Management Accounting Fundamentals [MA1]

Module 10: Pricing and trends in management

accounting
Required reading

Chapter 13 Appendix 13A, pages 637-644

Reading 10-1: "Contract cost Principles"

Chapter 2, Appendix 2A: pages 54-61

Reading 10-2: "How ethical is your company?"

Overview

In this module, the subject of decision making is extended into the area of pricing. Aspects of pricing that are
covered include cost-plus pricing formulas, the absorption and contribution approaches to cost-plus pricing,
target costing, and time and material pricing. Quality management and the costs of quality and reporting of
quality costs are also explained.

Learning objectives

10.1 Compute the target selling price of a product using cost-plus pricing under the absorption
approach. (Level 1)

10.2 Use a spreadsheet program to derive the markup percentage needed to achieve a target return
on investment (ROI) and prepare a price quotation under both absorption costing and
contribution approaches. (Level 2)

10.3 Explain the rationale of target costing. (Level 1)

10.4 Compute and use billing rates and the material loading charge used in time and material
pricing in service organizations. (Level 1)

10.5 Prepare and interpret a quality cost report. (Level 2)

10.6 List some of the benefits of implementing a corporate code of ethics. (Level 2)

Module 10: Pricing and trends in management accounting - Content Links

Required reading

Chapter 13 Appendix 13A, pages 637-644

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Reading 10-1: "Contract cost Principles"

Chapter 2, Appendix 2A: pages 54-61

Reading 10-2: "How ethical is your company?"

10.1 Cost-plus pricing

LEVEL 1

In planning their operations, some businesses can concentrate mainly on setting production levels (for
example, a dairy farmer operating under quota restrictions), while other businesses must tackle the additional
problem of determining the price of products or services. Cost, appropriately defined, is a key factor in
setting prices.

Some businesses need to consider the effect of retaliatory pricing (as in an oligopoly) both on their part and
on the part of their competitors. Also, parts of the demand curve may not be known. For example, some
people suggest that certain products are price inelastic up to a point and then become price elastic. The
government, in its pricing of liquor, is specifically concerned with this aspect of demand for products.

Cost-plus pricing is a common approach. In most cases, cost is primarily defined by the legal terms of a
contract, and the usual accounting concepts apply only secondarily. Cost could be defined to include direct
costs only or to include both direct and indirect costs. Reading 10-1 (To view the content, go to the end of
this document.) contains a definition of cost used by the Government of Canada for cost-plus contracts. The
total cost of the contract, as defined in Section 01, includes direct and indirect costs. Sections 04, 05, and 07
provide more detailed descriptions of indirect costs. The government requires a causal base as well as a
homogeneous overhead pool so that further breakdowns in the overhead groupings do not result in different
overhead assignments. Section 04 permits some selling and administrative costs to be charged to government
contracts while excluding others (Section 07).

Costing rules, such as the ones mentioned in Reading 10-1, are used for many government contracting
agreements. For example, procurement contracts, such as the frigate program and numerous smaller
programs, are done on a cost-plus basis for the government. Ship-repair contracts are also cost-plus in many
cases. Government subsidy programs for cost assistance on shipbuilding also require special costing rules as
part of the agreement.

When governments (federal or provincial) are concerned about costs, they use either the rules of the Supply
and Services Canada costing memorandum or their own set of rules to define the costs of the program.
Beyond these policies, it is useful to study both the absorption and contribution approaches to calculating a
price.

Absorption approach

In the absorption approach, the cost per unit will first depend on production volume because production
affects the per-unit fixed overhead charge. In practice, this problem may be handled by using the budgeted
base for the year, as described in Chapter 3.

If the unit cost is calculated in a reasonable manner, the estimated sales volume is needed to determine how

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much markup will be required to cover costs that were not included in unit production cost, such as selling
and administrative costs (expenses) in the textbook example.

Contribution approach

The contribution approach does not require an assumed production level in order to determine the unit cost,
since the fixed overhead costs are excluded from the unit cost. However, an estimated sales volume is needed
to calculate the unit markup (the desired contribution margin per unit).

The markup formula shows explicitly the need for a sales volume. The amount of profit the markup must
cover is calculated from a return on investment (ROI) calculation on the assets employed. (For absorption
costing, the production volume factor is buried in the unit cost to manufacture; consequently, the absorption
cost approach is more complex.)

