Professional Documents
Culture Documents
Closing
Closing
MASTER BUDGET
Hansell Company's management wants to prepare budgets for one of its products,
duraflex, for July 2002. The firm sells the product for $40 per unit and has the following
expected sales units for these months in 2002:
The firm's policy is to maintain a minimum of 100 units of duraflex on hand at alltimes with no fewer than 10 percent of un
the expected sales for the following month. 100
All materials inventories are to be maintained at 5 ercent of the production needs for the next month,
but not to exceed 1000 pounds 1000
The firm expects all inventories at the end of June to be within the
guidelines. The purchase department expects the materials to cost $1.25 per pound
and $5.00 per pound of dura-lOOO and flexplas, respectively.
The manufacturing of duraflex also requires one-tenth of an hour of K175 workers' time
for each unit manufactured.
Manufactured overhead is allocated at the rate of $200 per batch and $30 per
direct labor-hour.
Required On the basis of rhe preceding data and projections, prepare the following
budgets for July 2002:
Sales Budget (in dollars).
b. Production budget (in units).
c. Production budget for August (in units).
d. Direct materials purchase budget (in pounds).
e.Direct materials purchase budget (in -dollars).
f.Direct manufacturing labor budget ('in dollars).
1. Master Budget
b. HANSEll COMPANY
Production Budget (in units)
For July 2002
c. HANSEll COMPANY
Production Budget (in units)
For August 2002
d. HANSEll COMPANY
Direct Materials Purchases Budget (in pounds)
For July 2002
Direct Materials
Dura-tOOO Flexplas
(4Ib. each) (2Ib. each)
HANSEll COMPANY
f. Direct Manufacturing labor Budget
For July 2002
Direct Number
Labor-Hours of Total
per Batch Batches Hours
Kl02 Hours 1.00 61 61
K17SHours 10.00 61 610
Total 671
DLH PER UNIT 0.11
HANSELL COMPANY
Budget Trial Balance
June 30, 2002
Debit
Cash $ 10,000
Accounts receivable $ 80,000
Allowance for bad debts
Inventory $ 25,000
Plants, property, and equipment $ 650,000
Accumulated depreciation
Accounts payable
Wages and salaries payable
Note payable
Stockholders' equity
$ 765,000
Typically, cash sales represent 20 percent of sales and credit sales represent 80 percent.
20% 80%
Sales terms are 2/10, n/30. Hansell bills customers on the first day of each month 2%
Experience has shown that 60 percent of the billings will be' conicted within the discount period.
25 percent by the end of the month after sales,
10 percent by the end of the second month after the sale,
and 5 percent will be uncollectible. The firm
writes off uncollectible accounts after 12 months.
The term of purchses for materials is 2/15, n/60. The firm makes all payments 2%
within the discount period. Experience has shown that 80 percent of the purchases
are paid in the month of the purchase and the remainder are paid in the month immediately following.
In June 2002, the firm budgeted purchases of $25,000 for dura-1000 and $22,000 for flexplas.
dura-1000 $ 25,000
flexplas. $ 22,000
Total budgeted marketing, distribution, customer service, and administrative costs for 2002 are $600,000.
Of this amount, $270,000 is considered fixed and includes depreciation expenses of $150,000
. The remainder varies with sales.
The budgeted total sales for 2002 are $2 million.
All marketing and administrative costs are paid in the month incurred.
HANSEll COMPANY
Cash Budget
Jul-02
Cash Available
Cash balance, beginning
Add: Cash receipts
July cash sales $240,000 x 20% = $ 48,000 $ 240,000 20% $ 48,000
Collections of receivables
From sales in June
Collection within the discount period
5,500 x $40 x 80% x 60% x 98% $ 103,488
Collection after the discount period
5,500x $40 x 80% x 25% $ 44,000
From sales in May
5,400 x $40 x 80% x 10% $ 17,280
Cash Disbursement
Materials purchases
Financing
Amount to borrow $ 12,820 .=13000
Cash balance, July 31,2002
HANSELL COMPANY
Budget Income Statement
Jul-02
Sales
Cost of goods sold* $22.80 x 6,000 =
Gross margin
Selling and administrative expenses
Variable $ 39,600
Fixed $270,000 / 12 = $ 22,500
Net income
Direct materials
Dura-lOOO 4 1.25 $ 5.00
Flexplas 2 5 $ 10.00 $ 15.00
Direct labor
Kl021abor 0.01 hour x $50 $ 0.50
K175labor 0.1 hour x $20 $ 2.00 $ 2.50
Factory overhead
Applied based on batch $200 / 100 = $ 2.00
Applied based on direct labor-hour $30 x 0.11 hour = $ 3.30 $ 5.30
Cost per unit $ 22.80
$ 40
5%
$ 1.25
$ 5.00
100
(2Ib. each)
Price per Unit Total
$ 30,500
$ 61,500
$ 92,000
Rate
per
Hour
$ 50.00 $ 3,050
$ 20.00 $ 12,200
$ 15,250.00
Credit
$ 3,500
$ 320,000
$ 95,000
$ 24,000
$ 200,000
$ 122,500
$ 765,000
98%
60%
25%
10%
5%
98%
80%
20%
$ 600,000
$ 270,000 $ 150,000
$ 2,000,000
$ 40,000
$ 100,000
$ 10,000
$ 212,768
$ 222,768
$ 81,340
$ 15,250
$ 19,398
$ 30,000
$ 39,600
$ 10,000
$ 195,588
$ 27,180
13000
$ 40,180
$ 240,000
$ 136,800
$ 103,200
$ 62,100
$ 41,100
Farmers' Dairy purchases raw milk from individual farms and processes it
until the splitoff point, when two products - cream and liquid skim - emerge. These two
productsare sold to an independent company, which markets and distributes them to
supermarketsand other retail outlets.
Summary data for May 2004 are
Rawmilk processed, 110,000 gallons; 10,000 gallons are lost in the production
process due to evaporation, spillage, and the like, yielding 25,000 gallons of cream
and 75,000 gallons of liquid skim.
Production sales
Cost of purchasing 110,000 gallons of raw milk and processing it until the splitoff
point to yield cream and liquid skim, $400,000.
110,000 $ 400,000
Cream
1. Sales value of total production at splitoffpoint $ 200,000
2. Weighting 40%
Physical-Measure Method
The physical-measure method allocates joint costs to joint products on the basis of the
relative weight, volume, or other physical measure at the splitoff point of the total produc·
tion of these products during the accounting period. In Example 1, the $400,000 joint
costs produced 25,000 gallons of cream and 75,000 gallons ofliquid skim. Using the num·
ber of gallons produced as the physical measure, joint costs are allocated as follows:
Cream
1. Physical measure oftotal production (gallons) $ 25,000
2. Weighting 25%
Exhibit 16-5 presents the product-line income statement using the physical-measure
method. The gross-margin percentages are 50% for cream and 0% for liquid ·skim.
Under the benefits-received criterion, the physical-measure method is less preferred than
the sales value at splitoff method. Why? Because it has no relationship to the revenue·
producing power of the individual products. Consider a gold mine that extracts ore contain·
ing gold, silver, and lead. Use of a common physical measure (tons) would result in almost
all costs being allocated to lead - the product that weighs the most but has the lowest
revenue-producing power. In this case, the method of cost allocation is inconsistent with
the reason for the mine owner incurring mining costs - to find gold and silver, not lead. As
another example, if the joint costs of a hog were assigned to its various products on the basis
Example 2: Assume the same data as in Example 1except that here both cream and Iiq.
uid skim can be processed further:
• Cream ---'>Buttercream: 25,000 gallons of cream are further processed to yield 20,000
gallons of buttercream at additional processing costs of $280,000. Buttercream,
which sells for $25 per gallon, is used in the manufacture of butter-based products.
• Liquid Skim ---'>Condensed Milk: 75,000 gallons of liquid skim are further processed
to yield 50,000 gallons of condensed milk at additional processing costs of $520,000.
Condensed milk sells for $22 per gallon.
Sales during the accounting period were 12,000 gallons of buttercream and 45,000 gal.
Ions of condensed milk. Exhibit 16-6 depicts the basic relationships of how raw milkis
converted into cream and liquid skim in a joint production process, and how the creamis
separately processed into buttercream and the liquid skim is separately processed into
condensed milk. Inventory information follows:
Beginning Ending
Inventory Inventory
Raw milk 0 0
Cream 0 0
liquid skim 0 0
Buttercream 0 8,000
Condensed milk 0 5,000
The net realizable value (NRV) method allocates joint costs to joint products on the
basis of the relative NRV- the final sales value minus the separable costs _ of the total
production of the joint products during the accounting period. The NRV method is typi.
cally used in preference to the sales value at splitoff method only when we don't knowthe
market selling prices for one or more products at splitoff. Joint costs in this example are
allocated as follows: I
Buttercream
4. Weighting 27.50%
Exhibit 16-7 presents the product-line income statement using the estimated NRV
method. The gross-margin percentages are 22.0% for buttercream and 26.4% for condensed
milk.
The NRV method is often implemented using simplifYing assumptions. For example,
companies that frequently change the number of processing steps beyond the splitoff
point often assume a specific set of such steps. Also, if the selling prices of joint products
vary frequently, a given set of selling prices may be consistently used throughout the
accounting period.3
Because the sales value at splitoff method does not require knowledge of the processing
steps beyond the splitoff point, it is less complex than the NRV method. Howev~r,
using the sales value at splitoff method is not always feasible. That's because there may
not be market prices for at least one of the products at the splitoff point. Market prices
may only be available after processing occurs beyond the splitoff point.
Step 1: Compute the overall gross-margin percentage for all joint products together.
Note, Exhibit 16-8 uses the final sales value of the total production during the accounting
period, $1,600,000, not the total sales of the period, to calculate the overall gross
margin percentage of 25%.
• Step 2: Multiply the overall gross-margin percentage and the final sales values of each
product to calculate the gross margin for each product. Subtract the gross margin for
each product from the final sales value of each product to obtain the total costs that
each product will bear.
• Step 3: Deduct the separable costs from the total costs that each product will bear to
obtain the joint-cost allocation.
The joint costs allocated to a product can be negative under this method. Some products
may receive negative allocations of joint costs to bring their gross-margin percentages
up to the overall average. Exhibit 16-9 presents the product-line income statement for the
constant gross-margin percentage NRV method.
Step 1
Final sales value of total production during the accounting period:
(20,000 gal. x $25/gal.) + (50,000 gal. x $22/gal.) ,'"
Deduct joint and separable costs ($400,000+ $280,000 + $520,000)
Gross margin
Gross-margin percentage ($400,000.;-$1,600,000)
Step 2
Final sales ILalueof total production during Buttercream
the accounting period:
(buttercream, 20,000 gal. x $25/gal.; $ 500,000
condensed milk, 50,000 gal. x $22/gal.)
Deduct gross margin, using overall $ 125,000
gross-margin percentage (25%)
Cost of goods available for sale $ 375,000
Step 3
Deduct separable costs to complete and sell $ 280,000
Joint costs allocated $ 95,000
The net realizable value of the byproduct is used to reduce the joint production costs before the joint costs are allocated t
regarding Lankip’s operations for the current month are presented in the chart below. During the month, Lankip incurred
joint production costs of $2,520,000. $2,520,000
The main products are not marketable at the split-off point and, thus, have to be processed further
First Second
Main Main
Product Product By-product
Monthly output in pounds 90,000 150,000 60 90,000 150,000 60,000
Selling price per pound $30 $14 $2 $30 $14 $2
Separable process costs $540,000 $660,000 $540,000 $660,000
120,000
The amount of joint production cost that Lankip would allocate to the Second Main Product by using the physical-volume
method to allocate joint production costs would be
2,400,000
1,500,000
Answer (C) is correct. The joint cost to be allocated is $2,400,000 [$2,520,000 total joint cost – (60,000 pounds of
the by-product) × $2]. Accordingly, the joint cost to be allocated to the Second Main Product on a physical-volume
basis is $1,500,000 {[150,000 pounds ÷ (90,000 pounds + 150,000 pounds) × $2,400,000]}.
B-40
Physical units produced per batch 1500
Sales value per unit at splitoff $ 10.00
Cost per unit of further processing after splitoff $ 3.05
Sales value per unit after further processing 12.25
Incremental revenue per unit $ 2.25
Less: cost to process further $ (3.05)
Incremental profit per unit $ (0.80)
Sales value EI
400000
Underthe constantgross-margin
NRV method,the gross-margin
percentage for each product is
the same, regardlessofitsseparable
costs. This method, in
effect, "subsidizes" products
with relatively high separable
costs by assigning less joint
costs to them. That's why the
product,buttercream,has a 25%
gross marginunderthe constant
gross-margin percentage NRV
method(inExhibit16-9)buthas a
22% gross-margin percentage
underthe NRV method(inExhibit
16-7).
$ 1,600,000
s before the joint costs are allocated to the main products. Data
During the month, Lankip incurred
cessed further
J-60 H-102
2000 3200
$ 4.00 $ 7.25
$ 1.00 $ 2.50
5.7 9.75
$ 1.70 $ 2.50
$ (1.00) $ (2.50)
$ 0.70 $ -
nt Costs Allocated
ing Sales Value at
itoff Method: Farmers'
iry Product-Line Income
atement for May 2004
$ 22 45000 5,000
nt Costs Allocated
ing NRV Method:
rmers' Dairy Product-
e Income Statement for
Example 3: The Meatworks Group processes meat from slaughterhouses. One of its
departments cuts lamb shoulders and generates two products:
• Shoulder meat (the main product) -sold for $60 per pack $ 60
• Hock meat (the byproduct) -sold for $4 per pack (net of any selling costs) $ 4
Data under each column indicate the number of packs for this department in July 2004
Beginning
Production Sales Inventory
Shoulder meat 5000 4000 0
Hockmeat 1000 300 0
The joint manufacturing costs of these products in July 2004 were $250,000, comprising
$150,000 for direct materials and $100,000 for conversion costs. Both products are soldat
the splitoff point without further processing, as Exhibit 16-10 shows.
Two byproduct accounting methods are presented. Method A, the production
method, recognizes bypro ducts in the financial statements at the time production is completed.
Method B, the sale method, delays recognition of byproducts until the time of
sale. Recognition of bypro ducts at the time of production is conceptually correct.
Recognition at the time of sales often occurs in practice when the dollar amounts of
byproducts are immateriaJ4 Exhibit 16-11 presents the in ome statement of the
Meatworks Group under both methods.
Revenues
Main product: shoulder meat (4,000 packs x $60/pack) $ 240,000 $ 240,000
Byproduct: Hock meat (300 packs x $4/packl 0 $ 1,200
Total revenues $ 240,000 $ 241,200
Cost of goods sold
Total manufacturing costs $ 250,000 $ 250,000
Deduct byproduct revenue (1,000 PCJcksx $4/pack) $ 4,000 0
Net manufacturing costs $ 246,000 $ 250,000
Deduct main-product inventory $ 49,200 $ 50,000
Cost of goods sold $ 196,800 $ 200,000
Gross margin $ 43,200 $ 41,200
Gross-margin percentage 18.0% 17.1%
Inventoriable costs (end of period): $ 49,200 $ 50,000
Main product: Shoulder meat
Byproduct: Hock meat (700 packs x $4/packlc $ 2,800 0
'Recorded at selling prices.
Dr. Cr.
1. Work in Process $ 150,000
Accounts Payable $ 150,000
To record direct materials purchased and
used in production during July.
Ending
Inventory
1000
700
$ 150,000
$ 100,000
$ 250,000 Joint cost
NG METHOD
Cost allocation, which is a problem in nearly every organization and nearly every facet of
accounting, provides information needed for both strategic and operating decisions.
For example, how should university costs be allocated among undergraduate programs,
graduate programs, and research? How should the costs of expensive medical equipment,
facilities, and staff be allocated in a hospital? How should manufacturing overhead
be allocated to individual products when deciding the products to emphasize in a
multiple-product company such as Heinz?
Television and newspaper stories about questionable cost-charging practices frequently
involve questions of cost allocation. In one case, a patient in a hospital was
charged $17 for a quart of distilled water - $3.40 of direct costs and $13.60 of cost allocations.
Much of this $13.60 was questionably related to the services provided to the
patient. Cost-allocation issues inevitably arise in disputes over large cost overruns on construction
projects and movies as well. One such well-publicized dispute arose in the case
of the highly successful film "Forrest Gump." A writer, whose royalty depended on the
film's profits, disputed the costs allocated to the film.
Chapters 4 and 5 examined topics related largely to the allocation of indirect coststo
individual products. As we saw then, finding answers to cost-allocation questions is often
difficult. The answers are seldom clearly right or wrong: Nevertheless, in this chapter and
the next, we provide insight into cost allocation and the different issues that arise, evenif
the answers seem elusive. The emphasis in this chapter is on macro issues in cost allocation:
allocation of costs to divisions, plants, and customers. We describe customerprofitability
analysis where the customer rather than the product is the cost object and
revenues and costs are assigned to each customer. We also show how the sales-volume
variance introduced in Chapter 7 can be further analyzed when there are multiple cus·
tomers and multiple products. Chapter 15 describes micro issues in cost allocationallocating
support department costs to operating departments and allocating common
costs to various cost objects - as well as revenue allocations.
Purpose Illustrations
2.To motivate managers and To encourage the design of products that are simpler to
employees manufacture or less costly to service
To encourage sales representatives to push high-margin
products or services
3.To justify costs or compute To cost products at a "fair" price, often required by
reimbursement government defense contracts
To compute reimbursement for a consulting firm that is
based on a percentage of the cost savings resulting
from the implerpentation of its recommendations
4.To measure income and assets To cost inventories for financial reporting. (Under generally
for reporting to external parties accepted accounting principles, invento[iable costs
include manufacturing costs but exclude research and
development, marketing, <:IistribHtion, and customerservice
costs.)'
To cost inventories for reporting to tax authorities
Differentcosts are appropriate for different purposes. Consider costs of a product in terms
ofthe business functions in the value chain.
The same set of costs in these six business functions typically will not satisfy each of the
four purposes i Exhibit 1.4-1.
For some decision related to the economic-decision purpose (for example, long-run
product pricing), the costs in all 'six functions should be included.
For the motivatio purpose, ,costs from more than one business function are often
included to emphasize to managers how costs in different functions are related to each
other. For example, product designers in some Japanese companies incorporate costs of
other functions in the value chain - such as production, distribution, and customer service-+
into their product-cost estimates. The aim is to focus attention on how different
product design options affect total costs.
For the cost-reimbursement purpose, the particular contract will often stipulate
whether all six of the business functions or only a subset of them are to be reimbursed.
For instance, cost-reimbursement rules for U.S. government contracts explicitly exclude
marketing costs.
For the purpose of income and asset measurement for reporting to external parties,
inventoriable costs under GAAPinclude only manufacturing costs (and product design
costs in some cases). In the United States, R&D costs in most industries are a period cost
when they are incurred,1 as are marketing, distribution, and customer-service costs
Exhibit 14-2 presents four criteria used to guide cost-allocation decisions. These decisions
affect both the number of indirect-cost pools and the cost-allocation base for each indirect-
cost pool. Managers must first identify the purpose for a particular cost allocation
and then selec the criteria, to aiIocate costs. e emp asize the supe£iority ofthe causeand-
effect and the benefits-received criteria, especially when the purpose of cost allocation
is economic decisions or motivation.2 -
Fairness and ability to bear are less frequently used criteria than cause and effector
benefits received. Fairness is a difficult criterion on which to obtain agreement. What one
party views as fair, another party may view as unfair.3 For example, a university may view
allocating a share of general administrative. costs to government contracts as fair because
general administrative costs are incurred to support all activities of the university. The government
may view the allocation of such costs as unfair because the general administrative
costs would have been incurred by the university whether or not the government contract
had been signed. To get a sense of the ability-to-bear criterion, consider a product that
consumes a large amount of indirect costs but whose selling price is currently below its
direct costs. This product has no ability to bear any of the indirect costs it uses. If the
indirect costs it consumes are allocated to other products, these other products are effectively
subsidizing the product that is losing money.
The cause-and-effect criterion is the primary one used in activity-based costing
(ABC) applications. ABC systems use the concept of a cost hierarchy to identify the
cost drivers that best demonstrate the cause-and-effect relationship between each
activityand the costs in the related cost pool. The cost drivers are then chosen as costallocation
bases.
1. Cause and Effect. Using this criterion, managers identify the variables that cause resources to be
consumed. For example, managers may use hours of testing as the variable when allocating the costs
of a quality-testing area to products. Cost allocations based on the cause-and-effect criterion are likely
to be the most credible to operating personnel.
2. Benefits Received. Using this criterion, managers identify the beneficiaries of the ~ of the cost
object. The costs of the cost object are allocated among the beneficiaries in proportion to the benefits
each receives. Consider a corporatewide advertising program that promotes the general image ofthe
corporation rather than any individual product. The costs of this program may be allocated on the basis
of division reven~s; the higher the revenues, the higher the division's allocated cost of the advertising
program. The rationale behind this allocation is that divisions with higher revenues apparently
ene 'ted from the advertising more than divisions with lower revenue~ and, therefore, ought to be
allocated more of the advertising costs.
3. Fairness or Equity. This criterion is often cited in government contracts when cost allocations are
the basis for establishing a price satisfactory to the government and its suppliers. Cost allocation here
is viewed as a "reasonable" or "fair" means of establishing a selling price in the minds ofthe
contracting parties. For most allocation decisions, fairness is a difficult-to-achieve objective rather
than an operational criterion.
4. Ability to Bear. This criterion advocates allocating costs in proportion to the cost Object's ability
bear costs allocated to it. An example is the allocation of corporate executive salaries on the basis of
division operating income. The presumption is that the more-profitable divisions have a greater ability
to absorb corporate headquarters' costs.
Chapter 5 described how ABC systems define activity-cost pools and use activity-cost
drivers as allocation bases to assign costs of activity-cost pools to products. In this section,
wefocus on how costs are assigned to the activity-cost pools.
We will use Consumer Appliances, Ine. (CAI), to illustrate how costs incurred in different
parts of a company can be assigned, and then reassigned, for costing products, services, customers, or contracts.
Division Activity-Cost Pools and Cost-Allocation Bases, CAI. Inc., for Refrigerator Division (.R)and Clothes Dryer Division (CD)
cost cost
hierarchy allocation
Activity examples of costs amount category base
CAI has two divisions and each has its own manufacturing plant the
Refrigerator Division with a plant in Minneapolis and the Clothes Dryer Division witha
plant in St. Paul. CAI's headquarters is in a separate location in Minneapolis. In each division,
CAI manufactures and sells multiple products that differ in size and complexity.
• Treasury costs - interest of $900,000 on debt used to finance the construction of $900,000
new assembly equipment in the two divisions. Cost of new assembly equipment is
$5,200,000 in the Refrigerator Division and $3,800,000 in the Clothes Dryer $5,200,000
Division. $3,800,000
• Human resource management costs-recruitment and ongoing employee training
and development, $1,600,000. $1,600,000
• Corporate administration costs - executive salaries, rent, and general administration
costs, $5,400,000. $5,400,000
2. Division costs - there are two direct-cost categories (direct materials and direct manufacturing
labor) and six indirect-cost categories
Exhibit 14-4 presents an overview diagram of the allocation of corporate and division
overhead costs to products for CAI. Look first at the middle row of the exhibit, where you
see "Division Indirect Costs," and scan the lower half. It is similar to Exhibit 5-3, PanelA
(p. 146), which illustrates ABCsystems using activity-cost pools and cost drivers. The only
additional feature in the lower half of Exhibit 14-4 is that CAI has a cost pool called
Facility Costs (far right, middle row), which accumulates all annual costs of buildings and
furnishings (such as depreciation) incurred in the division. The arrows in the exhibit indicate
that CAI allocates these costs to the other activity-cost pools using the square feet area
required for the different activities (design, setup, manufacturing, distribution, and
administration). The activity-cost pools then include the costs of the building and facilities
needed to perform the various activities.
The activity-cost pools are allocated to products on the basis of cost drivers described
in Exhibit 14-3. These cost drivers are chosen as the cost-allocation bases because there is
a cause-and-effect relationship between the cost drivers and the costs in the activity-cost
pool. A cost rate per unit is calculated for each cost-allocation base. Indirect costs are allocated
to products on the basis of the total quantity of the cost-allocation base for each
activity used by the product.
Next focus on the upper half of Exhibit 14-4: how corporate costs are allocated to divisions
and then to activity-cost pools. Before getting into the details of the allocations, let's
first consider some broader choices that CAIfaces regarding the allocation of corporate costs
COST OBJECT:{
REFRIGERATOR
AND CLOTHES
DRYERPRODUCTS
a. Some companies allocate all corporate costs to divisions. They believe that corporate
costs are incurred to supprivision activities. Allocating all corporate costs motivates
division managers to examine how corporate costs are planned and controlled. Als
companies that want to calculate the ~ll cost of products must allocate corporate costs
to activity-cost pools of divisions
b. Other companies do not allocate corporate costs to divisions. They believe that these
costs are not controllable by division managers.
c. Still other companies allocate only those corporate costs, such as corporate human if, resources, that are widely perceive
provide explicit b fi divisions. These companies exc ude corporate costs such as
corporate donations to charitable foundations because division managers often have no
corporate donations to charitable foundations because division managers often have no
sayin making these decisions and because the benefits to the divisions are less evident or
too remote
For some decision purposes, allocating some but not all corporate costs to division
may be the preferred alternative. Consider the performance evaluation of division managers.
The controllability notion (see pp. 192-193) is frequently used to justify excluding
some corporate costs from division reports. For example, the salaries of the top
management at corporate headquarters are often excluded from responsibility accounting
reports of division managers. Although divisions tend to benefit from these corporate
costs, division managers argue they have no say in ("are not responsible for")
how much of these corporate~ces they use or how much they cost. The contrary
argument is that full allocation is justified because the divisions receive benefits from
all corporate costs
2. If CAI allocates corporate costs to divisions, how many cost pools should it use?
One extreme is to aggregate all corporate costs into a single cost pool. The other extreme
is to have numerous individual corporate cost pools. A variety of factors may prompt
managers to consider using multiple cost pools. A major factor is the concept of homogeneous
cost pools.
In a homogeneous cost pool, all of the costs in the cost pool have the same or a similar
cause-and-effect or benefits-received relationship with the cost-allocation base.
For example, when allocating corporate costs to divisions, CAI can combine corporate
administration costs and corporate human resource management costs into a single cost
pool if both cost categories have the same or a similar cause-and-effect relationship with
the same cost-allocation base (say, number of employees in each division). If, however,
each cost category has a cause-and-effect relationship with a different cost-allocation base
(for example, number of employees in each division affects corporate human resource
management costs, whereas revenues of each division affect corporate administration
costs), CAI will prefer to maintain separate cost pools for each of these costs. Determining
homogeneous cost pools requires judgment and should be revisited on a regular basis to
evaluatewhether the cause-and-effect relationship between the cost-allocation base and
the different cost categories in a cost pool has changed.
Another factor in deciding on the number of cost pools is the views of managers. Do
theybelieve that aggregating corporate costs into a single cost pool ignores important
differencesin how divisions use corporate resources? A final factor is the costs of implementinga
multiple cost-pool system. Improvements in information-gathering technologyare
enhancing the capability of companies and reducing the cost of using multiple
costpools.
3. If CAI allocates corporate costs to divisions, which allocation bases should it use?
Generally, the ones that have the best cause-and-effect relationship with costs.
1. CAI allocates treasury costs to each division on the basis of the cost of new assembly
equipment installed in each division (the cost driver of treasury costs). It allocates the
$900,000 of treasury costs as follows (using information from p. 486):
Each division then creates a separate cost pool consisting of the allocated corporate
treasury costs and reallocates these costs to products on the basis of machinehours
used on the new equipment. Treasury costs are an output unit-level cost because
they represent resources sacrificed on activities performed on each individual unit of
a product.
2. CArs analysis indicates that the demand for corporate human resource management
(CHRM) costs for recruitment and training varies with total salary and labor costs.
Asa result, these costs are allocated to divisions on the basis of the total salary and labor
costs incurred in each division. Suppose salary and labor costs are $44,000,000 in the
Refrigerator Division and $36,000,000 in the Clothes Dryer Division. Then CHRM costs
areallocated to the divisions as follows:
$1,600,000 x $44,000,000 = $880,000
$44,000,000 + $36,000,000
$1,600,000x $36,000,000 = $720,000
$44,000,000 + $36,000,000
Each division reallocates the CHRM costs allocated to it to the indirect-cost pools of
design, machine setup, manufacturing operations, distribution, and division administration
on the basis of the total salary and labor costs incurred for each of these activities.
CHRMcosts are added to the indirect-cost pools in each divisioll and alloc;ated to products
using the cost driver for each cost pool. Thus, CHRM costs are product-sustaining
costs (for the portion of CHRM costs allocated to the design cost pool), batch-level costs
(for the portion of CHRM costs allocated to the machine setup cost pool), output unitlevelcosts
(for the portions of CHRM costs allocated to the manufacturing operations and
distribution cost pools), and facility-sustaining costs (for the portion of CHRM costs allocated
to the division administration cost pool).
3. CAI allocates corporate administration costs to each division on the basis of division
administration costs (see Exhibit 14-3) because corporate administration's main role
is to support division management.
Refrigerator Division:
Clothes Dryer Division:
$5,400,000 x $1,000,000 =$3,000,000
$1,000,000 + $800,000
$5,400,000 x $800,000 = $2,400,000
$1,000,000 + $800,000
Each division adds the allocated corporate administration costs to the division administration
cost pool. The costs in this cost pool are facility-sustaining costs and do not have a
cause-and-effect relationship with individual products pr9duced and sold by each division.
CAl's policy, however, is to allocate all costs to products so that CAl's division managers
become aware of all costs incurred at CAI in their pricing and other decisions. It allocates
the division administration costs (including allocated corporate administration costs) to
products on the basis of product revenues (a benefits-received criterion).
Exhibit 14-4 highlights the different ways CAI allocates corporate overhead costs to
divisions and then to products. The company
• Establishes a separate activity-cost pool at the division level to allocate corporate treasury
costs to products.
• Allocates CHRM costs to divisions on the basis of division salary and labor costs and
then reallocates the CHRM costs allocated to divisions to multiple activity-cost pools
on the basis of the total salary and labor costs in each cost pool. Thus, the activity-cost
pools of each division include an allocation of CHRM costs, as shown in Exhibit 14-4.
• Allocates corporate administration costs to divisions on the basis ~idivision administration
costs and adds these costs to a single activity-cost pool (division administration)
as shown in Exhibit 14-4.
As we described in Chapter 5, focusing on activities and the hierarchy of costs promotes
cost management. The set of activities and the actions necessary to manage costs
are different if a cost is an output unit-level cost, a batch-level cost, a product-sustaining
cost, or a facility-sustaining cost. For example, to manage setup cost, which is a batch-level
cost, CAI must focus on batch-level activities, such as ways to reduce setup-hours and the
cost per setup-hour.
Exhibit 14-4 also reinforces the idea that costing systems have multiple cost objects,
such as corporate headquarters, divisions, departments, and products. An individual cost
item can be simultaneously a direct cost of one cost object and an indirect cost of another
cost object. Consider the salary of the manager of CHRM at CAL Her salary is a direct cost
of the Corporate Human Resource Management group at CAl's corporate office. It is then
allocated as an indirect cost to each of CAl's divisions and reallocated as an indirect cost
of the products in each division.
The issues discussed in this section regarding divisions and products apply nearly
identically to customers, as we shall show next. Instructors and students who, at this point,
want to explore more-detailed issues in cost allocation rather than customer issues can skip ahead
to Chapter 15.
In this problem,
the cost of central corporate support departments are allocated to operating divisions. The corporate
departments provide services to each other as well as to the operating divisions. Also, this problem
illustrates the use of the dual-rate method of allocating support departments' costs. (The dual-rate
method can also be used in manufacturing support department cost allocations).
Computer Horizons budgets the following amounts for its two central corporate support
departments (legal and personnel in supporting each other and the two manufacturing divisions,
the Laptop Division (LTD) and the Work Station Division (WSD):
Budgeted Usage by
To Be Supplied By Legal Personnel LTD WSD Total
Legal (hours) - 250 1,500 750 2,500
(percentages) 0% 10% 60% 30% 100%
Personnel (hours) 2,500 - 22,500 25,000 50,000
(percentages) 5% 0% 45% 50% 100%
Actual Usage by
To Be Supplied By Legal Personnel LTD WSD Total
Legal (hours) - 400 400 1,200 2,000
(percentages) 0% 20% 20% 60% 100%
Personnel (hours) 2,000 - 26,600 11,400 40,000
(percentages) 5% 0% 66.5% 28.5% 100%
Actual costs
Legal Personnel
Fixed $ 360,000 $ 475,000
Variable $ 200,000 $ 600,000
fixed costs are allocated on the basis of budgeted capacity. Variable costs are allocated on the basis
ofactualusage.
LTD WSD
(a) Direct Method
Fixed costs cost X budgeted rate $ 240,000 $ 120,000
$ 225,000 $ 250,000
Total FC allocated $ 465,000 $ 370,000
, or contracts.
Cause-and-Effect Relationship
That Motivates the Choice of
Manufacturing operations
overhead costs support
machines and, hence, increase with machine usage
$1,600,000
$5,400,000
WSD Total
$ 108,000
$ 268,947
$ 376,947 $ 835,000
$ 120,000
$ 192,000
$ 312,000 $ 800,000
Facility
including (CHRM) Costs
rs of divisions to which
sed in that budget period.
agers do not know the
tes are used, the efficiency
ser department
103. Gardener Company currently is using its full capacity of 25,000 machine hours to
manufacture product XR-2000.
LJB Corporation placed an order with Gardener for the manufacture of 1,000 units of KT-6500.
LJB would normally manufacture this component.
However, due to a fire at its plant, LJB needs to purchase these units to continue manufacturing other products. This is a o
KT-6500
Material $27.0
Direct labor $12.0
Variable overhead $6.0
Fixed overhead $48.0
Variable selling & administrative $5.0
Fixed selling & administrative $12.0
Normal selling price $125.0
Machine hours required 3.00
What is the minimum unit price that Gardener should charge LJB to manufacture 1,000
units of KT-6500?
CM $75.0
CM per machine hour $25.0
the minimum price must equal at least the VC to produce KT-6500 plus any foregone CM by not producing XR-2000
Total hours that will be used to prouce KT-6500 instead of producing XR 3,000.00
CM that will be lost from not prducing XR $46,500.0
CM per unit that will be lost from not prducing XR $46.5
The minimum unit price that Gardener should charge LJB to manufacture 1,000 units of KT-6500
$96.50
106. Following are the operating results of the two segments of Parklin Corporation.
Segment A
Sales $10,000.0
Variable costs of goods sold $4,000.0
Fixed costs of goods sold $1,500.0
Gross margin $4,500.0
Variable selling and administrative $2,000.0
Fixed selling and administrative $1,500.0
Operating income (loss) $1,000.0
Variable costs of goods sold are directly related to the operating segments. Fixed costs of
goods sold are allocated to each segment based on the number of employees. Fixed
selling and administrative expenses are allocated equally. If Segment B is eliminated,
$1,500 of fixed costs of goods sold would be eliminated. Assuming Segment B is closed,
the effect on operating income would be
Segment A
Sales $10,000.0
Variable costs of goods sold $4,000.0
Fixed costs of goods sold $1,500.0
Gross margin $4,500.0
Variable selling and administrative $2,000.0
Fixed selling and administrative $1,500.0
Operating income (loss) $1,000.0
107. Edwards Products has just developed a new product with a manufacturing cost of $30.
The Marketing Director has identified three marketing approaches for this new product.
Approach X Set a selling price of $36 and have the firm’s sales staff sell the
product at a 10% commission with no advertising program.
Estimated annual sales would be 10,000 units.
Approach Y Set a selling price of $38, have the firm’s sales staff sell the
product at a 10% commission, and back them up with a $30,000
advertising program. Estimated annual sales would be 12,000
units.
Approach Z Rely on wholesalers to handle the product. Edwards would sell the
new product to the wholesalers at $32 per unit and incur no selling
expenses. Estimated annual sales would be 14,000 units.
Approach X
Rank the three alternatives in order of net profit, from highest net profit to lowest.
107. C Z, X, Y.
108. Parker Manufacturing is analyzing the market potential for its specialty turbines. Parker
developed its pricing and cost structures for their specialty turbines over various relevant
ranges. The pricing and cost data for each relevant range are presented below.
Which one of the following production/sales levels would produce the highest operating
income for Parker?
a. 8 units. Rev
b. 10 units. VC
c. 14 units. FC
d. 17 units. OI
8 10 14 17
Rev $800,000.0 $1,000,000.0 $1,400,000.0 $1,700,000.0
VC $400,000.0 $500,000.0 $630,000.0 $765,000.0
FC $400,000.0 $400,000.0 $600,000.0 $800,000.0
OI $0.0 $100,000.0 $170,000.0 $135,000.0
109. Elgers Company produces valves for the plumbing industry. Elgers’ per unit sales price and variable costs are as follow
Rev 480000
VC 320000
FC $48,000.0
OI $112,000.0
Tax $44,800.0
Net I $67,200.0
110. Dayton Corporation manufactures pipe elbows for the plumbing industry. Dayton’s per
unit sales price and variable costs are as follows.
If Dayton produced and sold 30,000 units, net income would be 30,000.00
Rev $300,000.0
VC $210,000.0
FC $42,000.0
OI $48,000.0
Tax $24,000.0
Net I $24,000.0
111. Raymund Inc., a bearings manufacturer, has the capacity to produce 7,000 bearings per
month. The company is planning to replace a portion of its labor intensive production
process with a highly automated process, which would increase Raymund’s fixed
manufacturing costs by $30,000 per month and reduce its variable costs by $5 per uni
Raymund’s Income Statement for an average month is as follows.
If Raymund installs the automated process, the company’s monthly operating income
would be
112. Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of
Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit.
If Refrigerator accepts Cool Compartments’ offer the plant would be idled and fixed overhead amounting to $6 per unit co
The total relevant costs associated with the manufacture of ice-makers amount to
relevant
Direct materials $ 7 $7.0
Direct labor 12 $12.0
Variable overhead 5 $5.0
Fixed overhead 10 $6.0
Total costs $34 $30.0 $600,000.0
113. Phillips and Company produces educational software. Its current unit cost, based upon an anticipated volume of 150,0
Sales for the coming year are estimated at 175,000 units, which is within the relevant range of Phillip’s cost structure.
Cost management initiatives are expected to yield a 20% reduction in variable costs and a reduction of $750,000 in fixed c
.
Phillip’s cost structure for the coming year will include a: variable cost ratio of 32% and operating income of $9,6
114. Sunshine Corporation is considering the purchase of a new machine for $800,000.
The machine is capable of producing 1.6 million units of product over its useful life.
The manufacturer’s engineering specifications state that the machine-related cost of producing each unit of product should
Sunshine’s total anticipated demand over the asset’s useful life is 1.2 million units.
The average cost of materials and labor for each unit is $.40.
In considering whether to buy the new machine, would you recommend that Sunshine use the manufacturer’s engineer
b. No, the machine-related cost of producing each unit is $.67.
115. Cervine Corporation makes two types of motors for use in various products. Operating
data and unit cost information for its products are presented below.
Product A
Annual unit capacity 10,000 20,000 10,000.00
Annual unit demand 10,000 20,000 10,000.00
Selling price $100 $80 $100.0
Variable manufacturing cost 53 45 $53.0
Fixed manufacturing cost 10 10 $10.0
Variable selling & administrative 10 11 $10.0
Fixed selling & administrative 5 4 $5.0
Fixed other administrative 2 0 $2.0
Unit operating profit $ 20 $10 $20.0
Machine hours per unit 2.0 1.5 2
The relevant contribution margins, per machine hour for each product, to be utilized in making a decision on product prior
Product A
CM $37.0
CM per machine hours $18.5
116. Two months ago, Hickory Corporation purchased 4,500 pounds of Kaylene at a cost of$15,300.
The market for this product has become very strong, with the price jumping to $4.05 per pound.
Because of the demand, Hickory can buy or sell Kaylene at this price.
Hickory recently received a special order inquiry that would require the use of 4,200 pounds of Kaylene.
In deciding whether to accept the order, management must evaluate a number of decision factors.
Without regard to income taxes, which one of the
following combination of factors correctly depicts relevant and irrelevant decision
factors, respectively?
117. Reynolds Inc. manufactures several different products, including a premium lawn fertilizer and weed killer that is popu
Reynolds is currently operating at less than full capacity because of market saturation for lawn fertilizer.
Sales and cost data for a 40-pound bag of Reynolds lawn fertilizer is as follows.
Selling price
Production cost
Materials and labor $12.3
Variable overhead $3.8
Allocated fixed overhead $4.0
Income (loss) per bag $(1.50)
On the basis of this information, which one of the following alternatives should be
recommended to Reynolds management?
c. Continue to produce and market this product., since it is has a $2.5 CM Reynolds Inc. manufactures several different prod
CM
119. Capital Company has decided to discontinue a product produced on a machine purchased four years ago at a cost of $
The machine has a current book value of $30,000.
Due to technologically improved machinery now available in the marketplace the existing machine has no current salvage v
The company is reviewing the various aspects involved in the production of a new product.
The engineering staff advised that the existing machine can be used to produce the new product.
Other costs involved in the production of the new product will be materials of $20,000 and labor priced at $5,000.
$20,000.00
Ignoring income taxes, the costs relevant to the decision to produce or not to produce the
new product would be $25,000.00
123. Allred Company sells its single product for $30 per unit. $30.00
The contribution margin ratio is 45%, 45%
and fixed costs are $10,000 per month.
Allred has an effective income tax rate of 40%
. If Allred sells 1,000 units in the current month, 1000
Allred’s variable expenses would be
VC ratio 55%
sales revenue $30,000.00
VC $16,500.00
124. Phillips & Company produces educational software. Its unit cost structure, based upon
an anticipated production volume of 150,000 units, is as follows. 150000
The marketing department has estimated sales for the coming year at 175,000 units,which is within the relevant range of P
Phillip’s break-even volume (in units) and anticipated operating income for the coming year would amount to
total FC $8,250,000
CM $100
Rev $28,000,000
VC $10,500,000
CM $17,500,000
FC $8,250,000
OI $9,250,000
126. Jeffries Company sells its single product for $30 per unit. $30
The contribution margin ratio is 45%, and. 45%
fixed costs are $10,000 per month $10,000
Sales were 3,000 units in April and 4,000 units in May. 3,000 4,000
How much greater is the May income than the April income?
April May
Rev $90,000 $120,000
VC 55% $16.50 $49,500 $66,000
CM $40,500 $54,000
FC $10,000 $10,000
OI $30,500 $44,000
127. Cervine Corporation makes two types of motors for use in various products. Operating
data and unit cost information for its products are presented below.
Product A
. What is the maximum total contribution margin that Cervine can generate in the coming year?
Product A
CM $37.00
CM per machine hours $18.50
Total CM
128. Lazar Industries produces two products, Crates and Trunks. Per unit selling prices, costs,
and resource utilization for these products are as follows.
Crates
Selling price $20 $30 20
Direct material costs $ 5 $ 5 5
Direct labor costs 8 10 8
Variable overhead costs 3 5 3
Variable selling costs 1 2 1
Machine hours per unit 2 4 2
Production of Crates and Trunks involves joint processes and use of the same facilities.
The total fixed factory overhead cost is $2,000,000 and total fixed selling and administrative costs are $840,000.
Production and sales are scheduled for 500,000 Crates and 700,000 Trunks.
Lazar has a normal capacity to produce a total of 2,000,000 units in
any combination of Crates and Trunks, and maintains no direct materials, work-inprocess,
or finished goods inventory.
Due to plant renovations Lazar Industries will be limited to 1,000,000 machine hours.
What is the maximum amount of contribution margin Lazar can generate during the
renovation period?
Crates
CM 3.00
CM per machine hours 1.50
129. For the year just ended, Silverstone Company’s sales revenue was $450,000.
Silverstone’s fixed costs were $120,000 and it
s variable costs amounted to $270,000.
For the current year sales are forecasted at $500,000.
If the fixed costs do not change, Silverstone’s profits this year will be
130. Breeze Company has a contribution margin of $4,000 and fixed costs of $1,000. If the
total contribution margin increases by $1,000, operating profit would
131. Wilkinson Company sells its single product for $30 per unit. The contribution margin
ratio is 45% and Wilkinson has fixed costs of $10,000 per month. If 3,000 units are sold
in the current month, Wilkinson’s income would be
133. Starlight Theater stages a number of summer musicals at its theater in northern Ohio.
Preliminary planning has just begun for the upcoming season, and Starlight has
developed the following estimated data.
Average
Number of Attendance per Ticket
Production Performances Performance Price
Mr. Wonderful 12 3500 $18.00
That’s Life 20 3000 $15.00
All That Jazz 12 4000 $20.00
Starlight will also incur $565,000 of common fixed operating charges (administrative
overhead, facility costs, and advertising) for the entire season, and is subject to a 30%
income tax rate.
If Starlight’s schedule of musicals is held, as planned, how many patrons would have to
attend for Starlight to break even during the summer season?
FC $1,295,000.00
CM $16.20
Breakeven $79,938
134. Carson Inc. manufactures only one product and is preparing its budget for next year based on the following informatio
If Carson wants to achieve a net income of $1.3 million next year, its sales must be
CM $25.00
EBT $2,000,000.00
Numerator to be used $2,250,000.00
units to achieve 1.3 m 90,000.00
135. MetalCraft produces three inexpensive socket wrench sets that are popular with do-ityourselfers.
Budgeted information for the upcoming year is as follows.
Estimated
Model Selling Price Variable Cost Sales Volume
No. 109 10 5.5 30000
No. 145 15 8 75000
No. 153 20 14 45000
150000
Total fixed costs for the socket wrench product line is $961,000. If the company’s actual
experience remains consistent with the estimated sales volume percentage distribution,
and the firm desires to generate total operating income of $161,200, how many Model
No. 153 socket sets will MetalCraft have to sell?
Model CM CM
No. 109 20% 4.5 0.9
No. 145 50% 7 3.5
No. 153 30% 6 1.8
6.2
Numerator 1122200
units to ac 181000
No. 153 54300
This problem can be solved by setting up an equation and solving for the required sales amount, which
will be represented by the variable S. S = required sales
Sheet 14 april 2010 p3
169. Fennel Products is using cost-based pricing to determine the selling price for its new
product based on the following information.
Annual volume 25,000 units 25,000.00
Fixed costs $700,000 per year $700,000.00
Variable costs $200 per unit $200.00 $5,000,000.00
Plant investment $3,000,000 $3,000,000.00
Working capital $1,000,000 $1,000,000.00
Effective tax rate 40% 40%
The target price that Fennell needs to set for the new product to achieve a 15% after-tax
return on investment (ROI) would be
(ROI) $600,000.00
investment $4,000,000.00
168. Almelo Manpower Inc. provides contracted bookkeeping services. Almelo has annual
fixed costs of $100,000 and variable costs of $6 per hour. This year the company
budgeted 50,000 hours of bookkeeping services. Almelo prices its services at full cost
and uses a cost-plus pricing approach. The company developed a billing price of $9 per
hour. The company’s mark-up level would be
fixed costs $100,000.00
fixed costs per unit $2.00
VC per hour $6.00
budgeted 50,000 hours 50,000.00
billing price $9.00
165. Basic Computer Company (BCC) sells its microcomputers using bid pricing. It develops
its bids on a full cost basis. Full cost includes estimated material, labor, variable
overheads, fixed manufacturing overheads, and reasonable incremental computer
assembly administrative costs, plus a 10% return on full cost. BCC believes bids in
excess of $1,050 per computer are not likely to be considered.
BCC’s current cost structure, based on its normal production levels, is $500 for materials
per computer and $20 per labor hour. Assembly and testing of each computer requires 17
labor hours. BCC expects to incur variable manufacturing overhead of $2 per labor hour,
fixed manufacturing overhead of $3 per labor hour, and incremental administrative costs
of $8 per computer assembled.
BCC has received a request from a school board for 200 computers. Using the full-cost
criteria and desired level of return, which one of the following prices should be
recommended to BCC’s management for bidding purposes?
Full cost
10% return on full cost.
(BCC) bid pricing.
(BCC) bid pricing per computer
163. Leader Industries is planning to introduce a new product, DMA. It is expected that
10,000 units of DMA will be sold. The full product cost per unit is $300. Invested
capital for this product amounts to $20 million. Leader’s target rate of return on
investment is 20%. The markup percentage for this product, based on operating income
as a percentage of full product cost, will be
162. The Robo Division, a decentralized division of GMT Industries, has been approached to
submit a bid for a potential project for the RSP Company.
Robo Division has been informed by RSP that they will not consider bids over $8,000,000.
Robo Division purchases its materials from the Cross Division of GMT Industries.
There would be no additional fixed costs for either the Robo or Cross Divisions.
Sell to Robo
Cross Division Robo Division
Variable Costs $1,500,000 $4,800,000 $1,500,000.00 $4,800,000.00
Transfer Price 3,700,000 - $3,700,000.00 $0.00
If Robo Division submits a bid for $8,000,000, the amount of contribution margin 8000000
recognized by the Robo Division and GMT Industries, respectively, is
Cross Division Robo Division
Price of the product sold $3,700,000.00 $8,000,000.00
VC $1,500,000.00 $8,500,000.00
CM $2,200,000.00 -$500,000.00
161. Johnson Company manufactures a variety of shoes, and has received a special one-timeonly order directly from a who
Johnson has sufficient idle capacity to accept the special order to manufacture 15,000 pairs of sneakers at a price of $7.50
Johnson’s normal selling price is $11.50 per pair of sneakers.
Variable manufacturing costs are $5.00 per pair and fixed manufacturing costs are $3.00 a pair.
Johnson’s variable selling expense for its normal line of sneakers is $1.00 per pair.
What would the effect on Johnson’s operating income be if the company accepted the special order?
160. The Doll House, a very profitable company, plans to introduce a new type of doll to its
product line. The sales price and costs for the new dolls are as follows.
If 10,000 new dolls are produced and sold, the effect on Doll House’s profit (loss) would
159. Synergy Inc. produces a component that is popular in many refrigeration systems. Data
on three of the five different models of this component are as follows.
Model
A B C
Volume needed (units) 5000 6000 3000
Manufacturing costs
Variable direct costs $10 $24 $20 $ 10.00 $ 24.00 $ 20.00
Variable overhead 5 10 15 $ 5.00 $ 10.00 $ 15.00
Fixed overhead 11 20 17 $ 11.00 $ 20.00 $ 17.00
Total manufacturing costs $26 $54 $52 $ 26.00 $ 54.00 $ 52.00
Synergy applies variable overhead on the basis of machine hours at the rate of $2.50 per hour.
Models A and B are manufactured in the Freezer Department, which has a capacity of 28,000 machine processing hours.
Which one of the following options should be recommended to Synergy's management?
158. Green Corporation builds custom-designed machinery. A review of selected data and the company’s pricing policies re
Green recently received an invitation to bid on the manufacture of some custom machinery for Kennendale, Inc.
For this project, Green’s production accountants estimate the material and labor costs will be $66,000 and $120,000, respe
$66,000.00 $120,000.00
Accordingly, Green submitted a bid to Kennendale in the amount of $375,000. Feeling Green’s bid was too high, Kennendal
a. Accept the counteroffer because the order will increase operating income.
157. Jones Enterprises manufactures 3 products, A, B, and C. During the month of May
Jones’ production, costs, and sales data were as follows.
Products
A B C
Units of production 30,000.00 20,000.00 70,000.00
Joint production costs to split-off point $480,000
Further processing costs $ - $60,000 $140,000 $ - $ 60,000.00 $ 140,000.00
Further processing cost $ 3.00 $ 2.00
Unit sales price
At split-off 3.75 5.50 10.25 $ 3.75 $ 5.50 $ 10.25
After further processing - 8.00 12.50 $ - $ 8.00 $ 12.50
$ 5.00 $ 10.50
INCREMENTAL PROFIT $ (0.50) $ 0.25
Based on the above information, which one of the following alternatives should be recommended to Jones’ management?
156. Basic Computer Company (BCC) sells its micro-computers using bid pricing. It develops bids on a full cost basis.
Full cost includes estimated material, labor, variable overheads, fixed manufacturing overheads, and reasonable increment
BCC believes bids in excess of $925 per computer are not likely to be considered. 925
BCC’s current cost structure, based on its normal production levels, is $500 for materials per computer and $20 per labor h
Assembly and testing of each computer requires 12 labor hours.
BCC’s variable manufacturing overhead is $2 per labor hour, fixed manufacturing overhead is $3 per labor hour, and increm
The company has received a request from the School Board for 500 computers. BCC’s
management expects heavy competition in bidding for this job. As this is a very large
order for BCC, and could lead to other educational institution orders, management is
extremely interested in submitting a bid which would win the job, but at a price high
enough so that current net income will not be unfavorably impacted. Management
believes this order can be absorbed within its current manufacturing facility. Which one
of the following bid prices should be recommended to BCC’s management?
Full cost
10% return on full cost.
(BCC) bid pricing.
(BCC) bid pricing per computer
153. Lazar Industries produces two products, Crates and Boxes. Per unit selling prices, costs,
and resource utilization for these products are as follows.
Crates Boxes
Selling price $20 $30 $20.00 $30.00
Direct material costs $ 5 $ 5 2.5 $5.00 $5.00
Direct labor costs 8 10 $8.00 $10.00
Variable overhead costs 3 5 $ 5.25 $3.00 $5.00 VOH
Variable selling costs 1 2 $1.00 $2.00
Machine hours per unit 2 4 3.50 2.00 4.00
Production of Crates and Boxes involves joint processes and use of the same facilities.
The total fixed factory overhead cost is $2,000,000 and total fixed selling and administrative costs are $840,000.
Production and sales are scheduled for 500,000 units of Crates and 700,000 units of Boxes.
Lazar maintains no direct materials, work-inprocess, or finished goods inventory.
Lazar can reduce direct material costs for Crates by 50% per unit, with no change in direct labor costs.
However, it would increase machine-hour production time by 1-1/2 hours per unit. 1.50
For Crates, variable overhead costs are allocated based on machine hours.
What would be the effect on the total contribution margin if this change was implemented?
Before
CM $3.00 1,500,000.00
CM per constraint. $1.50
After
CM $3.25 1,625,000.00
CM per constraint. $0.93 125,000.00
Make
Direct materials $ 7 $7.00 7
Direct labor 12 $12.00 12
Variable overhead 5 $5.00 5
Fixed overhead 10 $10.00 6
Total costs $34 $34.00 $30.00
$30.00
$600,000.00
Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit.
If Refrigerator accepts Cool Compartments’ offer, the facilities used to manufacture ice-makers could be used to produce w
Revenues from the sale of water filtration units are estimated at $80,000, with variable costs amounting to 60% of sales.
In addition, $6 per unit of the fixed overhead associated with the manufacture of ice-makers could be eliminated.
For Refrigerator Company to determine the most appropriate action to take in this
situation, the total relevant costs of make vs. buy, respectively, are
c. $600,000 vs. $528,000.
151. Aspen Company plans to sell 12,000 units of product XT and 8,000 units of product RP.
Aspen has a capacity of 12,000 productive machine hours. 12000
The unit cost structure and machine hours required for each product is as follows.
12000 8000
Unit Costs XT RP
Materials $37 $24 $37.00 $24.00
Direct labor 12 13 $12.00 $13.00
Variable overhead 6 3 $6.00 $3.00
Fixed overhead 37 38 $37.00 $38.00
Machine hours required 1.0 1 1.5
VC $55.00 $40.00
Machine hours required 12,000.00 12,000.00
Aspen can purchase 12,000 units of XT at $60 and/or 8,000 units of RP at $45. Based on the above, which one of the follow
150. The Furniture Company currently has three divisions: Maple, Oak, and Cherry. The oak
furniture line does not seem to be doing well and the president of the company is
considering dropping this line.
If it is dropped, the revenues associated with the Oak
Division will be lost and the related variable costs saved. Also, 50% of the fixed costs
allocated to the oak furniture line would be eliminated. The income statements, by
divisions, are as follows.
Maple
Sales $55,000 $85,000 $100,000 $55,000.000
Variable Costs 40,000 72,000 82,000 $40,000.000
Contribution Margin 15,000 13,000 18,000 $15,000.000
Fixed costs 10,000 14,000 10,200 $10,000.000
Operating profit (loss) $ 5,000 $(1,000) $ 7,800 $5,000.000
Which one of the following options should be recommended to the president of the
company?
Maple
Sales $55,000 $85,000 $100,000 $55,000.000
Variable Costs 40,000 72,000 82,000 $40,000.000
Contribution Margin 15,000 13,000 18,000 $15,000.000
Fixed costs 10,000 14,000 10,200 $10,000.000
Operating profit (loss) $ 5,000 $(1,000) $ 7,800 $5,000.000
149. Raymund Inc. currently sells its only product to Mall-Stores. Raymund has received a
one-time-only order for 2,000 units from another buyer. Sale of the special order items
will not require any additional selling effort. Raymund has a manufacturing capacity to
produce 7,000 units. Raymund has an effective income tax rate of 40%. Raymund’s
Income Statement, before consideration of the one-time-only order, is as follows.
In negotiating a price for the special order, Raymund should set the minimum per unit
selling price at $10.0
148. Lark Industries accepted a contract to provide 30,000 units of Product A and 20,000 units
of Product B. Lark’s staff developed the following information with regard to meeting
this contract.
Product A Product B
30000 20000
Selling Price $75 $125 $75.0 $125.0
Variable costs $30 $48 $30.0 $48.0
Fixed overhead $1,600,000
Machine hours required 3 5 3.00 5.00
Machine hours available 160,000
Cost if outsourced $45 $60 $45.0 $60.0
Lark’s operations manager has identified the following alternatives. Which alternative
should be recommended to Lark’s management?
CM $45.0 $77.0
CM per constraint $ 15.00 $ 15.40
147. Aril Industries is a multiproduct company that currently manufactures 30,000 units of
Part 730 each month for use in production. The facilities now being used to produce Part
730 have fixed monthly overhead costs of $150,000, and a theoretical capacity to produce
60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the
facilities would be idle and 40% of fixed costs would continue to be incurred. There are
no alternative uses for the facilities. The variable production costs of Part 730 are $11
per unit. Fixed overhead is allocated based on planned production levels.
If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a
net benefit by purchasing Part 730 from an outside supplier only if the supplier’s unit
price is less than $ 14.00
146. Current business segment operations for Whitman, a mass retailer, are presented below.
Merchandise Automotive
Sales $ 500,000.00 $ 400,000.00
Variable costs $ 300,000.00 $ 200,000.00
CM $ 200,000.00 $ 200,000.00
Fixed costs $ 100,000.00 $ 100,000.00
Operating income (loss) $ 100,000.00 $ 100,000.00
Merchandise Automotive
Sales $ 475,000.00 $ 380,000.00
Variable costs $ 285,000.00 $ 190,000.00
CM $ 190,000.00 $ 190,000.00
Fixed costs $ 100,000.00 $ 100,000.00
Operating income (loss) $ 90,000.00 $ 90,000.00
144. Oakes Inc. manufactured 40,000 gallons of Mononate and 60,000 gallons of Beracyl in a
joint production process, incurring $250,000 of joint costs. Oakes allocates joint costs
based on the physical volume of each product produced. Mononate and Beracyl can each
be sold at the split-off point in a semifinished state or, alternatively, processed further.
Additional data about the two products are as follows.
40,000.00
Mononate
Sales price per gallon at split-off $ 7.00
Sales price per gallon if processed further $ 10.00
Variable production costs if processed further $ 125,000.00
An assistant in the company’s cost accounting department was overheard saying “....that
when both joint and separable costs are considered, the firm has no business processing
either product beyond the split-off point. The extra revenue is simply not worth the
effort.” Which of the following strategies should be recommended for Oakes?
(1) a fixed fee of $8,000 per month, (2) a fixed fee of $3,990 per month pl
8000
142. Eagle Brand Inc. produces two products. Data regarding these products are presented
below.
Product X Product Y
Selling price per unit $100 $130 $ 100.00 $ 130.00
Variable costs per unit $80 $100 $ 80.00 $ 100.00
Raw materials used per unit 4 lbs. 10 lbs. 4.00 10.00
Eagle Brand has 1,000 lbs. of raw materials which can be used to produce Products X and
Y.
Which one of the alternatives below should Eagle Brand accept in order to maximize
contribution margin?
CM 20 30
CM per constraint $ 5.00 $ 3.00
Units that can be produced by the constraint 250.00 100.00
12 20
8 15 Specialty Cakes Inc. produces two typ
RC HS cake. Total fixed costs for the firm are
CM $4.0 $5.0 the two types of cakes are presented
units 10000 15000 25000 2 lbs. 3 lbs.
40% 60% Round Cake Heart-shape Cake
$1.6 $3.0 $4.6 Selling price per unit $12 $20
Variable cost per unit $8 $15
fc $94,000.0 20,434.78 Current sales (units) 10,000 15,000
$12.0 $20.0
$8.0 $15.0 If the product sales mix were to change to three heart-s
RC HS the breakeven volume for each of these products would
CM $4.0 $5.0
units 6250 18750 25000
25% 75%
$1.0 $3.8 $4.8
fc $94,000.0 19,789.47
138. Zipper Company invested $300,000 in a new machine to produce cones for the textile
industry. Zipper’s variable costs are 30% of the selling price, and its fixed costs are
$600,000. Zipper has an effective income tax rate of 40%. The amount of sales required
to earn an 8% after-tax return on its investment would be
137. Bargain Press is considering publishing a new textbook. The publisher has developed the
following cost data related to a production run of 6,000, the minimum possible
production run. Bargain Press will sell the textbook for $45 per copy. How many
textbooks must Bargain Press sell in order to generate operating earnings (earnings before
interest and taxes) of 20% on sales? (Round your answer up to the nearest whole
textbook.)
