EXAM ONE REVIEW ~ Questions & SOLUTIONS ~ Revised Question 1; Nish Corporation has provided the following data for the month of Apri: Sales $220,000 Raw materials purchases $50,000 Direct labor cost $23,000 Manufacturing overhead cost $59,000 Selling expense $18,000 Administrative expense $43,000 Inventories: Beginning Ending Raw materials $26,000 $35,000 Work in process $18,000 $22,000 Finished goods $42,000 $29,000 Required: a. Prepare a Schedule of Cost of Goods Manufactured in good form for April b. Prepare Income Statement in good form for April.‘Answers: Question 1 Nish Corporation a. Schedule of Cost of Goods Manufactured Direct materials: Beginning materials inventory $26,000 _ Add: Purchases of raw materials .. 30,000 Raw materials available for use 76,000 Deduct; Ending raw materials inventory . 35,000 Raw materials used in production. Direct labor ...... Manufacturing overhead Total manufacturing costs. ‘Add: Beginning work in process inventory Deduct: Ending work in process inventory.. Cost of goods manufactured ...Question 2: Dodge 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 $12,000,000 Actual manufacturing overhead 12,142,000 Budgeted machine hours 800,000 Actual machine hours 794,000 The Machining Department data that follow pertain to job no. 775, the only job in production at year-end. Direct materials $125,000 Direct labor cost 61,800 Machine hours 550 Required: A. Assuming the use of normal costing, calculate the predetermined overhead rate that is _used in the Machining Department. 8. Compute the cost of the Machining Department's year-end work-in-process inventory. C. Determine whether overhead was under- or over-applied during the year in the Machining Department. D. If Dodge disposes of the Machining Department's under- or over-applied overhead as an adjustment to Cost of Goods Sold, would the company's Cost-of-Goods-Sold account Increase or decrease? Explain. E. How much overhead would have been charged to the Machining Department's Work-in- Process account during the year? F, Comment on the appropriateness of direct labor cost to apply manufacturing overhead in the Assembly Department,‘Answers: Question 2: Dodge Products ‘A. Machining overhead rate: $12,000,000 * 800,000 hours = $15 per machine hour B. The ending work in process is carried at a cost of $195,050, computed as follows: Direot materials $125,000 Direst labor 61,800 Manufacturing overhead (550 x $15) 8.250 Total cost i, Acta oven in the Machining Deparment mounted to $12,142,000, whereas aid ovechtad totaled $11,910,000 (794,000 hours * $15). Thus, overhead was underappied by $232,000 during the year. D. The department's manufacturing overhead was underapplied by $232,000. As a result of this situation, insufficient overhead flowed from Work in Process, to Finished Goods, to Cost of Goods Sold, meaning that the Cost-of-Goods-Sold account must be increased at year-end. E, The Work-in-Process account is charged with applied overhead, or $11,910,000. F. The firm's selection of application bases is likely appropriate, The bases should "drive" the ‘costs, meaning there should be a strong cause-and-effect relationship between the base that is ‘used and the amount of overhead incurred. In the Assembly Department, a considerable Portion of the overhead incurred is related to manual-assembly (i.e., labor) operations.Question 3: Pitney Corporation manufactures two types of transponders ~ no. 156 and no. 157 ~ and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows. No. 156 No. 157 Anticipated volume (units) 6,000 14,000 Direct material cost $40 $65 Direct labor cost $25 $25 The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities’ three respective cost drivers, follow. No. 156 No. 157 Total Setups 60 40 100 Machine hours worked 15,000 25,000 40,000 (Qutgoing shipments 120 80 200 The firm's total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000. Required: A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system B. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 186 and 157 if the expected manufacturing volume is attained. . Assuming use of activity-based costing, compute the total cost per unit of product no. 156. D. If the company's selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156? Show computations.Answers: Question 3: Pitney Corporation ‘A. Manufacturing setups: $260,000 + 100 setups (SU) = $2,600 per SU Machine processing: $2,400,000 + 40,000 machine hours (MH) = $60 per MH Product shipping: $400,000 + 200 outgoing shipments (OS) = $2,000 per OS B. ‘Activity ‘No. 156 ‘No. 157 Manufacturing setup: 60 SU x $2, S 156,000 40 SU x $2,600 $ 104,000 Machine processing: 15,000 MH x $60 900,000 25,000 MH x $60 1,500,000 Product shipping: ; 120 OS x $2,000 —240,000 80 OS x $2,000 —160,000 Total $1,296,000 $1,764,000 Production volume (units) 6,000 14,000 Cost per unit s2i6* $126** * $1,296,000 + 6,000 units = $216 **$1,764,000 + 14,000 units = $126 C. Direct material ($40) + direct labor ($25) + overhead ($216) = $281 D. Machine hours (15,000) + units produced (6,000) = 2.5 hours per unit; 2.5 hours * $76.50 = $191.25 overhead applied Direct material ($40.00) + direct labor ($25.00) + overhead ($191.25) = $256.25 Product no. 156 is currently undercosted ($256.25 vs. $281.00), so a switch to activity-based costing will likely result in a price hike.