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Week 13 In-class assignments

Exercise 2-11 (15 minutes)


Selling and
Cost Behaviour Administrative Product
Cost Item Variable Fixed Cost Cost
1. The costs of turn signal
switches used at a General
Motors plant........................ X X
2. Salary of production manager
at Blackberry....................... X X
3. Salespersons commissions at
Avon Products...................... X X
4. Insurance on one of
Bombardiers factory
buildings............................. X X
5. The costs of shipping brass
fittings to customers in
California............................. X X
6. Depreciation on the
bookshelves at Reston
Bookstore............................ X X
7. The costs of X-ray film at the
Toronto Generals radio-
logy lab............................... X X
8. The cost of leasing a toll-free
telephone number at
Staples Canada.................... X X
Cost Behaviour
9. The depreciation on the Selling and
playground equipment at a Administrative Product
McDonalds outlet................. X X
Cost Cost
10. The cost of the mozzarella
cheese used at a Pizza Hut
outlet.................................. X X
Problem 3-15 (45 minutes)
1. Maintenance cost at the 140,000 machine-hour level of activity can be isolated as follows:
Level of Activity
80,000 MH 140,000 MH
Total factory overhead cost............. $340,400 $483,200
Deduct:
Utilities cost @ $1.30 per MH*...... 104,000 182,000
Supervisory salaries..................... 120,000 120,000
Maintenance cost........................... $116,400 $181,200
*$104,000 80,000 MHs = $1.30 per MH

2. High-low analysis of maintenance cost:


Maintenance Machine-
Cost Hours
High activity level.............. $181,200 140,000
Low activity level............... 116,400 80,000
Change............................. $ 64,800 60,000
Note: in this problem the high level of activity (140,000 hours) does not correspond to the highest level
of total overhead costs, which occurs in November.

Variable cost per unit of activity:

Change in cost = $64,800 = $1.08 per MH

Change in activity 60,000 MHs


Problem 3-15 (continued)

Total fixed cost:


Total maintenance cost at the low activity level............ $116,400
Less the variable cost element
(80,000 MHs $1.08 per MH).................................. 86,400
Fixed cost element...................................................... $30,000
Therefore, the cost formula is $30,000 per month plus $1.08 per
machine-hour or Y = $30,000 + $1.08X, where X represents machine-hours.

3. Variable Rate per


Machine-Hour Fixed Cost
Maintenance cost.............. $1.08 $ 30,000
Utilities cost: $104,000/80,000
1.30
Supervisory salaries cost.... 120,000
Totals............................... $2.38 $150,000
Therefore, the cost formula would be $150,000 plus $2.38 per machine-hour, or Y = $150,000 +
$2.38X.

4. Fixed costs.......................................................... $150,000


Variable costs: $2.38 per MH 90,000 MHs.......... 214,200
Total overhead costs............................................ $364,200
Exercise 4-16 (30 minutes)
1. Sales = Variable expenses + Fixed expenses + Profits
$48Q = $36Q + $18,000 + $0
$12Q = $18,000
Q = $18,000 $12 per tackle box
Q = 1,500 tackle boxes, or at $48 per tackle box, $72,000 in sales

Alternative solution:

Break-even point = Fixed expenses


in unit sales Unit contribution margin
$18,000
= = 1,500 tackle boxes,
$12 per tackle box
or at $48 per tackle box, $72,000 in sales

2. An increase in the variable expenses as a percentage of the selling price would result in a higher
break-even point. The reason is that if variable expenses increase as a percentage of sales, then the
contribution margin will decrease as a percentage of sales. A lower CM ratio would mean that more
tackle boxes would have to be sold to generate enough contribution margin to cover the fixed costs.
Exercise 4-16 (continued)

Present: Proposed:
3. 2,600 Tackle Boxes 3,120 Tackle Boxes*
Total Per Unit Total Per Unit
Sales.............................. $124,800 $48 $131,040 $42 **
Variable expenses........... 93,600 36 112,320 36
Contribution margin......... 31,200 $12 18,720 $6
Fixed expenses............... 18,000 18,000
Operating income............ $ 13,200 $ 720

* 2,600 tackle boxes 1.20 = 3,120 tackle boxes


** $48 per tackle box (1 - 0.125) = $42 per tackle box
As shown above, a 20% increase in volume is not enough to offset a 12.5% reduction in the selling
price; thus, operating income decreases.

