Mixing Department in June, the first department in the
manufacturing process.

Kilograms of Percentage Completed

Cement Materials Conversion
Work in process, June 1 90,000 75% 35%
Work in process, June 60,000 50% 15%
30
Started into production 310,000
during June

Cost data relating to cement production in June are provided below:

Material cost in work in process inventory, June 1 GHS300,000
Conversion cost in work in process inventory, June 1 GHS210,000
Material cost added during June GHS1,820,000
Conversion cost added during June GHS680,000
Required:
On the assumption that the firm uses the weighted average method in its process
costing system,
i) Compute the equivalent units of production for June.
Note: Units transferred = Beginning WIP + Units started into production - Ending
WIP

ii) Compute cost per equivalent unit for materials and conversion.
iii) Compute the cost of units transferred and the cost of ending work
in process inventory.
 iv) Prepare a cost reconciliation report for the Mixing Department for
June

Question 3
Sister Carla Enterprise deals in Transparent Ladies Bra. The enterprise uses the
weighted-average method instead of the FIFO method in its process costing
system. Data relating to activities in Department A for the month of September
2019 is provided below:

Work in process, beginning:

Units in process 300
Stage of completion with respect to materials 70%
Stage of completion with respect to conversion 90%

Costs in the beginning inventory:

Materials cost GHS 1,820
Conversion cost GHS 34,290
Units started into production during the month 11,000
Units completed and transferred to department B 10,700

Costs added to production during the month:

Materials cost GHS 279,860
Conversion cost GHS 3,738,150

Work in process, ending:

Units in process 600
Stage of completion with respect to materials 90%
Stage of completion with respect to conversion 70%

Required:
i) Compute the equivalent units of production for September.

ii) Compute cost per equivalent unit for materials and conversion.
iii) Compute the cost of units transferred and the cost of ending work
in process inventory.

iv) Prepare a cost reconciliation report for the Department A for

September.
Question 4
Champion Co. Ltd manufactures and sells a specialized product called
champion. According to the Management Accountant, the company expects to
sell 15,000 units of the product in the current year for GH¢30 per unit. The
variable cost per unit and the total fixed cost for the period are GH¢18 and
GH¢120,000 respectively. The management of the firm is anxious to increase
the company’s profit and has asked for analysis of a number of issues.

Required:

a. Compute Champion’s contribution margin ratio and variable cost ratio

b. Calculate the company’s break-even point in units and in cedis.
Break-even point (in units) = Fixed Costs / Contribution Margin per unit
Break-even point (in cedis) = Break-even point (in units) * Selling Price per unit
Or
Break-even point (in cedis) = Break-even point (in units) * CM Ratio
Break-even point (in units) = GH¢120,000 / GH¢12 = 10,000 units
Break-even point (in cedis) = 10,000 units * GH¢30 = GH¢300,000
Or
Break-even point (in cedis) = 10,000 units/0.4 = GH¢300,000
c. What is the company’s margin of safety in units, cedis and percentage?
Margin of Safety (in units) = Actual Sales - Break-even Sales
Margin of Safety (in cedis) = Margin of Safety (in units) * Selling Price per unit
Margin of Safety Percentage = (Margin of Safety (in units) / Actual Sales) * 100

Actual Sales = 15,000 units * GH¢30 = GH¢450,000

 Margin of Safety (in units) = 15,000 units - 10,000 units = 5,000 units
Margin of Safety (in cedis) = 5,000 units * GH¢30 = GH¢150,000
Margin of Safety Percentage = (5,000 units / 15,000 units) * 100 = 33.33%
d. If the company wants to a target profit of at least GH¢45,000 next year,
how many units of champion should be sold to meet this target profit?
Target Units = (Fixed Costs + Target Profit) / Contribution Margin per unit
Target Units = (GH¢120,000 + GH¢45,000) / GH¢12 = 12,500 units
The company should sell at least 12,500 units of Champion to meet the target
profit of GH¢45,000.
e. Calculate the company’s degree of operating leverage at the present level
of sales.
DOL = Contribution Margin / Net Operating Income
DOL = 180,000/60,000
DOL = 3 times
f. Using the degree of operating leverage calculated in (e), by what
percentage will net operating income increases if the company’s sales
increases by 4% in next year.
Percentage Increase in NOI = Degree of Operating Leverage * Percentage
Increase in Sales
Percentage Increase in NOI = 3*4%
Percentage Increase in NOI =12%
g. If variable cost is increased by GH¢2 per unit and management expects
to increase selling price by 10%, what volume of sales should the
company make to achieve a profit of GH¢120,000.
Profit = (Sales - Variable Costs) - Fixed Costs
Given changes:
Variable cost increase = GH¢2 per unit
Selling price increase = 10%
Given changes:
Variable cost increase = GH¢2 per unit
Selling price increase = 10%
Target Profit = GH¢120,000

We need to calculate the volume of sales (X) required to achieve the target
profit.

