Anagene Inc., a genomics instrument company, manufactures Anagene Cartridges (a device that analyzes both single nucleotide polymorphism (SNP) and short tandem repeat (STR) forms of DNA for experimental use to find the best way to fight a specific diseases). The President and CFO of the Anagene, Inc., Gerald Kelly, currently faces difficult issues in predicting future profits from fluctuating gross margins. At the January 2001 board meeting, Kelly was questioned about the 40% increase in standard costs and was asked to find better ways to calculate product costs and gross margin.
Problems with Standard Cost Calculation:
● Decreasing cartridge margins - raised questions about the long-term profitability of the business.
● Fluctuating month-to-month …show more content…
will be able to manage the production costs more efficiently. Anagene, Inc. will be able to manage higher gross margins by using the practical capacity to allocate fixed overhead cost, instead of applying budgeted production volume.
Table B explains the practical capacity approach Anagene, Inc. should employ to be able to apply overhead costs more accurately to its cost of goods sold. Assuming that Anagene, Inc. sells 26,000 units, the applied overhead will be less than the actual overhead cost and the manufacturing overhead account will have a debit balance of $641,001 as the production is less than budgeted. If Anagene, Inc. sells 60,000 units, the applied overhead will be more than the actual overhead cost and the manufacturing overhead account will have a credit balance of $220,219 as the production is more than budgeted.
The balance in manufacturing overhead account of over or underapplied manufacturing overhead will be assigned to work in progress and cost of good sold account at the end of the …show more content…
The per unit prices originated from the calculations made by the revised estimate compiled by Kelly. The fixed overhead per unit cost of $25.33 as calculated using practical capacity units over the total overhead costs determined by the manufacturing department. Though a better application, production is far below capacity, resulting in an excess capacity. As explained within the case, Kelly based his overhead numbers on forecasted activity levels rather than capacity. The gross margin percent remains around 45%. This is due to the fact that Anagene, Inc. is operating under capacity. Utilizing the practical application of fixed overhead, the gross margin percent will continue to grow as units sold and produced increase.
After investigation, the analysis team identified that, in order to overcome the issues affecting the company, Anagene, Inc. should follow these recommendations:
● Implement the practical capacity approach rather than budgeted prediction. Anagene, Inc. will be able to manage production costs more efficiently, Reduce allocated fixed overhead costs per unit, increase gross margins, keep the current prices, maintain the demand without being affected by the vacillating costs, and maximize profits.
● Producing the Anagene Cartridge at full capacity. This will allow the company to allocate overhead costs at a reduced rate due to every machine running to the fullest extent. Even in low demand,
Problems with Standard Cost Calculation:
● Decreasing cartridge margins - raised questions about the long-term profitability of the business.
● Fluctuating month-to-month …show more content…
will be able to manage the production costs more efficiently. Anagene, Inc. will be able to manage higher gross margins by using the practical capacity to allocate fixed overhead cost, instead of applying budgeted production volume.
Table B explains the practical capacity approach Anagene, Inc. should employ to be able to apply overhead costs more accurately to its cost of goods sold. Assuming that Anagene, Inc. sells 26,000 units, the applied overhead will be less than the actual overhead cost and the manufacturing overhead account will have a debit balance of $641,001 as the production is less than budgeted. If Anagene, Inc. sells 60,000 units, the applied overhead will be more than the actual overhead cost and the manufacturing overhead account will have a credit balance of $220,219 as the production is more than budgeted.
The balance in manufacturing overhead account of over or underapplied manufacturing overhead will be assigned to work in progress and cost of good sold account at the end of the …show more content…
The per unit prices originated from the calculations made by the revised estimate compiled by Kelly. The fixed overhead per unit cost of $25.33 as calculated using practical capacity units over the total overhead costs determined by the manufacturing department. Though a better application, production is far below capacity, resulting in an excess capacity. As explained within the case, Kelly based his overhead numbers on forecasted activity levels rather than capacity. The gross margin percent remains around 45%. This is due to the fact that Anagene, Inc. is operating under capacity. Utilizing the practical application of fixed overhead, the gross margin percent will continue to grow as units sold and produced increase.
After investigation, the analysis team identified that, in order to overcome the issues affecting the company, Anagene, Inc. should follow these recommendations:
● Implement the practical capacity approach rather than budgeted prediction. Anagene, Inc. will be able to manage production costs more efficiently, Reduce allocated fixed overhead costs per unit, increase gross margins, keep the current prices, maintain the demand without being affected by the vacillating costs, and maximize profits.
● Producing the Anagene Cartridge at full capacity. This will allow the company to allocate overhead costs at a reduced rate due to every machine running to the fullest extent. Even in low demand,