4. Sales = Variable expenses + Fixed expenses + Profits


$42Q = $36Q + $18,000 + $14,400
$6Q = $32,400
Q = $32,400 $6 per tackle boxes
Q = 5,400 tackle boxes
Exercise 4-16 (continued)

Alternative solution:

Unit sales to attain = Fixed expenses + Target profit


target profit Unit contribution margin

$18,000 + $14,400
= = 5,400 units
$6 per unit

5. Unit sales to attain target profit with taxes:

Target aftertax profit


expenses+
1Tax Rate

Unit Contribution Margin

$ 16,800
$ 18,000+
1.3

$6
$ 18,000+$ 24,000
=7,000 units
$6
Exercise 5-15 (30 minutes)
1. The predetermined overhead rate is computed as follows:
Predetermined = Estimated total manufacturing overhead cost
overhead rate Estimated total amount of the allocation base

$170,000
= =$2.00 per machine-hour
85,000 machine-hours

2. The amount of overhead cost applied to Work in Process for the year would be: 80,000 machine-
hours $2.00 per machine-hour = $160,000. This amount is shown in entry (a) below:
Manufacturing Overhead
(Utilities) 14,000 (a) 160,000
(Insurance) 9,000
(Maintenance) 33,000
(Indirect materials) 7,000
(Indirect labour) 65,000
(Depreciation) 40,000
Balance 8,000

Work in Process
(Direct materials) 530,000
(Direct labour) 85,000
(Overhead) (a) 160,000
Exercise 5-15 (continued)

3. Overhead is underapplied by $8,000 for the year, as shown in the Manufacturing Overhead account
above. The entry to close out this balance to Cost of Goods Sold would be:
Cost of Goods Sold...................................... 8,000
Manufacturing Overhead........................... 8,000

4. When overhead is applied using a predetermined rate based on machine-hours, it is assumed that
overhead cost is proportional to machine-hours. When the actual level of activity turns out to be
80,000 machine-hours, the costing system assumes that the overhead will be 80,000 machine-hours
$2.00 per machine-hour, or $160,000. This is a drop of $10,000 from the initial estimated total
manufacturing overhead cost of $170,000. However, the actual total manufacturing overhead did not
drop by this much. The actual total manufacturing overhead was $168,000a drop of only $2,000
from the estimate. The manufacturing overhead did not decline by the full $10,000 because of the
existence of fixed costs and/or because overhead spending was not under control. These issues will
be covered in more detail in later chapters.
Exercise 6-7 (10 minutes)
Weighted-Average Method

Equivalent Units (EU)


Labour &
Materials Overhead
Litres transferred to the Heating Department
during October*.................................................. 45,000 45,000
Work in process, October 31:
Materials: 5,000 litres 100% complete............... 5,000
Labour and overhead: 5,000 litres 70%
complete.......................................................... 3,500
Equivalent units of production................................. 50,000 48,500

* Beginning WIP 25,000 + Started 25,000 Ending WIP 5,000 = 45,000 litres .
Exercise 7-10 (15 minutes)
Teller wages................................ $150,000
Assistant branch manager salary... $70,000
Branch manager salary................. $85,000

Distribution of Resource Consumption Across Activities


Processing
Processing Other
Opening Deposits and Customer Other
Accounts Withdrawals Transactions Activities Totals
Teller wages................................ 0% 75% 15% 10% 100%
Assistant branch manager salary... 10% 15% 25% 50% 100%
Branch manager salary................. 0% 0% 20% 80% 100%

Processing
Processing Other
Opening Deposits and Customer Other
Accounts Withdrawals Transactions Activities Totals
Teller wages................................ $ 0 $112,500 $22,500 $ 15,000 $150,000
Assistant branch manager salary... 7,000 10,500 17,500 35,000 70,000
Branch manager salary................. 0 0 17,000 68,000 85,000
Total cost..................................... $7,000 $123,000 $57,000 $118,000 $305,000

Teller wages are $150,000 and 75% of the tellers time is spent processing deposits and withdrawals:
$150,000 75% = $112,500
Other entries in the table are similarly determined.
Exercise 8-8 (20 minutes)
1. The company is using variable costing. The computations are:
Variable Absorption
Costing Costing
Direct materials.............................. $10 $10
Direct labour.................................. 5 5
Variable manufacturing overhead.... 2 2
Fixed manufacturing overhead
($90,000 30,000 units)............. 3
Unit product cost............................ $17 $20
Total cost, 5,000 units.................... $85,000 $100,000

2. a. The total cost based on variable costing of $85,000 would be acceptable for tax purposes, but not
for external reporting.

b. The finished goods inventory account should be stated at $100,000, which represents the
absorption cost of the 5,000 unsold units. Thus, the account should be increased by $15,000 for
external reporting purposes. This $15,000 consists of the amount of fixed manufacturing overhead
cost that is allocated to the 5,000 unsold units under absorption costing:
5,000 units $3 per unit fixed manufacturing overhead cost = $15,000
Exercise 9-10 (30 minutes)
Air Assurance Corporation
Comprehensive
Performance Report
For the Month Ended March 31