Step 1: Calculate the new variable cost per unit after the increase:
New Variable Cost per unit = Old Variable Cost per unit + Variable cost
increase
New Variable Cost per unit = GH¢18 + GH¢2 = GH¢20

Step 2: Calculate the new selling price per unit after the increase:
New Selling Price per unit = Old Selling Price per unit + (Old Selling Price per
unit * Selling price increase)
New Selling Price per unit = GH¢30 + (GH¢30 * 0.10) = GH¢33

Step 3: Set up the equation for profit:

Profit = (Sales - Variable Costs) - Fixed Costs

Given: Profit = GH¢120,000

Substituting the new values into the equation:

(GH¢33 * X - (GH¢20 * X) - GH¢120,000 = GH¢120,000

Step 4: Simplify the equation:

GH¢13 * X - GH¢120,000 = GH¢120,000
GH¢13 * X = GH¢240,000

Step 5: Solve for X (the volume of sales):

X = GH¢240,000 / GH¢13
X ≈ 18,462 units
 Therefore, the company needs to achieve sales of approximately 18,462 units
to reach a profit of GH¢120,000 with the given changes in variable cost and
selling price.

Question 5
Due to erratic sales of its sole product – a high-capacity battery for laptop
computers – Johane Ltd has been experiencing difficulty for some time. The
company’s contribution income statement for the most recent month is given
below:
Sales (19,500 units * $30 per unit) $585,000
Variable expenses 409,500
Contribution 175,500
Fixed Expenses 180,000
Operating Loss $(4500)

Required:
a. Compute the company’s CM ratio and its break-even point in both units
and dollars.
CM ratio = Contribution / Sales
= $175,500 / $585,000 = 0.3 or 30%
Break-even point in units = 180,000 / 9 = 20,000 units
Note: I found the Unit CM by dividing the contribution margin(175,000) by the
quantity(195000).
Break-even point in dollars = 20,000 units * $30 per unit = $600,000

b. The president believes that a $16,000 increase in the monthly advertising

budget, combined with an intensified effort by the sales staff, will result
in an $80,000 increase in monthly sales. If the president is right, what
will be the effect on the company’s net operating income or loss? (Use
the incremental approach in preparing your answer.)
c. The sales manager is convinced that a 10% reduction in the selling price,
combined with an increase of $60,000 in the monthly advertising budget,
will cause units sales to double. What will the new contribution format
income statement look like if these changes are adopted?

d. The Marketing Department thinks that a fancy new package for the laptop
computers battery would help sales. The new package would increase
packaging costs by 75 cents per unit. Assuming no other changes, how
many units would have to be sold each month to earn a profit of $9,750?
Sales = variable expenses + fixed expenses + profits
30Q = 21.75Q + 180,000 + 9750
30Q - 21.75Q = 180,000 + 9750
8.25Q = 189750
 Q = 23000
e. By automating certain operations, the company would reduce variable
costs by $3 per unit. However, fixed costs would increase by $72,000 each
month.

i. Compute the new CM ratio and the new break-even point in units and
dollars.
CM Ratio = 12/30 *100 = 40%
BEP units = 252000/12 = 21000 units
BEP dollars = 252000/0.4 = 630,000
ii. Assume that the company expects to sell 26,000 units next month.
Prepare two contribution format income statements, one assuming that
operations are not automated and one assuming that they are.

Not Automated Automated

Total Per Unit Total Per Unit
Sales (26,000 units*$30) 780,000 30 780,000 30
Variable Expenses 546,000 21 468,000 18
Contribution Margin 234,000 9 312000 12
Fixed Expenses 180,000 252000
Net Operating Income 54,000 60,000

iii. Would you recommend that the company automate its operations?
Explain.
If the company decide to automate its operation, obviously CM ratio will be
changed from 30% to 40 % . ( The higher ratio means than if the break-even-
point is reached , profit will increase more rapidly ). The company should tend
 to increase its sales volume for more profit. If the company's sales volume
decreases, loss will be larger than present because of the greater fixed cost.
Question 6
KKT Enterprises is the distributor for two products, Model A100 and Model
B900. Monthly sales and the contribution margin ratios for the two products
follow:
Product

Model A100 Model B900

Total Sales $700,000 $300,000 $1,000,000

Contribution 60% 70% ?

margin ratio

The company’s fixed expenses total $598,500 per month.

Required:

a. Prepare a contribution format income statement for the company.

b. Compute the break-even point for the company based on the current
sales mix.
c. Determine the break-even point for each product.