Estimated cost per unit
Development (reviews, class testing, editing) $35,000 $ 35,000.00
Typesetting 18,500 $ 18,500.00
Depreciation on Equipment 9,320 $ 9,320.00
General and Administrative 7,500 $ 7,500.00
Miscellaneous Fixed Costs 4,400 $ 4,400.00
Printing and Binding 30,000 $ 30,000.00 $ 5.00
Sales staff commissions (2% of selling price) 5,400 $ 5,400.00 $ 0.90
Bookstore commissions (25% of selling price) 67,500 $ 67,500.00 $ 11.25
Author’s Royalties (10% of selling price) 27,000 $ 27,000.00 $ 4.50
$ 21.65
Total costs at production of 6,000 copies $ 204,620.00
131. Wilkinson Company sells its single product for $30 per unit. The contribution margin
ratio is 45% and Wilkinson has fixed costs of $10,000 per month. If 3,000 units are sold
in the current month, Wilkinson’s income would be
CM $ 13.50
Total CM $ 40,500.00
FC $ 10,000.00
OI $ 30,500.00
25000 22000
1000
XR-2000 XR-2000
Q 6,250.00 $387,500.0
$24.0 Q 5,500.00 $341,000.0
$10.0 $46,500.0
$5.0 $46.50
$40.0
$4.0
$10.0
$105.0
4.00
$62.0
$15.5
750
Segment B Total
$15,000.0 $25,000.0
$8,500.0 $12,500.0
$2,500.0 $4,000.0
$4,000.0 $8,500.0
$3,000.0 $5,000.0
$1,500.0 $3,000.0
-$500.0 $500.0
Segment B Total
$10,000.0
$4,000.0
$1,000.0 $2,500.0
-$1,000.0 $3,500.0
$2,000.0
$1,500.0 $3,000.0
-$2,500.0 -$1,500.0
-$2,000.00
107. C Z, X, Y.
Approach Y Approach Z
$38.0 $32.0
12,000.00 14,000.00
$456,000.0 $448,000.0
$360,000.0 $420,000.0
$45,600.0 0
$30,000.0
$20,400.0 $28,000.0
108. C c. 14 units.
6 - 10 11 - 15 16 - 20
$400,000.0 $600,000.0 $800,000.0
$50,000.0 $45,000.0 $45,000.0
$100,000.0 $100,000.0 $100,000.0
e and variable costs are as follows. 109. B b. $67,200.
110. A a. $24,000.
$30,000.0
$5.0
$100,000.0
$65,000.0
$35,000.0
$20,000.0
$15,000.0
$100,000.0
increase Raymund’s fixed manufacturing costs
by $30,000 per month and reduce its variable
$40,000.0 costs by $5 per uni
$60,000.0
$50,000.0
$10,000.0
osts per unit, for 20,000 units of ice-makers, are as follows. 112. C
20,000.00
100%
32%
68%
use the manufacturer’s engineering specification of machine related unit production cost?
$800,000.0
$0.67
115. B
Product B
20,000.00
20,000.00
$80.0
$45.0
$10.0
$11.0
$4.0
$0.0
$10.0
1.5
Product B
$24.0
$16.0
116. B
4500 15300 $3.40
$4.05
ds of Kaylene. 4200
tilizer and weed killer that is popular in hot, dry climates. 117. C
awn fertilizer.
40
$18.5
$20.0
-$1.50
anufactures several different products, and the loss appear after the deduction of the allocated fixed costs
$2.5
119. A a. $25,000.
ased four years ago at a cost of $70,000.
123. D d. $16,500.
124. B
b. 82,500 units and $9,250,000 of operating income.
h is within the relevant range of Phillip’s cost structure. 175000
ar would amount to
126. B b. $13,500.
1,000
diff
$30,000
$13,500
$13,500
127. B b. $689,992.
689992
Product B
20,000.00
20,000.00
$80.0
$45.0
$10.0
$11.0
$4.0
$0.0
$10.0
1.5
Product B
$24.00
$16.00
370,000
20,000 13333
13,333.33 $319,992.00
320,000 320,000
$689,992 $0.0
128. B b. $2,000,000.
Trunks
30
5
10
5
2
4
1,000,000
Trunks
8.00
2.00
%
450000 b. $80,000. 129. B
120000
270000 0.6
500000
$565,000.00
30%
$1,300,000
tyourselfers. 135. B b. 54,300.
sets
sets
sets
961000
161200
136. D d. $1,200,000.
mount, which
169. D d. $268.
a. $228.
b. $238.
c. $258.
d. $268.
15%
168. A a. 12.5%.
100000 6
50000
9
165. D d. $1,026.30.
10%
200
$100,000.00
$68,000.00
$6,800.00
$10,200.00
$1,600.00
$186,600.00
$18,660.00
$205,260.00
$1,026.30
163. C c. 133.3%.
10,000.00 $300.00 $20,000,000.00
20%
GMT Industries
$11,700,000.00
$10,000,000.00
$1,700,000.00 ###
160. C c. $(39,200).
10000
Should be answered by
elimination
Should be answered by
elimination
$ 2.50
000 machine processing hours. 28,000.00
158. A
the company’s pricing policies revealed the following.
10%
40% 20%
10%
rative costs to cover income taxes and produce a profit. 25%
40%
80%
en’s bid was too high, Kennendale countered with a price of $280,000.
$234,000.00
$ 48,000.00 $ 24,000.00
$12,000.00
rative costs to cover income taxes and produce a profit. $ 84,000.00
157. C c. Process Product C further but sell Product B at the split-off point
TOTAL
120,000.00
$ 480,000.00
156. B b. $772.00.
s bids on a full cost basis.
heads, and reasonable incremental computer assembly administrative costs, plus a 10% return on full cost.
er computer and $20 per labor hour.
d is $3 per labor hour, and incremental administrative costs are $8 per computer assembled.
0.1
500
$250,000.00
$120,000.00
$12,000.00
$18,000.00
$4,000.00
$404,000.00 VC $386,000.00
$40,400.00 $0.00
$444,400.00 $386,000.00
$888.80 $772.00
Buy
28
$28.00
-$1.60
$26.40
$528,000.00
e above, which one of the following actions should be recommended to Aspen's management?
50%
-$6,000.000
149. A a. $10.
2000
40%
$100,000.0
$65,000.0
$35,000.0
$20,000.0
$15,000.0
$6,000.0
$9,000.0
Total
$1,600,000.0
160,000.00
147. D d. $14.00.
30,000.00
$ 150,000.00
60,000.00
60% $ 90,000.00
$ 11.00
$ 3.00
Restaurant Total
$ 100,000.00 $ 1,000,000.00
$ 70,000.00 $ 570,000.00
$ 30,000.00 $ 430,000.00
$ 50,000.00 $ 250,000.00
$ -20,000.00 $ 180,000.00
30% 43%
95%
Restaurant Total
$ 855,000.00
$ 475,000.00
$ - $ 380,000.00 What will Whitman’s total contribution margin be if
$ 20,000.00 $ 250,000.00 segment is discontinued?
$ -20,000.00 $ 130,000.00 145. D d. $380,000.
#DIV/0! 44%
Mononate Beracyl
144. B b. Sell at split-off Process further.
$ 250,000.00
60,000.00 100,000.00
Beracyl
$ 15.00
$ 18.00
$ 115,000.00
$ 1.92
$ 3.00
$ 1.92
$ 1.08
180,000.00
115,000.00
65,000.00
143. D d. Choose the third option no matter what Blaze exp
20
100
5700
fixed fee of $3,990 per month plus 10% of Blaze’s revenue (3) 30% of Blaze’s revenues.
4560 1710
1000
alty Cakes Inc. produces two types of cakes, a 2 lbs. round cake and a 3 lbs. heartshaped
Total fixed costs for the firm are $94,000. Variable costs and sales data for
wo types of cakes are presented below.
d Cake Heart-shape Cake
g price per unit $12 $20
ble cost per unit $8 $15
nt sales (units) 10,000 15,000
138. B b. $914,286.
$ 300,000.00
30%
$ 600,000.00
40%
8%
6000
$ 45.00
20%
$ 74,720.00
cellaneous ,
30 131. A a. $30,500
0.45 3000
10000
Section D: Decision Analysis
103. B b. $96.50. 101 169
KT-6500
3,000.00
c. a decrease of $2,000.
fixed manufacturing costs
h and reduce its variable
y $5 per uni
c. $600,000.
achine-related cost of producing each unit is $.67.
ng plan should include 5,000 units of
uct B at the split-off point.
Oak Division as discontinuance would result in a $6,000
oduct A, utilize the remaining capacity to make Product
contribution margin be if the Restaurant
Process further.
no matter what Blaze expects the revenues to be.
150. The Furniture Company currently has three divisions: Maple, Oak, and Cherry. The oak
furniture line does not seem to be doing well and the president of the company is
considering dropping this line.
If it is dropped, the revenues associated with the Oak
Division will be lost and the related variable costs saved. Also, 50% of the fixed costs
allocated to the oak furniture line would be eliminated. The income statements, by
divisions, are as follows.
Maple Oak
Sales $55,000 $85,000 $100,000 $55,000.000 $85,000.000
Variable Costs 40,000 72,000 82,000 $40,000.000 $72,000.000
Contribution Margin 15,000 13,000 18,000 $15,000.000 $13,000.000
Fixed costs 10,000 14,000 10,200 $10,000.000 $14,000.000
Operating profit (loss) $ 5,000 $(1,000) $ 7,800 $5,000.000 -$1,000.000
Which one of the following options should be recommended to the president of the
company?
Maple Oak
Sales $55,000 $85,000 $100,000 $55,000.000
Variable Costs 40,000 72,000 82,000 $40,000.000
Contribution Margin 15,000 13,000 18,000 $15,000.000 $0.000
Fixed costs 10,000 14,000 10,200 $10,000.000 $7,000.000
Operating profit (loss) $ 5,000 $(1,000) $ 7,800 $5,000.000 -$7,000.000
149. Raymund Inc. currently sells its only product to Mall-Stores. Raymund has received a
one-time-only order for 2,000 units from another buyer. Sale of the special order items
will not require any additional selling effort. Raymund has a manufacturing capacity to
produce 7,000 units. Raymund has an effective income tax rate of 40%. Raymund’s
Income Statement, before consideration of the one-time-only order, is as follows.
In negotiating a price for the special order, Raymund should set the minimum per unit
selling price at $10.0
148. Lark Industries accepted a contract to provide 30,000 units of Product A and 20,000 units
of Product B. Lark’s staff developed the following information with regard to meeting
this contract.
Product A Product B
30000 20000
Selling Price $75 $125 $75.0 $125.0
Variable costs $30 $48 $30.0 $48.0
Fixed overhead $1,600,000
Machine hours required 3 5 3.00 5.00
Machine hours available 160,000
Cost if outsourced $45 $60 $45.0 $60.0
Lark’s operations manager has identified the following alternatives. Which alternative
should be recommended to Lark’s management?
CM $45.0 $77.0
CM per constraint $ 15.00 $ 15.40
147. Aril Industries is a multiproduct company that currently manufactures 30,000 units of
Part 730 each month for use in production. The facilities now being used to produce Part
730 have fixed monthly overhead costs of $150,000, and a theoretical capacity to produce
60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the
facilities would be idle and 40% of fixed costs would continue to be incurred. There are
no alternative uses for the facilities. The variable production costs of Part 730 are $11
per unit. Fixed overhead is allocated based on planned production levels.
If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a
net benefit by purchasing Part 730 from an outside supplier only if the supplier’s unit
price is less than $ 14.00
146. Current business segment operations for Whitman, a mass retailer, are presented below.
50%
Cherry Total
$100,000.000 $240,000.000
$82,000.000 $194,000.000
$18,000.000 $46,000.000
$10,200.000 $34,200.000
$7,800.000 $11,800.000
Cherry Total
$100,000.000 $155,000.000
$82,000.000 $122,000.000
$18,000.000 $33,000.000
$10,200.000 $27,200.000
$7,800.000 $5,800.000
-$6,000.000
149. A a. $10.
2000
40%
$100,000.0
$65,000.0
$35,000.0
$20,000.0
$15,000.0
$6,000.0
$9,000.0
148. A a. Make 30,000 units of Product A, utilize the remaining capacity to make Prod
B, and outsource the remainder.
Total
$1,600,000.0
160,000.00
147. D d. $14.00.
30,000.00
$ 150,000.00
60,000.00
60% $ 90,000.00
$ 11.00
$ 3.00
146. D d. 40% 50% 30%
Retailing Automotive Restaurant
Total
$ 1,000,000.00
$ 570,000.00
$ 430,000.00
$ 250,000.00
$ 180,000.00
43%
95%
Total
$ 855,000.00
$ 475,000.00
$ 380,000.00 What will Whitman’s total contribution margin be if the Restaurant
$ 250,000.00 segment is discontinued?
$ 130,000.00 145. D d. $380,000.
44%
continuance would result in a $6,000
remaining capacity to make Product
n be if the Restaurant
103. Gardener Company currently is using its full capacity of 25,000 machine hours to
manufacture product XR-2000.
LJB Corporation placed an order with Gardener for the manufacture of 1,000 units of KT-6500.
LJB would normally manufacture this component.
However, due to a fire at its plant, LJB needs to purchase these units to continue manufacturing other products. This is a o
KT-6500
Material $27.0
Direct labor $12.0
Variable overhead $6.0
Fixed overhead $48.0
Variable selling & administrative $5.0
Fixed selling & administrative $12.0
Normal selling price $125.0
Machine hours required 3.00
What is the minimum unit price that Gardener should charge LJB to manufacture 1,000
units of KT-6500?
CM $75.0
CM per machine hour $25.0
the minimum price must equal at least the VC to produce KT-6500 plus any foregone CM by not producing XR-2000
Total hours that will be used to prouce KT-6500 instead of producing XR 3,000.00
CM that will be lost from not prducing XR $46,500.0
CM per unit that will be lost from not prducing XR $46.5
The minimum unit price that Gardener should charge LJB to manufacture 1,000 units of KT-6500
$96.50
106. Following are the operating results of the two segments of Parklin Corporation.
Segment A
Sales $10,000.0
Variable costs of goods sold $4,000.0
Fixed costs of goods sold $1,500.0
Gross margin $4,500.0
Variable selling and administrative $2,000.0
Fixed selling and administrative $1,500.0
Operating income (loss) $1,000.0
Variable costs of goods sold are directly related to the operating segments. Fixed costs of
goods sold are allocated to each segment based on the number of employees. Fixed
selling and administrative expenses are allocated equally. If Segment B is eliminated,
$1,500 of fixed costs of goods sold would be eliminated. Assuming Segment B is closed,
the effect on operating income would be
Segment A
Sales $10,000.0
Variable costs of goods sold $4,000.0
Fixed costs of goods sold $1,500.0
Gross margin $4,500.0
Variable selling and administrative $2,000.0
Fixed selling and administrative $1,500.0
Operating income (loss) $1,000.0
107. Edwards Products has just developed a new product with a manufacturing cost of $30.
The Marketing Director has identified three marketing approaches for this new product.
Approach X Set a selling price of $36 and have the firm’s sales staff sell the
product at a 10% commission with no advertising program.
Estimated annual sales would be 10,000 units.
Approach Y Set a selling price of $38, have the firm’s sales staff sell the
product at a 10% commission, and back them up with a $30,000
advertising program. Estimated annual sales would be 12,000
units.
Approach Z Rely on wholesalers to handle the product. Edwards would sell the
new product to the wholesalers at $32 per unit and incur no selling
expenses. Estimated annual sales would be 14,000 units.
Approach X
Rank the three alternatives in order of net profit, from highest net profit to lowest.
107. C Z, X, Y.
108. Parker Manufacturing is analyzing the market potential for its specialty turbines. Parker
developed its pricing and cost structures for their specialty turbines over various relevant
ranges. The pricing and cost data for each relevant range are presented below.
Which one of the following production/sales levels would produce the highest operating
income for Parker?
a. 8 units. Rev
b. 10 units. VC
c. 14 units. FC
d. 17 units. OI
8 10 14 17
Rev $800,000.0 $1,000,000.0 $1,400,000.0 $1,700,000.0
VC $400,000.0 $500,000.0 $630,000.0 $765,000.0
FC $400,000.0 $400,000.0 $600,000.0 $800,000.0
OI $0.0 $100,000.0 $170,000.0 $135,000.0
109. Elgers Company produces valves for the plumbing industry. Elgers’ per unit sales price and variable costs are as follow
Rev 480000
VC 320000
FC $48,000.0
OI $112,000.0
Tax $44,800.0
Net I $67,200.0
110. Dayton Corporation manufactures pipe elbows for the plumbing industry. Dayton’s per
unit sales price and variable costs are as follows.
If Dayton produced and sold 30,000 units, net income would be 30,000.00
Rev $300,000.0
VC $210,000.0
FC $42,000.0
OI $48,000.0
Tax $24,000.0
Net I $24,000.0
111. Raymund Inc., a bearings manufacturer, has the capacity to produce 7,000 bearings per
month. The company is planning to replace a portion of its labor intensive production
process with a highly automated process, which would increase Raymund’s fixed
manufacturing costs by $30,000 per month and reduce its variable costs by $5 per uni
Raymund’s Income Statement for an average month is as follows.
If Raymund installs the automated process, the company’s monthly operating income
would be
112. Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of
Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit.
If Refrigerator accepts Cool Compartments’ offer the plant would be idled and fixed overhead amounting to $6 per unit co
The total relevant costs associated with the manufacture of ice-makers amount to
relevant
Direct materials $ 7 $7.0
Direct labor 12 $12.0
Variable overhead 5 $5.0
Fixed overhead 10 $6.0
Total costs $34 $30.0 $600,000.0
113. Phillips and Company produces educational software. Its current unit cost, based upon an anticipated volume of 150,0
Sales for the coming year are estimated at 175,000 units, which is within the relevant range of Phillip’s cost structure.
Cost management initiatives are expected to yield a 20% reduction in variable costs and a reduction of $750,000 in fixed c
.
Phillip’s cost structure for the coming year will include a: variable cost ratio of 32% and operating income of $9,6
114. Sunshine Corporation is considering the purchase of a new machine for $800,000.
The machine is capable of producing 1.6 million units of product over its useful life.
The manufacturer’s engineering specifications state that the machine-related cost of producing each unit of product should
Sunshine’s total anticipated demand over the asset’s useful life is 1.2 million units.
The average cost of materials and labor for each unit is $.40.
In considering whether to buy the new machine, would you recommend that Sunshine use the manufacturer’s engineer
b. No, the machine-related cost of producing each unit is $.67.
115. Cervine Corporation makes two types of motors for use in various products. Operating
data and unit cost information for its products are presented below.
Product A
Annual unit capacity 10,000 20,000 10,000.00
Annual unit demand 10,000 20,000 10,000.00
Selling price $100 $80 $100.0
Variable manufacturing cost 53 45 $53.0
Fixed manufacturing cost 10 10 $10.0
Variable selling & administrative 10 11 $10.0
Fixed selling & administrative 5 4 $5.0
Fixed other administrative 2 0 $2.0
Unit operating profit $ 20 $10 $20.0
Machine hours per unit 2.0 1.5 2
The relevant contribution margins, per machine hour for each product, to be utilized in making a decision on product prior
Product A
CM $37.0
CM per machine hours $18.5
116. Two months ago, Hickory Corporation purchased 4,500 pounds of Kaylene at a cost of$15,300.
The market for this product has become very strong, with the price jumping to $4.05 per pound.
Because of the demand, Hickory can buy or sell Kaylene at this price.
Hickory recently received a special order inquiry that would require the use of 4,200 pounds of Kaylene.
In deciding whether to accept the order, management must evaluate a number of decision factors.
Without regard to income taxes, which one of the
following combination of factors correctly depicts relevant and irrelevant decision
factors, respectively?
117. Reynolds Inc. manufactures several different products, including a premium lawn fertilizer and weed killer that is popu
Reynolds is currently operating at less than full capacity because of market saturation for lawn fertilizer.
Sales and cost data for a 40-pound bag of Reynolds lawn fertilizer is as follows.
Selling price
Production cost
Materials and labor $12.3
Variable overhead $3.8
Allocated fixed overhead $4.0
Income (loss) per bag $(1.50)
On the basis of this information, which one of the following alternatives should be
recommended to Reynolds management?
c. Continue to produce and market this product., since it is has a $2.5 CM Reynolds Inc. manufactures several different prod
CM
119. Capital Company has decided to discontinue a product produced on a machine purchased four years ago at a cost of $
The machine has a current book value of $30,000.
Due to technologically improved machinery now available in the marketplace the existing machine has no current salvage v
The company is reviewing the various aspects involved in the production of a new product.
The engineering staff advised that the existing machine can be used to produce the new product.
Other costs involved in the production of the new product will be materials of $20,000 and labor priced at $5,000.
$20,000.00
Ignoring income taxes, the costs relevant to the decision to produce or not to produce the
new product would be $25,000.00
123. Allred Company sells its single product for $30 per unit. $30.00
The contribution margin ratio is 45%, 45%
and fixed costs are $10,000 per month.
Allred has an effective income tax rate of 40%
. If Allred sells 1,000 units in the current month, 1000
Allred’s variable expenses would be
VC ratio 55%
sales revenue $30,000.00
VC $16,500.00
124. Phillips & Company produces educational software. Its unit cost structure, based upon
an anticipated production volume of 150,000 units, is as follows. 150000
The marketing department has estimated sales for the coming year at 175,000 units,which is within the relevant range of P
Phillip’s break-even volume (in units) and anticipated operating income for the coming year would amount to
total FC $8,250,000
CM $100
Rev $28,000,000
VC $10,500,000
CM $17,500,000
FC $8,250,000
OI $9,250,000
126. Jeffries Company sells its single product for $30 per unit. $30
The contribution margin ratio is 45%, and. 45%
fixed costs are $10,000 per month $10,000
Sales were 3,000 units in April and 4,000 units in May. 3,000 4,000
How much greater is the May income than the April income?
April May
Rev $90,000 $120,000
VC 55% $16.50 $49,500 $66,000
CM $40,500 $54,000
FC $10,000 $10,000
OI $30,500 $44,000
127. Cervine Corporation makes two types of motors for use in various products. Operating
data and unit cost information for its products are presented below.
Product A
. What is the maximum total contribution margin that Cervine can generate in the coming year?
Product A
CM $37.00
CM per machine hours $18.50
Total CM
128. Lazar Industries produces two products, Crates and Trunks. Per unit selling prices, costs,
and resource utilization for these products are as follows.
Crates
Selling price $20 $30 20
Direct material costs $ 5 $ 5 5
Direct labor costs 8 10 8
Variable overhead costs 3 5 3
Variable selling costs 1 2 1
Machine hours per unit 2 4 2
Production of Crates and Trunks involves joint processes and use of the same facilities.
The total fixed factory overhead cost is $2,000,000 and total fixed selling and administrative costs are $840,000.
Production and sales are scheduled for 500,000 Crates and 700,000 Trunks.
Lazar has a normal capacity to produce a total of 2,000,000 units in
any combination of Crates and Trunks, and maintains no direct materials, work-inprocess,
or finished goods inventory.
Due to plant renovations Lazar Industries will be limited to 1,000,000 machine hours.
What is the maximum amount of contribution margin Lazar can generate during the
renovation period?
Crates
CM 3.00
CM per machine hours 1.50
129. For the year just ended, Silverstone Company’s sales revenue was $450,000.
Silverstone’s fixed costs were $120,000 and it
s variable costs amounted to $270,000.
For the current year sales are forecasted at $500,000.
If the fixed costs do not change, Silverstone’s profits this year will be
130. Breeze Company has a contribution margin of $4,000 and fixed costs of $1,000. If the
total contribution margin increases by $1,000, operating profit would
131. Wilkinson Company sells its single product for $30 per unit. The contribution margin
ratio is 45% and Wilkinson has fixed costs of $10,000 per month. If 3,000 units are sold
in the current month, Wilkinson’s income would be
133. Starlight Theater stages a number of summer musicals at its theater in northern Ohio.
Preliminary planning has just begun for the upcoming season, and Starlight has
developed the following estimated data.
Average
Number of Attendance per Ticket
Production Performances Performance Price
Mr. Wonderful 12 3500 $18.00
That’s Life 20 3000 $15.00
All That Jazz 12 4000 $20.00
Starlight will also incur $565,000 of common fixed operating charges (administrative
overhead, facility costs, and advertising) for the entire season, and is subject to a 30%
income tax rate.
If Starlight’s schedule of musicals is held, as planned, how many patrons would have to
attend for Starlight to break even during the summer season?
FC $1,295,000.00
CM $16.20
Breakeven $79,938
134. Carson Inc. manufactures only one product and is preparing its budget for next year based on the following informatio
If Carson wants to achieve a net income of $1.3 million next year, its sales must be
CM $25.00
EBT $2,000,000.00
Numerator to be used $2,250,000.00
units to achieve 1.3 m 90,000.00
135. MetalCraft produces three inexpensive socket wrench sets that are popular with do-ityourselfers.
Budgeted information for the upcoming year is as follows.
Estimated
Model Selling Price Variable Cost Sales Volume
No. 109 10 5.5 30000
No. 145 15 8 75000
No. 153 20 14 45000
150000
Total fixed costs for the socket wrench product line is $961,000. If the company’s actual
experience remains consistent with the estimated sales volume percentage distribution,
and the firm desires to generate total operating income of $161,200, how many Model
No. 153 socket sets will MetalCraft have to sell?
Model CM CM
No. 109 20% 4.5 0.9
No. 145 50% 7 3.5
No. 153 30% 6 1.8
6.2
Numerator 1122200
units to ac 181000
No. 153 54300
This problem can be solved by setting up an equation and solving for the required sales amount, which
will be represented by the variable S. S = required sales
137. ,"Bargain Press is considering publishing a new textbook. The publisher has developed the ",
,"following cost data related to a production run of 6,000, the minimum possible ",
,"production run. Bargain Press will sell the textbook for $45 per copy. How many ",
,"textbooks must Bargain Press sell in order to generate operating earnings (earnings before ",
,"interest and taxes) of 20% on sales? (Round your answer up to the nearest whole ",
,"textbook.) ",
,"Estimated cost ",
Development (reviews, class testing, editing) ,"$35,000 ",
Typesetting ,"18,500 ",
Depreciation on Equipment ,"9,320 ",
General and Administrative ,"7,500 ",
Miscellaneous Fixed Costs ,"4,400 ",
Printing and Binding ,"30,000 ",
Sales staff commissions (2% of selling price) ,"5,400 ",
Bookstore commissions (25% of selling price) ,"67,500 ",
Author’s Royalties (10% of selling price) ,"27,000 ",
Total costs at production of 6,000 copies ,"$204,620 ",
a. ,"2,076 copies. ",
b. ,"5,207 copies. ",
c. ,"5,412 copies. ",
d. ,"6,199 copies. ",
1000
XR-2000 XR-2000
Q 6,250.00 $387,500.0
$24.0 Q 5,500.00 $341,000.0
$10.0 $46,500.0
$5.0 $46.50
$40.0
$4.0
$10.0
$105.0
4.00
$62.0
$15.5
750
Segment B Total
$15,000.0 $25,000.0
$8,500.0 $12,500.0
$2,500.0 $4,000.0
$4,000.0 $8,500.0
$3,000.0 $5,000.0
$1,500.0 $3,000.0
-$500.0 $500.0
Segment B Total
$10,000.0
$4,000.0
$1,000.0 $2,500.0
-$1,000.0 $3,500.0
$2,000.0
$1,500.0 $3,000.0
-$2,500.0 -$1,500.0
-$2,000.00
107. C Z, X, Y.
Approach Y Approach Z
$38.0 $32.0
12,000.00 14,000.00
$456,000.0 $448,000.0
$360,000.0 $420,000.0
$45,600.0 0
$30,000.0
$20,400.0 $28,000.0
108. C c. 14 units.
6 - 10 11 - 15 16 - 20
$400,000.0 $600,000.0 $800,000.0
$50,000.0 $45,000.0 $45,000.0
$100,000.0 $100,000.0 $100,000.0
e and variable costs are as follows. 109. B b. $67,200.
110. A a. $24,000.
$30,000.0
$5.0
$100,000.0
$65,000.0
$35,000.0
$20,000.0
$15,000.0
$100,000.0
increase Raymund’s fixed manufacturing costs
by $30,000 per month and reduce its variable
$40,000.0 costs by $5 per uni
$60,000.0
$50,000.0
$10,000.0
osts per unit, for 20,000 units of ice-makers, are as follows. 112. C
20,000.00
100%
32%
68%
use the manufacturer’s engineering specification of machine related unit production cost?
$800,000.0
$0.67
115. B
Product B
20,000.00
20,000.00
$80.0
$45.0
$10.0
$11.0
$4.0
$0.0
$10.0
1.5
Product B
$24.0
$16.0
116. B
4500 15300 $3.40
$4.05
ds of Kaylene. 4200
tilizer and weed killer that is popular in hot, dry climates. 117. C
awn fertilizer.
40
$18.5
$20.0
-$1.50
anufactures several different products, and the loss appear after the deduction of the allocated fixed costs
$2.5
119. A a. $25,000.
ased four years ago at a cost of $70,000.
123. D d. $16,500.
124. B
b. 82,500 units and $9,250,000 of operating income.
h is within the relevant range of Phillip’s cost structure. 175000
ar would amount to
126. B b. $13,500.
1,000
diff
$30,000
$13,500
$13,500
127. B b. $689,992.
689992
Product B
20,000.00
20,000.00
$80.0
$45.0
$10.0
$11.0
$4.0
$0.0
$10.0
1.5
Product B
$24.00
$16.00
370,000
20,000 13333
13,333.33 $319,992.00
320,000 320,000
$689,992 $0.0
128. B b. $2,000,000.
Trunks
30
5
10
5
2
4
1,000,000
Trunks
8.00
2.00
%
450000 b. $80,000. 129. B
120000
270000 0.6
500000
$565,000.00
30%
$1,300,000
tyourselfers. 135. B b. 54,300.
sets
sets
sets
961000
161200
136. D d. $1,200,000.
mount, which
cellaneous ,
103. B b. $96.50.
KT-6500
3,000.00
c. a decrease of $2,000.
fixed manufacturing costs
h and reduce its variable
y $5 per uni
c. $600,000.
achine-related cost of producing each unit is $.67.
1. Account for all units (physical flow of quantities).
Practical capacity is the level of capacity that reduces theoretical capacity by unavoidable operating interruptions, such a
so on. Assume that the pra ical capacity is the practical production rate of 8,000 cases per shift for three shifts per day for
Both theoretical capacity and practical capacity measure capacity levels in terms of what a plant can supply- available cap
budget capacity utilization measure capacity levels in terms of demand for the output of the plant - the amount of the av
demand for its products. In many cases, budgeted demand is well below the production capacity available.
Normal capacity utilization is the level of capacity utilization that satisfies average customer demand over a period (say,
Master-budget capacity utilization is expected level of capacity utilization for the current budget period, typically one ye
when an industry has cyclical periods of high and low demand or
when management believes that the budgeted production for the coming period is not representativeof long-run deman
ConsiderBushells' master budget for 2004, based on production of 4,000,000 cases of tea per year.Despite using this mas
2004,top management believes that over the next three years the normal (average) annual production level will be 5,000
4,000,000 cases to be "abnormally" low. Why? Because a major competitor (Tea- Mania)has been sharply reducing its sel
expects that the competitor's lower price and advertising blitz will not be a long-run phenomenon and that, in 2005, Bus
ConsiderBushells' master budget for 2004, based on production of 4,000,000 cases of tea per year.Despite using this mas
2004,top management believes that over the next three years the normal (average) annual production level will be 5,000
4,000,000 cases to be "abnormally" low. Why? Because a major competitor (Tea- Mania)has been sharply reducing its sel
expects that the competitor's lower price and advertising blitz will not be a long-run phenomenon and that, in 2005, Bus
Theoreticalcapacity $0.50
Practicalcapacity $0.75
Normalcapacity utilization $1.08
Master-budgetcapacity $1.35 170%
utilization
Now assume that the Standard variable manufacturing cost is $5.20 per case. The total standard manufacturing cost per c
concepts is
Total
Standard variable manufacturing cost is $5.20 Manufacturing
Cost per Case
Theoreticalcapacity $5.70
Practicalcapacity $5.95
Normalcapacity utilization $6.28
Master-budgetcapacity $6.55
utilization
Effect on Financial Statements
The magnitude of the favorable/unfavorable production-volume variance under absorption costing will be affected by the
fixed manufacturing cost per case. Assume Bushells' actual production in 2004 is 4,400,000 cases of iced tea. Actual sales
inventory for 2004 and no price variances, spending variances, or efficiency variances in manufacturing costs. Those assum
and actual fixed manufacturing overhead costs are both $5,400,000. The average selling price per case of iced tea is $8.00
FOH allocated
Theoreticalcapacity $2,200,000.00
Practicalcapacity $3,300,000.00
Normalcapacity utilization $4,752,000.00
Master-budgetcapacity $5,940,000.00
utilization
How Bushells handles its end-of-period variances will determine the effect these p
will have on the company's operating income. We now discuss the three alternati
use to handle the production-volume varianc
1. Adjusted allocation-rate approach. This approach restates all amounts in the general and su
budgeted cost rates. Given that actual fIXed manufacturing overhead costs are $5,400,000 and
recalculated fixed manufacturing overhead cost is $1.23 per case ($5,400, 000 /4,4OO,OOO ca
allocation-rate approach results in the choice of the capacity level used to calculate the budge
having no effect on end-of-period financial statements.
In effect,an actual costing system is adopted at the en
Actual Rate $1.23
3. Write-off variances to cost of goods sold approach. Exhibit 9-7 shows how use of this appro
Recall, Bushells had no beginning inventory,production of 4,400,000 cases, and sales of 4,200,0
31, 2004, is 200,000 cases. Using master-budget capacity utilizationas the denominator results
manufacturing overheadcost per case to the 200,000 cases in ending inventory. Accordingly, op
capacity utilization concept. The differences in operating income for the four denominator-level
amounts of fixed manufacturing overhead being inventoried at the end of2004:
Theoreticalcapacity $100,000.00
Practicalcapacity $150,000.00
Normalcapacity utilization $216,000.00
Master-budgetcapacity $270,000.00
utilization
Income Statement Effects of Using Alternative Capacity-level Concepts Bushells Company for 2004
Theoretical Practical
10,800,000.00 7,200,000.00
sales rev $33,600,000.00 $33,600,000.00
Cost of Goods Sold
Beginning inventory $0.00 $0.00
Variable manufacturing costs $22,880,000.00 $22,880,000.00
Fixed manufacturing costs $2,200,000.00 $3,300,000.00
Cost for goods available for sale $25,080,000.00 $26,180,000.00
deduct ending inventory $1,140,000.00 $1,190,000.00
Total COGS(at standard costs) $23,940,000.00 $24,990,000.00
Adjustment for manufacturing variances $3,200,000.00 $2,100,000.00
Total COGS $27,140,000.00 $27,090,000.00
Gross Margin $6,460,000.00 $6,510,000.00
Operating cost $2,810,000.00 $2,810,000.00
Operating income $3,650,000.00 $3,700,000.00
the $54,000 difference ($3,820,000 - $3,766,000) in operating income betweenthe master-budget
capacity and the normal capacity utilization concepts is due to thedifference in fixed manufacturing
overhead inventoried ($270,000- $216,000)
Suppose Bushells Company is computing its operating income for 2006. That year's results are identical to the results for 2
utilization for 2006 is 6,000,000 cases instead of 4,000,000 cases. Production in 2006 is 4,400,000 cases. There is no begin
other than the production-volume variance.Bushells writes off this variance to cost of goods sold. Sales in 2006 are 4,200
Theonly change in Exhibit 9-7 results would be for the master-budget capacity utilization level. The
budgeted fIXed manufacturing overhead cost rate for 2006 is
Master-budgetcapacity $0.90
allocated fixed cost $3,960,000.00
PVV $1,440,000.00 $1,440,000.00
Themanufacturing cost per case is $6.10 ($5.20 + $0.90). So, the production-volume variance for
2006is
$6.10
The higher denominator level used to calculate budgeted fixed manufacturing cost per case inthe 2006 master budget
that fewer fixed manufacturing overhead costs are inventoried in 2006 than in 2004, given identical sales and producti
and assuming the production-volumevariance is written off to cost of goods sold.
e
00,000
ana
xamine
ed
capaci
.'
the time. Bushells can produce 10,000 cases of iced tea per shift when the bottling lines are
capacity for three 8-hour shifts per day is
tical capacity is theoretical in the sense that it does not allow for any plant mainte. nance,
ptions because of bottle breakage on the filling lines, or any other factor. Theoretical capacity
nts an ideal goal of capacity usage. Theoretical capacity is unattainable in the real world.
oidable operating interruptions, such as scheduled maintenance time, shutdowns for holidays, and
ses per shift for three shifts per day for 300 days a year. The practical annual capacity
f what a plant can supply- available capacity. In contrast, normal capacity utilization and master.
put of the plant - the amount of the available capacity that the plant expects to use based on the
uction capacity available.
customer demand over a period (say, 2 to 3 years) that includes seasonal, cyclical, and trendfactors.
current budget period, typically one year. These two capacity utilization levels can differ-for example,
s of tea per year.Despite using this master-budget capacity utilization level of 4,000,000 cases for
e) annual production level will be 5,000,000 cases. They view 2004's budgeted production level of
Mania)has been sharply reducing its selling price and spending large amounts on advertising. Bushells
un phenomenon and that, in 2005, Bushells' production and sales will be higher.
s of tea per year.Despite using this master-budget capacity utilization level of 4,000,000 cases for
e) annual production level will be 5,000,000 cases. They view 2004's budgeted production level of
Mania)has been sharply reducing its selling price and spending large amounts on advertising. Bushells
un phenomenon and that, in 2005, Bushells' production and sales will be higher.
$8.00
PVV The higher the denominator level, (1) the lower the budgeted FMOH cost rate,
and the lower the amount of FMOH allocated to output produced (because
the budgeted FMOH cost rate is lower), and (3) the higher the unfavorable PVV
$3,200,000.00 U (because the higher the denominator level, the more likely actual output will
$2,100,000.00 U fall short of that level).
$648,000.00 U
-$540,000.00 F
amounts in the general and subsidiary ledgers by using actual rather than
head costs are $5,400,000 and actual production is 4,400,000 cases,the
e ($5,400, 000 /4,4OO,OOO cases, rounded up to the nearest cent). The adjusted
el used to calculate the budgeted fixed manufacturingoverhead cost per case
7 shows how use of this approch affects Bushells' operating income for 2004.
000 cases, and sales of 4,200,000 cases. Hence, the ending inventory on December
tionas the denominator results in assigning the highest amount of fixed
ding inventory. Accordingly, operating income is highest using the master-budget
for the four denominator-level concepts in Exhibit 9-7 are due to different
he end of2004:
Normal Master-budget
5,000,000.00 4,000,000.00
$33,600,000.00 $33,600,000.00
$0.00 $0.00
$22,880,000.00 $22,880,000.00
$4,752,000.00 $5,940,000.00
$27,632,000.00 $28,820,000.00
$1,256,000.00 $1,310,000.00
$26,376,000.00 $27,510,000.00
$648,000.00 -$540,000.00
$27,024,000.00 $26,970,000.00
$6,576,000.00 $6,630,000.00
$2,810,000.00 $2,810,000.00
$3,766,000.00 $3,820,000.00
$54,000.00
$54,000.00
master-budget
d manufacturing
results are identical to the results for 2004, shown in Exhibit 9-7, except that master-budget capacity
06 is 4,400,000 cases. There is no beginning inventory on January 1, 2006, and there are no variances
of goods sold. Sales in 2006 are 4,200,000 cases.
variance for
ost per case inthe 2006 master budget means
004, given identical sales and production levels
d.
budgeted FMOH cost rate,
tput produced (because
higher the unfavorable PVV
re likely actual output will
Price $200.00 100% $ 1.00
VC $120.00 60% $ 0.60
CM $80.00 40% $ 0.40
FC $2,000.00
CM% = CM/Price 40%
Q.Break=FC/CM 25
Units
0 1 5
Revenues $0.00 $200.00 $1,000.00
VC $0.00 $120.00 $600.00
CM $0.00 $80.00 $400.00
FC $2,000.00 $2,000.00 $2,000.00
OI ($2,000.00) ($1,920.00) ($1,600.00)
Strategic decisions invariably entail risk. CVP analysis evaluates how operating income will be
affected if the original predicted data are not achieved - say, if sales are 10%lower than
estimated. Evaluating this risk affects other strategic decisions a company might make. For
example, if the probability of a decline in sales seems high, a manager may take actions to
shift the cost structure to have more variable costs and fewer fixed ,) costs.
Strategic decisions invariably entail risk. CVP analysis evaluates how operating income will be
affected if the original predicted data are not achieved - say, if sales are 10%lower than
estimated. Evaluating this risk affects other strategic decisions a company might make. For
example, if the probability of a decline in sales seems high, a manager may take actions to
shift the cost structure to have more variable costs and fewer fixed ,) costs.
Decision to Advertise
New Q will be 44 instead of 40
New FC will be $500 higher than old FC due to Adv.
Selling Price will be the same
Contribution margin from lowering price to $175: ($175 - $115) per unit x 50 units
Contribution margin from maintaining price at $200: ($200 - $120) per unit x 40 units
Change in contribution margin from lowering price
Mary can immediately see the revenues that need to be generated to reach particular operating-income levels, given a
variable cost per unit. For example, revenues of $6,40.0 ($2Q{) per unit x 32 units) are required to earn an operating inco
and variable cost per unit is $100. Mary can also use Exhibit 3-4 to assess what revenues she needs to break even (earn o
the booth rental at the Chicago convention is raised to $2,800 (increasing fIxed costs to $2,800) or if the software supplier
variable cost to $150 per unit).
Rev
must
be
200
FC VC CM CM%
1 2000 $ 100.00 $ 100.00 50%
2 2000 $ 120.00 $ 80.00 40%
3 2000 $ 150.00 $ 50.00 25%
4 2400 $ 100.00 $ 100.00 50%
5 2400 $ 120.00 $ 80.00 40%
6 2400 $ 150.00 $ 50.00 25%
7 2800 $ 100.00 $ 100.00 50%
8 2800 $ 120.00 $ 80.00 40%
9 2800 $ 150.00 $ 50.00 25%
Compare line 2 (fIxed costs, $2,000; variable cost per unit, $120)-and line 7 (fIxed
costs, $2,800; variable cost per unit, $100) See how the revenues required to break
even are higher for line 7 ($5,600 versus $5,000 in line 2) ..whereas the revenues
required to earn $2,000 of operating income are lower in line T ($9,600 versus
$10,000 in line 2). Line 7, with higher fIxed costs, has more risk of loss (has a higher
breakeven point) but offers a greater return (more profits) as revenues increase.
Quantity sold 40
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
The CVP analysis, however, highlights the different risks of loss and different return
differ from 40 units. The higher risk of a loss in option 1 is because of its higher fixe
higher breakeven point (25 units) and a lower margin of safety (40 - 25 = 15 units) r
representing option 1 intersects the
horizontal axis farther to the right than the lines representing options 2 and 3.
Quantity sold 25
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
Q Break
Consider operating income under each option if the number of units sold dr
20. Exhibit 3-5 shows that option 1 leads to an operating loss, whereas optio
continue to generate operating incomes. (A vertical line from X = 20 units so
option 1 line below the horizontal axis in the mauve area and cuts the optio
lines above the horizontal axis in the blue-green area.) The higher risk ofloss
however, must be evaluated against its potential benefits. Option 1 has the
margin per unit because of its low variable costs.
Quantity sold 20
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
Q Break
Once fixed costs are recovered at sales of 25 units, each additional unit sold adds $80 of contribution margin and, therefo
$80 of operating income per unit. For example, at sales of 60 units, option 1 shows an operating income of $2,800, greate
under options 2 and 3. By moving from option 1 toward option 3, Mary faces less risk of loss when demand is low, both b
contribution margin per unit. She must, however, accept less operating income when
demand is high because of the higher variable costs of option 3 compared with options 1 and 2. The choice among option
the level of demand for the software package and her willingness to risk losses if demand
is low.
Once fixed costs are recovered at sales of 25 units, each additional unit sold adds $80 of contribution margin and, therefo
$80 of operating income per unit. For example, at sales of 60 units, option 1 shows an operating income of $2,800, greate
under options 2 and 3. By moving from option 1 toward option 3, Mary faces less risk of loss when demand is low, both b
contribution margin per unit. She must, however, accept less operating income when
demand is high because of the higher variable costs of option 3 compared with options 1 and 2. The choice among option
the level of demand for the software package and her willingness to risk losses if demand
is low.
Quantity sold 60
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
Q Break
The risk-return tradeoff across alternative cost structures can be measured as operating leverage. Operating le
on changes in operating income as changes occur in units sold and, hence, in contribution margin.
Organizations with a high proportion of fixed costs in their cost structures, as is the case under option 1, have h
option 1 in Exhibit 3-5 is the steepest of the three lines. Small increases in sales lead to large increases in operati
incomes. Small decreases in sales result in relatively large decreases in operating incomes, leading to a greater r
the degree of operating leverage equals contribution margin divided by operating income.
Quantity sold 40
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
Operating Leverage=CM/OI
These numbers indicate that, when sales are 40 units, a percentage change in sales and contribution margin will result in
for option 1, but the same percentage change in operating income for option 3.
Consider, for example, a sales increase of 50% from 40 to 60 units. Contribution margin will increase by 50% under each
2.67 x 50% = 133% from $1,200 to $2,800 in option 1, but it will increase only by 1.00 x 50% = 50% from $1,200 to $1,800
These numbers indicate that, when sales are 40 units, a percentage change in sales and contribution margin will result in
for option 1, but the same percentage change in operating income for option 3.
Consider, for example, a sales increase of 50% from 40 to 60 units. Contribution margin will increase by 50% under each
2.67 x 50% = 133% from $1,200 to $2,800 in option 1, but it will increase only by 1.00 x 50% = 50% from $1,200 to $1,800
leverage at a given level of sales helps managers calculate the effect of fluctuations in sales
on operating incomes.
Quantity sold 60
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
50 % in units sold will raise the CM with 50% in each option
These numbers indicate that, when sales are 40 units, a percentage change in sales and contribution margin will result in
for option 1, but the same percentage change in operating income for option 3.
Consider, for example, a sales increase of 50% from 40 to 60 units. Contribution margin will increase by 50% under each o
2.67 x 50% = 133% from $1,200 to $2,800 in option 1, but it will increase only by 1.00 x 50% = 50% from $1,200 to $1,800
leverage at a given level of sales helps managers calculate the effect of fluctuations in sales
on operating incomes.
old sales
(1) % change in EBIT 133% $ 8,000.00
(2) % change in output (sales) 50% 50%
DOL (1)/ (2) 2.67
The degree of operating leverage should thus be viewed as a measure of "potential risk" whic
sales and production cost variability.The degree of operating leverage itself is not the source o
12 20
8 15
RC HS
CM $4.0 $5.0
units 10000 15000 25000
40% 60%
$1.6 $3.0 $4.6
fc $94,000.0 20,434.78
fc $94,000.0 19,789.47
15 20
3,000 4,000 4800
se.
Diff
10
$ (200.00)
0
$ (200.00)
$ 3,000.00
$ 3,200.00
$ (200.00)
ting leverage. Operating leverage describes the effects that fixed costs have
ution margin.
ase under option 1, have high operating leverage. The line representing
to large increases in operating
omes, leading to a greater risk of operating losses. At any given level of sales,
ome.
tribution margin will result in 2.67 times that percentage change in operating income
increase by 50% under each option. Operating income, however, will increase by
= 50% from $1,200 to $1,800 in option 3 (see Exhibit 3-5). The degree of operating
tribution margin will result in 2.67 times that percentage change in operating income
increase by 50% under each option. Operating income, however, will increase by
= 50% from $1,200 to $1,800 in option 3 (see Exhibit 3-5). The degree of operating
ribution margin will result in 2.67 times that percentage change in operating income
ncrease by 50% under each option. Operating income, however, will increase by
= 50% from $1,200 to $1,800 in option 3 (see Exhibit 3-5). The degree of operating
new sales
$ 12,000.00
er?
n sales would have on operating profit. Sometimes, in response to
its sales policy and/ or cost structure. As a general rule, firms do
age. Since, in that situation, a small drop in sales may lead to an
Specialty Cakes Inc. produces two types of cakes, a 2 lbs. round cake and a 3 lbs. heartshaped
cake. Total fixed costs for the firm are $94,000. Variable costs and sales data for
the two types of cakes are presented below.
2 lbs. 3 lbs.
Round Cake Heart-shape Cake
Selling price per unit $12 $20
Variable cost per unit $8 $15
Current sales (units) 10,000 15,000
If the product sales mix were to change to three heart-shaped cakes for each round cake,
the breakeven volume for each of these products would be
lbs. heartshaped
Budgeted production in units
Actual production in units
Budgeted Allocation base (ex.hours)
Actual allocation base (ex.hours)
the standard allocation base per unit
the Actual allocation base per unit
Total Actual OH
Total Actual VOH
Total Actual FOH
Total Budgeted OH
Total Budgeted VOH
Total Budgeted FOH
Total Applied OH
Applied VOH
Applied FOH
Budgeted VOH rate
Budgeted FOH rate
1)
Total Budgeted VOH = Budgeted Rate x Budgeted Allocation Base
2)
Allocated VOH( the same in the flexible budget)
Budgeted Input Allowed for actual output X Budgeted VOH Rate
Budgeted Input Allowed for actual output = Budgeted input (allocation base) per unit X Actual units
1)
Total Budgeted FOH = Budgeted Rate x Budgeted Allocation Base
BudgetedFOH Rate Budgeted Allocation Base
2)
Allocated FOH
Budgeted Input Allowed for actual output X Budgeted FOH Rate
Budgeted Input Allowed for actual output = Budgeted input (allocation base) per unit X Actual units
VMOH
FMOH
$ -
$ -
FMOH
$ -
$ -
VMOH
$ -
1)
Total Budgeted VOH = Budgeted Rate x Budgeted Allocation Base
2)
Allocated VOH( the same in the flexible budget)
Budgeted Input Allowed for actual output X Budgeted VOH Rate
0.5
Budgeted Input Allowed for actual output = Budgeted input (allocation base) per unit X Actual units
VMOH
$ 596,000.00
FMOH
Actual costs Incurred
$ -
$ 410,000.00
1)
Total Budgeted VOH = Budgeted Rate x Budgeted Allocation Base
2)
Allocated VOH( the same in the flexible budget)
Budgeted Input Allowed for actual output X Budgeted VOH Rate
Budgeted Input Allowed for actual output = Budgeted input (allocation base) per unit X Actual units
1)
Total Budgeted FOH = Budgeted Rate x Budgeted Allocation Base
2)
Allocated FOH
Budgeted Input Allowed for actual output X Budgeted FOH Rate
Budgeted Input Allowed for actual output = Budgeted input (allocation base) per unit X Actual units
VMOH
$ 352,000.00
FMOH
Actual costs Incurred
$ -
$ 575,000.00
FMOH
$ -
$ -
242. C
242. A company had a total labor variance of $15,000 favorable and a labor efficiency
variance of $18,000 unfavorable. The labor price variance was
a. $3,000 favorable.
b. $3,000 unfavorable.
c. $33,000 favorable.
d. $33,000 unfavorable
238. B
238. At the beginning of the year, Douglas Company prepared the following monthly budget
for direct materials.
Units produced and sold 10,000 15,000 10000 15000
Direct material $15,000 $22,500 $ 15,000 $ 22,500
1.5 1.5
12000
At the end of the month, the company's records showed that 12,000 units were produced
and sold and $20,000 was spent for direct materials. The variance for direct materials is
a. $2,000 favorable. 18000 20000
b. $2,000 unfavorable.
c. $5,000 favorable.
d. $5,000 unfavorable.
237. D
237. Lee Manufacturing uses a standard cost system with overhead applied based on direct
labor hours. The manufacturing budget for the production of 5,000 units for the month of
May included the following information.
Direct labor (10,000 hours at $15 per hour) $150,000 10000 15
Variable overhead 30,000
Fixed overhead 80,000
During May, 6,000 units were produced and the direct labor efficiency variance was
$1,500 unfavorable. Based on this information, the actual number of direct labor hours
used in May was
a. 9,900 hours.
b. 10,100 hours.
c. 11,900 hours. R DA
d. 12,100 hours E DS
SQA
236. C
236. A company isolates its raw material price variance in order to provide the earliest
possible information to the manager responsible for the variance. The budgeted amount
of material usage for the year was computed as follows.
150,000 units of finished goods x 3 pounds/unit x $2.00/pound = $900,000.
150000 3 2 $ 900,000
Actual results for the year were the following.
Finished goods produced 160,000 units 160,000
Raw materials purchased 500,000 pounds 500,000
Raw materials used 490,000 pounds 490,000
Cost per pound $2.02 $ 2.02
The raw material price variance for the year was
a. $9,600 unfavorable.
b. $9,800 unfavorable.
c. $10,000 unfavorable.
d. $20,000 unfavorable
(10,000.00)
235. B
235. Christopher Akers is the chief executive officer of SBL Inc., a masonry contractor. The
financial statements have just arrived showing a $3,000 loss on the new stadium job that
was budgeted to show a $6,000 profit. Actual and budget information relating to the
materials for the job are as follows.
Actual Budget
Bricks - number of bundles 3,000 2,850 3000 2850
Bricks - cost per bundle $7.90 $8.00 $ 7.90 $ 8.00
Which one of the following is a correct statement regarding the stadium job for SBL?
a. The price variance was favorable by $285.
b. The price variance was favorable by $300.
c. The efficiency variance was unfavorable by $1,185.
d. The flexible budget variance was unfavorable by $900.
234. D
234. Frisco Company recently purchased 108,000 units of raw material for $583,200. Three
units of raw materials are budgeted for use in each finished good manufactured, with the
raw material standard set at $16.50 for each completed product. Frisco manufactured
32,700 finished units during the period just ended and used 99,200 units of raw material.
If management is concerned about the timely reporting of variances in an effort to
improve cost control and bottom-line performance, the materials purchase price variance
should be reported as
a. $6,050 unfavorable.
b. $9,920 favorable.
c. $10,800 unfavorable.
d. $10,800 favorable
233. D
233. MinnOil performs oil changes and other minor maintenance services (e.g., tire pressure
checks) for cars. The company advertises that all services are completed within 15
minutes for each service. On a recent Saturday, 160 cars were serviced resulting in the
following labor variances: rate, $19 unfavorable; efficiency, $14 favorable. If MinnOil’s
standard labor rate is $7 per hour, determine the actual wage rate per hour and the actual
hours worked.
Wage Rate Hours Worked
a. $6.55 42.00.
b. $6.67 42.71.
c. $7.45 42.00.
d. $7.50 38.00.
.=Total Budgeted VOH
0
0
.=Total Budgeted FOH
0
wing parts
units
#DIV/0!
Flexible Budget :
Budgeted Input Allowed
Actual Inputs X for Actual Output X
Budgeted Rate Budgeted Rate
Actual Inputs X Budgeted Rate Budgeted Input Allowed for Actual Outp
- $ - -
-
Budgeted Rate
$ - $ -
$ -
Flexible Budget :
Same Budgeted Same Budgeted
Lump Sum Lump Sum
As in Static Budget regardless of As in Static Budget regardless of
Output Level Output Level
Actual Inputs X Budgeted Rate Budgeted Input Allowed for Actual Outp
- $ - -
-
Budgeted Rate
$ - $ -
$ - $ -
$ -
Flexible Budget :
Same Budgeted Same Budgeted
Lump Sum Lump Sum
As in Static Budget regardless of As in Static Budget regardless of
Output Level Output Level
Actual Inputs X Budgeted Rate Budgeted Input Allowed for Actual Outp
- $ - -
-
Budgeted Rate
$ - $ -
$ -
$ 600,000.00
243. B b. $4.00.
243. Lee manufacturing uses a standard cost system with overhead applied based on direct
labor hours. The manufacturing budget for the production of 5,000 units for the month of
June included 10,000 hours of direct labor at $15 per hour, $150,000. During June, 4,500
units were produced, using 9,600 direct labor hours, incurring $39,360 of variable
overhead, and showing a variable overhead efficiency variance of $2,400 unfavorable.
The standard variable overhead rate per direct labor hour was
$ 4.00
2.00
5,000.00 wing parts
4,500.00 units
9,600.00
$ -
Since the eff.Var.= the diff between , and it is equal (2,400), the Q will be solved through a formula.
Flexible Budget :
Budgeted Input Allowed
Actual Inputs X for Actual Output X
Budgeted Rate Budgeted Rate
Actual Inputs X Budgeted Rate Budgeted Input Allowed for Actual Outp
9,600.00 $ 4.00 2.00
9,000.00
Budgeted Rate
$ 38,400.00 $ 4.00
$ 36,000.00
U
x= (4.00)
246. B b. $115,000 favorable.
Sp
Actual VOH Actua inpxbudgeted rate
215000
sp
Actual FOH static
$ 1,500,000.00
0
$ 60.00 60 247. D
$ 40.00 40
247. The JoyT Company manufactures Maxi Dolls for sale i
wing parts year, JoyT estimated variable factory overhead of $600,000
$ 400,000.00 $400,000. JoyT uses a standard costing system, and factory
600,000.00 produced on the basis of standard direct labor hours. The
60.00 budgeted for this year was 10,000 direct labor hours, and J
labor hours.
units Based on the output accomplished during this year, 9,900
10,300.00 should have been used. Actual variable factory overhead w
$ 596,000.00 factory overhead was $410,000 for the year. Based on this
$ 410,000.00 overhead spending variance for JoyT for this year was
$ 57.86
Flexible Budget :
Budgeted Input Allowed
Actual Inputs X for Actual Output X
Budgeted Rate Budgeted Rate
Actual Inputs X Budgeted Rate Budgeted Input Allowed for Actual Outp
10,300.00 $ 60.00 -
-
Budgeted Rate
$ 618,000.00 $ 60.00
$ 594,000.00
Flexible Budget :
Same Budgeted Same Budgeted
Lump Sum Lump Sum
As in Static Budget regardless of As in Static Budget regardless of
Output Level Output Level
Actual Inputs X Budgeted Rate Budgeted Input Allowed for Actual Outp
- $ - -
-
Budgeted Rate
$ - $ -
$ 400,000.00 $ -
$ 400,000.00
C. $1,000 Unfavorable.
Answer (C) is correct. The budget (spending) variance for fi
udget includes $324,000 for $324,000 cost of supervisory salaries is fixed and is incurre
xpected to be incurred difference between actual costs of $28,000 and the budge
upervisory salaries incurred
.=Total Budgeted VOH
0
0
$ 0.75 [Fact Pattern #73]
$ 3.00 Franklin Glass Works’ production budget for the year ende
2.00 standard hours of labor for completion. Total overhead wa
200,000.00 units estimated to be $3.00 per unit. Both fixed and variable ove
$ 600,000.00 The actual data for the year ended November 30 are prese
Actual production in units 198,000
Actual direct labor hours 440,000
Actual variable overhead $352,000
198,000.00 units Actual fixed overhead $575,000
440,000.00
$ 352,000.00 voh 300000
$ 575,000.00 unit x allo 2
unit x allo 400,000.00
$ 0.80 0.75
Flexible Budget :
Budgeted Input Allowed
Actual Inputs X for Actual Output X
Budgeted Rate Budgeted Rate
Actual Inputs X Budgeted Rate Budgeted Input Allowed for Actual Outp
440,000.00 $ 0.75 2.00
396,000.00
Budgeted Rate
$ 330,000.00 $ 0.75
$ 297,000.00
Flexible Budget :
Same Budgeted Same Budgeted
Lump Sum Lump Sum
As in Static Budget regardless of As in Static Budget regardless of
Output Level Output Level
Actual Inputs X Budgeted Rate Budgeted Input Allowed for Actual Outp
- $ - -
-
Budgeted Rate
$ - $ -
$ 600,000.00 $ -
$ 600,000.00
s the PVV = the dif. between FB(static) and it is give, and the allocated FOH that = budgeted rate x
actual units
Flexible Budget :
Same Budgeted Same Budgeted
Lump Sum Lump Sum
As in Static Budget regardless of As in Static Budget regardless of
Output Level Output Level
Actual Inputs X Budgeted Rate Budgeted Input Allowed for Actual Outp
- $ - -
-
Budgeted Rate
$ - $ -
$ -
$ 600,000.00
173. D
$ 15,000.00 $ (18,000.00) $ 33,000.00 174. A
175. C
176. C
177. B
178. A
179. D
180. C
181. B
182. D
183. A
184. B
185. C
186. D
187. A
188. B
189. D
190. C
$ (2,000) 191. B
192. A
193. D
194. D
195. A
196. C
197. A
198. B
199. C
200. D
5000 201. C
202. D
$ 150,000 2 203. B
30000 204. D
80000 205. C
6000 206. D
1500 207. C
208. B
209. D
210. B
211. B
1500 12000 $ 180,000 212. A
$ 181,500 213. D
12,100 214. D
215. D
216. C
217. C
218. C
219. B
220. B
221. C
222. D
223. B
224. B
225. A
226. D
227. B
228. C
229. C
230. B
231. A
232. A
233. D
239. A
240. A
241. B
3000 242. C
243. B
244. D
245. B
246. B
$ (300.00) 247. D
248. D
249. D
250. D
251. D
252. D
253. D
254. D
255. B
256. B
257. B
108000 583200 5.4 258. B
3 259. B
16.5 5.5 10,800.00 260. B
32700 99200 261. C
262. C
263. D
264. C
265. C
266. A
267. D
268. D
269. B
270. D
271. D
272. B
273. B
274. A
15 275. A
160 276. D
277. A
278. B
279. C
280. C
281. B
282. B
283. D
284. A
285. D
286. B
287. B
288. C
289. B
290. C
291. C
292. B
293. B
294. B
295. C
296. A
297. A
298. C
299. B
300. A
301. D
302. C
303. B
304. B
305. A
306. C
307. A
308. C
309. B
310. D
311. A
312. B
313. D
314. A
315. B
316. D
317. B
318. B
319. A
320. D
321. D
322. C
323. A
324. B
325. C
326. A
327. A
328. A
329. A
330. A
331. B
332. C
333. C
334. B
335. C
336. B
337. C
338. C
339. C
340. C
341. D
342. A
343. B
344. A
345. C
346. A
347. D
348. D
349. D
350. C
351. B
352. D
353. A
354. A
355. C
356. C
Allocated:
Budgeted Input Allowed
for Actual Output X
Budgeted Rate
Allowed for Actual Output Budgeted Input Allowed for Actual Output
- - -
-
Budgeted Rate
$ -
$ -
Allocated:
Budgeted Input Allowed
for Actual Output X
Budgeted Rate
Allowed for Actual Output Budgeted Input Allowed for Actual Output
- - -
-
Budgeted Rate
$ -
$ -
Allocated:
Budgeted Input Allowed
for Actual Output X
Budgeted Rate
Allowed for Actual Output Budgeted Input Allowed for Actual Output
- - -
-
Budgeted Rate
$ -
$ 570,000.00
ved through a formula...
