Jan 17, 2018 sample paper

Describe the difference between contribution margin and gross margin, and illustrate the difference with an example.

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Questions

1.
Describe the difference between contribution margin and gross
margin, and illustrate the difference with an example. From a management
perspective, indicate which margin figure would be most useful for product
pricing and which would be most useful for overall profit prediction.

2.
Compare the assignment of under/over applied overhead costs at year
end utilizing the allocation-rate approach, the proration approach, and the
write-off approach. Create a numerical example to illustrate the proper handling
of each case

3.
Using this week’s lecture, describe cost objects, cost drivers
(activities), and cost pools and give an example of each that relates to the
others. Include a discussion on cost hierarchies and how this relates to the
other terms you describe.

Lecture:

ABC
costing takes basic cost data generated out of either job costing or process
costing systems and attempts to associate direct costs and overhead costs to
specific activities performed. The activities, then, are tied to a
specific product. Many firms have adopted ABC costing as a way to get
more accurate costing of products and/or activities. However, the process
is time consuming and can be expensive to implement. It is also not
recognized by GAAP, so it is strictly for internal analysis. In short,
ABC is all about information for decision making, not for publishing financial
statements. ABC refines pools of cost into smaller groups which are then
analyzed for what drives the cost (cost driver). What this amounts to is
we may have multiple overhead pools that are allocated to products based on
different allocation bases (remember, not all costs are driven by labor hours
or machine hours, right?).

Here is a real life example. The firm is a manufacturer of plastic bags
for the meat packers like Hormel, IBP and Excel. The firm printed
customer logos, safe handling instructions and so forth on the plastic sheet
stock before cutting it into bags with a heat seal. For years jobs were
priced based on the amount of direct labor hours estimated for the job.
Over the years the firm seemed to be getting more and more short run
multi-color jobs (small quantities like 5000 bags for example), which are not
nearly as profitable as the long running jobs (250,000 bags or more). When
the firm really analyzed the process via ABC, it discovered that the true cost
of the job was actually driven by the number of colors in the job, because each
color of ink required a separate print head, printing plate and print
dryer. Anyone who knows something about colors knows that each layer of
color must go on in a particular sequence and it must be completely dry before
it gets to the next print head where another color will be applied. The setup
process for each color was very labor intensive. Once the setup was
completed one operator could run the job. So the producer was pouring
lots of labor hours into each setup but only charging for the amount of labor
needed torunthat job. Once the firm figured this
out they changed the product pricing to be based on the number of job colors
and then added an upcharge for the length of the job to cover that labor
cost. Almost immediately the small multi-color jobs disappeared and the
long-run single or two-color jobs started showing up. Profitability increased
substantially because of the change in pricing structure.

Let us look at a couple of videos that demonstrate the ABC process:

.youtube.com/watch?v=mRt5YMVGOxg”>Activity Based Costing (Cost Hierarchy Categories, Cost Allocation
Bases, ABC System Setup, etc.)

.youtube.com/watch?v=n68Yns3c95s”>Activity Based Costing (Overview of ABC System
Overhead Allocation Based on Resource Consumption

4.
Discuss the concept of overhead in terms of flexible budgeting,
overhead cost variances and how each relates to a manager’s ability to control
various aspects of their operation. Include in your discussion each of the
possible overhead variances and why they need to be analyzed.

ALL
QUESTIONS ARE 200 – 250 WORDS EACH


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