Your CFO has supplied you with the following information. Current product standard costs are as follows: Selling price per unit: $5,000 $1,400/unit direct material $400/unit direct labor $200/unit variable overhead $200/unit fixed overhead (this figure is the result of the budgeted fixed overhead of $2,000,000 and budgeted sales volume of 10,000 units) Income Tax rate = 40%
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Your CFO has supplied you with the following information. Current product
- Selling price per unit: $5,000
- $1,400/unit direct material
- $400/unit direct labor
- $200/unit variable overhead
- $200/unit fixed overhead (this figure is the result of the budgeted fixed overhead of $2,000,000 and budgeted sales volume of 10,000 units)
- Income Tax rate = 40%
The board of directors has requested a thorough presentation to determine whether taking on this potential customer is a good idea. Assume that your factory is fully operational and that you will not have any learning curve impacts.
In your presentation, answer the following questions from the board using the data from the CFO:
- What is meant by cost variance?
- What is an effective way to incorporate
variance analysis in the budget process? - What are the differences between labor and material variances?
- How is a quantity variance different from a rate variance?
- What are the subcomponents of fixed overhead?
- What are the subcomponents of variable overhead?
- What is the lowest possible price you could offer to this potential customer (you know that you have sufficient capacity without working overtime and without adding any new equipment to make this order)? Please show your calculations.
- In terms of capacity, under what conditions would offering this lowest possible price be a bad decision? Why?
- Create a pro-forma income statement to show a net income/net loss for the year.
- You have been considering investing in automation to eliminate some factory labor if you get this large order. This technology advancement will cost an added $100,000/yr. to lease (net of taxes), but it will reduce labor cost/unit on the customer's units by 50%. How would this change the lowest possible price you could offer to this potential customer and at least still break even? Please show your calculations.
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