COST ACCOUNTING
2nd semester
Write your answers in
the blank space below each question.
Question 1: What are the two main objectives
of cost accounting, which cannot be attained with the data produced by general
accounting?
-
prepare a budget, i.e. a forecast of sales per profit center, and a plan of costs per cost center
-
calculate costs per unit
(we can add
:
-
calculate past results per profit center
-
calculation of future cash flows of an investment)
Question 2: Explain what we mean when we say
that double-entry accounting is a “value accounting” as opposed to single-entry
accounting which is a “cash accounting”.
In double-entry accounting, we
record transactions where there may be no movement of cash between the firm and
the rest of the world, but there are necessarily movements of value in and out
of the firm
Single-entry accounting is simply
the record keeping of cash movements in and out of the firm’s till.
Question 3: A computer store F sells a computer to a flower
shop G. The price is 1000 euros, paid on credit. Post the transaction in F
accounting system.
Sales account :
credit 1000
Client account :
debit 1000
And post the transaction in G accounting
system.
Supplier account :
credit 1000
Equipment account :
debit 1000 (careful: in a flower shop, the acquisition of a computer does not
go into the Purchases account)
Question 4: In cost accounting, what is a cost
center? Give some examples.
A cost center
is a fine subdivision of the activities of the firm, where costs corresponding
to an activity of a homogeneous nature are accumulated. Each cost center has a person responsible for keeping the costs in
line with the budget. Examples: the stamping shop, the assembly shop, the
maintenance dept, the security dept, the G&A, the canteen…
Question 5: What is a profit center? Give some examples.
A profit center
is a large subdivision of the activities of the firm, to which we can not only
attach costs, but also sales, and therefore a profit or loss figure. Examples:
the car division of Renault, the truck division of Renault, etc.
(Some cost centers
may serve several profit centers.)
Question 6: A firm F had the following results
last year
|
Firm F |
|
|
|
|
|
Product line A |
Product line B |
Total |
|
|
|
|
|
|
Units sold |
1000 |
2000 |
|
|
Price per unit (€) |
25 |
10 |
|
|
VC per unit (€) |
10 |
5 |
|
|
|
|
|
|
|
Sales
(K€) |
25 |
20 |
45 |
|
Variable costs (K€) |
10 |
10 |
20 |
|
Fixed costs (K€) |
|
|
15 |
|
|
|
|
|
|
Net result (K€) |
|
|
10 |
What were the contributions per unit in
product line A, and in product line B?
The global contribution of product
line A is 25K-10K = 15K euros. The contribution per unit is 15 euros.
The global contribution of product
line B is 20K-10K = 10 K euros. The contribution per unit is 10 000 / 2000
= 5 euros.
Question 7: For next year, the management of F
budgeted 1250 units in product line A, and 2500 units
in product line B. The price per unit in A will be 22 euros, and in B 9 euros.
The variable costs per unit won’t change. The total fixed costs are budgeted to
be 17 K€.
What is the budgeted net result?
|
Firm F |
|
|
|
|
|
Product line A |
Product line B |
Total |
|
|
|
|
|
|
Units |
1250 |
2500 |
|
|
Price per unit (€) |
22 |
9 |
|
|
VC per unit (€) |
10 |
5 |
|
|
|
|
|
|
|
Sales (K€) |
27,5 |
22,5 |
50 |
|
Variable costs (K€) |
12,5 |
12,5 |
25 |
|
Fixed costs (K€) |
|
|
17 |
|
|
|
|
|
|
Net result (K€) |
|
|
8 |
Question 8: If we allocate the fixed costs
proportionally to the number of units sold, what were the total costs per unit
last year in A, and in B? And what are they budgeted to be next year?
