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    Costing Case

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    nguyenthingocmaimk
    The document provides production and sales data for products A-E of Knight Ltd. Company. It asks to prepare income statements assuming products are processed or not, and suggest a production plan to maximize profits. Processing A, C and E, but not B, maximizes profits at $1,330,000.

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    Costing Case

    Uploaded by

    nguyenthingocmaimk
    9 views6 pages
    The document provides production and sales data for products A-E of Knight Ltd. Company. It asks to prepare income statements assuming products are processed or not, and suggest a production plan to maximize profits. Processing A, C and E, but not B, maximizes profits at $1,330,000.

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    © © All Rights Reserved

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    The document provides production and sales data for products A-E of Knight Ltd. Company. It asks to prepare income statements assuming products are processed or not, and suggest a production plan to maximize profits. Processing A, C and E, but not B, maximizes profits at $1,330,000.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    9 views6 pages

    Costing Case

    Uploaded by

    nguyenthingocmaimk
    The document provides production and sales data for products A-E of Knight Ltd. Company. It asks to prepare income statements assuming products are processed or not, and suggest a production plan to maximize profits. Processing A, C and E, but not B, maximizes profits at $1,330,000.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 6

    Case: Knight Ltd.

    Company produces and sells the following products

    Selling price Selling price


    Product Unit
    at split-off point ($) at additional processing ($)
    A 200.000 17 25
    B 30.000 13 17
    C 25.000 8 12
    D 20.000 10 -
    E 75.000 14 20

    Raw material costs $3.590.000 and other manufacturing expenses cost $547.000 in the
    manufacturing process which is absorbed on the products on the basis of their “Net
    Realisable Value”. The additional processing costs of A, B, C, and E are $1.250.000,
    $150.000, $50.000, and $150.000 respectively. Fixed costs are $473.000.
    You are required to PREPARE the following in respect of the coming year:
    (a) Statement showing the income forecast of the company assuming that none of
    its products are to be further processed.
    (b) Statement showing the income forecast of the company assuming that
    products A, B, C, and E are to be processed further.
    Can you suggest any other production plan whereby the company can maximize
    its profits? If yes, then submit a statement showing the income forecast arising out of
    the adoption of that plan
    (c) Knight Ltd. Company has been selling all of its products at the split-off point.
    Selling any of the products after further processing will entail direct competition with
    some major customers. What strategic factors does the firm need to consider in
    deciding whether to process any of the products further?
    Answer:
    Working note:
    Allocation of joint costs on the basis of Net Realisable Value method
    Additional Net
    Allocated
    Product Sales value ($) processing Realisable
    Cost ($)
    cost ($) Value ($)
    5.000.000
    A 1.250.000 3.750.000 2.625.000
    (200.000 units x $25)
    510.000
    B 150.000 360.000 252.000
    (30.000 units x $17)
    300.000
    C 50.000 250.000 175.000
    (25.000 units x $12)
    200.000
    D - 200.000 140.000
    (20.000 units x $10)
    1.500.000
    E 150.000 1.350.000 945.000
    (75.000 units x $20)

    5.910.000 4.137.000

    Total joint cost = Raw material cost + Manufacturing expenses


    = $3.590.000 + $547.000 = $4.137.000
    Allocated joint cost = (Total joint cost/Total net realisable value) x Net realisable value
    of each product
    Allocated joint cost for Product A= ($4.137.000/$5.910.000) x $3.750.000 =
    $2.625.000
    Allocated joint cost for Product B= ($4.137.000/$5.910.000) x $360.000 = $252.000
    Allocated joint cost for Product C= ($4.137.000/$5.910.000) x $250.000 = $175.000
    Allocated joint cost for Product D= ($4.137.000/$5.910.000) x $200.000 = $140.000
    Allocated joint cost for Product E= ($4.137.000/$5.910.000) x $1.350.000 = $945.000
    (a) Statement showing income forecast of the company assuming that none of its
    products are further processed
    Products
    Total
    A B C D E
    3.400.000 390000 200.000 1.050.000
    Sales 200.000
    ($17 x ($13 x ($10 x ($14 x 5.240.000
    revenue ($8 x 25.000)
    200.000) 30.000) 20.000) 75.000)