Allocated:
Budgeted Input Allowed
for Actual Output X
Budgeted Rate
Allowed for Actual Output Budgeted Input Allowed for Actual Output
4,500.00 2.00 4,500.00
9,000.00
Budgeted Rate
$ 4.00
$ 36,000.00
246. Harper Company’s performance report indicated the following information for the past
month.
Actual total overhead $1,600,000
Budgeted fixed overhead 1,500,000
5,000 favorable. Applied fixed overhead at $3 per labor hour 1,200,000
Applied variable overhead at $.50 per labor hour 200,000
Actual labor hours 430,000
Harper’s total overhead spending variance for the month was
d. $22,000 favorable.
res Maxi Dolls for sale in toy stores. In planning for this
y overhead of $600,000 and fixed factory overhead of
ting system, and factory overhead is allocated to units
direct labor hours. The denominator level of activity
direct labor hours, and JoyT used 10,300 actual direct 10000
Allocated:
Budgeted Input Allowed
for Actual Output X
Budgeted Rate
Allowed for Actual Output Budgeted Input Allowed for Actual Output
- - -
-
Budgeted Rate
$ 60.00
$ 594,000.00
Allocated:
Budgeted Input Allowed
for Actual Output X
Budgeted Rate
Allowed for Actual Output Budgeted Input Allowed for Actual Output
- - -
-
Budgeted Rate
$ 40.00
$ -
spending) variance for fixed O/H equals actual minus budgeted fixed O/H. The
es is fixed and is incurred at $27,000 per month. Thus, the variance is the
$28,000 and the budgeted costs of $27,000, or $1,000 unfavorable.
udget for the year ended November 30 was based on 200,000 units. Each unit requires two
tion. Total overhead was budgeted at $900,000 for the year, and the fixed overhead rate was
h fixed and variable overhead are assigned to the product on the basis of direct labor hours.
November 30 are presented as follows.
Allocated:
Budgeted Input Allowed
for Actual Output X
Budgeted Rate
Allowed for Actual Output Budgeted Input Allowed for Actual Output
198,000.00 2.00 198,000.00
396,000.00
Budgeted Rate
$ 0.75
$ 297,000.00
Allocated:
Budgeted Input Allowed
for Actual Output X
Budgeted Rate
Allowed for Actual Output Budgeted Input Allowed for Actual Output
- 3.00 198,000.00
594,000.00
Budgeted Rate
$ 3.00
$ 594,000.00
Allocated:
Budgeted Input Allowed
for Actual Output X
Budgeted Rate
Allowed for Actual Output Budgeted Input Allowed for Actual Output
- - -
-
Budgeted Rate
$ -
$ 570,000.00
mation for the past
Maria Lopez is the newly appointed president of Laser Products. She is examining the May
2004 results for the Aerospace Products Division. This division manufactures wing parts for
satellites. Lopez's current concern is with manufacturing overhead costs at the Aerospace
Products Division. Both variable manufacturing overhead costs and fixed manufacturing
overhead costs are allocated to the wing parts on the basis of laser-cutting-hours. The
Budgeted cost rates are variable manufacturing overhead of $200 per hour and fixed
manufacturing overhead of $240 per hour.
Budgeted production and sales for May 2004 is 5,000 wing parts. Budgeted fixed
manufacturing overhead costs for May 2004 is $1,800,000.
The Budgeted cost rates are variable manufacturing overhead of $200 per hour and fixed manufact
VMOH
$ - $ -
$ 1,832,200.00 $ 1,800,000.00
fixed
wing parts
units
Flexible Budget :
Same Budgeted Allocated:
Lump Sum Budgeted Input Allowed
regardless of As in Static Budget regardless of for Actual Output X
Output Level Budgeted Rate
dgeted Rate Budgeted Input Allowed for Actual Output Budgeted Input Allowed
$ - - - 1.50
-
Budgeted Rate
$ -
$ -
$ 1,800,000.00
Input Allowed
Input Allowed
Maple
Sales $55,000 $85,000 $100,000 $55,000.000
Variable Costs 40,000 72,000 82,000 $40,000.000
Contribution Margin 15,000 13,000 18,000 $15,000.000
Fixed costs 10,000 14,000 10,200 $10,000.000
Operating profit (loss) $ 5,000 $(1,000) $ 7,800 $5,000.000
Which one of the following options should be recommended to the president of the
company?
Maple
Sales $55,000 $85,000 $100,000 $55,000.000
Variable Costs 40,000 72,000 82,000 $40,000.000
Contribution Margin 15,000 13,000 18,000 $15,000.000
Fixed costs 10,000 14,000 10,200 $10,000.000
Operating profit (loss) $ 5,000 $(1,000) $ 7,800 $5,000.000
149. Raymund Inc. currently sells its only product to Mall-Stores. Raymund has received a
one-time-only order for 2,000 units from another buyer. Sale of the special order items
will not require any additional selling effort. Raymund has a manufacturing capacity to
produce 7,000 units. Raymund has an effective income tax rate of 40%. Raymund’s
Income Statement, before consideration of the one-time-only order, is as follows.
In negotiating a price for the special order, Raymund should set the minimum per unit
selling price at $10.0
148. Lark Industries accepted a contract to provide 30,000 units of Product A and 20,000 units
of Product B. Lark’s staff developed the following information with regard to meeting
this contract.
Product A Product B
30000 20000
Selling Price $75 $125 $75.0 $125.0
Variable costs $30 $48 $30.0 $48.0
Fixed overhead $1,600,000
Machine hours required 3 5 3.00 5.00
Machine hours available 160,000
Cost if outsourced $45 $60 $45.0 $60.0
Lark’s operations manager has identified the following alternatives. Which alternative
should be recommended to Lark’s management?
CM $45.0 $77.0
CM per constraint $ 15.00 $ 15.40
147. Aril Industries is a multiproduct company that currently manufactures 30,000 units of
Part 730 each month for use in production. The facilities now being used to produce Part
730 have fixed monthly overhead costs of $150,000, and a theoretical capacity to produce
60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the
facilities would be idle and 40% of fixed costs would continue to be incurred. There are
no alternative uses for the facilities. The variable production costs of Part 730 are $11
per unit. Fixed overhead is allocated based on planned production levels.
If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a
net benefit by purchasing Part 730 from an outside supplier only if the supplier’s unit
price is less than $ 14.00
146. Current business segment operations for Whitman, a mass retailer, are presented below.
Merchandise Automotive
Sales $ 500,000.00 $ 400,000.00
Variable costs $ 300,000.00 $ 200,000.00
CM $ 200,000.00 $ 200,000.00
Fixed costs $ 100,000.00 $ 100,000.00
Operating income (loss) $ 100,000.00 $ 100,000.00
Merchandise Automotive
Sales $ 475,000.00 $ 380,000.00
Variable costs $ 285,000.00 $ 190,000.00
CM $ 190,000.00 $ 190,000.00
Fixed costs $ 100,000.00 $ 100,000.00
Operating income (loss) $ 90,000.00 $ 90,000.00
144. Oakes Inc. manufactured 40,000 gallons of Mononate and 60,000 gallons of Beracyl in a
joint production process, incurring $250,000 of joint costs. Oakes allocates joint costs
based on the physical volume of each product produced. Mononate and Beracyl can each
be sold at the split-off point in a semifinished state or, alternatively, processed further.
Additional data about the two products are as follows.
40,000.00
Mononate
Sales price per gallon at split-off $ 7.00
Sales price per gallon if processed further $ 10.00
Variable production costs if processed further $ 125,000.00
An assistant in the company’s cost accounting department was overheard saying “....that
when both joint and separable costs are considered, the firm has no business processing
either product beyond the split-off point. The extra revenue is simply not worth the
effort.” Which of the following strategies should be recommended for Oakes?
143. Jack Blaze wants to rent store space in a new shopping mall for the three month holiday
shopping season. Blaze believes he has a new product available which has the potential
for good sales. The product can be obtained on consignment at the cost of $20 per unit
and he expects to sell the item for $100 per unit. Due to other business ventures, Blaze’s
risk tolerance is low. He recognizes that, as the product is entirely new, there is an
element of risk. The mall management has offered Blaze three rental options: (1) a fixed
fee of $8,000 per month, (2) a fixed fee of $3,990 per month plus 10% of Blaze’s
revenue, or (3) 30% of Blaze’s revenues. Which one of the following actions would you
recommend to Jack Blaze?
(1) a fixed fee of $8,000 per month, (2) a fixed fee of $3,990 per mon
8000
142. Eagle Brand Inc. produces two products. Data regarding these products are presented
below.
Product X Product Y
Selling price per unit $100 $130 $ 100.00 $ 130.00
Variable costs per unit $80 $100 $ 80.00 $ 100.00
Raw materials used per unit 4 lbs. 10 lbs. 4.00 10.00
Eagle Brand has 1,000 lbs. of raw materials which can be used to produce Products X and
Y.
Which one of the alternatives below should Eagle Brand accept in order to maximize
contribution margin?
CM 20 30
CM per constraint $ 5.00 $ 3.00
Units that can be produced by the constraint 250.00 100.00
12 20
8 15 Specialty Cakes Inc. produces two
RC HS cake. Total fixed costs for the firm
CM $4.0 $5.0 the two types of cakes are presen
units 10000 15000 25000 2 lbs. 3 lbs.
40% 60% Round Cake Heart-shape Cake
$1.6 $3.0 $4.6 Selling price per unit $12 $20
Variable cost per unit $8 $15
fc $94,000.0 20,434.78 Current sales (units) 10,000 15,00
$12.0 $20.0
$8.0 $15.0 If the product sales mix were to change to three he
RC HS the breakeven volume for each of these products w
CM $4.0 $5.0
units 6250 18750 25000
25% 75%
$1.0 $3.8 $4.8
fc $94,000.0 19,789.47
138. Zipper Company invested $300,000 in a new machine to produce cones for the textile
industry. Zipper’s variable costs are 30% of the selling price, and its fixed costs are
$600,000. Zipper has an effective income tax rate of 40%. The amount of sales required
to earn an 8% after-tax return on its investment would be
137. Bargain Press is considering publishing a new textbook. The publisher has developed the
following cost data related to a production run of 6,000, the minimum possible
production run. Bargain Press will sell the textbook for $45 per copy. How many
textbooks must Bargain Press sell in order to generate operating earnings (earnings before
interest and taxes) of 20% on sales? (Round your answer up to the nearest whole
textbook.)
Estimated cost per unit
Development (reviews, class testing, editing) $35,000 $ 35,000.00
Typesetting 18,500 $ 18,500.00
Depreciation on Equipment 9,320 $ 9,320.00
General and Administrative 7,500 $ 7,500.00
Miscellaneous Fixed Costs 4,400 $ 4,400.00
Printing and Binding 30,000 $ 30,000.00 $ 5.00
Sales staff commissions (2% of selling price) 5,400 $ 5,400.00 $ 0.90
Bookstore commissions (25% of selling price) 67,500 $ 67,500.00 $ 11.25
Author’s Royalties (10% of selling price) 27,000 $ 27,000.00 $ 4.50
$ 21.65
Total costs at production of 6,000 copies $ 204,620.00
131. Wilkinson Company sells its single product for $30 per unit. The contribution margin
ratio is 45% and Wilkinson has fixed costs of $10,000 per month. If 3,000 units are sold
in the current month, Wilkinson’s income would be
CM $ 13.50
Total CM $ 40,500.00
FC $ 10,000.00
OI $ 30,500.00
150. B b. Continue operating the Oak Division as discontinuanc
decline in operating profits.
50%
-$6,000.000
149. A a. $10.
2000
40%
$100,000.0
$65,000.0
$35,000.0
$20,000.0
$15,000.0
$6,000.0
$9,000.0
Product B Total
$1,600,000.0
160,000.00
147. D d. $14.00.
30,000.00
$ 150,000.00
60,000.00
60% $ 90,000.00
$ 11.00
$ 3.00
146. D d. 40% 50% 30%
Retailing Automotive Restaurant
Restaurant Total
$ 100,000.00 $ 1,000,000.00
$ 70,000.00 $ 570,000.00
$ 30,000.00 $ 430,000.00
$ 50,000.00 $ 250,000.00
$ -20,000.00 $ 180,000.00
30% 43%
95%
Restaurant Total
$ 855,000.00
$ 475,000.00
$ - $ 380,000.00 What will Whitman’s total contribution margin be if the
$ 20,000.00 $ 250,000.00 segment is discontinued?
$ -20,000.00 $ 130,000.00 145. D d. $380,000.
#DIV/0! 44%
Mononate Beracyl
144. B b. Sell at split-off Process further.
$ 250,000.00
60,000.00 100,000.00
Beracyl
$ 15.00
$ 18.00
$ 115,000.00
$ 1.92
$ 3.00
$ 1.92
$ 1.08
180,000.00
115,000.00
65,000.00
20
100
5700
(2) a fixed fee of $3,990 per month plus 10% of Blaze’s revenue (3) 30% of Blaze’s revenues.
4560 1710
Specialty Cakes Inc. produces two types of cakes, a 2 lbs. round cake and a 3 lbs. heartshaped
cake. Total fixed costs for the firm are $94,000. Variable costs and sales data for
the two types of cakes are presented below.
2 lbs. 3 lbs.
Round Cake Heart-shape Cake
Selling price per unit $12 $20
Variable cost per unit $8 $15
Current sales (units) 10,000 15,000
les mix were to change to three heart-shaped cakes for each round cake,
olume for each of these products would be
138. B b. $914,286.
$ 300,000.00
30%
$ 600,000.00
40%
8%
6000
$ 45.00
20%
$ 74,720.00
equals the ,
miscellaneous ,
30 131. A a. $30,500
0.45 3000
10000
e Oak Division as discontinuance would result in a $6,000
Product A, utilize the remaining capacity to make Product
al contribution margin be if the Restaurant
Process further.
on no matter what Blaze expects the revenues to be.
169. Fennel Products is using cost-based pricing to determine the selling price for its new
product based on the following information.
Annual volume 25,000 units 25,000.00
Fixed costs $700,000 per year $700,000.00
Variable costs $200 per unit $200.00 $5,000,000.00
Plant investment $3,000,000 $3,000,000.00
Working capital $1,000,000 $1,000,000.00
Effective tax rate 40% 40%
The target price that Fennell needs to set for the new product to achieve a 15% after-tax
return on investment (ROI) would be
(ROI) $600,000.00
investment $4,000,000.00
168. Almelo Manpower Inc. provides contracted bookkeeping services. Almelo has annual
fixed costs of $100,000 and variable costs of $6 per hour. This year the company
budgeted 50,000 hours of bookkeeping services. Almelo prices its services at full cost
and uses a cost-plus pricing approach. The company developed a billing price of $9 per
hour. The company’s mark-up level would be
BCC’s current cost structure, based on its normal production levels, is $500 for materials
per computer and $20 per labor hour. Assembly and testing of each computer requires 17
labor hours. BCC expects to incur variable manufacturing overhead of $2 per labor hour,
fixed manufacturing overhead of $3 per labor hour, and incremental administrative costs
of $8 per computer assembled.
BCC has received a request from a school board for 200 computers. Using the full-cost
criteria and desired level of return, which one of the following prices should be
recommended to BCC’s management for bidding purposes?
Full cost
10% return on full cost.
(BCC) bid pricing.
(BCC) bid pricing per computer
163. Leader Industries is planning to introduce a new product, DMA. It is expected that
10,000 units of DMA will be sold. The full product cost per unit is $300. Invested
capital for this product amounts to $20 million. Leader’s target rate of return on
investment is 20%. The markup percentage for this product, based on operating income
as a percentage of full product cost, will be
162. The Robo Division, a decentralized division of GMT Industries, has been approached to
submit a bid for a potential project for the RSP Company.
Robo Division has been informed by RSP that they will not consider bids over $8,000,000.
Robo Division purchases its materials from the Cross Division of GMT Industries.
There would be no additional fixed costs for either the Robo or Cross Divisions.
Sell to Robo
Cross Division Robo Division
Variable Costs $1,500,000 $4,800,000 $1,500,000.00 $4,800,000.00
Transfer Price 3,700,000 - $3,700,000.00 $0.00
If Robo Division submits a bid for $8,000,000, the amount of contribution margin 8000000
recognized by the Robo Division and GMT Industries, respectively, is
Cross Division Robo Division
Price of the product sold $3,700,000.00 $8,000,000.00
VC $1,500,000.00 $8,500,000.00
CM $2,200,000.00 -$500,000.00
161. Johnson Company manufactures a variety of shoes, and has received a special one-timeonly order directly from a who
Johnson has sufficient idle capacity to accept the special order to manufacture 15,000 pairs of sneakers at a price of $7.50
Johnson’s normal selling price is $11.50 per pair of sneakers.
Variable manufacturing costs are $5.00 per pair and fixed manufacturing costs are $3.00 a pair.
Johnson’s variable selling expense for its normal line of sneakers is $1.00 per pair.
What would the effect on Johnson’s operating income be if the company accepted the special order?
If 10,000 new dolls are produced and sold, the effect on Doll House’s profit (loss) would
159. Synergy Inc. produces a component that is popular in many refrigeration systems. Data
on three of the five different models of this component are as follows.
Model
A B C
Volume needed (units) 5000 6000 3000
Manufacturing costs
Variable direct costs $10 $24 $20 $ 10.00 $ 24.00 $ 20.00
Variable overhead 5 10 15 $ 5.00 $ 10.00 $ 15.00
Fixed overhead 11 20 17 $ 11.00 $ 20.00 $ 17.00
Total manufacturing costs $26 $54 $52 $ 26.00 $ 54.00 $ 52.00
Synergy applies variable overhead on the basis of machine hours at the rate of $2.50 per hour.
Models A and B are manufactured in the Freezer Department, which has a capacity of 28,000 machine processing hours.
Which one of the following options should be recommended to Synergy's management?
a. Purchase all three products in the quantities required.
b. Manufacture all three products in the quantities required.
c. The Freezer Department's manufacturing plan should include 5,000 units of
Model A and 4,500 units of Model B.
d. The Freezer Department's manufacturing plan should include 2,000 units of
Model A and 6,000 units of Model B.
158. Green Corporation builds custom-designed machinery. A review of selected data and the company’s pricing policies re
Green recently received an invitation to bid on the manufacture of some custom machinery for Kennendale, Inc.
For this project, Green’s production accountants estimate the material and labor costs will be $66,000 and $120,000, respe
$66,000.00 $120,000.00
Accordingly, Green submitted a bid to Kennendale in the amount of $375,000. Feeling Green’s bid was too high, Kennendal
DM $66,000.00
DL $120,000.00
VOH $ 48,000.00
FOH $ 24,000.00
Admin $12,000.00
Full cost $270,000.00
25% mark $67,500.00 25%
$337,500.00 375000 $37,500.00
• A 10% commission is paid on all sales orders.
$37,500.00 10%
Accordingly, Green submitted a bid to Kennendale in the amount of $375,000 375000
$375,000.00
a. Accept the counteroffer because the order will increase operating income.
157. Jones Enterprises manufactures 3 products, A, B, and C. During the month of May
Jones’ production, costs, and sales data were as follows.
Products
A B C
Units of production 30,000.00 20,000.00 70,000.00
Joint production costs to split-off point $480,000
Further processing costs $ - $60,000 $140,000 $ - $ 60,000.00 $ 140,000.00
Further processing cost $ 3.00 $ 2.00
Unit sales price
At split-off 3.75 5.50 10.25 $ 3.75 $ 5.50 $ 10.25
After further processing - 8.00 12.50 $ - $ 8.00 $ 12.50
$ 5.00 $ 10.50
INCREMENTAL PROFIT $ (0.50) $ 0.25
Based on the above information, which one of the following alternatives should be recommended to Jones’ management?
156. Basic Computer Company (BCC) sells its micro-computers using bid pricing. It develops bids on a full cost basis.
Full cost includes estimated material, labor, variable overheads, fixed manufacturing overheads, and reasonable increment
BCC believes bids in excess of $925 per computer are not likely to be considered. 925
BCC’s current cost structure, based on its normal production levels, is $500 for materials per computer and $20 per labor h
Assembly and testing of each computer requires 12 labor hours.
BCC’s variable manufacturing overhead is $2 per labor hour, fixed manufacturing overhead is $3 per labor hour, and increm
The company has received a request from the School Board for 500 computers. BCC’s
management expects heavy competition in bidding for this job. As this is a very large
order for BCC, and could lead to other educational institution orders, management is
extremely interested in submitting a bid which would win the job, but at a price high
enough so that current net income will not be unfavorably impacted. Management
believes this order can be absorbed within its current manufacturing facility. Which one
of the following bid prices should be recommended to BCC’s management?
Full cost
10% return on full cost.
(BCC) bid pricing.
(BCC) bid pricing per computer
153. Lazar Industries produces two products, Crates and Boxes. Per unit selling prices, costs,
and resource utilization for these products are as follows.
Crates Boxes
Selling price $20 $30 $20.00 $30.00
Direct material costs $ 5 $ 5 2.5 $5.00 $5.00
Direct labor costs 8 10 $8.00 $10.00
Variable overhead costs 3 5 $ 5.25 $3.00 $5.00 VOH
Variable selling costs 1 2 $1.00 $2.00
Machine hours per unit 2 4 3.50 2.00 4.00
Production of Crates and Boxes involves joint processes and use of the same facilities.
The total fixed factory overhead cost is $2,000,000 and total fixed selling and administrative costs are $840,000.
Production and sales are scheduled for 500,000 units of Crates and 700,000 units of Boxes.
Lazar maintains no direct materials, work-inprocess, or finished goods inventory.
Lazar can reduce direct material costs for Crates by 50% per unit, with no change in direct labor costs.
However, it would increase machine-hour production time by 1-1/2 hours per unit. 1.50
For Crates, variable overhead costs are allocated based on machine hours.
What would be the effect on the total contribution margin if this change was implemented?
Before
CM $3.00 1,500,000.00
CM per constraint. $1.50
After
CM $3.25 1,625,000.00
CM per constraint. $0.93 125,000.00
Make
Direct materials $ 7 $7.00 7
Direct labor 12 $12.00 12
Variable overhead 5 $5.00 5
Fixed overhead 10 $10.00 6
Total costs $34 $34.00 $30.00
$30.00
$600,000.00
Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit.
If Refrigerator accepts Cool Compartments’ offer, the facilities used to manufacture ice-makers could be used to produce w
Revenues from the sale of water filtration units are estimated at $80,000, with variable costs amounting to 60% of sales.
In addition, $6 per unit of the fixed overhead associated with the manufacture of ice-makers could be eliminated.
For Refrigerator Company to determine the most appropriate action to take in this
situation, the total relevant costs of make vs. buy, respectively, are
c. $600,000 vs. $528,000.
151. Aspen Company plans to sell 12,000 units of product XT and 8,000 units of product RP.
Aspen has a capacity of 12,000 productive machine hours. 12000
The unit cost structure and machine hours required for each product is as follows.
12000 8000
Unit Costs XT RP
Materials $37 $24 $37.00 $24.00
Direct labor 12 13 $12.00 $13.00
Variable overhead 6 3 $6.00 $3.00
Fixed overhead 37 38 $37.00 $38.00
Machine hours required 1.0 1.5 1 1.5
VC $55.00 $40.00
Machine hours required 12,000.00 12,000.00
Aspen can purchase 12,000 units of XT at $60 and/or 8,000 units of RP at $45. Based on the above, which one of the follow
169. D d. $268.
a. $228.
b. $238.
c. $258.
d. $268.
15%
168. A a. 12.5%.
100000 6
50000
9
165. D d. $1,026.30.
10%
200
$100,000.00
$68,000.00
$6,800.00
$10,200.00
$1,600.00
$186,600.00
$18,660.00
$205,260.00
$1,026.30
163. C c. 133.3%.
10,000.00 $300.00 $20,000,000.00
20%
162. C c. $(500,000) and $1,700,000
GMT Industries
$11,700,000.00
$10,000,000.00
$1,700,000.00 $1,700,000.00
10000
Should be answered by
elimination
$ 2.50
achine processing hours. 28,000.00
158. A
mpany’s pricing policies revealed the following.
10%
40% 20%
10%
costs to cover income taxes and produce a profit. 25%
40%
80%
Kennendale, Inc.
6,000 and $120,000, respectively.
$234,000.00
$ 48,000.00 $ 24,000.00
$12,000.00
costs to cover income taxes and produce a profit. $ 84,000.00
157. C c. Process Product C further but sell Product B at the split-off point.
TOTAL
120,000.00
$ 480,000.00
ed to Jones’ management?
156. B b. $772.00.
on a full cost basis.
and reasonable incremental computer assembly administrative costs, plus a 10% return on full cost.
per labor hour, and incremental administrative costs are $8 per computer assembled.
0.1
500
$250,000.00
$120,000.00
$12,000.00
$18,000.00
$4,000.00
$404,000.00 VC $386,000.00
$40,400.00 $0.00
$444,400.00 $386,000.00
$888.80 $772.00
Buy
28
$28.00
-$1.60
$26.40
$528,000.00
The company's underapplied overhead equals $133,000 . On the basis of this information, Elk's cost of goods sold is most a
a. $987,000.
b. $1,213,100. 98000
c. $1,218,000. $ 1,218,000.00
d. $1,253,000.
SANS COM Corporation utilizes an activity - based costing system for applying costs to its two products, P an
the assembly department, material handling costs vary directly with the number of parts inserted into the p
Machinery is recalibrated and oiled each weekend regardless of the number of parts inserted during the pre
week. Both material handling and machinery maintenance costs are charged to the product on the basis of t
number of parts inserted. Due to reengineering of the production process for Product P, the number of inse
parts per finished unit has been reduced. How will the redesign of the production process for Product P affe
activity-based cost of Product Q?
Assembly department
P
number of parts inserted into the product 100
Allocated Material Handling costs (No. of parts) $ 8,500.00
Allocated machinery maintenance costs (fixed cost) $ 15,000.00
$ 23,500.00
Material Handling costs per unit $ 85.00
machinery maintenance costs per unit $ 150.00
Due to reengineering of the production process for Product P
the number of insertion parts per finished unit has been reduced.
Material Handling costs (No. of parts) $ 85.00 per part
machinery maintenance costs (fixed cost) $ 30,000.00 in total $ 171.43
Assembly department
P
number of parts inserted into the product 75
Allocated Material Handling costs (No. of parts) $ 6,375.00
Allocated machinery maintenance costs (fixed cost) $ 12,857.14
$ 19,232.14
Material Handling costs per unit $ 85.00
machinery maintenance costs per unit $ 171.43
c. Material handling cost per Q unit will remain unchanged, and machinery maintenance cost per Q
133000
on, Elk's cost of goods sold is most appropriately reported as
Cost Driver
(No. of parts)
(No. of parts)
mbly department
Q Total number of parts inserted into the product
100 200
$ 8,500.00
$ 15,000.00
$ 23,500.00
$ 85.00
$ 150.00
mbly department
Q
100 175
$ 8,500.00
$ 17,142.86
$ 25,642.86
$ 85.00
$ 171.43
If Adam uses the direct method to allocate support department costs to production
departments, the total overhead (rounded to the nearest dollar) for the Machining
Department to allocate to its products would be
165. Logo Inc. has two data services departments (the Systems Department and the Facilities
Department) that provide support to the company’s three production departments
(Machining Department, Assembly Department, and Finishing Department). The
overhead costs of the Systems Department are allocated to other departments on the basis
of computer usage hours. The overhead costs of the Facilities Department are allocated
based on square feet occupied (in thousands). Other information pertaining to Logo is as
follows.
Computer
Department Overhead Usage Hours
Systems $200,000 300
Facilities $100,000 900
Machining $400,000 3600
Assembly $550,000 1800
Finishing $620,000 2700
9300
Logo employs the step-down method of allocating service department costs and begins
with the Systems Department. Which one of the following correctly denotes the amount
of the Systems Department’s overhead that would be allocated to the Facilities
Department and the Facilities Department’s overhead charges that would be allocated to
the Machining Department?
Systems to Facilities
the % ofsys costs that should be allocated to facil 10.0% $20,000
163. Adam Corporation manufactures computer tables and has the following budgeted indirect
manufacturing cost information for next year.
If Adam uses the step-down method, beginning with the Maintenance Department, to
allocate support department costs to production departments, the total overhead (rounded
to the nearest dollar) for the Machining Department to allocate to its products would be
162. Logo Inc. has two data services departments (the Systems Department and the Facilities
Department) that provide support to the company’s three production departments
(Machining Department, Assembly Department, and Finishing Department). The
overhead costs of the Systems Department are allocated to other departments on the basis
of computer usage hours. The overhead costs of the Facilities Department are allocated
based on square feet occupied (in thousands). Other information pertaining to Logo is as
follows.
Computer
Department Overhead Usage Hours
Systems $200,000 300
Facilities $100,000 900
Machining $400,000 3600
Assembly $550,000 1800
Finishing $620,000 2700
9300
If Logo employs the direct method of allocating service department costs, the overhead of
the Systems Department would be allocated by dividing the overhead amount by
8100
156. Atmel Inc. manufactures and sells two products. Data with regard to these products are
given below.
Product A
Total budgeted machine hours are 100,000. The budgeted overhead costs are shown below.
The cost driver for engineering costs is the number of production orders per product
line. Using activity-based costing, the engineering cost per unit for Product B would be
152. Patterson Corporation expects to incur $70,000 of factory overhead and $60,000 of
general and administrative costs next year. Direct labor costs at $5 per hour are expected
to total $50,000. If factory overhead is to be applied per direct labor hour, how much
overhead will be applied to a job incurring 20 hours of direct labor?
OH $70,000
Hours 10,000
rate $7
Applied $140
151. Cynthia Rogers, the cost accountant for Sanford Manufacturing, is preparing a
management report which must include an allocation of overhead. The budgeted
overhead for each department and the data for one job are shown below.
Department
Tooling
Supplies $ 690 $ 80 $690
Supervisor's salaries 1,400 1,800 $1,400
Indirect labor 1,000 4,000 $1,000
Depreciation 1,200 5,200 $1,200
Repairs 4,400 3,000 $4,400
Total budgeted overhead $8,690 $14,080 $8,690
Total direct labor hours 440 640 440
Direct labor hours on Job #231 10 2 10
Using the departmental overhead application rates, and allocating overhead on the basis
of direct labor hours, overhead applied to Job #231 in the Tooling Department would be
OH $8,690
Hours 440
rate $19.75
Applied $197.50
Departments
Tooling
Supplies $ 850 $ 200 $850
Supervisors' salaries 1,500 2,000 $1,500
Indirect labor 1,200 4,880 $1,200
Depreciation 1,000 5,500 $1,000
Repairs 4,075 3,540 $4,075
Total budgeted overhead $8,625 $16,120 $8,625
Total direct labor hours 460 620 460
Direct labor hours on Job #231 12 3 12
Using the departmental overhead application rates, total overhead applied to Job #231
in the Tooling and Fabricating Departments will be
Tooling
rate $19
Applied $225
Fabricating
rate $26
Applied $78
149. Baldwin Printing Company uses a job order costing system and applies overhead based
on machine hours. A total of 150,000 machine hours have been budgeted for the year.
During the year, an order for 1,000 units was completed and incurred the following
The accountant calculated the inventory cost of this order to be $4.30 per unit. The
annual budgeted overhead in dollars was
Numerator
denmenator $150,000
143. Atmel Inc. manufactures and sells two products. Data with regard to these products are
given below.
Product A
Total budgeted machine hours are 100,000. The budgeted overhead costs are shown below.
Using activity-based costing, the per unit overhead cost allocation of receiving costs
for product A is $112,500
$3.75
142. The Chocolate Baker specializes in chocolate baked goods. The firm has long assessed
the profitability of a product line by comparing revenues to the cost of goods sold.
However, Barry White, the firm’s new accountant, wants to use an activity-based costing
system that takes into consideration the cost of the delivery person. Listed below are
activity and cost information relating to two of Chocolate Baker’s major products.
Muffins
Revenue $53,000 $46,000 $53,000
Cost of goods sold 26,000 21,000 $26,000
Delivery Activity
Number of deliveries 150 85 150
Average length of delivery 10 Minutes 15 Minutes 10
Cost per hour for delivery $20.00 $20.00 $20
Cost per Minute for delivery 0.333333333
$26,500
50%
141. Pelder Products Company manufactures two types of engineering diagnostic equipment
used in construction. The two products are based upon different technologies, x-ray and
ultra-sound, but are manufactured in the same factory. Pelder has computed the
manufacturing cost of the x-ray and ultra-sound products by adding together direct
materials, direct labor, and overhead cost applied based on the number of direct labor
hours. The factory has three overhead departments that support the single production line
that makes both products. Budgeted overhead spending for the departments is as follows.
Department
Engineering design Material handling
$6,000 $5,000
Pelder’s budgeted manufacturing activities and costs for the period are as follows
Activity X-Ray
Units produced and sold 50 100 50
Direct materials used $5,000 $8,000 $5,000
Direct labor hours used 100 300 $100
Direct labor cost $4,000 $12,000 $4,000
Number of parts used 400 600 400
Number of engineering changes 2 1 2
Number of product setups 8 7 8
The budgeted cost to manufacture one ultra-sound machine using the activity-based
costing method is
ABC Rates ultra-sound
Engineering design $2,000 2,000
Material handling $5 3,000
Setup $200 1,400
total cost $26,400
per unit $264
With respect to Material B, the ending shirms in process represent how many equivalent units?
138. Jones Corporation uses a first-in, first-out (FIFO) process costing system. Jones has the
following unit information for the month of August.
The number of equivalent units of production for conversion costs for the month of
August is
Step 2: compute Equivalent Units of Production
EUP Computation under FIFO (If materials are added as work in process (continually):
Material Conversion
135. San Jose Inc. uses a weighted-average process costing system. All materials are
introduced at the start of manufacturing, and conversion cost is incurred evenly
throughout production. The company started 70,000 units during May and had the
following work-in-process inventories at the beginning and end of the month.
Assuming no spoilage or defective units, the total equivalent units used to assign costs for
May are
All materials are introduced at the start of the manufacturing process, and conversion cost
is incurred uniformly throughout production. Conversations with plant personnel reveal
that, on average, month-end in-process inventory is 25% complete. Assuming no
spoilage, how should Oster’s October manufacturing cost be assigned?
Completed
M 60000
C 60000
Colt Company uses a weighted-average process cost system to account for the cost of
producing a chemical compound. As part of production, Material B is added when the
goods are 80% complete.
Beginning work-in-process inventory for the current month was 20,000 units, 90% complete.
During the month, 70,000 units were started in process,
and 65,000 of these units were completed. There were no lost or spoiled units. If the
ending inventory was 60% complete, the total equivalent units for Material B for the
month was
132. Southwood Industries uses a process costing system and inspects its goods at the end of
manufacturing. The inspection as of June 30 revealed the following information for the
month of June.
Southwood Industries uses a process costing system and inspects its goods at the end of
manufacturing. The inspection as of June 30 revealed the following information for the
month of June.
Good units completed 16,000 16000
Normal spoilage (units) 300
Abnormal spoilage (units) 100
Unit costs were: materials, $3.50; and conversion costs, $6.00. The number of units that
Southwood would transfer to its finished goods inventory and the related cost of these
M CONV
Beginning WIP XX
Started Units this period XX $3.5 $6.0
$3.5 $6.0
Total Units to Account for 16000 0
1. Finished or Transferred-out Good 16000 $152,000.0
2. Ending WIP
3. NormalSpoilage (lost) 300 $2,850.0 product cost
4. Abnormal Spoilage (lost) 100 $950 period cost
The number of units that Southwood would transfer to its finished goods inventory and the related cost of these
16000
128. Fashion Inc. manufactures women’s dresses using cotton and polyester. Since the same
style dresses are made out of both fabrics, Fashions uses operation costing.
The cost per unit to manufacture one polyester dress during June was
M C
$22,500 $13,300.0
units 1500 1900
per unit $15 $7 $22
Mack Inc. uses a weighted-average process costing system. Direct materials and
conversion costs are incurred evenly during the production process. During the month of
October, the following costs were incurred.
Direct materials $39,700
Conversion costs 70,000
The work-in-process inventory as of October 1 consisted of 5,000 units, valued at $4,300,
that were 20% complete. During October, 27,000 units were transferred out. Inventory
as of October 31 consisted of 3,000 units that were 50% complete. The weighted-average
inventory cost per unit completed in October was
During December, Krause Chemical Company had the following selected data
concerning the manufacture of Xyzine, an industrial cleaner.
Production Flow Physical Units
Completed and transferred to the next department 100
Add: Ending work-in-process inventory 10 (40% complete as
to conversion)
Total units to account for 110
Less: Beginning work-in-process inventory 20 (60% complete as
to conversion)
Units started during December 90
All material is added at the beginning of processing in this department, and conversion
costs are added uniformly during the process. The beginning work-in-process inventory
had $120 of raw material and $180 of conversion costs incurred. Material added during
December was $540 and conversion costs of $1,484 were incurred. Krause uses the
weighted-average process-costing method. The total raw material costs in the ending
work-in-process inventory for December is
M CONV
Beginning WIP XX 20 60% conv $120 $180
Started Units this period X 90 $540 $1,484
$660 $1,664
Total Units to Account for 110 110
M conv
Ü EUP under weighted average costing may be computed as follows:
Total Units Completed this period XX 100 100
Work to date on Ending WIP XX 10 4
_____
EUP under weighted average XXXX 110 104
6.00 16.00
The total raw material costs in the ending work-in-process inventory for Dece 60.00
Southwood Industries uses a process costing system and inspects its goods at the end of
manufacturing. The inspection as of June 30 revealed the following information for the
month of June.
Good units completed 16,000 16000
Normal spoilage (units) 300
Abnormal spoilage (units) 100
Unit costs were: materials, $3.50; and conversion costs, $6.00. The number of units that
Southwood would transfer to its finished goods inventory and the related cost of these
M CONV
Beginning WIP XX
Started Units this period XX $3.5 $6.0
$3.5 $6.0
Total Units to Account for 16000 0
The number of units that Southwood would transfer to its finished goods inventory and the related cost of these
16000
Colt Company uses a weighted-average process cost system to account for the cost of
producing a chemical compound. As part of production, Material B is added when the
goods are 80% complete. Beginning work-in-process inventory for the current month
was 20,000 units, 90% complete. During the month, 70,000 units were started in process,
and 65,000 of these units were completed. There were no lost or spoiled units. If the
ending inventory was 60% complete, the total equivalent units for Material B for the
month was
M CONV
Beginning WIP XX 20000 90%
Started Units this period X 70000
$0.0 $0.0
Total Units to Account for 90000 90000
M conv
Ü EUP under weighted average costing may be computed as follows:
Total Units Completed this period XX 65000 65000
Work to date on Ending WIP XX 0 15000
_____
EUP under weighted average XXXX 65000 80000
123. Tempo Company produces three products from a joint process. The three products are
sold after further processing as there is no market for any of the products at the split-off
point. Joint costs per batch are $315,000. Other product information is shown below.
Product A Product B
Units produced per batch 20000 30000
Further processing and marketing cost per unit $0.70 $3.00
Final sales value per unit $5.00 $6.00
If Tempo uses the net realizable value method of allocating joint costs, how much of the
joint costs will be allocated to each unit of Product C?
112. Consider the following situation for Donaldson Company for the prior year.
• The company produced 1,000 units and sold 900 units, both as budgeted. 1000
• There were no beginning or ending work-in-process inventories and no
beginning finished goods inventory.
• Budgeted and actual fixed costs were equal, all variable manufacturing costs
are affected by volume of production only, and all variable selling costs are
affected by sales volume only.
• Budgeted per unit revenues and costs were as follows.
Per Unit
Sales price $100 $100.00
Direct materials 30 $30.00
Direct labor 20 $20.00
Variable manufacturing costs 10 $10.00
Fixed manufacturing costs 5 $5.00
Variable selling costs 12 $12.00
Fixed selling costs ($3,600 total) 4 $4.00
Fixed administrative costs ($1,800 total) 2 $2.00
Assuming that Donaldson uses variable costing, the operating income for the prior year
was
109. Merlene Company uses a standard cost accounting system. Data for the last fiscal year
are as follows
Units
Per Unit
Product selling price $200 $200.00
Standard variable manufacturing cost 90 $90.00
Standard fixed manufacturing cost 20* $20.00
There were no price, efficiency, or spending variances for the year, and actual selling and
administrative expenses equaled the budget amount. Any volume variance is written off
to cost of goods sold in the year incurred. There are no work-in-process inventories.
The amount of operating income earned by Merlene for the last fiscal year using variable
costing was
Variable Variable
manufacturing cost marketing cost
$5.00 $3.50
A total of 100,000 units were manufactured during June of which 10,000 remain in
ending inventory. Chassen uses the first-in, first-out (FIFO) inventory method, and the
10,000 units are the only finished goods inventory at month-end. Using the full
absorption costing method, Chassen's finished goods inventory value would be $70,000.00
87. Fowler Co. provides the following summary of its total budgeted production costs at
three production levels.
Volume in Units
1000 1500 2000
Cost A $1,420.00 $1.42 $2,130.00 $1.42 $2,840.00
Cost b $1,550.00 $1.55 $2,200.00 $1.47 $2,900.00
Cost c $1,000.00 $1.00 $1,000.00 $0.67 $1,000.00
Cost d $1,630.00 $1.63 $2,445.00 $1.63 $3,260.00
81. A review of Plunkett Corporation’s accounting records for last year disclosed the
following selected information
Variable costs
Direct materials used $ 56,000 $56,000.00
Direct labor 179,100 $179,100.00
Manufacturing overhead 154,000 $154,000.00
Selling costs 108,400 $108,400.00
Fixed costs
Manufacturing overhead 267,000 $267,000.00
Selling costs 121,000 $121,000.00
Administrative costs 235,900 $235,900.00
In addition, the company suffered a $27,700 uninsured factory fire loss during the year.
What were Plunkett’s product costs and period costs for last year?
Product Period
$656,100.00 $493,000.00
80. Kimber Company has the following unit cost for the current year
Fixed manufacturing cost is based on an annual activity level of 8,000 units. Based on
these data, the total manufacturing cost expected to be incurred to manufacture 9,000
units in the current year is
$615,000.00
166. D d. $445,000
40% 100%
50% 100%
165. D
d. $20,000 $24,000.
Square Feet
Occupied
1000
600
2000
3000
5000
11600
Facilities to Machining
$20,000
$100,000
$120,000
20% $24,000
163. C c. $442,053.
40% 100%
50% 100%
156. C c. $15.00.
Product B total
12000 42000
3 5
150 200
18 30
30 50
100000
30 $10,000
$180,000
$15
$70,000 $60,000 152. C c. $140.
$5
$50,000
20.00
151. B b. $197.50
Fabricating
$80
$1,800
$4,000
$5,200
$3,000
$14,080
640
2
150. B b. $303.
Fabricating
$200
$2,000
$4,880
$5,500
$3,540
$16,120
620
3
149. B b. $600,000
$150,000
1000
4.3
a. $3.75 143. A
Product B total
12000 42000
3 5
150 200
18 30
30 50
100,000
200 $2,250
30 $10,000
142. C
Cheesecake
$46,000
$21,000
85
15
$20
0.33333333
1275
425
141. B b. $264.
Setup Total
$3,000 $14,000
Product
Ultra-Sound
100
$8,000
$300
$12,000
600 1,000
1 3
7 15
139. B b. 8,800 units.
e units are 20% completed, and the remaining 60% of Material B is added when the units are 80% completed.
22000
138. A a. 87,300.
Units
10000
90000
8000
135. D d. 100,000 82,000
70000
onversion Cost
134. C c. $1,155,000 $235,000
M C
$740,000 $650,000
the total cost of the material should be allocated between the completed units and WIP based on the % of un
so, we have to calculate the no. of units in WIP
$9.5
elated cost of these
$154,850.0
128. C c. $22.00.
1000
ng of the process.
mplete by the end of the month. 900
1900
126. D d. $4.00.
Total Units Completed this period XX
Current cost Work to date on Ending WIP XX
DM $39,700 _____
Conv $70,000 EUP under weighted average XXXX
$109,700
$114,000
127. C c. $60.
132. B b. 16,000 $154,850
Units Transferred Cost
$9.5
123. D d $3.78.
$315,000
Product C
50000
$1.72
$7.00
$264,000.00 $440,000.00
60.00%
$189,000.00 $315,000.00
50000
$3.78
112. C c. $14,800
900 100
$5,000.00
$3,600.00
$1,800.00
Simple
solution
dremmon
Fixed Fixed
manufacturing cost marketing cost
$2.00 $4.00
100000
10000
$1.42 VC
$1.45 SV Fixed cost fixed in total &
$0.50 FC variable cost fixed per unit
$1.63 VC
$27,700.00
80. C c. $615,000.
8000
9000
c. $442,053.
nits and WIP based on the % of units
ed this period XX 27000
ding WIP XX 1500
_____
d average XXXX 28500
$4.0
U
Collection Pattern for Credit Sales
Month of sale 30%
One month following sale 40%
Second month following sale 25%
Karmee’s cost of goods sold averages 40% of the sales value. Karmee’s objective is to maintain a target inventory equal to 30
in units. Purchases of merchandise for resale are paid for in the month following the sale.
Budget Information
Total Cash receipt cash 120,000.0 130,000.0 140,000.0 125,000.0 144,000.0
30% cr 144,000.0 156,000.0 168,000.0 150,000.0 172,800.0
40%cr 192,000.00 208,000.00 224,000.00 200,000.00
25%cr 120,000.00 130,000.00 140,000.00
june
800,000
160,000
640,000
448,000
320,000
96,000
224,000
-
(96,000.0)
80,000.0
(72,000.0)
-60000
-90000
-150000
160,000.0
192,000.0
230,400.00
125,000.00
707,400.00
The Raymar Company example
The firm has established a $200,000 line of credit with its bank at a 12% annual rate of interest on which borrowin
deficits must be made in $10,000 increments. There is no outstanding balance on the line of credit loan on April 1
repayments are to be made in any month in which there is a surplus of cash.
Interest is to be paid monthly. If there are no outstanding balances on the loans, Raymar will invest any cash in ex
desired end-of-month cash balance in U.S. Treasury bills. Raymar intends to maintain a minimum balance of $100
of each month by either borrowing for deficits below the minimum balance or investing any excess cash. Expected
collection and disbursement patterns are shown in the column to the right.
• Collections. 50% of the current month’s sales budget and 50% of the previous month’s sales budget.
• Accounts payable disbursements. 75% of the current month’s accounts payable budget and 25% of the
previous month’s accounts payable budget.
• All other disbursements occur in the month in which they are budgeted.
Budget Information
sales budget.
t and 25% of the
1. Account for all units (physical flow of quantities).
or = 116,000.00
ferred-out Goods 92,000.00
24,000.00
153,168.00
n-process inventory at May 31 is
als for May is
st for May is
Gregg Industries manufactures molded chairs. The three models of molded chairs, which are all variations of the same des
are Standard (can be stacked), Deluxe (with arms), and Executive (with arms and padding). The company uses batch
manufacturing and has an operation costing system.
Gregg has an extrusion operation and subsequent operations to form, trim, and finish the chairs.
Plastic sheets are produced by the extrusion operation, some of which are sold directly to other manufacturers.
During the forming operation, the remaining plastic sheets are molded into chair seats and the legs are added; the standar
During the trim operation, the arms are added to the deluxe and executive models and the chair edges are smoothed.
Only the executive model enters the finish operation where the padding is added.
All of the units produced are subject to the same steps within each
operation, and no units are in process at the end of the period. The units of production and direct materials costs were as f
Plastic sheets are produced by the During the forming operation, the remaining
extrusion operation, some of which plastic sheets are molded into chair seats and
are sold directly to other the legs are added; the standard model is sold
manufacturers. after this operation.
A standard model passes through the extrusion and form operations. Thus, its unit cost includes the
materials and conversion costs for both operations. The unit materials and conversion costs for the extrusion
operation are $12.00 ($192,000 ÷ 16,000 units) and $24.50 [($152,000 + $240,000) ÷ 16,000 units], respectively. The
unit materials and conversion costs for the form operation are $4.00 [$44,000 ÷ (16,000 – 5,000) units] and $12.00
[($60,000 + $72,000) ÷ (16,000 – 5,000) units], respectively. Accordingly, the unit cost of a standard model is $52.50
($12.00 + $24.50 + $4.00 + $12.00).
A standard model passes through the extrusion and form operations. Thus, its unit cost includes the
materials and conversion costs for both operations. The unit materials and conversion costs for the extrusion
operation are $12.00 ($192,000 ÷ 16,000 units) and $24.50 [($152,000 + $240,000) ÷ 16,000 units], respectively. The
unit materials and conversion costs for the form operation are $4.00 [$44,000 ÷ (16,000 – 5,000) units] and $12.00
[($60,000 + $72,000) ÷ (16,000 – 5,000) units], respectively. Accordingly, the unit cost of a standard model is $52.50
($12.00 + $24.50 + $4.00 + $12.00).
Total DM 50,000.00
Total Conv. $142,600.00
Total cost $192,600
An executive model passes through all four operations. Thus, its unit cost equals that of the deluxe model plus the
unit costs incurred in the finish operation. The unit cost of the deluxe model is $69.30. The unit materials and
conversion costs for the finish operation are $6.00 [$12,000 ÷ (16,000 – 14,000) units] and $21.00 [($18,000 + $24,000)
÷ (16,000 – 14,000) units], respectively. Consequently, the unit cost of the executive model is $96.30 ($69.30 + $6.00 +
$21.00), and the total product cost is $192,600 (2,000 units × $96.30).
r manufacturers.
legs are added; the standard model is sold after this operation.
ir edges are smoothed.
Trim Finish
Materials Materials
$9,000
$6,000 $12,000
$15,000.00 $12,000.00
5,000.00 2,000.00
$3.00 $6.00
ation, the remaining During the trim operation, the arms are
into chair seats and added to the deluxe and executive Only the executive model enters
andard model is sold models and the chair edges are the finish operation where the
eration. smoothed. padding is added.
Trim Finish
Operation Operation
$30,000 $18,000
$39,000 $24,000
$69,000 $42,000
5,000.00 2,000.00
$13.80 $21.00
EUP 4600
cost 15.00
per unit
units 100,000
Direct materials $200,000 $2.00
Direct labor $100,000 $1.00
V.Manufacturing overhead $100,000 $1.00
F.Manufacturing overhead $100,000
Selling and administrative expense $50,000 $0.50
F.Selling and administrative expense $100,000
V.Manuf. $4.00
F.manf $100,000
V.SGA $0.50
F.SGA $100,000
The total costs to produce and sell 110,000 units for the year are
110000 $695,000.00
$370,000
CoGs Total
Beg.RM 67,000
Add: Purchase 163,000
Less : Returns and discounts 2,000
Net Purchase 161,000
Add: Freight-in 4,000
RM Available for use 232,000
Less : End.RM 62,000
DM used in Production 170,000
DL 200,000 370,000
MOH 140,000
Total manufacturing costs for the period 510,000
Add: Beg. WIP 145,000
Less: End. WIP 171,000
Costs of goods Manufacturing 484,000
Add: Beg.Finished 85,000
Goods Available for sale 569,000
Less: End. Finished 78,000
Costs of goods Sold 491,000
Lucy Sportswear manufactures a specialty line of T-shirts using a job-order costing system. During March, the following
costs were incurred in completing job ICU2: direct materials, $13,700; direct labor, $4,800; administrative, $1,400; and
selling, $5,600. Overhead was applied at the rate of $25 per machine hour, and job ICU2 required 800 machine hours. If
job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be
CoGs Total
Beg.RM 13,700
Add: Purchase
Less : Returns and discounts
Net Purchase -
Add: Freight-in
RM Available for use 13,700
Less : End.RM
DM used in Production 13,700
DL 4,800
MOH 20,000
Total manufacturing costs for the period 38,500
Add: Beg. WIP -
Less: End. WIP -
Costs of goods Manufacturing 38,500
Add: Beg.Finished
Goods Available for sale 38,500
Less: End. Finished
Costs of goods Sold 38,500 7000
Under a costing system that allocates overhead on the basis of direct labor hours, Zeta Company’s materials handling cos
allocated to one unit of wall mirrors would be
allocated to 25 25000
allocated to one unit $1,000
Under activity-based costing (ABC), Zeta’s materials handling costs allocated to one unit of wall mirrors would be
allocated to 25 12500
allocated to one unit $500
New-Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products
at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to
distribute quality control costs more equitably, New-Rage is considering activity-based costing. The monthly data shown
in the chart below have been gathered for Satin Sheen makeup.
administrative
Madtack Company’s prime cost for November is
Madtack Company’s cost of goods transferred to finished goods inventory for November is
mirrors would be
Per Unit
Product selling price $200 $200
Standard variable manufacturing cost 90 $90
Standard fixed manufacturing cost 20* $20
$110
Budgeted selling and administrative costs (all fixed) $45,000 45,000
*Denominator level of activity is 750 units for the year. 750
Absorb.
sales rev $150,000
Cost of Goods Sold
Beginning inventory $11,000
Variable manufacturing costs $63,000
Fixed manufacturing costs $14,000
Cost for goods available for sale $88,000
deduct ending inventory $5,500
Total COGS(at standard costs) $82,500
Adjustment for manufacturing variances $1,000
Total COGS $83,500
Gross Margin $66,500
Operating cost $45,000
Operating income $21,500
There were no price, efficiency, or spending variances for the year, and actual selling and
administrative expenses equaled the budget amount. Any volume variance is written off
to cost of goods sold in the year incurred. There are no work-in-process inventories.
Assuming that Dremmon used absorption costing, the amount of operating income earned
in the last fiscal year was $21,500
Bethany Company has just completed the first month of producing a new product but has
not yet shipped any of this product. The product incurred variable manufacturing costs of
$5,000,000, fixed manufacturing costs of $2,000,000, variable marketing costs of
$1,000,000, and fixed marketing costs of $3,000,000.
If Bethany uses the variable cost method to value inventory, the inventory value of the
new product would be
$5,000,000
Consider the following situation for Weisman Corporation for the prior year.
• The company produced 1,000 units and sold 900 units, both as budgeted.
• There were no beginning or ending work-in-process inventories and no beginning
finished goods inventory.
• Budgeted and actual fixed costs were equal, all variable manufacturing costs are
affected by volume of production only, and all variable selling costs are affected
by sales volume only.
• Budgeted per unit revenues and costs were as follows.
The operating income for Weisman for the prior year using absorption costing was
Absorb.
sales rev $90,000
Cost of Goods Sold
Beginning inventory
Variable manufacturing costs $60,000
Fixed manufacturing costs $5,000
Cost for goods available for sale $65,000
deduct ending inventory $6,500
Total COGS(at standard costs) $58,500
Adjustment for manufacturing variances $0
Total COGS $58,500
Gross Margin $31,500
Operating cost $16,200
Operating income $15,300
Mill Corporation had the following unit costs for the recently concluded calendar year.
Variable Fixed
Manufacturing $8 $3
Nonmanufacturing $2 $6
Inventory for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on
December 31. When compared to variable costing income, Mill’s absorption costing
income is
$2,400 Lower
During the month of May, Robinson Corporation sold 1,000 units. The cost per unit for
May was as follows.
May’s income using absorption costing was $9,500. The income for May, if variable
costing had been used, would have been $9,125. The number of units Robinson
produced during May was 1,250
[Fact Pattern #36] The planned per-unit cost figures sh
Valyn Corporation employs an absorption costing system for
internal reporting purposes; however, the company is
considering using variable costing. Data regarding Valyn’s Direct materials
planned and actual operations for the calendar year are Direct labor
presented below. Variable manufacturing
overhead
Fixed manufacturing
overhead
Variable selling expenses
Fixed selling expenses
Planned Actual Variable administrative
Activity Activity expenses
Beginning finished goods Fixed administrative
inventory in units 35,000 35,000 expenses
Sales in units 140,000 125,000 Total
Production in units 140,000 130,000
endning finished goods 40,000
inventory in units
Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a com
purposes. Any over- or underapplied manufacturing overhead is closed to the cost of goods sold account at the end of the
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s planned unit
planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. T
planned and actual unit selling price for the current year was $ 70.00 per unit.
Sales in units
Production in units
Budgeted FMOH
Allocated MOH
At year-end, the underapplied overhead was also added to cost of goods sold.
Because production was expected to be 140,000 units, the overhead application rate for
the $700,000 of planned fixed manufacturing overhead was $5 per unit.
sales rev
Cost of Goods Sold
Beginning inventory
Variable manufacturing costs
Fixed manufacturing costs
FMOH=sold*5
Cost for goods available for sale
deduct ending inventory
Total COGS(at standard costs)
FMOH=sold*5
Using variable costing, the unit cost of ending inventory is $25 ($12 direct materials + $9
direct labor + $4 variable overhead). Given beginning inventory of 35,000 units, the ending inventory equals
40,000 units (35,000 BI + 130,000 produced – 125,000 sold). Thus, ending inventory was $1,000,000 (40,000
units × $25).
8,750,000.00
$9,000
$63,000
$15,000
$87,000 We did not use the appropriate format
in solving the VC method
$4,500
$82,500
$67,500
$45,000
$22,500
Assuming that Dremmon used V costing, the amount of operating income earned
$22,500
production 1000
sales 900
end.inv. 100
VC
$90,000
$60,000
$5,000
$65,000
We did not use the appropriate format in
solving the VC method
We did not use the appropriate format in
6000 solving the VC method
$59,000
$0
$59,000
$31,000
$16,200
$14,800
BI 6000
E.Inv 5200
Diff 800
1000
$9,500.0
$9,125.0
Diff $375.0 250
lanned per-unit cost figures shown in the next schedule were based on the estimated production and sale of 140,000 units for the year
Planned Costs Incurred Costs
Per Unit Total
12 1,680,000 1,560,000 12
9 1,260,000 1,170,000 9
ble manufacturing 4 560,000 4 520,000
manufacturing
5 700,000 715,000
ble selling expenses 8 1,120,000 1,000,000
selling expenses 7 980,000 980,000
ble administrative
2 280,000 250,000
administrative
3 420,000 425,000
$ 50 $ 7,000,000 $ 6,620,000
ead to its product; thus, a combined manufacturing overhead rate of $ 9.00 per unit was employed for absorp
sold account at the end of the reporting year.
1,405,000
The beginning finished goods inventory included 35,000 units, each of
which had absorbed $5 of fixed manufacturing overhead.
175,000
Given that 125,000 of those units were sold, cost of goods sold was
625,000 debited for $625,000 of fixed overhead (125,000 units × $5).
Given that 125,000 of those units were sold, cost of goods sold was
debited for $625,000 of fixed overhead (125,000 units × $5).
650,000 Each unit produced during the year also absorbed $5 of fixed
manufacturing overhead
200,000
700,000
650,000
715,000 50,000 u pvv
15,000 u FBV
625,000
700,000
25,000
715,000 65,000
$425,000 administrative
pplied overhead).
2,095,000
FMOH=sold*5+underapplied
FMOH=sold*5+underapplied
nventory equals
000,000 (40,000
6,000,000
600,000
6,600,000
2,400,000
4,200,000
4,200,000
600,000
400,000
200,000
40,000 units for the year.
1)
Total Budgeted VOH = Budgeted Rate x Budgeted Allocation Base
Total Actual VOH = Actual Rate x Actual Allocation Base .= Total actual VOH
0
2)
Allocated VOH( the same in the flexible budget)
Budgeted Input Allowed for actual output X Budgeted VOH Rate
0.5 0
Budgeted Input Allowed for actual output = Budgeted input (allocation base) per unit X Actual units
Total Actual FOH = Actual Rate x Actual Allocation Base .= Total actual FOH
0
2)
Allocated FOH
Budgeted Input Allowed for actual output X Budgeted FOH Rate
0
Budgeted Input Allowed for actual output = Budgeted input (allocation base) per unit X Actual units
X Actual units
0
.=Total Budgeted FOH
X Actual units
0
246. Harper Company’s performance report indicated the following information for the past
1)
Total Budgeted VOH = Budgeted Rate x Budgeted Allocation Base
Total Actual VOH = Actual Rate x Actual Allocation Base .= Total actual VOH
0
2)
Allocated VOH( the same in the flexible budget)
Budgeted Input Allowed for actual output X Budgeted VOH Rate
0
Budgeted Input Allowed for actual output = Budgeted input (allocation base) per unit X Actual units
1)
Total Budgeted FOH = Budgeted Rate x Budgeted Allocation Base
Total Actual FOH = Actual Rate x Actual Allocation Base .= Total actual FOH
0
2)
Allocated FOH
Budgeted Input Allowed for actual output X Budgeted FOH Rate
0
Budgeted Input Allowed for actual output = Budgeted input (allocation base) per unit X Actual units
DR Cogs 2,025.00 2%
DR WIP 3,915.00 3%
DR FG 129,060.00 96%
Dr Applied OH 1,080,000.00 135,000.00
CR MOH control 1,215,000.00
Comparative Balance Sheet (A & B) 31-12-2000
Sin SAD
Cash
Marketable sec.10%
Acc.Rec
Inventory
Total CA 85,000 85,000
Net P,P&E 150,000 150,000
Total Assets 235,000 235,000
Measure of riskeness
Measure of Liquidity risk
Current Ratio 2.1 1.2
WC 45,000 15,000
Comparative Balance Sheet (A & B) 31-12-2000
A B
Cash 10,000 10,000
Marketable sec.10% - 15,000
Acc.Rec 20,000 20,000
Inventory 30,000 30,000
Total CA 60,000 75,000
Net P,P&E 125,000 125,000
Total Assets 185,000 200,000
CL 45,000 45,000
L.T.loans 40,000 40,000
Equity 100,000 115,000
185,000 200,000
Measure of riskeness
Measure of Liquidity risk
Current Ratio 1.3 1.7
Quick Ratio 0.67 1.0
WC 15,000 30,000
Inv*.15 2850
2000=NI -2850
NI=4850 4850
NI = Rev- Cost
4850=30000-cost
cost=30000-4850 25150
Tucariz Company processes Duo into two joint products, Big and Mini. Duo is
purchased in 1,000 gallon drums for $2,000. Processing costs are $3,000 to process the
1,000 gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price
is $9 per gallon for Big and $4 per gallon for Mini. Big can be processed further into 600
gallons of Giant if $1,000 of additional processing costs are incurred. Giant can be sold
for $17 per gallon. If the net-realizable-value method were used to allocate costs to the
joint products, the total cost of producing Giant would be
If the net-realizable-value method were used to allocate costs to the joint products, the total cost of producing Giant would
1)The first step we have to allocate the portion of the joint costs with NRV % $4,600
2) then adding the $1000 additional costs concerning Giant $1,000
$5,600
28. Tucariz Company processes Duo into two joints products, Big and Mini. Duo is purchased in 1,000-gallon drums for $2,0
Processing costs are $3,000 to process the 1,000 gallons of Duo into 800 gallons of Big and 200 gallons of Mini.
