For dental clinic, number of patients is the best measurement for the overall activity. This is because dental clinic is kind of a business that provides services to customers. This is not fair if we measure its activity in times of services because every service charges different prices according to the patient's need. Besides, there is a much difference in prices which are charged to the patients in every service. Different services cost different prices for different patients' needs ant at the bottom line is every patient may need DIFFERENT SERVICE. Thus, we cannot measure its activity level in times of service. For example, tooth removal, dental surgery, dietary consultation (related dental health), and desensitization of teeth and brace treatment. All these services will charge different price. Normally as we know that brace treatment is charged to the higher cost compared to tooth removal difference. Therefore, dental clinic cannot make profit if there is no single patient to step in the clinic even though there are a lot of services offered to customers. The more patient the clinic have the more services can be carried out. The more services are carried out the higher profit they make and the higher activity is.
(3)For the fast food restaurant, sales value is the best measurement to reflect the overall activity. Fast food restaurant like Pizza Hut provides variety of foods and beverages. Fast food restaurant is keen on offering various packages to customers like family package and personal package. Different packages include different food and beverage. For example, there are 3 large pans of pizza, a jar of Pepsi and 6 bowls of soups for family package whereas for the personal package include a personal pan of pizza and a glass of Pepsi. Hence, the manager of the fast food restaurant is not able to measure his business's activity in unit because it will make it more complicated to trace the cost in unit since most probably the fast food restaurant offer their food in package.
(4)For the automobile repair shop, number of car repaired is a reflective measurement for its overall activity level. Automobile repair shop is a type of business which provides cars maintenance service to customer. Therefore, the profit of the automobile repair shop is computed based on the car repaired unit. The more cars repaired the more profit they will make and the higher activity is. Using number of cars repaired as an activity measurement will be more accurate instead of number of customers. This is because there are no any rules or criteria states that every customer can only bring one car for service. Therefore, there is a possibility of every customer bringing MORE THAN ONE and TWO cars for service. Hence, it is inaccurate if the manager of the automobile repair shop measures their activity level according to the number of customers.
b) RETAIL STORE THAT SELLS MUSIC CDs
The following table shows the different level of activity in sales of music CDs
ACTIVITY LEVEL (SALES UNIT )
1 CD (RM)
10 CDS (RM)
100CDS (RM)
Total variable cost (sales commission)
Variable cost per unit
5.00
5.00
50.00
5.00
500.00
5.00
Total fixed cost (rental)
Fixed cost per unit
1000.00
1000.00
1000.00
100.00
1000.00
10.00
Total cost
Total cost per unit
1005.00
1005.00
1050.00
105.00
1500.00
15.00
Business
Increase in activity level
Decrease in activity level
Total Fixed Cost
Total fixed cost is a cost which tends to be unaffected by the changes in the volume of output.
In the table the rental remain constant even the increase of activity level.
Fixed costs remain constant unless influenced by some outside force, such as a price change.
A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity.
For example, even the sales of the CDs decrease, the rental still need to pay in the same amount annually.
The rental cost remains constant despite decrease in the level of business activity.
Fixed cost per unit of activity
Although the rental cost remains unchanged the fixed cost per unit will decrease as the activity level increase.
Because fixed cost is viewed on a per unit basis and as activity level rises we will see a decrease in average cost.
The rental cost remains constant but on per unit basis, the cost of rent will increase as the activity level decrease.
Because fixed cost is viewed on a per unit basis and as activity level decrease we will see an increase in average cost.
Total variable cost
Total variable cost is a cost that varies in total, in direct proportion to changes in the level of activity.
If the activity increase 10% the variable cost will increase 10%.
In the table, the sales unit rises 10 times. Therefore the sale commission increase 10 times.
Variable cost is a cost which tends to vary directly with the volume of output.
If the activity decreases 10% the variable cost will decrease 10%.
In the table, the sales units reduce 10 times. Therefore the sale commission decrease 10 times.
Variable cost per unit of activity
Although the total variable cost increases when the activity level raises, variable cost per unit still remain constant.
This is because variable cost per unit does not affected by the level of activity. So regardless of how many CDs has sold the price is still same with RM 5 per unit.
Even though the activity level decreases the payment for sale commission per unit will be remained in the same amount.
The reason is the price per CDs is the same even though the sales decrease.
(c)
CDs music retail store is a business which has a high ratio in fixed cost and low ratio in variable cost. As we know that CDs music retail store is a store that sells music CDs to customer. Therefore, they need employer and LOTS OF employees to supervise the store and stocks and promote CDs. When a company rely on more labour to run their business the variable cost will be higher. They need a manager to supervise the store and order stocks. Likewise they will also need part-time or temporary employees to be promoter to promote the CDs to customer. Promoters have played an important role in running the business and raising the activity level of the store because the activity level will be measured in sales unit. The more CDs have sold the higher activity they make. Basically as a par-time promoter, their wages will be categorised into two types. One is basic salary and another one is sales commission. There is a fixed percentage of commission of the sales for every store. Hence, the more CDs have sold the more commission to be paid by the store. Besides, the sales commission usually accompany with the production bonus. Likewise, the higher commission is, the higher bonus the promoter got. Sale commission and bonus payment are variable costs as its total amount will rise whenever the activity level increase.