‘Question 4: Lewis Company needs to determine the variable utilities rate per machine hour in order to estimate cost for August. Relevant information is as follows. Machine Hours Utilities Month Worked Cost April 4,500 $9,560 May 4,200 9,440 June 6,500 10,725 July 7,000 11,400 Lewis anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine time. The company uses the high-low method to analyze costs. Required: A. Calculate the variable and fixed components of the utilities cost. B. Using the data calculated above, estimate the utilities cost for August. C. Compare the high-low method versus the visual-fit method with respect to (1) number of data observations used in the analysis and (2) objectivity of the results.‘Answers: Question 4: Lewis Company A. Variable cost: ($11,400 - $9,440) * (7,000 - 4,200) = $0.70 per hour Total cost for 7,000 hours ‘$11,400 ‘Less: Variable cost (7,000 x $0.70) 4,900 Fixed cost $6,500 B. Variable cost (5,000 x 1.5 x $0.70) $ 5,250 Fixed cost _ 6500 Total cost $1,250 C. The high-low method uses only two data observations, the highest and the lowest, whereas the visual-fit method utili all data points that have been gathered (except outliers). Many analysts would say the visual-fit method is advantageous in this regard. However, the visual-fit method lacks total objectivity because of the manner in which the cost line is fit through the data points (drawn by "visual approximation”). The high-low method is therefore said to be more objective.Question 5: Belli-Pit, Inc. produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows: Sales $540,000 Variable expenses 360,000 Contribution margin 180,000 Fixed expenses 120.000 Net operating income § 60.000 The company produced and sold 120,000 kilograms of product during the month. There were no beginning or ending inventories. Required: a. Given the present situation, compute 1 The break-even sales in kilograms, 2. The break-even sales in dollars. 3. The sales in kilograms that would be required to produce net operating income of $90,000. 4. The margin of safety in dollars. b. An important part of processing is performed by a machine that is currently being leased for $20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease. 1. Should the company choose the lease or the royalty plan? 2. Under the royalty plan compute break-even point in kilograms 3. Under the royalty plan compute break-even point in dollars. 4, Under the rayalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000.Answers: Question 5: Belli-Pitt, Inc. 1. Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.00Q + $120,000 + $0 $1.50Q = $120,000 Q = $120,000 + $1.50 per unit = 80,000 units 2. 80,000 units « $4.50 per unit = $360,000 ‘expenses + Fixed expenses + Target profit $4309 5.009 + siai0e;s 000 1.50Q = $21 Q= $210,000 + $1.50 per unit = 140,000 units 4. Margin of safety = Sales ~ Sales at breakeven = $540,000 — $360,000 = $180,000 1, Asis Proposed Per Unit Amount ~ PerUnit Amount $540,000 $4.50 $540,000 $4.50 360,000 3.00 372,000 3.10 180,000 1.50 168,000 1.40 120,000 1.00 100,000 0.83 $00,000 $0.50 $68,000 $0.57 Since net operating income increases by $8,000 the royalty is a good plan, provided ‘sales remains at the same level. 2. Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.10Q + $100,000 + $0 $1.40Q = $100,000 OQ = $100,000 + $1.40 per unit = 71,429 units 3. 71.429 units « $4.50 unit = $321.429 4, Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.10Q + $100,000 + $90,000 $1.40Q = $190,000 Q= $190,000 + $1.40 per unit = 135,714 unitsQuestion 6: Beachcraft Corporation has fixed manufacturing cost of $12 per unit. Consider the three independent cases that follow. Case A: Absorption- and variable costing net income each totaled $240,000 in a period when the firm produced 18,000 units. Case B: Absorption-costing net income totaled $320,000 in a period when finished-goods inventory levels rose by 7,000 units. Case C: Absorption-costing net income and variable-costing net income respectively totaled $220,000 and $250,000 in a period when the beginning finished-goods inventory was 14,000 units. Required: A. In Case A, how many units were sold during the period? B. In Case B, how much income would Beachcraft report under variable costing? C. In Case C, how many units were in the ending finished-goods inventory?Answers: Question 