In addition to the target price, specific market factors need to be considered. The target is the starting place
and a check on the judgment of the manager. Insight into the competitor's position may be useful in
competitive bidding, a topic addressed later in this module.

10.2 Computer illustration 10-1: Pricing

LEVEL 2

Material provided

A partially completed worksheet MXP1

A completed solution worksheet MXP1S

Description

The Li Company manufactures a variety of household appliances. In the near future, the company would like
to produce and market a new kind of baking oven. The accounting and engineering departments of the
company have developed the following unit cost data based on an activity level of 60,000 units per year:

Additional investment of $1,200,000 is also necessary to carry inventories and accounts receivable and
purchase new equipment. The company desires a 25% return on investment (ROI) for new products.

Required

1. Assume the company uses the absorption costing approach.

a. Compute the markup percentage needed to achieve the desired 25% ROI. All calculations should

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be rounded to two decimal places.

b. Prepare a price quotation sheet for the oven.

2. Assume the company uses the contribution approach.

a. Compute the markup percentage needed to achieve the desired 25% ROI. All calculations should
be rounded to two decimal places.
b. Prepare a price quotation sheet for an oven.

Procedure

1. Open the file MA1MXP1.

2. Study the layout of the worksheet. Rows 5 to 17 contain the data table displaying the information
given in the problem.

3. Move to cell A19. Columns A and B have been allocated to the absorption costing approach, while
columns D and E have been allocated to the contribution costing approach. The worksheet contains
these sections:

Rows 21 to 26 Calculation of the unit cost

Row 28 Calculation of the markup percentage
Rows 30 to 38 Price quotation sheet

4. Enter in cells A22 to A25 the appropriate row labels for the components of the unit manufacturing
cost.

5. Enter in cells B22 to B25 the required formula to reference the data table. Enter in cell B26 the
formula for the total unit manufacturing cost.

6. Enter in cell B28 the necessary formula to calculate the markup percentage.

7. Beginning in row 32, construct a price quotation sheet based on the absorption approach. Enter the row
labels in column A and the corresponding formulas in column B.

8. Repeat steps 4 to 7 for the contribution costing approach. The row labels should be entered in column
D, and the formulas should be entered in column E.

9. Format your worksheet appropriately.

10. Save your completed worksheet.

11. Print a copy of your worksheet and a copy of the formulas, and compare your results with the solution
worksheet MXP1S.

Conclusion

Both approaches give the same result, a selling price of $156.00. The different cost bases normally result in
different markup percentages. However, in this illustration, the cost bases are the same because the per-unit
overhead cost (fixed plus variable) exactly equals the variable manufacturing overhead plus the variable
sales and administrative expenses. Different costs are included in the numerator of the markup calculations

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depending on the approach used — selling and administrative costs for the absorption method and all fixed
costs for the contribution method. These costs plus the required return must be covered by the selling price.

When using these cost-plus methods, managers must keep in mind the demand at different price levels, the
concept of price elasticity, competitive reaction, and so on.

10.3 Target costing

LEVEL 1

It is not always possible for an entity to add a markup to its costs. More and more often, the selling price for
a product or service is market driven. Customers do not care what it cost to produce the product. They simply
care what they have to pay for it and often have a price ceiling in mind. In such cases, the entity must work
backwards from the selling price to determine what the maximum cost can be in order to make a profit. The
key to this whole process is designing the product to fit the cost structure rather than designing the product
and then trying to convince the customer to pay for the costs incurred.

10.4 Time and material pricing

LEVEL 1

Time and material pricing is a common approach used by many small businesses. This method allows for
variations in labour and materials on each job but treats overhead as a lump sum that is not allocated to each
job. Some of the "lump sum" is covered by a materials loading charge and some by a labour loading charge.
The method, while simple to use, may cause considerable difficulty in setting the margins, since both the
material and labour volumes must be estimated in order to set the markup percentage.

This topic marks the end of the textbook coverage of pricing products and services. To ensure you
understand this material, read the Appendix 13A summary.

10.5 Cost of quality

LEVEL 2

To survive in today’s competitive marketplace requires a commitment to quality. Quality is defined as the
conformance of a product or service to customer expectations in terms of features and performance. In effect,
quality is measured by the customer. If the product or service does not meet the customer’s expectations, the
customer will likely go elsewhere.