The selling price is $9 per gallon for Big and $4 per gallon for Mini. If the physical measure method is used to allocate joint
llons of Mini.
KT-6500
Material $27.0
Direct labor $12.0
Variable overhead $6.0
Fixed overhead $48.0
Variable selling & administrative $5.0
Fixed selling & administrative $12.0
Normal selling price $125.0
Machine hours required 3.00
What is the minimum unit price that Gardener should charge LJB to manufacture 1,000
units of KT-6500?
CM $75.0
CM per machine hour $25.0
the minimum price must equal at least the VC to produce KT-6500 plus any foregone CM by not producing XR-2000
Total hours that will be used to prouce KT-6500 instead of producing XR 3,000.00
CM that will be lost from not prducing XR $46,500.0
CM per unit that will be lost from not prducing XR $46.5
The minimum unit price that Gardener should charge LJB to manufacture 1,000 units of KT-6500
$96.50
106. Following are the operating results of the two segments of Parklin Corporation.
Segment A
Sales $10,000.0
Variable costs of goods sold $4,000.0
Fixed costs of goods sold $1,500.0
Gross margin $4,500.0
Variable selling and administrative $2,000.0
Fixed selling and administrative $1,500.0
Operating income (loss) $1,000.0
Variable costs of goods sold are directly related to the operating segments. Fixed costs of
goods sold are allocated to each segment based on the number of employees. Fixed
selling and administrative expenses are allocated equally. If Segment B is eliminated,
$1,500 of fixed costs of goods sold would be eliminated. Assuming Segment B is closed,
the effect on operating income would be
Segment A
Sales $10,000.0
Variable costs of goods sold $4,000.0
Fixed costs of goods sold $1,500.0
Gross margin $4,500.0
Variable selling and administrative $2,000.0
Fixed selling and administrative $1,500.0
Operating income (loss) $1,000.0
107. Edwards Products has just developed a new product with a manufacturing cost of $30.
The Marketing Director has identified three marketing approaches for this new product.
Approach X Set a selling price of $36 and have the firm’s sales staff sell the
product at a 10% commission with no advertising program.
Estimated annual sales would be 10,000 units.
Approach Y Set a selling price of $38, have the firm’s sales staff sell the
product at a 10% commission, and back them up with a $30,000
advertising program. Estimated annual sales would be 12,000
units.
Approach Z Rely on wholesalers to handle the product. Edwards would sell the
new product to the wholesalers at $32 per unit and incur no selling
expenses. Estimated annual sales would be 14,000 units.
Approach X
Rank the three alternatives in order of net profit, from highest net profit to lowest.
107. C Z, X, Y.
108. Parker Manufacturing is analyzing the market potential for its specialty turbines. Parker
developed its pricing and cost structures for their specialty turbines over various relevant
ranges. The pricing and cost data for each relevant range are presented below.
Which one of the following production/sales levels would produce the highest operating
income for Parker?
a. 8 units. Rev
b. 10 units. VC
c. 14 units. FC
d. 17 units. OI
8 10 14 17
Rev $800,000.0 $1,000,000.0 $1,400,000.0 $1,700,000.0
VC $400,000.0 $500,000.0 $630,000.0 $765,000.0
FC $400,000.0 $400,000.0 $600,000.0 $800,000.0
OI $0.0 $100,000.0 $170,000.0 $135,000.0
109. Elgers Company produces valves for the plumbing industry. Elgers’ per unit sales price and variable costs are as follow
Rev 480000
VC 320000
FC $48,000.0
OI $112,000.0
Tax $44,800.0
Net I $67,200.0
110. Dayton Corporation manufactures pipe elbows for the plumbing industry. Dayton’s per
unit sales price and variable costs are as follows.
If Dayton produced and sold 30,000 units, net income would be 30,000.00
Rev $300,000.0
VC $210,000.0
FC $42,000.0
OI $48,000.0
Tax $24,000.0
Net I $24,000.0
111. Raymund Inc., a bearings manufacturer, has the capacity to produce 7,000 bearings per
month. The company is planning to replace a portion of its labor intensive production
process with a highly automated process, which would increase Raymund’s fixed
manufacturing costs by $30,000 per month and reduce its variable costs by $5 per uni
Raymund’s Income Statement for an average month is as follows.
If Raymund installs the automated process, the company’s monthly operating income
would be
112. Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of
Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit.
If Refrigerator accepts Cool Compartments’ offer the plant would be idled and fixed overhead amounting to $6 per unit co
The total relevant costs associated with the manufacture of ice-makers amount to
relevant
Direct materials $ 7 $7.0
Direct labor 12 $12.0
Variable overhead 5 $5.0
Fixed overhead 10 $6.0
Total costs $34 $30.0 $600,000.0
113. Phillips and Company produces educational software. Its current unit cost, based upon an anticipated volume of 150,0
Sales for the coming year are estimated at 175,000 units, which is within the relevant range of Phillip’s cost structure.
Cost management initiatives are expected to yield a 20% reduction in variable costs and a reduction of $750,000 in fixed c
.
Phillip’s cost structure for the coming year will include a: variable cost ratio of 32% and operating income of $9,6
114. Sunshine Corporation is considering the purchase of a new machine for $800,000.
The machine is capable of producing 1.6 million units of product over its useful life.
The manufacturer’s engineering specifications state that the machine-related cost of producing each unit of product should
Sunshine’s total anticipated demand over the asset’s useful life is 1.2 million units.
The average cost of materials and labor for each unit is $.40.
In considering whether to buy the new machine, would you recommend that Sunshine use the manufacturer’s engineer
b. No, the machine-related cost of producing each unit is $.67.
115. Cervine Corporation makes two types of motors for use in various products. Operating
data and unit cost information for its products are presented below.
Product A
Annual unit capacity 10,000 20,000 10,000.00
Annual unit demand 10,000 20,000 10,000.00
Selling price $100 $80 $100.0
Variable manufacturing cost 53 45 $53.0
Fixed manufacturing cost 10 10 $10.0
Variable selling & administrative 10 11 $10.0
Fixed selling & administrative 5 4 $5.0
Fixed other administrative 2 0 $2.0
Unit operating profit $ 20 $10 $20.0
Machine hours per unit 2.0 1.5 2
The relevant contribution margins, per machine hour for each product, to be utilized in making a decision on product prior
Product A
CM $37.0
CM per machine hours $18.5
116. Two months ago, Hickory Corporation purchased 4,500 pounds of Kaylene at a cost of$15,300.
The market for this product has become very strong, with the price jumping to $4.05 per pound.
Because of the demand, Hickory can buy or sell Kaylene at this price.
Hickory recently received a special order inquiry that would require the use of 4,200 pounds of Kaylene.
In deciding whether to accept the order, management must evaluate a number of decision factors.
Without regard to income taxes, which one of the
following combination of factors correctly depicts relevant and irrelevant decision
factors, respectively?
117. Reynolds Inc. manufactures several different products, including a premium lawn fertilizer and weed killer that is popu
Reynolds is currently operating at less than full capacity because of market saturation for lawn fertilizer.
Sales and cost data for a 40-pound bag of Reynolds lawn fertilizer is as follows.
Selling price
Production cost
Materials and labor $12.3
Variable overhead $3.8
Allocated fixed overhead $4.0
Income (loss) per bag $(1.50)
On the basis of this information, which one of the following alternatives should be
recommended to Reynolds management?
c. Continue to produce and market this product., since it is has a $2.5 CM Reynolds Inc. manufactures several different prod
CM
119. Capital Company has decided to discontinue a product produced on a machine purchased four years ago at a cost of $
The machine has a current book value of $30,000.
Due to technologically improved machinery now available in the marketplace the existing machine has no current salvage v
The company is reviewing the various aspects involved in the production of a new product.
The engineering staff advised that the existing machine can be used to produce the new product.
Other costs involved in the production of the new product will be materials of $20,000 and labor priced at $5,000.
$20,000.00
Ignoring income taxes, the costs relevant to the decision to produce or not to produce the
new product would be $25,000.00
123. Allred Company sells its single product for $30 per unit. $30.00
The contribution margin ratio is 45%, 45%
and fixed costs are $10,000 per month.
Allred has an effective income tax rate of 40%
. If Allred sells 1,000 units in the current month, 1000
Allred’s variable expenses would be
VC ratio 55%
sales revenue $30,000.00
VC $16,500.00
124. Phillips & Company produces educational software. Its unit cost structure, based upon
an anticipated production volume of 150,000 units, is as follows. 150000
The marketing department has estimated sales for the coming year at 175,000 units,which is within the relevant range of P
Phillip’s break-even volume (in units) and anticipated operating income for the coming year would amount to
total FC $8,250,000
CM $100
Rev $28,000,000
VC $10,500,000
CM $17,500,000
FC $8,250,000
OI $9,250,000
126. Jeffries Company sells its single product for $30 per unit. $30
The contribution margin ratio is 45%, and. 45%
fixed costs are $10,000 per month $10,000
Sales were 3,000 units in April and 4,000 units in May. 3,000 4,000
How much greater is the May income than the April income?
April May
Rev $90,000 $120,000
VC 55% $16.50 $49,500 $66,000
CM $40,500 $54,000
FC $10,000 $10,000
OI $30,500 $44,000
127. Cervine Corporation makes two types of motors for use in various products. Operating
data and unit cost information for its products are presented below.
Product A
. What is the maximum total contribution margin that Cervine can generate in the coming year?
Product A
CM $37.00
CM per machine hours $18.50
Total CM
128. Lazar Industries produces two products, Crates and Trunks. Per unit selling prices, costs,
and resource utilization for these products are as follows.
Crates
Selling price $20 $30 20
Direct material costs $ 5 $ 5 5
Direct labor costs 8 10 8
Variable overhead costs 3 5 3
Variable selling costs 1 2 1
Machine hours per unit 2 4 2
Production of Crates and Trunks involves joint processes and use of the same facilities.
The total fixed factory overhead cost is $2,000,000 and total fixed selling and administrative costs are $840,000.
Production and sales are scheduled for 500,000 Crates and 700,000 Trunks.
Lazar has a normal capacity to produce a total of 2,000,000 units in
any combination of Crates and Trunks, and maintains no direct materials, work-inprocess,
or finished goods inventory.
Due to plant renovations Lazar Industries will be limited to 1,000,000 machine hours.
What is the maximum amount of contribution margin Lazar can generate during the
renovation period?
Crates
CM 3.00
CM per machine hours 1.50
129. For the year just ended, Silverstone Company’s sales revenue was $450,000.
Silverstone’s fixed costs were $120,000 and it
s variable costs amounted to $270,000.
For the current year sales are forecasted at $500,000.
If the fixed costs do not change, Silverstone’s profits this year will be
130. Breeze Company has a contribution margin of $4,000 and fixed costs of $1,000. If the
total contribution margin increases by $1,000, operating profit would
131. Wilkinson Company sells its single product for $30 per unit. The contribution margin
ratio is 45% and Wilkinson has fixed costs of $10,000 per month. If 3,000 units are sold
in the current month, Wilkinson’s income would be
133. Starlight Theater stages a number of summer musicals at its theater in northern Ohio.
Preliminary planning has just begun for the upcoming season, and Starlight has
developed the following estimated data.
Average
Number of Attendance per Ticket
Production Performances Performance Price
Mr. Wonderful 12 3500 $18.00
That’s Life 20 3000 $15.00
All That Jazz 12 4000 $20.00
Starlight will also incur $565,000 of common fixed operating charges (administrative
overhead, facility costs, and advertising) for the entire season, and is subject to a 30%
income tax rate.
If Starlight’s schedule of musicals is held, as planned, how many patrons would have to
attend for Starlight to break even during the summer season?
FC $1,295,000.00
CM $16.20
Breakeven $79,938
134. Carson Inc. manufactures only one product and is preparing its budget for next year based on the following informatio
If Carson wants to achieve a net income of $1.3 million next year, its sales must be
CM $25.00
EBT $2,000,000.00
Numerator to be used $2,250,000.00
units to achieve 1.3 m 90,000.00
135. MetalCraft produces three inexpensive socket wrench sets that are popular with do-ityourselfers.
Budgeted information for the upcoming year is as follows.
Estimated
Model Selling Price Variable Cost Sales Volume
No. 109 10 5.5 30000
No. 145 15 8 75000
No. 153 20 14 45000
150000
Total fixed costs for the socket wrench product line is $961,000. If the company’s actual
experience remains consistent with the estimated sales volume percentage distribution,
and the firm desires to generate total operating income of $161,200, how many Model
No. 153 socket sets will MetalCraft have to sell?
Model CM CM
No. 109 20% 4.5 0.9
No. 145 50% 7 3.5
No. 153 30% 6 1.8
6.2
Numerator 1122200
units to ac 181000
No. 153 54300
This problem can be solved by setting up an equation and solving for the required sales amount, which
will be represented by the variable S. S = required sales
Sheet 14 april 2010 p3
169. Fennel Products is using cost-based pricing to determine the selling price for its new
product based on the following information.
Annual volume 25,000 units 25,000.00
Fixed costs $700,000 per year $700,000.00
Variable costs $200 per unit $200.00 $5,000,000.00
Plant investment $3,000,000 $3,000,000.00
Working capital $1,000,000 $1,000,000.00
Effective tax rate 40% 40%
The target price that Fennell needs to set for the new product to achieve a 15% after-tax
return on investment (ROI) would be
(ROI) $600,000.00
investment $4,000,000.00
168. Almelo Manpower Inc. provides contracted bookkeeping services. Almelo has annual
fixed costs of $100,000 and variable costs of $6 per hour. This year the company
budgeted 50,000 hours of bookkeeping services. Almelo prices its services at full cost
and uses a cost-plus pricing approach. The company developed a billing price of $9 per
hour. The company’s mark-up level would be
fixed costs $100,000.00
fixed costs per unit $2.00
VC per hour $6.00
budgeted 50,000 hours 50,000.00
billing price $9.00
165. Basic Computer Company (BCC) sells its microcomputers using bid pricing. It develops
its bids on a full cost basis. Full cost includes estimated material, labor, variable
overheads, fixed manufacturing overheads, and reasonable incremental computer
assembly administrative costs, plus a 10% return on full cost. BCC believes bids in
excess of $1,050 per computer are not likely to be considered.
BCC’s current cost structure, based on its normal production levels, is $500 for materials
per computer and $20 per labor hour. Assembly and testing of each computer requires 17
labor hours. BCC expects to incur variable manufacturing overhead of $2 per labor hour,
fixed manufacturing overhead of $3 per labor hour, and incremental administrative costs
of $8 per computer assembled.
BCC has received a request from a school board for 200 computers. Using the full-cost
criteria and desired level of return, which one of the following prices should be
recommended to BCC’s management for bidding purposes?
Full cost
10% return on full cost.
(BCC) bid pricing.
(BCC) bid pricing per computer
163. Leader Industries is planning to introduce a new product, DMA. It is expected that
10,000 units of DMA will be sold. The full product cost per unit is $300. Invested
capital for this product amounts to $20 million. Leader’s target rate of return on
investment is 20%. The markup percentage for this product, based on operating income
as a percentage of full product cost, will be
162. The Robo Division, a decentralized division of GMT Industries, has been approached to
submit a bid for a potential project for the RSP Company.
Robo Division has been informed by RSP that they will not consider bids over $8,000,000.
Robo Division purchases its materials from the Cross Division of GMT Industries.
There would be no additional fixed costs for either the Robo or Cross Divisions.
Sell to Robo
Cross Division Robo Division
Variable Costs $1,500,000 $4,800,000 $1,500,000.00 $4,800,000.00
Transfer Price 3,700,000 - $3,700,000.00 $0.00
If Robo Division submits a bid for $8,000,000, the amount of contribution margin 8000000
recognized by the Robo Division and GMT Industries, respectively, is
Cross Division Robo Division
Price of the product sold $3,700,000.00 $8,000,000.00
VC $1,500,000.00 $8,500,000.00
CM $2,200,000.00 -$500,000.00
161. Johnson Company manufactures a variety of shoes, and has received a special one-timeonly order directly from a who
Johnson has sufficient idle capacity to accept the special order to manufacture 15,000 pairs of sneakers at a price of $7.50
Johnson’s normal selling price is $11.50 per pair of sneakers.
Variable manufacturing costs are $5.00 per pair and fixed manufacturing costs are $3.00 a pair.
Johnson’s variable selling expense for its normal line of sneakers is $1.00 per pair.
What would the effect on Johnson’s operating income be if the company accepted the special order?
160. The Doll House, a very profitable company, plans to introduce a new type of doll to its
product line. The sales price and costs for the new dolls are as follows.
If 10,000 new dolls are produced and sold, the effect on Doll House’s profit (loss) would
159. Synergy Inc. produces a component that is popular in many refrigeration systems. Data
on three of the five different models of this component are as follows.
Model
A B C
Volume needed (units) 5000 6000 3000
Manufacturing costs
Variable direct costs $10 $24 $20 $ 10.00 $ 24.00 $ 20.00
Variable overhead 5 10 15 $ 5.00 $ 10.00 $ 15.00
Fixed overhead 11 20 17 $ 11.00 $ 20.00 $ 17.00
Total manufacturing costs $26 $54 $52 $ 26.00 $ 54.00 $ 52.00
Synergy applies variable overhead on the basis of machine hours at the rate of $2.50 per hour.
Models A and B are manufactured in the Freezer Department, which has a capacity of 28,000 machine processing hours.
Which one of the following options should be recommended to Synergy's management?
158. Green Corporation builds custom-designed machinery. A review of selected data and the company’s pricing policies re
Green recently received an invitation to bid on the manufacture of some custom machinery for Kennendale, Inc.
For this project, Green’s production accountants estimate the material and labor costs will be $66,000 and $120,000, respe
$66,000.00 $120,000.00
Accordingly, Green submitted a bid to Kennendale in the amount of $375,000. Feeling Green’s bid was too high, Kennendal
a. Accept the counteroffer because the order will increase operating income.
157. Jones Enterprises manufactures 3 products, A, B, and C. During the month of May
Jones’ production, costs, and sales data were as follows.
Products
A B C
Units of production 30,000.00 20,000.00 70,000.00
Joint production costs to split-off point $480,000
Further processing costs $ - $60,000 $140,000 $ - $ 60,000.00 $ 140,000.00
Further processing cost $ 3.00 $ 2.00
Unit sales price
At split-off 3.75 5.50 10.25 $ 3.75 $ 5.50 $ 10.25
After further processing - 8.00 12.50 $ - $ 8.00 $ 12.50
$ 5.00 $ 10.50
INCREMENTAL PROFIT $ (0.50) $ 0.25
Based on the above information, which one of the following alternatives should be recommended to Jones’ management?
156. Basic Computer Company (BCC) sells its micro-computers using bid pricing. It develops bids on a full cost basis.
Full cost includes estimated material, labor, variable overheads, fixed manufacturing overheads, and reasonable increment
BCC believes bids in excess of $925 per computer are not likely to be considered. 925
BCC’s current cost structure, based on its normal production levels, is $500 for materials per computer and $20 per labor h
Assembly and testing of each computer requires 12 labor hours.
BCC’s variable manufacturing overhead is $2 per labor hour, fixed manufacturing overhead is $3 per labor hour, and increm
The company has received a request from the School Board for 500 computers. BCC’s
management expects heavy competition in bidding for this job. As this is a very large
order for BCC, and could lead to other educational institution orders, management is
extremely interested in submitting a bid which would win the job, but at a price high
enough so that current net income will not be unfavorably impacted. Management
believes this order can be absorbed within its current manufacturing facility. Which one
of the following bid prices should be recommended to BCC’s management?
Full cost
10% return on full cost.
(BCC) bid pricing.
(BCC) bid pricing per computer
153. Lazar Industries produces two products, Crates and Boxes. Per unit selling prices, costs,
and resource utilization for these products are as follows.
Crates Boxes
Selling price $20 $30 $20.00 $30.00
Direct material costs $ 5 $ 5 2.5 $5.00 $5.00
Direct labor costs 8 10 $8.00 $10.00
Variable overhead costs 3 5 $ 5.25 $3.00 $5.00 VOH
Variable selling costs 1 2 $1.00 $2.00
Machine hours per unit 2 4 3.50 2.00 4.00
Production of Crates and Boxes involves joint processes and use of the same facilities.
The total fixed factory overhead cost is $2,000,000 and total fixed selling and administrative costs are $840,000.
Production and sales are scheduled for 500,000 units of Crates and 700,000 units of Boxes.
Lazar maintains no direct materials, work-inprocess, or finished goods inventory.
Lazar can reduce direct material costs for Crates by 50% per unit, with no change in direct labor costs.
However, it would increase machine-hour production time by 1-1/2 hours per unit. 1.50
For Crates, variable overhead costs are allocated based on machine hours.
What would be the effect on the total contribution margin if this change was implemented?
Before
CM $3.00 1,500,000.00
CM per constraint. $1.50
After
CM $3.25 1,625,000.00
CM per constraint. $0.93 125,000.00
Make
Direct materials $ 7 $7.00 7
Direct labor 12 $12.00 12
Variable overhead 5 $5.00 5
Fixed overhead 10 $10.00 6
Total costs $34 $34.00 $30.00
$30.00
$600,000.00
Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit.
If Refrigerator accepts Cool Compartments’ offer, the facilities used to manufacture ice-makers could be used to produce w
Revenues from the sale of water filtration units are estimated at $80,000, with variable costs amounting to 60% of sales.
In addition, $6 per unit of the fixed overhead associated with the manufacture of ice-makers could be eliminated.
For Refrigerator Company to determine the most appropriate action to take in this
situation, the total relevant costs of make vs. buy, respectively, are
c. $600,000 vs. $528,000.
151. Aspen Company plans to sell 12,000 units of product XT and 8,000 units of product RP.
Aspen has a capacity of 12,000 productive machine hours. 12000
The unit cost structure and machine hours required for each product is as follows.
12000 8000
Unit Costs XT RP
Materials $37 $24 $37.00 $24.00
Direct labor 12 13 $12.00 $13.00
Variable overhead 6 3 $6.00 $3.00
Fixed overhead 37 38 $37.00 $38.00
Machine hours required 1.0 1 1.5
VC $55.00 $40.00
Machine hours required 12,000.00 12,000.00
Aspen can purchase 12,000 units of XT at $60 and/or 8,000 units of RP at $45. Based on the above, which one of the follow
150. The Furniture Company currently has three divisions: Maple, Oak, and Cherry. The oak
furniture line does not seem to be doing well and the president of the company is
considering dropping this line.
If it is dropped, the revenues associated with the Oak
Division will be lost and the related variable costs saved. Also, 50% of the fixed costs
allocated to the oak furniture line would be eliminated. The income statements, by
divisions, are as follows.
Maple
Sales $55,000 $85,000 $100,000 $55,000.000
Variable Costs 40,000 72,000 82,000 $40,000.000
Contribution Margin 15,000 13,000 18,000 $15,000.000
Fixed costs 10,000 14,000 10,200 $10,000.000
Operating profit (loss) $ 5,000 $(1,000) $ 7,800 $5,000.000
Which one of the following options should be recommended to the president of the
company?
Maple
Sales $55,000 $85,000 $100,000 $55,000.000
Variable Costs 40,000 72,000 82,000 $40,000.000
Contribution Margin 15,000 13,000 18,000 $15,000.000
Fixed costs 10,000 14,000 10,200 $10,000.000
Operating profit (loss) $ 5,000 $(1,000) $ 7,800 $5,000.000
149. Raymund Inc. currently sells its only product to Mall-Stores. Raymund has received a
one-time-only order for 2,000 units from another buyer. Sale of the special order items
will not require any additional selling effort. Raymund has a manufacturing capacity to
produce 7,000 units. Raymund has an effective income tax rate of 40%. Raymund’s
Income Statement, before consideration of the one-time-only order, is as follows.
In negotiating a price for the special order, Raymund should set the minimum per unit
selling price at $10.0
148. Lark Industries accepted a contract to provide 30,000 units of Product A and 20,000 units
of Product B. Lark’s staff developed the following information with regard to meeting
this contract.
Product A Product B
30000 20000
Selling Price $75 $125 $75.0 $125.0
Variable costs $30 $48 $30.0 $48.0
Fixed overhead $1,600,000
Machine hours required 3 5 3.00 5.00
Machine hours available 160,000
Cost if outsourced $45 $60 $45.0 $60.0
Lark’s operations manager has identified the following alternatives. Which alternative
should be recommended to Lark’s management?
CM $45.0 $77.0
CM per constraint $ 15.00 $ 15.40
147. Aril Industries is a multiproduct company that currently manufactures 30,000 units of
Part 730 each month for use in production. The facilities now being used to produce Part
730 have fixed monthly overhead costs of $150,000, and a theoretical capacity to produce
60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the
facilities would be idle and 40% of fixed costs would continue to be incurred. There are
no alternative uses for the facilities. The variable production costs of Part 730 are $11
per unit. Fixed overhead is allocated based on planned production levels.
If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a
net benefit by purchasing Part 730 from an outside supplier only if the supplier’s unit
price is less than $ 14.00
146. Current business segment operations for Whitman, a mass retailer, are presented below.
Merchandise Automotive
Sales $ 500,000.00 $ 400,000.00
Variable costs $ 300,000.00 $ 200,000.00
CM $ 200,000.00 $ 200,000.00
Fixed costs $ 100,000.00 $ 100,000.00
Operating income (loss) $ 100,000.00 $ 100,000.00
Merchandise Automotive
Sales $ 475,000.00 $ 380,000.00
Variable costs $ 285,000.00 $ 190,000.00
CM $ 190,000.00 $ 190,000.00
Fixed costs $ 100,000.00 $ 100,000.00
Operating income (loss) $ 90,000.00 $ 90,000.00
144. Oakes Inc. manufactured 40,000 gallons of Mononate and 60,000 gallons of Beracyl in a
joint production process, incurring $250,000 of joint costs. Oakes allocates joint costs
based on the physical volume of each product produced. Mononate and Beracyl can each
be sold at the split-off point in a semifinished state or, alternatively, processed further.
Additional data about the two products are as follows.
40,000.00
Mononate
Sales price per gallon at split-off $ 7.00
Sales price per gallon if processed further $ 10.00
Variable production costs if processed further $ 125,000.00
An assistant in the company’s cost accounting department was overheard saying “....that
when both joint and separable costs are considered, the firm has no business processing
either product beyond the split-off point. The extra revenue is simply not worth the
effort.” Which of the following strategies should be recommended for Oakes?
(1) a fixed fee of $8,000 per month, (2) a fixed fee of $3,990 per month pl
8000
142. Eagle Brand Inc. produces two products. Data regarding these products are presented
below.
Product X Product Y
Selling price per unit $100 $130 $ 100.00 $ 130.00
Variable costs per unit $80 $100 $ 80.00 $ 100.00
Raw materials used per unit 4 lbs. 10 lbs. 4.00 10.00
Eagle Brand has 1,000 lbs. of raw materials which can be used to produce Products X and
Y.
Which one of the alternatives below should Eagle Brand accept in order to maximize
contribution margin?
CM 20 30
CM per constraint $ 5.00 $ 3.00
Units that can be produced by the constraint 250.00 100.00
12 20
8 15 Specialty Cakes Inc. produces two typ
RC HS cake. Total fixed costs for the firm are
CM $4.0 $5.0 the two types of cakes are presented
units 10000 15000 25000 2 lbs. 3 lbs.
40% 60% Round Cake Heart-shape Cake
$1.6 $3.0 $4.6 Selling price per unit $12 $20
Variable cost per unit $8 $15
fc $94,000.0 20,434.78 Current sales (units) 10,000 15,000
$12.0 $20.0
$8.0 $15.0 If the product sales mix were to change to three heart-s
RC HS the breakeven volume for each of these products would
CM $4.0 $5.0
units 6250 18750 25000
25% 75%
$1.0 $3.8 $4.8
fc $94,000.0 19,789.47
138. Zipper Company invested $300,000 in a new machine to produce cones for the textile
industry. Zipper’s variable costs are 30% of the selling price, and its fixed costs are
$600,000. Zipper has an effective income tax rate of 40%. The amount of sales required
to earn an 8% after-tax return on its investment would be
137. Bargain Press is considering publishing a new textbook. The publisher has developed the
following cost data related to a production run of 6,000, the minimum possible
production run. Bargain Press will sell the textbook for $45 per copy. How many
textbooks must Bargain Press sell in order to generate operating earnings (earnings before
interest and taxes) of 20% on sales? (Round your answer up to the nearest whole
textbook.)
Estimated cost per unit
Development (reviews, class testing, editing) $35,000 $ 35,000.00
Typesetting 18,500 $ 18,500.00
Depreciation on Equipment 9,320 $ 9,320.00
General and Administrative 7,500 $ 7,500.00
Miscellaneous Fixed Costs 4,400 $ 4,400.00
Printing and Binding 30,000 $ 30,000.00 $ 5.00
Sales staff commissions (2% of selling price) 5,400 $ 5,400.00 $ 0.90
Bookstore commissions (25% of selling price) 67,500 $ 67,500.00 $ 11.25
Author’s Royalties (10% of selling price) 27,000 $ 27,000.00 $ 4.50
$ 21.65
Total costs at production of 6,000 copies $ 204,620.00
131. Wilkinson Company sells its single product for $30 per unit. The contribution margin
ratio is 45% and Wilkinson has fixed costs of $10,000 per month. If 3,000 units are sold
in the current month, Wilkinson’s income would be
CM $ 13.50
Total CM $ 40,500.00
FC $ 10,000.00
OI $ 30,500.00
25000 22000
1000
XR-2000 XR-2000
Q 6,250.00 $387,500.0
$24.0 Q 5,500.00 $341,000.0
$10.0 $46,500.0
$5.0 $46.50
$40.0
$4.0
$10.0
$105.0
4.00
$62.0
$15.5
750
Segment B Total
$15,000.0 $25,000.0
$8,500.0 $12,500.0
$2,500.0 $4,000.0
$4,000.0 $8,500.0
$3,000.0 $5,000.0
$1,500.0 $3,000.0
-$500.0 $500.0
Segment B Total
$10,000.0
$4,000.0
$1,000.0 $2,500.0
-$1,000.0 $3,500.0
$2,000.0
$1,500.0 $3,000.0
-$2,500.0 -$1,500.0
-$2,000.00
107. C Z, X, Y.
Approach Y Approach Z
$38.0 $32.0
12,000.00 14,000.00
$456,000.0 $448,000.0
$360,000.0 $420,000.0
$45,600.0 0
$30,000.0
$20,400.0 $28,000.0
108. C c. 14 units.
6 - 10 11 - 15 16 - 20
$400,000.0 $600,000.0 $800,000.0
$50,000.0 $45,000.0 $45,000.0
$100,000.0 $100,000.0 $100,000.0
e and variable costs are as follows. 109. B b. $67,200.
110. A a. $24,000.
$30,000.0
$5.0
$100,000.0
$65,000.0
$35,000.0
$20,000.0
$15,000.0
$100,000.0
increase Raymund’s fixed manufacturing costs
by $30,000 per month and reduce its variable
$40,000.0 costs by $5 per uni
$60,000.0
$50,000.0
$10,000.0
osts per unit, for 20,000 units of ice-makers, are as follows. 112. C
20,000.00
100%
32%
68%
use the manufacturer’s engineering specification of machine related unit production cost?
$800,000.0
$0.67
115. B
Product B
20,000.00
20,000.00
$80.0
$45.0
$10.0
$11.0
$4.0
$0.0
$10.0
1.5
Product B
$24.0
$16.0
116. B
4500 15300 $3.40
$4.05
ds of Kaylene. 4200
tilizer and weed killer that is popular in hot, dry climates. 117. C
awn fertilizer.
40
$18.5
$20.0
-$1.50
anufactures several different products, and the loss appear after the deduction of the allocated fixed costs
$2.5
119. A a. $25,000.
ased four years ago at a cost of $70,000.
123. D d. $16,500.
124. B
b. 82,500 units and $9,250,000 of operating income.
h is within the relevant range of Phillip’s cost structure. 175000
ar would amount to
126. B b. $13,500.
1,000
diff
$30,000
$13,500
$13,500
127. B b. $689,992.
689992
Product B
20,000.00
20,000.00
$80.0
$45.0
$10.0
$11.0
$4.0
$0.0
$10.0
1.5
Product B
$24.00
$16.00
370,000
20,000 13333
13,333.33 $319,992.00
320,000 320,000
$689,992 $0.0
128. B b. $2,000,000.
Trunks
30
5
10
5
2
4
1,000,000
Trunks
8.00
2.00
%
450000 b. $80,000. 129. B
120000
270000 0.6
500000
$565,000.00
30%
$1,300,000
tyourselfers. 135. B b. 54,300.
sets
sets
sets
961000
161200
136. D d. $1,200,000.
mount, which
169. D d. $268.
a. $228.
b. $238.
c. $258.
d. $268.
15%
168. A a. 12.5%.
100000 6
50000
9
165. D d. $1,026.30.
10%
200
$100,000.00
$68,000.00
$6,800.00
$10,200.00
$1,600.00
$186,600.00
$18,660.00
$205,260.00
$1,026.30
163. C c. 133.3%.
10,000.00 $300.00 $20,000,000.00
20%
GMT Industries
$11,700,000.00
$10,000,000.00
$1,700,000.00 ###
160. C c. $(39,200).
10000
Should be answered by
elimination
Should be answered by
elimination
$ 2.50
000 machine processing hours. 28,000.00
158. A
the company’s pricing policies revealed the following.
10%
40% 20%
10%
rative costs to cover income taxes and produce a profit. 25%
40%
80%
en’s bid was too high, Kennendale countered with a price of $280,000.
$234,000.00
$ 48,000.00 $ 24,000.00
$12,000.00
rative costs to cover income taxes and produce a profit. $ 84,000.00
157. C c. Process Product C further but sell Product B at the split-off point
TOTAL
120,000.00
$ 480,000.00
156. B b. $772.00.
s bids on a full cost basis.
heads, and reasonable incremental computer assembly administrative costs, plus a 10% return on full cost.
er computer and $20 per labor hour.
d is $3 per labor hour, and incremental administrative costs are $8 per computer assembled.
0.1
500
$250,000.00
$120,000.00
$12,000.00
$18,000.00
$4,000.00
$404,000.00 VC $386,000.00
$40,400.00 $0.00
$444,400.00 $386,000.00
$888.80 $772.00
Buy
28
$28.00
-$1.60
$26.40
$528,000.00
e above, which one of the following actions should be recommended to Aspen's management?
50%
-$6,000.000
149. A a. $10.
2000
40%
$100,000.0
$65,000.0
$35,000.0
$20,000.0
$15,000.0
$6,000.0
$9,000.0
Total
$1,600,000.0
160,000.00
147. D d. $14.00.
30,000.00
$ 150,000.00
60,000.00
60% $ 90,000.00
$ 11.00
$ 3.00
Restaurant Total
$ 100,000.00 $ 1,000,000.00
$ 70,000.00 $ 570,000.00
$ 30,000.00 $ 430,000.00
$ 50,000.00 $ 250,000.00
$ -20,000.00 $ 180,000.00
30% 43%
95%
Restaurant Total
$ 855,000.00
$ 475,000.00
$ - $ 380,000.00 What will Whitman’s total contribution margin be if
$ 20,000.00 $ 250,000.00 segment is discontinued?
$ -20,000.00 $ 130,000.00 145. D d. $380,000.
#DIV/0! 44%
Mononate Beracyl
144. B b. Sell at split-off Process further.
$ 250,000.00
60,000.00 100,000.00
Beracyl
$ 15.00
$ 18.00
$ 115,000.00
$ 1.92
$ 3.00
$ 1.92
$ 1.08
180,000.00
115,000.00
65,000.00
143. D d. Choose the third option no matter what Blaze exp
20
100
5700
fixed fee of $3,990 per month plus 10% of Blaze’s revenue (3) 30% of Blaze’s revenues.
4560 1710
1000
alty Cakes Inc. produces two types of cakes, a 2 lbs. round cake and a 3 lbs. heartshaped
Total fixed costs for the firm are $94,000. Variable costs and sales data for
wo types of cakes are presented below.
d Cake Heart-shape Cake
g price per unit $12 $20
ble cost per unit $8 $15
nt sales (units) 10,000 15,000
138. B b. $914,286.
$ 300,000.00
30%
$ 600,000.00
40%
8%
6000
$ 45.00
20%
$ 74,720.00
cellaneous ,
30 131. A a. $30,500
0.45 3000
10000
Section D: Decision Analysis
103. B b. $96.50. 101 169
KT-6500
3,000.00
c. a decrease of $2,000.
fixed manufacturing costs
h and reduce its variable
y $5 per uni
c. $600,000.
achine-related cost of producing each unit is $.67.
ng plan should include 5,000 units of
uct B at the split-off point.
Oak Division as discontinuance would result in a $6,000
oduct A, utilize the remaining capacity to make Product
contribution margin be if the Restaurant
Process further.
no matter what Blaze expects the revenues to be.
Gregg Industries manufactures molded chairs. The three models of molded chairs, which are all variations of the same des
are Standard (can be stacked), Deluxe (with arms), and Executive (with arms and padding). The company uses batch
manufacturing and has an operation costing system.
Gregg has an extrusion operation and subsequent operations to form, trim, and finish the chairs.
Plastic sheets are produced by the extrusion operation, some of which are sold directly to other manufacturers.
During the forming operation, the remaining plastic sheets are molded into chair seats and the legs are added; the standar
During the trim operation, the arms are added to the deluxe and executive models and the chair edges are smoothed.
Only the executive model enters the finish operation where the padding is added.
All of the units produced are subject to the same steps within each
operation, and no units are in process at the end of the period. The units of production and direct materials costs were as f
Plastic sheets are produced by the During the forming operation, the remaining
extrusion operation, some of which plastic sheets are molded into chair seats and
are sold directly to other the legs are added; the standard model is sold
manufacturers. after this operation.
A standard model passes through the extrusion and form operations. Thus, its unit cost includes the
materials and conversion costs for both operations. The unit materials and conversion costs for the extrusion
operation are $12.00 ($192,000 ÷ 16,000 units) and $24.50 [($152,000 + $240,000) ÷ 16,000 units], respectively. The
unit materials and conversion costs for the form operation are $4.00 [$44,000 ÷ (16,000 – 5,000) units] and $12.00
[($60,000 + $72,000) ÷ (16,000 – 5,000) units], respectively. Accordingly, the unit cost of a standard model is $52.50
($12.00 + $24.50 + $4.00 + $12.00).
A standard model passes through the extrusion and form operations. Thus, its unit cost includes the
materials and conversion costs for both operations. The unit materials and conversion costs for the extrusion
operation are $12.00 ($192,000 ÷ 16,000 units) and $24.50 [($152,000 + $240,000) ÷ 16,000 units], respectively. The
unit materials and conversion costs for the form operation are $4.00 [$44,000 ÷ (16,000 – 5,000) units] and $12.00
[($60,000 + $72,000) ÷ (16,000 – 5,000) units], respectively. Accordingly, the unit cost of a standard model is $52.50
($12.00 + $24.50 + $4.00 + $12.00).
Total DM 50,000.00
Total Conv. $142,600.00
Total cost $192,600
An executive model passes through all four operations. Thus, its unit cost equals that of the deluxe model plus the
unit costs incurred in the finish operation. The unit cost of the deluxe model is $69.30. The unit materials and
conversion costs for the finish operation are $6.00 [$12,000 ÷ (16,000 – 14,000) units] and $21.00 [($18,000 + $24,000)
÷ (16,000 – 14,000) units], respectively. Consequently, the unit cost of the executive model is $96.30 ($69.30 + $6.00 +
$21.00), and the total product cost is $192,600 (2,000 units × $96.30).
r manufacturers.
legs are added; the standard model is sold after this operation.
ir edges are smoothed.
Trim Finish
Materials Materials
$9,000
$6,000 $12,000
$15,000.00 $12,000.00
5,000.00 2,000.00
$3.00 $6.00
ation, the remaining During the trim operation, the arms are
into chair seats and added to the deluxe and executive Only the executive model enters
andard model is sold models and the chair edges are the finish operation where the
eration. smoothed. padding is added.
Trim Finish
Operation Operation
$30,000 $18,000
$39,000 $24,000
$69,000 $42,000
5,000.00 2,000.00
$13.80 $21.00
EUP 4600
cost 15.00
per unit
units 100,000
Direct materials $200,000 $2.00
Direct labor $100,000 $1.00
V.Manufacturing overhead $100,000 $1.00
F.Manufacturing overhead $100,000
Selling and administrative expense $50,000 $0.50
F.Selling and administrative expense $100,000
V.Manuf. $4.00
F.manf $100,000
V.SGA $0.50
F.SGA $100,000
The total costs to produce and sell 110,000 units for the year are
110000 $695,000.00
$370,000
CoGs Total
Beg.RM 67,000
Add: Purchase 163,000
Less : Returns and discounts 2,000
Net Purchase 161,000
Add: Freight-in 4,000
RM Available for use 232,000
Less : End.RM 62,000
DM used in Production 170,000
DL 200,000
MOH 140,000
Total manufacturing costs for the period 510,000
Add: Beg. WIP 145,000
Less: End. WIP 171,000
Costs of goods Manufacturing 484,000
Add: Beg.Finished 85,000
Goods Available for sale 569,000
Less: End. Finished 78,000
Costs of goods Sold 491,000
Lucy Sportswear manufactures a specialty line of T-shirts using a job-order costing system. During March, the following
costs were incurred in completing job ICU2: direct materials, $13,700; direct labor, $4,800; administrative, $1,400; and
selling, $5,600. Overhead was applied at the rate of $25 per machine hour, and job ICU2 required 800 machine hours. If
job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be
CoGs Total
Beg.RM 13,700
Add: Purchase
Less : Returns and discounts
Net Purchase -
Add: Freight-in
RM Available for use 13,700
Less : End.RM
DM used in Production 13,700
DL 4,800
MOH 20,000
Total manufacturing costs for the period 38,500
Add: Beg. WIP -
Less: End. WIP -
Costs of goods Manufacturing 38,500
Add: Beg.Finished
Goods Available for sale 38,500
Less: End. Finished
Costs of goods Sold 38,500
Wall Mirrors
Units produced 25 25 25
Material moves per product line 5 15 5
Direct labor hours per unit 200 200 200
Budgeted materials handling costs $50,000 $50,000
Under a costing system that allocates overhead on the basis of direct labor hours, Zeta Company’s materials handling cos
allocated to one unit of wall mirrors would be
allocated to 25 25000
allocated to one unit $1,000
Under activity-based costing (ABC), Zeta’s materials handling costs allocated to one unit of wall mirrors would be
allocated to 25 12500
allocated to one unit $500
New-Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products
at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to
distribute quality control costs more equitably, New-Rage is considering activity-based costing. The monthly data shown
in the chart below have been gathered for Satin Sheen makeup.
85. A
Taylor Corporation is determining the cost behavior of several items in order to budget
for the upcoming year. Past trends have indicated the following dollars were spent at
three different levels of output.
In establishing a budget for 14,000 units, Taylor should treat Costs A, B, and C,
respectively, as
97. A company employs a just-in-time (JIT) production system and utilizes backflush
accounting. All acquisitions of raw materials are recorded in a raw materials control
account when purchased. All conversion costs are recorded in a control account as
incurred, while the assignment of conversion costs are from an allocated conversion cost
account. Company practice is to record the cost of goods manufactured at the time the
units are completed using the estimated budgeted cost of the goods manufactured.
The budgeted cost per unit for one of the company's products is as follows
During the current accounting period, 80,000 units of product were completed, and
75,000 units were sold. The entry to record the cost of the completed units for the period
would be
b. Finished Goods - Control 4,000,000 4000000
Raw Material - Control 1,200,000 1200000
Conversion Cost Allocated 2,800,000. 2800000
99. From the following budgeted data, calculate the budgeted indirect cost rate that would be
used in a normal costing system
104. B b. $8,500.
The marketing manager of Ames Company has learned the following about a new
product that is being introduced by Ames. Sales of this product are planned at $100,000 100000
for the first year. Sales commission expense is budgeted at 8% of sales plus the 8.0%
marketing manager's incentive budgeted at an additional ½%. The preparation of a 0.5%
product brochure will require 20 hours of marketing salaried staff time at an average rate
of $100 per hour, and 10 hours, at $150 per hour, for an outside illustrator's effort. The 100
variable marketing cost for this new product will be
110. A
110. Bethany Company has just completed the first month of producing a new product but has
not yet shipped any of this product. The product incurred variable manufacturing costs of
$5,000,000, fixed manufacturing costs of $2,000,000, variable marketing costs of
$1,000,000, and fixed marketing costs of $3,000,000. $1,000,000
If Bethany uses the variable cost method to value inventory, the inventory value of the new product would be
administrative
370,000 Madtack Company’s prime cost for November is
Madtack Company’s cost of goods transferred to finished goods inventory for November is
mirrors would be
97. B
80000
99. D d. $48.
20
$5,000,000
$2,000,000
$3,000,000
Per Unit
Product selling price $200 $200
Standard variable manufacturing cost 90 $90
Standard fixed manufacturing cost 20* $20
$110
Budgeted selling and administrative costs (all fixed) $45,000 45,000
*Denominator level of activity is 750 units for the year. 750
Absorb.
sales rev $150,000
Cost of Goods Sold
Beginning inventory $11,000
Variable manufacturing costs $63,000
Fixed manufacturing costs $14,000
Cost for goods available for sale $88,000
deduct ending inventory $5,500
Total COGS(at standard costs) $82,500
Adjustment for manufacturing variances $1,000
Total COGS $83,500
Gross Margin $66,500
Operating cost $45,000
Operating income $21,500
There were no price, efficiency, or spending variances for the year, and actual selling and
administrative expenses equaled the budget amount. Any volume variance is written off
to cost of goods sold in the year incurred. There are no work-in-process inventories.
Assuming that Dremmon used absorption costing, the amount of operating income earned
in the last fiscal year was $21,500
Bethany Company has just completed the first month of producing a new product but has
not yet shipped any of this product. The product incurred variable manufacturing costs of
$5,000,000, fixed manufacturing costs of $2,000,000, variable marketing costs of
$1,000,000, and fixed marketing costs of $3,000,000.
If Bethany uses the variable cost method to value inventory, the inventory value of the
new product would be
$5,000,000
Consider the following situation for Weisman Corporation for the prior year.
• The company produced 1,000 units and sold 900 units, both as budgeted.
• There were no beginning or ending work-in-process inventories and no beginning
finished goods inventory.
• Budgeted and actual fixed costs were equal, all variable manufacturing costs are
affected by volume of production only, and all variable selling costs are affected
by sales volume only.
• Budgeted per unit revenues and costs were as follows.
The operating income for Weisman for the prior year using absorption costing was
Absorb.
sales rev $90,000
Cost of Goods Sold
Beginning inventory
Variable manufacturing costs $60,000
Fixed manufacturing costs $5,000
Cost for goods available for sale $65,000
deduct ending inventory $6,500
Total COGS(at standard costs) $58,500
Adjustment for manufacturing variances $0
Total COGS $58,500
Gross Margin $31,500
Operating cost $16,200
Operating income $15,300
Mill Corporation had the following unit costs for the recently concluded calendar year.
Variable Fixed
Manufacturing $8 $3
Nonmanufacturing $2 $6
Inventory for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on
December 31. When compared to variable costing income, Mill’s absorption costing
income is
$2,400 Lower
During the month of May, Robinson Corporation sold 1,000 units. The cost per unit for
May was as follows.
May’s income using absorption costing was $9,500. The income for May, if variable
costing had been used, would have been $9,125. The number of units Robinson
produced during May was 1,250
[Fact Pattern #36] The planned per-unit cost figure
Valyn Corporation employs an absorption costing system for
internal reporting purposes; however, the company is
considering using variable costing. Data regarding Valyn’s Direct materials
planned and actual operations for the calendar year are Direct labor
presented below. Variable manufacturing
overhead
Fixed manufacturing
overhead
Variable selling expenses
Fixed selling expenses
Planned Actual Variable administrative
Activity Activity expenses
Beginning finished goods Fixed administrative
inventory in units 35,000 35,000 expenses
Sales in units 140,000 125,000 Total
Production in units 140,000 130,000
endning finished goods 40,000
inventory in units
Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a com
purposes. Any over- or underapplied manufacturing overhead is closed to the cost of goods sold account at the end of the
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s planned unit
planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. T
planned and actual unit selling price for the current year was $ 70.00 per unit.
Sales in units
Production in units
Budgeted FMOH
Allocated MOH
At year-end, the underapplied overhead was also added to cost of goods sold.
Because production was expected to be 140,000 units, the overhead application rate for
the $700,000 of planned fixed manufacturing overhead was $5 per unit.
sales rev
Cost of Goods Sold
Beginning inventory
Variable manufacturing costs
Fixed manufacturing costs
FMOH=so
Cost for goods available for sale
deduct ending inventory
Total COGS(at standard costs)
FMOH=so
Using variable costing, the unit cost of ending inventory is $25 ($12 direct materials + $9
direct labor + $4 variable overhead). Given beginning inventory of 35,000 units, the ending inventory equals
40,000 units (35,000 BI + 130,000 produced – 125,000 sold). Thus, ending inventory was $1,000,000 (40,000
units × $25).
8,750,000.00
85. A
Taylor Corporation is determining the cost behavior of several items in order to budget
for the upcoming year. Past trends have indicated the following dollars were spent at
three different levels of output.
In establishing a budget for 14,000 units, Taylor should treat Costs A, B, and C,
respectively, as
105. Which of the following correctly shows the treatment of (1) factory insurance, (2) direct
labor, and (3) finished goods shipping costs under absorption costing and variable
costing?
Absorption Costing Variable Costing
Product Cost Period Cost Product Cost Period Cost
a. 1, 2 3 2 1, 3.
b. 2 1, 3 1, 2 3.
c. 1, 2 3 1 2, 3.
d. 1 2, 3 2, 3 1.
Product Cost under absorption costing Product Cost under variable costing
All Manufacturing Costs such as: All variable Manufacturing Costs such as:
DM DM
DL DL
MOH VMOH
Product Cost under absorption costing Product Cost under variable costing
All Manufacturing Costs such as: All variable Manufacturing Costs such as:
DM DM
DL DL
VMOH VMOH
FMOH factory insurance
Both methods treat SGA as aperiod cost, finished goods shipping costs
$9,000
$63,000
$15,000
$87,000 We did not use the appropriate format
in solving the VC method
$4,500
$82,500
$67,500
$45,000
$22,500
Assuming that Dremmon used V costing, the amount of operating income earned
$22,500
production 1000
sales 900
end.inv. 100
VC
$90,000
$60,000
$5,000
$65,000
We did not use the appropriate format in
solving the VC method
We did not use the appropriate format in
6000 solving the VC method
$59,000
$0
$59,000
$31,000
$16,200
$14,800
BI 6000
E.Inv 5200
Diff 800
1000
$9,500.0
$9,125.0
Diff $375.0 250
lanned per-unit cost figures shown in the next schedule were based on the estimated production and sale of 140,000 units for the year
Planned Costs Incurred Costs
Per Unit Total
12 1,680,000 1,560,000 12
9 1,260,000 1,170,000 9
ble manufacturing 4 560,000 4 520,000
manufacturing
5 700,000 715,000
ble selling expenses 8 1,120,000 1,000,000
selling expenses 7 980,000 980,000
ble administrative
2 280,000 250,000
administrative
3 420,000 425,000
$ 50 $ 7,000,000 $ 6,620,000
to its product; thus, a combined manufacturing overhead rate of $ 9.00 per unit was employed for absorp
account at the end of the reporting year.
1,405,000
The beginning finished goods inventory included 35,000 units, each of
which had absorbed $5 of fixed manufacturing overhead.
175,000
Given that 125,000 of those units were sold, cost of goods sold was
625,000 debited for $625,000 of fixed overhead (125,000 units × $5).
Given that 125,000 of those units were sold, cost of goods sold was
debited for $625,000 of fixed overhead (125,000 units × $5).
650,000 Each unit produced during the year also absorbed $5 of fixed
manufacturing overhead
200,000
700,000
650,000
715,000 50,000 u pvv
15,000 u FBV
625,000
700,000
25,000
715,000 65,000
25,000 administrative
ed overhead).
2,095,000
FMOH=sold*5+underapplied
FMOH=sold*5+underapplied
1,000,000
ntory equals
000 (40,000
6,000,000
600,000
6,600,000
2,400,000
4,200,000
4,200,000
600,000
400,000
200,000
105. A
variable costing
cturing Costs such as:
40,000 units for the year.
fc 94000 20434.78261
8173.913
Nash Glassworks Company has budgeted fixed manufacturing overhead of $100,000 per month. The
company uses absorption costing for both external and internal financial reporting purposes. Budgeted overhead
rates for cost allocations for the month of April using alternative unit output denominator levels are shown in the
next column.
The choice of a production volume level as a denominator in the computation of fixed overhead r
significantly affect reported net income. Which one of the following statements is true for Nash G
Company if its beginning inventory is zero, production exceeded sales, and variances are adjustm
goods sold? The choice of Practical capacity as the denominator level will result in a lower net inc
if master-budget capacity is chosen.
Answer (A) is correct. The choice of practical rather than master budget capacity as the denominator level will result in a lo
costing net income. Practical capacity is the maximum level at which output is produced efficiently, with an allowance for un
interruptions, for example, for holidays and scheduled maintenance. Because this level will be higher than master-budget (ex
use will usually result in the underapplication of fixed overhead. For example, given costs of $100,000 and master-budget cap
800,000 units, $.125 per unit is the application rate. If practical capacity is 1,250,000 units, the application rate is $.08 per un
is 800,000 units, fixed overhead will not be over- or underapplied given the use of master-budget capacity. However, there w
units × $.08) of underapplied fixed overhead if practical capacity is the denominator level. Consequently, given that the begin
and that production exceeded sales, less fixed overhead will be inventoried at the lower practical capacity rate than at the m
Thus, master-budget net income will be greater.
onth. The
s. Budgeted overhead
evels are shown in the
Per Unit
Product selling price $200 $200
Standard variable manufacturing cost 90 $90
Standard fixed manufacturing cost 20* $20
$110
Budgeted selling and administrative costs (all fixed) $45,000 45,000
*Denominator level of activity is 750 units for the year. 750
Absorb.
sales rev $150,000
Cost of Goods Sold
Beginning inventory $11,000
Variable manufacturing costs $63,000
Fixed manufacturing costs $14,000
Cost for goods available for sale $88,000
deduct ending inventory $5,500
Total COGS(at standard costs) $82,500
Adjustment for manufacturing variances $1,000
Total COGS $83,500
Gross Margin $66,500
Operating cost $45,000
Operating income $21,500
There were no price, efficiency, or spending variances for the year, and actual selling and
administrative expenses equaled the budget amount. Any volume variance is written off
to cost of goods sold in the year incurred. There are no work-in-process inventories.
Assuming that Dremmon used absorption costing, the amount of operating income earned
in the last fiscal year was $21,500
Bethany Company has just completed the first month of producing a new product but has
not yet shipped any of this product. The product incurred variable manufacturing costs of
$5,000,000, fixed manufacturing costs of $2,000,000, variable marketing costs of
$1,000,000, and fixed marketing costs of $3,000,000.
If Bethany uses the variable cost method to value inventory, the inventory value of the
new product would be
$5,000,000
Consider the following situation for Weisman Corporation for the prior year.
• The company produced 1,000 units and sold 900 units, both as budgeted.
• There were no beginning or ending work-in-process inventories and no beginning
finished goods inventory.
• Budgeted and actual fixed costs were equal, all variable manufacturing costs are
affected by volume of production only, and all variable selling costs are affected
by sales volume only.
• Budgeted per unit revenues and costs were as follows.
The operating income for Weisman for the prior year using absorption costing was
Absorb.
sales rev $90,000
Cost of Goods Sold
Beginning inventory
Variable manufacturing costs $60,000
Fixed manufacturing costs $5,000
Cost for goods available for sale $65,000
deduct ending inventory $6,500
Total COGS(at standard costs) $58,500
Adjustment for manufacturing variances $0
Total COGS $58,500
Gross Margin $31,500
Operating cost $16,200
Operating income $15,300
Mill Corporation had the following unit costs for the recently concluded calendar year.
Variable Fixed
Manufacturing $8 $3
Nonmanufacturing $2 $6
Inventory for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on
December 31. When compared to variable costing income, Mill’s absorption costing
income is
$2,400 Lower
During the month of May, Robinson Corporation sold 1,000 units. The cost per unit for
May was as follows.
May’s income using absorption costing was $9,500. The income for May, if variable
costing had been used, would have been $9,125. The number of units Robinson
produced during May was 1,250
[Fact Pattern #36] The planned per-unit cost figure
Valyn Corporation employs an absorption costing system for
internal reporting purposes; however, the company is
considering using variable costing. Data regarding Valyn’s Direct materials
planned and actual operations for the calendar year are Direct labor
presented below. Variable manufacturing
overhead
Fixed manufacturing
overhead
Variable selling expenses
Fixed selling expenses
Planned Actual Variable administrative
Activity Activity expenses
Beginning finished goods Fixed administrative
inventory in units 35,000 35,000 expenses
Sales in units 140,000 125,000 Total
Production in units 140,000 130,000
endning finished goods 40,000
inventory in units
Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a com
purposes. Any over- or underapplied manufacturing overhead is closed to the cost of goods sold account at the end of the
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s planned unit
planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. T
planned and actual unit selling price for the current year was $ 70.00 per unit.
Sales in units
Production in units
Budgeted FMOH
Allocated MOH
At year-end, the underapplied overhead was also added to cost of goods sold.
Because production was expected to be 140,000 units, the overhead application rate for
the $700,000 of planned fixed manufacturing overhead was $5 per unit.
sales rev
Cost of Goods Sold
Beginning inventory
Variable manufacturing costs
Fixed manufacturing costs
FMOH=so
Cost for goods available for sale
deduct ending inventory
Total COGS(at standard costs)
FMOH=so
Using variable costing, the unit cost of ending inventory is $25 ($12 direct materials + $9
direct labor + $4 variable overhead). Given beginning inventory of 35,000 units, the ending inventory equals
40,000 units (35,000 BI + 130,000 produced – 125,000 sold). Thus, ending inventory was $1,000,000 (40,000
units × $25).
8,750,000.00
85. A
Taylor Corporation is determining the cost behavior of several items in order to budget
for the upcoming year. Past trends have indicated the following dollars were spent at
three different levels of output.
In establishing a budget for 14,000 units, Taylor should treat Costs A, B, and C,
respectively, as
$9,000
$63,000
$15,000
$87,000 We did not use the appropriate format
in solving the VC method
$4,500
$82,500
$67,500
$45,000
$22,500
Assuming that Dremmon used V costing, the amount of operating income earned
$22,500
production 1000
sales 900
end.inv. 100
VC
$90,000
$60,000
$5,000
$65,000
We did not use the appropriate format in
solving the VC method
We did not use the appropriate format in
6000 solving the VC method
$59,000
$0
$59,000
$31,000
$16,200
$14,800
BI 6000
E.Inv 5200
Diff 800
1000
$9,500.0
$9,125.0
Diff $375.0 250
lanned per-unit cost figures shown in the next schedule were based on the estimated production and sale of 140,000 units for the year
Planned Costs Incurred Costs
Per Unit Total
12 1,680,000 1,560,000 12
9 1,260,000 1,170,000 9
ble manufacturing 4 560,000 4 520,000
manufacturing
5 700,000 715,000
ble selling expenses 8 1,120,000 1,000,000
selling expenses 7 980,000 980,000
ble administrative
2 280,000 250,000
administrative
3 420,000 425,000
$ 50 $ 7,000,000 $ 6,620,000
to its product; thus, a combined manufacturing overhead rate of $ 9.00 per unit was employed for absorp
account at the end of the reporting year.
1,405,000
The beginning finished goods inventory included 35,000 units, each of
which had absorbed $5 of fixed manufacturing overhead.
175,000
Given that 125,000 of those units were sold, cost of goods sold was
625,000 debited for $625,000 of fixed overhead (125,000 units × $5).
Given that 125,000 of those units were sold, cost of goods sold was
debited for $625,000 of fixed overhead (125,000 units × $5).
650,000 Each unit produced during the year also absorbed $5 of fixed
manufacturing overhead
200,000
107 a - Under absorption costing the fixed sel
fixed costs. Additionally, $5 per unit of fixed m
is $625,000. In total, this is now $2,030,000 in
applied overhead is closed to cost of goods so
over-applied) or added to (in the case of unde
700,000 calculated above. Overhead was applied at $5
650,000 overhead was applied. The actual incurred wa
(a form of expensing). This brings the total to
715,000 50,000 u pvv
15,000 u FBV
625,000
700,000
25,000
715,000 65,000
25,000 administrative
ed overhead).
2,095,000
FMOH=sold*5+underapplied
FMOH=sold*5+underapplied
1,000,000
ntory equals
000 (40,000
6,000,000
600,000
6,600,000
2,400,000
4,200,000
4,200,000
600,000
400,000
200,000
f fixed
f goods sold
A firm has budgeted sales of 10,000 units of its sole product at $17 per
unit. Variable costs are expected to be $10 per unit and fixed costs are budgeted at
$50,000. A comparison of budgeted to actual results is as follows:
Although sales were greater than predicted, the contribution margin is less than
expected.
a) The discrepancy can be analyzed in terms of the sales price variance and
the sales volume variance.
Selling Price = (Actual sel
Variance pric
sales price variance -$11,000 U
For the single product, the sales volume variance is the change in contribution
margin caused by the difference between the actual and budgeted volume
(holding price constant).
a) In the example, it equals $7,000 F (1,000-unit increase in volume ×
Operating Income sales
$7 budgeted UCM). Volume variance
The sales mix variance is zero because the firm sells only one product. Hence,
the sales volume variance equals the sales quantity variance.
5) The sales price variance ($11,000 U) combined with the sales volume variance
($7,000 F) equals the total change in the contribution margin ($4,000 U).
If a company produces two or more products, the multiproduct sales variances reflect not
only the effects of the change in total unit sales, but also any difference in the mix of
products sold.
Plastic Metal
Comprehensive example:
As shown below (000 omitted), the total contribution margin variance was
$100 unfavorable ($130 unfavorable sales price variance – $30 favorable sales
volume variance).
