Cost Accounting and Control -2nd Sem AY 21-22

Quiz for Module 2

Name: JASPER JOHN C. NACUA

Class Schedule: T-TH; 8:30 AM – 10:00 AM

P roblem 1 – 50 points; show your solutions

XYZ Co., makes small plant stands that sell for P25 each. The company’s annual level of production and
sales is 120,000 units. In addition to P430,500 of fixed manufacturing overhead and P159,050 of fixed
administrative expenses, the following per unit costs have been determined for each plant stand:

Direct material P6.00

Direct labor 3.00
Variable manufacturing OH 0.80
Variable selling expense 2.20
Total variable cost P12.00

1. Prepare a variable costing income statement at the current level of production and sales.

2. Calculate the unit contribution margin in pesos and the contribution margin ratio for a plant stand.
3. Determine the break-even point in number of plant stands.

4. Calculate the pesos break-even point using the contribution margin ratio.

5. Determine XYZ’s margin of safety in units, in sales pesos, and as a percentage.

6. Compute the company’s degree of operating leverage.

7. If sales increase by 25%, by what percentage will before-tax income increase?

8. How many plant stands must the company sell to earn P996,450 in before-tax income?

9. If the company wants to earn P657,800 after tax and is subject to a 20 percent tax rate, how many
units must be sold?

10. How many plant stands must be sold to break even if XYZ’s fixed manufacturing cost
increases by P7,865? (use the original data).
 11. The company has received an offer from a Brazilian company to buy 4,000 plant stands at P40 per
unit. The per-unit variable selling cost of the additional units will be P2.80 (rather than P2.20), and
P18,000 of additional fixed administrative cost will be incurred. This sale would not affect domestic
sales or their costs. Based on quantitative factors alone, should XYZ accept this offer?

Basing from the solely on the quantitative factors, I must say, yes, the company should accept
this offer due to the fact that it would yield great profit which is in amount of P91,600 in such few unit
of products being sold. As we have solved and foreseen, the selling price per unit of P40 is sufficient
enough to cover all the cost of the goods sold as well as the selling and administrative expenses
despite the some increases on expenses. Thus, it is a winner situation for XYZ Co. to accept the offer
from Brazilian company.

P roblem 2 – 35 points

Rojo Products sells camping equipment. One of the company’s products, a camp lantern, sells for P900
per unit. Variable expenses are P630 per lanterns, and fixed expenses associated with the lantern total
P1,350,000 per month.

1. Compute the company’s break-even point in number of lanterns and in total sales pesos.

2. If the variable expenses per lantern increase as a percentage of the selling price, will it result in
a higher or a lower break-even point? Why?

Answer:
If the variable expenses per lantern increase as a percentage of the selling price, it will
result into a higher break-even point due the fact that it would lessen the gap or profit range
between the selling price and the variable expenses. For as the variable expenses becomes
higher as to percentage of sales, the lower the contribution margin it would give as a
percentage of sales. This is in consideration of the fact that the fixed cost remains
unchanged. Let us say for example, the variable expense per lantern increases to 720. When
we divide 720 by 900, it would result to 0.8. Thereafter, subtract it from 1, the denominator
becomes 0.2. And 1,350,000 divided by 0.2 is equal to 6,750,000, which is higher than the
break-even point solved in the problem amounting to 4,500,000. Furthermore, it also
increases the break-even point in terms of units. To solve from the example I have given,
the break-even point in terms of units increased to 7,500.

3. At present, the company is selling 8,000 lanterns per month. The sales manager is
convinced that a 10% reduction in the selling price will result in a 25% increase in the number of lanterns
sold each month. Prepare two contribution income statements, one under present operating conditions,
and one as operations would appear after the proposed changes. Show both total and per unit data on
your statements.

₱
 4. Refer to No. 3. How many lanterns would have to be sold at the new selling price to yield a
minimum net operating income of P720,000 per month?

P roblem 3 – 25 points

Mega Doors Company sells prehung doors to home builders. The doors are sold for P600 each.
Variable costs are P420 per door, and fixed costs total P4,500,000 per year. The company is
currently selling 30,000 doors per year.

1. Prepare a contribution format income statement for the company at the present level of sales.

2. Compute the degree of operating leverage.

 3. Management is confident that the company can sell 37,500 doors next year (an increase of 7,500
doors, or 25%, over current sales). Compute the following:
a. The expected percentage increase in net operating income for next year.

You may also solve this using this formula:

b. The expected total peso net operating income for the next year. (do not prepare an income
statement; use the degree of operating leverage to compute your answer.)