The costs of quality include all costs incurred to ensure that high quality is maintained (prevention and
appraisal costs) and to detect defects in the products or services (internal and external failure costs). When a
company adopts a program of total quality management defects should decrease, which should cause a
decrease in the quality costs of internal and external failures. In turn, as the existence of defects or the
expectation of finding defects decreases, the time and effort involved in inspection and appraisal should also

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decrease. In the perfect setting, the costs of quality would approach zero and would consist solely of
prevention costs.

Quality of design is the degree to which a company’s design specifications for a particular product or service
meet customer expectations for the grade level chosen. A product is considered to have a high quality of
design if it has all the features and operates in the way that customers would expect it to operate at the grade
level they have chosen. For example, a laser printer capable of printing consistently in sharp, clear colours
that is competing in the high-end colour printer market has a high quality of design. A printer with poor
colour reproduction capabilities competing in the same high-end market has a poor quality of design.

The costs associated with quality of design are opportunity costs. If a company’s product design is such that
its features and performance fail to meet customer expectations, the result is lost sales. Customers will
gravitate towards products that consistently deliver the features they expect. The company loses the
contribution margin on these lost sales.

Accountants have a role to play in this process by providing analysis of issues, counselling management on
the economics of alternatives, and removing impediments to quality improvements often found in traditional
accounting practices.

10.6 Ethical considerations

LEVEL 2

As organizations struggle with increased accountability to various stakeholders, corporate ethics programs
have emerged from back stage to centre stage. Some of the benefits from doing so have been cited as
follows:

Increase in consumers, employee morale, and productivity

Support for an organization’s reputation

Smoother government relations

The Reading 10-2 (To view the content, go to the end of this document.) indicates that the management
accountant can and should play a pivotal role in encouraging and auditing ethical behaviour.

Course summary

In this course, you studied how accounting information can be used by managers to carry out three essential
functions in an organization: (1) planning operations, (2) controlling activities, and (3) making decisions.
You learned about the kind of information needed and where this information can be obtained. You learned
that the management accountant is not just a number cruncher or "corporate cop," but also a key specialist in
supporting the decision-making process.

The next management accounting course in the CGA course of professional studies, Management
Accounting 2, builds on the material you learned in this course and looks at other ways in which the
management accountant can contribute to the success of an organization in an increasingly competitive
marketplace.

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Audio lectures
Audio lectures are available for this module. System requirements and instructions on how to access the
online lectures are included.

Module 10 summary
Module 10 deals with emerging issues in the matters of pricing decision and quality costs.

The two first topics consist of pricing decisions that use traditional approaches. Thus, Topic 10.1 discusses
pricing decision based on the cost-plus method under absorption costing method.

As for Topic 10.2, it focuses on cost-plus decisions given a target ROI. The problem comes to determine the
markup percentage in order to achieve that ROI.

The following three topics introduce issues raised by emerging trends. Thus, Topic 10.3 introduces target
costing where the selling price is market-driven. The problem is to determine the maximum allowable cost
for a new product or service that will have to be developed accordingly.

Topic 10.4 deals with time and material pricing policy where the selling price is based on direct labour time
and direct material cost.

Topic 10.5 discusses quality costs that are the focus of new trends management accountants must cope with.

Finally, Topic 10.6 concludes the module by focusing again on the crucial role of accountants in upholding
ethical standards.

Module 10 self-test

Question 1

Computer question

Before attempting this question, you should work through Computer illustration 10-1.

Description

Towbell Inc. manufactures a variety of construction products. The company wants to introduce a new
product that would have the following cost characteristics (based on an activity level of 60,000 units

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produced and sold each year):

Per
motor Total
Direct materials $30
Direct labour 56
Variable overhead 9
Fixed overhead 21 $1,260,000
Variable selling and administrative expenses 7
Fixed selling and administrative expenses 13 780,000

After careful study, the company has determined that production of the new product would require an
investment of $1,700,000 in order to purchase equipment, carry inventories, and provide for other working
capital needs. The company desires a 15% return on investment for all new products.