Flexible
Budget Flexible Sales Volume Static
Actual Variance Budget Variance Budget
Jobs 98 98 100

Revenue...................................................................................... $24,750 ($2,200) U $26,950 (550) U $27,500


Variable Expenses:
Mobile lab operating expenses............................................... 2,744 (98) F 2,842 58 F 2,900
Office expenses...................................................................... 294 0 294 6 F 300
Miscellaneous expenses......................................................... 196 0 196 4 F 200
Total variable expenses........................................................... 3,234 (98) F 3,332 68 F 3,400
Contribution margin 21,516 (2,102) U 23,618 (482) U 24,100
Less fixed expenses:
Technician wages ................................................................. 8,450 (150) F 8,600 0 8,600
Mobile lab operating expenses............................................. 5,216 316 U 4,900 0 4,900
Office expenses.................................................................... 2,556 (144) F 2,700 0 2,700
Advertising expenses............................................................ 1,650 70 U 1,580 0 1,580
Insurance ............................................................................. 2,870 0 2,870 0 2,870
Miscellaneous....................................................................... 269 (691) F 960 0 960
Total fixed expenses................................................................ 21,011 (599) F 21,610 0 21,610
Operating income........................................................................ $ 505 ($1,503) U $ 2,008 ($482) U $ 2,490
Problem 10-21 (45 minutes)

1. Total rate: (31,500 + 72,000)/18,000 MHs = 5.75 per MH

Variable rate: 31,500/18,000 MHs = 1.75 per MH


Fixed rate: 72,000/18,000 MHs = 4.00 per MH

2. 16,000 standard MHs 5.75 per MH = 92,000

3. Variable manufacturing overhead variances:


Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH AR) (AH SR) (SH SR)
26,500 15,000 MHs 16,000 MHs
1.75 per MH 1.75 per MH
= 26,250 = 28,000


Spending Variance, Efficiency Variance,
250 U -1,750 F

Alternative solution:
Variable Overhead Spending Variance = (AH AR) (AH SR)
(26,500) (15,000 MHs 1.75 per MH) = 250 U
Variable Overhead Efficiency Variance = SR (AH SH)
1.75 per MH (15,000 MHs 16,000 MHs) = -1,750 F
Problem 10-21 (continued)
Fixed overhead variances:
Fixed Overhead Cost
Actual Fixed Budgeted Fixed Applied to
Overhead Cost Overhead Cost Work in Process
70,000 72,000 16,000 MHs
4 per MH
= 64,000


Budget Variance, Volume Variance,
-2,000 F 8,000 U

Alternative approach to the budget variance:


Budget variance = Actual fixed overhead Flexible budget fixed overhead
70,000 72,000 = -2,000 F
Alternative approach to the volume variance:
Volume variance = Fixed Overhead Rate (Denominator hours standard hours allowed)
4 per MH (18,000 MHs 16,000 MHs) = 8,000 U
Verification of variances:
Variable overhead spending variance................ 250 U
Variable overhead efficiency variance............... 1,750 F
Fixed overhead budget variance....................... 2,000 F
Fixed overhead volume variance...................... 8,000 U
Underapplied overhead.................................... 4,500
Problem 10-21 (continued)
4. Variable overhead
Spending variance: This variance includes both price and quantity elements. The overhead spending
variance reflects differences between actual and standard prices for variable overhead items. It also
reflects differences between the amounts of variable overhead inputs that were actually used and the
amounts that should have been used for the actual output of the period. Since the variable overhead
spending variance is unfavourable, either too much was paid for variable overhead items or too many
of them were used.
Efficiency variance: The term variable overhead efficiency variance is a misnomer, since the
variance does not measure efficiency in the use of overhead items. It measures the indirect effect on
variable overhead of the efficiency or inefficiency with which the activity base is utilized. In this
company, machine-hours is the activity base. If variable overhead is really proportional to machine-
hours, then more effective use of machine-hours has the indirect effect of reducing variable
overhead. Since 1,000 fewer machine-hours were required than indicated by the standards, the
indirect effect was presumably to reduce variable overhead spending by about 1,750 (1.75 per
machine-hour 1,000 machine-hours).

