Unchained Music (UM) produces two acoustic and two electric guitars: the Jerry, the Layne, the Mike, and the Sean. Despite an increase in the volume of orders, UM’s profits are declining. New competitors entered the market, which forced the UM to carefully revise its pricing strategy and reduce its costs. Yet, gross profits mysteriously seem to continue shrinking. The direct labour rate is $35 per hour, and direct labour is a variable cost. The cost driver used to allocate manufacturing overhead costs to products at UM is calculated by dividing the total manufacturing overhead costs by the total planned capacity in direct labour hours. Planned capacity is 80,960 direct labour hours per year. The total manufacturing overhead cost is $339,750 per year and none of it is attributable to products so cannot be saved if a product is dropped. The owners of UM, two brothers, want to identify and drop any guitar that is not profitable, that is, any product that would show a negative gross profit. They have provided you with the following information on the guitars: Jerry Layne Mike Sean Total Planned unit sales 800 720 600 500 2620 Selling price per unit $2000 $2500 $3000 $3500 Direct materials cost per unit $900 $1200 $1700 $2000 Direct labour hours per unit 26 28 35 38 Question 1 Calculate the plantwide overhead rate, and the gross profit for each product (and for UM). Present your calculations in the following template Jerry Layne Mike Sean Total Planned Unit Sales Revenue Direct Materials Direct Labour Manufacturing Overhead Gross Profit Planned Direct Labour Hours Assume that dropping a product has no effect on the unit sales of the remaining products and that the direct labour hours of the dropped product would not be used for the production of other products. Question 2 Based on the gross profits calculated in Q1, drop any unprofitable guitar from the product mix. Recalculate the overhead rate based on the new total direct labor hours remaining in the plant. Use this revised overhead rate to assign overhead costs to the remaining products. Using the same template as in Q1 (modified to only keep the profitable guitars), calculate the gross profit for each product and for UM and comment on it.
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.
Unchained Music (UM) produces two acoustic and two electric guitars: the Jerry, the Layne, the Mike, and the Sean. Despite an increase in the volume of orders, UM’s profits are declining. New competitors entered the market, which forced the UM to carefully revise its pricing strategy and reduce its costs. Yet, gross profits mysteriously seem to continue shrinking.
The direct labour rate is $35 per hour, and direct labour is a variable cost. The cost driver used to allocate manufacturing
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Jerry |
Layne |
Mike |
Sean |
Total |
|
Planned unit sales |
800 |
720 |
600 |
500 |
2620 |
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Selling price per unit |
$2000 |
$2500 |
$3000 |
$3500 |
|
|
Direct materials cost per unit |
$900 |
$1200 |
$1700 |
$2000 |
|
|
Direct labour hours per unit |
26 |
28 |
35 |
38 |
|
Question 1
Calculate the plantwide overhead rate, and the gross profit for each product (and for UM). Present your calculations in the following template
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Jerry |
Layne |
Mike |
Sean |
Total |
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Planned Unit Sales |
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Revenue |
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Direct Materials |
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Direct Labour |
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Manufacturing Overhead |
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Gross Profit |
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Planned Direct Labour Hours |
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Assume that dropping a product has no effect on the unit sales of the remaining products and that the direct labour hours of the dropped product would not be used for the production of other products.
Question 2
Based on the gross profits calculated in Q1, drop any unprofitable guitar from the product mix. Recalculate the overhead rate based on the new total direct labor hours remaining in the plant. Use this revised overhead rate to assign overhead costs to the remaining products. Using the same template as in Q1 (modified to only keep the profitable guitars), calculate the gross profit for each product and for UM and comment on it.
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repeat the step from q2: drop any product that is uprofittable with the reviewed cost assignment
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