Required

Use the procedure described to complete the worksheet for MXQ1. From this worksheet, answer the
following questions:

1. The formula to determine the markup percentage using contribution costing is as follows:
(Desired Return + Fixed costs) ÷ (Volume in units × unit variable costs).

What is the markup percentage required to achieve the company’s desired 15% ROI under:

a. absorption costing?
b. contribution costing?

2.
a. What is the target selling price required to achieve the company’s desired 15% ROI under
absorption costing and contribution costing?
b. Is it coincidental that the target selling price is the same under both options? Explain.

Procedure

1. Open the file MA1MXQ1 and click the MXQ1 sheet tab for the solution worksheet.

2. Examine the layout of the worksheet. Rows 4 to 17 contain the data table. Rows 19 to 39 contain a
partially completed calculation area.

3. Enter in cells A4 to C17 the values required to answer the question.

4. Enter in cells A19 to E38 the required formulas to answer the required.

Solution

Question 2

Textbook, Problem 13-29, pages 661-662.

Solution

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Question 3

a. Textbook, Exercise 13-11, page 650.

b. Textbook, Problem 13-27, pages 660-661.

Solution

Question 4

Textbook, Exercise 13-13, page 650.

Solution

Question 5

Textbook, Problem 2-23, page 73.

Solution

Question 6

Textbook, Problem 13-17, page 653.

Solution

Self-test - Content Links

Solution 1

Problem 13-29

Computer solution

Requirement 1

The markup percentage required to achieve the company’s desired 15% ROI is:

a. 20.91% under absorption costing

b. 37.50% under contribution costing

Requirement 2

a. The target selling price required to achieve the company’s desired 15% ROI under both absorption

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costing and contribution costing is $140.25.

b. It is not coincidental that the target selling price is the same under both options. Since the investment,
ROI, and all costs are the same under both approaches, it makes sense that the target selling price is the
same.

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Adapted with permission.

Solution 2

Problem 13-29

Requirement 1

Supporting computations:

Number of pads produced per year:

100,000 labour-hours ÷ 2 hours per pad = 50,000 pads

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Standard cost per pad:

$4,000,000 cost of goods sold ÷ 50,000 pads = $80 cost per pad

Fixed manufacturing overhead cost per pad:

$1,750,000 ÷ 50,000 pads = $35 per pad

Manufacturing overhead cost per pad:

$7 variable per pad + $35 fixed per pad = $42 per pad

Direct labour cost per pad:

$80 – ($30 + $42) = $8

Given the computations above, the completed standard cost card follows:

Standard Standard Standard

quantity or hours price or rate cost

Direct materials 5 metres $ 6 per metre $30

Direct labour 2 hours 4 per hour* 8
Manufacturing overhead 2 hours 21 per hour** 42
Total standard cost per pad $80

* 8 ÷ 2 hours = $4 per hour.

** $42 ÷ 2 hours = $21 per hour.

Requirement 2

a.
Desired return on assets employed +
Markup percentage = SG & A expenses
Volume in units × Unit manufacturing cost

(24% × $3,500,000) + $2,160,000

=
50,000 pads × $80

$3,000,000
=
$4,000,000

= 75%

b.
Direct materials $ 30
Direct labour 8
Manufacturing overhead 42
Total cost to manufacture 80
Add markup: 75% 60
Target selling price $140

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c.
Sales (50,000 pads × $140) $7,000,000
Less cost of goods sold (50,000 pads × $80) 4,000,000
Gross margin 3,000,000
Less selling, general, and administrative expense 2,160,000
Net income $840,000

Net operating income Sales

× = ROI
Sales Average operating assets

$840,000 $7,000,000
× = ROI
$7,000,000 $3,500,000

12% × 2 = 24%

Requirement 3

a. Supporting computations:

Total fixed costs:

Manufacturing overhead $1,750,000
Selling, general, and administrative
[$2,160,000 – (50,000 pads × $5 variable)] 1,910,000
Total fixed costs $3,660,000

Variable costs per pad:

Direct materials $30
Direct labour 8
Variable manufacturing overhead 7
Variable selling 5
Total variable costs $50

To achieve the 24% ROI, the company would have to sell at least 50,000 units assumed in part (2)
above.

b. The break-even volume can be computed as follows:

Fixed expenses
Break-even point in units sold =
Unit Contribution Margin

$3,660,000
=
$140 per pad – $50 per pad

= 40,667 pads

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.

