Accounting 4002
What is the formula for economic order quantity (EOQ)
(2 x Order cost x Demand)/(Holding cost) all under a square root
Before accepting a contract the following non-monetary factors should be considered.
(i) Is there sufficient spare capacity to undertake the project? (ii) Is the overseas customer credit worthy? (iii) Has the workforce the necessary skills to undertake the project? (iv) Is the contract likely to result in repeat business with the customer?
Gringe Plc has in inventory a raw material which cost €5,000 to purchase some time ago. This material can either be sold for €3,000 or used as a substitute for another material on a special contract, thereby saving purchase costs of €3,800. What is the relevant cost of using this material on the special contract?
800
A company produces and sells memory sticks which have the following selling price and variable cost: € Selling price per unit 10.00 Less: Variable cost per unit (4.50) Contribution per unit 5.50 Fixed costs are €88,000 and the company currently sells 30,000 units. Required a) Calculate the company's current profit or loss b) Calculate the break-even point in units and sales revenue c) Calculate the contribution sales ratio d) Using your answer to c), calculate the effect on profit if the company increased its sales by €6,000 and the selling price per unit, the variable costs per unit and the fixed costs remained the same. Verify your answer by preparing a new profit and loss statement showing the increase in sales of €6,000.
BEP Units = 16,000 BEP Rev. = 160,000 Profit/Loss MOS = 30,000 Sold - 16,000 MOS =14,000 Units x 5.5 =77,000 Profit Contribution to Sales Ratio 5.5/10 = 55% or .55 Increase Sales Rev by 6,000 or increase sales by 600 units: 6,000 x 55% = 3,300 Increase to profit assumed Check: 30,600 units = 306,000 Sales 30,600 x VC (4.5) = 137,000 Contribution = 168,300 Contribution - Fixed Cost = Profit/loss 168,300-88,000 =New Profit of 80,300 (Old Profit was 77,000) We have an increase of 3,300
If R = sales revenue per unit F = fixed cost per unit V = variable cost per unit TF = total fixed cost BEP = the break-even point (in units), What is the formula to be used when calculating the break-even point (in units) for a particular product or service.
BEP= (TF)/(R-V) (Total Fixed Cost)/(Selling Price - Variable Cost)
Five C's of Credit-Worthiness
Character, Capacity, Capital, Collateral, Conditions
Which of the following is not one of the ethical responsibilities of a management accountant? A Credibility B Confidentiality C Integrity D Competitiveness
Competitiveness
Variable costs: A Are constant per unit B Are constant in total when volume varies C Vary per unit as volume varies D Vary in total when volume is constant
Constant Per unit
Fixed costs are conventionally deemed to be: A constant per unit of output B outside the control of management C constant in total when production volume changes D those unaffected by inflation
Constant in total when production volume changes
Which of the following statements is True/False. (i) Relevant costs are those that relate to the objective of the business and that remain constant despite the decision. (ii) Relevant costs include future outlay and opportunity costs.
D - (i)=F (ii)=T
Question 25 Prime cost comprises of what two components? A Direct labour and overheads B Direct labour and finished goods C Direct material and manufacturing overhead D Direct material and direct labour
Direct materials and Direct labour
A restaurant has fixed monthly costs of €21,000. During a typical month, 1,000 customers visit the restaurant, paying an average of €45 each. The restaurant's variable costs average €15 per customer. Required a) Calculate the break-even number of customers per month. b) Calculate how much profit or loss is made from 1,000 customers.
FC=21,000 Contribution=(45-15)=30 21000/30 = 700 BEP Units 1000 Customers has an excess of the BEP by 300 Units 300 x Contribution (30) = 9,000 Profit
What is and are examples of - Fixed Costs
Fixed expenses are those expenses that do not change when there is a change in production or sales level. Expenses like rent, insurance, payment on loans, management salaries, advertising are examples of fixed expenses.
The primary focus of cost management is to
Help Managers make decisions
What would be your advice if you were told that the business was operating below break-even point? Give reasons for your advice.
If the company were operating below the break-even point, acceptance of the order would provide a further contribution towards fixed costs and reduce the existing loss. In the short term it is better to accept the order and reduce the total loss but if, in the long run, there are not enough orders to generate sufficient contributions to cover total fixed costs, then the company will not survive.
Which of the following is not true about strategy? A It involves matching its capabilities with the opportunities in the marketplace to accomplish its objective. B It has a short-term focus C It can be implemented through price competition or product differentiation D It involves the use of strategic cost management.
It does not have a short term focus
The Sunset Company produces three products with the following costs and selling prices: X Y Z Selling price per unit €16 €21 €21 Variable cost per unit 7 11 13 Contribution per unit €9 €10 €8 Direct labour hours per unit 1.5 2 1 Machine hours per unit 1 2 1.5 If machine hours are the company's production constraint, the three products should be produced in the order: A xyz B yxz C zxy D xzy
Look at contribution per constrained production method x= 9/1 = 9/machine hour y= 10/2 = 5/machine hour z= 8/1.5 = 5.33/machine hour XZY
Flynt Ltd needs 5,000 units of a certain part to use in one of its products. The following information is available: Cost to Flynt to make the part: Direct materials €29 per unit Direct labour €44 per unit Variable manufacturing overhead €60 per unit Fixed manufacturing overhead €500,000 Stone plc has offered to sell this part to Flynt Ltd for €220 each. If Flynt buys the part from Stone instead of making it, Flynt would not have any use for the released capacity. In addition, 40% of the fixed manufacturing overhead costs will continue regardless of what decision is made. Assume that direct labour is an avoidable cost in this decision. In deciding whether to make or buy the part, the total relevant costs to make the part are: A €665,000 B €965,000 C €865,000 D €1,165,000
Make: 29 x 5000 = 145,000 44 x 5000 = 220,000 60 x 5000 = 300,000 .6 x 500,000 = 300,000 (only 60% of fixed cost is relevant since 40% will be regardless of decision to make or buy) Total to make = 965,000 Buy: 220 x 5000 = 1,100,000 .4 x 500,000 = 200,000 Total to buy = 1.3 Million
The key financial objective pursued by most businesses seems to be A Maximisation of shareholders' (owners') wealth. B Maximisation of net profit after tax. C Maximisation of sales revenue. D Maximisation of the rate of growth.
Maximization of shareholders wealth (Owners Wealth)
Benefit of allowing customer credit
Often encourages customers to speed up or increase the amount of their spending.
The extent to which an organisation uses fixed costs in its cost structure is measured by: A Financial gearing B Operating gearing C Fixed cost gearing D Contribution gearing
Operating Gearing
Fixit Ltd has estimated fixed costs of €400,000 next year and requires to sell 5,000 units of its only product in order to earn profit of €100,000. Actual sales are anticipated to be 8,000 for the year. What is the company's break-even point in units? A 500 B 100 C 3,000 D 4,000
Target Profit Given: 400,000+100,000 at 5000 Units 500,000/(contribution)=5000 units Contribution = 100/Unit Fixed Cost = 400,000 400,000/100 = 4,000 Units BEP
The breakeven point can be defined as: A. The level of activity where profits equal fixed costs B. The level of activity where cash flow equals zero C. The level of activity at which there is neither a profit or a loss D. The level of activity where variable costs are covered by sales revenue
The level of activity at which there is neither a profit or a loss