Sales price variance:
Plastic 260 × ($6.00 – $6.00) $ 0 0 -130
Metal 260 × ($10 – $9.50) (130) $130 unfavorable
Sales volume variance:
Plastic (260 – 300) × $3.00 $(120) -$120.0 U $150.0
Metal (260 – 200) × $2.50 150 $ 30 favorable
Total contribution margin variance $100 unfavorable -$100.0
The sales volume variance may be broken down as follows: Sales quantity
variance:
Sales quantity variance:
Plastic [(520 × .6) – 300] × $3.00 $ 36 $36.0 F $20.0
Metal [(520 × .4) – 200] × $2.50 20 $ 56 favorable
Sales mix variance:
Plastic [260 – (520 × .6)] × $3.00 $(156) -$156.0 U $130.0
Metal [260 – (520 × .4)] × $2.50 130 $ 26 unfavorable
Sales volume variance $ 30 favorable
e. The sales quantity variance may be broken down into the market size and market
share variances.
1) The market size variance measures the effect on the contribution margin of the
difference between the actual market size in units and the budgeted market
size in units, assuming the market share percentage and the budgeted
weighted-average UCM are constant.
a) It equals the budgeted market share percentage, times the difference
between the actual market size in units and the budgeted market size in
units, times the budgeted weighted-average UCM.
The market share variance measures the effect on the contribution margin of
the difference between the actual and budgeted market share percentages,
assuming the actual market size in units and the budgeted weighted-average
UCM are constant.
a) It equals the difference between the actual market share percentage and
the budgeted market share percentage, times the actual market size in
units, times the budgeted weighted-average UCM.
3) EXAMPLE: Assume that a company’s budgeted and actual market sizes and
market shares are as follows:
Budget Actual
Market size in units 60,000 50,000
Market share 9% 10%
$110,000
$16,000
Operating Income sales = (Actual Units sold - unites Budgeted) X Master budget CM per unit
Volume variance to be sold
Total
500
100%
520
520
F $56.0 F
F -$26.0 U
the market size variance is
W av. UCM
$3.0
1% $2,700.0 U
6,600.00 1,000.00
33,000.00
17,000.00
50,000.00
000 bats were completed and transferred to the 8000
epartment; the remaining 2,000 bats were still in 2000
process at the end of the month. All of the
partment’s direct materials were placed in
t, on average, only 25% of the conversion cost
to the ending work-in-process inventory.
nt for = 10,000.00
nsferred-out Goods 8,000.00
2,000.00
Units
Work-in-process on November 1
(60% complete as to conversion costs) 1000
Units started during November 5000
Total units to account for 6000
Units completed and transferred out
from beginning inventory 1000
Units started and completed during November 3000
Work-in-process on November 30
(20% complete as to conversion costs) 2000
Total units accounted for 6000
nt for = 6,000.00
nsferred-out Goods 4,000.00
2,000.00
as follows:
November are
Department at the end of May is
1. Account for all units (physical flow of quantities).
Using the FIFO method, Kimbeth’s equivalent unit cost of materials for May is
Using the FIFO method, Kimbeth’s the total cost of units in the ending work-in-process inventory at May 31 is
Material Conversion
Total Units Completed this period 92,000.00 92000
Work to date on Ending WIP 21,600.00 9600
EUP under weighted average 113,600.00 101,600.00
Using the weighted-average method, Kimbeth’s equivalent unit cost of materials for May is
$ 4.60 $ 6.00
116,000.00
rred-out Goods 92,000.00
24,000.00
The beginning inventory was 60% complete for materials and 20% complete for
conversion costs. The ending inventory was 90% complete for materials and
40% complete for conversion costs.
The firm has established a $200,000 line of credit with its bank at a 12% annual rate of interest on which borrowin
$10,000 increments. There is no outstanding balance on the line of credit loan on April 1. Principal repayments ar
there is a surplus of cash.
Interest is to be paid monthly. If there are no outstanding balances on the loans, Raymar will invest any cash in ex
balance in U.S. Treasury bills. Raymar intends to maintain a minimum balance of $100,000 at the end of each mo
below the minimum balance or investing any excess cash. Expected monthly collection and disbursement pattern
• Collections. 50% of the current month’s sales budget and 50% of the previous month’s sales budget.
• Accounts payable disbursements. 75% of the current month’s accounts payable budget and 25% of the
previous month’s accounts payable budget.
• All other disbursements occur in the month in which they are budgeted.
Budget Information
Total Cash receipt
March April May
20,000.00 25,000.00 50,000.00
20,000.00 25,000.00
Total Cash disb
22,500.00 30,000.00 30,000.00
7,500.00 10,000.00
1) calculate the excess cash that result because Raymer borrow with $10,000 increment as it will be the beginning balance in M
According to the loan provisions Raymer must borrow an amount of $100,000 to cover the $92,500 deficit
thus it will have an excess balance with an amount of $7,500
The loan amount 100,000
The deficit to be covered (92,500)
the excess cash in April 7,500
Estimated Monthly Sales Type of Monthly Sale Collection Pattern for Credit Sales
Jan 600,000 Cash sales 20% Month of sale
feb 650,000 Credit sales 80% One month following sale
march 700,000 Second month following sale
april 625,000
may 720,000
june 800,000
Karmee’s cost of goods sold averages 40% of the sales value. Karmee’s objective is to maintain a target inventory equal to 30
Purchases of merchandise for resale are paid for in the month following the sale.
Karmee’s cost of goods sold averages 40% of the sales value. Karmee’s objective is to maintain a target inventory equal to 30
Purchases of merchandise for resale are paid for in the month following the sale.
The variable operating expenses (other than cost of goods sold) for Karmee are 10% of sales and are paid for in the month
following the sale. The annual fixed operating expenses are presented below. All of these are incurred uniformly
throughout the year and paid monthly except for insurance and property taxes. Insurance is paid quarterly in January, April,
July, and October. Property taxes are paid twice a year in April and October.
308,000
629,000
(Refers to Fact Pattern #14)
The purchase of merchandise that Karmee Company will need to make during February will be
Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers.
79,375
The estimated collections in July related to April credit sales will be reduced by $1,440.
Estimated collections in the month of the sale will be unchanged.
Super Drive
Statement of Financial Position
Position November 30
Assets
Cash 52,000
Accounts receivable, net 150,000
Inventory 315,000
Property, plant, and equipment 1,000,000
Total assets 1,517,000
Dec Jan
Sales 520,000 500,000
Collections are expected to be 60% in the month of sale 312,000 300,000
Collections are expected to be 40% in the month following the sale. 150,000 208,000
Payment for the components is made in the month following the purchase.
462,000
161,280
104,000
A total of 80% of the merchandise held for resale is purchased in the month prior to the month of sale
120000
208,000
10,000
153,000
120,000
ate of interest on which borrowings for cash deficits must be made in
April 1. Principal repayments are to be made in any month in which
Raymar will invest any cash in excess of its desired end-of-month cash
$100,000 at the end of each month by either borrowing for deficits
ction and disbursement patterns are shown in the column to the right.
’s sales budget.
et and 25% of the
The net negative cash flow (amount to be borrowed to reach the required
minimum cash balance of $100,000) is $92,500 ($137,500 – $45,000). Bec
the line of credit must be drawn upon in $10,000 increments, the loan mu
for $100,000.
The net negative cash flow (amount to be borrowed to reach the required
minimum cash balance of $100,000) is $92,500 ($137,500 – $45,000). Bec
the line of credit must be drawn upon in $10,000 increments, the loan mu
for $100,000.
and pay $1,000 interest.
ntain a target inventory equal to 30% of the next month’s sales in units.
ntain a target inventory equal to 30% of the next month’s sales in units.
erating expenses The outflow of variable operating expenses Fixed Operating Costs
150,000 45,000
60,000 150,000
65,000 150,000
70,000 150,000 45,000 120,000
62,500 150,000
72,000 150,000
80,000 150,000
june
160,000
640,000
192,000
230,400
125,000
707,400
Cash collected during a month on sales for that month equals 44% of total sales. Hence, cash
receipts in April on April’s sales are $275,000 ($625,000 × 44%). April collections on March
credit sales equal $224,000 ($700,000 × 40% × 80%). April collections on February credit sales
equal $130,000 ($650,000 ×
25% × 80%). Thus, total cash receipts for April were $629,000 ($275,000 + $224,000 +
$130,000).
receipts in April on April’s sales are $275,000 ($625,000 × 44%). April collections on March
credit sales equal $224,000 ($700,000 × 40% × 80%). April collections on February credit sales
equal $130,000 ($650,000 ×
25% × 80%). Thus, total cash receipts for April were $629,000 ($275,000 + $224,000 +
$130,000).
Purchases equal cost of goods sold, plus ending inventory, minus beginning inventory.
Estimated cost of goods sold for February equals $260,000 ($650,000 sales × 40%). Ending
inventory is given as 30% of sales in units. Stated at cost, this amount equals $84,000
($700,000 March sales × 30% × 40%).
Furthermore, beginning inventory is $78,000 ($260,000 CGS for February × 30%). Thus,
purchases equal $266,000 ($260,000 + $84,000 – $78,000).
Cash disbursements for variable operating expenses in April (excluding cost of goods sold)
equal $70,000 ($700,000 March sales × 10%). Cash disbursements for fixed operating
expenses (excluding depreciation, a noncash expense) include advertising ($720,000 ÷ 12 =
$60,000), salaries ($1,080,000 ÷ 12 = $90,000), insurance ($180,000 ÷ 4 = $45,000), and
property taxes ($240,000 ÷ 2 = $120,000). Hence, cash payments for April operating expenses
are $385,000 ($70,000 + $60,000 + $90,000 + $45,000 + $120,000).
Collections are expected to be 60% in the month of sale and 40% in the month
following the sale. Thus, collections in December consist of the $150,000 of
receivables at November 30, plus 60% of December sales. Total collections are
therefore $462,000 [$150,000 + ($520,000 × 60%)].
Payments are made in the month following purchase. The balance in accounts
payable on November 30 is $175,000; this amount will be paid in December. The
account is credited for purchases of a portion of components to be used for sales in
December (20% of December components) and for sales in January (80% of January
components). Cost of goods sold is 80% of sales, and components are 40% of cost of
goods sold. Thus, December component needs are $166,400 ($520,000 sales × 80% ×
40%), and January component needs are $160,000 ($500,000 sales × 80% × 40%). The
December purchases of December component needs equal $33,280 ($166,400 ×
20%).
December purchases of January component needs are $128,000 ($160,000 × 80%).
Hence, the total of December purchases (ending balance in accounts payable) equals
$161,280 ($33,280 + $128,000).
Given that cost of goods sold is 80% of sales, gross profit is 20% of sales.
Consequently, pro forma gross profit is $104,000 ($520,000 × 20%).
Given that cost of goods sold is 80% of sales, gross profit is 20% of sales.
Consequently, pro forma gross profit is $104,000 ($520,000 × 20%).
Since collections are 60% of the current month’s sales and 38% of the
previous month’s sales, total collections should be
Sales are budgeted at $220,000. Given that cost of goods sold is 75% of sales, or
$165,000, gross profit is $55,000. Deduct cash expenses of $22,600, depreciation of
$18,000 ($216,000 ÷ 12), and bad debt expense of $4,400 ($220,000 × .02). This
leaves an income of $10,000
Sales are budgeted at $220,000. Given that cost of goods sold is 75% of sales, or
$165,000, gross profit is $55,000. Deduct cash expenses of $22,600, depreciation of
$18,000 ($216,000 ÷ 12), and bad debt expense of $4,400 ($220,000 × .02). This
leaves an income of $10,000
The balance is equal to the purchases made during December since all purchases are paid for in the
month following purchase. Purchases for December is given as 20% of December’s sales and 80% of
January’s sales. Thus, of the $220,000 of merchandise sold during December, 20%, or $44,000, would have
been purchased during the month. January’s sales are expected to be $200,000, so 80% of that amount,
or $160,000, would have been purchased during December. December purchases are thus estimated as
$204,000 at the company’s selling prices. The merchandise costs only 75% of the marked selling prices,
however. Therefore, the balance in the purchases account at month-end is projected to be $153,000
($204,000 × 75%).
The inventory is expected to be 80% of January’s needs. $200,000 projected January sales ×
80% = $160,000. Thus, the ending inventory would be goods that the company could sell for $160,000.
Given a gross margin of 25%, cost would only be 75% of sales, and ending inventory would be $120,000
($160,000 × 75%).
reach the required
00 – $45,000). Because
ments, the loan must be
reach the required
00 – $45,000). Because
ments, the loan must be
If the beginning balance for May of the materials inventory account was $27,500, the ending balance for May is $28,750,
and $128,900 of materials were used during the month, the materials purchased during the month cost
CoGs Total
Beg.RM 27,500
Add: Purchase
Less : Returns and discounts
Net Purchase -
Add: Freight-in
RM Available for use 27,500
Less : End.RM 28,750
DM used in Production (1,250)
DL
MOH
Total manufacturing costs for the period (1,250)
Add: Beg. WIP -
Less: End. WIP -
Costs of goods Manufacturing (1,250)
Add: Beg.Finished
Goods Available for sale (1,250)
Less: End. Finished
Costs of goods Sold (1,250)
balance for May is $28,750,
128900 130150
Job 298
Actual DM 4606 2003 Actual DL hours 27,000.00
Actual DL 1579 Actual MOH 1,215,000.00
6185 Actual rate $ 45.00
Actual DL hours for Job 298 88
Actual Allocated OH 88 X $45 $ 3,960.00 2003 Budgeted DL hours 28,000.00
Budgeted MOH 1,120,000.00
Total Manf. Cost $ 10,145.00 Budgeted rate $ 40.00
Actual Price $ 15,000.00
Gross Margin $ 4,855.00
Gross Margin % 32%
Applied MOH 1,080,000.00
Net (Dr) Balance 135,000.00 12.05%
Job 298Applied MOH 88X$40 $ 3,520.00
Total Manf. Cost(normal costing) $ 9,705.00 Dr CoGS 135,000.00
DR Applied 1,080,000.00
Diff $ 440.00 CR MOH control 1,215,000.00
DR Cogs 2,025.00 2%
DR WIP 3,915.00 3%
DR FG 129,060.00 96%
Dr Applied OH 1,080,000.00 135,000.00
CR MOH control 1,215,000.00
99. From the following budgeted data, calculate the budgeted indirect cost rate that would be
used in a normal costing system
Total direct labor hours 250,000 250,000
Direct costs $10,000,000 $ 10,000,000
Total indirect labor hours 50,000 50,000
Total indirect-labor-related costs $ 5,000,000 $ 5,000,000
Total indirect non-labor related costs $ 7,000,000 $ 7,000,000
100. Loyal Co. produces three types of men’s undershirts: T-shirts, V-neck shirts, and athletic 100. D
shirts. In the Folding and Packaging Department, operations costing is used to apply
costs to individual units, based on the standard time allowed to fold and package each
type of undershirt. The standard time to fold and package each type of undershirt is as
follows.
Allocation base
T-shirt 40 seconds per shirt 40 2,000,000.0 50,000 56%
V-neck shirt 40 seconds per shirt 40 1,200,000 30,000 33%
Athletic shirt 20 seconds per shirt 20 400,000 20,000 11%
100 3,600,000 100,000 1.0
During the month of April, Loyal produced and sold 50,000 T-shirts, 30,000 V-neck
shirts, and 20,000 athletic shirts. If costs in the Folding and Packaging Department were $ 78,200
$78,200 during April, how much folding and packaging cost should be applied to each Tshirt?
Beginning WIP 0
Started Units this period 10000
M C
Total units Completed
Beginning WIP (regardless of % of completion)
Units Started and Completed this Period 8000 8000
+ Amount needed to complete Beginning WIP
+ Amount Completed on Ending WIP 2000 500
10000 8500
3.30 2.00
The total cost transferred was therefore $42,400 26,400.00 16,000.00 42,400.00
New MCQ
Mack Inc. uses a weighted-average process costing system. Direct materials and
conversion costs are incurred evenly during the production process. During the month of
October, the following costs were incurred.
Direct materials $39,700
Conversion costs 70,000
The work-in-process inventory as of October 1 consisted of 5,000 units, valued at $4,300,
that were 20% complete. During October, 27,000 units were transferred out. Inventory
as of October 31 consisted of 3,000 units that were 50% complete. The weighted-average
inventory cost per unit completed in October was
During December, Krause Chemical Company had the following selected data
concerning the manufacture of Xyzine, an industrial cleaner.
Production Flow Physical Units
Completed and transferred to the next department 100
Add: Ending work-in-process inventory 10 (40% complete as
to conversion)
Total units to account for 110
Less: Beginning work-in-process inventory 20 (60% complete as
to conversion)
Units started during December 90
All material is added at the beginning of processing in this department, and conversion
costs are added uniformly during the process. The beginning work-in-process inventory
had $120 of raw material and $180 of conversion costs incurred. Material added during
December was $540 and conversion costs of $1,484 were incurred. Krause uses the
weighted-average process-costing method. The total raw material costs in the ending
work-in-process inventory for December is
M CONV
Beginning WIP 20 60% conv $120 $180
Started Units this period 90 $540 $1,484
$660 $1,664
Total Units to Account for 110 110
M conv
Ü EUP under weighted average costing may be computed as follows:
Total Units Completed this period XX 100 100
Work to date on Ending WIP XX 10 4
_____
EUP under weighted average XXXX 110 104
6.00 16.00
The total raw material costs in the ending work-in-process invent 60.00
Southwood Industries uses a process costing system and inspects its goods at the end of
manufacturing. The inspection as of June 30 revealed the following information for the
month of June.
Good units completed 16,000 16000
Normal spoilage (units) 300
Abnormal spoilage (units) 100
Unit costs were: materials, $3.50; and conversion costs, $6.00. The number of units that
Southwood would transfer to its finished goods inventory and the related cost of these
M CONV
Beginning WIP XX
Started Units this period XX $3.5 $6.0
$3.5 $6.0 $9.5
Total Units to Account for 16000 0
Colt Company uses a weighted-average process cost system to account for the cost of
producing a chemical compound. As part of production, Material B is added when the
goods are 80% complete. Beginning work-in-process inventory for the current month
was 20,000 units, 90% complete. During the month, 70,000 units were started in process,
and 65,000 of these units were completed. There were no lost or spoiled units. If the
ending inventory was 60% complete, the total equivalent units for Material B for the
month was
M CONV
Beginning WIP 20000 90%
Started Units this period 70000
$0.0 $0.0
Total Units to Account for 90000 90000
M conv
Ü EUP under weighted average costing may be computed as follows:
Total Units Completed this period XX 65000 65000
Work to date on Ending WIP XX 0 15000
_____
EUP under weighted average XXXX 65000 80000
DM 33000
Conv 17000
50000
The cost of the work-in-process inventory in Snapping Turtle’s Forming Department at the end of May is
Total Units Completed this period XX 27000
Current cost Work to date on Ending WIP XX 1500
DM $39,700 _____
Conv $70,000 EUP under weighted average XXXX 28500
$109,700
$114,000 $4.0
related cost of these
$154,850.0
Price $200.00 100% $ 1.00
VC $120.00 60% $ 0.60
CM $80.00 40% $ 0.40
FC $2,000.00
CM% = CM/Price 40%
Break=FC/CM 25 Units
0 1 5 25
Revenues $0.00 $200.00 $1,000.00 $5,000.00
VC $0.00 $120.00 $600.00 $3,000.00
CM $0.00 $80.00 $400.00 $2,000.00
FC $2,000.00 $2,000.00 $2,000.00 $2,000.00
OI ($2,000.00) ($1,920.00) ($1,600.00) $0.00
Q Margin of safety
$ Margin of safety
Strategic decisions invariably entail risk. CVP analysis evaluates how operating
income will be affected if the original predicted data are not achieved - say, if
sales are 10%lower than estimated. Evaluating this risk affects other strategic
decisions a company might make. For example, if the probability of a decline in
sales seems high, a manager may take actions to shift the cost structure to
have more variable costs and fewer fixed ,) costs.
Strategic decisions invariably entail risk. CVP analysis evaluates how operating
income will be affected if the original predicted data are not achieved - say, if
sales are 10%lower than estimated. Evaluating this risk affects other strategic
decisions a company might make. For example, if the probability of a decline in
sales seems high, a manager may take actions to shift the cost structure to
have more variable costs and fewer fixed ,) costs.
Decision to Advertise
New Q will be 44 instead of 40
New FC will be $500 higher than old FC due to Adv.
Selling Price will be the same
Contribution margin from lowering price to $175: ($175 - $115) per unit x 50 units $ 3,000.00
Contribution margin from maintaining price at $200: ($200 - $120) per unit x 40 units $ 3,200.00
Change in contribution margin from lowering price $ (200.00)
Mary can immediately see the revenues that need to be generated to reach particular operating-income levels, given a
costs and variable cost per unit. For example, revenues of $6,40.0 ($2Q{) per unit x 32 units) are required to earn an oper
fIxed/costs are $2,000 and variable cost per unit is $100. Mary can also use Exhibit 3-4 to assess what revenues she needs
operating income of $0) if, for example, the booth rental at the Chicago convention is raised to $2,800 (increasing fIxed co
software supplier raises its price to $150 (increasing variable cost to $150 per unit).
Rev
must
be
Rev
must
be
200
FC VC CM CM%
1 2000 $ 100.00 $ 100.00 50% rev must be
2 2000 $ 120.00 $ 80.00 40% rev must be
3 2000 $ 150.00 $ 50.00 25% rev must be
4 2400 $ 100.00 $ 100.00 50% rev must be
5 2400 $ 120.00 $ 80.00 40% rev must be
6 2400 $ 150.00 $ 50.00 25% rev must be
7 2800 $ 100.00 $ 100.00 50% rev must be
8 2800 $ 120.00 $ 80.00 40% rev must be
9 2800 $ 150.00 $ 50.00 25% rev must be
Compare line 2 (fIxed costs, $2,000; variable cost per unit, $120)-and
line 7 (fIxed costs, $2,800; variable cost per unit, $100) See how the
revenues required to break even are higher for line 7 ($5,600 versus
$5,000 in line 2) ..whereas the revenues required to earn $2,000 of
operating income are lower in line T ($9,600 versus $10,000 in line 2).
Line 7, with higher fIxed costs, has more risk of loss (has a higher
breakeven point) but offers a greater return (more profits) as revenues
increase.
The CVP analysis, however, highlights the different risks of loss and different return
option if sales differ from 40 units. The higher risk of a loss in option 1 is because o
($2,000), which result in a higher breakeven point (25 units) and a lower margin of
units) relative to the other options. The line representing option 1 intersects the
horizontal axis farther to the right than the lines representing options 2 and 3.
Consider operating income under each option if the number of units sold dr
20. Exhibit 3-5 shows that option 1 leads to an operating loss, whereas optio
continue to generate operating incomes. (A vertical line from X = 20 units so
option 1 line below the horizontal axis in the mauve area and cuts the optio
lines above the horizontal axis in the blue-green area.) The higher risk ofloss
however, must be evaluated against its potential benefits. Option 1 has the
margin per unit because of its low variable costs.
Once fixed costs are recovered at sales of 25 units, each additional unit sold adds $80 of contribution margin and, therefo
$80 of operating income per unit. For example, at sales of 60 units, option 1 shows an operating income of $2,800, greate
60 units under options 2 and 3. By moving from option 1 toward option 3, Mary faces less risk of loss when demand is lo
because she loses less contribution margin per unit. She must, however, accept less operating income when
demand is high because of the higher variable costs of option 3 compared with options 1 and 2. The choice among option
confidence in the level of demand for the software package and her willingness to risk losses if demand
is low.
Once fixed costs are recovered at sales of 25 units, each additional unit sold adds $80 of contribution margin and, therefo
$80 of operating income per unit. For example, at sales of 60 units, option 1 shows an operating income of $2,800, greate
60 units under options 2 and 3. By moving from option 1 toward option 3, Mary faces less risk of loss when demand is lo
because she loses less contribution margin per unit. She must, however, accept less operating income when
demand is high because of the higher variable costs of option 3 compared with options 1 and 2. The choice among option
confidence in the level of demand for the software package and her willingness to risk losses if demand
is low.
The risk-return tradeoff across alternative cost structures can be measured as operating leverage. Operating le
costs have on changes in operating income as changes occur in units sold and, hence, in contribution margin.
Organizations with a high proportion of fixed costs in their cost structures, as is the case under option 1, have h
representing option 1 in Exhibit 3-5 is the steepest of the three lines. Small increases in sales lead to large incre
incomes. Small decreases in sales result in relatively large decreases in operating incomes, leading to a greater r
level of sales, the degree of operating leverage equals contribution margin divided by operating income.
These numbers indicate that, when sales are 40 units, a percentage change in sales and contribution margin will result in
operating income for option 1, but the same percentage change in operating income for option 3.
Consider, for example, a sales increase of 50% from 40 to 60 units. Contribution margin will increase by 50% under each
increase by 2.67 x 50% = 133% from $1,200 to $2,800 in option 1, but it will increase only by 1.00 x 50% = 50% from $1,2
The degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales
These numbers indicate that, when sales are 40 units, a percentage change in sales and contribution margin will result in
operating income for option 1, but the same percentage change in operating income for option 3.
Consider, for example, a sales increase of 50% from 40 to 60 units. Contribution margin will increase by 50% under each
increase by 2.67 x 50% = 133% from $1,200 to $2,800 in option 1, but it will increase only by 1.00 x 50% = 50% from $1,2
The degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales
on operating incomes.
These numbers indicate that, when sales are 40 units, a percentage change in sales and contribution margin will result in
operating income for option 1, but the same percentage change in operating income for option 3.
Consider, for example, a sales increase of 50% from 40 to 60 units. Contribution margin will increase by 50% under each o
increase by 2.67 x 50% = 133% from $1,200 to $2,800 in option 1, but it will increase only by 1.00 x 50% = 50% from $1,20
The degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales
on operating incomes.
The degree of operating leverage should thus be viewed as a measure of "potential risk" whic
presence of sales and production cost variability.The degree of operating leverage itself is not
12 20
8 15
RC HS
CM $4.0 $5.0
units 10000 15000 25000
40% 60%
$1.6 $3.0 $4.6
fc $94,000.0 20,434.78
fc $94,000.0 19,789.47
40% 40%
60% 60%
15 20
3,000 4,000
Rev
must
be
Rev
must
be
To earn OI
zero $ 1,200.00 $ 1,600.00 $ 2,000.00
$ 4,000.00 $ 6,400.00 $ 7,200.00 $ 8,000.00
$ 5,000.00 $ 8,000.00 $ 9,000.00 $ 10,000.00
$ 8,000.00 $ 12,800.00 $ 14,400.00 $ 16,000.00
$ 4,800.00 $ 7,200.00 $ 8,000.00 $ 8,800.00
$ 6,000.00 $ 9,000.00 $ 10,000.00 $ 11,000.00
$ 9,600.00 $ 14,400.00 $ 16,000.00 $ 17,600.00
$ 5,600.00 $ 8,000.00 $ 8,800.00 $ 9,600.00
$ 7,000.00 $ 10,000.00 $ 11,000.00 $ 12,000.00
$ 11,200.00 $ 16,000.00 $ 17,600.00 $ 19,200.00
Option 2 Option 3
$ 200.00 $ 200.00
$ 150.00 $ 170.00
$ 50.00 $ 30.00
40 40
$ 2,000.00 $ 1,200.00
25% 15%
800 0
$ 1,200.00 $ 1,200.00
Option 2 Option 3
$ 200.00 $ 200.00
$ 150.00 $ 170.00
$ 50.00 $ 30.00
25 25
$ 1,250.00 $ 750.00
25% 15%
800 0
$ 450.00 $ 750.00
16.00 -
Option 2 Option 3
$ 200.00 $ 200.00
$ 150.00 $ 170.00
$ 50.00 $ 30.00
20 20
$ 1,000.00 $ 600.00
25% 15%
800 0
$ 200.00 $ 600.00
16.00 -
Option 2 Option 3
$ 200.00 $ 200.00
$ 150.00 $ 170.00
$ 50.00 $ 30.00
60 60
$ 3,000.00 $ 1,800.00
25% 15%
800 0
$ 2,200.00 $ 1,800.00
16.00 -
Option 2 Option 3
$ 200.00 $ 200.00
$ 150.00 $ 170.00
$ 50.00 $ 30.00
40 40
$ 2,000.00 $ 1,200.00
25% 15%
800 0
$ 1,200.00 $ 1,200.00
$ 1.67 $ 1.00
Option 2 Option 3
$ 200.00 $ 200.00
$ 150.00 $ 170.00
$ 50.00 $ 30.00
60 60
$ 3,000.00 $ 1,800.00 50%
25% 15%
800 0
$ 2,200.00 $ 1,800.00
50% 50%
83% 50%
83% 50%
$ 1.36 $ 1.00
er?
n sales would have on operating profit. Sometimes, in
e changes in its sales policy and/ or cost structure. As a
ree of operating leverage. Since, in that situation, a small
Specialty Cakes Inc. produces two types of cakes, a 2 lbs. round cake and a 3 lbs. heartshaped
cake. Total fixed costs for the firm are $94,000. Variable costs and sales data for
the two types of cakes are presented below.
2 lbs. 3 lbs.
Round Cake Heart-shape Cake
Selling price per unit $12 $20
Variable cost per unit $8 $15
Current sales (units) 10,000 15,000
the product sales mix were to change to three heart-shaped cakes for each round cake,
e breakeven volume for each of these products would be
Price $200.00 100% $ 1.00
VC $120.00 60% $ 0.60
CM $80.00 40% $ 0.40
FC $2,000.00
CM% = CM/Price 40%
Q.Break=FC/CM 25
Units
0 1 5
Revenues $0.00 $200.00 $1,000.00
VC $0.00 $120.00 $600.00
CM $0.00 $80.00 $400.00
FC $2,000.00 $2,000.00 $2,000.00
OI ($2,000.00) ($1,920.00) ($1,600.00)
Strategic decisions invariably entail risk. CVP analysis evaluates how operating income will be
affected if the original predicted data are not achieved - say, if sales are 10%lower than
estimated. Evaluating this risk affects other strategic decisions a company might make. For
example, if the probability of a decline in sales seems high, a manager may take actions to
shift the cost structure to have more variable costs and fewer fixed ,) costs.
Strategic decisions invariably entail risk. CVP analysis evaluates how operating income will be
affected if the original predicted data are not achieved - say, if sales are 10%lower than
estimated. Evaluating this risk affects other strategic decisions a company might make. For
example, if the probability of a decline in sales seems high, a manager may take actions to
shift the cost structure to have more variable costs and fewer fixed ,) costs.
Decision to Advertise
New Q will be 44 instead of 40
New FC will be $500 higher than old FC due to Adv.
Selling Price will be the same
Contribution margin from lowering price to $175: ($175 - $115) per unit x 50 units
Contribution margin from maintaining price at $200: ($200 - $120) per unit x 40 units
Change in contribution margin from lowering price
Mary can immediately see the revenues that need to be generated to reach particular operating-income levels, given a
variable cost per unit. For example, revenues of $6,40.0 ($2Q{) per unit x 32 units) are required to earn an operating inco
and variable cost per unit is $100. Mary can also use Exhibit 3-4 to assess what revenues she needs to break even (earn o
the booth rental at the Chicago convention is raised to $2,800 (increasing fIxed costs to $2,800) or if the software supplier
variable cost to $150 per unit).
Rev
must
be
200
FC VC CM CM%
1 2000 $ 100.00 $ 100.00 50%
2 2000 $ 120.00 $ 80.00 40%
3 2000 $ 150.00 $ 50.00 25%
4 2400 $ 100.00 $ 100.00 50%
5 2400 $ 120.00 $ 80.00 40%
6 2400 $ 150.00 $ 50.00 25%
7 2800 $ 100.00 $ 100.00 50%
8 2800 $ 120.00 $ 80.00 40%
9 2800 $ 150.00 $ 50.00 25%
Compare line 2 (fIxed costs, $2,000; variable cost per unit, $120)-and line 7 (fIxed
costs, $2,800; variable cost per unit, $100) See how the revenues required to break
even are higher for line 7 ($5,600 versus $5,000 in line 2) ..whereas the revenues
required to earn $2,000 of operating income are lower in line T ($9,600 versus
$10,000 in line 2). Line 7, with higher fIxed costs, has more risk of loss (has a higher
breakeven point) but offers a greater return (more profits) as revenues increase.
Quantity sold 40
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
The CVP analysis, however, highlights the different risks of loss and different return
differ from 40 units. The higher risk of a loss in option 1 is because of its higher fixe
higher breakeven point (25 units) and a lower margin of safety (40 - 25 = 15 units) r
representing option 1 intersects the
horizontal axis farther to the right than the lines representing options 2 and 3.
Quantity sold 25
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
Q Break
Consider operating income under each option if the number of units sold dr
20. Exhibit 3-5 shows that option 1 leads to an operating loss, whereas optio
continue to generate operating incomes. (A vertical line from X = 20 units so
option 1 line below the horizontal axis in the mauve area and cuts the optio
lines above the horizontal axis in the blue-green area.) The higher risk ofloss
however, must be evaluated against its potential benefits. Option 1 has the
margin per unit because of its low variable costs.
Quantity sold 20
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
Q Break
Once fixed costs are recovered at sales of 25 units, each additional unit sold adds $80 of contribution margin and, therefo
$80 of operating income per unit. For example, at sales of 60 units, option 1 shows an operating income of $2,800, greate
under options 2 and 3. By moving from option 1 toward option 3, Mary faces less risk of loss when demand is low, both b
contribution margin per unit. She must, however, accept less operating income when
demand is high because of the higher variable costs of option 3 compared with options 1 and 2. The choice among option
the level of demand for the software package and her willingness to risk losses if demand
is low.
Once fixed costs are recovered at sales of 25 units, each additional unit sold adds $80 of contribution margin and, therefo
$80 of operating income per unit. For example, at sales of 60 units, option 1 shows an operating income of $2,800, greate
under options 2 and 3. By moving from option 1 toward option 3, Mary faces less risk of loss when demand is low, both b
contribution margin per unit. She must, however, accept less operating income when
demand is high because of the higher variable costs of option 3 compared with options 1 and 2. The choice among option
the level of demand for the software package and her willingness to risk losses if demand
is low.
Quantity sold 60
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
Q Break
The risk-return tradeoff across alternative cost structures can be measured as operating leverage. Operating le
on changes in operating income as changes occur in units sold and, hence, in contribution margin.
Organizations with a high proportion of fixed costs in their cost structures, as is the case under option 1, have h
option 1 in Exhibit 3-5 is the steepest of the three lines. Small increases in sales lead to large increases in operati
incomes. Small decreases in sales result in relatively large decreases in operating incomes, leading to a greater r
the degree of operating leverage equals contribution margin divided by operating income.
Quantity sold 40
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
Operating Leverage=CM/OI
These numbers indicate that, when sales are 40 units, a percentage change in sales and contribution margin will result in
for option 1, but the same percentage change in operating income for option 3.
Consider, for example, a sales increase of 50% from 40 to 60 units. Contribution margin will increase by 50% under each
2.67 x 50% = 133% from $1,200 to $2,800 in option 1, but it will increase only by 1.00 x 50% = 50% from $1,200 to $1,800
These numbers indicate that, when sales are 40 units, a percentage change in sales and contribution margin will result in
for option 1, but the same percentage change in operating income for option 3.
Consider, for example, a sales increase of 50% from 40 to 60 units. Contribution margin will increase by 50% under each
2.67 x 50% = 133% from $1,200 to $2,800 in option 1, but it will increase only by 1.00 x 50% = 50% from $1,200 to $1,800
leverage at a given level of sales helps managers calculate the effect of fluctuations in sales
on operating incomes.
Quantity sold 60
Price $ 200.00
VC $ 120.00 VC
incremental VC in option 2 (15% from rev) $ 30.00 CM per unit
incremental VC in option 3 (25% from rev) $ 50.00 Quantity sold
CM
CM%
FC
OI
50 % in units sold will raise the CM with 50% in each option
These numbers indicate that, when sales are 40 units, a percentage change in sales and contribution margin will result in
for option 1, but the same percentage change in operating income for option 3.
Consider, for example, a sales increase of 50% from 40 to 60 units. Contribution margin will increase by 50% under each o
2.67 x 50% = 133% from $1,200 to $2,800 in option 1, but it will increase only by 1.00 x 50% = 50% from $1,200 to $1,800
leverage at a given level of sales helps managers calculate the effect of fluctuations in sales
on operating incomes.
old sales
(1) % change in EBIT 133% $ 8,000.00
(2) % change in output (sales) 50% 50%
DOL (1)/ (2) 2.67
The degree of operating leverage should thus be viewed as a measure of "potential risk" whic
sales and production cost variability.The degree of operating leverage itself is not the source o
12 20
8 15
RC HS
CM $4.0 $5.0
units 10000 15000 25000
40% 60%
$1.6 $3.0 $4.6
fc $94,000.0 20,434.78
fc $94,000.0 19,789.47
15 20
3,000 4,000 4800
se.
Diff
10
$ (200.00)
0
$ (200.00)
$ 3,000.00
$ 3,200.00
$ (200.00)
ting leverage. Operating leverage describes the effects that fixed costs have
ution margin.
ase under option 1, have high operating leverage. The line representing
to large increases in operating
omes, leading to a greater risk of operating losses. At any given level of sales,
ome.
tribution margin will result in 2.67 times that percentage change in operating income
increase by 50% under each option. Operating income, however, will increase by
= 50% from $1,200 to $1,800 in option 3 (see Exhibit 3-5). The degree of operating
tribution margin will result in 2.67 times that percentage change in operating income
increase by 50% under each option. Operating income, however, will increase by
= 50% from $1,200 to $1,800 in option 3 (see Exhibit 3-5). The degree of operating
ribution margin will result in 2.67 times that percentage change in operating income
ncrease by 50% under each option. Operating income, however, will increase by
= 50% from $1,200 to $1,800 in option 3 (see Exhibit 3-5). The degree of operating
new sales
$ 12,000.00
er?
n sales would have on operating profit. Sometimes, in response to
its sales policy and/ or cost structure. As a general rule, firms do
age. Since, in that situation, a small drop in sales may lead to an
Specialty Cakes Inc. produces two types of cakes, a 2 lbs. round cake and a 3 lbs. heartshaped
cake. Total fixed costs for the firm are $94,000. Variable costs and sales data for
the two types of cakes are presented below.
2 lbs. 3 lbs.
Round Cake Heart-shape Cake
Selling price per unit $12 $20
Variable cost per unit $8 $15
Current sales (units) 10,000 15,000
If the product sales mix were to change to three heart-shaped cakes for each round cake,
the breakeven volume for each of these products would be
lbs. heartshaped
Firm F Firm V
Sales 10000 11000
Operating costs
FC 7000 2000
VC 2000 7000
Operating Profit (EBIT) $ 1,000.00 $ 2,000.00
Operating leverage ratios
FC/total costs 0.78 0.22
FC/sales 0.70 0.18
All firms show the effects of operating leverage (that is, changes in sales result in more than proportional changes in oper
But, Firm F proves to be the most sensitive firm with a 50 percent increase in sales leading to a 400 percent increase in op
As we have
just seen, it would be an error to assume that the firm with the largest absolute or relative amount of fixed costs automati
the most dramatic effects of operating leverage. Later, we will come up with an easy way to determine which firm is most
the presence of operating leverage. But before we can do so, we need to learn how to study operating leverage by means
analysis.
Price $ 50.00
Annual FC $ 100,000.00
VC $ 25.00
CM $ 25.00
CM% 50%
Q Break 4,000
$ Break $ 200,000
Long-Term Financing (Common Equity) $ 10,000,000
Need another 5$ m for expansion $ 5,000,000
Current EBIT without the expansion $ 1,500,000
New EBIT with the expansion $ 2,700,000
Tax 40%
Common stock outstanding 200,000
option 2
All debt 12% I
I $ 600,000
option 3
All P.Stock 11% Div $ 550,000
% change in EPS
% change in EBIT
We have seen in our example that if EBIT is above $1.8 million, debt financing is the preferred alternative from the stan
earnings per share. We know from our earlier discussion, however, that the impact on expected return is only one side
coin. The other side is the effect that financial leverage has on risk.
For one thing, the financial manager should compare the indifference point between two alternatives, like debt financin
stock financing, with the most likely level of EBIT .The higher the expected level of EBIT,assuming that
exceeds the indifference point, the stronger the case that can be made for debt financing, all other
same.
In addition, the financial manager should assess the likelihood of future EBITs actually falling below the indifference po
estimate of expected EBIT is $2.7million. Given the business risk of the company and the resulting possible fluctuations
in EBIT,the financial manager should assess the probability of EBITsfalling below $1.8 million. If the probability is neg
debt alternative will be supported. On the other hand, if EBIT is presently only slightly above the indiffe
the probability of EBITs falling below this point is high, the financialmanager may conclude
alternative is too risky.
In summary, the greater the level of expected EBIT above the indifference point and the lower
fluctuation, the stronger the case that can be made for the use of debt financing. EBIT-EPS bre
several methods used for determining the appropriate amount of debt a firm might carry. No o
satisfactory by itself. When several methods of analysis are undertaken simultaneously, howev
A quantitative measure of the sensitivity of a firm's earnings per share to a change in the firm's operating profit is ca
financial leverage (DFL). The degree of financial leverage at a particular level of operating profit is simply the percent
per share over the percentage change in operating profit that causes the change in earnings per share.
2700000
1.5
DFL 1 1.17
Firm 2F
19500
14000
3000
$ 2,500.00
0.82
0.72
50%
1.5
29250
14000
4500
$ 10,750.00
24750
2.30
330%
$ 2,700,000
$ 1,080,000.00
$ 1,620,000.00 Financial leverage is employed in
the hope of increasing the return to
$ 550,000 common shareholders.
$ 1,070,000.00
200,000
$ 5.4
1.51
$ 1,800,000
$ 720,000.00
$ 1,080,000.00
$ 550,000
$ 530,000.00
200,000
$ 2.7
4,050,000.00
4050000
1080000
2970000
550000 916666.7
$ 2,420,000
200000
12.1
1.29
RC HS
CM 4 5
units 10000 15000 25000
0.4 0.6
1.6 3 4.6
fc 94000 20434.78261
8173.913
Products Asphalt Fuel oil
Quantity 300 300
Q based Allocation 30% 30%
Common Costs $ 100,000 $ 30,000 $ 30,000
1,000 barrels of crude oil
Products Asphalt Fuel oil
Quantity 300 300
Price per unit $ 60 $ 180
Market Valueat split $ 18,000 $ 54,000
Market Value % 14% 42%
Market based Allocation $ 13,846 $ 41,538
1 gross margin
2 gross margin%
3 gross margin to each product $ 5,503.45 $ 15,724.14
4 (final price - Gross margin) $ 15,496.55 $ 44,275.86
Deduct gross margin from each product to arrive at a cost of goods sold
180 90 190
$ 36,000 $ 9,000 $ 19,000 $ 145,000
1000 2000 2000 $ 7,000.00
$ 35,000 $ 7,000 $ 17,000 $ 138,000
25% 5% 12%
$ 25,362.32 $ 5,072.46 $ 12,318.84 $ 100,000
CM $ 0.16
CM 64,000 10% 6,400.00 70,400.00
FC 28000 28000
EBIT $ 36,000 42,400.00
I 6000 6000
EBT $ 30,000 36,400.00
T 12000 14,560.00
EAT $ 18,000 21,840.00
P.Div 2000 $ 3,333.33 2000
EA p.s $ 16,000 19,840
DFL denemenator $ 26,667 24,506.67
C>S 1000 1000
DOL 1.78
DFL 1.35
DTL 2.40
EPS 16 19.84
We can note when the DFL =1.35, with 18% increase in EBIT , EPS will increase with (18% x
1.35)=24%
2009 2010 %
sales revenues 1,400,000.00 1,800,000.00 29%
VC 800,000.00 900,000.00 13%
CM 600,000.00 900,000.00 50%
FC 530,000.00 750,000.00 42%
OI 70,000.00 150,000.00 114%
S,G,A 25,000.00 65,000.00 160%
EBIT 45,000.00 85,000.00 89%
I 10,000.00 15,000.00 50%
EBT 35,000.00 70,000.00 100%
T 14,000.00 28,000.00 100%
NI 21,000.00 42,000.00 100%
6,400 18%
$ 3,840 21%
3333.333
$ 3,840 24% 24%
$ 4 0.24
with (18% x
Quantity 30000
Price $ 100 DOL=3, an increase (or decrease )in sales with 1%
will increase (or decrease) EBIT with 3%
VC $ 40
CM $ 60
FC $ 1,200,000
FFC(interest) $ 200,000
With 10% DFL=1.5, an increase (or decrease )in EBIT with
1% will increase (or decrease) NI with 1.5%
sales $ 3,000,000
VC $ 1,200,000
CM $ 1,800,000 $ 1,980,000.00 10%
FC 1200000 $ 1,200,000.00
EBIT $ 600,000 $ 780,000.00 30% DTL=4.5, an increase (or decrease )in sales with
I 200000 200000 1% will increase (or decrease) NI with 1.5%
EBT $ 400,000 $ 580,000
T $ 160,000 $ 232,000
EAT (NI) $ 240,000 $ 348,000 45%
beforetax
return on investment (ROI) for last year 16.67%
.=EBIT/Av total Inv.
Sales 450,000
Operating income 25,000
Net profit after taxes 8,000
Total assets 500,000
Shareholders’ equity 200,000
Cost of capital 6% 30,000
ROI 6%
RI = Income- %*Inv (5,000)
Return on investment is commonly calculated by dividing pretax income by total assets available.
Residual income is the excess of the return on investment over a targeted amount equal to an imputed interest charge on
invested capital. The rate used is ordinarily the weighted-average cost of capital. Some companies measure managerial
performance in terms of the amount of residual income rather than the percentage return on investment. Because REB has
assets of $500,000 and a cost of capital of 6%, it must earn $30,000 on those assets to cover the cost of capital. Given that
operating income was only $25,000, it had a negative residual income of $5,000.
The following selected information is from the financial statements of Bishop
Corporation for the last fiscal year.
Current assets $ 500,000 500,000
Fixed assets 250,000 250,000
Current liabilities 100,000 100,000
Long-term debt 300,000 300,000
Shareholders' equity 350,000 350,000
Operating profit 1,000,000 1,000,000
Income taxes 400,000 400,000
Net income 600,000 600,000
Bishop has a cost of capital of 10%. The company's economic value added (EVA) for
last year was
ble.
imputed interest charge on
nies measure managerial
investment. Because REB has
he cost of capital. Given that
Economic Value Added (sp
version of residual incom
Economic value added (EVA®)
g income
ost of capital
nt liabilities)]
Consider Bushells Company, which produces 12-ounce bottles of iced tea at ils
Sydney bottling plant. The annual fixed manufacturing costs of the bottling plant are
Bushells currently uses absorption costing with a standard-costing systemfor . $5,400,000
external reporting purposes, and it calculates its budgeted fixed manufacturing rate ana
per case basis (one case is twenty-four 12-ounce bottles of iced tea). We will now examine
four different capacity levels used as the denominator to compute the budgeted fixed
~'manufacturing overhead cost rate: theoretical capacity, practical capacity, normal capaci
.utilization, and master-budget capacity utilization
Practical capacity is the level of capacity that reduces theoretical capacity by unavoidable operating interruptions, such a
so on. Assume that the pra ical capacity is the practical production rate of 8,000 cases per shift for three shifts per day for
Both theoretical capacity and practical capacity measure capacity levels in terms of what a plant can supply- available cap
budget capacity utilization measure capacity levels in terms of demand for the output of the plant - the amount of the av
demand for its products. In many cases, budgeted demand is well below the production capacity available.
Normal capacity utilization is the level of capacity utilization that satisfies average customer demand over a period (say,
Master-budget capacity utilization is expected level of capacity utilization for the current budget period, typically one ye
when an industry has cyclical periods of high and low demand or
when management believes that the budgeted production for the coming period is not representativeof long-run deman
ConsiderBushells' master budget for 2004, based on production of 4,000,000 cases of tea per year.Despite using this mas
2004,top management believes that over the next three years the normal (average) annual production level will be 5,000
4,000,000 cases to be "abnormally" low. Why? Because a major competitor (Tea- Mania)has been sharply reducing its sel
expects that the competitor's lower price and advertising blitz will not be a long-run phenomenon and that, in 2005, Bus
ConsiderBushells' master budget for 2004, based on production of 4,000,000 cases of tea per year.Despite using this mas
2004,top management believes that over the next three years the normal (average) annual production level will be 5,000
4,000,000 cases to be "abnormally" low. Why? Because a major competitor (Tea- Mania)has been sharply reducing its sel
expects that the competitor's lower price and advertising blitz will not be a long-run phenomenon and that, in 2005, Bus
Theoreticalcapacity $0.50
Practicalcapacity $0.75
Normalcapacity utilization $1.08
Master-budgetcapacity $1.35 170%
utilization
Now assume that the Standard variable manufacturing cost is $5.20 per case. The total standard manufacturing cost per c
concepts is
Total
Standard variable manufacturing cost is $5.20 Manufacturing
Cost per Case
Theoreticalcapacity $5.70
Practicalcapacity $5.95
Normalcapacity utilization $6.28
Master-budgetcapacity $6.55
utilization
Effect on Financial Statements
The magnitude of the favorable/unfavorable production-volume variance under absorption costing will be affected by the
fixed manufacturing cost per case. Assume Bushells' actual production in 2004 is 4,400,000 cases of iced tea. Actual sales
inventory for 2004 and no price variances, spending variances, or efficiency variances in manufacturing costs. Those assum
and actual fixed manufacturing overhead costs are both $5,400,000. The average selling price per case of iced tea is $8.00
FOH allocated
Theoreticalcapacity $2,200,000.00
Practicalcapacity $3,300,000.00
Normalcapacity utilization $4,752,000.00
Master-budgetcapacity $5,940,000.00
utilization
How Bushells handles its end-of-period variances will determine the effect these p
will have on the company's operating income. We now discuss the three alternati
use to handle the production-volume varianc
1. Adjusted allocation-rate approach. This approach restates all amounts in the general and su
budgeted cost rates. Given that actual fIXed manufacturing overhead costs are $5,400,000 and
recalculated fixed manufacturing overhead cost is $1.23 per case ($5,400, 000 /4,4OO,OOO ca
allocation-rate approach results in the choice of the capacity level used to calculate the budge
having no effect on end-of-period financial statements.
In effect,an actual costing system is adopted at the en
Actual Rate $1.23
3. Write-off variances to cost of goods sold approach. Exhibit 9-7 shows how use of this appro
Recall, Bushells had no beginning inventory,production of 4,400,000 cases, and sales of 4,200,0
31, 2004, is 200,000 cases. Using master-budget capacity utilizationas the denominator results
manufacturing overheadcost per case to the 200,000 cases in ending inventory. Accordingly, op
capacity utilization concept. The differences in operating income for the four denominator-level
amounts of fixed manufacturing overhead being inventoried at the end of2004:
Theoreticalcapacity $100,000.00
Practicalcapacity $150,000.00
Normalcapacity utilization $216,000.00
Master-budgetcapacity $270,000.00
utilization
Income Statement Effects of Using Alternative Capacity-level Concepts Bushells Company for 2004
Theoretical Practical
10,800,000.00 7,200,000.00
sales rev $33,600,000.00 $33,600,000.00
Cost of Goods Sold
Beginning inventory $0.00 $0.00
Variable manufacturing costs $22,880,000.00 $22,880,000.00
Fixed manufacturing costs $2,200,000.00 $3,300,000.00
Cost for goods available for sale $25,080,000.00 $26,180,000.00
deduct ending inventory $1,140,000.00 $1,190,000.00
Total COGS(at standard costs) $23,940,000.00 $24,990,000.00
Adjustment for manufacturing variances $3,200,000.00 $2,100,000.00
Total COGS $27,140,000.00 $27,090,000.00
Gross Margin $6,460,000.00 $6,510,000.00
Operating cost $2,810,000.00 $2,810,000.00
Operating income $3,650,000.00 $3,700,000.00
the $54,000 difference ($3,820,000 - $3,766,000) in operating income betweenthe master-budget
capacity and the normal capacity utilization concepts is due to thedifference in fixed manufacturing
overhead inventoried ($270,000- $216,000)
Suppose Bushells Company is computing its operating income for 2006. That year's results are identical to the results for 2
utilization for 2006 is 6,000,000 cases instead of 4,000,000 cases. Production in 2006 is 4,400,000 cases. There is no begin
other than the production-volume variance.Bushells writes off this variance to cost of goods sold. Sales in 2006 are 4,200
Theonly change in Exhibit 9-7 results would be for the master-budget capacity utilization level. The
budgeted fIXed manufacturing overhead cost rate for 2006 is
Master-budgetcapacity $0.90
allocated fixed cost $3,960,000.00
PVV $1,440,000.00 $1,440,000.00
Themanufacturing cost per case is $6.10 ($5.20 + $0.90). So, the production-volume variance for
2006is
$6.10
The higher denominator level used to calculate budgeted fixed manufacturing cost per case inthe 2006 master budget
that fewer fixed manufacturing overhead costs are inventoried in 2006 than in 2004, given identical sales and producti
and assuming the production-volumevariance is written off to cost of goods sold.
e
00,000
ana
xamine
ed
capaci
.'
the time. Bushells can produce 10,000 cases of iced tea per shift when the bottling lines are
capacity for three 8-hour shifts per day is
tical capacity is theoretical in the sense that it does not allow for any plant mainte. nance,
ptions because of bottle breakage on the filling lines, or any other factor. Theoretical capacity
nts an ideal goal of capacity usage. Theoretical capacity is unattainable in the real world.
oidable operating interruptions, such as scheduled maintenance time, shutdowns for holidays, and
ses per shift for three shifts per day for 300 days a year. The practical annual capacity
f what a plant can supply- available capacity. In contrast, normal capacity utilization and master.
put of the plant - the amount of the available capacity that the plant expects to use based on the
uction capacity available.
customer demand over a period (say, 2 to 3 years) that includes seasonal, cyclical, and trendfactors.
current budget period, typically one year. These two capacity utilization levels can differ-for example,
s of tea per year.Despite using this master-budget capacity utilization level of 4,000,000 cases for
e) annual production level will be 5,000,000 cases. They view 2004's budgeted production level of
Mania)has been sharply reducing its selling price and spending large amounts on advertising. Bushells
un phenomenon and that, in 2005, Bushells' production and sales will be higher.
s of tea per year.Despite using this master-budget capacity utilization level of 4,000,000 cases for
e) annual production level will be 5,000,000 cases. They view 2004's budgeted production level of
Mania)has been sharply reducing its selling price and spending large amounts on advertising. Bushells
un phenomenon and that, in 2005, Bushells' production and sales will be higher.
$8.00
PVV The higher the denominator level, (1) the lower the budgeted FMOH cost rate,
and the lower the amount of FMOH allocated to output produced (because
the budgeted FMOH cost rate is lower), and (3) the higher the unfavorable PVV
$3,200,000.00 U (because the higher the denominator level, the more likely actual output will
$2,100,000.00 U fall short of that level).
$648,000.00 U
-$540,000.00 F
amounts in the general and subsidiary ledgers by using actual rather than
head costs are $5,400,000 and actual production is 4,400,000 cases,the
e ($5,400, 000 /4,4OO,OOO cases, rounded up to the nearest cent). The adjusted
el used to calculate the budgeted fixed manufacturingoverhead cost per case
7 shows how use of this approch affects Bushells' operating income for 2004.
000 cases, and sales of 4,200,000 cases. Hence, the ending inventory on December
tionas the denominator results in assigning the highest amount of fixed
ding inventory. Accordingly, operating income is highest using the master-budget
for the four denominator-level concepts in Exhibit 9-7 are due to different
he end of2004:
Normal Master-budget
5,000,000.00 4,000,000.00
$33,600,000.00 $33,600,000.00
$0.00 $0.00
$22,880,000.00 $22,880,000.00
$4,752,000.00 $5,940,000.00
$27,632,000.00 $28,820,000.00
$1,256,000.00 $1,310,000.00
$26,376,000.00 $27,510,000.00
$648,000.00 -$540,000.00
$27,024,000.00 $26,970,000.00
$6,576,000.00 $6,630,000.00
$2,810,000.00 $2,810,000.00
$3,766,000.00 $3,820,000.00
$54,000.00
$54,000.00
master-budget
d manufacturing
results are identical to the results for 2004, shown in Exhibit 9-7, except that master-budget capacity
06 is 4,400,000 cases. There is no beginning inventory on January 1, 2006, and there are no variances
of goods sold. Sales in 2006 are 4,200,000 cases.
variance for
ost per case inthe 2006 master budget means
004, given identical sales and production levels
d.
budgeted FMOH cost rate,
tput produced (because
higher the unfavorable PVV
re likely actual output will
Product D Product R
Units 5,000 15,000
Price $ 400 $ 200
Prime $ 200 $ 80
DL hours 25,000 75,000 100,000
units 100,000
Direct materials $200,000
Direct labor $100,000
V.Manufacturing overhead $100,000
F.Manufacturing overhead $100,000
Selling and administrative expense $50,000
F.Selling and administrative expense $100,000
V.Manuf.
F.manf
V.SGA
F.SGA
The total costs to produce and sell 110,000 units for the year are
110000
$370,000
CoGs
Beg.RM
Add: Purchase 163,000
Less : Returns and discounts 2,000
Net Purchase 161,000
Add: Freight-in 4,000
RM Available for use
Less : End.RM
DM used in Production
DL
MOH
Total manufacturing costs for the period
Add: Beg. WIP
Less: End. WIP
Costs of goods Manufacturing
Add: Beg.Finished
Goods Available for sale
Less: End. Finished
Costs of goods Sold
Lucy Sportswear manufactures a specialty line of T-shirts using a job-order costing system. During March, the following
costs were incurred in completing job ICU2: direct materials, $13,700; direct labor, $4,800; administrative, $1,400; and
selling, $5,600. Overhead was applied at the rate of $25 per machine hour, and job ICU2 required 800 machine hours. If
job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be
CoGs
Beg.RM
Add: Purchase
Less : Returns and discounts
Net Purchase -
Add: Freight-in
RM Available for use
Less : End.RM
DM used in Production
DL
MOH
Total manufacturing costs for the period
Add: Beg. WIP
Less: End. WIP
Costs of goods Manufacturing
Add: Beg.Finished
Goods Available for sale
Less: End. Finished
Costs of goods Sold
Units produced 25 25
Material moves per product line 5 15
Direct labor hours per unit 200 200
Budgeted materials handling costs $50,000 $50,000
Under a costing system that allocates overhead on the basis of direct labor hours, Zeta Company’s materials handling cos
allocated to one unit of wall mirrors would be
allocated to 25
allocated to one unit
Under activity-based costing (ABC), Zeta’s materials handling costs allocated to one unit of wall mirrors would be
allocated to 25
allocated to one unit
New-Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products
at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to
distribute quality control costs more equitably, New-Rage is considering activity-based costing. The monthly data shown
in the chart below have been gathered for Satin Sheen makeup.
In establishing a budget for 14,000 units, Taylor should treat Costs A, B, and C,
respectively, as
97. A company employs a just-in-time (JIT) production system and utilizes backflush
accounting. All acquisitions of raw materials are recorded in a raw materials control
account when purchased. All conversion costs are recorded in a control account as
incurred, while the assignment of conversion costs are from an allocated conversion cost
account. Company practice is to record the cost of goods manufactured at the time the
units are completed using the estimated budgeted cost of the goods manufactured.
The budgeted cost per unit for one of the company's products is as follows
During the current accounting period, 80,000 units of product were completed, and
75,000 units were sold. The entry to record the cost of the completed units for the period
would be
b. Finished Goods - Control 4,000,000
Raw Material - Control 1,200,000
Conversion Cost Allocated 2,800,000.
99. From the following budgeted data, calculate the budgeted indirect cost rate that would be
used in a normal costing system
104. B
The marketing manager of Ames Company has learned the following about a new
product that is being introduced by Ames. Sales of this product are planned at $100,000
for the first year. Sales commission expense is budgeted at 8% of sales plus the
marketing manager's incentive budgeted at an additional ½%. The preparation of a
product brochure will require 20 hours of marketing salaried staff time at an average rate
of $100 per hour, and 10 hours, at $150 per hour, for an outside illustrator's effort. The
variable marketing cost for this new product will be
110. A
110. Bethany Company has just completed the first month of producing a new product but has
not yet shipped any of this product. The product incurred variable manufacturing costs of
$5,000,000, fixed manufacturing costs of $2,000,000, variable marketing costs of
$1,000,000, and fixed marketing costs of $3,000,000.
If Bethany uses the variable cost method to value inventory, the inventory value of the new product would be
production 470,000.00
sales 475,000.00
JoyCo’s budget analyst has the following actual data for the last 3 months:
Production Manufacturing
Month in Units Supplies
Using these data and the high-low method to develop a cost estimating equation, the estimate of needed manufacturing
supplies for July would be 752,060.00
Answer (D) is correct. The fixed and variable portions of mixed costs may be estimated by identifying the highest
and the lowest costs within the relevant range. The difference in cost divided by the difference in activity is the
variable rate. Once the variable rate is found, the fixed portion is determinable. April and March provide the
highest and lowest amounts. The difference in production was 90,000 units (540,000 April – 450,000 March), and
the difference in the cost of supplies was $130,500 ($853,560 – $723,060). Hence, the unit variable cost was $1.45
($130,500 ÷ 90,000 units). The total variable costs for March must have been $652,500 (450,000 units × $1.45 VC
per unit), and the fixed cost must therefore have been $70,560 ($723,060 – $652,500). The probable costs for July
equal $681,500 (470,000 units × $1.45 VC per unit), plus $70,560 of fixed costs, a total of $752,060.
VC 5 495000
FC 200000 $ 695,000
Answer (C) is correct. Direct materials unit costs are strictly variable at $2 ($200,000 ÷ 100,000 units). Similarly,
direct labor has a variable unit cost of $1 ($100,000 ÷ 100,000 units). The $200,000 of manufacturing overhead for
100,000 units is 50%. The variable unit cost is $1. Selling costs are $100,000 fixed and $50,000 variable for
production of 100,000 units, and the variable unit selling expenses is $.50 ($50,000 ÷ 100,000 units). The total unit
variable cost is therefore $4.50 ($2 + $1 + $1 + $.50). Fixed costs are $200,000. At a production level of 110,000
units, variable costs are $495,000 (110,000 units × $4.50). Hence, total costs are $695,000 ($495,000 + $200,000).
Sales salaries will increase by exactly 5%. The per-unit commission amount will remain
constant, but sales commissions in total are expected to increase by 10%. Thus, total sales salaries and
commissions will increase somewhere between 5% and 10%.
