Cost accounting analyss PDF

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Final-Term Exam Summer – 2021 Department of Business Administration

Subject: Cost Accounting Hours

Submission Duration: 3 (03:00PM-6:00PM)

Instructor: Dr. Rakesh Parkash

Submission Date: 5-9-2021

Program: BBA

Max. Marks: 40 (25+15)

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Question 1 (25 marks) Toxaway Company is a merchandiser that segments its business into two divisions— Commercial and Residential. The company’s accounting intern was asked to prepare segmented income statements that the company’s divisional managers could use to calculate their break-even points and Toxaway Company is a merchandiser that segments its business into two divisions— Commercial and Residential. The company’s accounting intern was asked to prepare segmented income statements that the company’s divisional managers could use to calculate their break-even points and make decisions. She took the prior month’s companywide income statement and prepared the absorption format segmented income statement shown below:

Sales Cost of goods sold Gross margin Selling and Administrative expenses Net operating income

Total Company 900,000 600,000 300000

Commerci al 300,000 168000 132000

Residenti al 600,000 432000 168000

288000 12000

124800 7200

163200 4800

In preparing these statements, the intern determined that Toxaway’s only variable selling and administrative expense is a 10% sales commission on all sales. The company’s total fixed expenses include $86,400 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $45,600 of fixed expenses that would be avoided if the Residential segment is dropped, and $66,000 of fixed expenses that would be avoided if the Commercial segment is dropped.

Required: 1. Do you agree with the intern’s decision to use an absorption format for her segmented income statement? Why?

No, the intern's decision to use an absorption format for her segmented income statement is not a good idea because if the break-even point is to be calculated, then the contribution format should be used rather than the absorption format.

2. Based on the intern’s segmented income statement, can you determine how she allocated the company’s common fixed expenses to the Commercial and Residential segments? Do you agree with her decision to allocate the common fixed expenses to the Commercial and Residential segments?

commercial total selling and administrative expense

resendial

124800

163200

less:Direct fixed expenses

66,000

45,600

less:Variable sales commission(10% of sales)

30,000

60,000

common fixed expenses allocated to segments

45,600

No, we don't agree with the intern's decision to allocate the common fixed expenses because these expenses do not directly relate to the segment

3. Redo the intern’s segmented income statement using the contribution format.

segmented income statement using contribution format total sales

commercial

residential

900,000

300,000

600,000

600,000

168000

432000

variable expenses cost of good solds sales commision

90,000

30,000

60,000

total variable expenses

690,000

198,000

492000

contribution margin

210000

102,000

108,000

66,000

45,600

less:Direct fixed expenses

segment margin less:common fixed expenses net operating income

4. Compute the companywide break-even point in dollar sales.

total total Contribution margin

210,000

total sales

900,000

contribution margin ratio total company wide fixed costs CM ratio companywide break even point in dollar sales

5. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division.

commercial

residential

segment contribution margin

102,000

108,000

segment sales

300,000

600,000

66,000

45,600

CM ratio direct fixed costs

CM ratio segment breakeven point in dollar sales

6. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $18,000 and $36,000, respectively, and to lower its companywide sales commission percentage from 10% to 5%. Calculate the new break-even point in dollar sales for the Commercial Division and the Residential Division. segments revised break even point in dollar sales

commercial

resendiatail

300,000

600,000

cost of goods sold

168,000

432,000

revised sales commission

15,000

30,000

total variable expenses

183,000

462000

contribution margin

117,000

138,000

sales variable expenses

revised CM ratio Revised direct fixed expenses CM ratio segments break even point in dollar sales

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