P roblem 4 – 40 points

ABC Company sells a single product. The company’s sales and expenses for a recent month follow:

Per
Total Unit
Sales P600,000 P40
Total variable cost 420,000 28
Contribution margin 180,000 12
Total fixed cost 150,000
 Operating income 3 0,000

1. What is the monthly break-even point in units sold and in pesos?

2. Without resorting to computations, what is the total contribution margin at the break-even point?

Answer:
Without resorting to computations, the total contribution margin at the break-even
point is P150,000 because the contribution margin is equal to the fixed costs or expenses at
the break-even point.

3. How many units would have to be sold each month to earn a minimum target profit of P18,000?
Use the contribution margin method. Verify your answer by preparing a
contribution income statement at the target level of sales.

Sales = 14,000 x 40 = 560,000

Variable Expenses = 14,000 x 28 = 392,000
Contribution Margin = 14,000 x 12 = 168,000
4. Refer to the original data. Compute the company’s margin of safety in both peso and
percentage terms.

5. What is the company’s CM ratio?

6. If monthly sales increase by P80,000 and there is no change in fixed expenses, by how much would
you expect monthly net operating income to increase?
 P roblem 5 – 26 points
The following events took place at the Barton Manufacturing corporation for the current year:
1. Purchased P80,000 in direct materials.

2. Incurred labor costs as follows:

a. Direct labor, P42,000
b. Supervisory labor, P11,500 (part of manufacturing overhead).
3. Purchased manufacturing equipment for P67,200.
4. Other manufacturing overhead was P80,500, excluding supervisory labor.
5. Transferred 70 percent of the materials purchased to work in process.
6. Completed work on 60 percent of the goods in process. Cost are assigned equally across all work in
process.
7. Sold 90 percent of the completed goods.
There were no beginning balances in the inventory accounts. All costs incurred were debited to the
appropriate account and credited to accounts payable.
Required:
a. Prepare journal entries to reflect these events.
b. Prepare a cost of goods sold statement from the data.

Requirement (a):

1. Direct materials inventory 80,000

Accounts payable 80,000
To record purchase of direct materials

2. Work in process inventory 42,000

Manufacturing overhead 11,500
Wages payable 53,500
To record incurred labor costs

3. Manufacturing overhead 67,200

Accounts payable 67,200
To record purchase of manufacturing equipment

4. Manufacturing overhead control 80,500

Accounts payable 80,500
To record incurred manufacturing overhead

5. Work in process inventory 56,000

Direct material 56,000
To record 70% of direct material transferred to WIP

Work in process inventory 159,200

Manufacturing overhead 159,200
To record transfer of all manufacturing overhead to
WIP

6. Finished goods inventory 154,320

 Work in process inventory 154,320
To record work completed on 60% of the goods in
process

7. Cost of goods sold 138,888

Finished goods 138,888
To record 90% of the completed goods sold

Solution:
Finished Goods = (42,000 + 56,000 + 159,200) x 60% = P154,320
Sale of Goods = 154,320 x 90% = P138,888

Requirement (b):

P roblem 6 -24 points

High Plains Sales Corporation experienced the following events during the current year:
1. Incurred marketing costs of P197,000.
2. Purchased P971,000 of merchandise.
3. Paid P26,000 for transportation-in costs.
4. Incurred P400,000 of administrative costs.
5. Took a periodic inventory on December 31 and learned that goods with a cost of P297,000 were on
hand. This compared with a beginning inventory of P314,000 on January 1.
 6. Sales revenue during the year was P1,850,000.
All costs incurred were debited to the appropriate account and credited to Accounts Payable. All sales
were on credit.
Required:
a. Prepare journal entries to reflect these events.
b. Prepare an income statement based on these data.

Requirement (a):

1. Marketing expenses 197,000

Accounts payable 197,000
To record marketing costs incurred

2. Purchases 971,000
Accounts payable 971,000
To record purchase of merchandise on account

3. Freight –in 26,000

Accounts payable 26,000
To record transportation-in costs on purchases

4. Administrative expense 400,000

Accounts payable 400,000
To record administrative costs

5. Merchandise inventory, end 297,000

Cost of goods sold 1,014,000
Purchases 971,000
Freight – in 26,000
Merchandise inventory, beg 314,000
To record cost of goods sold and its related accounts
under periodic inventory system

6. Accounts receivable 1,850,000

Sales revenue 1,850,000
To record sales income during the year

Cost of goods sold 1,014,000

Merchandise inventory 1,014,000
To record cost of goods sold
Requirement (b):