Last year:
|
Units |
1000 |
2000 |
|
|
Price per unit (€) |
25 |
10 |
|
|
VC per unit (€) |
10 |
5 |
|
|
|
|
|
|
|
Sales (K€) |
25 |
20 |
45 |
|
Variable costs (K€) |
10 |
10 |
20 |
|
Fixed costs (K€) |
5 |
10 |
15 |
|
|
|
|
|
|
Net result (K€) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
total cost per unit |
15 |
10 |
|
Next year:
|
Firm F |
|
|
|
|
|
Product line A |
Product line B |
Total |
|
|
|
|
|
|
Units |
1250 |
2500 |
|
|
Price per unit (€) |
22 |
9 |
|
|
VC per unit (€) |
10 |
5 |
|
|
|
|
|
|
|
Sales (K€) |
27,5 |
22,5 |
50 |
|
Variable costs (K€) |
12,5 |
12,5 |
25 |
|
Fixed costs (K€) |
5,67 |
11,33 |
17 |
|
|
|
|
|
|
Net result (K€) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
total cost per unit |
14,53 |
9,53 |
|
|
prices |
22 |
9 |
|
|
|
|
|
|
|
net result per
unit |
7,47 |
-0,53 |
|
Question 9: We are unhappy with this budget,
and decide to see what will happen if we sell more units of B. Everything else
being equal, for which number of units of B will the net result of B be zero?
(Be careful with the allocation of the FC which is still proportional to units
sold in each product line.)
Try another number of units in B,
for instance 3500:
|
Firm F |
|
|
|
|
|
Product line A |
Product line B |
Total |
|
|
|
|
|
|
Units |
1250 |
3500 |
|
|
Price per unit (€) |
22 |
9 |
|
|
VC per unit (€) |
10 |
5 |
|
|
|
|
|
|
|
Sales (K€) |
27,5 |
31,5 |
59 |
|
Variable costs (K€) |
12,5 |
17,5 |
30 |
|
Fixed costs (K€) |
4,47 |
12,53 |
17 |
|
|
|
|
|
|
Net result (K€) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
total cost per
unit |
13,58 |
8,58 |
|
|
prices |
22 |
9 |
|
|
|
|
|
|
|
net result per
unit |
8,42 |
0,42 |
|
Therefore 3500 units B is too much.
Try 3000:
|
Firm F |
|
|
|
|
|
Product line A |
Product line B |
Total |
|
|
|
|
|
|
Units |
1250 |
3000 |
|
|
Price per unit (€) |
22 |
9 |
|
|
VC per unit (€) |
10 |
5 |
|
|
|
|
|
|
|
Sales (K€) |
27,5 |
27 |
54,5 |
|
Variable costs (K€) |
12,5 |
15 |
27,5 |
|
Fixed costs (K€) |
5,00 |
12,00 |
17 |
|
|
|
|
|
|
Net result (K€) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
total cost per
unit |
14,00 |
9,00 |
|
|
prices |
22 |
9 |
|
|
|
|
|
|
|
net result per
unit |
8,00 |
0,00 |
|
3000 is the correct number of units
to produce in B.
Question 10: Explain what is
a direct cost in a cost center.
It is a cost which can be attached
directly to units produced. Examples: raw materials going into the product;
direct labor to assemble the product.
Whereas, maintenance, for instance,
is not a direct cost, because usually it cannot be directly related to specific
units produced (for instance if we repair machines used for different
products).
Question 11: What does the abbreviation OH
stands for? And explain what is this kind of cost.
OH = overhead (or overheads).
This is another name for indirect
costs (costs which are not direct).
(Some accountants restrict the name
“overheads” to costs which do not participate physically in the production
process. They would include G&A, but not maintenance.)
Question 12: If we suppress a product line, do
we change the total costs per unit in the remaining product lines, or do they
stay the same? Explain your answer.
We do change the costs per
units in the other remaining product lines.
This is because the OH must then be
allocated to the remaining products, and therefore they received a larger share
of OH per unit.
This is also why “total costs per
units” are somewhat artificial.
Question 13: An exercise on stocks and delivery to production. We bought and received in stocks
five identical elements which will go into the finished products after some
work in the work shop. The prices from the oldest to the most recently received
were 4 euros, 5 euros, 5 euros, 6 euros, 5 euros. Sometime later, three
elements went into production. What is the value of the remaining stock using
the FIFO method of evaluation?
Using FIFO, we record as gone into
production the oldest elements. Therefore the remaining ones are worth 6 + 5 =
11 euros.
Same question with the LIFO method.
Using LIFO, we record as gone into
production the most recent elements. Therefore the remaining ones are worth 4 +
5 = 9 euros.
Same question with the continuing averaging
method.
Before production the entire stock
is worth 25 euros, that is 5 euros per element.
After using three of them, we are
left with 2 elements, valued altogether at 10 euros.