Fixed overhead
Budget variance: This variance is simply the difference between the budgeted fixed cost and the
actual fixed cost. In this case, the variance is favourable, which indicates that actual fixed costs were
lower than anticipated in the budget.
Volume variance: This variance occurs as a result of actual activity being different from the
denominator activity that was used in the predetermined overhead rate. In this case, the variance is
unfavourable, so actual activity was less than the denominator activity. It is difficult to place much of
a meaningful economic interpretation on this variance. It tends to be large, so it often swamps the
other, more meaningful variances if they are simply netted against each other.
Problem 11-15 (45 minutes)
1. Segments defined as product lines:
Product Line
Leather
Division Garments Shoes Handbags
Sales......................................... R1,500,000 R500,000 R700,000 R300,000
Variable expenses...................... 761,000 325,000 280,000 156,000
Contribution margin................... 739,000 175,000 420,000 144,000
Traceable fixed expenses:
Advertising.............................. 312,000 80,000 112,000 120,000
Administration......................... 107,000 30,000 35,000 42,000
Depreciation............................ 114,000 25,000 56,000 33,000
Total traceable fixed expenses.... 533,000 135,000 203,000 195,000
Product line segment margin...... 206,000 R40,000 R217,000 R (51,000)
Common fixed expenses:
Administrative*....................... 110,000
Divisional segment margin.......... R 96,000
*R217,000 R107,000 = R110,000.
Problem 11-15 (continued)
2. Segments defined as markets for the handbag product line:
Sales Market
Handbags
Domestic Foreign
Sales......................................... R300,000
R200,000 R100,000
Variable expenses...................... 156,00086,000 70,000
Contribution margin................... 144,000
114,000 30,000
Traceable fixed expenses:
Advertising.............................. 120,000 40,000 80,000
Market segment margin.............. 24,000 R74,000 R(50,000)
Common fixed expenses:
Administrative......................... 42,000
Depreciation............................ 33,000
Total common fixed expenses..... 75,000
Product line segment margin...... R(51,000)

3. Garments Shoes
Contribution margin (a)............................. R175,000 R420,000
Sales (b).................................................. R500,000 R700,000
Contribution margin ratio (a) (b)............ 35% 60%

Incremental contribution margin:


35% R200,000 increased sales............ R70,000
60% R145,000 increased sales............ R87,000
Less cost of the promotional campaign....... 30,000 30,000
Increased operating income....................... R40,000 R57,000
Based on these data, the campaign should be directed toward the shoes
product line. Notice that the analysis uses the contribution margin ratio
rather than the segment margin ratio because fixed expenses do not
change.
Exercise 12-14 (30 minutes)
1. The relevant costs of a hunting trip would be:
Travel expense (100 kilometres @ $0.25 per kilometre) $25
Shotgun shells................................................ 20
Coffee beans.................................................. 20
Total.............................................................. $65
This answer assumes that Jason would not be drinking the coffee
anyway. It also assumes that the resale values of the camper, pickup
truck, and boat are not affected by taking one more hunting trip.
The money lost in the poker game is not relevant because Jason would
have played poker even if he did not go hunting. He plays poker every
weekend.
The other costs are sunk at the point at which the decision is made to
go on another hunting trip.
2. If Jason gets lucky and bags another two ducks, all of his costs are
likely to be about the same as they were on his last trip. Therefore, it
really doesnt cost him anything to shoot the last two ducksexcept
possibly the costs for extra shotgun shells. The costs are really incurred
in order to be able to hunt ducks and would be the same whether one,
two, three, or a dozen ducks were actually shot. All of the costs, with
the possible exception of the costs of the shotgun shells, are basically
fixed with respect to how many ducks are actually bagged during any
one hunting trip.
3. In a decision of whether to give up hunting entirely, more of the costs
listed by Harry are relevant. If Jason did not hunt, he would not need to
pay for: gas, oil, and tires; shotgun shells; the hunting license; and the
coffee. Assuming Jason would not be drinking the coffee anyway. In
addition, he would be able to sell his camper, equipment, boat, and
possibly pickup truck, the proceeds of which would be considered
relevant in this decision. The original costs of these items are not
relevant, but their resale values are relevant.
These three requirements illustrate the slippery nature of costs. A cost
that is relevant in one situation can be irrelevant in the next. None of
the costsexcept possibly the cost of the shotgun shellsare relevant
when we compute the cost of bagging a particular duck; some of them
are relevant when we compute the cost of a hunting trip; and more of
them are relevant when we consider the possibility of giving up hunting.
Exercise 13-15 (15 minutes)
1. Computation of the annual cash inflow associated with the new go-cart
track:
Operating income...................................... $73,000
Add: Noncash deduction for depreciation.... 63,000
Net annual cash inflow............................... $136,000
The payback computation would be:
Investment required
Payback period = Net annual cash inflow
$ 680,000
= $ 136,000

Yes, the go-cart track meets the requirement. The payback period is
less than the maximum 6 years required.

2. The simple rate of return would be:


Incremental operating income
Simple rate of return=
Initial investment
$ 73,000

$ 680,000
= 10.7%

Yes, the new go-cart track satisfies the criterion. Its 10.7% return
exceeds the requirement of a 10% return.