What is the estimated total cost for handling 75,000 gallons? 75000
$ 153,000
[63] Gleim #: 3.3.63 -- Source: CMA 696 3-19
If the beginning balance for May of the materials inventory account was $27,500, the ending balance for May is $28,750,
and $128,900 of materials were used during the month, the materials purchased during the month cost
BI $ 27,500
Pur $ 130,150
Avi $ 157,650
EI $ 28,750
Used $ 128,900
Jan-01 Jan-31
Finished goods $125,000 $117, $ 125,000 $ 117,000
Work-in-process 235,000 251,0 $ 235,000 $ 251,000 DM availabe
Direct materials 134,000 124,0 $ 134,000 $ 124,000 $ 325,000
The following additional manufacturing data were available for the month of January:
Direct materials purchased $189,000 $ 189,000
Purchase returns and allowances 1,000 $ 1,000
Transportation-in 3,000 $ 3,000
Direct labor 300,000 $ 300,000
Actual factory overhead 175,000 $ 175,000
Alex Company applies factory overhead at a rate of 60% of direct labor cost, and any overapplied or underapplied factory
overhead is deferred until the end of the year, December 31.
DM $ 201,000
DL $ 300,000
APP.OH $ 180,000
$ 681,000
[77] Gleim #: 3.3.77 -- Source: CMA 690 4-3
(Refers to Fact Pattern #3)
Alex Company’s cost of goods manufactured for January was $ 665,000
Dr Cr
$ 175,000 $ 180,000
The factory overhead control account should have a debit of $175,000 for the actual costs
incurred and a credit for the $180,000 (60% of direct labor) applied to production.
The value of the work-in-process inventory at the beginning of the fiscal year was
Factory overhead was applied at the rate of $50 per direct labor hour, and job J-1 required 400 direct labor hours. If job J-
1 resulted in 4,000 good dresses, the cost of goods sold per unit is
OH App 20000
57000
$ 14.25
At the beginning of the current reporting period, Kepler had 2,200 units in inventory,
and during the period, production was started and completed on 4,000 units.
Units in inventory at the end of the current reporting period were 1,500,
and the units transferred out were 3,000.
During this period, the abnormal spoilage for Kepler’s lens production was
Answer (A) is correct. Kepler’s abnormal spoilage for the period can be calculated as follows:
Beginning work-in-process 2,200
Add: started and completed 4,000
Less: transferred out (3,000)
Less: ending work-in-process (1,500)
Total spoilage for period 1,700
Less: normal spoilage (1,000)
Abnormal spoilage for period 700
Answer (D) is correct. Normal spoilage is an inventoriable cost of production that is charged to cost of goods sold
when the units are sold. Abnormal spoilage is a period cost recognized when incurred.
Thus, the normal spoilage expensed during the month is $10,000 ($20,000 × 50%). Total spoilage charged against revenue
DM
DL
App.OH
TMC 2,500,000.00
BWIP 75,000.00
EWIP (100,000.00)
2,425,000.00 (75,000.00) 2,475,000.00 50,000.00
ing and administrative
per unit
$2.00
$1.00
$1.00
$0.50
$4.00
$100,000
$0.50
$100,000
$695,000.00
November .30
$62,000
$171,000
$78,000
Total
67,000
232,000
62,000
170,000
200,000 370,000 Madtack Company’s prime cost for November is
140,000
510,000 Madtack Company’s total manufacturing cost for November is
145,000
171,000
484,000 Madtack Company’s cost of goods transferred to finished goods inven
85,000
569,000
78,000
491,000 Madtack Company’s cost of goods sold for November is
Total
13,700
13,700
13,700
4,800
20,000
38,500
-
-
38,500
38,500
25000
$1,000
12500
$500
11.5 12 138
0.14 17500 2450
77 25 1925
4513
525.5
per unit
$2.33 semi
$1.00 fixed Fixed cost fixed in total &
variable cost fixed per unit
$1.50 VC per unit fixed
97. B
80000
4000000
1200000
2800000
99. D d. $48.
250,000
$ 10,000,000
50,000
$ 5,000,000
$ 7,000,000
$ 12,000,000
250,000
$ 48
b. $8,500.
100000
8.0%
0.5%
20
100
$5,000,000
$2,000,000
$1,000,000 $3,000,000
cost behaiv
VC FC
652,500 70,560
783,000 70,560
cost behaiv
100,000
100000 1
50000 0.50
ing and administrative
110000
cost behaiv
5.19%
salaries and
ng balance for May is $28,750,
he month cost
DM used in prod
$ 201,000
e net effect is a $5,000 credit balance resulting from the overapplication of overhead.
B. $250,000
B. $14.25
2200
4000 6200
1500
3000 4500
1700
700
000 ÷ 50,000) of the units completed were sold during the period.
B. $900,000
$ 900,000
$ 1,060,000
$ 450,000
$ 530,000
nformation is from the financial
2500000
2425000
30%
80%
st for November is
st for November is
November is
Gregg Industries manufactures molded chairs. The three models of molded chairs, which are all variations of the same des
are Standard (can be stacked), Deluxe (with arms), and Executive (with arms and padding). The company uses batch
manufacturing and has an operation costing system.
Gregg has an extrusion operation and subsequent operations to form, trim, and finish the chairs.
Plastic sheets are produced by the extrusion operation, some of which are sold directly to other manufacturers.
During the forming operation, the remaining plastic sheets are molded into chair seats and the legs are added; the standar
During the trim operation, the arms are added to the deluxe and executive models and the chair edges are smoothed.
Only the executive model enters the finish operation where the padding is added.
All of the units produced are subject to the same steps within each
operation, and no units are in process at the end of the period. The units of production and direct materials costs were as f
Plastic sheets are produced by the During the forming operation, the remaining
extrusion operation, some of which plastic sheets are molded into chair seats and
are sold directly to other the legs are added; the standard model is sold
manufacturers. after this operation.
A standard model passes through the extrusion and form operations. Thus, its unit cost includes the
materials and conversion costs for both operations. The unit materials and conversion costs for the extrusion
operation are $12.00 ($192,000 ÷ 16,000 units) and $24.50 [($152,000 + $240,000) ÷ 16,000 units], respectively. The
unit materials and conversion costs for the form operation are $4.00 [$44,000 ÷ (16,000 – 5,000) units] and $12.00
[($60,000 + $72,000) ÷ (16,000 – 5,000) units], respectively. Accordingly, the unit cost of a standard model is $52.50
($12.00 + $24.50 + $4.00 + $12.00).
A standard model passes through the extrusion and form operations. Thus, its unit cost includes the
materials and conversion costs for both operations. The unit materials and conversion costs for the extrusion
operation are $12.00 ($192,000 ÷ 16,000 units) and $24.50 [($152,000 + $240,000) ÷ 16,000 units], respectively. The
unit materials and conversion costs for the form operation are $4.00 [$44,000 ÷ (16,000 – 5,000) units] and $12.00
[($60,000 + $72,000) ÷ (16,000 – 5,000) units], respectively. Accordingly, the unit cost of a standard model is $52.50
($12.00 + $24.50 + $4.00 + $12.00).
Total DM 50,000.00
Total Conv. $142,600.00
Total cost $192,600
An executive model passes through all four operations. Thus, its unit cost equals that of the deluxe model plus the
unit costs incurred in the finish operation. The unit cost of the deluxe model is $69.30. The unit materials and
conversion costs for the finish operation are $6.00 [$12,000 ÷ (16,000 – 14,000) units] and $21.00 [($18,000 + $24,000)
÷ (16,000 – 14,000) units], respectively. Consequently, the unit cost of the executive model is $96.30 ($69.30 + $6.00 +
$21.00), and the total product cost is $192,600 (2,000 units × $96.30).
r manufacturers.
legs are added; the standard model is sold after this operation.
ir edges are smoothed.
Trim Finish
Materials Materials
$9,000
$6,000 $12,000
$15,000.00 $12,000.00
5,000.00 2,000.00
$3.00 $6.00
ation, the remaining During the trim operation, the arms are
into chair seats and added to the deluxe and executive Only the executive model enters
andard model is sold models and the chair edges are the finish operation where the
eration. smoothed. padding is added.
Trim Finish
Operation Operation
$30,000 $18,000
$39,000 $24,000
$69,000 $42,000
5,000.00 2,000.00
$13.80 $21.00
EUP 4600
cost 15.00
January
Sales $60,000.00
Purchases $35,000.00
Operating costs $25,000.00
All sales are made on credit and are collected in the second month following the sale.
Purchases are paid in the month following the purchase, while operating costs are paid in
the month that they are incurred. How much will Mountain Mule need to borrow at the
end of the quarter if the company needs to maintain a minimum cash balance of $5,000 as
required by a loan covenant agreement?
January
Coll Sales
Pyt. Purchases
Operating costs $25,000.00
cash coll - disb -$25,000.00
NET
minimum cash balance
Mule need to borrow
77. Data regarding Johnsen Inc.’s forecasted dollar sales for the last seven months of the year
and Johnsen’s projected collection patterns are as follows.
Johnsen’s budgeted cash receipts from sales and collections on account for September are
76. Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with
60% collected in the month of sale and 40% collected in the following month. A
schedule of cash collections for January through March of the coming year reveals the
following receipts for the period.
Cash Receipts
January February
December receivables $32,000 $32,000.00
From January sales 54,000 $36,000 $54,000.00 $36,000.00
From February sales 66,000 $44,000 $66,000.00
From March sales 72,000
Ignoring income taxes, the financing needed in January to maintain the firm’s minimum
cash balance is
cash coll $110,900.00
cash disbur. $121,500.00
-$10,600.00 since , Any required borrowings are in multiples of 1
75. Health Foods Inc. has decided to start a cash budgeting program to improve overall cash
management. Information gathered from the past year reveals the following cash
collection trends.
Sales for June are projected to be $255,000. Based on this information, the expected cash
receipts for March would be
74. Brooke Company’s management team is preparing a cash budget for the coming quarter.
The following budgeted information is under review.
January February
Revenue $700,000 $800,000 $500,000 $700,000.00 $800,000.00
Inventory purchases 350,000 425,000 225,000 $350,000.00 $425,000.00
Other expenses 150,000 175,000 175,000 $150,000.00 $175,000.00
The company expects to collect 40% of its monthly sales in the month of sale and 60% in
the following month. 50% of inventory purchases are paid in the month of purchase, and
50% in the following month. Payments for all other expenses are made in the month
incurred.
Brooke forecasts the following account balances at the beginning of the quarter.
Given the above information, the projected ending cash balance for February will be
January February
40% in the same mnth $280,000.00 $320,000.00
60% follow $300,000.00 $420,000.00
cash coll $580,000.00 $740,000.00
pyt of 50% purchase $175,000.00 $212,500.00
pyt of 50% purchase in the follow $400,000.00 $175,000.00
pyt purchase $575,000.00 $387,500.00
Other expenses $150,000.00 $175,000.00
total disb $725,000.00 $562,500.00
73. ANNCO sells products on account, and experiences the following collection schedule.
72. Prudent Corporation’s budget for the upcoming accounting period reveals total sales of
$700,000 in April and $750,000 in May. The sales cash collection pattern is
If Prudent anticipates the cash sale of a piece of old equipment in May for $25,000,
May’s total budgeted cash receipts would be
$700,000.00 $750,000.00
April May
cash sales $140,000.00 $150,000.00
Cr sales $560,000.00 $600,000.00
70. Monroe Products is preparing a cash forecast based on the following information.
• Monthly sales: December $200,000; January $200,000; February $350,000;
March $400,000.
• All sales are on credit and collected the month following the sale.
• Purchases are 60% of next month’s sales and are paid for in the month of
purchase.
• Other monthly expenses are $25,000, including $5,000 of depreciation.
If the January beginning cash balance is $30,000, and Monroe is required to maintain a
minimum cash balance of $10,000, how much short-term borrowing will be required at
the end of February?
DEC January
sales $200,000.00 $200,000.00
pur $120,000.00 $210,000.00
coll from sales $200,000.00
pyt pur $120,000.00 $210,000.00
cash exp 20000 20000
cash BB 30000
minm
$0.00
69. Tip-Top Cleaning Supply carries a large number of different items in its inventory, giving
the firm a competitive advantage in its industry. Below is part of Tip-Top’s budget for
the first quarter of next year.
Historically, all of the sales are on account and are made evenly over the quarter. 5% of
all sales are determined to be uncollectible and written off. The balance of the
receivables is collected in 50 days. This sales and collection experience is expected to
continue in the first quarter. The projected balance sheet for the first day of the quarter
includes the following account balances
How much cash can Tip-Top anticipate collecting in the first quarter (based on a 360-day year)?
$450,000.00
$361,000.00
$811,000.00
68. Projected monthly sales of Wallstead Corporation for January, February, March, and
April are as follows.
• The company bills each month's sales on the last day of the month.
• Receivables are booked gross and credit terms of sale are: 2/10, n/30.
• 50% of the billings are collected within the discount period, 30% are collected by
the end of the month, 15% are collected by the end of the second month, and 5%
become uncollectible.
Jan
50% of the billings are collected within the discount period 0.5
30% are collected by the end of the month, 0.3
15% are collected by the end of the second month, 0.15
5% become uncollectible.
67. Bootstrap Corporation anticipates the following sales during the last six months of the
year.
CASH SALES CR SALES NET CR SALES 5%
July $460,000 $460,000.00 $92,000.00 $368,000.00 $349,600.00 $18,400.00
August 500,000 $500,000.00 $100,000.00 $400,000.00 $380,000.00 $20,000.00
September 525,000 $525,000.00 $105,000.00 $420,000.00 $399,000.00 $21,000.00
October 500,000 $500,000.00 $100,000.00 $400,000.00 $380,000.00 $20,000.00
November 480,000 $480,000.00 $96,000.00 $384,000.00 $364,800.00 $19,200.00
December 450,000 $450,000.00 $90,000.00 $360,000.00 $342,000.00 $18,000.00
$2,915,000.00 $583,000.00 $2,332,000.00 $2,215,400.00 $116,600.00
20% of Bootstrap’s sales are for cash.
Sales $2,915,000.00
coll $2,504,400.00
gross acc/rec $410,600.00
tWO
5% $116,600.00 WAYS
net Acc/Rec $294,000.00
66. Cooper Company’s management team is preparing a cash budget for the coming quarter.
The following budgeted information is under review.
January February
Revenue $700,000 $800,000 $500,000 $700,000.00 $800,000.00
Inventory purchases 350,000 425,000 225,000 $350,000.00 $425,000.00
Other expenses 150,000 175,000 175,000 $150,000.00 $175,000.00
The company expects to collect 40% of its monthly sales in the month of sale and 60% in
the following month. 50% of inventory purchases are paid in the month of purchase, and
50% in the following month. Payments for all other expenses are made in the month
incurred.
Brooke forecasts the following account balances at the beginning of the quarter.
Given the above information, the projected change in cash during the coming quarter will
be
January February
40% in the same mnth $280,000.00 $320,000.00
60% follow $300,000.00 $420,000.00
cash coll $580,000.00 $740,000.00
pyt of 50% purchase $175,000.00 $212,500.00
pyt of 50% purchase in the follow $500,000.00 $175,000.00
pyt purchase $675,000.00 $387,500.00
Other expenses $150,000.00 $175,000.00
total disb $825,000.00 $562,500.00
Given the above information, the projected change in cash during the coming quarter will
Historical trends indicate that 40% of sales are collected during the month of sale, 50%
are collected in the month following the sale, and 10% are collected two months after the
sale.
Brown’s accounts receivable balance as of December 31 totals $80,000 ($72,000
from December’s sales and $8,000 from November’s sales). The amount of cash Brown
can expect to collect during the month of January is
62. Granite Company sells products exclusively on account, and has experienced the
following collection pattern: 60% in the month of sale, 25% in the month after sale, and
15% in the second month after sale. Uncollectible accounts are negligible. Customers
who pay in the month of sale are given a 2% discount. If sales are $220,000 in January,
$200,000 in February, $280,000 in March, and $260,000 in April, Granite’s accounts
receivable balance on May 1 will be
jan feb mar
$220,000.00 $200,000.00 $280,000.00
61. Tut Company’s selling and administrative costs for the month of August, when it sold
20,000 units, were as follows. 20,000.00
Costs
Per Unit
Variable costs $18.60 $372,000 $18.60
Step costs 4.25 85,000 $4.25
Fixed costs 8.80 176,000 $8.80
Total selling and
administrative costs $31.65 $633,000 $31.65
The variable costs represent sales commissions paid at the rate of 6.2% of sales.
The step costs depend on the number of salespersons employed by the company.
In August there were 17 persons on the sales force. However, two members have taken early retirement effective August 3
It is anticipated that these positions will remain vacant for several months.
Total fixed costs are unchanged within a relevant range of 15,000 to 30,000 units per month.
Tut is planning a sales price cut of 10%, which it expects will increase sales volume to 24,000 units per month.
If Tut implements the sales price reduction, the total budgeted selling and administrative costs for the month of Septem
61. Tut Company’s selling and administrative costs for the month of August, when it sold
20,000 units, were as follows. 24,000.00
Costs
Per Unit
Variable costs $18.60 $372,000 $16.74
Step costs 4.25 85,000 $3.13
Fixed costs 8.80 176,000 $8.80
Total selling and
administrative costs $31.65 $633,000 $28.67
78. C c. $10,000.
85000
February March
$40,000.00 $50,000.00
$40,000.00 $75,000.00
$25,000.00 $25,000.00
5000
February March
$60,000.00
$35,000.00 $40,000.00
$25,000.00 $25,000.00
-$60,000.00 -$5,000.00 -$90,000.00
-$5,000.00
-$5,000.00
-$10,000.00
77. B b. $684,500.
$490,000.00
$420,000.00
$455,000.00
$560,000.00
$595,000.00
$630,000.00
$588,000.00
$20.00 76. C c. $11,000.
March
$44,000.00
$72,000.00
30%
$15,000.00
$106,500.00
$24,900.00
borrowings are in multiples of 1000
75. C c. $242,000.
74. C c. $232,500
March
$500,000.00
$225,000.00
$175,000.00
40% 60%
50%
March
$200,000.00
$480,000.00
$680,000.00
$112,500.00
$212,500.00
$325,000.00
$175,000.00
$500,000.00
$180,000.00
73. B b. $174,500
72. C c. $735,000
20.00%
5.00% 0.95
70.00%
25.00%
$25,000.00
70. B b. $70,000
60%
10000
-$70,000.00
69. A a. $811,000.
Q
90 40
44%
68. A a. $343,300
feb march april
$181,300.00
$111,000.00
$51,000.00
$343,300.00
67. B b. $294,000.
$100,000.00 $105,000.00 $100,000.00 $96,000.00 $90,000.00 $583,000.00 20% of Bootstrap’s sales are for
$160,000.00 $168,000.00 $160,000.00 $153,600.00 $144,000.00 Percentage of balance collected
$110,400.00 $120,000.00 $126,000.00 $120,000.00 $115,200.00 Percentage of balance collected
$92,000.00 $100,000.00 $105,000.00 $100,000.00 Percentage of balance collected
$370,400.00 $485,000.00 $486,000.00 $474,600.00 $449,200.00 $2,504,400.00
66. C c. $112,500.
March
$500,000.00
$225,000.00
$175,000.00
40% 60%
50%
March
$200,000.00
$480,000.00
$680,000.00
$112,500.00
$212,500.00
$325,000.00
$175,000.00
$500,000.00
$32,500.00
$180,000.00
$212,500.00
$112,500.00
65. C c. $108,000.
40%
50% 83%
10%
72000 8000
62. C c. $146,000.
april may
$260,000.00
$70,000.00 $65,000.00
$30,000.00 $42,000.00 $39,000.00
$65,000.00
$42,000.00 $39,000.00
$146,000.00
61. A a. $652,760.
Total
$372,000.00
$85,000.00 17 5000
$176,000.00
$633,000.00
Total
$401,760.00
$75,000.00 17 4411.76471
$176,000.00 3.75
$652,760.00
simple
Dec sales , thus the portion to be collected =60% from the 90%
July August September October
20% of Bootstrap’s sales are for cash. $92,000.00 $100,000.00 $105,000.00 $100,000.00
Percentage of balance collected in the month of sale 40% $147,200.00 $160,000.00 $168,000.00 $160,000.00
Percentage of balance collected in the month following sale 30% $110,400.00 $120,000.00 $126,000.00
Percentage of balance collected in the second month following $92,000.00 $100,000.00
November December JAN FEB MARCH
$96,000.00 $90,000.00
$153,600.00 $144,000.00
$120,000.00 $115,200.00 $108,000.00
$105,000.00 $100,000.00 $96,000.00 $90,000.00
$294,000.00
Section A: Budget Preparation
35. Stumphouse Cheese is in the process of implementing a cost improvement system with
kaizen costing as the basis for budgeting all manufacturing activities. This will be
utilized over the next four years in an attempt to become more profitable. The target
reduction rate has been set at 5% of fixed overhead costs. Total fixed overhead costs for
this year were $900,000. What is the budgeted amount for the next two years using
kaizen costing?
855,000.00 812,250.00
Items 1 and 3 are different models of the same product. Item 2 is a complement to Item1.
Past experience indicates that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant.
Netco is considering an 10% price increase for the coming year for Item 1,
which will cause sales of Item 1 to decline by 20%, while simultaneously
causing sales of Item 3 to increase by 5%. If Netco institutes the price increase for Item
1, total sales revenue will decrease by
$ (1,050,000)
37. Troughton Company manufactures radio-controlled toy dogs. Summary budget financial
data for Troughton for the current year are as follows.
Sales (5,000 units at $150 each) 5000
Variable manufacturing cost
Fixed manufacturing cost
Variable selling and administrative cost
Fixed selling and administrative cost
Troughton uses an absorption costing system with overhead applied based on the number of units produced, with a denom
Underapplied or overapplied manufacturing overhead is written off to cost of goods sold in the year incurred.
The $20,000 budgeted operating income from producing and selling 5,000 toy dogs planned for this year is of concern to Tr
She believes she could increase operating income to $50,000 (her bonus threshold) if Troughton produces more units than
How much of an increase in the number of units in the finished goods inventory would be needed to generate the $50,000
Targeted OI
Curr OI
Diff
38. Ace Manufacturing plans to produce two products, Product C and Product F, during the
next year, with the following characteristics.
Product C
Selling price per unit $10 $15 $ 10
Variable cost per unit $ 8 $10 $ 8
Expected sales (units) 20,000 5,000 20,000
80%
CM $ 2
$ 1.60
39. B b. $540,000.
39. Hannon Retailing Company prices its products by adding 30% to its cost.
Hannon anticipates sales of $715,000 in July, $728,000 in August, and $624,000 in September.
Hannon’s policy is to have on hand enough inventory at the end of the month to cover 25% of the next month’s sales.
What will be the cost of the inventory that Hannon should budget for purchase in August?
41. Tyler Company produces one product and budgeted 220,000 units for the month of
August with the following budgeted manufacturing costs.
Total Costs Cost Per Unit
Variable costs $ 1,408,000.0 $ 6.4
Batch set-up cost $ 880,000.0 $ 4.0
Fixed costs $ 1,210,000.0 $ 5.5
Total $ 3,498,000.0 $ 15.9
The variable cost per unit and the total fixed costs are unchanged within a production range of 200,000 to 300,000 units pe
The total for the batch set-up cost in any month depends on the number of production batches that Tyler runs.
A normal batch consists 50,000 units unless production requires less volume.
In the prior year, Tyler experienced a mixture of monthly batch sizes of 42,000 units, 45,000 units, and 50,000 units.
Tyler consistently plans production each month in order to minimize the number of batches.
For the month of September, Tyler plans to manufacture 260,000 units.
What will be Tyler’s total budgeted production costs for September?
$ 1,664,000
$ 1,210,000 $ 2,874,000
$ 2,874,000
No. of batches to produce Aug 4.40
= 5.00
Cost per batch 176,000.00
The cost per set-up is $176,000, which is computed from the August budget of 220,000 units. The 220,000 units for August
No. of batches to produce Sep 5.20
= 6.00
What will be Tyler’s total budgeted production costs for September?
$ 1,664,000
$ 1,210,000 $ 2,874,000
Batch set-up cost $ 1,056,000
$ 3,930,000
42. C c. 7,133.
42. Ming Company has budgeted sales at 6,300 units for the next fiscal year, and desires to
have 590 good units on hand at the end of that year. Beginning inventory is 470 units.
Ming has found from past experience that 10% of all units produced do not pass final
inspection, and must therefore be destroyed. How many units should Ming plan to
produce in the next fiscal year?
43. B b. 71,700.
43. Savior Corporation assembles backup tape drive systems for home microcomputers. For
the first quarter, the budget for sales is 67,500 units. Savior will finish the fourth quarter
of last year with an inventory of 3,500 units, of which 200 are obsolete. The target
ending inventory is 10 days of sales (based upon 360 days). What is the budgeted production for the first quarter?
d. 86,000 units.
44. Streeter Company produces plastic microwave turntables. Sales for the next year are
expected to be 65,000 units in the first quarter, 72,000 units in the second quarter, 84,000
units in the third quarter, and 66,000 units in the fourth quarter. Streeter usually
maintains a finished goods inventory at the end of each quarter equal to one half of the
units expected to be sold in the next quarter. However, due to a work stoppage, the
finished goods inventory at the end of the first quarter is 8,000 units less than it should
be. How many units should Streeter produce in the second quarter?
Q1 Q2 Q3 Q4
65,000 72,000 84,000 66,000
EI 28,000 42,000 33,000 -
86,000
46. Krouse Company is in the process of developing its operating budget for the coming
year. Given below are selected data regarding the company’s two products, laminated
putter heads and forged putter heads, that are sold through specialty golf shops.
Forged
Raw materials
Steel 2 pounds @ $5/lb.
10
Copper None
-
Direct labor 1/4 hour @ $20/hr.
5
Expected sales (units) 8,200 2,000 8200
Selling price per unit $30 $80 $ 30
Ending inventory target (units) 100 60 100
Beginning inventory (units) 300 60 300
Beginning inventory (cost) $5,250 $3,120 $ 5,250
Production 8,000
Production hours 2,000
Manufacturing overhead is applied to units produced on the basis of direct labor hours.
Variable manufacturing overhead is projected to be $25,000, and fixed manufacturing
overhead is expected to be $15,000.
The estimated cost to produce one unit of the laminated putter head is
47. Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with
60% collected in the month of sale and 40% collected in the following month. A partial
schedule of cash collections for January through March of the coming year reveals the
following receipts for the period
January
December receivables $32,000 $ 32,000
From January sales 54,000 $36,000 $ 54,000
From February sales 66,000 $44,000
January
sales 90000
33000
Standard
Material Per Unit Price /ib Current Inventory
Geo 2.0 pounds $15/lb. 5,000 pound 2 15 5000
Clio 1.5 pounds $10/lb. 7,500 pound 1.5 10 7500
Stevens forecasts sales of 20,000 components for the next two production periods.
Company policy dictates that 25% of the raw materials needed to produce the next
period’s projected sales be maintained in ending direct materials inventory
Based on this information, the budgeted direct material purchases for the coming period
would be
prod ei units to be purchse
Geo 2.0 pounds 40000 10000 45000
Clio 1.5 pounds 30000 7500 30000
49. Petersons Planters Inc. budgeted the following amounts for the coming year.
Beginning inventory, finished goods $ 10,000 $ 10,000
Cost of goods sold 400,000 $ 400,000
Direct material used in production 100,000 $ 100,000
Ending inventory, finished goods 25,000 $ 25,000
Beginning and ending work-in-process inventory Zero $ -
Overhead is estimated to be two times the amount of direct labor dollars. The amount
that should be budgeted for direct labor for the coming year is
$ 415,000
OH+DL $ 315,000
$ 105,000
dm $ 100,000
dl
oh
cogm $ 100,000
bf $ 10,000
ef $ (25,000)
cogs $ 400,000
50. Over the past several years, McFadden Industries has experienced the following
regarding the company’s shipping expenses.
Fixed costs $16,000 16000
Average shipment 15 pounds 15
Cost per pound $.50 $ 0.50
Shown below are McFadden’s budget data for the coming year.
Number of units shipped 8,000 8000
Number of sales orders 800 800
Number of shipments 800 800
Total sales $1,200,000 1200000
Total pounds shipped 9,600 9600
51. Swan Company is a maker of men's slacks. The company would like to maintain
20,000 yards of fabric in ending inventory. The beginning fabric inventory is expected to
contain 25,000 yards. The expected yards of fabric needed for sales is 90,000. Compute
the yards of fabric that Swan needs to purchase.
52. Manoli Gift Shop maintains a 35% gross profit percentage on sales, and carries an ending
inventory balance each month sufficient to support 30% of the next month’s expected
sales. Anticipated sales for the fourth quarter are as follows. ei
cost @ (100%-35%) ei
October $42,000 42000 27300 11310
November 58,000 58000 37700 14430
December 74,000 74000 48100 0
What amount of goods should Manoli Gift Shop plan to purchase during the month of
November?
$ 40,820
53. In preparing the direct material purchases budget for next quarter, the plant controller has
the following information available.
Budgeted unit sales 2,000 2000
Pounds of materials per unit 4 4 8000
Cost of materials per pound $3 $ 3.00
Pounds of materials on hand 400 400
Finished units on hand 250 250
Target ending units inventory 325 325
Target ending inventory of pounds of materials 800 800
Prod 2075
pounds for prod 8300
8,700
54. Playtime Toys estimates that it will sell 200,000 dolls during the coming year. The
beginning inventory is 12,000 dolls; the target ending inventory is 15,000 dolls. Each
doll requires two shoes which are purchased from an outside supplier. The beginning
inventory of shoes is 20,000; the target ending inventory is 18,000 shoes. The number of
shoes that should be purchased during the year is
sales fg 200000
bfg 12000
efg 15000
purchase fg 203000 406000
bs 20000
es 18000
404,000
55. Maker Distributors has a policy of maintaining inventory at 15% of the next month’s
forecasted sales. The cost of Maker’s merchandise averages 60% of the selling price.
The inventory balance as of May 31 is $63,000, and the forecasted dollar sales for the last
seven months of the year are as follows
cost
June $700,000 $ 700,000 420000
July 600,000 $ 600,000 360000
August 650,000 $ 650,000 390000
September 800,000 $ 800,000 480000
October 850,000 $ 850,000 510000
November 900,000 $ 900,000 540000
December 840,000 $ 840,000 504000
What is the budgeted dollar amount of Maker’s purchases for July?
58. Using the following budget data for Valley Corporation, which produces only one
product, calculate the company’s predetermined factory overhead application rate for
variable overhead.
Num $ 23,000
Den 11000
$ 2.09
60. Given the following data for Scurry Company, what is the cost of goods sold?
Beginning inventory of finished goods $100,000 $ 100,000
Cost of goods manufactured 700,000 $ 700,000
Ending inventory of finished goods 200,000 $ 200,000
Beginning work-in-process inventory 300,000 $ 300,000
Ending work-in-process inventory 50,000 $ 50,000
600,000
61. Tut Company’s selling and administrative costs for the month of August, when it sold
20,000 units, were as follows. 20000 sales
Costs
Per Unit
Variable costs $18.60 $372,000 $ 18.6
Step costs 4.25 85,000 $ 4.3
Fixed costs 8.80 176,000 $ 8.8
Total selling and
administrative costs $31.65 $633,000 $ 31.65
The variable costs represent sales commissions paid at the rate of 6.2% of sales.
The step costs depend on the number of salespersons employed by the company.
In August there were 17 persons on the sales force. However, two members have taken early retirement effective August 3
It is anticipated that these positions will remain vacant for several months.
Total fixed costs are unchanged within a relevant range of 15,000 to 30,000 units per month.
Tut is planning a sales price cut of 10%, which it expects will increase sales volume to 24,000 units per month.
If Tut implements the sales price reduction, the total budgeted selling and administrative costs for the month of Septem
Variable costs
Step costs
Fixed costs
61. Tut Company’s selling and administrative costs for the month of August, when it sold
20,000 units, were as follows.
The variable costs represent sales commissions paid at the rate of 6.2% of sales.
The step costs depend on the number of salespersons employed by the company.
In August there were 17 persons on the sales force. However, two members have taken early retirement effective August 3
It is anticipated that these positions will remain vacant for several months.
Total fixed costs are unchanged within a relevant range of 15,000 to 30,000 units per month.
Tut is planning a sales price cut of 10%, which it expects will increase sales volume to 24,000 units per month.
If Tut implements the sales price reduction, the total budgeted selling and administrative costs for the month of Septem
61. Tut Company’s selling and administrative costs for the month of August, when it sold
20,000 units, were as follows.
62. Granite Company sells products exclusively on account, and has experienced the
following collection pattern: 60% in the month of sale, 25% in the month after sale, and
15% in the second month after sale. Uncollectible accounts are negligible. Customers
who pay in the month of sale are given a 2% discount. If sales are $220,000 in January,
$200,000 in February, $280,000 in March, and $260,000 in April, Granite’s accounts
receivable balance on May 1 will be
jan feb
220000 200000
60% in the month of sale,
25% in the month after sale
15% in the second month after sale.
62. Granite Company sells products exclusively on account, and has experienced the
following collection pattern: 60% in the month of sale, 25% in the month after sale, and
15% in the second month after sale. Uncollectible accounts are negligible. Customers
who pay in the month of sale are given a 2% discount. If sales are $220,000 in January,
$200,000 in February, $280,000 in March, and $260,000 in April, Granite’s accounts
receivable balance on May 1 will be
jan
$220,000.00
jan
$220,000.00
Historical trends indicate that 40% of sales are collected during the month of sale, 50%
are collected in the month following the sale, and 10% are collected two months after the
sale. Brown’s accounts receivable balance as of December 31 totals $80,000 ($72,000
from December’s sales and $8,000 from November’s sales). The amount of cash Brown
can expect to collect during the month of January is
Historical trends indicate that 40% of sales are collected during the month of sale, 50%
are collected in the month following the sale, and 10% are collected two months after the
sale.
Brown’s accounts receivable balance as of December 31 totals $80,000 ($72,000
from December’s sales and $8,000 from November’s sales). The amount of cash Brown
can expect to collect during the month of January is
66. Cooper Company’s management team is preparing a cash budget for the coming quarter.
The following budgeted information is under review.
January
Revenue $700,000 $800,000 $500,000 $ 700,000
Inventory purchases 350,000 425,000 225,000 $ 350,000
Other expenses 150,000 175,000 175,000 $ 150,000
The company expects to collect 40% of its monthly sales in the month of sale and 60% in
the following month. 50% of inventory purchases are paid in the month of purchase, and
the other 50% in the following month. All payments for other expenses are made in the
month incurred.
Cooper forecasts the following account balances at the beginning of the quarter.
Cash $ 100,000
Accounts receivable $ 300,000
Accounts payable (Inventory) $ 500,000
Given the above information, the projected change in cash during the coming quarter will
be
66. Cooper Company’s management team is preparing a cash budget for the coming quarter.
The following budgeted information is under review.
January
Revenue $700,000 $800,000 $500,000 $700,000.00
Inventory purchases 350,000 425,000 225,000 $350,000.00
Other expenses 150,000 175,000 175,000 $150,000.00
The company expects to collect 40% of its monthly sales in the month of sale and 60% in
the following month. 50% of inventory purchases are paid in the month of purchase, and
50% in the following month. Payments for all other expenses are made in the month
incurred.
Brooke forecasts the following account balances at the beginning of the quarter.
Given the above information, the projected change in cash during the coming quarter will
be
January
40% in the same mnth $280,000.00
60% follow $300,000.00
cash coll $580,000.00
pyt of 50% purchase $175,000.00
pyt of 50% purchase in the follow $500,000.00
pyt purchase $675,000.00
Other expenses $150,000.00
total disb $825,000.00
Historical trends indicate that 40% of sales are collected during the month of sale, 50%
are collected in the month following the sale, and 10% are collected two months after the
sale.
Brown’s accounts receivable balance as of December 31 totals $80,000 ($72,000
from December’s sales and $8,000 from November’s sales). The amount of cash Brown
can expect to collect during the month of January is
67. Bootstrap Corporation anticipates the following sales during the last six months of the
year. cr sales
July $460,000 $ 460,000 $ 368,000
August 500,000 $ 500,000 $ 400,000
September 525,000 $ 525,000 $ 420,000
October 500,000 $ 500,000 $ 400,000
November 480,000 $ 480,000 $ 384,000 96000
December 450,000 $ 450,000 $ 360,000 198000
20% of Bootstrap’s sales are for cash. The balance is subject to the collection pattern
shown below.
67. Bootstrap Corporation anticipates the following sales during the last six months of the
year.
CASH SALES CR SALES
July $460,000 $460,000.00 $92,000.00 $368,000.00
August 500,000 $500,000.00 $100,000.00 $400,000.00
September 525,000 $525,000.00 $105,000.00 $420,000.00
October 500,000 $500,000.00 $100,000.00 $400,000.00
November 480,000 $480,000.00 $96,000.00 $384,000.00
December 450,000 $450,000.00 $90,000.00 $360,000.00
$2,915,000.00 $583,000.00 $2,332,000.00
20% of Bootstrap’s sales are for cash.
Sales $2,915,000.00
coll $2,504,400.00
gross acc/rec $410,600.00
5% $116,600.00
net Acc/Rec $294,000.00
68. Projected monthly sales of Wallstead Corporation for January, February, March, and
April are as follows.
• The company bills each month's sales on the last day of the month.
• Receivables are booked gross and credit terms of sale are: 2/10, n/30.
• 50% of the billings are collected within the discount period, 30% are collected by
the end of the month, 15% are collected by the end of the second month, and 5%
become uncollectible.
69. Tip-Top Cleaning Supply carries a large number of different items in its inventory, giving
the firm a competitive advantage in its industry. Below is part of Tip-Top’s budget for
the first quarter of next year.
Historically, all of the sales are on account and are made evenly over the quarter. 5% of
all sales are determined to be uncollectible and written off. The balance of the
receivables is collected in 50 days. This sales and collection experience is expected to
continue in the first quarter. The projected balance sheet for the first day of the quarter
includes the following account balances
How much cash can Tip-Top anticipate collecting in the first quarter (based on a 360-day year)?
$450,000.00
$361,000.00
$811,000.00
70. Monroe Products is preparing a cash forecast based on the following information.
• Monthly sales: December $200,000; January $200,000; February $350,000;
March $400,000.
• All sales are on credit and collected the month following the sale.
• Purchases are 60% of next month’s sales and are paid for in the month of
purchase.
• Other monthly expenses are $25,000, including $5,000 of depreciation.
If the January beginning cash balance is $30,000, and Monroe is required to maintain a
minimum cash balance of $10,000, how much short-term borrowing will be required at
the end of February?
DEC
sales $200,000.00
pur $120,000.00
coll from sales
pyt pur $120,000.00
cash exp 20000
cash BB
minm
72. Prudent Corporation’s budget for the upcoming accounting period reveals total sales of
$700,000 in April and $750,000 in May. The sales cash collection pattern is
If Prudent anticipates the cash sale of a piece of old equipment in May for $25,000,
May’s total budgeted cash receipts would be
$700,000.00
April
cash sales $140,000.00
Cr sales $560,000.00
73. ANNCO sells products on account, and experiences the following collection schedule.
74. Brooke Company’s management team is preparing a cash budget for the coming quarter.
The following budgeted information is under review.
January
Revenue $700,000 $800,000 $500,000 $700,000.00
Inventory purchases 350,000 425,000 225,000 $350,000.00
Other expenses 150,000 175,000 175,000 $150,000.00
The company expects to collect 40% of its monthly sales in the month of sale and 60% in
the following month. 50% of inventory purchases are paid in the month of purchase, and
50% in the following month. Payments for all other expenses are made in the month
incurred.
Brooke forecasts the following account balances at the beginning of the quarter.
Given the above information, the projected ending cash balance for February will be
January
40% in the same mnth $280,000.00
60% follow $300,000.00
cash coll $580,000.00
pyt of 50% purchase $175,000.00
pyt of 50% purchase in the follow $400,000.00
pyt purchase $575,000.00
Other expenses $150,000.00
total disb $725,000.00
Cash B.B $200,000.00
Net coll - disbur -$145,000.00
net $55,000.00
75. Health Foods Inc. has decided to start a cash budgeting program to improve overall cash
management. Information gathered from the past year reveals the following cash
collection trends.
Sales for June are projected to be $255,000. Based on this information, the expected cash
receipts for March would be
January
December receivables $32,000 $32,000.00
From January sales 54,000 $36,000 $54,000.00
From February sales 66,000 $44,000
From March sales 72,000
Ignoring income taxes, the financing needed in January to maintain the firm’s minimum
cash balance is
77. Data regarding Johnsen Inc.’s forecasted dollar sales for the last seven months of the year
and Johnsen’s projected collection patterns are as follows.
Forecasted sales
June $700,000 $700,000.00
July 600,000 $600,000.00
August 650,000 $650,000.00
September 800,000 $800,000.00
October 850,000 $850,000.00
November 900,000 $900,000.00
December 840,000 $840,000.00
Types of sales
Cash sales 30% 0.3
Credit sales 70% 0.7
Johnsen’s budgeted cash receipts from sales and collections on account for September are
78. The Mountain Mule Glove Company is in its first year of business. Mountain Mule had a
beginning cash balance of $85,000 for the quarter. The company has a $50,000 shortterm
line of credit. The budgeted information for the first quarter is shown below.
Sales
Purchases
Operating costs
All sales are made on credit and are collected in the second month following the sale.
Purchases are paid in the month following the purchase, while operating costs are paid in
the month that they are incurred. How much will Mountain Mule need to borrow at the
end of the quarter if the company needs to maintain a minimum cash balance of $5,000 as
required by a loan covenant agreement?
Coll Sales
Pyt. Purchases
Operating costs
cash coll - disb
Projected
Month Sales in Units
January 30,000
February 36,000
March 33,000
April 40,000
May 29,000
Answer (C) is correct. January’s production should be 1.5 times February’s sales. Thus, the production budget for
January should be 54,000 units (36,000 units of February sales × 1.5).
Answer (D) is correct. The units to be produced in February equal 50% of March sales, or 16,500 units (33,000 ×
.5). The unit variable cost is $7.00 ($3.50 + $1.00 + $2.00 + $.50), so total variable costs are $115,500 (16,500 ×
$7). Thus, the dollar production budget for February is $127,500 ($115,500 VUC + $12,000 FC).
Q P sales rev
Cranberry Sparkling Water 12,500 $ 24.8 $ 310,000.0
Lemon Dream Cola 33,100 $ 32.0 $ 1,059,200.0
VC
A. $4,736 Answer (C) is correct. The sale of 12,500 cases of Cranberry at $24.80 per case produces revenue of $
B. $82,152 amount that does not qualify for commissions. The sale of 33,100 cases of Lemon at $32 per case pro
C. $84,736 of $1,059,200. This amount is greater than the minimum and therefore qualifies for a commission of $
D. $103,336 ($1,059,200 × 8%). This calculation assumes that commissions are paid on all sales if the revenue quo
Answer (B) is correct. Cash sales for Harvin, Inc. for the month of October are budgeted at $100,000 (half of
$200,000 overall sales). Projections for collections of credit sales in August indicate that 20% will be cash inflows
in October, or ($150,000 × 20%) = $30,000. Projections for collections of credit sales in September indicate that
70% will be cash inflows in October, or ($200,000 × 70%) = $140,000. Therefore, total cash inflows projected for
the month of October equal $100,000 + $30,000 + $140,000 = $270,000. Because sales commissions are set at 5%
of monthly cash inflows, the sales commissions for October equal ($270,000 × 5%) = $13,500.
Prd 575,000
Answer (B) is correct. Using production-related budgets, units to produce equals budgeted sales + desired ending
finished goods inventory + desired equivalent units in ending work-in-process inventory – beginning finished
goods inventory – equivalent units in beginning work-in-process inventory. Therefore, in this case, units to
produce is equal to 650,000 + 200,000 + 100,000 – 300,000 – 75,000 = 575,000.
50%
Mountain’s projected unit sales: Ending finished goods inventory
October 4600 2500
November 5000 2100
December 4200 3000
January 6000
Mountain’s ending inventories in units at September 30:
Finished goods 3800
Handles 16000
Answer (B) is correct. The company will need 4,200 finished units to meet the sales estimate for December. In
addition, 3,000 finished units (6,000 unit sales in January × 50%) should be in inventory at the end of December.
The total requirement is therefore 7,200 units (4,200 + 3,000). Of these units, 2,100 (4,200 unit sales in December
× 50%) should be available from November’s ending inventory. Consequently, production in December should be
5,100 units (7,200 – 2,100).
0.4
Rokat’s sales budget in units for the next quarter is as follows: ei
July 2300 1000
August 2500 840
September 2100
Rokat’s ending inventories in units for June 30 are
Finished goods 1900
Direct materials (legs) 4000
Answer (B) is correct. The company will need 2,500 finished units for August sales. In addition, 840 units (2,100
September unit sales × 40%) should be in inventory at the end of August. August sales plus the desired ending
inventory equals 3,340 units. Of these units, 40% of August’s sales, or 1,000 units, should be available from
beginning inventory. Consequently, production in August should be 2,340 units.
[176] Gleim #: 2.3.62 -- Source: CMA 695 3-15
(Refers to Fact Pattern #17)
Assume Rokat’s required production for August and September is 1,600 and 1,800 units, respectively, and the July 31
direct materials inventory is 4,200 units. The number of table legs to be purchased in August is
PRD
AUG 1600 6400
SEP 1800
BEG. DM INV AUG 4200
Targeted EI DM in Au 4320
6520
A. 6,520 legs.
B. 9,400 legs.
C. 2,200 legs.
D. 6,400 legs.
Answer (D) is correct. Jordan needs 27,000 pounds (3 × 9,000 units) of materials for March production. It also
needs 43,700 pounds {[(3 × 12,000 units to be produced in April) × 120%] + 500} for ending inventory. Given a
beginning inventory of 32,900 pounds {[(3 × 9,000 units to be produced in March) × 120%] + 500}, required
purchases equal 37,800 pounds (27,000 pounds + 43,700 pounds – 32,900 pounds).
Answer (A) is correct. The standard unit labor cost is $19.50 [($6.75 × 2 hours in Department 1) + ($12 × .5 hour
in Department 2)], so the total budgeted direct labor dollars for February equal $156,000 (8,000 units × $19.50).
Answer (C) is correct. The $324,000 for supervisory salaries is a fixed cost, at a rate of $27,000 per month. Since
these costs are fixed, volume is irrelevant. Thus, the variance is the difference between actual costs of $28,000 and
the budgeted costs of $27,000, which equals $1,000 unfavorable
A. $1,900 unfavorable.
B. $700 favorable.
C. $1,900 favorable.
D. $700 unfavorable.
Answer (B) is correct. The $144,000 annual amount equals $12,000 per month. Since volume is expected to be
5,000 units per month, and the $12,000 is considered a variable cost, budgeted cost per unit is $2.40 ($12,000 ÷
5,000 units). If 4,500 units are produced, the total variable costs should be $10,800 (4,500 units × $2.40).
Subtracting the $10,100 of actual costs from the budgeted figure results in a favorable variance of $700.
Answer (A) is correct. Beginning inventory should be 30,600 pounds (34,000 units of budgeted sales × 3 pounds
× 30%). Ending inventory should be 43,200 pounds (48,000 units of budgeted sales for Quarter 4 × 3 pounds ×
30%). Since BI plus purchases minus EI equals Quarter 3 budgeted sales, purchases must be 114,600.
30,600 + X – 43,200 = 3 × 34,000
X – 12,600 = 102,000
X = 114,600
Superflite plans the following beginning and ending inventories for the month of April and uses standard absorption costin
Answer (B) is correct. Sales are expected to be 402,000 units in April. The beginning inventory is 12,000 units,
and the ending inventory is expected to be 10,000 units, a decline in inventory of 2,000 units. Thus, the budget
should be based on production of 400,000 units (402,000 units to be sold – 12,000 units BI + 10,000 units EI).
[212] Gleim #: 2.3.98 -- Source: CMA 1293 3-11
(Refers to Fact Pattern #22)
Assume Superflite plans to manufacture 400,000 units in April. Superflite’s April budget for the purchase of A-9 should
be
A. 379,000 units.
B. 388,000 units.
C. 402,000 units.
D. 412,000 units.
Answer (B) is correct. Each of the 400,000 units to be produced in April will require one unit of A-9, a total
requirement of 400,000 units. In addition, ending inventory is expected to be 9,000 units. Hence, 409,000 units
must be supplied during the month. Of these, 21,000 are available in the beginning inventory. Subtracting the
21,000 beginning inventory from 409,000 leaves 388,000 to be purchased.
Answer (D) is correct. The finished units needed for sales (480,000), plus the units desired for ending inventory
(50,000), minus beginning inventory (80,000), equals the necessary production of 450,000 units.
Answer (C) is correct. The 500,000 finished units to be manufactured require 1,000,000 units of raw material (2 ×
500,000). In addition, the inventory of raw material is planned to increase by 10,000 units. Consequently,
1,010,000 units of raw material should be purchased.
Answer (B) is correct. The standard direct labor unit cost equals 3 hours times the cost per DLH. This amount is
determined by adding employee benefits to weekly wages and dividing by hours per week.
Weekly wages $245.00
Add: benefits ($245 × .25) 61.25
Weekly total compensation $306.25
Divided by: hours/week ÷ 35
Cost per DL hour $ 8.75
Times: DL hours per unit × 3
Unit DL cost $ 26.25
A. $169,800
B. $147,960
C. $197,880
D. $194,760
Answer (A) is correct. The budgeted cash collections for September are $169,800 [($120,000 July sale
($211,000 August sales × 60%)].
From the data above, determine Holland’s projected cash balance at the end of the second quarter.
Answer (D) is correct. The change in Holland’s cash balance can be calculated as follows:
Beginning cash balance $ 36,000
Add: cash collections 1,300,000
Less: net change in accounts payable (25,000)
Less: accrual-basis costs and expenses (1,200,000)
Add: depreciation expense (noncash) 60,000
Less: payment for equipment (50,000)
Add: net cash received from asset sale 40,000
Less: retirement of notes payable (66,000)
Ending cash balance $ 95,000
[256] Gleim #: 2.4.142 -- Source: CMA Sample Q 02/2005 2-10
Steers Company has just completed its prospective financial statements for the coming year. Relevant
summarized below:
Projected net income $100,000 100000
Anticipated capital expenditures 50,000 50000
Increase in working capital 25,000 25000
Depreciation expense 15,000 15000
From the information provided above, the increase in Steers’ cash account for the coming year will be
The sales on open account have been budgeted for the first 6 months of the year as follows:
January $ 70,000 $ 70,000
February 90,000 $ 90,000
March 100,000 $ 100,000
April 120,000 $ 120,000
May 100,000 $ 100,000
June 90,000 $ 90,000
April
70% collected in month of sale $ 84,000
$ 84,000
May
70% collected in month of sale $ 70,000
15% from april sales collected in the first month after sa $ 18,000
$ 88,000
June
70% collected in month of sale $ 63,000
15% from may collected in the first month after sale $ 15,000
10% from april collected in the second month after sale $ 12,000
$ 90,000
35. B
5%
900,000.00
36. A a. $1,050,000.
150 $ 750,000
$ 400,000
$ 20 $ 100,000
$ 80,000
$ 150,000
$ 50,000
$ 20,000
$ 30,000
1,500
Product F
$ 15
$ 10
5,000 25,000
20%
$ 5
$ 1.00 $ 2.60
30,000
expected level of sales of both products.
2,307.69 11,538.46
0.3
n September. $ 715,000 $ 728,000 $ 624,000
over 25% of the next month’s sales.
40. C c. 78,000 units.
Q4
66000
-
$ 1,056,000 $ 176,000.0
0,000 units. The 220,000 units for August would require a minimum of 5 batch set-ups.
6300
590 470
10%
71700
71,700
67,500
3,500 200 3,300
production for the first quarter?
44. D
a. 3,700. 45. A
c. $52. 46. C
Putter Heads
Laminated
2,000
2,000 4,000
$ 25,000
$ 15,000
$ 52.00
Cash Receipts
February March
$ 36,000
$ 66,000 $ 44,000
February March
110000 150000
45000
$ 122,000
6,100
48. B
b. $675,000 $300,000
nt Inventory
20000
25%
to be purchse
$ 675,000
$ 300,000
d. $105,000. 49. D
d. $20,800 50. D
51. A a. 85,000.
20000
25000
90000
85000
a. $40,820 52. A
c. 8,700. 53. C
ontroller has
d. 404,000 shoes. 54. D
200000 400000
12000 24000
15000 30000
20000
18000
55. C c. $364,500
15%
60%
63000
ei
54000
58500
72000
76500
81000
75600
0
$ 364,500
a. $2.09. 56. D
b. $600,000 60. B
a. $652,760. 61. A
6,000,000 $ 300.00
Total
$ 372,000
$ 85,000 5000
$ 176,000
$ 633,000.00
6.2%
$ 6,480,000
$ 401,760
$ 75,000
$ 176,000
$ 652,760
61. A a. $652,760.
$31.65 $633,000.00
$28.67 $652,760.00
c. $146,000. 62. C
0.6
0.25
0.15
0.02
220000
mar apr
280000 260000
42000
104000
$ 146,000
62. C c. $146,000.
$70,000.00 $65,000.00
$30,000.00 $42,000.00 $39,000.00
$65,000.00
$42,000.00 $39,000.00
$146,000.00
65. C c. $108,000.
72000
8000
0.8333333333
65. C c. $108,000.
40%
50% 83%
10%
72000 8000
$40,000.00
$60,000.00
$8,000.00
$108,000.00
9/8/2010.
66. C c. $112,500.
February March
$ 800,000 $ 500,000 $ 2,000,000
$ 425,000 $ 225,000 $ 1,000,000
$ 175,000 $ 175,000 $ 500,000
40% 60%
50% 50%
66. C c. $112,500.
February March
$800,000.00 $500,000.00
$425,000.00 $225,000.00
$175,000.00 $175,000.00
40% 60%
50%
February March
$320,000.00 $200,000.00
$420,000.00 $480,000.00
$740,000.00 $680,000.00
$212,500.00 $112,500.00
$175,000.00 $212,500.00
$387,500.00 $325,000.00
$175,000.00 $175,000.00
$562,500.00 $500,000.00
-$145,000.00 $32,500.00
$177,500.00 $180,000.00
$32,500.00 $212,500.00
$112,500.00
65. C c. $108,000.
40%
50% 83%
10%
72000 8000
$40,000.00
$60,000.00
$8,000.00
$108,000.00
67. B b. $294,000.
40%
30%
25%
5%
67. B b. $294,000.
40.0%
30.0%
25.0%
5.0%
TWO
WAYS
TWO
WAYS
68. A a. $343,300
$343,300.00
69. A
Q
90 40
$812,250.00 44%
60-day year)?
70. B b. $70,000
60%
30000
10000
$0.00 -$70,000.00
20.00%
5.00% 0.95
70.00%
25.00%
$25,000.00
$750,000.00
May
$150,000.00
$600,000.00
$150,000.00
$420,000.00
$140,000.00
$25,000.00
$735,000.00
73. B
67%
33%
74. C
February March
$800,000.00 $500,000.00
$425,000.00 $225,000.00
$175,000.00 $175,000.00
40% 60%
50%
February March
$320,000.00 $200,000.00
$420,000.00 $480,000.00
$740,000.00 $680,000.00
$212,500.00 $112,500.00
$175,000.00 $212,500.00
$387,500.00 $325,000.00
$175,000.00 $175,000.00
$562,500.00 $500,000.00
$55,000.00
$177,500.00 $180,000.00
$232,500.00
75. C c. $242,000.
40%
50%
30%
15%
5%
$150,000.00
$50,000.00
$28,800.00
$13,200.00
$242,000.00
$20.00
Cash Receipts
February March
$36,000.00
$66,000.00 $44,000.00
$72,000.00
30%
$15,000.00
$106,500.00
$24,900.00
$210,000.00 $490,000.00
$180,000.00 $420,000.00
$195,000.00 $455,000.00
$240,000.00 $560,000.00
$255,000.00 $595,000.00
$270,000.00 $630,000.00
$252,000.00 $588,000.00
0.2
0.5
0.25
85000
5000
NET -$5,000.00
minimum cash balance -$5,000.00
Mule need to borrow -$10,000.00
Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit.
Voice boxes are purchased from another supplier at $1.00 each.
Assembly labor cost is $2.00 per rabbit,
and variable overhead cost is $.50 per rabbit.
Fixed manufacturing overhead applicable to rabbit production is $12,000 per month.
Daffy’s policy is to manufacture 1.5 times the coming month’s projected sales every other month, startin
and to manufacture 0.5 times the coming month’s projected sales in alternate months (i.e., even-numbe
This allows Daffy to allocate limited manufacturing resources to other products as needed during the ev
Thus, the production budget for 17 b - This is a very long question, but with only a few important pieces of informatio
$ 127,500.00 18 b - In February the production will be equal to 1 - 2 of March sales. March sales a
$.50), so total variable costs will be $115,500. We need to add to this the $12,000 of
ales, or 16,500 units (33,000 ×
costs are $115,500 (16,500 ×
$12,000 FC).
VC
6% less than
8% $ 84,736.0
5%
bud cr sales cash inflows fm cr sales cash inflows com
$ 150,000
$ 200,000 $ 105,000
$ 100,000 $ 140,000 $ 30,000 $ 270,000 $ 13,500
Department 1 Department 2
s per unit 2.0 0.5 2.0 0.5
y rate $6.75 $12.00 $ 6.75 $ 12.00
prd bi ei
27000 32900 43700 37800
15750
28000 (1,000.00)
Annual prd
uct monthly. 5,000 60000
ndirect labor to be a variable cost. $ 144,000 VC per unit $ 2.40
4,500 $ 10,800
$ 10,100
or indirect labor of $ 700
Purchase
128700
110400
114,600
100800
3
s equal to 30% of that quarter’s direct material requirements. 0.3
$ 11
units at $11 each. Each C-14 requires three
$ 3.00
$ 1.00 500,000 $ 500,000
388,000
or July, $211,000 for August, and $198,000 for September. $ 120,000 $ 211,000 $ 198,000
es will be collected the month after the sale, 36% will be
e cash receipts from accounts receivable that should be
60% 36% 4%
$ 120,000
$ 211,000 72000
$ 198,000 126600 43200 $ 169,800
$ 36,000 $ 36,000
$ 1,300,000 $ 1,300,000
$ 100,000
$ 75,000 $ (25,000)
$ 1,200,000
$ 60,000 $ (1,140,000)
$ 50,000 $ (50,000)
$ 5,000
$ 35,000 $ 40,000
$ 66,000 $ (66,000)
$ 95,000
an be calculated as follows:
statements for the coming year. Relevant information is
100,000.00
(50,000.00)
(25,000.00)
15,000.00
cash account for the coming year will be
$ 40,000
Answer (A) is correct. The second calendar quarter consists of April, May, and June. For April’s sales of $1
collections should be 95% (70% + 15% + 10%), or $114,000. For May’s sales of $100,000, collections sho
(70% + 15%), or $85,000. For June’s sales of $90,000, collections should be 70%, or $63,000. The quarter
$262,000 ($114,000 + $85,000 + $63,000).
$ 262,000
Karmee Company
YummyDog BoneCompany
b. $855,000 $812,250
b. $174,500
180000
e amount of $162000 represents 90% from Dec sales , thus the portion to be collected =60% from the 90%
c. $232,500
edit sales 40%
76. C c. $11,000.
tant pieces of information. In January, the production will be equal to 1.5 times the expected sales in February. Expected February sale
rch sales. March sales are expected to be 33,000, so February will see production of 16,500 units. The variable cost per unit is $7 ($3.5
dd to this the $12,000 of fixed costs giving us a total production cost of $127,500.
ne. For April’s sales of $120,000,
100,000, collections should be 85%
or $63,000. The quarterly total is
rmee Company
mmyDog BoneCompanyis
August SeptemberOctober NovemberDecemberJAN FEB MARCH
###
ebruary. Expected February sales are 36,000 so in January the company will produce 54,000 units.
variable cost per unit is $7 ($3.50 + $1 + $2 +
[803] Gleim #: 7.8.163 -- Source: CMA Sample Q 02/2005 2-40
Teaneck, Inc. sells two products, Product E and Product F, and had the following data for last month:
Product E Product F
Budget Actual Budget Actual
Unit sales 5500 6000 4500 6000
Unit contribution margin $ 4.50 $ 4.80 $ 10.00 $ 10.50
Answer (A) is correct. The first step is to calculate the contribution margin (CM) for a “composite” unit using
budgeted mix percentages and budgeted margins:
This process is repeated using actual mix percentages and budgeted margins:
The difference between the two is multiplied by the number of units sold to arrive at the sales mix variance [(6,000
+ 6,000) × ($7.250 actual – $6.975 budget) = (12,000 × $0.275) = $3,300 favorable].
The following information is available for the Mitchelville Products Company for the month of July.
Master
Budget Actual
Units 4,000 3,800 4000 3800 -200
unit price $ 15.00 $ 14.00
Sales revenue $60,000 $53,200 $ 60,000 $ 53,200
Variable manufacturing costs 16,000 19,00 $ 16,000 $ 19,000
$ 4 $ 5
Fixed manufacturing costs 15,000 16,000 $ 15,000 $ 16,000
Variable selling and administrative
expense 8,000 7,600 $ 8,000 $ 7,600
$ 2 $ 2
Fixed selling and administrative
expense 9,000 10,000 $ 9,000 $ 10,000
CM $ 9 $ 7
The contribution margin volume variance for the month of July would be $ (1,800)
x variance [(6,000
B. $1,800 unfavorable.
[76] Gleim #: 1.5.76 -- Source: CMA 697 4-22
Philip Enterprises, distributor of video discs, is developing its budgeted cost of goods sold for next year. Philip has
developed the following range of sales estimates and associated probabilities for the year:
Philip’s cost of goods sold averages 80% of sales. What is the expected value of Philip’s budgeted cost of goods sold?
80% 67,200
Answer (D) is correct. The expected value is calculated by weighting each sales estimate by the probability of its
occurrence. Consequently, the expected value of sales is $84,000 [$60,000 × .25) + ($85,000 × .40) + ($100,000 × .35)].
Cost of goods sold is therefore $67,200 ($84,000 × .80).
