Term Paper on "Overhead Fixed Costs I Have Prepared"

Quoted Instructions for "Overhead Fixed Costs I Have Prepared" Assignment:

1.Accounting Module 3 Case Assignment is below; I need 4 pages for the Assignment below.

Pecos Printers, Inc.

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Pecos Printers, Inc. is a small manufacturing firm in Houston, Texas that manufactures color ink jet printers for the small business market. It has just launched the PP 7500. Read the following article from the Los Angeles Times for background on printers in this market. click here

A 50% markup is standard in this industry so that Pecos must sell to distributors below $400 per printer to keep the retail price below the industry top of $600 ($400 * 150% = $600). Paul Pecos, the founder and CEO of Pecos Printers, wants to keep the price to distributors as low as possible so he has carefully engineered his manufacturing process to be as efficient as possible.

The model PP 7500 is an exceptionally desirable model with the following features:

• A monthly capacity of 10,000 copies

• A print speed of 10 copies per minute for black and white and 5 copies per minute for color.

• A lifetime capacity of 120,000 copies.

• The ability to accept readily available HP ink cartridges.

Lester Ledger, the Pecos Controller has developed the following cost sheet for the model 7500:

Cost Category Cost per Unit

Direct Materials (variable) $125

Direct Labor (variable) 50

Overhead (Variable) 30

Overhead (Fixed)* 45

Total Unit Costs $250

*This is determined on a per unit basis as followed. Lester assumes that the annual fixed overhead costs for this product will be $450,000 and that approximately 10,000 Model 7500's will be produced during the current year. Pecos has the capacity to produce 20,000 units per year without increasing fixed costs.

Paul has determined that approximately 20% of the total manufacturing costs are necessary for a decent profit. Therefore, the minimum wholesale cost for this model is $300 ($250 * 120%) and the resulting minimum retail price is $450 ($300 * 150%).

Based on these data, Paul has developed the following pricing rule for his sales staff: Accept any offer from distributors of $300 or more and reject any offer below $300.

The sales staff is on salary with no commission paid for any sale. The salesmen negotiate with distributors who make firm offers which the Pecos salesmen then either accept or reject. Last month the three salesmen reported the following offers and results:

Offer (per unit) Number of Units Accepted?

Sam Smoothtalk

Offer No. 1 $310 200 Yes

Offer No. 2 $305 150 Yes

Offer No. 3 $295 300 No

Harry Hustler

Offer No. 1 $305 50 Yes

Offer No. 2 $200 250 No

Offer No. 3 $300 100 Yes

Offer No. 4 $330 75 Yes

Gary Giftofgab

Offer No. 1 $305 250 Yes

Offer No. 2 $245 400 No

Offer No. 3 $325 100 Yes

In addition, Ms. Glenda Goodperson, the office assistant manager received an offer from a new distributor for 700 units at $290. She felt this would be advantageous for Pecos and accepted the offer. When Paul Pecos found out about this transaction, he was furious that Ms. Goodperson had violated his decision rule and fired her on the spot. He then cancelled the order with the new distributor.

Overall, Paul was satisfied with the month's sales results. His sales staff had sold 925 units which translated to an annual rate of over 11,000 units. This was 10% above his estimate of 10,000 annual sales.

Required:

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1. Evaluate Paul Pecos' decision rule.

2. Evaluate Paul Pecos' reaction to Ms. Goodperson's sale.

3. Prepare a contribution margin income statement for the month with two columns: in the first column, show the results following Paul's decision rule. In the second column, show what the results would have been if you chose to revise the decision rule and your revised decision rule had been followed. For simplicity sake, ignore non-manufacturing costs and taxes.

4. Do you have any other recommendations for Paul to improve his operations?

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This background material below to help better understand the Model 3 Case Assignment above.If needed

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Decision making - relevant costsby Ian Herbert

01 Sep 1998Accounting Technician Scheme

Relevant to Paper C2

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In this article Ian Herbert looks at the use of relevant costs in management decision making. The objective of this article is to help you to understand:

• the context of management decision making;

• which costs are relevant to a decision and which costs are not;

• how other factors might influence a decision.

Overview

A key feature of management accounting is its focus on the future. Decision making should only consider what will change as a result of implementing a decision, nothing else. In this respect there are a number of ways in which we can view costs.

• Differential costs

• Opportunity costs

• Sunk costs

• Avoidable costs

• Committed costs

• Notional costs

It seems strange that a cost can be anything other than a charge to the organisation that results in a sum of money leaving the bank account. However, if you think about charges such as, depreciation, or a provision for doubtful debts, then these are examples of non-cash costs which help us to evaluate performance over a particular time period more easily. As we shall see, such costs are irrelevant to decision making. Relevant costs translate into future cash flows.

Differential costs

The difference in total cost between alternatives, calculated to assist in decision making. *

These are also referred to as incremental costs, usually when a choice exists between maintaining the status quo or taking some positive action. For example, introducing a bonus system, will entail additional costs but, through better performance, should eventually result in an incremental cash inflow. The Barkington Hospital illustration below, is a good example of differential costs occurring between two alternatives.

Opportunity costs

The value of benefit sacrificed when one course of action is chosen, in preference to an alternative. The opportunity cost is represented by the foregone potential benefit from the best rejected course of action.*

Consider the following example:

Barkington Hospital is reviewing its accommodation requirements. It has some empty buildings on site that could be rented out as small business units for £10,000 p.a., but it also needs some space for refurbishing hospital furniture over the next 12 months. The total cost of labour and materials for the refurbishment is estimated at £25,000. It has received a quote from outside contractors to undertake the refurbishment work for £32,000. What should it do?

