Reference no: EM131767304

Question 1: Information for management

Joe Murphy retired a few years ago at the age of 48, having built up a substantial retirement portfolio through a range of entrepreneurial activities. He moved to the Snowy Mountains to follow his dream of a peaceful mountain life. However, after a few months, Murphy became restless and opened a ski equipment store. This single store soon grew into a chain of four outlets spread from the Snowy Mountains to the Victorian Alps. As Murphy put it, ‘I can't believe how fast we've expanded. It's basically been uncontrolled growth-growth that has occurred in spite of what we've done'.

Although business was profitable, the chain did have its share of problems. Sales tended to be seasonal, with a slowdown once the snow had disappeared. Murphy therefore added fishing and camping equipment to his product line. The need to finance required inventories seemed to be bulging and left cash balances at very low levels, occasionally giving rise to short-term bank loans.

Part of Murphy's business focused on skiing trips, which were arranged through local ski lodges, and included ski hire, lessons and lift passes. Reports from the company's financial accounting system seemed to indicate that this part of the business was losing money because of increasing costs, but Murphy could not be sure. ‘The traditional income statement is not too useful in assessing the problem', he noted. ‘Also, my gut feeling is that we are not dealing with the best suppliers in terms of quality, delivery reliability and prices.' Additional complications were caused by an increasingly competitive marketplace, with many former customers now buying equipment through the internet.

Murphy was not sure what to do. The company's accountant was very good at keeping the books and preparing the financial statements and tax return, but she did not understand the way the business really worked.

Required:

1. Describe the types of information that Murphy needs to run his business more effectively.

2. Murphy approaches the accountant to seek her help in gathering and analysing this information, but she responds: ‘You must be joking-I'm an accountant. My job is to look after the money side of the business!' Do you agree with this statement?

3. What actions would you recommend that Murphy takes?

Question 2: Cost behaviour; committed and discretionary costs; high-low method: mining company

Outback Mining Ltd (OML), which mines ore in Australia's north-west, uses a calendar year for financial reporting purposes. The following selected costs were incurred in December, the low point of activity, when 1400 tonnes of ore were extracted.

Straight-line depreciation                  $30 000

Charitable contributions*                     12 000

Mining labour (including oncosts)    315 000

Royalties                                               140 000

Trucking and hauling                         280 000

Peak activity of 2700 tonnes occurred in June, resulting in mining labour costs (including oncosts) of $607 500, royalties of $224 500, and trucking and haulage costs of $360 000. The trucking and hauling costs exhibit the following behaviour:

Less than 1 500 tonnes                      $240 000

From 1 500-1 899 tonnes                   280 000

From 1 900-2 299 tonnes                   320 000

From 2 300-2 699 tonnes                   360 000

OML uses the high-low method for analysing cost behaviour.

Required:

1 Assuming that royalties are a semi variable cost, classify each of the other four costs listed above in terms of their behavior as variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semi-variable. Show calculations to support your answers for mining labour costs.

2 Calculate the total cost for next February when 1650 tonnes of ore are expected to be extracted.

3 Comment on the cost effectiveness of hauling 1500 tonnes with respect to OML's trucking/hauling cost. Can the company's cost effectiveness be improved? How?

4 Distinguish between committed and discretionary fixed costs. If OML were to experience severe

Question 3: Operation Costing: Manufacturer

AusSports Ltd produces sporting equipment in a number of plants across Australia. The Sydney Division's production for November consisted of Batch P25 (1000 professional basketballs) and Batch S33 (3000 scholastic basketballs). Professional basketballs have genuine leather exteriors and are packaged in an attractive cardboard box. Scholastic basketballs use imitation leather and are sold without special packaging. Both products go through identical preparation and finishing operations. Each batch was started and finished during November, and there was no beginning or ending work in process. Costs incurred were as follows:

Direct material:
Batch P25, $20 000, including $1000 for packaging material
Batch S33, $30 000

Conversion costs:
Preparation Department, predetermined rate of $10.00 per unit
Finishing Department, predetermined rate of $7.00 per unit
Packaging Department, predetermined rate of $1.00 per unit

Required:

1. Draw a diagram depicting the Division's batch manufacturing process, using text boxes and arrows.

2. Calculate the November product cost for each type of basketball.

3. Prepare journal entries to record the cost flows during November.

Question 4: Cost of goods manufactured; overapplied or underapplied overhead; journal entries

Cool Cooking Tools Ltd, manufacturer of gourmet cooking utensils, uses job costing. Manufacturing overhead is applied to production at a predetermined overhead rate of 150 per cent of direct labour cost. Any overapplied or underapplied manufacturing overhead is closed to cost of goods sold at the end of each month. Additional information:

Job SR22, consisting of ceramic spoon rests, was the only job in process on 31 January, with accumulated costs as follows:

Direct material                                      $4000

Direct labour                                         2000

Applied manufacturing overhead          3000

Total                                                       $9000

Jobs BS67, TR29 and GT108 were started during February.
Direct materials requisitions during February totalled $26 000.
Direct labour cost of $20 000 was incurred during February.
Manufacturing overhead incurred in February was $32 000.

The only job still in process on 28 February was job number GT108, with costs of $2800 for direct material and $1800 for direct labour.

Required:

1 Calculate the cost of goods manufactured for February.

2 Calculate the amount of overapplied or underapplied overhead to be closed to cost of goods sold on 28 February.

3 Prepare journal entries to record the events described in requirements 1 and 2.