Accounting+Solution+%2846%29

Question 1: Schickel Inc. regularly uses material B39U and currently has in stock 460 liters of the material for which it paid $3,128 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.95 per liter. New stocks of the material can be purchased on the open market for $6.45 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 760 liters of the material to be used in a job for a customer. The relevant cost of the 760 liters of material B39U is:

$6,450

$4,902

$4,672

$4,522

Solution:- Computation of Relevant cost Relevant cost = $6.45 per liter 760 liters = $4,902

Question 2: Munafo Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,500 units of component VGI. Each unit of VGI requires 1 unit of material I57 and 5 units of material M97. Data concerning these two materials follow:

Material I57 is in use in many of the company's products and is routinely replenished. Material M97 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VGI?

$174,850

$213,850

$171,925

$213,130

Solution:

Material # Required Relevant Total

per unit priceI57 1 × $9.40 = $ 9.40M97 5 × $3.50 = 17.50 Total per unit relevant cost $26.90

Minimum acceptable price for 6,500 units of VGI =$26.90 per unit × 6,500 units = $174,850

Question 3Winder Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 3,000 units of component QEA. Each unit of QEA requires 5 units of material F85 and 5 units of material E71. Data concerning these two materials follow:

Material F85 is in use in many of the company's products and is routinely replenished. Material E71 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product QEA?

$141,750

$126,702

$145,965

$126,295

Solution:

Total needed Inventory

# of units to purchase on

marketRelevant

price Total cost

F85.............(3,000 × 5) =

15,000 15,000 $4.75 $ 71,250

E71.............(3,000 × 5) =

15,000(15,000 −

13,680) = 1,320 $4.70 6,20413,680 $3.60 49,248

Minimum acceptable price for 3,000 units of QEA........... $126,702

Question 4:

Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year:

Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor Company accept Valve Company's offer, and why?

Yes, because it would be $25,000 cheaper to buy the part.

No, because it would be $15,000 cheaper to make the part.

Yes, because it would be $10,000 cheaper to buy the part.

No, because it would be $5,000 cheaper to make the part.

Solution:Relevant cost of manufacturing:

Direct materials $ 20,000Direct labor 55,000Variable manufacturing overhead 45,000Fixed manufacturing overhead ($4 × 10,000) 40,000 Relevant manufacturing cost $160,000

Net advantage (disadvantage):Relevant manufacturing cost savings $160,000Annual rental of manufacturing facilities

given up if manufacture Part M-1 15,000Cost of purchasing the part ($18 × 10,000) ( 180,000)Net disadvantage of purchasing part M-1 ($ 5,000 )

Question 5: Sardi Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 17,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:

Direct materials $ 8.20

Direct labor 8.30

Variable manufacturing overhead 1.20

Fixed manufacturing overhead 4.30

Unit product cost $22.00

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 2 minutes on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 4 minutes on the constraining machine and that has a contribution margin of $7.00 per unit.When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

$20.71

$25.50

$24.21

$22.00

Solution: Relevant cost per unit

Direct materials $ 8.20Direct labor 8.30Variable manufacturing overhead 1.20Fixed manufacturing overhead ($4.30 × 0.70) 3.01 Relevant manufacturing cost $20.71Add contribution margin lost 3.50 Total $24.21

contribution margin lost = $7.00 ÷ 4 minutes = $1.75 per minute; $1.75 per minute × 2 minutes = $3.50

Question 6: Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours. The following per unit data relates to the three products of the corporation:

Letter Openers Elvis Statues Candle Holders

Sales price $30 $80 $42

Variable costs $20 $40 $20

Labor hours required 1 6 2

Assume that Wood Carving only has 1,800 labor hours available next month. Also assume that Wood Carving can only sell 800 units of each product in a given month. What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?

$12,000

$19,600

$19,000

$19,800

Solution:

Demand for wood carvers:Letter Openers Elvis Statues Candle Holders

Labor-hours per unit 1 6 2Monthly demand in units 800 800 800Total hours required 800 4,800 1,600

Total time required for all products: 7,200

Optimal production plan:Letter Openers Elvis Statues Candle Holders

Selling price per unit $30.00 $80.00 $42.00Variable cost per unit $20.00 $40.00 $20.00Contribution margin per unit $10.00 $40.00 $22.00Labor-hours per unit 1 6 2Contribution margin per hour $10.00 $6.67 $11.00

Rank in terms of profitability 2 3 1

Optimal production 200 0 800

Total hours available 1,800Less: hours required for 800 Candle Holders (800 × 2) 1,600Hours remaining 200Divided by hours required per Letter Opener ÷ 1Number of Letter Openers to produce 200

Maximum contribution margin:Candle Holders (800 × $22) $17,600Letter Openers (200 × $10) 2,000

Maximum contribution margin $19,600

Question 7: Elly Industries is a multi-product company that currently manufactures 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit.

If Elly Industries continues to use 30,000 units of Part MR24 each month, it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier's unit price is less than:

$14.00

$11.00

$16.00

$13.00

Solution:

Avoidable fixed costs ($150,000 × 0.60) $90,000Divided by 30,000 units ÷30,000Relevant fixed cost per unit $ 3Add variable production costs per unit 11 Outside supplier price $14

Question 8: Elly Industries is a multi-product company that currently manufactures 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit.

