Problem 1 - CVP Analysis - 18 Points

Tanner Company's most recent contribution format income statement is presented below:

The company sells its only product for $15 per unit. There were no beginning or ending
inventories.
Required:
a. Compute the company's break-even point in units sold.

b. Compute the total variable expenses at the break-even point.

c. How many units would have to be sold to earn a target profit of $9,000?

d. The sales manager is convinced that a $6,000 increase in the advertising budget would
increase total sales by $25,000. Would you advise the increased advertising outlay?

e. Refer to the original data when answering this question. Management is considering
using a new component that would increase the unit variable cost by $2. Since the new
component would increase the features of the company's product, the marketing manager
predicts that monthly sales would increase by 1,000 units. What should be the overall
effect on the company's monthly net operating income of this change? Show your work
Problem 2 . Costing 8 Points

Fine & Associates is an interior decorating firm in Tucson. The following costs were incurred in
a project to redecorate the mayor's offices:

Direct material $ 29,000

Direct professional labor 42,000

The firm's budget for the year included the following estimates:

Budgeted overhead $800,000

Budgeted direct professional labor 640,000

Overhead is applied to contracts by using a predetermined overhead rate that is based on

direct professional labor cost. Actual professional labor during the year was $655,000
and actual overhead was $793,000.

Required:

A. Determine the total cost to redecorate the mayor's offices.

B. Calculate the under- or overapplied overhead for the year. Be sure to label your
answer.
Problem 3. Costing: 8 Points

Packard Products uses a job-costing system for its units, which pass from the Machining
Department, to the Assembly Department, to finished-goods inventory. The Machining
Department is heavily automated; in contrast, the Assembly Department performs a number of
manual-assembly activities. The following information relates to the Machining Department for
the year just ended:

Budgeted manufacturing overhead $8,000,000

Actual manufacturing overhead 7,975,000
Budgeted machine hours 500,000
Actual machine hours 510,000

The Machining Department data that follow pertain to job no. 243, the only job in
production at year-end.

Direct materials $64,800

Direct labor cost 35,200
Machine hours 450

Required:
A. Assuming the use of normal costing, calculate the predetermined overhead rate that is
used in the Machining Department.

B. Compute the cost of the Machining Department's year-end work-in-process

inventory.

C. Determine whether overhead was under- or overapplied during the year in the
Machining Department.
Problem 4 . Activity-Based Costing, Traditional Costing - 16 Points
The controller for Wolfe Machining has established the following overhead cost pools and cost
drivers:

Budgeted
Overhead Cost Pool Overhead Cost Cost Driver
Machine setups $240,000 Number of setups
Material handling 90,000 Units of raw material
Quality control inspection 48,000 Number of inspections
Other overhead costs 160,000 Machine hours
Total $538,000

Budgeted Level
Overhead Cost Pool for Cost Driver Overhead Rate
Machine setups 200 setups $1,200 per setup
Material handling 60,000 units $1.50 per unit
Quality control 1,200 inspections $40 per inspection
Other overhead 20,000 machine hours $8 per machine hour

Order no. 715 has the following production requirements:

Machine setups: 7
Raw material: 11,200 units
Inspections: 16
Machine hours: 850

Required:
A. Compute the total overhead that should be assigned to order no. 715 by using
activity-based costing.

B. Suppose that Wolfe were to use a single, predetermined overhead rate based on
machine hours. Compute the predetermined overhead rate per hour and the total
overhead assigned to order no. 715.

C. Discuss the merits of an activity-based costing system in comparison with a

traditional costing system.
Problem 5 – COGM, COGS, Income Statement ------ 18 Points

Babbel Company is a manufacturing firm that uses job-order costing. The company's
inventory balances were as follows at the beginning and end of the year:

The company applies overhead to jobs using a predetermined overhead rate based on
machine-hours. At the beginning of the year, the company estimated that it would work
38,000 machine-hours and incur $266,000 in manufacturing overhead cost. The
following transactions were recorded for the year:
 Raw materials were requisitioned for use in production, $297,000 $(281,000 direct and
$16,000 indirect).
 The following employee costs were incurred: direct labor, $389,000; indirect labor,
$62,000; and administrative salaries, $176,000.
 Selling costs, $160,000.
 Factory utility costs, $19,000.
 Depreciation for the year was $143,000 of which $137,000 is related to factory
operations and $6,000 is related to selling, general, and administrative activities.
 Manufacturing overhead was applied to jobs. The actual level of activity for the year
was 34,000 machine-hours.
 Sales for the year totaled $1,283,000.

Required:

a. Prepare a schedule of cost of goods manufactured in good form.

b. Was the overhead underapplied or overapplied? By how much?

c. Prepare an income statement for the year in good form. The company closes any
underapplied or overapplied overhead to Cost of Goods Sold.

Answer 5
Answer 5 (continued)