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Revenue Budget and Standard Costing Assignment

Question 1: Budget

Required:

1. Prepare a revenue budget for the upcoming academic year

2. Determine the number of staff needed to cover classes.

3. Assume there is a shortage of full-time academic staff. List at least five actions that Resort Island might take to accommodate the growing student numbers.

4. You have been requested by the university's deputy vice chancellor (DVC) to construct budgets for other areas  of operation (such as library, grounds, cafeteria, and maintenance). The DVC noted: 'The most important resource of the university is academic staff. Now that you know the number of staff needed, you can prepare the other budgets. Academic staff are indeed the key driver - without them  we don't operate.' Does the DVC really understand the linkages with the budgeting process? Explain.

Revenue Budget

For the upcoming year:


No of students

15000

No of subject

60000

Price per subject

3500

Revenue expected

  210,000,000.00





Staff needed

Total No of classes

190

No of teachers

63

3) In case of shortage of staff, resort island can

  • Hire temporary teachers
  • Tell Seniors to teach juniors
  • Merge two classes of same teacher
  • Make the classroom discussions online
  • Current teacher can take alternative classes

4) No the DVC does not really understand the linkage between budgeting process, it involves us to know more details about what expenses are needed for respective sections.

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Question 2: Standard Costing (20 marks in total)

Required:

1. Calculate the number of standard clerical hours allowed in April, given the number of applications processed.

2. Explain why the company's flexible budget should be based on the number of clerical hours allowed rather than on the number of applications processed.

3. Using Excel, construct a formula flexible overhead budget for the company, and calculate the flexible budget for total overhead cost in April. Include both the formula view and results view of your spreadsheet in your Word document.

4. Prepare a short memorandum to the management of Good Health evaluating the benefits that standard costing systems can offer a business.

Sol:

Type

Standard hours per Application

Multiply: Number of Application

Standard hours allowed

Health

                   1.0

                      375

                  375

Life

                   1.5

                      300

                  450

Automobile

                   2.0

                      150

                  300

Renter

                   2.0

                      600

               1,200

Homeowner

                   5.0

                      300

               1,500

Total Standard hours allowed in April

               3,825





Flexible budget based on clerical hours rather than the number of application processed. Because of Each type of Application required the different number of labor hour per application of the process.





Formula, Y = 6000 + 10X

Where, X means Clerical hours

Y means Total Overhead Cost





Total Overhead cost using equation

Y = 6000 + 10*3825



Y = 6000 + 38250



Y = 44250





Total Overhead cost using Spread Sheet  

Total Standard hours allowed in April

               3,825

Multiply: Variable overhead per hour

$                 10

Total Variable cost


$         38,250

Add: Fixed Overhead Cost


$           6,000

Total Overhead Cost


$         44,250





Standard costing helps to management to check the efficiency of the resource of the business such as material, labor, and overhead.

It also helps to cost control.

It helps to measure the value of inventory based on standard cost.

Helpful in Setting the price of the product.

Helpful to allocate responsibility of the business. (Hint: Material price variance is unfavorable then Purchasing agent of the company will responsible for a variance.)

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Question 3: Activity based costing (20 marks in total)

Required

1. Calculate the total overhead that should be assigned to the order for development of chemicals.

2. What is the overhead cost per box of chemicals?

3. If Pix Photographic Supply wee to use a plant-wide predetermined overhead rate based on machine hours, calculate he rate per hour.

4. Under the approach in requirement 3, how much overhead would be assigned to the order for development chemicals:

1. in total

2. per box of chemical?

5. Explain why these two product costing systems result in such widely differing costs. Which system do you recommend? Why?

6. Calculate the unit cost of a production order for 100 specially coated plates used in film development. In addition to direct material costing $180 per plate and direct labour costing $60 per plate, the order requires the following:

Machine setups

2 setups

Raw material

800 kg

Hazardous materials

300 kg

Inspections

3 inspections

Machine hours

50 machine hours

Ans:

1. Total overhead to be assigned to the order for film development : $ 65,625

Activity

Activity Rate

Production Requirements

Overhead Cost

Machine Setup

$ 3,000 per setup

4 setups

$ 12,000

Materials Handling

$ 3 per kg

10,000 kgs.

30,000

Hazardous Waste Control

$ 7.50 per kg

2,000 kgs

15,000

Quality Control

$ 112.50 per inspection

10 inspections

1,125

Other Overhead Costs

$ 15 per machine hour

500 machine hours

7,500

Total Overhead Cost



$ 65,625

2. Overhead cost per box of chemicals = $ 65,625 / 1,000 boxes = $ 65.625

3. Plant-wide predetermined overhead rate = $ 937,500 / 20,000 machine hours = $ 46.875 per machine hour.

4. Overhead to be assigned to the order for development chemicals = $ 500 machine hours x $ 46.875 per machine hour = $ 23,437.50

5. The difference is due to multiple cost drivers and cost pools being used in activity based costing, as against a single cost driver and a single overhead cost pool in the plantwide method.