Hot
Soft Hot 40% $ 2,500 $ 1,000 40%
Cold 60% $ 1,000 $ 600
$ 1,600
$ 2,200
Answer (B) is correct. The vendor would like to sell coffee on cold days ($2,000) and soft drinks on hot days
($2,500). Hot days are expected 40% of the time. Hence, the probability is 40% of making $2,500 by selling soft
drinks. The chance of making $2,000 by selling coffee is 60%. The payoff equation is:
Exp. payoff with perf. info. = Prob. hot (Payoff soft drinks) +
Prob. cold (Payoff coffee)
= .4($2,500) + .6($2,000)
= $2,200
Hot Cold
Soft Hot 0% $ 2,500 $ -
Cold 0% $ 1,000 $ -
EX VL Soft $ -
$ 1,900
$ 600
$ 300 50%
Answer (B) is correct. If the weather is hot and coffee is served, the vendor earns $1,900. If the vendor knows the
weather will be hot, (s)he would sell soft drinks and make $2,500, a $600 increase. Thus, the vendor should be willing to
pay up to $600 for perfect information regarding hot weather. However, if the forecasts are only 50% accurate, the
information is not perfect. Accordingly, the vendor should be willing to pay only $300 (the $600 potential increase in
profits × 50%) for the sometimes accurate forecasts
Demand in Units
0 2 4 6
Probability of Demand
Supply in Units 10% 30% 40% 20%
0 - - - -
2 (80) 40 40 40
4 (160) (40) 80 80
6 (240) (120) - 120
Probability of Demand
Supply in Units 10% 30% 40% 20%
4 (160) (40) 80 80
-16 -12 32 16 20
Ex Vl with - 12 32 24 68
Ex Vl without 28
Ex Vl of 40
Answer (B) is correct. The maximum amount the seller should pay for perfect information is the difference
between the expected profit with perfect information ($68) and the expected profit if demand is not known.
Without the perfect information, the seller should purchase the supply that will result in the maximum long-run
profit. Using the information given, it can be determined that the profit will be $20 when the supply is 4 units. It is
also evident that the profit is zero when the supply is zero. The expected profit must also be calculated for supply
levels of 2 and 6 units. For a supply of 2 units, the expected profit is
.1(–$80) + .3($40) + .4($40) + .2($40) = $28
For a supply of 6 units, the expected loss is
.1(–$240) + .3(–$120) + .4($0) + .2($120) = $(36)
Thus, without perfect information, profits are maximized at $28 when the supply is 2 units. However, with perfect
information, profits will be $68. Thus, a rational seller should therefore be willing to pay up to $40 ($68 – $28).
[Fact Pattern #6]
The College Honor Society sells hot pretzels at the home
football games. The pretzels are sold for $1.00 each, and
the cost per pretzel is $.30. Any unsold pretzels are
discarded because they will be stale before the next home
game.
The frequency distribution of the demand for pretzels per
game is presented as follows.
Unit Sales Volume Probability
2000 pretzels 10% 200
3000 pretzels 15% 450
4000 pretzels 20% 800
5000 pretzels 35% 1750
6000 pretzels 20% 1200
4400
Answer (C) is correct. A deterministic approach assumes that a value is known with certainty. If that value is deemed to
be the most likely outcome, assumed demand will be 5,000 pretzels, the volume with the highest probability (35%).
Answer (C) is correct. Each pretzel costs $.30. Thus, the cost of 4,000 pretzels is $1,200 (4,000 × $.30). Selling
4,000 pretzels at $1 each produces revenue of $4,000. Subtracting the $1,200 of costs from the $4,000 of revenue
results in a conditional profit of $2,800.
States of Nature
S1 S2 S3
Decision 1 24 14 -6
2.4 7 -2.4 7
Decision 2 20 10 5
2 5 2 9
Decision 3 -20 8 15
-2 4 6 8
Probabilities 10% 50% 40%
The expected value of perfect information for this firm in this case is
Answer (A) is correct. The first step is to determine the expected value without perfect information by formulating
a payoff matrix. For example, the expected payoff for the combination of State of Nature S1 and Decision 1 is
$2.40 (10% probability × $24 outcome). The entire payoff matrix is
S1 S2 S3 Total
Decision 1 $ 2.40 $7.00 $(2.40) $7.00
Decision 2 2.00 5.00 2.00 9.00
Decision 3 (2.00) 4.00 6.00 8.00
Thus, the best decision under conditions of uncertainty is Decision 2 (expected value = $9). If the decision maker
knew exactly when each state of nature would occur, the decision would correspond to the maximum profit
opportunity for that state of nature. For instance, if S1 is certain, the most profitable decision is Decision 1 ($24).
Thus, the expected payoff given perfect information is $15.40.
The demand for units of the new product is described by the following probability distribution.
Answer (A) is correct. The expected demand is 300,000 units [(.4 × 200,000) + (.3 × 300,000) + (.2 × 400,000) +
(.1 × 500,000)]. Total expected cost is therefore $170,000 [$50,000 fixed cost + ($.40 × 300,000) variable cost].
[Fact Pattern #2]
In preparing the annual profit plan for the coming year,
Wilkens Company wants to determine the cost behavior
pattern of the maintenance costs. Wilkens has decided to use
linear regression by employing the equation y = a + bx for
maintenance costs. The prior year’s data regarding
maintenance hours and costs and the results of the regression
analysis are as follows.
Answer (A) is incorrect because The cost of the items in the fourth batch equals $4,320.
Answer (B) is incorrect because The amount of $10,368 is based on the assumption that the cumulative average
unit labor cost is reduced by the learning curve percentage with each batch, not each doubling of output.
Answer (C) is incorrect because The amount of $2,592 represents the labor cost of 100 units at the unit rate
expected after another doubling of production to eight batches.
Answer (D) is correct. The learning curve reflects the increased rate at which people perform tasks as they gain
experience. The time required to perform a given task becomes progressively shorter. Ordinarily, the curve is
expressed in a percentage of reduced time to complete a task for each doubling of cumulative production. One
common assumption in a learning curve model is that the cumulative average time (and labor cost) per unit is
reduced by a certain percentage each time production doubles. Given a $120 cost per unit for the first 100 units and
a $72 cost per unit when cumulative production doubled to 200 units, the learning curve percentage must be 60%
($72 ÷ $120). If production is again doubled to 400 units (four batches), the average unit labor cost should be
$43.20 ($72 × 60%). Hence, total labor cost for 400 units is estimated to be $17,280 (400 units × $43.20).
Answer (B) is correct. With an 80% learning curve, the average cost after 8 units is 51.20% of the cost of the first
unit (100% × 80% × 80% × 80%). After 16 units, the average cost is 40.96% (51.20% × 80%). Thus, the average
cost of units in the last batch (units 9 through 16) must have been 30.72% [(40.96% × 2) – 51.20%].
At LCB, variable overhead is applied on the basis of $1.00 per direct labor dollar. $ 1
Based on historical costs, LCB knows that the production of 40 engines will incur $100,000 of fixed overhead costs.all comp
The bid request is for an additional 40 units; submitting bids are allowed to charge a maximum of 25% above full cost for e
80 $ 480,000 $ 491,520
DM DL VOH
40 increm $ 240,000 $ 184,320 $ 184,320 $ 608,640
12,000
27,200
28,000
67,200
Cold
60%
nks on hot days
2,500 by selling soft
لكن لو انا عارف ان الجو حار )عن طريق دراسة مثل( هفدم سوفت واكسب
the difference
nd is not known.
e maximum long-run
e supply is 4 units. It is
calculated for supply
C. $2,800
00 × $.30). Selling
the $4,000 of revenue
A. $6.40
mation by formulating
and Decision 1 is
) + (.2 × 400,000) +
000) variable cost].
Hours of Maintenance
Activity Costs
January 480 $ 4,200 480 4200
February 320 3,000 320 3000
March 400 3,600 400 3600
April 300 2820
May 500 4,350 500 4350
June 310 2,960 310 2960
July 320 3,030 320 3030
August 520 4470 220 1650 7.5
September 490 4,260 490 4260 3900
October 470 4,050 470 4050 570
November 350 3,300 350 3300
December 340 3,160 340 3160
Sum 4,800 $43,200 4800 43200
Average 400 $ 3,600 400 3600
ssion equation is
ssion equation is
ssion equation is
00 hours of activity,
$570 above the variable
ves y = $570 + $7.50x.
cumulative average
ing of output.
s at the unit rate
1500
000 hours × $8.50) 8,500 1000 8.5 8500
ad (1,000 hours × $4.00)* 4,000 1000 4 4000 14000
1400
15400
e basis of direct labor hours.
e rate of 10% of variable cost 10%
80%
hours
1600
2560
4 6000
2560 21760
2560 10240 38000
3800
$ 41,800
$ 26,400
70% 150
hours
1400
1960 hours required to produce 200 units
$ 16,660 DL cost to produce 200 units
$ 8,160 960 $ 8.50 6.40
B. 31%
30.72%
ErgoFurn's work-in-process inventory at April 30, 1993, consisted of the following jobs.
At April 30, 1993, the company's finished goods inventory, which is evaluated using the flrstin,
first-out (FIFO) method, consisted of four items.
At the end of April, the balance in ErgoFurn's Materials Inventory account, which includes
both raw materials and purchased parts, was $668,000. Additions to, and requisitions from,
the materials inventory during the month of May included the following.
Raw Materials
Additions $242,000 $396,000 $ 242,000
Requisitions:
Job CC723 $ 51,000
Job Ch291 $ 3,000
Job PS812 $ 124,000
Job DS444 $ 65,000
(5,000 desks) 5000
Listed below are the Jobs that were completed and the unit sales for the month of May.
Requisitions: Item Quantity Completed
CC723 Computer caddy 20,000 20000
CH291 Chair 15,000 15000
DS444 Desk 5,000 5000
Required
A. Describe when it is appropriate for a company to use a job order cost system.
B. Calculate the dollar balance in ErgoFurn Inc.'s work-in-process inventory account as of
May 31, 1993.
C. Calculate the dollar value of the chairs In ErgoFurn Inc.'s finished goods Inventory as of
May 31, 1993.
D. Explain the proper accounting treatment for overapplied or underapplied overhead balances
when using a job order cost system.
Alaire Corporation manufactures several different types of printed circuit boards; however,
two of the boards account for the majority of the company's sales.
The first of these boards,a television (TV) circuit board, has been a standard in the industry for several years.
The market for this type of board is competitive and, therefore, price-sensitive.
Alaire plans to sell 65,000 of the TV boards in 1993 at a price of $150 per unit.
65,000 $ 150
The second high-volume product , a personal computer (PC) circuit board, is a recent addition to Alaire's product line.
Because the PC board incorporates the latest technology, it can be sold at a premium price; the
1993 plans include the sale of 40.000 PC boards at $300 per unit.
40,000 $ 300
Alaire’s management group is meeting to discuss strategies for 1993, and the current topic of conversation is how to spend
The sales manager believes that the market share for the TV board could be expanded by concentrating
Alaire's promotional efforts in this area. In response to this suggestion, the production manager
said, "Why don't you go after a bigger market for the PC board? The cost sheets that I
get show that the contribution from the PC board is more than double the contribution from
the TV board. I know we get a premium price for the PC board; selling it should help overall
profitability."
Alaire uses a standard cost system, and the following data apply to the TV and PC boards.
TV Board PC Board
Direct material $80 $140 $ 80 $ 140
Direct labor 1.5 hours 4 hours 1.50 4.00
Machine time .5 hours 1.5 hours 0.50 1.50
Alaire applies a material handling charge at 10 percent of material cost; this material handling charge is not included in v
10%
Total 1993 expenditures for material are budgeted at $10,600,000.
Budgeted Cost
Material overhead:
Procurement $400,00 $ 400,000
Production schedulin $ 220,000
Packaging and shippi $ 440,000
$ 1,060,000
Variable overhead:
Machine set-up $ 446,000
Hazardous waste disp $ 48,000
Quality control $ 560,000
General supplies $ 66,000
$ 1,120,000
Manufacturing:
Machine insertion $ 1,200,000
Manual insertion $ 4,000,000
Wave soldering $ 132,000
$ 5,332,000
Ed Welch, Alaire's controller, believes that before the management group proceeds with the
discussion about allocating sales and promotional dollars to individual products, it might be
worthwhile to look at these products on the basis of the activities involved in their production.
As Welch explained to the group, "Activity-based costing integrates to cost of all activities,
known as cost drivers. Into individual product costs rather than including these costs in overhead
pools." Welch has prepared the schedule shown above to help the management group
understand this concept.
Using this information, Welch explained, "we can calculate an activity-based cost for each
TV board and each PC board and then compare it to the standard cost we have been using.
The only cost that remains the same for both cost methods is the cost of direct material. The
cost drivers will replace the direct labor, machine time, and overhead costs in the standard
cost."
Required
A. Identify at least four general advantages that are associated with activity-based costing.
B. On the basis of standard costs, calculate the total contribution expected in 1993 for Alaire Corporation's
1) TV board.
2) PC board.
C. On the basis of activity-based costs, calculate the total contribution expected in 1993 for Alaire Corporation's
1) TV board.
2) PC board.
D. Explain how the comparison of the results of the two costing methods may impact the decisions made by Alaire Corpo
Solution
A. At least four general advantages associated with activity-based costing include the following.
Provides management with a more thorough understanding of complex product costs
and product profitability for improved resource management and pricing decisions.
Allows management to focus on value-added and nonvalueadded activities so that
nonvalueadded activities can be controlled or eliminated, thus streamlining production
processes.
Highlights the Interrelationship (cause and effect) of activities which identifies opportunities
to reduce costs, i.e., designing products with fewer parts in order to reduce
the cost of the manufacturing process.
Provides more appropriate means of charging overhead costs to products.
B. 1. Using standard costs, the total contribution expected in 1993 by Allaire Corporation
from the TV Board is $1,950,000, calculated as follows.
Per Unit
Revenue $ 150
Direct material $ 80
Material overhead (10% of material) $ 8
Direct labor ($14 x 1.5 hours) $ 21
Variable overhead ($4x 1.5hours)* $ 6
Machine time ($10 x.5) $ 5
Total cost $ 120
Unit contribution $ 30 Total contribution (65,000 x $30) $ $ 30
2. Using standard costs, the total contribution expected in 1993 by Allaire Corporation
from the PC Board is $2,360,000, calculated as follows.
Per Unit
Revenue $ 300
Direct material $ 140
Material overhead (10% of material) $ 14
Direct labor ($14 x 4 hours) $ 56
Variable overhead ($4x 4 hours)* $ 16
Machine time ($10 x.5) $ 15
Total cost $ 241
Unit contribution $ 30 Total contribution (65,000 x $30) $ $ 59
C. Shown below are the calculations of the cost drivers which apply to both C. 1. and C. 2.
1) Using activity-based costing, the total contribution expected in 1993 by Allaire Corporation
from the TV Board is $2,557,100 calculated as follows.
Per Unit
Revenue $150.00 $9,750,000 $ 150
Direct material 80.00 5,200,000 $ 80
Material overhead
Procurement ($.10x25) 2.50 162,500 $ 2.50
Production scheduling 2.00 130,000 $ 2.00
Packaging & shipping 4.00 260,000 $ 4.00
Variable overhead
Machine set-ups ($1.60x2) 3.20 208,000 $ 3.20
Waste disposal ($3 x .02) .06 3,900 $ 0.06
Quality control 3.50 227,500 $ 3.50
General supplies .60 39,000 $ 0.60
Manufacturing
Machine insertion ($.40 x 24) 9.60 624,000 $ 9.60
Manual insertion 4.00 260,000 $ 4.00
Wave soldering 1.20 78,000 $ 1.20
Total cost 110.66 7,192,900 $ 110.66
Unit contribution $39.34 $ 39.34
Total contribution
2) Using activity-based costing, the total contribution expected in 1993 by Allaire Corporation
from the PC Board is $1,594,000 calculated as follows.
Per Unit
Revenue $300.00 $12,000,000 $ 300
Direct material 140.00 5,600,000 $ 140
Material overhead
Procurement ($.10x55) 5.50 220,000 5.5
Production scheduling 8 0,0 00 Packaging & 2.00
shipping 4.00 160,000 4.00
Variable overhead
Machine set-ups ($1.60x3) 4.80 192,000 4.8
Waste disposal ($3 x .35) 1.05 42,000 1.05
Quality control ($3.50 x 2) 7.00 280,000 7
General supplies .60 24,000 0.60
Manufacturing
Machine insertion ($.40 x 35) 14.00 560,000 14
Manual insertion ($4 x 20) 80.00 3,200,000 80
Wave soldering 1.20 48,000 1.20
Total cost 260.15 10,406,000 $ 260
Unit contribution $ 39.85 $ 39.85
Total contribution $1,594,000
D. The analysis using standard costs shows that the unit contribution of the PC Board is almost
double that of the TV Board. On this basis, Alaire's management is likely to accept
the suggestion of the production manager and concentrate promotional efforts on expanding
the market for the PC Boards.
However, the analysis using activity-based costs does not support this decision. This
analysis shows that the unit dollar contribution from each of the boards is almost equal,
and the total contribution from the TV Board exceeds that of the PC Board by almost
$1,000,000. As a percentage of selling price, the contribution from the TV Board is double
that of the PC Board, e.g., 26 percent versus 13 percent.
Hawthorn Company
Question
Hawthorn Company manufactures three lawncare component parts: fuel systems, transmission
assemblies, and electrical systems. For the past five years, manufacturing overhead has
been applied to products on standard direct labor hours for the units actually produced. The
standard cost information is shown below.
The current direct labor rate is $10 per hour. New machinery that highly automates the production
process, was installed two years ago and greatly reduced the direct labor time to
produce the three products. The selling price for each of the three products is 125 percent of
the manufacturing cost.
Hawthorn’s segment of the lawncare component industry has become very competitive, and
the company’s profits have been decreasing. Jim Briggs, controller, has been asked by the
president of the company to analyze the overhead allocations and pricing structure. Briggs
thinks that future allocations should be based on machine hours and direct labor hours rather
than the current allocation method which is based on direct labor hours, only. Briggs has determined
the additional product information shown below.
Manufacturing overhead:
Direct labor hours 560,000 560,000
Machine hours 3,360,000 3,360,000
Required
A. By allocating all of the budgeted overhead based on direct labor hours, calculate the unit
manufacturing cost and unit sales price for each of the three products manufactured at
Hawthorn Company.
B. Prepare an analysis for Hawthorn Company using the appropriate cost driver(s) determined
by Jim Briggs for manufacturing overhead. Calculate the unit manufacturing cost
and unit sales price for each of the three products.
C. Based on your calculations in Requirements A and B, prepare a recommendation for the
president at Hawthorn Company to increase the firm's profitability.
Solution
A. The allocation of all of Hawthorn Company's budgeted manufacturing overhead based on
direct labor hours, results in the unit manufacturing costs and unit sales prices for its
three products, calculated as follows.
Note:
(1) Total manufacturing overhead labor hour of $3,920,000 ÷ 80,000 total direct labor
hours = $49.00 per direct labor hour
B. When the cost drivers, identified by Jim Briggs, are used to allocate manufacturing overhead,
the unit manufacturing costs and unit sales prices for the three products manufactured
at Hawthorn Company are calculated as follows.
Note:
(1) Direct labor overhead of $560,000 * 80,000 total direct labor hours = $7.00 per direct
labor hour
(2) Machine overhead of $3,360,000 * 280,000 total machine hours = $12.00 per machine
hour
C. Presented below is a summary of the revised margins for each of Hawthorn Company's
three products assuming the sales prices developed in Requirement A (allocation of all
manufacturing overhead based on direct labor hours) is compared to revised costs developed
in Requirement B (allocation of manufacturing overhead based on cost drivers).
The apples are washed and the outside skin is removed in the Cutting Department.
The apples are then cored and trimmed for slicing. The three main products and the
by-product are recognizable after processing in the Cutting Department. Each product
is then transferred to a separate department for final processing.
The trimmed apples are forwarded to the Slicing Department where they are sliced
and frozen. Any juice generated during the slicing operation is frozen with the slices.
The pieces of apple trimmed from the fruit are processed into applesauce in the
Crushing Department. Again, the juice generated during this operation is used in the
applesauce.
The core and any surplus apple generated from the Cutting Department are pulverized
into a liquid in the Juicing Department. There is a loss equal to eight percent of
the weight of the good output produced in this department.
The outside skin is chopped into animal feed and packaged in the Feed Department.
A total of 270,000 pounds of apples were entered into the Cutting Department during November.
The schedule presented below shows the costs incurred in each department, the
proportion by weight transferred to the four final processing departments, and the selling
price of each end product.
Required
A. Princess Corporation uses the net realizable value method to determine inventory values
for its main products and by-products. For the month of November 1991, calculate the
1) resulting output for apple slices, applesauce, apple juice, and animal feed, in
pounds.
2) net realizable value at the split-off point for each of the three main products.
3) amount of the cost of the Cutting Department assigned to each of the three main
products and to the by-product in accordance with corporate policy.
4) gross margins in dollars for each of the three main products.
Solution
A. 1. For the month of November, 1991, Princess Corporation's resulting pounds of apple
slices, applesauce, apple juice, and animal feed were 89,100, 81,000, 67,500, and
27,000, respectively, as calculated in Exhibit 1.
Exhibit 1
Princess Corporation
Product Output in Pounds
Nov-91
Product Input Proportion Total Pounds Net
Pounds Lost Pounds
Slices 270, 270,000.00 33% 89,100.00 89,100.00
Sauce 270, 270,000.00 30% 81,000.00 81,000.00
Juice 270, 270,000.00 27% 72,900.00 5,400.00 67,500.00
Feed 270,0 270,000.00 10% 27,000.00 27,000.00
100% 270,000.00 270,000.00
Note(1)
Net Pounds: = 72,900 - (.08 x net pounds.)
= 72,900+ 1.08
= 67,500 net pounds
2. The net realizable value for each of the three main products is calculated below.
3. The net realizable value of the by-product is deducted from the production costs prior
to allocation to the main products, as presented below.
Allocation of Cutting Department Costs To Main and By-Products
Net realizable value (NRV) of by-product = By-product revenue -Separable costs
= $.10(270,000x10%)-$700 2,000.00
= $2,700 - $700
= $2,000
Costs to be allocated = Joint cost - NRV of by-product
= $60,000 - $2,000 58,000.00
= $58,000
4. The gross margin in dollars for each of Princess Corporation's three main products is
reflected in Exhibit 2 below.
Exhibit 2
Princess Corporation
Gross Margin in Dollars
Nov-91
Product Revenue Separable Joint Gross
__Cost___ __Cost__ __Margin_
B. The gross margin dollar information by main product is determined by the arbitrary allocation
of joint production costs. As a result, these cost figures and the resulting gross
margin information are of little significance for planning and control purposes. The allocation
is made only for purposes of inventory valuation and income determination.
1. Account for all units (physical flow of quantities).
Question
Kristina Company, which manufactures quality paint sold at premium prices, uses a single
production department. Production begins with the blending of various chemicals, which are
added at the beginning of the process, and ends with the canning of the paint.
Canning occurs when the mixture reaches the 90 percent stage of completion. The gallon cans are then
transferred to the Shipping Department for crating and shipment. Labor and overhead are
added continuously throughout the process. Factory overhead is applied on the basis of direct
labor hours at the rate of $3.00 per hour.
Prior to May, when a change in the process was implemented, work-in-process inventories
were insignificant. The change in the process enables greater production but results in material
amounts of work-in-process for the first time. The company has always used the
weighted average method to determine equivalent production and unit costs. Now, production
management is considering changing from the weighted average method to the first-in,
first-out method.
The following data relate to actual production during the month of May.
Accumulated
___Cost___
$ 900,000
$ 431,000
$ 250,000
$ 1,581,000
ng the flrstin,
Accumulated
_____Cost_____
$ 480,000
$ 679,000
$ 1,155,000
$ 1,142,400
$ 3,456,400
$ 668,000
Purchased Parts
$ 396,000
$ 104,000
$ 10,800
$ 87,000
$ 187,000
uantity Completed
uantity Completed
ead balances
$ (1,133,400)
$ (510,000)
$ (273,000)
$ (1,916,400) $ 759,000
BWIP $ 431,000
DM $ 13,800
DL $ 43,200
OH $ 22,000
TC $ 510,000
ent topic of conversation is how to spend the sales and promotion dollars for next year.
nded by concentrating
tion manager
$ 1,120,000
280,000 $ 4.00
$ 10
$ 14
$ 10,600,000
TV Board Pc Board
25 55
24 35
1 20
2 3
0.02 lb. 0.35 lb.
1 2
r production.
sts in overhead
93 for Alaire Corporation's
the following.
pportunities
Totals for
65,000 units
$ 9,750,000
$ 5,200,000
$ 520,000
$ 1,365,000
$ 390,000
$ 325,000
$ 7,800,000
$ 1,950,000
Totals for
40,000 units
$ 12,000,000
$ 5,600,000
$ 560,000
$ 2,240,000
$ 640,000
$ 600,000
$ 9,640,000
$ 2,360,000
e Corporation
Totals for
65,000 units
$ 9,750,000
$ 5,200,000
$ 162,500
$ 130,000
$ 260,000
$ 208,000
$ 3,900
$ 227,500
$ 39,000
$ 624,000
$ 260,000
$ 78,000
$ 7,192,900
$ 2,557,100
e Corporation
Totals for
40,000 units
$ 12,000,000
$ 5,600,000
$ 220,000
$ 80,000
$ 160,000
$ 192,000
$ 42,000
$ 280,000
$ 24,000
$ 560,000
$ 3,200,000
$ 48,000
$ 10,406,000
$ 1,594,000
ard is almost
n expanding
transmission
s the production $ 10
hours rather
ggs has determined
determined
ing overhead,
7.00
12.00
s developed
anufacturing
—sliced apples
osts prior to
8%
67500
50%
30%
20%
rary allocation
Total Units to Account for = 25,000.00
Finished or Transferred-out Goods 20,000.00
Ending WIP 5,000.00
Spoilage (lost)
Conversion
20,000.00
4,000.00
16,000.00
3000
19,000.00
puted as follows:
ts in material
w, production
below are the calculations of the cost drivers which apply to both C. 1. and C. 2.
parts
boards
boards
set-ups
pounds
inspections
parts
parts
boards
Watkins Machinery Company uses a normal job costing system. The company has this
partial trial balance information on March 1, 2001, the last month of its fiscal year:
Material X
Material Y
Indirect materials
Total
b. Issued direct materials and indirect materials with this summary of requisition forms:
d. Factory utilities, factory depreciation, and factory insurance incurred are summarized by these factory vouchers, invoic
Utilities 500
Depreciation 15000
Insurance 2500
Total $ 18,000
e. Factory overhead costs were applied to jobs at the predetermined rate of $15 per machine-hour. Job 101 incurred 1,20
f. Job 101 was completed; job 102 was still in process at the end of March.
g. Job 100 and job 101 were shipped to customers during March. Both jobs had gross margins of 20 percent based on ma
The company closed the overapplied or underapplied overhead to the Cost of Goods Sold account at the end of March.
Required
1. Prepare journal entries to record the transactions and events. Letter your
entries from a to g.
2. Compute the ending balance of the Work-in-Process Inventory account.
3. Compute the overhead variance and indicate whether it is overapplied or underapplied.
4 Close the overhead variance to the Cost of Goods Sold account.
2. Compute the ending balance of the Work-in-Process Inventory account.
2. Ending balance of the Work-in- Process Inventory account for Job 102:
Direct materials 6000
Direct labor 8000
Factory overhead applied 12000
Total ending balance 26000
Carter Company manufactures two products, Deluxe and Regular, and uses a traditional two-stage cost allocation system.
The first stage assigns all factory overhead costs to two production departments A and B, based on machine-hours.
The second stage uses direct labor-hours to allocate overhead to individual products.
For 2006, the fi rms budgeted $1,000,000 total factory overhead cost for these operations
Production Department A
Machine-hour 4,000 0.2
Direct labor-hour 20,000
The following information relates to the fi rm’s operations for the month of January, 2006:
Deluxe
Units produced and sold 200 800 200
Unit cost of direct materials $100 $ 50 100
Hourly direct labor wage rate $ 25 $ 20 25
Direct labor-hours in Department A per unit 2 2 2 400
Direct labor-hours in Department B per unit 1 1 1 200
Stage 2 Allocation
Per Unit Cost
Deluxe Regular
Overhead allocated to Department A
($200,000/20,000) × 2 = $ 20 $ 10 $ 20
($200,000/20,000) × 2 = $ 20 $ 10 $ 20
Department B
($800,000/10,000) × 1 = 80 80 80
($800,000/10,000) × 1 = 80 80 80
Total $ 100 $ 100
Product cost per unit: Deluxe Regular
Direct materials $100 $ 50 100 50
Direct labor 75 60
$25 × (2 + 1) = 75
$20 × (2 + 1) = 60
Factory overhead 100 100 $ 100 $ 100
Unit cost $275 $210 $ 275 $ 210
The following example contrasts Steps 2 and 3 of the volume-based costing system using
direct labor-hours as the cost driver with an activity-based costing system that uses both
volume-based and activity-based cost drivers.
Haymarket BioTech, Inc. (HBT) produces and sells two secure communication systems,
AW (Anywhere) and SZ (SecureZone). AW uses satellite technology and allows parties whose
DNA is implanted in the device to communicate anywhere on the earth. SZ uses similar technology
except it allows communication between two parties who are within 10 miles of each
other. HBT has the following operating data for the two products:
AW SZ
Production volume 5000 20000
Selling price $ 400 $ 200
Unit direct materials and labor $ 200 $ 80
Direct labor-hours 25000 75000
Direct labor-hours per unit 5 3.75
Volume-Based Costing
The volume-based costing system that the fi rm uses assigns factory overhead (OH) based on
direct labor-hours (DLH). The fi rm has a total budgeted overhead of $2,000,000. Since the
fi rm budgeted 100,000 direct labor hours for the year, the overhead rate per direct labor hour
is $20 per direct labor hour.
Since the fi rm uses 25,000 direct labor hours to manufacture 5,000 units of AW, the factory
overhead assigned to AW is $500,000 in total and $100 per unit:
The factory overhead for SZ is $1,500,000 in total and $75 per unit since the fi rm spent
75,000 direct labor hours to manufacture 20,000 units of SZ:
In Exhibit 5.5 we show a product profi tability analysis using the fi rm’s volume based
costing system.
AW SZ
Unit selling price $400 $200 $ 400 $ 200
Unit product cost:
Direct materials and labor $200 $80 $ 200 $ 80
Factory overhead 100 75 $ 100 $ 75
Cost per unit 300 155 $ 300 $ 155
Unit margin $100 $ 45 $ 100 $ 45
Activity-Based Costing
In using an activity-based costing, HBT has identifi ed the following activities, budgeted costs,
and activity consumption cost drivers:
HBT also has gathered the following operating data pertaining to each of its products:
AW AW SZ SZ
Engineering hours 5,000 7,500 12,500 5000 $ 50,000 $ 75,000 7500
Number of setups 200 100 300 200 $ 200,000 $ 100,000 100
Machine-hours 50,000 100,000 150,0 50000 $ 500,000 $ 1,000,000 100000
Number of packing orders 5,000 10,00 5000 $ 25,000 $ 50,000 10000
$ 775,000 $ 1,225,000
$ 10,000
6000
10000
$ 26,000
ne-hour. Job 101 incurred 1,200 machine-hours; job 102 used 800 machine-hours.
15 1200 800
e. e. Work-in-Process Inventory 30,000
Factory Overhead Applied 30,000
To record the application of factory overhead to jobs.
Summaryoffactory overhead applied
Job 1 ($15 x 1,2001 18000
Job 2 ($15 x 800) 12000
Total 30000
45000
45000
Regular
800
50
20
2 1600 2000
1 800 1000
350 15 20 20
500 25 50 800
19600 200 800 30
250 50 100 20
Note that the volume-based costing system overcosts the high-volume regular product a
the low-volume deluxe product
$ 2,000,000
100,000
$ 20.00
$ 500,000
5000
$ 100
$ 1,500,000
20000
$ 75
EXHIBIT 5.5
Product Profi tability Analysis
under Volume-Based Costing
Using the gathered data, the cost driver rate for each activity consumption cost driver is
Total calculated as follows:
12,500 $ 10
300 $ 1,000
150,000 $ 10
15,000 $ 5
500
15000
2500
-volume regular product and under costs
cost driver is
The following data are used in developing Stylistic's 2004 budget:
Direct Materials
Particle board (PB) 9 board feet (b.f.) per table
Red oak (RO) 10 board feet (b.f.) per table
Direct manufacturing labor
Laminating labor 0.25 hours per table
Machining labor 3.75 hours per table
b. Inventory information in physical units for 2004 is Ending inventory is not just a leftover
Finished goods
Coffee tables 5000 units 3000 units
f. The inventoriable (manufacturing) cost is $275 $ 275.0 per coffee table in 2003.
Prepare the Direct Materials Usage Budget and Direct Materials Purcnas Budget.
Particle
Board (PB) Red Oak (RO)
Phvsical Units Budget
PB: 50,000 units x 9.00 b.f. per unit 450,000
RO: 50,000 units x 10.00 b.f. per unit 500,000
To be used in production, b.f. 450,000 500,000
Cost Budget
(Available trom beginning inventory)
PB: $3.90 per b.t. x 20,000 b.f. $ 78,000
RO: $5.80 per b.f. x 25,000 b.f. $ 145,000
To be obtained from purchases of this period:
PB: $4.00 per b.f. x (450,000 b.f. - 20,000 b.f.) $ 1,720,000
RO: $6.00 per b.t. x (500,000 b.f. - 25,000 b.f.) $ 2,850,000
Schedule 3B computes the budget for direct materials purchases, which depends on the bu
materials to be used, the beginning inventory of direct materials, and the target ending inv
materials
Schedule 3B computes the budget for direct materials purchases, which depends on the bu
materials to be used, the beginning inventory of direct materials, and the target ending inv
materials
Cost Budget
PB: 448,000 b.f. x $4.00 per b.f. $ 1,792,000.00
RO: 497,000 b.t. x $6.00 per b.f. $ 2,982,000.00
Purchases $ 1,792,000.00 $ 2,982,000.00
Laminating Machining
Labor Labor
(LL) (ML)
Labor-Hours Budget
LL:50,000 units x 0.25 hours/unit 12,500 hours
ML: 50,000 units x 3.75 hours/unit 187,500
12,500 187,500
Cost Budget
LL:$25.00 per hour x 12,500 hours 312,500
ML: $30.00 per hour x 187,500 hours 5,625,000
312,500 5,625,000
It inventories manufacturing overhead at the budgeted rate of $17.50 per direct manufacturing labor-hour
(total budgeted manufacturing overhead, $3,500,000 + 200,000 budgeted direct manufacturing labor-hours).
The $70 budgeted manufacturing overhead cost per coffee table can also be calculated as $17.50 budgeted cost
per direct manufacturing labor-hour x 4 budgeted direct manufacturing labor hours per coffee table = $70.
Cost per
Unit of Input Input
Direct materials
Particle board (per b.f) $ 4.00 per b.f 9
Red oak (per b.f) $ 6.00 per b.f 10
Direct manufaturing labor
Laminating labor (per hour) $ 25.00 per hour 0.25
Machining labor (per hour) $ 30.00 per hour 3.75
Manufacturing Overhead $ 17.50 per hour 4.00
Total
This $284.75 unit cost for 2004 compares to $275.00 unit cost for 2003
Cost
per Unit Units
Direct materials
Particle board (per b.f) $ 4.00 18000 $ 72,000
Red oak (per b.f) $ 6.00 22000 $ 132,000
$
Variable non manufacturing costs-13.5% of revenues 13.5% $ 2,751,840
Fixed non manufacturing costs - $1,400,000 $ 1,400,000 $ 1,400,000
Step 9: Prepare the Budgeted Income Statement.
Revenues Schedule 1
Costof goods sold Schedule 7
Gross margin
Operating costs
R& D/Product design Schedule 8 $ 555,760
Marketingcosts Schedule 8 $ 1,920,720
Distributioncosts Schedule 8 $ 729,600
Customer-service costs Schedule 8 $ 504,992
Administrativecosts Schedule 8 $ 440,768
Operating income
Variable Fixed
Costs Costs
Value-Chain Function
R& D/Product design $ 305,760 $ 250,000
Marketing $ 1,630,720 $ 290,000
Distribution $ 509,600 $ 220,000
Customer service $ 264,992 $ 240,000
Administrative $ 40,768 $ 400,000
$ 2,751,840 $ 1,400,000
To see how sensitivity analysis works, let's consider two parameters in Stylistic
Furniture's budget model for 2004:
1. Selling price per table of $392.
2. Direct material prices of $4 per bJ. for particle board and $6 per bJ. for red oak.
What if either or both of these parameters were to change? Exhibit 6-4 presents the budgeted
operating income for nine combinations of different inputs for parameters 1 and 2:
8. Selling prices per table of (i) $431.20 (10% increase), (ii) $392.00 (original budgeted
price), and (iii) $352.80 (10% decrease).
b. Direct material purchase prices (i) decreasing by 5% to $3.80 per b.f. for particle board
and $5.70 per bJ. for red oak, (ii) remaining at the original budgeted price of $4.00 per
bJ. for particle board and $6.00 per b.f. for red oak, and (iii) increasing by 5% to $4.20
per bJ. for particle board and $6.30 per bJ. for red oak.
The nine combinations in Exhibit 6-4 show how budgeted operating income will change
considerably with changes in selling prices and direct material costs.
Effect of Changes in
Budget Assumptions on
Budgeted Operating
Income for Stylistic
Furniture
Current Assets
Cash $ 500,000
Accounts receivable $ 1,881,600
Direct materials inventory 223,000 $ 223,000
Finished goods inwntory 1,375,000 $3,979,600 $ 1,375,000 $ 3,979,600
Property, plant and equipment
Land $ 1,200,000
Building and equipment $ 2,300,000
Accumulated depreciation $ (800,000) $ 1,500,000 $ 2,700,000
Total $ 6,679,600
Suppose Stylistic Furniture had the balance sheet for the year ended December 31,2006, shown
in Exhibit 6-5. The budgeted cash nows for 2007 are:
Quarters
1 2 3 4
Collections from customers $ 5,331,220 $ 4,704,000 $ 4,704,000 $ 6,272,000
Disbursements
Direct materials $ 960,000 $ 1,152,000 $ 1,152,000 $ 1,536,000
Payroll $ 1,626,300 $ 1,626,300 $ 1,888,600 $ 1,626,300
Other costs $ 1,580,460 $ 1,580,460 $ 1,580,460 $ 1,580,460
Machinery purchese $ - $ - $ 1,800,000 $ -
Interest expense on long-term deb$ 60,000 $ 60,000 $ 60,000 $ 60,000
Income taxes $ 100,000 $ 120,460 $ 100,000 $ 100,000
The quanerly data are based on the budgeted cash effects of the operations formulated in Sd1cdules
1 through 8 in the chapter, but the details of that formulation are not shown here to keep this illustration
as brief and as focused as possible.
Long-term debt is $2.4 million at an annual interest rate of 10%, with $60,000 interest payable
every quarter. The company wants to maintain a $100,000 minimum cash balance at the end of
each quarter. The company can borrow or repay money at an interest rate of 12% per year.
Management does not want to borrow any more short-term cash than is necessary. By special
arrangement, interest is computed and paid when the principal is repaid. Assume, for simplicity,
that borrowing takes place (in multiples of $1,000) at the beginning and repayment at the end of
the quarter under consideration. Interest is computed to the nearest dollar.
Suppose the management accountant at Stylistic is given the preceding data and the other data
contained in the budgets in the chapter (pp. 188-193). She is instructed as follows:
1. Prepare a cash budget for 2007 by quarter. That is, prepare a statemenl of cash receipts and disbursements
by quarter, including details of borrowing, repayment. and interest.
2. Prepare a budgeted balance sheel on December 31, 2007.
3. Prepare a budgeted income stalement for the year ended December 31, 2007. This statement
should include interest expense and income taxes (at a rate of 36% of operating income). In
April 2007, Stylistic will pay $120,640 of income taxes. This amount is the remaining payment
due for the 2006 income tax year togelher with tlle $100,000 Stylistic pays each quarter of
2007 toward its 2007 income tax bill. Any remaining amount due is paid in April 2008.
Quarters
1 2 3 4
Cash balance, beginnir1g $ 500,000 $ 1,504,440 $ 1,669,220 $ 100,160
Add receipts
Collections from customers $ 5,331,220 $ 4,704,000 $ 4,704,000 $ 6,272,000
Total cash available for needs (x) $ 5,831,220 $ 6,208,440 $ 6,373,220 $ 6,372,160
Deduct disbursements
Direct materials $ 960,000 $ 1,152,000 $ 1,152,000 $ 1,536,000
Payroll $ 1,626,300 $ 1,626,300 $ 1,888,600 $ 1,626,300
Other costs $ 1,580,460 $ 1,580,460 $ 1,580,460 $ 1,580,460
Machinery purchese $ - $ - $ 1,800,000 $ -
Interest expense on long-term de $ 60,000 $ 60,000 $ 60,000 $ 60,000
Income taxes $ 100,000 $ 120,460 $ 100,000 $ 100,000
Total disbursements (y) $ 4,326,760 $ 4,539,220 $ 6,581,060 $ 4,902,760
Minimum cash balance desired $ 100,000 $ 100,000 $ 100,000 $ 100,000
Total cash needed $ 4,426,760 $ 4,639,220 $ 6,681,060 $ 5,002,760
Cash excess(defIciency)a $ 1,404,460 $ 1,569,220 $ (307,840) $ 1,369,400
Financing
Bonowing (at beginning) $ - $ - $ 308,000
Repayment (at end) $ - $ - $ - $ (308,000)
Interest (at 12% per annum) b $ - $ - $ - $ (18,480)
Total effects of fmancing $ - $ - $ 308,000 $ (326,480)
Cash balance, ending c $ - $ - $ 160
g inventory is not just a leftover; it is a budgeted amount
195,000
ule 2, isthe k
nd in dollars.
Total
$ 4,793,000
$ 4,774,000
These costs depend on wage rates, production methods, and hiring plans.
Total
hours
200,000
5,937,500
The total of these costs depends on how individual overhead costs vary wi
The calculations of budgeted manufacturing overhead costs appear in Sche
manufacturing overhead costs are based on input from Stylistic's operating
uring labor-hour and prior years. Management makes adjustments for cost changes expecte
manufacturing overhead as inventoriable costs. Stylistic does not use a sep
uring labor-hours). overhead rate and a separate fIxed manufacturing overhead rate.
per direct manufacturing labor-hour
$ 1,900,000
$ 1,600,000
$ 3,500,000
Total
$ 36.00
$ 60.00 $ 96.00
$ 6.25
$ 112.50 $ 118.75
$ 70.00
$ 284.75
Total
$ 204,000
$ 854,250
$ 1,058,250
Schedules 2 through 7 cover budgeting for Stylistic's production function part of the value chain
brevity, other parts of the value chain are combined into a single schedule Variable
nonmanufacturing costs are variable with respect to the amount of revenues at the rate of 13.5
revenues: $20,384,000 from Schedule 1 x 0.135 = $2,751,840. For example, variable product de
costs represent roy.
alty payments of 1.5% of revenues paid to the company that designed the table; variable marke
costs are 8% sales commission on revenues paid to salespersons; variable distribution costs are
of revenues for insurance and freight; and variable customer service costs equal 1.3% of revenu
paidto an outside party to service all warranty claims. The individual fixed COSI
amounts are based on input from Stylistic's business function managers in different parts of its
chain.
Schedules 1, 7, and 8 provide the information needed to complete the budgeted
Exhibit 6-3. More details could be included in the income statement: The more
$ 20,384,000 details put in the income statement, the fewer supporting schedules needed for
$ 14,751,250 the income statement.
$ 5,632,750 Top management's strategies for achieving revenue and operating income
goals influence the costs planned for the different business functions of the value
chain. As strategies change, the budgeted costs for different elements of the valu
chain will also change. For example, a shift in strategy toward emphasizing produ
development and customer service will result in increased costs in these parts
of the operating budget.
$ 4,151,840
$ 1,480,910
Total
Costs
$ 555,760
$ 1,920,720
$ 729,600
$ 504,992
$ 440,768
$ 4,151,840
his illustration
and disbursements
Years as whole
$ 500,000
$ 21,011,220
$ 21,511,220
$ 4,800,000
$ 6,767,500
$ 6,321,840
$ 1,800,000
$ 240,000
$ 420,460
$ 20,349,800
$ 100,000
$ 20,449,800
$ 1,061,420
ement.
ering and discussions among sales managers and
eds, market potential, and competitors' products.
in sales forecasting. These techniques use indicators
rs should use statistical analysis only as one input to
e collective experience and judgement of managers.
nd. Occasionally, a factor other than demand limits
production capacity or a resource factor is in short
could be produced. Why? Because sales would be
eds, market potential, and competitors' products.
in sales forecasting. These techniques use indicators
rs should use statistical analysis only as one input to
e collective experience and judgement of managers.
nd. Occasionally, a factor other than demand limits
production capacity or a resource factor is in short
could be produced. Why? Because sales would be
overhead costs vary with respect to the cost driver - direct manufacturing labor-hours, in this example.
ead costs appear in Schedule 5. The individual amounts for variable manufacturing overhead costs and fIxed
rom Stylistic's operating personnel. The starting point for these amounts is Stylistic's costs in the current
or cost changes expected in the future. Stylistic treats both variable manufacturing overhead and fIxed
listic does not use a separate variable manufacturing
overhead rate.
uate in
ost-
ing labor-
ereas
constant
cost of
d
e (for a
. (Note,
ning or
perating income
s functions of the value
nt elements of the value
ard emphasizing product
d costs in these parts
Exhibit 9-4 Sales Budget Kerry sets the sales levels shown and a selling price of $30 per unit.
To illustrate, Kerry expects to have 5,000 units on hand at the beginning of the quarter, April 1.
The firm's operation guideline requires the inventory on hand at the end of each month to be 30 percent of the following mon
Kerry therefore has a production budget to manufacture 22,500 units in April as calculated
Exhibit 9-5 shows Kerry's production budget for the first quarter of 2002. This budget
is based on the sales budget in Exhibit 9-4 and the expected sales of 40,000 units in July.
Kerry expects its total sales in May 2002 to be 25,000 units. The desired ending
inventory on April 30, therefore, is 7,500 units as shown in step 1 below. Step 2 shows
the calculation that determines the number of units to be manufactured in April.
The last line of the production budget (Exhibit 9-5) shows the number of units of its only product that Kerry Industrial Compan
This amount becomes line 1 of Exhibit 9-6, Kerry's direct materials usage budget.
This budget shows that production of one unit requires 3 pounds of aluminum alloy for a total of
The remainder of the direct materials usage budget (Exhibit 9-6, part B) identifies the cost
of direct materials for the budget period, but it can be completed after Kerry prepares
the second budget, its direct materials purchase budget (Exhibit 9-7). A direct materials
purchase budget shows the amount of direct materials (in units and cost) to be purchased
during the period to meet production needs.
Kerry prepares its direct materials purchase budget to identify the purchases that it must make to ensure that it has sufficient d
needs and to maintain the amount of direct materials ending inventory required by the firm's operation guidelines.
Line 3 of Exhibit 9-6 shows that the firm needs 67,500,84,000, and 109,500 pounds of aluminum alloy to meet the productio
The sum oflines 1 and 2 (Exhibit 9-7) identifies the total amount of direct materials needed for April,
75,900 pounds. The firm expects to have 7,000 pounds (March's ending inventory) as
the beginning balance in April; this amount must be subtracted from the amount to
5000
o be 30 percent of the following month's predicted sales. 30%
here. 22,500
25,000
30%
7,500
20,000
7,500
27,500
5000
22,500
40000
25,000
Quarter july
80,000 40000
12,000
92,000
5000 10500
87,000 (10,500)
product that Kerry Industrial Company plans to manufacture in April: 22500 units.
um alloy for a total of 67,500 pounds (line 3) to produce the 22,500 units planned.
make to ensure that it has sufficient direct materials available to meet production
m's operation guidelines.
uminum alloy to meet the production budget for April, May, and June, respectively.
June Quarter
36,500 87,000
10,800 10,800
2.6 2.6
28,080 28,080
urchasing department estimates the cost of aluminum alloy to be $2.45 per 2.45
April, for a total cost of $168,805 for the 68,900 pounds it must purchase.
the procedure just described, the firm completes the purchase budgets
nd June. June's direct materials ending inventory of 10,800 pounds is determined
the 36,000 units to be manufactured in July (3 pounds per unit X
108,000 pounds; 10% X 108,000 = 10,800 pounds).
the procedure just described, the firm completes the purchase budgets
nd June. June's direct materials ending inventory of 10,800 pounds is determined 10,800
the 36,000 units to be manufactured in July (3 pounds per unit X 36,000
108,000 pounds; 10% X 108,000 = 10,800 pounds). 108,000
VARIABLE COSTING AND ABSORPTION COSTING
Data for One- Year Example
Stassen Company manufactures and markets optical consumer products. Stassen uses a standard costing system in which:
a. Direct costs are traced to products using standard prices and standard inputs allowed for actual outputs produced.
b. Indirect (overhead) costs are allocated using standard indirect rates times the standard inputs allowed for the actual outputs
The allocation base for all indirect manufacturing costs is budgeted units produced; the allocation base for all indirect marketin
Stassen wants you to prepare an income statement for 2003 (the year just ended) for the telescope product line. The operating
Units
Beginning inventory 0
Production 800
Sales 600
Ending inventory 200
3. The budgeted level of production for 2003 is 800 units, which is used to calculate the budgeted fIxed-manufacturing cost pe
The actual production for 2003 is 800 units.
4. Stassen budgeted sales of 600 units for 2003, which is the same as the actual sales for 2003
5. There are no price variances, no efficiency variances, no spending variances. Hence, the
budgeted (standard) price and cost data for 2003 are the same as the actual price and cost
data as given. Our fIrst example (2003) has no production-volume variance for manufacturing
costs. Later examples (for 2004 and 2005) have production-volume variances.
6. All variances are written off to cost of goods sold in the period (year) in which they
occur.
The accounting for fixed manufacturing costs is the main difference between variable costing and absorption costing.
Under variable costing, fixed manufacturing costs are treated as an expense of the period .
Under absorption costing, fIxed manufacturing costs are inventoriable costs.
In our example, the standard fixed manufacturing overhead cost is $15 per unit ($12,000 / 800 units) produced.
Inventoriable costs per unit produced in 2003 under the two methods for Stassen are
Variable Absorption
Costing Costing
Variable manufacturing cost per unit produced
Direct material $ 11 $ 11
Direct manufacturing labor $ 4 $ 4
Indirect manufacturing cost $ 5 $ 20 $ 5
Fixed indirect manufacturing cost per unit produced 0
Total inventoriable cost per unit produced $ 20
underabsorption costing regards each finished unit as absorbing $15 of fixed manufacturingcost. Under absorption costing, th
($15 per unit x 800 units) is initially treatedas an inventoriable cost in 2003. Given the preceding data for Stassen, $9,000 ($15
600 units) subsequently becomes a part of cost of goods sold in 2003, and $3,000 ($]5 per unit x 200 units) remains an asset-
ending finished goods inventory on December31, 2003. Operating income is $3,000 higher under absorption costing compare
variable costing, because only $9,000 of ftxed manufacturing costs are expensed underabsorption costing, whereas all $12,00
manufacturing costs are expensed undervariable costing. The variable manufacturing cost of $20 per unit is accounted for the
in bothincome statements in Exhibit 9-l.
Besure that other issues don't distract you from seeing clearly that the difference betweenvariable costing and
absorption costing is how fixed manufacturing costs are accounted for. If inventory levels change, operating income will
differ between the two methods because of the difference in accounting for fixed manufacturing costs. To see
this,let's compare telescope sales of 600, 700, and 800 units by Stassen in 2003, when 800 units were produced. Of the
$12,000 total fixed manufacturing costs, the amount expensedin the 2003 income statement would be
sales are 700 units, inventory is 100 units, 700 $ 10,500 expensed
and $1,500 ($15 x 100) is included in inventory ($12,000 - $1,500)
The actual quantities sold for 2004 and 2005 are the same as the sales quantities budgeted for these respective years, given
1. The $15 fIxed manufacturing cost rate is based on a budgeted denominator level of 800 units produced per year ($12,000 +
Whenever production - that's the quantity produced not the quantity sold - deviates from the denominator level, there will be
The amount of the variance here is $15 per unit multiplied by the difference between the actual level of production and the de
In 2004, production was 500 units, 300 lower than the denominator level of 800 2004
units. The result is an unfavorable production-volume variance of $4,500 ($15 per unitx -300
300 units). The year 2005 has a favorable production-volume variance of $3,000 ($15per -4500
unit x 200 units), due to production of 1,000 units exceeding the denominator levelaf
800 units.
Recall how standard costing works. Each time a unit is manufactured, $15 of fixed manufacturing costs is included in
In 2004, when 500 units are manufactured, $7,500 ($15 per unit x 500 units) of fixed costs are included in the cost o
Total fIxed manufacturing costs for 2004 are $12,000. The production-volume variance of $4,500 U equals the differe
In Panel B, note how,for each year, the fixed manufacturing costs included in the cost of goods available for sale plus
2. The production-volume variance, which relates to fIxed manufacturing overhead,exists under absorption costing but not und
Because under variable costing, fIxed manufacturing costs of $12,000 are always treated as an expense of the period, regardle
The PVV is the difference between the lump-sum budgeted FMOH and FMOH allocated
Because FMOH costs aren't allocated to output produced under VC (FMOH costs are ex
Here's a summary of the operating income differences for Stassen Company during the 2003 - 2005 period:
These percentage differences illustrate why managers whose performance is measured by reported income are concerned ab
choice between variable costing and absorption costing.
Why do variable costing and absorption costing usually report different income numbers? In general, if the unit level of inven
increases during an accounting period, less operating income will be reported under variable costing than absorption costing,
Conversely, if the inventory level decreases, more operating income will be reported under variable costing than absorption c
difference in reported operating
ting system in which:
puts produced.
wed for the actual outputs produced.
Absorption
$ 20
$ 15
$ 35
The difference between VC and
AC operating incomes is a
matter of timing. Under VC,
der absorption costing, the $12,000 FMOH costs are expensed in
a for Stassen, $9,000 ($15 per unit x the period incurred. Under AC,
0 units) remains an asset-part of FMOH costs are allocated to
sorption costing comparedwith output produced and are not
osting, whereas all $12,000 of fixed expensed until those units are
r unit is accounted for the same way sold
oduced using
nominator level of
oduced per year
osting and
erating income will
ts. To see
e produced. Of the
be
escope production differs from the budgeted level of production of
2005
200
$ 3,000
ring costs is included in the cost of goods manufactured and available for sale.
e included in the cost of goods available for sale (see Exhibit 9-2, Panel B, line4).
500 U equals the difference between $12,000 and $7,500.
s available for sale plus the production-volume variance always equals $12,000.
2005
$ 75,000
$ 1,000
$ 20,000
$ 21,000
$ (6,000)
$ 15,000
$ 14,250
0
$ 29,250
$ 45,750
$ 12,000
$ 10,800
0
$ 22,800
$ 22,950
1000
2005
$ 75,000
$ 1,750
'Production-volume variance:
$ 20,000 Fixedmanufacturing costs per unit x (Denominator level - Actual output
2003:$15 x (800 - 800) units = $15 x 0 = $0
$ 15,000 2004:$15x (800 - 500) units = $15 x 300 = $4,500 U
$ 36,750 2005:$15 x (800 - 1,000)units = $15 x (200) = $3,000 F
$ (10,500)
$ (3,000) $ 12,000 $ 12,000 $ 12,000
$ 23,250
$ 51,750
$ 14,250
$ 10,800
0
$ 25,050
$ 26,700
$ 26,700
$ 22,950
$ 3,750
14.0%
0) = $3,000 F
Accounting System at Webb
Webbmanufactures and sells a designer jacket that requires tailoring and many hand operations
Webb's only costs are manufacturing costs; it incurs no costs in other value chain
functionssuch as marketing and distribution. Weassume that all units manufactured in April
2003are sold in April 2003. There are no beginning inventories or ending inventories.
Variable Cost
Cost Category per Jacket
Directmaterialscosts $ 60
Directmanufacturinglaborcosts $ 16
Variablemanufacturingoverheadcosts $ 12
Total variable costs $ 88
The budgeted fixed manufacturing costs are $276,000 for production
between 0 and 12,000 jackets. $ 276,000
0 12,000.00
This selling price is the same for all distributors. The static budget for April 2003 is based
on selling 12,000 jackets. Actual sales for April 2003 were 10,000 jackets. Exhibit 7-1,
column 3, presents the static budget for Webb Company for April 2003.
STATIC-BUDGET VARIANCES
Astatic-budget variance is the difference between an actual result and the corresponding
budgeted amount in the static budget. Exhibit 7-1 shows the Level 0 and Level 1 variance
analyses for April 2003. Level 0 gives the least detailed comparison of the actual and
budgeted operating income.
LEVEL 0 ANALYSIS
Actual operating income
Budgeted operating income
Static-budget variance for operating income
LEVEL 1 ANALYSIS
Units sold
Revenues
Variable costs
Direct materials
Direct manufacturing labor
Variable manufacturing overhead
Total variable costs
Contribution margin
Fixed costs
Operating income
Although Level 1 analysis provides more information than Level 0 analysis, managers often desire still more detail
1. The budgeted selling price is the same $120 per jacket used in preparing the static budget.
2. The budgeted variable costs are the same $88 per jacket used in the static budget.
3. The budgeted fixed costs are the same static budget amount of $276,000 (because the
10,000 jackets produced falls within the relevant range of 0 to 12,000 jackets for which
fIxed costs are $276,000).
EXHIBIT 7 - 2 level 2 Flexible-Budget-Based Variance Analysis for Webb Company for April 2003a
LEVEL2 ANALYSIS
Actual
Results
(1)
Sales-Volume Variances
Keep in mind the flexible-budget amounts in column 3 of Exhibit 7-2 and the static
budget amounts in column 5 are both computed using budgeted selling prices, budgetec
variable cost per jacket, and budgeted fIxed costs. The only distinction is that the flexible.
budget amount is calculated using the actual output level, whereas the static-budget
amount is calculated using the budgeted output level. The difference between these two
amounts is called the sales-volume variance because it represents the difference caused
solely by the difference in the 10,000 actual quantity (or volume) of jackets sold and the
12,000 quantity of jackets expected to be sold in the static budget.
Sales-Volume Variances
BUdgeted selling price Budgeted variable cost per unit
$ 120 $ 88 $ 32
Flexible-Budget Variances
Thefirst three columns of Exhibit 7-2 compare actual results with flexible-budget
amounts. Flexible-budget variances are in column 2 for each line item in the income
statement:
The operating income line in Exhibit 7-2 shows the flexible-budget variance is $29,100 U
($14,900 - $44,000). The $29,100 U arises because actual selling price, variable cost per
unit, and fixed costs differ from their budgeted amounts. The actual and budgeted
amountsfor the selling price and variable cost per unit are
Actual Amount
Selling price 125
Variable cost per jacket 95.01
The flexible-budget variance for revenues is called the selling-price variance because
itarises solely from differences between the actual selling price and the budgeted selling
pnce:
Actual Selling price 125 Budgeted Selling price
Webbhas a favorable selling-price variance because the $125 actual selling price exceeds
the $120 budgeted amount, which increases operating income. Marketing managers are
generallyin the best position to understand and explain the reason for this selling price
difference,for example, due to better workmanship or because of an overall increase in
marketprices.
The flexible-budget variance for variable costs is unfavorable for the actual output of
10,000 jackets. It's unfavorable because either (a) Webb used more quantities of inputs
(suchas direct manufacturing labor-hours) relative to the budgeted quantities of inputs,
or(b)Webb incurred higher prices per unit for the inputs (such as the wage rate per direct
manufacturing labor-hour) relative to the budgeted prices per unit for the inputs, or
(c)both (a) and (b). Higher input quantities relative to the budget and/or higher input
pricesrelative to the budget could be the result of Webb deciding to produce a superior
productto what was planned in the budget, or the result of inefficiencies in Webb's manufacturingand
purchasing, or both. You should always think of variance analysis as providing
suggestionsfor further investigation rather than as establishing conclusive evidence of good or
badperformance
The actual fixed costs of $285,000 are $9,000 more than the budgeted amount of
$276,000. This higher fixed cost decreases operating income, making this flexible-budget
variance unfavorable.
Wenow illustrate how the Level 2 flexible-budget variance for direct-cost inputs can be
furthersubdivided into two more detailed variances, which are Level 3 variances: '
1.Apricevariance that reflects the difference between an actual input price and a budgeted
input price
2. An efficiency variance that reflects the difference between an actual input quantity and a
budgeted input quantity
The information available from these Level 3 variances helps managers better understand
past performance and better plan for future performance.
Standard direct material cost per jacket: 2 square yards of cloth input allowed per output unit
(jacket) manufactured, at $30 standard price per square yard
Standard direct material cost per jacket = 2 square yards x $30 per square yard = $60
Standard direct manufacturing labor cost per jacket: 0.8 manufacturing labor-hour of input
allowed per output unit manufactured, at $20 standard price per hour.
Standard direct manufacturing labor cost per jacket = 0.8 hour x $20 per hour = $16
How are the words "budget" and "standard" related? Budget is the broader term. As
the description above indicates, budgeted input prices, budgeted input quantities, and
budgeted costs need not be based on standards.
However, when standards are used to obtain budgeted input quantities and budgeted input prices, the terms "standard" an
The standard quantity of each input per unit of output and the standard price of each input determine the standard,or bud
See how the standard cost computations for direct materials and direct manufacturing labor equal the budgeted direct
materialcost per jacket of $60 and the budgeted direct manufacturing labor cost of $16 referredto earlier in this chapter (p
In its standard costing system, Webb uses standards that are attainable through efficient operations but allow for normal d
Some companies use ideal standards
or theoretical standards that assume peak operating conditions with no machine breakdownsand
no defective production. Obviously, these kinds of standards are difficult to
achieve.Aswe discussed in Chapter 6, setting difficult standards increases worker frustration
and hurts motivation and performance. The Surveys of Company Practice above
describesthe widespread use of standard costs.
Columnar Presentation of Variance Analysis: Direct Costs for Webb Company for April2003a
EXHIBIT 7-3
LEVEl 3 ANALYSIS
Actual Costs Incurred
(Actual Input Quantity x
Actual Price)
(1)
Direct (22,200 sq. yds. x $28/sq. yd.)
Materials $ 621,600
Direct
Manufacturing 9,000 hours x $22/hr.