Question 14: Describe what is the simplest cost
model of the activity of a single product line firm?
It is a model of the costs behavior, where some costs generated in the firm are
exactly proportional to the number of units produced, and the other costs are
fixed (do not vary at all with the number of units produced).
Question 15: What is the fundamental equation
of this simplest cost model?
If we denote
A = level of activity (i.e. number
of units produced)
P = price per unit
VCU = variable cost per unit
FC = fixed costs in the firm
P&L = Profit or loss
the equation is
P x A = VCU x A + FC + P&L
(note that
P&L depends on A; we could also write it P&L(A) )
Question 16: Draw the so-called Break-Even
graph.
Question 17: A firm F, making only one type of
product, had the following results last year:
|
Number of units sold |
10 000 |
|
|
|
|
|
|
|
|
|
|
Per unit |
Total |
|
|
|
(€) |
(K€) |
|
|
|
|
|
|
Sales |
|
30 |
300 |
|
VC |
|
15 |
150 |
|
|
|
|
|
|
Contribution |
|
15 |
150 |
|
|
|
|
|
|
FC |
|
|
60 |
|
|
|
|
|
|
Profit |
|
|
90 |
What was the BE point?
It is the level of activity where
Sales = Total costs.
Therefore where
A x Contribution per unit = Fixed
costs
The contribution per unit, here, is
15 euros. The FC are 60 000 euros. Therefore the BE is
60 000 / 15 = 4000
units.
What was our margin of safety?
The margin of safety, at a given
level of activity, is the distance between that level of activity and the BE. Here,
it is 10 000 – 4000 = 6000 units.
Question 18: In order to try and boost profit
to 100 K€ next year, we consider the two following possibilities:
a)
launch
a marketing campaign which will cost 20 000 euros
b)
improve
product quality, which will cost an extra 2 euros per unit
Comment upon each option. And suggest one to
the management, explaining why.
Answers:
a) if we add 20K euros of
extra costs, in order to reach 100K€ of profit next year, we must reach a level
of activity satisfying the equation
30€ x A = 15€ x A + 80K€ + 100K€
(the 80K€
is the new FC, and the 100K€ is the profit we would like to attain)
This requires a level of activity A
= 180 000 / 15 = 12 000 units.
(15 is the contribution per unit =
30 - 15)
b) if we improve the quality
of the product while raising its variable cost per unit, the new contribution
per unit will be 13 euros.
In this case, the level of activity
A, must satisfy
30€ x A = 17€ x A + 60K€ + 100K€
This yield A = 12 308 units
The question becomes: “are we more
likely to sell 12 000 units with the ad campaign, or to sell 12 308 units with a product improvement
?”
If we believe that the market is
sensitive to product improvement, option b) is probably the best. If the
product cannot much improved, and the 2€ per product will not create a
significant difference, then we should rather choose the ad campaign.
Question 19: Explain why total cost per units in a multi-product-line firm are artificial.
Because, we must allocate
OH.
And these OH do not correspond to specific products. The allocation can be done
in several ways.
When we cancel some production, the
other products see their total cost per unit go up.
Question 20: The last two years, a firm F had
the following results:
|
Year |
Sales |
Profits |
|
|
(K€) |
(K€) |
|
|
|
|
|
2008 |
700 |
120 |
|
|
|
|
|
2009 |
900 |
200 |
If, in 2010, we budget sales of one million
euros, what will be our profit?
Solve a system of two linear
equations with two unknowns (VCU and FC):
700 x 1K€ = 700 x VCU + FC + 120K€
900 x 1K€ = 900 x VCU + FC + 200K€
Say, for the sake of the
calculation, that PU = 1K€ (any number will do).
We find:
|
VCU = |
0,6K€ |
|
|
|
|
FC = |
160K€ |
Then if A is 1000 units (i.e. Sales
= 1 mio €), then
1 mio € = 1000
x 0,6K€ + 160K€ + P&L
This yields P&L = 240 000
euros
This result can also be obtained
without all these calculations:
The profit is linearly related to
sales. We see that an increase of 200K€ in sales, leads to an increase of 80K€
in profit. Therefore a further increase of 100K€ in sales will lead to a further
increase in profit of 40K€.
Therefore at 1 mio
€ of sales, the profit will be 240K€.