Answer

The cost of the outside quote is £32,000

The cost of in-house work is: Labour and materials £25,000

Plus the opportunity cost

of the rent foregone £10,000

Total cost £35,000

Conclusion

The outside quote is cheaper on the basis of the relevant costs. This is because the in-house team would effectively be consuming a resource that has a market value of £10,000. The differential cost of the in-house option is therefore £3,000.

Question

How might your decision change in each of the following situations?

a. the in-house workers would have to be made redundant at a cost of £5,000 if the refurbishment contract was placed outside.

b. the refurbishment could be undertaken in lower grade premises available at a rent of £6,000 pa.

Answer

a. the cost of the outside option increases by £5,000 to £37,000 and is therefore now more expensive than the in-house option;

b. the total cost of the in-house work would be:

£

Labour and materials 25,000

Plus the cost of

hiring premises 6,000

31,000

The cost of the external

contract is 32,000

The in-house option is now preferable.

Note: In scenario (b) the benefit of £10,000 is not shown in the calculation, as rent will now be received in both options: we are only interested in the relative difference between alternatives.

Sunk costs

A past cost not directly relevant in decision making. *

Question

What has Barkington Hospital do if it had already purchased some of the materials for the refurbishment at a cost of £4,000 and those materials have no alternative use.

Answer

The cost of the outside quote is £32,000

The cost of in-house work is now:

Labour and materials

(£25,000 - £4,000) £21,000

Plus the opportunity cost

of the rent foregone £10,000

Total cost £31,000

The work should now be done in-house as the incremental cash outflow is less than the money that would be paid to the contractor. Of course, when the Hospital prepares its financial accounts, the cost of labour and materials will be stated as £25,000. However, for the purpose of making a decision about the future the £4,000 already incurred for materials is a sunk cost and is therefore not relevant to the decision.

In short term decision making, fixed costs are generally regarded as sunk costs.

Avoidable costs

The specific costs of an activity or sector of a business which would be avoided if that activity or sector did not exist.*

If a factory decides to save money, say by closing a part of the production facilities, it is necessary to examine each cost element in terms of whether that cost can be avoided or not. In the long term, all costs are ultimately avoidable, but in the short term, many costs are not. For example, closing a part of the factory might avoid the cost of heating, lighting and cleaning, although in the short term rent, property taxes, security and maintenance costs would presumably still be incurred.

Committed costs

These costs are similar to sunk costs in that they exist as a result of previous decisions although the 'charge' has yet to be incurred or the cash released.

Question

Imagine that in the course of the deliberations at Barkington Hospital someone had said "but we just can't rent out those buildings or simply use them for workshops, we've just signed a contract to spend £50,000 on an air conditioning system". Would this make any difference to your decision?

Answer

None whatsoever. While situations such as this may be embarrassing in political terms, past costs (and mistakes) should not impact upon the logic of financial decision making. The £50,000 that has been committed contractually is effectively a sunk cost.

The UK government recently changed the specification of the millennium exhibition dome at Greenwich, London. In doing so they had to pay around £500,000 in compensation to the contracted suppliers, as the new material is to come from a different firm. The decision apparently made financial sense, as the new material will make a permanent and not a temporary facility. The national newspapers however, printed many stories on the theme of government incompetence resulting in the wastage of public resources.

Notional costs

Notional costs are intended to make internal decision making more realistic by assuming that the cost of all resources consumed reflects the full economic value - usually by applying market prices. Notional charges are typically used to charge responsibility centres with a 'market rent', where buildings have been purchased on a freehold basis. Such a mechanism helps to focus management attention on making best use of space so that surplus space across the whole organisation might then be sold or rented to another user. Notional interest is often charged for the use of internally generated funds.

Other factors

So far, our recommendations to management have been made solely on the basis of financial analysis. In practice, there are usually many other factors, of a qualitative nature, that have to be considered. For example, Barkington Hospital needs to consider the following:

• Who will make a better job of the refurbishment work, the existing in-house team or the external contractor?

• How long might it take to actually get a tenant to rent the buildings?

• Will the hospital workers be required in the long term?

• What effect will the option of redundancy have on the morale of other staff?

• Could the materials already purchased be sold for scrap or to the contractor?

• Could Barkington undertake refurbishment work profitably for other hospitals in the future?

• How reliable is the estimate for the in-house option? Accepting the contractor's quote would not expose Barkington to the risk of inflation.

• Can the delivery timescale be enforced against the contractor? Generally an organisation has more control if their own workers are doing the work.

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The end of Mod 3 Case Assignment

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This the beginning of Mod 3 Session Long ProjectBELOW

2.Module 3 Session Long Project Assignment below. I need 1 page for this Assignment Below. Kmart is the Company/organization I chose.

By this time, you should have an organization selected and approved for your project. Ichose Kmart

In this module, we are going to have our second application to that project. Identify a decision that has recently been made or will be made in the near future in your organization. Identify two relevant and two non-relevant costs in this decision.

If you cannot identify specific actual amounts, make a reasonable estimate and apply the tool as if the data were factual. Use KMART

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Your report should include

• The name and nature of the organization

• The activity and time period you used

• The inputs you used

• Your results

• Any implications from your results