Question

Fjeldsted A/S produces three different products in the same plant and use a job order costing system to estimate product costs. A flexible budget is used to forecast overhead costs. Total budgeted fixed factory overhead is DKK 4,250,000 and variable overhead is 140 percent of direct labor DKK. The details of the three products are as follows: Product Standard Product Medium Product High 5,000 500 275 Projected number of units Direct materials per unit (DKK) Direct labor per unit (DKK) Selling price (DKK) 10,000 190 100 900 210 150 1,050 200 1,250 An analysis of the overhead account shows that warehousing (inventory) costs seems to be the most important item of the different items in the overhead account. The manufacturing process requires six operations. Between operations, intermediate products are moved and warehoused until the next production stage will take place. Each product requires 10 days of processing time to complete all six operations. But the products have different total cycle times because of different waiting times between operations. Cycle time is the total time from when the product is started in production until it is completed and shipped. Product Standard has the shortest cycle time (20 days) because the large volume allows more accurate forecasts and more continuous scheduling of production. Product Medium has a total cycle time of 45 days, and product High has a total cycle time of 60 days. Medium and High have longer warehouse times of work in progress because of more frequent scheduling changes and suppliers delay. 50 percent of the fixed overhead costs are related to the warehousing functions. Required a. Prepare an income statement product by product for the year based on full absorption costing. b. Prepare a revised income statement product by product using Activity Based Costing (ABC). C. Discuss the two types of income statements and presents your recommendation to the management.

Answer 1

7 Zets compare profit of product under a k b. 4 is seen that in(a)all products are generating porofits, highesr being Standard gproduct 1) n (b), enly tuo products are generating profits and Broduct atigh is in loss . 1) This is mainly because of distributon of fixed cost iN Under (b) ABC is follomed, which distributes cosA based on some cosrdrivers.inour case it is Warehousing cycle time : V) ABC shoms clear picture as it make reponsible each product boged on cost driver- Recommedationto Management :- 12 Management should follow Activity based co8ing to allocate the fixed cost aš it allouug to get realisic profit of cach product . i) Based on our calculatiờn under ontion(6). goduct High is loss making prwduct. Manage- -ment shouid try to better forecast and reduce scheduling changes. 2Suppliers agreement/contract/relationship should be evataulated to reduce odelay in snpply of moterials. ii) Management should try to find out cost drivers for remaining So% of fixed oer- head to deermine more accurate prwfits

a) bruome Statement produck by gooduct Brodut Baorluct Burluct d. Parheulars medium High Selleng Brice less: Riret Material 190 Less Derectlabor less: Variable 0H contribution per Uhit u70 Brojected No. of unit10,000 g00 1050 1250 210 100 150 200 140 280 210 480 495 5,000 47,0000 24,00000 2,47,500 500 Totul Contribution less: Fixed Cost(WNI)2741,935 13,70968 1,37,097 Profit 19,58,065 10,29,032 I10,403 WN 1:- Fixed Cost of 4250o00 is distributed among products bused on the projeckd no.ofunits. eg. Total Broducts - 10,000 + 5,000+500 =15500 For broduct Steendard, 42500010000=27,41,935. క for Poduct mediam, 4250000 5000=13,70,968 క For broduct High 42,50,000x 5UD = 1,37,097 15500

7 fevised neome Statement eusing Actividy Bafed Corning CABC) Particulars Standard mediem High Selling Brice less: Rirect Material Less: Direct labor ess: Varialble OH g00 190 1050 1250 210 100 150 210 200 140 280 contributionlunit 470 480 brojecteol No of units Total Contribution less! Fixed Overheads. Warehousing Overhead 10,000 5000 500 47,00000 24,oOpo 2,47,SU0 340000 765o001020,000 (UN2) Remaining Fixed Overheads 13,70 968 685 484 68,548 29,89,032 949,516 (841,048) Bwfit WN 2:-As grven in querion, 50%, of fixed onerheads Cosrelated to warehowsing Hene, 42,50,000 x 90%' = 21,25,000 warehowsing cycle time of respective jivducts. Boduck cost is distributed bused on warehoing cycle Time Stendard 20 days 340,000 7,65,000 us days Go days 725days Mediam 10,20,000 High 21,25,000 Remaining 50'% of fixed overheads is aguin distributed bufed on no. of prodicct produced. in absencl of any cost drivers·