However, the amount involved in total fixed costs of a CDs music retail store is not as big as total variable costs because music retail store need and rely on more employees to run the business instead of machinery or rental or tax. For example, a music retail store will have to pay the rental and tax assessment monthly. Therefore, it becomes their total fixed costs. Whenever the activity level change they still need to pay the rental and tax assessment in the same amount monthly. For instance, when the activity of the music retail store was high which were 30000 unit CDs sold in a month. The manager will pay the rental and tax assessment at the end of the month with the same amount which was RM700 and RM250 respectively. However, the commission of the promoter will be 5% of the sales which is RM900000 ([RM30/unit x 30000] x 5%).Therefore the sales commission will be RM 45000 and the bonus will be 2% of the commission which is RM900. The total variable cost add up together will be RM459000 compared to total fixed costs which is only RM950 per month.
Whereas dental clinic is a business which has high ratio in variable costs and low ratio in fixed cost. Dental clinic is a business that provides services to those who need dental health care. Dental clinic carries out their service by using machinery and dental supply such as dental hand piece repair, intraoral dental camera repair, small dental equipment repair, dental chair and etc. All these machinery tools are mainly used for a dentist to carry out the service to their patient. Therefore, depreciation machinery has automatically come into fixed cost for a dental clinic business. Since there are a lot of machinery involved in every single service there will be a large amount of fixed costs which is depreciation of machinery or dental supply for a dental clinic. Besides machinery, the dental clinic also has to pay the licenses fees which involve a sum of money annually. Thus, the ratio of variable costs will be lower compared to fixed costs. Variable costs of a dental clinic are associated with the dental medicine, cost of X-ray film and etc. Dental medicine does not involve a large amount of money compared to the depreciation of machinery. Furthermore, those medicine bought can be last for a certain period after the first time purchase. They will only need to place order whenever the medicine runs out of the stock.
(d)The business profit would be most sensitive to changes in the level of activity is dental clinic. This is because there are provide professional service to each customer. And in an hour they can run through a lot of customer .It so the efficiency works. Customer also pay out of pocket because happy with the service. On the others hand, the business profit of retail store that sells music CDs would be the least sensitive to changes in the level of activity. This is because they are run the business with the contract. If the seller didn't sold the CDs under quota as contract the seller will pay the percentage of profit. And the sale is variable due to the economic and the popular of the CDs.
QUESTION 2
(a)Predetermine overhead rate = RM 3,402,000 +RM 348,000+ RM 50,000
63,000 hours - 6000 hours
= RM 3,800,000
57,000 hours
= RM 66.67 /per hour
The new predetermined overhead rate is higher than the rate that was original estimated for year 2011.This is due to the increasing of estimated overhead cost is bigger than the decreasing of estimated indirect labour hour. The overhead cost increase due to the purchasing of new machine. Even though it can reduce 6000direct labour hours, it require technician with a hired of RM50, 000 per year as maintenance and annual lease of RM 348000. All these cost is included in factory overhead.
(b)The new rate will increase the cost of job .That is because the calculation is used the plant wide method to calculate the overhead rate.
(c)Manager concern the new overhead cost because the new predetermined overhead cost is higher than the original predetermined overhead cost. It will tax the products using the same amount of direct labour hours. Due to the poor job such product will not be emerged. Even though there is no increase in the real cost but there may increase the goods price.
(d) Even though the calculations in saving cost were in error but buying the new machine is also a great idea for as a tool to enhance company. Previously the calculation showed that the amount of overhead decrease due to the less direct labour hours. At the end, the cost of annual lease and a new skilled technician affect the cost of overhead increased. Different cost analysis will show the automate equipment increased RM 316,000 a year, while the real labour saving would be only 2000 hours. That is the annual lease for machine plus the salary of skilled technician with the amount RM 398,000 (RM 348,000 + RM 50,000) and minus the cost saving by the labour hours RM 82,000 (RM 41/per hour x 2000 hours) to be the net increase of manufacturing overhead cost RM 316,000 .
Cost effect by lease the automated equipment:
Increase in manufacturing overhead cost:
Saving direct labour hour
2000 hours
6000 hours
RM
RM
Annual lease cost for machine
348,000
348,000
Salary of skilled technician
50,000
50,000
398,000
398,000
Cost saving by direct labour hours
(82,000)
(246,000)
Net increase
316,000
152,000
If the 6000 labour hours are the workers who retire or quite and it became true. It will make the machine no attractive to use in the company. Because that only will add RM 164,000 (RM 246,000 - RM 82,000) in cost saving. The net increase will be RM 152,000
