Cost & Management Accounting

Cost & Management Accounting

A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs  to aid company management in measuring financial performance.

Exam : Managerial Accounting

Date  : 12/09/2015  5:00 pm- 7:00 pm GMT+3

Place : A(1) and A(2)

Targeted : Batch 2015 Semester 2  

Hospital costs

Gotham city hospital unionized. In 2006 received an average annual Salary of $45,000. The hospital administrator is considering change in the contract with nurses for 2007. In turn, the hospital may also change the way it charges nursing costs to each department.

The hospital each department accountable for its financial performance and it allocates     revenues and expenses to departments. Consider the expenses of the obstetrics department in 2006.

Variable expenses (based on 2006 patient-days) are:

Meals

$610.000

Laundry

260.000

Laboratory

900.000

Pharmacy

850.000

Maintenance

150.000

Other

530.000

Total

$ 3.300.000

 Fixed expenses (based on number of beds) are:

      Rent

$ 3.300.000

General administrative  services

2.200.000

 Janitorial

200.000

 Maintenance

150.000

 Other

350.000

 Total

$ 5.900.000

Management assigns nurses to departments on the basis of annual patient-days as follows:

Volume Level in Patient-days

Number of Nurses

10.000-12.000

30

12.001-16.000

35

Total patient-days are the number of patient multiplied by the number of days they are hospitalized. The hospital charges each department for the salaries of the nurses assigned to it.
During 2006, the obstetrics department had a capacity of 60 beds, billed each patient an average of $810 per day, and had revenues of $12, 15 million.

Questions

$11.     Compute the 2006 volume of activity in patient-days.

$12.     Compute the 2006 patient-days that would have been necessary for the obstetrics department to recoup all fixed expenses except nursing expenses.

$13.     Compute the 2006 patient-days that would have been necessary for the obstetrics department to breakeven including nurses salaries as fixed cost.

$14.     Suppose obstetrics must pay $200 per patient-day for nursing services. This plan would replace the two-level, fixed –cost system employed in 2006.compute what the break-even point in patient-days would have been in 2006 under this plan.

Answer

$11.       $12,150,000= 15,000 patient-days

                  $810

$12.       Variable costs = $3,300,000 = $220 per patient-day

                                         15,000

Contribution margin = $810 - $220 = $590 per patient-day

To recoup the fixed expenses:

$5,900,000 ÷ $590 = 10,000 patient-days

$13.        The fixed cost levels differ as the relevant range changes:

Patient-Days

Non-Nursing

Nursing

Total

Fixed Expenses

Fixed Expenses

Fixed Expenses

10,000-12,000

$5,900,000

$1,350,000(1)

$7,250,000

12,001-16,000

5,900,000

1,575,000(2)

7,475,000

(1) $45,000 x 30 = $1,350,000

(2) $45,000 x 35 = $1,575,000

To break even on higher level of fixed costs:

$7,250,000 ÷ $590 = 12,288 patient-days

This answer exceeds the higher-level maximum; therefore, this answer is infeasible.

The department must operate at a $7,475,000 level of fixed costs to break even:

$7,475,000 ÷ $590 = 12,669 patient-days.

$14.       The nursing costs would have been variable instead of fixed. The contribution margin per patient-day would have been $810 - $220 - $200 = $390. The break-even point would be higher: $5,900,000 ÷ 390 = 15,128 patient-days.

Chapter (1): 2-A1 and 2-A2 Chapter (3): 3-50 and 3-53 Chapter (4): 4-A1 and 4-A2 Chapter (5): 5-A1 and 5-A2 Chapter (6): 6-A1

Assignment No 1

Sheet 3, Page 5, Example 2

Example 2

The following information is extracted from the accounts of Tata Ltd for the 2nd quarter of the year 2011 (in units only)

Month

April

May

June

Production

18,000

20,000

21,000

Sales

20,000

21,000

21,000

 

Additional information

  1. The closing stock of finished goods on 31 March was 6,000 units
  2. The variable cost of production per unit is SDG 58 made up as follows
    Direct material27
    Direct labour22
    Variable production overheads9
  3. Fixed production overheads are estimated at SDG 280,000 per month and are absorbed into the cost of production of the unit produced by a budgeted absorption rate calculated on the basis of the normal level of production of 20,000 units per month
  4. The selling price per unit is determined by adding a gross profit margin of 25% of the total cost of production per unit to that cost.

Required:

  1. Prepare a month by month and in total the profit and loss account for the 2nd quarter using:
  • .Absorption costing method
  • Marginal costing method
  1. Explain the difference between the two methods as to:
  • Closing stock valuation
  • The reported profit

Solution:

Absorption rate per unit = Fixed cost / Normal production = 280,000/20,000 = 14 SDG per unit

Production cost using full costing:

Direct material

27

Direct labour

22

Variable overheads

9

Fixed overheads

14

Total

72

 Production cost using marginal costing

Direct material

27

Direct labour

22

Variable overheads

9

Total

58

 

To calculate opening and closing stocks:

Month

April

May

June

Opening stock

6,000

4,000

3,000

Production

18,000

20,000

21,000

Total available

24,000

24,000

24,000

Sales

20,000

21,000

21,000

Closing stock

4,000

3,000

3,000

 

Selling price = total cost of production + 25%

                        = 72 + 18 = 90

Using full costing:

Particular

April

May

June

Total

Sales revenue x90

1,800,000

1,890,000

1,890,000

5,580,000

Total cost of sales

 

 

 

 

Opening stock

432,000

288,000

216,000

432,000

Production in month

 

 

 

 

Direct material x27

486,000

540,000

567,000

1,593,000

Direct labour x22

396,000

440,000

462,000

1,298,000

Variable OH x9

162,000

180,000

189,000

531,000

Fixed OH x14

252,000

280,000

294,000

826,000

Total cost of production

1,728,000

1,728,000

1,728,000

4,680,000

Closing stock

288,000

216,000

216,000

216,000

Cost of production of sales

1,440,000

1,512,000

1,512,000

4,464,000

Profit before adjustment

360,000

378,000

378,000

1,116,000

Under/over absorption

(28,000)

0

14,000

(14,000)

Profit after adjustment

332,000

378,000

392,000

1,102,000

 

Using marginal costing

Particular

April

May

June

Total

Sales revenue

1,800,000

1,890,000

1,890,000

5,580,000

Total cost of sales

 

 

 

 

Opening stock

348,000

232,000

174,000

348,000

Production in month

 

 

 

 

Direct material x27

486,000

540,000

567,000

1,593,000

Direct labour x22

396,000

440,000

462,000

1,298,000

Variable OH x9

162,000

180,000

189,000

531,000

Total variable cost

1,392,000

1,392,000

1,392,000

3,770,000

Closing stock

232,000

174,000

174,000

174,000

Variable Cost of production of sales

1,160,000

1,218,000

1,218,000

3,596,000

Contribution

640,000

672,000

672,000

1,984,000

Fixed cost

280,000

280,000

280,000

840,000

Profit

360,000

392,000

392,000

1,144,000

 

The difference in closing stock valuation = 216,000 – 174,000 = 42,000

The difference in reported profits = 1,144,000 – 1,102,000 = 42,000

This difference is attributed to the fixed overheads x units in the period

Opening stock – closing stock = 6,000 – 3,000 = 3,000

Fixed overheads per unit = 14

3,000 x 14 = 42,000 (which is the difference in profit and closing stock valuation)

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