Cost Allocation Concepts. A committed fixed cost works to the long-term advantage of a company…

Cost Allocation Concepts

Introduction

Complete Problems 6-37 and 7-38 in the textbook.

Both of these problems should be completed using Word.

Save your assignment as Lastname_FirstnameACC650_T4.docx.

At least one external source should be cited, not including a textbook.

Prepare this assignment according to the guidelines found in the APA Style Guide, located in the Student Success Center. An abstract is not required.

You are required to submit this assignment to LopesWrite. Refer to the LopesWrite Technical Support articles for assistance.

Problem 6-37: Cost Behavior and Analysis; High-Low Method

Solution

1. Classify the five listed in terms of their behavior: Variable, Step-variable, Committed fixed, discretionary fixed, step-fixed, or semi variable. Show calculations to support your answers for mining labor/fringe benefits and royalties

Straight-line depreciation –     Committed fixed

Charitable Contributions –      Discretionary fixed

Mining labor/fringe benefits – Variable

Royalties –                               Semi variable

Trucking and hauling –            Step variable

• Calculate the total cost for next February when 1,650 tons are expected to be extracted.

Average straight-line depreciation is set at     = $25,000

Mining labor/fringe benefits calculated as      = $379,500(1,650×230)

Royalties                                                         = $144,000 (1,650 ×60 variable costs + 45,00 fixed costs)

Trucking and hauling                                      = $275,000

Total                                                                = $823,500

• Comment on the cost-effectiveness of hauling 1,500 tons with respect to Antioch’s trucking/hauling cost behavior. Can the company’s effectiveness be improved? How?

The company’s cost effectiveness could be attained at 2,699 units.

Distinguish between committed and discretionary fixed costs. If Antioch were to experience severe economic difficulties, which of the two types of fixed costs should management try to cut? Why?

A committed fixed cost works to the long-term advantage of a company. It exceeds an annual lifespan and could be used to enhance longevity of company operations. For example, a company’s building structures and equipment used to produce products are often purchased as a “one-time thing.” In contrast, discretionary fixed costs work for short-term purposes the company seeks to undertake within a duration less than one year (Environment, 2021). An example of discretionary fixed costs includes annual budgets for marketing and research activities. Any management system could choose the committed fixed cost for long-term goals.

• Speculate as to why the company’s charitable contribution cost arises only in December.

Companies use multiple approaches to meet tax provisions. In this case, charitable contributions arise only in December because the company seek to label the contributions as tax deductions for the year.

Problem 7-38-Sales Mix and Employee Compensation; Operating Changes

1. Define the term sales mix

Sales mix refers to selling different company goods and services to customers. As a result, a company attains sales mix both in products sold and revenue collected thus indicate the multiple product offerings (Environment, 2021). Business research indicates that for a firm trading different product, each constituent component of the product is referred to as sales mix.

• Comparing Plan: A to the current compensation arrangement:Will Plan A achieve management’s objective of an increased presence in the marketplace? Briefly explain.

Total sales, (19,500+45,500) = 65,000 units. The current sales average 60,000 units. Therefore, the difference is 5,000 indicating that Plan A will attain management objectives of an increased presence in the marketplace.

b.      From a sales-mix perspective, will the salespeople be promoting the product that one would logically expect? Briefly discuss.

From a sales-mix perspective, it is evident that commission from deluxe sales would be higher under Plan A. Salespersons earn commission based on quantity of products sold meaning that commissions increase sales indirectly as the person will be marketing the product.

	Current Units	Sales Mix		Plan A	Sales Mix
Deluxe	39,000	65%	Deluxe	45,500	70%
Basic	21,000	35%	Basic	19,500	30%
Total	60,000	100%	Total	65,000	100%

• Will the sales force likely be satisfied with the results of Plan A? Why?

Yes, the motivating factor in this case is more money. Therefore, since Plan A guarantees additional money from commissions, it means the sales force will be satisfied with the results of Plan A.

• Will Lawrence likely be satisfied with the resulting impact of Plan A on company profitability? Why?

In terms of profit-making, the sales force will benefit at the expense of the company. Therefore, Lawrence will be dissatisfied because of dismal profitability.

3.      Assume that Plan B is under consideration.

1. Compare Plan A and Plan B with respect to total units sold and the sales mix. Comment on the results.

	Sales Revenue	Plan A	Plan B
	Deluxe (45,500*86) B: (26,000*86)	3,913,000	2,236,000
	Basic A (19,500*74) B: (39000*74)	1,443,000	2,886,000
	Total	5,356,000	5,122,000
	Less variable Cost
	Deluxe-A:(45,500*65) B:	2,957,500	1,690,000
(26,000*65)
Basic-A (19,500*41) B: (39,000*41)	799,500	1,599,000
Sales Commission- A (10%) B (30%)	535,600	549,900
Total	4,292,600	3,289,000
Contribution margin	1,063,400	1,833,000
Net Income	1,063,400	(1,833,000-549,900) 1,283,100

 

• In comparison with flat salaries, is Plan B more attractive to the sales force? To the company? Show calculations to support your answers.

Plan B is more attractive to the company due to high net income rates

Sales Revenue Current Plan A Plan B Deluxe (45,500*86) B:(26,000*86) 3,354,000 3,913,000 2,236,000 Basic- A (19,500*74) B:(39000*74) 1,554,000 1,443,000 2,886,000 Total 4,908,000 5,356,000 5,122,000 Less variable Cost       Deluxe-A:(45,500*65) B: (26,000*65) 2,535,000 2,957,500 1,690,000 Basic-A (19,500*41) B:(39,000*41) 861,000 799,500 1,599,000 Sales Commission- A (10%) B (30%)   535,600 549,900 Total 3,396,000 4,292,600 3,289,000 Contribution margin 1,512,000 1,063,400 1,833,000 Salaries 400,000     Net Income 1,112,000 1,063,400 (1,833,000-549,900) 1,283,100

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References

Discretionary fixed cost. (n.d.). Retrieved from https://www.accountingtools.com/articles/what- is-a-discretionary-fixed-cost.html

Environment, M. (2021). Managerial Accounting: Creating Value in a Dynamic Business Environment. Retrieved 20 May 2021, from https://www.mheducation.com/highered/product/managerial-accounting-creating-value-dynamic-business-environment-hilton-platt/M9781259969515.html