If the plantwide method is used, the company would be getting orders no doubt, but at the cost of compromised profitability, as the system is obviously resulting in undercosting of its products, and consequent underpricing. Therefore, the company should follow the activity based costing system.

5. Overhead cost per box of chemical : $ 23,437.50 / 1,000 boxes = $ 23.4375 per box.

6. Unit cost of specially coated plate: $ 327.375

Machine Setup

$ 3,000

Material Handling

2,400

Hazardous Waste Control

2,250

Quality Control

337.50

Other Overhead

750

Total Overhead

8,737.50

Number of plates

100

Overhead cost per plate

87.375

Direct Materials

180

Direct Labor

60

Unit Cost

$ 327.375

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Question 4: Relevant information for decisions

Required

1. Write a letter providing an analysis and a recommendation with respect to whether the banolide should be sold at split off or processed further. Also include in this letter the key issues that the management should consider when making the outsourcing decision.

Ans:

The decision rule to make discussion of wheather to sell at split off point or to further process is if the incremental revenue is more than incremental cost of further processing, then it is better to further process else its better to sell at split off point, if it has a sales value at split off.

Ltrs

GSX

10000 litres

XeniteBanolide

7000 litres                        3000 litres

Particulars

Split off

Further processing

Incremental

Sales Value($)

5000

20000

15000

Cost:




Further processing cost

0

26200

26200

Profit/Loss

5000

-6200

-11200

So here it is clearly seen that the company is getting into losses if it chooses to further process, it is better to sell at split off point

Joint costs are irrelevant for decision making, as this cost will be same weather we sell at split off or after further processing

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Question 5: Variable costing

Required

1. Prepare an income statement for Slumberworld for the current year using:

1. absorption costing

2. variable costing

2. Which costing  method, absorption costing or variable costing, shows a higher operating profit? Why?

3. What would be Slumberworld's finished goods inventory cost on 31 December, under:

1. absorption costing

2. variable costing

4. Which costing method, variable or absorption, would you recommend to Slumberworld's management? Why

Answer 1

Absorption Costing

Direct Material

     1,20,000

Direct Labour

        60,000

Fixed Manufacturing Overhead

        75,000

Variable Manufacturing Overhead

        36,000


     2,91,000

Units Manufactured

        15,000

Cost Per Unit

          19.40

 

INCOME STATEMENT - ABSORPTION COSTING METHOD

PARTICULARS

AMOUNT



Sales

      8,10,000



Less: Cost of Goods Sold

      2,61,900

(13500 X 19.4)




Gross Profit

      5,48,100



Fixed Selling and Admin Expenses

         90,000

Variable Selling and Admin Expenses

         13,500



Net Income

      4,44,600

 

Variable Costing Method

Direct Material

   1,20,000

Direct Labour

      60,000

Variable Manufacturing Overhead

      36,000


   2,16,000

Units Manufactured

      15,000

Cost Per Unit

14.40

 

INCOME STATEMENT - VARIABLE COSTING METHOD

PARTICULARS

AMOUNT



Sales

      8,10,000



Less: Cost of Goods Sold

      1,94,400

(13500 X 14.4)




Fixed Manufacturing Overhead

         75,000



Gross Profit

      5,40,600



Fixed Selling and Admin Expenses

         90,000

Variable Selling and Admin Expenses

         13,500



Net Income

      4,37,100

Answer 2

The Absorption Costing method shows higher amount of profit. This is solely due to fixed manufacturing overhead treatment. In absorption costing, Fixed Manufacturing Overhead is apportioned over the units produced hence $75000 is allocated among 15000 Units, per unit cost of same comes down to $5 per unit. Total units sold are 13500 hence total fixed manufacturing overhead charged in absorption costing method is $5 * 13500 Units = $67500. Hence Fixed cost charged as per variable cost method is $7500 more thanthat charged in absorption costing method.

Answer 3

Absorption Costing

Finished Stock (Units)

          1,500

Cost Per Unit

          19.40

Finished Goods Inventory

        29,100

 

Variable Costing

Finished Stock (Units)

        1,500

Cost Per Unit

        14.40

Finished Goods Inventory

      21,600

Answer 4

If management wants to state higher profit in the books then they should use the absorption costing method and otherwise.

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