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Dealing with Cost Accounting

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You recently read a newspaper article about how the majority of businesses fail in their very first year. To minimize the possibility of this happening to you, you decide to use a breakeven analysis. You know it is a very useful and powerful tool not only for new businesses, but as an ongoing tool for the managers of a firm. At your next management meeting, discuss the following topics:

- At least 3 different applications of breakeven analysis
- The importance of only considering relevant versus irrelevant costs in analysis and decision making, using at least 1 example to demonstrate your point
- The challenge of, and how to handle, the mixed (i.e., semi-fixed or semi-variable) cost category.

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Breakeven is a point of no profit no loss. It is a useful tool of management accounting. It is calculated by following the formula:
Fixed costs/ Contribution Margin per unit.
Contribution margin is the direct margin of the business and fixed costs are the costs which don't change with the change in sales.
Application:
1) To understand the level of operations required to achieve profits.
2) To know about margin of safety. Margin of safety is positive if actual sales are greater than the break even. A higher margin ...

Solution Summary

Solution discusses the 3 different applications of breakeven analysis

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Cost Accounting: This solution relates overhead allocation to cost estimation and decision making.

See the attached document "Problem Cost Estimation, Estimating Overhead Rates, Job Costing, Decision-Making: O'Leary Corporation for all properly formatted information.

O'Leary Corporation manufactures special purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications).O'Leary uses a normal job costing system. Direct labor at O'Leary is paid $17 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates). See the attached document "Problem Cost Estimation, Estimating Overhead Rates, Job Costing, Decision-Making: O'Leary Corporation for all properly formatted information.

Required:
a. What was the amount in the beginning Finished Goods and beginning Work-In-Process accounts for year 3?

b. O'Leary incurred direct materials cost of $57,000 and used an additional 300 hours in year 3 to complete job MC-275. What was the final total cost charged to job MC-275?

c. What was the over-applied or under-applied overhead for year 3?

d. O'Leary prorates any over-applied or under-applied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-In-Process Inventory. Prepare the journal entry to prorate the Over-applied or Under-applied Overhead computed in requirement (C).

e. A customer has asked O'Leary to bid on a job to be completed in year 4. O'Leary estimates that the job will require about $92,500 in direct materials and 5,000 direct labor-hours. Because of the economy, O'Leary expects demand for their services to be low in year 4, and the CEO wants to bid aggressively, but does not want to lose any money on the project. O'Leary estimates that there would be virtually no sales or administrative costs associated with this job. What is the minimum amount O'Leary can bid on the job and still not incur a loss?

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