6; Beacheraft etn ee eng eee le mie mown, he erty le unchanged. Thus, sales totaled 18,000 units. B. The difference between absorption-costing income and variable-costing income is $84,000 (7,000 units * $12). Given that inventories are rising, variable-costing net income will ‘amount to $236,000 ($320,000 - $84,000). c Th $9000 diinncnn income ($2500 - $220,000) is explained by the change in inventory units, multiplied by the fixed overhead per unit. Thus, the inventory changed by 2,500 units ($30,000 *, $12). Given that absorption income is ies tan income computed by the variable-costing method, inventory levels must have decreased, resulting in an ending inventory level of 11,500 units (14,000 - 2.500).Question 7;_ Segment Reporting O’Mara’s, Incorporated's income statement for the most recent month is given below Total Store A Store B $300,000 $100,000 $200,000 192,000 _72,000 120,000 108,000 28,000 80,000 16,000 _ 21,000 _ 55,000 Sales... Variable expense: Contribution margin... Traceable fixed expenses .. Segment margin... 32,000 $_7,000 $25,000 Common fixed expenses 27,000 Net operating income uw. $_$,000 For each of the following questions, refer back to the original data. (a) If Store B sales increase by $20,000 with no change in traceable fixed expenses, by what should the overall company net operating income increase? (b) The marketing department believes that a promotional campaign at Store A costing $5,000 will increase sales by $15,000. If its plan is adopted, what impact will this have on overall company net operating income? (c) A proposal has been made that will lower variable expenses in Store A to 62% of sales. However, this reduction can only be accomplished by an increase in fixed expenses of $8,000. If this proposal is implemented and sales remain constant, by what amount would overall company net operating income increase? (A) If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed expenses, what would the impact be on the segment margin? (e) Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal has been made to change from a fixed salary to a sales commission of 5%. Assume that this proposal is adopted, and that as a result sales increase by $20,000. What would be the new segment margin for Store B?Solution to Question 7:_ Segment Reporting - Page 1 of 2 (O’Mara’s, Incorporated's income statement for the most recent month is given below Total Store A Store B Sales. $300,000 $100,000 $200,000 Variable expense: 192,000 _72,000 120,000 Contribution margin. 108,000 28,000 80,000 Traceable fixed expenses 76,000 _ 21,000 _$5,000 Segment margin... 32,000 $_7,000 $25,000 Common fixed expenses 27,000 Net operating income... S_5,000 For each of the following questions, refer back to the original data. (8) If Store B sales increase by $20,000 with no change in traceable fixed expenses, by what, should the overall company net operating income increase? Answer: Increase by $8,000 Store B contribution margin ratio = $80,000 + $200,000 = 40% Additional net operating income = $20,000 * 40% = $8,000 (g) The marketing department believes that a promotional campaign at Store A costing $5,000 will increase sales by $15,000. If its plan is adopted, what impact will this have on overall ‘company net operating income? Answer: Decrease by $800 Store A contribution margin ratio = $28,000 * $100,000 = 28: Change in net operating income = ($15,000 * 28%) ~ $5,000 = $4,200 ~ $5,000 = $800 decrease (a) A proposal has been made that will lower variable expenses in Store A to 62% of sales However, this reduction can only be accomplished by an increase in fixed expenses of $8,000. If this proposal is implemented and sales remain constant, by what amount would overall company net operating income increase? Answer: increase by $2,000‘New amount for Store A variable expenses = $100,000 * 62% = $62,000 Change in net operating income ~ (572,000 ~ $62,000) ~ $8,000 = $10,000 ~ $8,000 = $2,000 increase (i) If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed expenses, ‘what would the impact be on the segment margin? Answer: the segment margin should increase by $5,000 Store B contribution margin ratio = $80,000 * $200,000 = Change in segment margin ~ ($30,000 * 40%) ~ $7,000 = 512,000 ~ $7,000 = $5,000 increase (j) Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal has been made to change from a fixed salary to a sales commission of 5%. Assume that this proposal is adopted, and that as a result sales increase by $20,000. What would be the new segment margin for Store B? Answer: $29,000 Sales $220,000 ($200,000 + $20,000) Sales commissions 11,000 ($220,000 » 5%) Other variable expenses .. 132,000 ($220,000 = 60%*) Contribution margin 77,000 Traceable fixed expenses .. 48,000 ($55,000 ~ $7,000) Segment margin... $29,000 * Variable expenses + Sales = $120,000 + $200,000 = 60%