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Solution 3

a. Exercise 13-11

1.
(Required ROI × Investment) +
Markup percentage SG&A expenses
=
on absorption cost Unit sales × Unit product cost

(18% × $500,000) + $60,000

=
12,500 units × $30 per unit

$150,000
=
$375,000

= 40%

2.
Unit product cost $30
Markup: 40% × $30 12
Target selling price per unit $42

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.

b. Problem 13-27

1.
Projected sales (80 machines × $3,795 per machine) $303,600
Less desired profit (20% × $50,000) 10,000
Target cost for 80 machines $293,600

Target cost per machine ($293,600 ÷ 80 machines) $3,670

Less Choice Culinary Supply’s variable selling cost per machine 350
Maximum allowable purchase price per machine $3,320

2. The relation between the purchase price of the machine and ROI can be developed as follows:

Total projected sales – Total cost

ROI =
Investment

$303,600 – ($350 + Purchase price of machines) × 80

=
$50,000

The above formula can be used to compute the ROI for purchase prices between $2,400 and $3,400 (in
increments of $100):

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Purchase
price ROI
$2,400 167.2%
$2,500 151.2%
$2,600 135.2%
$2,700 119.2%
$2,800 103.2%
$2,900 87.2%
$3,000 71.2%
$3,100 55.2%
$3,200 39.2%
$3,300 23.2%
$3,400 7.2%

Using the above data, the relation between purchase price and ROI can be plotted as follows:

3. A number of options are available in addition to simply giving up on adding the new gelato machines
to the company’s product lines. These options include:

Check the projected unit sales figures. Perhaps more units could be sold at the $3,795 price.
However, management should be careful not to indulge in wishful thinking just to make the
numbers come out right.

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Modify the selling price. This does not necessarily mean increasing the projected selling price.
Decreasing the selling price may generate enough additional unit sales to make carrying the
gelato machines more profitable.

Improve the selling process to decrease the variable selling costs.

Rethink the investment that would be required to carry this new product. Can the size of the
inventory be reduced? Are the new warehouse fixtures really necessary?

Does the company really need a 20% ROI? Does it cost the company this much to acquire more
funds?

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.

Solution 4

Exercise 13-13

1.
Time rate to be used:
Plumbers’ wages and fringe benefits
($340,000 ÷ 20,000 hours) $17
Other repair costs
($160,000 ÷ 20,000 hours) 8
Desired profit per hour of plumber time 5
Total charging rate per hour for service $30

Material loading charge:

Ordering, handling, and storage cost 15% of invoice cost
Desired profit on parts 30% of invoice cost
Material loading charge 45% of invoice cost

2.
Time charge: 3 hours × $30 per hour $ 90
Material charge:
Invoice cost of parts $40
Material loading charge (45% × $40) 18 58
Billed cost of the job $148

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.

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Solution 5

Problem 2-23

1. A percentage analysis of the company’s quality cost report is presented below:

*Percentage figures may not add down due to rounding.

From the above analysis it would appear that Bergen Inc.’s program has been successful, since:

total quality costs as a percentage of total production have declined from 23.4% to 13.1%.

external failure costs, those costs signaling customer dissatisfaction, have declined from 8% of total
production to 2.3%. These declines in warranty repairs and customer returns should translate into
increased sales in the future.

internal failure costs have been reduced from 4.6% to 2.3% of production costs, which represents a
50% drop.

appraisal costs have decreased from 5.0% to 2.6% of total production — a drop of 48%. Higher quality
is reducing the demand for final testing.

quality costs have shifted to the area of prevention where problems are solved before the customer
becomes involved. Maintenance, training, and design reviews have increased from 5.8% of total
production cost to 6% and from 24.9% of total quality costs to 45.7%. The $30,000 increase is more
than offset by decreases in other quality costs.

2. Tony Reese’s current reaction to the quality improvement program is more favourable as he is seeing the
benefits of having the quality problems investigated and solved before they reach the production floor.
Because of improved designs, quality training, and additional pre-production inspections, scrap and
rework costs have declined. Consequently, fewer resources are now required for customer service.

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Throughput has increased and throughput time has decreased; work is now moving much faster through
the department.

