Accounting Assignment: Evaluation of Business Cases Based on Managerial Accounting

Question

Task: Write an accounting assignment addressing the following questions:
Question 1
Happy Jones is the Facilities Manager for a university. She is considering an opportunity that involves renting food vending machines and placing them in various locations throughout the university. This would allow students and staff to conveniently access a quick range of similarly priced food items for snacking “pick-me-up” purposes. (Assume a non-COVID-19 state of affairs on campus.) As a not-for-profit university, the main aim is to cover all costs. If any profits are made, they will be used to boost student support services.

For the purposes of analysing this opportunity, Happy has the following estimates:

Happy has asked you to undertake a cost-volume-profit analysis of the opportunity.
a) Calculate the contribution per unit and the contribution margin ratio.
b) Calculate the break-even point in number of food items and in dollars of revenue.
c) Calculate the sales (in units) needed to earn a target annual profit of $2,000.
d) The vending machine owner initially offered Happy a fixed rental fee option. However, the owner has since provided another rental agreement option: a $9,000 fixed rental plus 2.5% of revenues from the sale of food items. Calculate the break-even point in units under this option and briefly explain from the university’s perspective which rental agreement option might be preferred. Your explanation should not exceed 100 words.

Question 2
You need a new roof on your old home. You employ William, the owner of a sole trader roofing business, to do the job. Although William’s quote was the lowest you received, you picked him because he was highly recommended by several friends. You were sure the low quote did not suggest a low quality job. As it turned out, you were right.

William works alone so you chatted with him during lunch breaks to keep him company. During one of these chats, you were surprised to hear that his business was struggling financially, even though William had jobs booked 5 days a week for a year ahead, except for 4 weeks in summer when he wants to take a well-earned break. You thought about that low quote. Was he charging enough to cover all his costs? The answer became clear when you received William’s invoice. It included the correct list of materials, all charged at appropriate, going-rate-in-the-market prices (total $10,000). No obvious problems there. It was the other item on the invoice – labour – that suggested a problem. William had charged the correct amount of hours (total 80 hours = 8 hours per day, 5 days per week for 2 weeks) but at only $30 per hour! Clearly such a low rate could only be the direct labour rate. It seemed that no overheads had been incorporated into that rate, as would normally be the case for ‘tradies’. You guess William’s overheads would be around $50,000 per year.

You pay the invoice but then decide you want to help William out by explaining how he could apply a job costing approach in the future.
In your explanation to William, you will need to include the following:
a) A brief description of job costing and its purpose.
b) A definition of overheads along with 4 examples of overheads applicable to jobs for William’s business.
c) A numerical example applied to your roofing job that derives the full cost of your job. The example should correctly use the information above, provide any necessary formulas and justify any choices. The example should be well presented in a logical order that will be easy for William to follow and understand.

Your Question 2 answer should not exceed 500 words.

Answer

Accounting Assignment Answer 1
a) The input data is indicated below.
Average selling price per unit = $2.00
Average variable cost per unit = $1.60
Estimated fixed cost for the year = Rental ($12,000) + Labour ($10,000) +
Other fixed expenses ($2,000) = $24,000

The applicable formula is outlined as follows. Contribution margin per unit = Unit sale price – Unit variable cost Contribution margin ratio = (Contribution margin per unit/Unit sale price)
Putting the input values identified above in the formulas indicated above, we get the following.
Contribution margin per unit = $2 - $1.60 = $0.40
Contribution margin ratio = ($0.4/$2)*100 = 20%

b) The applicable formula is outlined as follows.
Break-even point (in terms of units) = Annual fixed costs/Unit contribution margin
Putting the input values given and computed in part a, we get the following. Break-even point (in terms of units) = ($24,000/$0.4) = 60,000

In order to determine the breakeven in terms of dollars, the revenue generated from 60,000 units ought to be computed which is $2*60,000 = $ 120,000

c) The applicable formula is outlined as follows.
Unit sale required to achieve the given profit = (Annual fixed costs + Profit amount)/Unit contribution margin

Unit sale required to achieve the profit of $2,000 = ($24,000 +$2,000)/$0.4 = $65,000

d) The alternative plan presented by the vending machine owner would have the following two changes.
• Drop in the annual fixed rental to $ 9,000 from $ 12,000 in the other plan. Thus, the annual fixed cost would be $ 21,000 instead of $ 24,000 in the original plan.
• Drop in the contribution margin per unit by the extent of revenue shared i.e. 2.5% * $2 = $0.05

Break-even point under the proposed revenue sharing plan = $21,000/($0.4-$0.05) = 60,000

For the two rental plans extended by the vending machine owner, it is apparent that no clear choice can be made on the basis of break even since the university would have to sell 60,000 food items in either of the plans to break even. Thus, the superior choice would be made so as to lower the amount of losses in case of sales being lower than 60,000 units. This is important since the university is a not for profit entity for which decisions are not driven by profit motive. As a result, the optimal choice would be the revenue sharing model since if the sales are less than 60,000 units, the losses would be comparatively less.

Answer 2
a) For computing the costs for dissimilar or heterogeneous jobs, the job costing method is used. In such jobs, the products are customised as a result of which the standardised prices are not applicable for every client and instead an individual quotation needs to be provided. This would consider not only the direct costs but also the indirect costs associated with the job. In job costing, a significant issue is the indirect costs or overhead costs which are relatively difficult to allocate but are key to accurate pricing of various jobs.

b) In the completion of various manufacturing jobs, there are a host of costs which have no direct relation to the end product and these are known as overhead costs. Even though these costs have no direct role in the production of a good or delivery of service, but nevertheless, these are costs which need to be allocated to the different jobs based on a suitable allocation criterion. In the context of the roofing business, some of the overhead costs are salaries to administrative staff, utility bills for office, rent for office premises and also the fuel costs for William’s travel to the client location.

c) The roofing job which is being carried out by Williams has two components of costs namely direct and indirect. In preparation of quotation for the client, William has successfully considered the relevant direct costs but has ignored the overhead (indirect) costs.

Direct costs
Direct material cost is $ 10,000 which is the actual cost for the material that would be used to complete the job.

Direct labour would consider the wage rate ($30 per hour) and the amount of hours dedicated by William to completion of job. Amount of hours = 2 weeks * 5 days every week * 8 hours everyday = 80 hours of direct labour

Hence, direct labour cost = $30 * 80 = $2,400 Overhead Costs

Estimation of William’s overhead cost = $ 50,000 per year
The allocation of the above overhead costs for the whole year to the concerned job would be on the basis of direct labour hour.

Weekly direct labour output = 8 hours per day * 5 days per week = 40 hours
Annual direct labour output = 40 hours per week * 52 weeks = 2080 hours Overhead cost allocation per direct labour hour = $50,000/2080 = $24.03 or $24 approximately.

Overhead cost allocated to the current job = 80*$24 = $1,920
Total Cost obtained in this accounting assignment
Costing for the current job = Direct cost ($ 10,000 + $2,400) + Overhead cost ($1,920) = $14,320