Labor $ 198,000
Efficiency Variance
For any actual level of output, the efficiency variance is the difference between the input
that was actually used and the input that should have been used to produce the actual
output, holding input price constant at the budgeted price:
Efficiency Actual
vanance = quantIty of -
input
Theidea here is that a company is inefficient if it uses a larger quantity of input than the
budgeted quantity for the actual output units produced; the company is efficient if it uses
fewer inputs than budgeted for the actual output units produced.
The efficiency variances for each of Webb's direct-cost categories are
Summary of Variances
Exhibit 7-4 is a summary of the LevelL 2, and 3 variances. Note how the variances in
Level 3 aggregate to the variances in Level 2 and how the variances in Level 2 aggregate to
the variances in Level 1.
The variances show why actual operating income is $14,900 when the static budget
operating income is $108,000. Recall, a favorable variance has the effect of increasing
operatingincome relative to the static budget, and an unfavorable variance has the effect
ofdecreasingoperating income relative to the static budget.
Static-budget variance
Level 1 for operating income
(93,100)
Flexible-budget variance
for operating income
(29,100) U
Actionsby Webb's suppliers could cause an unfavorable direct material efficiency variance
atWebb.
Thelist of six possible causes of Webb's unfavorable direct material efficiency variance
isfarfrom exhaustive. However, it does indicate that the cause of a variance in one part of
thevalue chain (production in our example) can result from actions taken in other parts
ofthe value chain (for example, product design or marketing) and in the supply chain.
Improvementsin early stages of the value chain and the supply chain can have a large
effecton reducing the magnitude of variances in subsequent stages.
The focus of variance analysis is to understand why variances arise and how to use that
understanding to learn and to improve performance. For instance, to reduce the unfavorable
directmaterial efficiency variance, a company may seek improvements in product design,
inthe quality of supplied materials, and in the commitment of the manufacturing labor
forceto do the job right the first time, among other improvements. Sometimes an unfavorabledirect
material efficiency variance may signal a need to change product strategy,
perhapsbecause the product cannot be made at a low enough cost. Variance analysis
should not be a tool to "play the blame game" (that is, seeking a person to blame for
everyunfavorable variance). Rather, it should help the company learn about what happenedand
how to perform better.
Adelicate balance needs to be struck between the two uses of variances we have discussed:
performance evaluation and organization learning. Variance analysis is helpful for
performance evaluation, but an overemphasis on performance evaluation and meeting
individualvariance targets can undermine learning and continuous improvement. Why?
Becauseachieving the standard becomes an end in and of itself. As a result, managers will
seektargets that are easy to attain rather than targets that are challenging and that require
creativityand resourcefulness. For example, if performance evaluation is overemphasized,
Webb'smanufacturing manager will prefer a standard that allows workers ample time to
manufacture a jacket; he will have little incentive to improve processes and methods to
reducemanufacturing time and cost.
ufactured in April
The number of units manufactured is the cost driver for direct materials, direct manufacturing
labor, and variable manufacturing overhead.
The relevant range for the cost driveris from 0 to 12,000 jackets.
corresponding
evel 1 variance
$ 14,900
$ 108,000
$ (93,100) The unfavorable variance of $93,100 in Exhibit 7-1 for Level 0 is simply the result of
subtracting the static-budget operating income ofh $108,000 from the actual operating
income of $14,900:
Actual Static-Budget
Results Variances
(1) (2)=(1)-(3)
10,000 (2,000)
$ 1,250,000 $ (190,000)
$ 621,600 $ (98,400)
$ 198,000 $ 6,000
$ 130,500 $ (13,500)
$ 950,100 $ (105,900)
$ 299,900 24.0% $ (84,100)
$ 285,000 $ 9,000
$ 14,900 $ (93,100)
analysis, managers often desire still more detail about the causes of variances. That's when a flexible budget helps.
0 (because the
ets for which
Flexible-Budget Sales-Volume
Variances Flexible Budget Variances
(2)=(1)-(3) (3) (4)=(3)-(5)
- 10,000 (2,000)
50,000 $ 1,200,000 (240,000)
ckets, althoug
ould like to kno,
output units sold an
2003. Creating a flexJ
ices, budgetec
hat the flexible.
ebb's jackets.
tions, such as
ce was caused by
n to analyze
he manufacturing
managers to
es and costs
erating performance
osts to budgeted costs
ce compares
Flexible- budget
amount
e is $29,100 U
iable cost per
dgeted selling
g price exceeds
managers are
selling price
ll increase in
ties of inputs
ties of inputs,
rate per direct
ce a superior
n Webb's manufacturingand
evidence of good or
flexible-budget
d input prices
actual input
be used as the budgeted
mpanies may
Webb determines
based on work
manner. There
efficiencies, and
er speed and
facturing labor
to produce a
imilarly, Webb
illed operator to
tiplying them
ning and how
t - such as square
of output, such as
xpects to pay for a
of a standard price
ned cost of a unit
acket at Webb.
antities, and
d budgeted input prices, the terms "standard" and budget mean the same thing and are used intercqangeably.
rice of each input determine the standard,or budgeted, cost of each input per unit of output.
achine breakdownsand
worker frustration
22,200 For simplicity, we assume the quantity of direct material used equals the quan
$ 28 material purchased.
$ 621,600
9,000
$ 22
$ 198,000
Flexible Budget
Actual Input Quantity x (Budgeted Input Quantity Allowed
Budgeted Price for Actual Output x Budgeted Price)
(2) (3)
(22,200 sq. yds. x $30/sq. yd.) (10,000 units x 2 sq. yds./unit x $30/sq. yd.)
$ 666,000 $ 600,000
$ (44,400) F $ 66,000 U
Price variance Efficiency variance
input-price variance or rate variance usage variance.
$ 21,600 U
Flexible-budget variance
$ 21,600 U
$ 18,000 F $ 20,000 U
Price variance Efficiency variance
$ 38,000
Flexible-budget variance
$ 38,000
22,200 (44,400) F
9,000 18,000 U
(26,400) F
e of the following:
killfully than
ties budgeted,
alysis of market
an price (such
more manufacturing
he operating
gineers and
will be fewer
l 2 aggregate to
Sales-volume variance
for operating income
(64,000) U
$ 108,000
$ (64,000)
$ 44,000 $ 44,000
$ 50,000
$ (21,600)
$ (38,000)
-10500
$ (9,000)
$ (29,100)
$ 14,900
of performance
mance evaluation.
a favorable variance
lted in excessive
costs or higher
favorable direct
sing manager
d 3 than it gains
le variance as
cy variance or a
o make decisions
may conflict
a performance
terial efficiency
o a purchasing
riances in isolation
e the result of
Webb's production
ciency variance
ncy variance
e in one part of
n other parts
w to use that
ce the unfavorable
roduct design,
cturing labor
mes an unfavorabledirect
ut what happenedand
e have discussed:
and meeting
ement. Why?
, managers will
and that require
veremphasized,
ample time to
d methods to
ake actions
ons could hurt
y push workers
o poorer qualityjackets
more willingto
es are made to distributors who sell to independent clothing stores and retail chains.
U 12,000
U $ 1,440,000
F $ 720,000
U $ 192,000
F $ 144,000
F $ 1,056,000
F $ 384,000 26.7% The budgeted contribution margin percentage of 26.7% decreas
U $ 276,000
U $ 108,000
helps.
Sales-Volume
Static Budget Variances
(5)
12,000 (2,000)
$ 1,440,000
$ 720,000
$ 192,000
$ 144,000
$ 1,056,000
$ 384,000
$ 276,000
$ 108,000
F
erial used equals the quantity of direct
Price Variances
The formula for computing the price variance is
Price = (Actual price _ Budgeted price] x Actual quantity
variance of input of input of input
./unit x $20/hr.
eflexiblebu for inputs is
sed on the bugted quantity
inputs allowed for actual
tput level (BOlA). Tounderstand
IA in the Webbexample,
tinguish inputs (square
rds of cloth, direct manufacturing
or-hours)fromoutput
ckets).BQIA is computedby
ultiplyingthe actual quantity
output produced times how
uchofeach inputshouldhave
en used per outputunit.
percentage of 26.7% decreases to 24.0% for the actual results.
For simplicity, we assume the quantity of direct material used equals the quantity of direct
material purchased. Let's use this Webb Company data to illustrate the price variance and
the efficiency variance.
A price variance is the difference between the actual price and the budgeted price multi.
plied by the actual quantity of input, such as direct material purchased or used. A price vari.
ances is sometimes called an input-price variance or rate variance, especially when referring
to a price variance for direct labor. An efficiency variance is the difference between the actual
quantity of input used - such as square yards of cloth of direct materials - and the budgeted
quantity of input that should have been used to produce the actual output, multiplied by the
budgeted price. An efficiency variance is sometimes called a usage variance.
Exhibit 7-3 shows how the price variance and the efficiency variance subdivide the flexible.
budget variance. Consider the panel for direct materials. The direct material flexible-budget
varia~ce of$21,600 U is the difference between the actual costs incurred (actual input quantity
x actual price) shown in column 1 and the flexible budget (budgeted input quantity allowed
for actual output x budgeted price) shown in column 3. Column 2 (actual input quantity x
budgeted price) is inserted between column 1 and column 3. The difference between columns
1 and 2 is the price variance of $44,400 F because the same actual input quantity is multiplied
by the actual price in column 1 and the budgeted price in column 2. The difference between
columns 2 and 3 is the efficiency variance of $66,000 U because the same budgeted price is
multiplied by the actual input quantity in column 2 and the budgeted input quantity allowed for
actual output in column 3. See how the direct material price variance, $44,400 F, plus the direct
material efficiency variance, $66,000 U, equals the direct material flexible-budget variance,
$21,600 U. We next discuss the price variances and the efficiency variances in greater detail.
It is not unusual for more than This chapter shows how flexible budgets and variance analysis can help
50% of a company's total product plan and control the overhead costs of their companies.
costs throughout the value
chain to be classified as indirect.
Increased automation, In this chapter, we focus on the indirect-cost categories of variable man
more complexity of production fixed manufacturing overhead. And we explain why managers should b
and distribution processes, and interpreting variances based on overhead cost concepts developed prim
product proliferation usually reporting purposes.
increase the proportion of total
product costs that are indirect.
However, the lower cost of
information processing works
against this trend by facilitating
more direct-cost tracing.
How do managers plan variable overhead costs and fixed overhead costs?
Planning of both variable overhead costs and fixed overhead costs involves
undertaking only activities that add value and then being efficient in that undertaking.
The key difference is that for variable-cost planning, ongoing decisions during the
budget period play a larger role; whereas for fixed-cost planning, most key decisions
must be made before the start of the period.
In our example, Webb Company should examine how each of the activities in its variable
overhead cost pools is related to delivering a product or service to customers. For
example, customers know sewing to be an essential activity at Webb. Hence, maintenance
activities for sewing machines - included in Webb's variable overhead costs - are also
essential activities. Such maintenance should be done in a cost-effective way. This means,
for example, scheduling equipment maintenance in a systematic way rather than waiting
for sewing machines to break down.
Effective planning of fixed overhead costs is much the same as effective planning for variable
overhead costs - planning to undertake only essential activities and then planning
to be efficient in that undertaking. But with planning fixed overhead costs, there is one
more consideration: choosing the appropriate level of capacity or investment that will
benefithe company over a long time. This third item is a key strategic decision. Consider
Webb's leasing of sewing machines, each having a fIxed cost per year. Leasing insuffIcient
machine capacity - say, because Webb underestimates demand - will result in an inability to
meet demand and lost sales of jackets. Leasing more machines than necessary - if
Webb overestimates demand - will result in additional fIxed leasing costs on machines
not fullyutilized during the year.
At the start of a budget period, management will have made most of the decisions
that determine the level of fIxed overhead costs to be incurred. But, it's the day-to-day,
ongoing operating decisions that mainly determine the level of variable overhead costs
incurred in that period.
Webb uses standard costing. The development of standards for Webb's direct-cost categories was described in Chapter 7.
This chapter discusses Webb's indirect-cost categories. Standard costing is a costing method that
(a) traces direct costs to output produced by multiplying the standard prices or rates by the standard quantities of inputs
and (b) allocates indirect costs on the basis of the standard indirect rates times the standard quantities of the allocation
Step 1: Choose the Period to Be Used for the Budget. Webb uses a 12-month budget
period that includes a full calendar-year cycle that includes different seasons.
Step 3: Identify the Variable Overhead Costs Associated with Each Cost-Allocation
Base.Webb groups in a single pool all its variable manufacturing overhead costs,
including costs of energy, machine maintenance, engineering support, indirect
materials, and indirect manufacturing labor. Webb's budgeted variable manufacturing
costs for 2003 are $1,728,000.
Step 4: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate
Variable Overhead Costs to Output Produced. Dividing the amount in step 3
($1,728,000) by the amount in step 2 (57,600 machine-hours), Webb estimates
a rate of $30 per standard machine-hour for its variable manufacturing
overhead costs.
In standard costing, the variable overhead rate per unit of the cost-allocation base
(machine-hours for Webb) is generally expressed as a standard rate per output unit. This
standardrate depends on the number of units of the cost-allocation base (that's the input
units) allowed per output unit. On the basis of an engineering study, Webb estimates it
will take 0.40 machine-hours per actual output unit.
We now illustrate how the budgeted variable manufacturing overhead rate is used in computing
Webb's variable manufacturing overhead cost variances. The following data are for
April 2003, when Webb produced and sold 10,000 jackets:
Actual
Cost Item/Allocation Base Result
1. Output units (jackets) 10,000
2. Machine-hours 4,500
3. Machine-hours per output unit (2 -;-1) 0.45
4. Variable manufacturing overhead costs $ 130,500
5. Variable manufacturing overhead costs per
machine-hour (4 -;-2) $ 29
6. Variable manufacturing overhead costs per
output unit (4 -;-1) $ 13.05
The flexible-budget enables Webb to highlight the effect of differences between actual
costs and actual quantities versus budgeted costs and budgeted quantities for the actual
output level of 10,000 jackets.
Flexible-Budget Analysis
As you saw in Chapter 7, the variable overhead flexible-budget variance measures the
difference between actual variable overhead costs and flexible-budget variable overhead
costs. As Exhibit 8-1 shows:
= $ 130,500
= $ 10,500
Columnar Presentation of
Variable Manufacturing
Overhead Variance
Analysis: Webb Company Actual Costs Actual Input
for April 2003 a Incurred x Budgeted Rate
(1) (2)
(4,500 hrs. x $29/hr.) (4,500 hrs. x $30/hr.)
$ (4,500) F
Spending variance
level 2 $ 10,500
Flexible-budget variance
$ 10,500
$ 15,000 U
Columns2 and 3 of Exhibit 8-1 show the variable overhead efficiency variance. The variableoverhead
efficiency variance is computed in the same way as the efficiency variance
fordirect-cost items (Chapter 7, pp. 225-226). But the interpretation of the direct-cost
efficiencyvariances differs from the interpretation of the variable overhead efficiency variance.
In Chapter 7, efficiency variances for direct-cost items are based on differences
betweenactual inputs used and the budgeted inputs allowed for actual output produced.
Forexample, an efficiency variance for direct manufacturing labor for Webb will indicate
whethermore or less direct manufacturing labor is used per jacket than was budgeted for
theactual output produced. In contrast, here in Chapter 8 the efficiency variance for variableoverhead
cost is based on the efficiency with which the cost-allocation base is used.
Webb's unfavorable variable overhead efficiency variance of $15,000 means that
actualmachine-hours (the cost-allocation base) turned out to be higher than the budgetedmachine-
hours allowed to manufacture 10,000 jackets. Possible causes for Webb's
actualmachine-hours used exceeding budgeted machine-hours include:
Webb operated in April 2003 with a lower-than-budgeted variable overhead cost per
machine-hour. Hence, there is a favorable variable overhead spending variance. Columns
1 and 2 in Exhibit 8-1 depict this variance.
To understand the variable overhead spending variance, you need to recognize why
the actual variable overhead cost per unit of the cost-allocation base is lower than the
budgeted variable overhead cost per unit of the cost-allocation base. Here's why: Relative to
the flexible budget, the percentage increase in the actual quantity of the cost-allocation
base is more than the percentage increase in actual total costs of individual items in the
indirect-cost pool. In the Webb example, the 4,500 actual machine-hours are 12.5%
greater than the flexible-budget amount of 4,000 machine hours [(4,500 - 4,000) 74,000
= 0.125, or 12.5%]. Actual variable overhead costs of $130,500 are only 8.75% greater
than the flexible-budget amount of $120,000 [($130,500 - $120,000) + $120,000 =
0.0875. or 8.75%]. Because the percentage increase in actual variable overhead costs is
less than the percentage increase in machine-hours, the actual variable overhead cost per
machine-hour is lower than the budgeted amount.
Price effects have implications for Webb's purchasing decisions. Quantity effects have
implications for Webb's production decisions. Distinguishing these two effects for a variable
overhead spending variance requires detailed information about the budgeted prices
and budgeted quantities of the individual items in the variable overhead cost pool.
To clarify the concepts of variable overhead efficiency variance and variable overhead
spending variance, consider the following example, assuming that (a) energy is the only
item of variable overhead and machine-hours is the cost-allocation base, (b) the actual
machine-hours used to produce the actual output equals the budgeted machine-hours,
and (c) the actual price of energy equals the budgeted price. Under those assumptions,
there would be no efficiency variance, but there could be a spending variance. The company
has been efficient with respect to the number of machine-hours used to produce the
actual output. But it could be using too much energy - not because of excessive machinehours
but because of wastage (more energy per ma hine-hour). The cost of this higher
energy usage would be measured by the spending variance.
The variable manufacturing overhead variances computed
The variable manufacturing overhead variances computed in this section can be summarized
as follows:
Flexible-budget variance
Spending variance
(4,500) F
The cause for Webb's unfavorable flexible-budget variance was using a higherthan-
budgeted number of machine-hours. Webb found out later that the machines in
April2003 operated below budgeted efficiency levels due to insufficient maintenance
performedin February and March. Aformer plant manager delayed maintenance in a presumedattempt
to meet monthly budget cost targets. Webb has since strengthened its
internal maintenance procedures so that failure to do monthly maintenance as
completely as needed raises a "red flag" that must be immediately explained to top
management.
Fromvariable overhead costs we now turn our attention to fIXedoverhead costs.
Fixed overhead costs are, by definition, a lump sum of costs that remains unchanged in
total for a given period despite wide changes in the level of total activity or volume related
tothose overhead costs. Total fIXed costs are usually included in flexible budgets, but they
remain the same total amount within the relevant range of activity regardless of the output
level chosen to "flex" the variable costs and revenues. The steps in developing the
budgetedfIXedoverhead rate are
Step 1: Choose the Period to Use for the Budget. Aswith variable overhead costs, the
budget period for fIXedcosts is typically 12 months. Chapter 4 (pp. 105-106)
provides several reasons for using annual overhead rates rather than, say,
monthly rates: numerator reasons-such as reducing the influence of seasonality
and denominator reasons - such as reducing the effect of varying output
and number of days in a month. In addition, setting annual overhead rates
once a year saves management time from being tied up 12 times during the
year if budget rates had to be set monthly.
Step 2: Select the Cost-Allocation Base to Use in Allocating Fixed Overhead Costs to
Output Produced. Webb uses standard machine-hours as the cost-allocation
base for fixed manufacturing overhead costs. This is the denominator of the budgeted
fIXed overhead rate computation and is called the denominator level. In
manufacturing settings, the denominator level is called more specifically, the
production-denominator level. Standard machine-hours is also the allocation
base Webb uses for its variable manufacturing overhead costs. For simplicity, we
assume Webb expects to operate at capacity in 2003 - budgeted machine-hours
of 57,600 hours for a budgeted output of 144,000 jackets.1
Step 3: Identify the Fixed Overhead Costs Associated with Each Cost-Allocation Base.
Webb groups all its fIXedmanufacturing overhead costs in a single cost pool.
Costs in this pool include depreciation on plant and equipment, plant and
equipment leasing costs, the plant manager's salary, and some administrative
costs. Webb's fixed manufacturing budget for 2003 is $3,312,000.
Step 4: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate
Fixed Overhead Costs to Output Produced. Dividing the $3,312,000 from step
3 by the 57,600 machine-hours from step 2, Webb estimates a fixed manufacturing
overhead cost rate of $57.50 per machine-hour:
$3,312,000
57,600
In standard costing, the $57.50 fixed overhead cost per machine-hour is usually expressed
as a standard cost per output unit:
When preparing monthly budgets for 2003, Webb divides the $3,312,000 annual total
fixed costs into 12 equal monthly amounts of $276,000.
The flexible-budget amount for a fixed-cost item is also the amount included in the static
budget prepared at the start of the period. No adjustment is required for differences
between the actual output and the budgeted output for fixed costs. By definition, fixed
costs are unaffected by changes in the output level within the relevant range. At the start of
2003, Webb budgeted fixed manufacturing overhead costs to be $276,000 per month. The
actual amount for April 2003 turns out to be $285,000. As we saw in Chapter 7, the fixed
overhead flexible-budget variance is the difference between actual fixed overhead costs
and the fixed overhead costs in the flexible budget:
= $ 285,000 -
= $ 9,000 U
As Exhibit 8-2 shows, the variance is unfavorable because $285,000 actual fIxed manufacturing
overhead costs exceed the $276,000 budgeted for April 2003, which decreases that
month's operating income compared to the budget by $9,000.
The variable overhead flexible-budget variance described earlier in this chapter was
subdivided into a spending variance and an efficiency variance. There is not an efficiency
variance for fixed costs. That's because a given lump sum of fIxed costs will be unaffected
by how effIciently machine-hours are used to produce output in a given budget period. As
Exhibit 8-2 shows, the fIxed overhead spending variance, a Level 3 variance, is the same
amount as the Level 2 fixed overhead flexible-budget variance:
= $ 285,000
= $ 9,000 U
Webb investigated this variance and found that there was a $9,000 per month unexpected
increase in its equipment leasing costs. However, management concluded that the new
lease rates were competitive with lease rates available elsewhere
PRODUCTION-VOLUME VARIANCE
Flexible Budget:
Same Budgeted
lump Sum
(as in Static Budget)
Actual Costs Regardless of
Incurred Output level
(1) (2)
$ 285,000 $ 276,000
Level 3 $ 9,000 U
Spending variance
Level 2 $ 9,000 U
Flexible-budget variance
nowconsider a variance that arises when the actual level of the cost-allocation base for
allocatingfIxed overhead costs differs from the budgeted level of the cost-allocation base
chosen at the start of the period. This budgeted level for Webb in April 2003 was
4,800 hours (0.40 machine-hours per output unit X 12,000 budgeted output units).
The production-volume variance is the difference between budgeted fIxed overhead
and fIxed overhead allocated on the basis of actual output produced. The productionvolume
variance is also referred to as denominator-level variance, as well as outputleveloverhead
variance.
The formula for calculating the production-volume variance, expressed in terms of
allocation base units (machine-hours for Webb), is
The formula can also be expressed in terms of the budgeted fIxed cost per output unit:
$ 46,000 U
As shown in Exhibit 8-2, the amount used for budgeted fIxed overhead will be the
samelump sum shown in the static budget and also in any flexible budget within the relevantrange.
Fixed overhead allocated is the amount of the fIxed overhead costs allocated
to each unit of output multiplied by the number of output units produced during the
budgetperiod
The production-volume variance arises whenever the actual level of the denominator used
for allocating fIxed overhead costs differs from the level used to calculate the budgeted
ftxed overhead cost rate. We compute this budgeted fIxed overhead rate because inventory
costing and some types of contracts require fIxed overhead costs to be expressed on a unit of-
output basis. The production-volume variance results from "unitizing" fIxed costs. In
our Webb example, each jacket produced is assumed to use $23 of fixed costs.
An unfavorable production-volume variance means we have underallocated the fixed overhead costs to actual output pr
A favorable production-volume variance indicates overallocated fIxed overhead costs to actual output produced.
Lump-sum fixed costs represent costs of acquiring capacity, such as plant and equipment
leases, that cannot be decreased if the resources needed turn out to be less than the
resources acquired. Sometimes, costs are fixed for contractual reasons such as a lease contract;
at other times, costs are fixed because of lumpiness in acquiring and disposing of
capacity (as we discussed in Chapter 2).
Webb leased equipment capacity to produce 12,000 jackets per month. Although it
produced only 10,000 jackets, the lease contract prevented Webb from reducing equipment
lease costs during April 2003.
Unitizing and allocating fixed costs at $23 per jacket helps Webb to measure the amount of fixed-cost resources it used to
$230,000 ($23 per jacket x 10,000 jackets).
The unfavorable production-volume variance of $46,000 (budgeted fixed overhead costs of $276,000 minus $230,000 bud
measures the amount of extra fixed costs that Webb incurred for manufacturing capacity it planned to use but did not us
Webb's management would want to analyze why this over capacity occurred.
Is demand weak? Should Webb reevaluate its product and marketing strategies? ;Is there a quality
problem? Or did Webb make a strategic mistake and acquire too much capacity?
Always explore the why of a variance before concluding that the label unfavorable or
favorable necessarily indicates, respectively, poor or good management performance.
Understanding the reasons for a variance also helps managers decide on future courses of
action (see Concepts in Action, p. 261). Should they try to reduce capacity, increase sales,
or do nothing? Chapter 9 and Chapter 13 examine these issues in more detail.
As our discussion indicates, the variance calculations for variable manufacturing overhead and fIxed manufacturing overhe
Variable manufacturing overhead has no production-volume variance .
Fixed manufacturing overhead has no effIciency variance.
Exhibit 8-3 presents an integrated summary of the variable overhead variances and
the fixed overhead variances computed using standard costs at the end of April 2003
Exhibit8-3 indicates the columns for which no variances are calculated. Panel A shows
thevariances for variable manufacturing overhead; Panel B shows the variances for fIxed
manufacturingoverhead. As you study Exhibit 8-3, note how the columns in Panels A and
B arealigned to measure the different variances. In both Panels A and B,
1 .The difference between columns 1 and 2 measures the spending variance.
2 .The difference between columns 2 and 3 measures the efficiencyvariance (when applicable).
3.The difference between columns 3 and 4 measures the production-volume variance (when applicable).
l-Variance Analysis
Total Manufacturing Overhead
Thesingle variance of $65,500 U in the I-variance analysis is called total-overhead variance.
Using fIgures from Exhibit 8-3, the $65,500 U total-overhead variance is the differencebetween
(a) the total actual manufacturing overhead incurred ($130,500 + $285,000
= $415,500) and (b) the manufacturing overhead allocated ($120,000 + $230,000 =
$350.000) to the actual output produced.
As you have seen in the case of other variances, the variances in Webb's 4-variance
analysisare not necessarily independent of each other. For example, Webb may purchase
lower-quality machine fluids (leading to a favorable variable overhead spending variance),
which results in the machines taking longer to operate than budgeted (causing an
unfavorable variable overhead efficiency variance).
Panel A presents an overall picture of how total variable overhead might behave. Of
course, variable overhead consists of many items, including energy costs, repairs, indirect
labor, and so on. Managers help control variable overhead costs by budgeting each line
item and then investigating possible causes for any significant variances
Consider the monthly leasing costs for building and equipment included in Webb's budgeted fixed manufacturing overhead
Managers control this fixed leasing cost at the time the lease is signed.
For any month during the leasing period, management can do little-most likely can do nothing - to change the lease payme
Contrast this description of fixed overhead with how these costs are depicted for the inventory costing purpose in Panel B.
method that
standard quantities of the allocation bases allowed for the actual outputs produced.
57,600
144,000
The budgeted variable manufacturing
overhead (BVMOH)
cost rate differs from the budgeted
price of direct materials
(DM) or direct manufacturing
$ 1,728,000 labor (DML). The BVMOH cost
rate encompasses costs of
many diverse VMOH items per
unit of the cost-allocation base.
$ 30 per standard machine-hour In the Webb example, the
BVMOH cost rate is $30 per
machine-hour: That is, Webb
expects to spend about $30 on
a "market basket" of VMOH
items. The market basket aspect
of the BVMOH cost rate makes
0.40 VMOH variances more difficult
to interpret than OM and OML
variances.
Budgeted variable
Overhead cost rate
per input unit
computing
- $ 120,000
Flexible Budget:
Budgeted Input
Allowed for
Actual Input Actual Output
x Budgeted Rate x Budgeted Rate
(3)
0 hrs. x $30/hr.) (0.40 hrs/unit x 10,000 units x $30/hr.)
4,000 hrs. x $30/hr.
$ 120,000
$ 15,000 U
Efficiency variance
U
Flexible-budget variance
U
ufacturingoverhead
ingoverhead
ariableoverhead
variableoverhead
getedmachine-
machine-hours
presumedattempt
1BecauseWebb plans its capacity over multiple periods, anticipated demand in 2003 could be such that bud
output for 2003 is less than capacity. The analysis presented in this chapter is unchanged if the master budg
57,600.00 levelis used as the denominator level. If capacity is used as the denominator level, some additional issues a
144,000.00 that are beyond the scope of this chapter. Chapter 9 discusses choice of a denominator level in more detail
$ 3,312,000
$ 3,312,000
57,600.00
$ 57.50
Budgeted fixed
overhead cost x
per unit of
cost-allocation base
$ 276,000
$ 276,000
$ 285,000
Flexible-budget
amount
$ 276,000
EXHIBIT 8-2
Columnar Presentation of
Fixed Manufacturing
Overhead Variance
Analysis: Webb Company
for April200J8
Allocated:
Budgeted Input
Allowed for
Actual Output
x Budgeted Rate
(3)
(0.40 hrs./unit x 10,000 units X $57.50/hr.)
(4,000 hrs. X $57.50/hr.)
$ 230,000
$ 46,000 U
Production-volume variance
allocated using
nits produced
allocated using
er output unit
al output produced
relevantrange.
capacity occurred.
here a quality
s why Webb
4-variance analysis
Production-Volume
Variance
U Never a variance
Never a variance $ 46,000 U
ufacturingoverhead.
Production-Volume
Variance
U $ 46,000 U
etimescalled
Production-Volume
Variance
$ 46,000 U
Total Overhead
Variance
$ 65,500
HEAD COST ANALYSIS
any Practice,p. 265).
uring overhead:
le with respect to output units (jackets) for the planning and control purpose
Rein Company, a compressor manufacturer, is developing a budgeted income statement for the
calendar year 2006. The president is generally satisfied with the projected net income for 2005 of
$700,000 resulting in an earnings per share figure of $2.80.
However, next year he would like earnings per share to increase to at least $3. Rein Company employs a standard absorptio
system. Inflation necessitates an annual revision in the standards as evidenced by an increase in
production costs expected in 2006. The total standard manufacturing cost for 2005 is $72 per unit
produced.
Rein expects to sell 100,000 compressors at $110 each in the current year (2005). Forecasts from the
sales department are favorable, and Rein Company is projecting an annual increase of 10% in unit
sales in 2006 and 2007.
This increase in sales will occur even though a $15 increase in unit selling price will be implemented in 2006. The selling pr
for the increased production costs and operating expenses. However, management is concerned that any additional sales p
Standard production costs are developed for the two primary metals used in the compressor (brass
and a steel alloy), the direct labor, and manufacturing overhead. The following schedule represents
the 2006 standard quantities and rates for material and labor to produce one compressor
The material content of the compressor has been reduced slightly, hopefully without a noticeable
decrease in the quality of the finished product. Improved labor productivity and some increase in
automation have resulted in a decrease in labor hours per unit from 4.4 to 4.0.
However, the significant increases in material prices and hourly labor rates more than offset any savings from
reduced input quantities. The manufacturing overhead cost per unit schedule has yet to be
completed. Preliminary data is as follows:
The standard overhead rate is based upon direct labor hours and is developed by using the total
overhead costs from the above schedule for the activity level closest to planned production. In
developing the standards for the manufacturing costs the following two assumptions were made.
• The cost of brass is currently selling at $5.65/pound. However, this price is historically high
and the purchasing manager expects the price to drop to the predetermined standard early in 2006
• Several new employees will be hired for the production line in 2006. The employees will be
generally unskilled. If basic training programs are not effective and improved labor
productivity is not experienced, then the production time per unit of product will increase by
15 minutes over the 2006 standards.
Rein employs a LIFO inventory system for its finished goods. Rein’s inventory policy for finished
goods is to have 15% of the expected annual unit sales for the coming year in finished goods
inventory at the end of the prior year. The finished goods inventory at December 31, 2005, is
expected to consist of 16,500 units at a total carrying cost of $1,006,500.
BI 16500 $1,006,500
Operating expenses are classified as selling, which are variable, and administrative, which are all
fixed. The budgeted selling expenses are expected to average 12% of sales revenue in 2006 which is
consistent with the performance in 2005.
The administrative expenses in 2006 are expected to be 20% higher than the predicted 2005 amount of $907,850.
Management accepts the cost standards developed by the production and accounting department.
However, they are concerned about the possible effect on net income if the price of brass does not
decrease, and/or the labor efficiency does not improve as expected. Therefore management wants the
budgeted income statement to be prepared using the standards as developed but to consider the worst
possible situation for 2006.
Each resulting manufacturing variance should be separately identified and added to or subtracted from budgeted cost of go
Rein is subject to a 45% income tax rate. 45%
REQUIRED:
A. Prepare the budgeted income statement for 2006 for Rein Company as specified by
management. Round all calculations to the nearest dollar.
B. Review the 2006 budgeted income statement prepared for Rein Company and discuss whether
the president’s objectives can be achieved.
Rein Company
Budgeted Income Statement
For the Year Ended December 31, 2006
Sales [100,000 x 1.1 x ($110 + 15)] $13,750,000 $13,750,000
Cost of goods sold at standard
[110,000 x (65.20 + 19.80)1] 9,350,000 $9,350,000
Gross margin at standard $ 4,400,000 $4,400,000
Variances
Material-brass-unfavorable $133,980.00
[(111,650 compressors2) x
(4 lbs/compressor) x ($.30/lb)] $(133,980)
Labor efficiency-unfavorable
[(111,650 compressors) x
(.25 hours/compressor) x ($7/hr)] (195,388) $195,387.50
Variable overhead efficiency unfavorable
[(111,650 compressors) x $ 92,111.25
(.25 hrs/compressor) x ($3.30/hour3)] ( 92,111)
Fixed overhead volume favorable
[(111,650-110,000 $10,890.00
compressors) x $6.60/compressor4)] 10,890 (410,589)
2Production schedule
2006 sales 110,000 110,000
Desired ending inventory 12/31/06 (110,000 x 1.1 x .15) 18,150 18,150
Required inventory 128,150 128,150
Beginning inventory 1/1/06 (110,000 x .15) 16,500 16,500
2006 production 111,650 111,650
B. Based upon the results of the 2006 budgeted income statement, the president’s objective cannot
be achieved. A review of the statement highlights the following circumstances.
! A 2006 income statement prepared using the worst situation gives a net income of $687,495 and
earnings per share of $2.75 which is a decrease from the 2005 income of $700,000 and earnings
per share of $2.80. These budgeted figures are also considerably below the president’s objective
of $750,000 net income and $3 earnings per share.
! If the unfavorable variances do not occur, net income will increase by $231,813 after taxes
($421,479 x .55) resulting in an increase in earnings per share of $.927, giving a total earnings
per share of $3.677 which is well above the president’s objective.
! Manufacturing costs are 65.5% of the selling price ($72/$110) in 2005, and 68% of the selling
price in 2006. Administrative expenses increased 20% in 2006. Therefore, the 13.6% sales price
increase in 2006 was not sufficient to cover the increases in manufacturing cost and increases in
administrative expense
oys a standard absorption cost
10,000
$132,000
$13.20 /compressor
$ 3.30
15%
12% $1,650,000
nt of $907,850. $1,089,420
$4,400,000
$10,890.00
$4,410,890
$1,650,000
$1,089,420
$1,671,470
$752,161.50
$919,308.50 $231,813.31
$ 3.68
4-33 Proration of overhead.IZ. Iqbal. adapted) The Zaf Radiator Company uses a normal-costing system
with a single manufacturing overhead cost pool and machine-hours as the cost-allocation base. The following data
are for 2007:
Budgeted manufacturing overhead $4.800,000 4,800,000
Overhead allocation base Machine-hours
Budgeted machine-hours 80,000 80,000
Manufacturing overhead incurred $4,900,000 4,900,000
Actual machine-hours 75,000 75,000
Machine-hours data and the ending balances (before proration of under- or overallocated overhead) are
as follows:
Actual 2007 End-aI-Year
Machine·Hours Balance
Cost of Goods Sold 60,000 $8,000.00
Finished Goods Control 11,000 1,250,000
Work in Process Control 4,000 750,000
75,000
Re'lufred
1. Compute the budgeted manufacturing overhead rate for 2007.
2. Compute the under- or overallocated manufacturing overhead of Zaf Radiator in 2007. Dispose of this
amount using
a. Write-off to Cost of Goods Sold
b. Proration based on ending balances (before prorationl in Work·in-Process Control, Finished Goods
Control, and Cost of Goods Sold
c. Proration based on the allocated overhead amount (before proration) in the ending balances of
Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold
3. Which method do you prefer in requirement 2? Explain.
2. Compute the under- or overallocated manufacturing overhead of Zaf Radiator in 2007. Dispose of this
amount using
2. Manufacturing overhead
underallocated = Manufacturing overhead
incurred – Manufacturing overhead
allocated
= $4,900,000 – $4,500,000*
= $400,000 $ 400,000
*$60 × 75,000 actual machine-hours = $4,500,000 $ 4,500,000
400,000
Proration of $400,000
Account Underallocated
Balance Manufacturing
Account (Before Proration) Overhead
c. Proration based on the allocated overhead amount (before proration) in the ending
balances of Work in Process, Finished Goods, and Cost of Goods Sold.
Allocated Overhead
Account Component in
Balance the Account Balance
Account (Before Proration) (Before Proration
a
$60 × 4,000 machine-hours; b
$60 × 11,000 machine-hours; c
$60 × 60,000 machine-hours
4-34 Normal costing, overhead allocation, working backward. 1M. Rajan. adaptedl Gibson Manufacturing
usesnormal costing for its job-costing system, which has two direct-cost categories (direct materials and
direct manufacturing labor) and one indirect-cost category (manufacturing overhead). The following information
is obtained for 2007:
• Total manufacturing costs, $8,000,000
• Manufacturing overhead allocated, $3,600,000 (allocated at a rate of 200% of direct manufacturing
labor costs)
• Work-in-process inventory on January 1, 2007, $320,000
• Cost of finished goods manufactured, $7,920,000
1. Use information in the first two bullet points to calculate (a) direct manufacturing labor costs in 2007
and Ibl cost of direct materials used in 2007.
2. Calculate the ending work-in-process inventory on December 31,2007.
4-39 Allocation and proratioo of manufacturing overhead. (SMA, heavily adapted) Nicole Limited is a companythat
produces machinery to customer order. Its job-costing system (using normal costing) has two directcostcategories
(direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead,
allocated using a budgeted rate based on direct manufacturing labor costs). The budgetfor 2007was:
Direct manufacturing labor $420,000
Manufacturing overhead $252,000
5-17 ABC, cost hierarchy, service. leMA, adaptedl
Plymouth Test Laboratories does heat testing(HT)and stress testing (ST) on materials.
Under its current simple costing system, Plymouth aggregates all operating costs of S1,200,000 into a single overhead cost
Plymouth calculates a rate per test hour of $15 ($1,200,000/ 80,000 total test-hours).
HT uses 50,000 test-hours, and ST uses 30,000 testhours. 50,000 30000
Gary Celeste, Plymouth's controller, believes that there is enough variation in test procedures
andcost structures to establish separate costing and billing rates for HT and ST. The market for test
servicesis becoming competitive. Without this information, any miscosting and mispricing of its servicescould
cause Plymouth to lose business.
c. Setup costs, $350,000. These costs are allocated to HT and ST on the basis of the number of setup hours
required. HT requires 13,500 setup-hours, and ST requires 4,000 setup-hours. 13500
d. Costsof designing tests, $210,000. These costs are allocated to HT and ST on the basis of the time
required to design the tests. HT requires 2,800 hours, and ST requires 1,400 hours.
Setup costs
$20 per setup-hour† × 13,500 setup-hours
$20 per setup-hour† × 4,000 setup-hours
2.33
Total costs $840,000 $16.80 $360,000 $12.00
*$400,000 ÷ (50,000 + 30,000) hours = $5 per test-hour
†$350,000 ÷ (13,500 + 4,000) setup hours = $20 per setup-hour
**$210,000 ÷ (2,800 + 1,400) hours = $50 per hour
6-30 Revenue and production budgets. (CPA, adaptedl The Scarborough Corporation manufactures and
sells two products: Thingone and Thingtwo. In July 2006, Scarborough's budget department gathered the
following data to prepare budgets for 2007:
2007 Projected Sales
Product Units
Thingone 60,000
Thingtwo 40,000
Projected data for 2007 with respectto direct materials are as follows:
Anticipated EXPECTED TARGET INV.DEC 2007
Direct Material PURCHASE INVETORIES
PRICE JAN 1 2007
A 12 32000 36000
B 5 29000 32000
C 3 6000 7000
Projected direct manufacturing labor requirements and rates for 2007 are as follows:
Manufacturing overhead is allocated at the rate of $20 per direct manufacturing labor-hour.
Based on the preceding projections and budget requirements for Thingone and Thingtwo, prepare the
following budgets for 2007:
Thingone Thingtwo
65,000 41,000
A B C
Thingone 260,000 130,000 -
Thingtwo 205,000 123,000 41,000
PURCHASE 469,000 256,000 42,000
PURCHASE$ $ 5,628,000 $ 1,280,000 $ 126,000
5. Scarborough Corporation
Direct Manufacturing Labor Budget (in dollars) for 2007
Thingone 130,000 12
Thingtwo 123,000 16
Scarborough Corporation
6 Budgeted Finished Goods Inventory
at December 31, 2007
Thingone
DM A 48
B 10
C
DL 24
MOH 40
122 3,050,000
Thingtwo A 60
B 15
C 3
DL 48
MOH 60
186 1,674,000
Budgeted finished goods inventory, December 31, 4,724,000
6-40 Comprehensive Review 01 Budgeting, Cash Budgeting, Chapter Appendix
Wilson Beverages bottles two soft drinks under license to Cadbury Schweppes at its Manchester plant.
All inventory is in direct materials and finished goods at the end of each working day. There is no work-in-process inventor
The two soft drinks bottled by Wilson Beverages are lemonade and diet lemonade.
The syrup for both soft drinks is purchased from Cad bury Schweppes.
Wilson Beverages uses a lot size of 1,000 cases as the unit of analysis in its budgeting. (Each case contains 24 bottles.)
1000
Direct materials are expressed in terms of lots, in which one lot of direct materials is the input necessary to yield one lot
1
The following purchase prices are forecast for direct materials in 2005:
1. Sales
• Lemonade, 1,080 lots at $9,000 selling price per lot 1080 $ 9,000
All sales are on account.
7. Variable manufacturing overhead is forecast to be $600 per hour of bottling time; bottling time is the
time the filling equipment is in operation. Ittakes two hours to bottle one lot of lemonade and two hours
to bottle one lot of diet lemonade. Assume all variable manufacturing overhead costs are paid during
the same month when incurred.
Fixed manufacturing overhead is forecast to be $1,200,000for 2005. Included in the fixed manufacturing
overhead forecast is $400,000 for depreciation. All manufacturing overhead costs are paid as incurred.
8. Hours of budgeted bottling time is the sole cost allocation base for all fixed manufacturing overhead.
9. Administration costs are forecast to be 10% of the cost of goods manufactured for 2005.
Marketing costs are forecast to be 12% of revenues for 2005.
Distribution costs are forecast to be 8% of revenues for 2005.
All these costs are paid during the month when incurred. Assume there are no depreciation or amortization expenses.
REQURED
Assume Wilson Beverages uses the first-in, first-out method for costing all inventories. On the basis of the
preceding data, prepare the following budgets for 2005:
A. Revenues budget (in dollars) g. Ending finished goods inventory budget
b, Production budget (in unitsl h, Cost of goods sold budget
c. Direct materials usage budget (in units and dollars) i. Marketing costs budget
d. Direct materials purchases budget j. Distribution costs budget
k. Administration costs budget (in units and dollars) I. Budgeted income statement
e. Direct manufacturing labor budget m, Cash budget
f. Manufacturing overhead costs budget
6-40 (60 min.) Comprehensive Review of Budgeting, Cash Budgeting,Chapter Appendix.
a. Schedule 1: Revenues Budget for the Year Ended December 31, 2005
Units (Lots) Selling Price Total Sales
Lemonade 1,080 $9,000 $ 9,720,000 1080 $ 9,000 $ 9,720,000
Diet Lemonade 540 8,500 4,590,000 540 $ 8,500 $ 4,590,000
Total $14,310,000 $ 14,310,000
b. Schedule 2: Production Budget in Units for the Year Ended December 31, 2005
Products
Lemonade Diet Lemonade
Budgeted unit sales (Schedule 1) 1,080 540 1080 540
Add target ending finished goods inventory 20 10 20 10
Total requirements 1,100 550 1100 550
Deduct beginning finished goods inventory 100 50 100 50
Units to be produced 1,000 500 1000 500
c. Schedule 3A: Direct Materials Usage Budget in Units and Dollars for the Year Ended December 31, 2005
Syrup-
Lemon.
Units of direct materials to be used for production of
Lemonade (1,000 lots × 1) 1,000 1,000 1,000 1000 1 1000
Units of direct materials to be used for production of
Diet Lemonade (500 lots × 1) 500 500 500 500 1
Total direct materials to be used (in units) 1000
d. Schedule 3B: Direct Materials Purchases Budget in Units and Dollars for the Year Ended December 31, 2005
Syrup-
Lemon.
Direct materials to be used in production (in units) from Schedule 3A 1000
Add target ending direct materials inventory in units 30
Total requirements in units 1030
Deduct beginning direct materials inventory in units 80
Units of direct materials to be purchased 950
Multiply by cost/unit of purchased materials $ 1,200
Direct materials purchase costs $ 1,140,000
e. Schedule 4: Direct Manufacturing Labor Budget for the Year Ended December 31, 2005
Output Direct
Units Manufacturing
Produced Labor HourTotal Hourly
(Schedule 2) per Unit Hours Rate Total
Lemonade 1000 20 20000 $ 25 $ 500,000
Diet Lemonade 500 20 10000 $ 25 $ 250,000
Total 30000 $ 750,000
f. Schedule 5: Manufacturing Overhead Costs Budget for the Year Ended December 31, 2005
Variable manufacturing overhead costs:
Lemonade [$600 × 2 hours per lot × 1,000 lots (Schedule 2)] $1,200,000 $ 1,200,000
Diet Lemonade [$600 × 2 hours per lot × 500 lots (Schedule 2)] 600,000 $ 600,000
Variable manufacturing overhead costs 1,800,000 $ 1,800,000
Fixed manufacturing overhead costs 1,200,000 $ 1,200,000
Total manufacturing overhead costs $3,000,000 $ 3,000,000
Fixed manufacturing overhead per bottling hour = $1,200,000 ÷ 3,000 = $400.
$ 1,200,000 3000 $ 400
Note that the total number of bottling hours is 3,000 hours: 2,000 hours for Lemonade (2 hours per lot ×1,000 lots) plus 1,0
2
g. Schedule 6A: Ending Finished Goods Inventory Budget as of December 31, 2005
Cost per
Units Unit
(Lots) (Lot) Total
Direct materials
Syrup for lemonade 30 $1,200 $ 36,000 30 $ 1,200 $ 36,000
Syrup for diet lemonade 20 1,100 22,000 20 $ 1,100 $ 22,000
Containers 100 1,000 100,000 100 $ 1,000 $ 100,000
Packaging 200 800 160,000 $318,000 200 $ 800 $ 160,000
Finished goods
Lemonade 20 $5,500* $110,000 20 $ 5,500 $ 110,000
Diet lemonade 10 5,400* 54,000 164,000 10 $ 5,400 $ 54,000
Total ending inventory $482,000
*See Schedule 6B
Schedule 6B: Computation of Unit Costs of Manufacturing Finished Goods For the Year Ended December 31, 2005
*Variable manufacturing overhead varies with bottling hours (2 hours per lot for both Lemonade and Diet
Lemonade). Fixed manufacturing overhead is allocated on the basis of bottling hours at the rate of $400 per bottling
hour calculated in Schedule 5.
h. Schedule 7: Cost of Goods Sold Budget for the Year Ended December 31, 2005
From
Schedule
Beginning finished goods inventory,
January 1, 2005. Given*
Direct materials used 3A $ 4,465,000
Direct manufacturing labor 4 $ 750,000
Manufacturing overhead 5 $ 3,000,000
Cost of goods manufactured
Cost of goods available for sale
Deduct ending finished goods inventory,
December 31, 2005. 6A
Cost of goods sold
*Given in description of basic data and requirements (Lemonade, $5,300 × 100; diet Lemonade, $5,200 × 50)
i. Schedule 8: Marketing Costs Budget for the Year Ended December 31, 2005
Marketing costs, 12% × Revenues, $14,310,000 $1,717,200 $ 1,717,200
j. Schedule 9: Distribution Costs Budget for the Year Ended December 31, 2005
Distribution costs, 8% × Revenues, $14,310,000 $1,144,800 $ 1,144,800
k. Schedule 10: Administration Costs Budget for the Year Ended December 31, 2005
Administration costs, 10% × Cost of goods $ 821,500
manufactured, $8,215,000 $ 821,500
l. Budgeted Income Statement for the Year Ended December 31, 2005
Sales Schedule 1 $ 14,310,000
Cost of goods sold Schedule 7 $ 8,841,000
Gross margin $ 5,469,000
Operating costs:
Marketing costs Schedule 8 $ 1,717,200
Distribution costs Schedule 9 $ 1,144,800
Administration costs Schedule 10 $ 821,500
Total operating costs 3,683,500 $ 3,683,500
Operating income $ 1,785,500
Income tax expense Given 625,000 $ 625,000
Net income $ 1,160,500
Cash Budget
31-Dec-05
Cash balance, beginning Given $ 100,000 Given $ 100,000
Add receipts
Collections from customers Schedule 11 14,260,000 $ 14,260,000
Total cash available for needs $14,360,000 $ 14,360,000
Deduct disbursements
Direct materials Schedule 12 $ 3,975,000 $ 3,975,000
Direct manufacturing labor Schedule 4 750,000 $ 750,000
Variable manufacturing overhead Schedule 13 1,800,000 $ 1,800,000
Fixed manufacturing overhead Schedule 14 800,000 $ 800,000
Equipment purchase Given 1,350,000 $ 1,350,000
Marketing costs Schedule 8 1,717,200 $ 1,717,200
Distribution costs Schedule 9 1,144,800 $ 1,144,800
Administration costs Schedule 10 821,500 $ 821,500
Income tax expense Given 625,000 $ 625,000
Total disbursements $12,983,500 $ 12,983,500
Cash excess (deficiency) $ 1,376,500 $ 1,376,500
Financing
Borrowing 0 0
Repayment 0 0
Interest 0 0
Total effects of financing 0 0
Cash balance ending $ 1,376,500 $ 1,376,500
4-33
se. The following data 4-34
5-17
6-30
erhead) are
$ 60 per machine-hour.
pose of this
pose of this
Account
Balance
(After Proration)
750,000
1,250,000
8,400,000
$10,400,000
Account
Balance
(After Proration)
780,000
1,300,000
8,320,000
$10,400,000
Account
Proration of $400,000 Balance
Underallocated (After
Manufacturing Overhead Proration)
llowing information
$ 8,000,000
$ 3,600,000 200%
320000
7920000
ited is a companythat
directcostcategories
00 into a single overhead cost pool. $ 1,200,000
80000 $ 15.00
its servicescould
$ 180,000 $ 60,000
e allocated to $ 400,000
$ 210,000
2800 1400
r facilitysustaining.
e ABC system.
r facilitysustaining.
Testing (ST)
Per Hour
(4) =
(3) ÷ 30,000
gathered the
Price
$ 165 9,900,000
$ 250 10,000,000
19,900,000
ET INV.DEC 2007
20
$ 7,034,000
per lot
per lot
per lot
g process for
Diet lemonade, 540 lots atSS,500 selling price per lot 540 $ 8,500
• Containers, 200 lots at S950 purchase price per lot 200 $ 950
•Packaging, 400 lots at $900 purchase price per lot 400 $ 900
d two hours
Diet lemonade
2 H/LOT
nufacturing
Diet lemonade
2 H/LOT
0.1
0.12
0.08
or amortization expenses.
e basis of the
inventory budget
mber 31, 2005
Syrup-
Diet Lem. Containers Packaging Total
1000 1000
70 200 400
$ 1,000 $ 950 $ 900
$ 70,000 $ 190,000 $ 360,000 $ 708,000
urs per lot ×1,000 lots) plus 1,000 hours for Diet Lemonade (2 hours per lot × 500 lots).
1000 2000 2 500 1000
$ 318,000
$ 164,000
$ 482,000
Total
$ 790,000
$ 8,215,000
$ 9,005,000
$ 164,000
$ 8,841,000
Q Desc Type N/A
204 balanced SC T
205 T measuring a division manager’s efficiency
206 T motivation and performance
207 DM DL VAR T
208 T goal congruence,
209 balanced SC T
210 T goal congruence,
211 T goal congruence between the economic order quantity (EOQ) model and the manufacturin
212 VOH VAR T cause of variance
213 T performance is measured by how well she performs to budget.
214 T evaluating the performance of the Repair and Maintenance Department
215 T CONTROLABILITY
216 DM VAR T
217 SERVICE DPT T goal congruence USING Budgeted rate times actual hours of computer usage
218 T unfavorable operating income variance
219 DM DL VAR T
220 DM VAR T
221 DL VAR T
222 flexible budge T advantage
223 static budget T disadvantage
224 static budget T var
225 flexible budge T
226 flexible budge T
227 sales quantity T
228 sales-volume vT
229 management bT
230 standard cost T
231 standard cost T
232 standard cost T
233 DL VAR p
234 DM VAR p
235 DM VAR p
236 DM VAR p
237 DL VAR p
238 DM VAR p
239 DL VAR T
240 DL VAR T
241 DM VAR T
242 DL VAR p
243 VOH VAR p
244 PVV p
245 DL VAR T
246 overhead spenp
247 overhead spenp
248 overhead spenT
249 overhead spenT
250 Ethical T
251 DM VAR T
252 DL VAR T
253 DM VAR T
254 PVV T
255
256
257
258
259
260
261
262
263
264
265
266
267
268
269
270
271
272
model and the manufacturing manager’s own preference
omputer usage
Operating Data for Horizon
Petroleum
External market: Transportation Division
Contract price Variable cost per barrel of crude oil $ 1.00
for supplying crude Fixed cost per barrel of crude oil $ 3.00
oil = $12 per barrel Full cost per barrel of Clude oil $4 $ 4.00
$ 12.00
Division Operating In-come of Horizon Petroleum for 100 Barrels of Crude Oil Under Alternative
Transfer-Pricing Methods
Method A:
Internal Transfers Internal Transfers
at Market
Prices
Transportation Division
Revenues $ 21.00
100
$ 2,100.00
$ 340.00
Deduct:
Crude oil purchase costs, 100
$ 1,200.00
Deduct:
Transferred-in costs, $21, $17.60, $19.25 $ 2,100
X 100 barrels of crude oil
Method B: Method C:
Internal Transfers Internal Transfers
at 110% of at Negotiated
Full Costs Prices
110%
$ 17.60 $ 19.25
100 100
$ 1,760.00 $ 1,925.00
100 100
$ 1,200.00 $ 1,200.00
$ 100.00 $ 100.00
$ 300.00 $ 300.00
$ 160.00 $ 325.00
58 58
50 50
$ 2,900 $ 2,900
$ 1,760 $ 1,925
$ 400 $ 400
$ 300 $ 300
$ 440 $ 275
$ 600 $ 600
Allocated
MOH
Included in each
Account Bal. Account Bal.
Account Control (Before proration) (Before proration)
WIP Control $50,000 $16,200
FG Control $75,000 $31,320
COGS Control $2,375,000 $1,032,480
$2,500,000 $1,080,000
Allocated Allocated
MOH MOH
Included in each Included in each Proration of $135,000
Account Bal. Account Bal. Account Bal.
Account Control (Before proration) (Before proration) as a % of total
WIP Control $50,000 $16,200 1.50% $135,000
FG Control $75,000 $31,320 2.90% $135,000
COGS Control $2,375,000 $1,032,480 95.60% $135,000
$2,500,000 $1,080,000 100.0%
WIP
$ 81,000 $ 188,800
$ 39,000
$ 80,000
$ 11,200
Job 298
Actual DM
Actual DL
Proration of $135,000 of
Underallocated Account Bal. Job 298Applied MOH 88X$40
MOH (After proration) Total Manf. Cost(normal costing)
$2,025 $52,025
$3,915 $78,915 Diff
$129,060 $2,504,060
$135,000 $2,635,000
Account Bal.
(After proration)
(4) =(1)+(3)
$52,700
$79,050
$2,503,250
$2,635,000
$ 4,000
$ 15,000
AP
COGS
$ 180,000
4606 2003 Actual DL hours 27,000.00
1579 Actual MOH 1,215,000.00
6185 Actual rate $ 45.00
88
$ 3,960.00 2003 Budgeted DL hours 28,000.00
Budgeted MOH 1,120,000.00
$ 10,145.00 Budgeted rate $ 40.00
$ 15,000.00
$ 4,855.00
32%
Applied MOH 1,080,000.00
Net (Dr) Balance 135,000.00 12.05%
$ 3,520.00
$ 9,705.00 Dr CoGS 135,000.00
DR Applied 1,080,000.00
$ 440.00 CR MOH control 1,215,000.00
DR Cogs 2,025.00 2%
DR WIP 3,915.00 3%
2. The table below shows the estimated probabilities of the percent of defective units resulting from a production run.
3. Reeves Inc. has developed a new production process to manufacture its product. The new
process is complex and requires a high degree of technical skill. However, management
believes there is a good opportunity for the employees to improve as they become more
familiar with the production process.
The production of the first unit requires 100 direct labor hours.
If a 70% learning curve is used,
the cumulative direct labor hours required to produce a total of eight units would be
1 100 2
2 140
4 196
8 274.4
or we have 3 doubling
34.3 x 274.4
6. Carson Products sells sweatshirts and is preparing for a World Cup Soccer match. The cost per sweatshirt varies with the
Carson must purchase the shirts one month before the game and has analyzed the market and estimated sales levels as fol
Unit sales Probability
4,000 15% 600 25
5,000 20% 1000 25
6,000 35% 2100 25
7,000 30% 2100 25
5800
The estimated selling price is $25 for sales made before and during the day of the game.
Any shirts remaining after game day can be sold at wholesale to a local discount store for $10.
The expected profit if Carson purchased 6,000 shirts is
Revenue
Demand
4000 5000 6000 7000*
Revenue (orig. sales) 100000 125000 150000 150000
Wholesale revenue $ 20,000 $ 10,000
Cost of shirts $ 78,000 $ 78,000 $ 78,000 $ 78,000
Profit $ 42,000 $ 57,000 $ 72,000 $ 72,000
Probability 15% 20% 35% 30%
Profit x probability $ 6,300 $ 11,400 $ 25,200 $ 21,600
Expected profit (sum) $ 64,500
15. Werner Company buys raw materials from several suppliers, and makes payments according to the following schedule.
In the month of purchase 25% 25%
In the month after purchase 60% 60%
In the second month after purchase 15% 15%
In preparing the master budget for the fourth quarter of the year, Werner assumed that total purchases for the quarter wo
In its pro forma balance sheet, Werner anticipated a December 31 account payable balance of $207,000. What amount o
10 11 12
60%
15% 15% 90%
19. The Profit and Loss Statement of Madengrad Mining Inc. includes the following information for the current fiscal year.
Sales $160,000 $ 160,000
Gross profit 48,000 $ 48,000
Year-end finished goods inventory 58,300 $ 58,300
Opening finished goods inventory 60,190 $ 60,190
The cost of goods manufactured by Madengrad for the current fiscal year is
COGS $ 112,000
$ 110,110
29. Pane Company uses a job costing system and applies overhead to products on the basis of direct labor cost.
Job No. 75, the only job in process on January 1, had the following costs assigned as of that date:
direct materials, $40,000; $ 40,000
direct labor, $80,000; and $ 80,000
factory overhead, $120,000. $ 120,000
Pane’s profit plan for the year included budgeted direct labor of $320,000 and factory overhead of $448,000. There was no
320000
BOH RATE $ 1.40
OH APPL. $ 345,000 $ 483,000.00 $ 24,000 OVER
34. Juniper Manufacturing uses a weighted-average process costing system at its satellite plant.
Goods pass from the Major Assembly Department to the Finishing Department to finished goods inventory. The goods are
The first inspection occurs when the goods are 30% complete, and the second inspection occurs at the end of production.
The following data pertain to the Finishing Department for the month of July.
Units
Good units started and completed during July 65,000
Normal spoilage - first inspection 2,000
Abnormal spoilage - second inspection 150
Ending work-in-process inventory, 60% complete 15,000
3. Key = b
100 x .7 x .7 x.7 = 34.3 average hours for 8 units; total hours = 8 x 34.3
100
70%
15. Key = d
ing to the following schedule. Accounts payable at 12/31 = 75% of December and 15% of
$207,000/.90 = $230,000 for month; $690,000 for the qua
purchases for the quarter would be spread evenly over the three months.
of $207,000. What amount of purchase did Werner anticipate for the fourth quarter of the year?
$ 207,000
$ 230,000 $ 690,000
19. Key = c
on for the current fiscal year. Cost of goods sold = Sales – Gross profit = $160,000 - $48,000 = $112
Available for sale finished goods = Cost of goods sold + Ending finishe
Cost of goods manufactured = Available for Sale finished goods - Ope
21. Key = c
(Standard price-actual price) x number of pound
3 $ 0.72 ($0.72 - $0.75) x 4,500 pounds = $135 unfavorab
00 pounds in the production of 1,300 finished units of product.
4,100 1,300
$ (135.00)
29. Key = b
Applied overhead - actual = amount over/underapplied
$448,000/$320,000 = budgeted application rate of 1.4
$345,000 direct labor actual x 1.4 = $483,000 applied
$483,000 applied - $459,000 total not traceable = $24,000 overapplied
ad of $448,000. There was no work-in-process on December 31. Pane’s overhead for the year was
448000
oods inventory. The goods are inspected twice in the Finishing Department.
urs at the end of production.
multiplied by its probability of occurrence
.20) = .60 + 1.50 + .80 = 2.90%