3. To measure the opportunity cost of not implementing the quality program, Bergen Inc. could assume that:

sales and market share would continue to decline and then calculate the revenue and income lost.

the company would have to compete on price rather than quality and calculate the impact of having to
lower product prices.

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.

Solution 6

Problem 13-17

1. Product MJ-7 yields a contribution margin of $3.50 per litre ($8.75 – $5.25 = $3.50). If the plant closes,
this contribution margin will be lost on the 88,000 litres (44,000 litres per month × 2 = 88,000 litres) that
could have been sold during the two-month period. However, the company will be able to avoid certain
fixed costs as a result of closing down. The analysis is:

Contribution margin lost by closing the plant for two months

($3.50 per litre × 88,000 litres) $(308,000)
Costs avoided by closing the plant for two months:
Fixed manufacturing overhead cost
($230,000 – $170,000 = $60,000;
$60,000 × 2 months = $120,000) $120,000
Fixed selling costs
($310,000 × 10% × 2 months) 62,000 182,000
Net disadvantage of closing, before start-up costs (126,000)
Add start-up costs (14,000)
Disadvantage of closing the plant $(140,000)

No, the company should not close the plant; it should continue to operate at the reduced level of 44,000 litres
produced and sold each month. Closing will result in a $140,000 greater loss over the two-month period than
if the company continues to operate. Additional factors are the potential loss of goodwill among the
customers who need the 44,000 litres of MJ-7 each month and the adverse effect on employee morale. By
closing down, the needs of customers will not be met (no inventories are on hand), and their business may be
permanently lost to another supplier.

Alternative Solution:

Difference—
Net Operating
Plant Plant Income
Kept Open Closed Increase (Decrease)

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Sales (44,000 litres × $8.75 per litre × 2) $770,000 $ 0 $(770,000)

Less variable expenses
(44,000 litres × $5.25 per litre × 2) 462,000 0 462,000
Contribution margin 308,000 0 (308,000)
Less fixed costs:
Fixed manufacturing overhead cost
($230,000 × 2; $170,000 × 2) 460,000 340,000 120,000
Fixed selling cost
($310,000 × 2; $310,000 × 90% × 2) 620,000 558,000 62,000
Total fixed cost 1,080,000 898,000 182,000
Net operating loss before start-up costs (772,000) (898,000) (126,000)
Start-up costs (14,000) (14,000)
Net operating loss $(772,000) $(912,000) $(140,000)

2. Ignoring the additional factors cited in part (1) above, Hallas Company should be indifferent between
closing down or continuing to operate if the level of sales drops to 48,000 litres (24,000 litres per month)
over the two-month period. The computations are:

Cost avoided by closing the plant for two months

(see above) $182,000
Less start-up costs 14,000
Net avoidable costs $168,000

Net avoidable costs $168,000

=
Contribution margin per litre $3.50 per litre

= 48,000 litres

Verification:

Operate at 48,000 Litres for Close for Two

Two Months Months
Sales (48,000 litres × $8.75 per litre) $ 420,000 $ 0
Less variable expenses (48,000 litre× $5.25 per litre) 252,000 0
Contribution margins 168,000 0
Less fixed expenses:
Manufacturing overhead
($230,000 and $170,000 × 2 months) 460,000 340,000
Selling ($310,000 and $279,000 × 2 months) 620,000 558,000
Total fixed expenses 1,080,000 898,000
Start-up costs 0 14,000
Total costs 1,080,000 912,000
Net operating loss $(912,000) $(912,000)

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.

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Quiz 5

You must be online to view this course component.

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READING 10-1

Section 3, General Conditions, DSS-MAS 1031-2, “Contract Cost Principles,” Standard Acquisition Clauses and Conditions
Manual, Public Works and Government Services Canada. Reproduced with the permission of the Minister of Public Works
and Government Services, 2001.
2  Reading 10-1 Management Accounting 1
Management Accounting 1 Reading 10-1  3
4  Reading 10-1 Management Accounting 1
Management Accounting 1 Reading 10-1  5
READING 10-2

Reprinted from Management Accounting. Copyright by Institute of Management Accountants, Montvale, N.J. July 1992.
2  Reading 10-2 Management Accounting 1
Management Accounting 1 Reading 10-2  3