Grüning Exercises

Question 1

Calculate product cost

Answer 1

variable Machine cost (total variable cost / cost per hour x time)
+ direct Material
= variable cost
+ fixed cost (overhead / running time x time per unit)
= total cost
/ success rate
= Total cost of successfull unit

Question 2

Factors to consider when recommending an option

Answer 2

Accounting modell
non-financial information 
   - is time of the essence
   - is accuracy / low waste of the essence
   - are there capacity constraints

Question 3

Prepare overhead absorption rate according to direct labour cost method

Answer 3

Production overhead € / direct labour €

Question 4

Prepare overhead absorption rate according to direct labour hour method

Answer 4

Production Overhead / direct labour hours

Question 5

Prepare overhead absorption rate according to machine hour method

Answer 5

production overhead / Machine hours

Question 6

Why do you use a pre determined overhead absorption rate?

Answer 6

Compared to actual overhead rates:
– Product costs can be calculated before the end of the period.
– Therefore, product cost are timely available.
– No seasonal fluctuations.

Question 7

Select an appropriate Absopriton rate

Answer 7

• consider what relation is the most significant (machines, employee labbour time)
• think if that relation may logically be the main reason for overhead

Question 8

Calculate the price of a product incl. the absorbed costs

Answer 8

direct material
+ direct labour
+ direct expenses
= Prime costs
+ Production Overhead (absorption rate x multiplier)
= Manufacturing cost
+ Admin overhead (admin rate x [total admin budget / total manufacturing cost budget])
=Total Cost
+ Profit Margin (Total Cost / [1-profit margin in %]-Total cost)
= Selling price

Question 9

Prepare the Process 2 account for the period, using FIFO principles.

Answer 9

Step 1: Prepare a statement of Input and Output and make sure it tallies
Step 2: Calculation of cost per unit and cost of completed production (FIFO method)
a. divide into three parts: Previous Process Cost, Materials, Conversion Costs
b. Calculate current costs (all costs in this period) for each sector
c. Calculate Completed units less opening units WIP eq. units
d. put abnormal loss into Previous process and materials
e. enter closing WIP eq. units
f. calculate current total eq. units (completed units - opening WIP + abnormal loss + closing WIP)
g. divide Current Cost by Current total units

Step 3: Calculate Cost of completed production by calc. sector units * CpU and calc. Curent Period Production + Abnormal loss + Closing WIP

Step 4:
write down the process 2 account and make sure it tallies

Question 10

Explain how, and why, your calculations would have been different if wastage occurred at the end of the process.

Answer 10

loss at the end of the process => normal loss only charged to units that passed the process. -> cost of normal losses should not be allocated to closing WIP.
To meet this requirement a separate column for normal losses is incorporated into the unit cost statement and the normal loss equivalent into the unit cost calculation of total equivalent units. The cost of the normal loss should be calculated and added to the cost of completed production.

Question 11

Prepare operating statements for EACH of the periods, based on marginal costing principles

Answer 11

Sales
   - opening stock
   - Production cost
   \+ closing stock
   = marginal CoGS
Sales - Marginal CoGS = Contribution
- Fixed Costs
Contribution - Fixed COsts = Net profit

Question 12

Prepare operating statements for EACH of the periods 1 to 4, based on absorption costing principles.

Answer 12

Sales
   - opening Stock
   - total production cost (fix + variabel)
   \+ closing stock
   \+/- over/underapplied overhead
   = CoGS
Sales - CoGS = Gross profit
Period Costs (non production overhead)

Question 13

Comment briefly on the results obtained in each period AND in total by the two systems (Absorption vs. marginal costing)

Answer 13

In period production equals sales and there are no stock movements so that profits are the same with both systems.
When production exceeds sales absorption costing reports the greater profits because fixed costs are deferred in the stock valuations.
When sales exceed production the opposite situation occurs and marginal costing reports the higher profits.

Question 14

Calculate Break Even Point

Answer 14

Sales
   - var. Cost
   = Contribution
   - fixed Costs
   = Net Profit
--> b.E. profit
--> b.E. unit

Question 15

How to calculate the impact of proposals on budget

Answer 15

Calculate impact on sales
Calculate impact on Contribution
Calculate impact on fixed Costs
Calculate difference on b.e. units and b.e. profit

Question 16

Identify three non-financial issues to be considered before a final decision is made. (break even point)

Answer 16

1. the promotion campaign might generate increased sales beyond the current year;
2. the price reduction for proposals B and C may cause competitors to react thus provoking a price war;
3. the price reduction for proposals B and C may not result in the predicted sales volume if customers perceive the product to be of low quality;
4. proposal C will result in the company operating at full capacity. This may result in changes in cost structure if the company is operating outside the relevant output range.
5. video cassette recorders (VCR) are an outdated product?

Question 17

How to calculate if the price for something is appropriate (break even analysis)?

Answer 17

proposed selling price
- relevant costs
   Materials (replacement costs + value in stock)
- direct labour
-variable factory overhead
- fixed factory overhead

Question 18

Explain the relevance of opportunity costs in decision-making.

Answer 18

Relevant costs are costs that will be affected by the decision. Opportunity costs represent the lost contribution of profits arising from the best use of the alternative foregone. These costs are affect-ed by the decision and should therefore be considered as relevant costs.