    Less:
    Allocated
    Costs
    2.625.000 252.000 175.000 140.000 945.000 4.137.000
    (Refer to
    Working
    note)

    775.000 138.000 25.000 60.000 105.000

    Less:
    Fixed 473.000
    Cost

    Profit 630.000

    (b) Statement showing income forecast of the company: assuming that products A,
    B, C, and E are futher processed (Refer to working note)
    Product
    Total
    A B C D E
    7.510.00
    Sales Revenue 5.000.000 510.000 300.000 200.000 1.500.000
    0
    4.137.00
    Allocated Cost 2.625.000 252.000 175.000 140.000 945.000
    0
    Additional 1.600.00
    1.250.000 150.000 50.000 - 150.000
    Processing Cost 0
    Total Processing 5.737.00
    3.875.000 402.000 225.000 140.000 1.095.000
    Cost 0
    1.773.00
    Gross Profit 1.125.000 108.000 75.000 60.000 405.000
    0
    Fixed Cost 473.000
    1.300.00
    Profit
    0

    Total processing cost= Allocated Cost + Additional processing cost


    Total processing cost for Product A= $2.625.000 + $1.250.000 =$3.875.000
    Total processing cost for Product B= $252.000 + $150.000 =$402.000
    Total processing cost for Product C= $175.000 + $50.000 =$225.000
    Total processing cost for Product D= $140.000
    Total processing cost for Product E= $945.000 + $150.000 =$1.095.000

    Gross Profit = Sale revenue – Total processing cost


    Gross Profit for product A= $5.000.000 - $3.875.000= $1.125.000
    Gross Profit for product B= $510.000 - $402.000= $108.000
    Gross Profit for product C= $300.000 - $225.000= $75.000
    Gross Profit for product D= $200.000 - $140.000= $60.000
    Gross Profit for product E= $1.500.000 - $1.095.000= $405.000

    Profit= Gross Profit – Fixed Cost


    =$1.773.000 - $473.000 = $1.300.00

    Suggested production plan for maximizing profits:


    On comparing the figures of excess of revenue over cost of manufacturing in the above
    statements one observes that the concern is earning more after further processing of A,
    C, and E products but is losing a sum of $30.000 in the case of product B (if it is
    processed further). Hence the best production plan will be to sell A, C, and E after
    further processing and B and D at the point of split off. The profit statement based on
    this suggested production plan is as below
    Profit statement based on suggested production plan
    Product
    Total
    A B C D E

    Sales Revenue 5.000.000 390.000 300.000 200.000 1.500.000 7.390.000

    Allocated Cost 2.625.000 252.000 175.000 140.000 945.000 4.137.000

    Additional
    1.250.000 - 50.000 - 150.000 1.450.000
    Processing Cost
    Total Processing
    3.875.000 252.000 225.000 140.000 1.095.000 5.587.000
    Cost

    Gross Profit 1.125.000 138.000 75.000 60.000 405.000 1.803.000

    Fixed Cost 473.000

    Profit 1.330.000

    Total processing cost = Allocated Costs + Additional processing cost


    Total processing cost for product A= $2.625.000 + $1.250.000= $3.875.000
    Total processing cost for product B= $252.000
    Total processing cost for product C= $175.000 + $50.000= $225.000
    Total processing cost for product D= $140.000
    Total processing cost for product E= $945.000 + $150.000= $1.095.000

    Gross Profit = Sales revenue - Total processing cost


    Gross Profit for product A= $5.000.000 - $3.875.000 = $1.125.000
    Gross Profit for product B= $390.000 - $252.000 = $138.000
    Gross Profit for product C= $300.000 - $225.000 = $75.000
    Gross Profit for product D= $200.000 - $140.000 = $60.000
    Gross Profit for product E= $1.500.000 - $1.095.000 = $405.000

    Profit= Gross Profit – Fixed Cost


    = $1.803.000 - $473.000 = $1.330.000
    Hence the profit of the company has increased by $30.000
    (c) Knight Ltd. Company has been selling all of its products at the split-off point.
    Selling any of the products after further processing will entail direct competition
    with some major customers. What strategic factors does the firm need to consider
    in deciding whether to process any of the products further?

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