cost accounting
Axelrod Company
by
Khursheed Omer
Axelrod Company makes three types of t-shirts: Calm, Windy, and Gale. Mr. Brown, the general
manager of the Company is disappointed with low sales and low profitability of Gale and is
considering dropping the product. He believes that such a move will allow him to focus more
attention to other profitable lines. He discusses this with you and asks for your opinion. You gather
the following information about last year’s performance of the three products.
Calm Windy Gale
Units Sold 25,000 18,750 3,750
Selling Price/unit $ 30 $ 32 $ 39
Production Cost:
Direct Materials/unit $ 10 $ 10 $ 15
Direct Labor/unit $ 14 $ 14 $ 21
There is no variable overhead. Annual total fixed overhead amounts to $ 168,000 and will remain the
same whether the product line is dropped or retained. The fixed overhead rate established by the
company was $ 3.60 per unit. . The analysis provided to Mr. Brown on the basis of which he was
considering to drop Gale from the line of products sold was as follows:
:
` Calm Windy Gale
Selling Price/unit $ 30.00 $ 32.00 $ 39.00
Direct Materials/unit ($ 10.00) ($ 10.00) ($ 15.00)
Direct Labor/unit ($ 14.00) ($ 14.00) ($ 21.00)
Fixed Overhead/unit ($ 3.60) ($ 3.60) ($ 3.60)
CASE 2
Roxbury Manufacturing Company
by
Khursheed Omer
Roxbury Manufacturing Company is a privately owned business. Products manufactured by Roxbury
had been doing very well until the year 2011. The last two years have seen a steady decline in sales and
profit. If this declining trend continues, the company might come under financial distress. Income
statements for the last two years are given below.
Year 1 Percent Year 2 Percent
Sales $ 4,000,000 100 $ 3,600,000 100
Less Variable Expenses $ 3,000,000 75 $ 2,700,000 75
——————————————————————–
Total Contribution Margin $ 1,000,000 25 $ 900,000 25
Less Fixed Expenses $ 500,000 $ 500,000
———————————————————————
Net Income before taxes $ 500,000 $ 400,000
==========================================
Mr. Creighton, the owner of the company is baffled that only a ten percent decline in sales has resulted
in a twenty percent decline in profits. He asks you to explain to him how in spite of maintaining
efficiency in operations by keeping variable expenses and contribution margin at the same percentage
CASE -1
Reynolds Manufacturing Company
by
Khursheed Omer
Reynolds Manufacturing Company manufactures a product that is processed in three
sequential departments. Lately, the competition in the industry has become very intense as
many foreign manufacturers have introduced their product in the international market at
lower prices.
Management at Reynolds is considering process improvement. They have been told by a
sales representative of a manufacturing equipment company that introduction of state-of-art
equipment and several other measures in processing department #1 can significantly reduce
the per unit cost of processing. This would allow competitive pricing of their finished
product. Cost reduction will be accomplished by eliminating material wastage and
eliminating direct labor cost (the new equipment will perform many functions that previously
required manual labor). The new system will cost $ 6,320,000 and will have a useful life of
ten years. Accordingly, new equipment and other measures were introduced on a trial basis.
Management is eager to find out if this change would yield the desired results. At the end of
the trial month, the per unit cost figures and the following partial cost of production report
for Process #1 prepared by the company accountant was made available.
…… continued on next page
Beginning Work in Process 60,000 units
(100% Material, 75% Conversion)
Units Started during the month 40,000 units
—————–
Units to account for 100,000 units
===========
EQUIVALENT UNITS
Direct Material Conversion
Total number of units completed 85,000 units 85,000 85,000
Ending Work in Process 15,000 units 15,000 12,000
(100% Material, 80% Conversion)
——————————————————————–
Units accounted for 100,000 100,000 97,000
===========================================
Direct materials Conversion Total
Cost of Beginning Work in Process: $ 300,000 $ 450,000 $ 750,000
Cost incurred this month: $ 160,000 $ 116,000 $ 276,000
————————————————————————-
Total Cost $ 460,000 $ 566,000 $1,026,000
Divided by Equivalent units ÷ ÷
100,000 97,000
= $ 4.60 $ 5.84 $ 10.44
The Company CEO and the foreman in charge of the department are not very enthused by the
performance of the new system as they see no significant difference in per unit cost of
processing. They are wondering if such a huge investment is justified when the company is
under intensive competitive pressure. However, the equipment sales representative insists
that other companies who have purchased this system have experienced significant reduction
in the cost of processing. You are a management consultant retained by the company. You
have been asked to look into this issue and make a recommendation to the CEO of the
company.
level, he has experienced a greater percentage decline in profits.