If Elly industries is able to obtain Part MR24 from an outside supplier at a unit purchase price of $15, the monthly usage at which it will be indifferent between purchasing and making Part MR24 is:

32,000 units

22,500 units

30,000 units

35,000 units

Solution:

. The total relevant cost per unit of making the part is composed of the variable production cost per unit ($11) plus the fixed cost per unit. Since the total cost must be equal to $15, then the fixed cost per unit must be $4 ($15 − $11).

The fixed cost per unit is calculated as:Fixed cost per unit = Total relevant fixed costs ÷ Units to be produced

Substituting:$4 = $90,000 ÷ Units to be producedUnits to be produced = 22,500

Question 9: Ahron Company makes 80,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials $14.90

Direct labor 17.50

Variable manufacturing overhead 1.90

Fixed manufacturing overhead 21.10

Unit product cost $55.40

An outside supplier has offered to sell the company all of these parts it needs for $46.60 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $560,000 per year.If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $13.60 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 80,000 units required each year?

$7.00

$55.40

$62.40

$48.80

Solution:Relevant cost per unit

Direct materials $14.90Direct labor 17.50Variable manufacturing overhead 1.90Fixed manufacturing overhead ($21.10 − $13.60) 7.50 Relevant manufacturing cost $41.80

Maximum acceptable purchase price:Manufacturing cost savings ($41.80 × 80,000) $3,344,000Additional contribution margin 560,000 Total benefit $3,904,000Number of units 80,000Benefit per unit $48.80

Question 10: Younes Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air

conditioners, is known as P06. Data concerning this product are given below:

The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost.

The company has received a special, one-time-only order for 500 units of component P06. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Younes has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $10,000. What is the minimum price per unit on the special order below which the company should not go?

$67

$83

$103

$20

Solution:

Variable cost per unit on normal sales:Direct materials $38Direct labor 1Variable manufacturing overhead 8Variable selling expense 4 Variable cost per unit on normal sales $51

Variable cost per unit on special order:Normal variable cost per unit $51Reduction in variable selling expense. ( 4)Opportunity cost of sales given up $10,000 ÷ 500) 20 Variable cost per unit on special order $67

Question 11: Elfving Company produces a single product. The cost of producing and selling a single unit of this product at the

company's normal activity level of 80,000 units per month is as follows:


Direct labor $6.00

Variable manufacturing overhead $1.00

Fixed manufacturing overhead $11.50

Variable selling & administrative expense $1.80

Fixed selling & administrative expense $8.00

The normal selling price of the product is $71.10 per unit.An order has been received from an overseas customer for 1,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.50 less per unit on this order than on normal sales.Direct labor is a variable cost in this company.

Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

$5.30

$6.80

$7.40

$24.80

Solution:

Variable cost per unit on normal sales:Direct materials $37.50Direct labor 6.00Variable manufacturing overhead 1.00Variable selling & administrative expense 1.80 Variable cost per unit on normal sales $46.30

Selling price for normal sales $71.10Variable cost per unit 46.30 Unit contribution margin $24.80

Question 12: Elfving Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 80,000 units per month is as follows:


Direct labor $6.00

Variable manufacturing overhead $1.00

Fixed manufacturing overhead $11.50

Variable selling & administrative expense $1.80

Fixed selling & administrative expense $8.00

The normal selling price of the product is $71.10 per unit.An order has been received from an overseas customer for 1,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.50 less per unit on this order than on normal sales.Direct labor is a variable cost in this company.

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 400 units for regular customers. The minimum acceptable price per unit for the special order is closest to:

$54.72

$56.00

$71.10

$65.80

Solution:

Variable cost per unit on normal sales:Direct materials $37.50Direct labor 6.00Variable manufacturing overhead 1.00Variable selling & administrative expense 1.80 Variable cost per unit on normal sales $46.30

Lost contribution margin:Selling price for normal sales $71.10Variable cost per unit on normal sales 46.30 Contribution margin per unit $24.80Number of units cut back in production 400Total lost contribution margin $9,920Number of units in special order 1,000

Lost contribution margin per unit $9.92

Variable cost per unit on special order:Normal variable cost per unit $46.30Add opportunity cost for lost contribution margin 9.92Reduction in variable selling and administrative expense. (1.50) Variable cost per unit on special order $54.72

Question 13: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow:

- Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January.- Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible.- The cost of goods sold is 80% of sales.- The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase.- Other monthly expenses to be paid in cash are $21,100.- Monthly depreciation is $21,000.- Ignore taxes.

Expected cash collections in December are:

$310,000

$297,200

$201,500

$95,700

Solution :- Computation of Expected cash collections in December

December sales ($310,000 × 65%) $201,500November sales ($290,000 × 33%) 95,700 Total $297,200

Question 14:

Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow:


The cost of December merchandise purchases would be:

$192,000

$248,000

$232,000

$117,600

Solution ;- Computation of cost of December merchandise purchases

Particulars Sales

Cost of Goods Sold

November $290,000 $232,000December $310,000 $248,000January $210,000 $168,000

Merchandise purchases = Ending inventory + Cost of goods sold − Beginning inventory = ($168,000 × 70%) + $248,000 − ($248,000 × 70%) = $117,600 + $248,000 − $173,600 = $192,000



December cash disbursements for merchandise purchases would be:

$192,000

$248,000

$117,600

$243,200

Solution:- computation of December cash disbursements for merchandise purchases

Particulars Sales

Cost of Goods

SoldNovember $290,000 $232,000December $310,000 $248,000January $210,000 $168,000

December cash disbursements = 70% of December Cost of Goods Sold + 30% of November Cost of Good Sold = (70% × $248,000) + (30% × $232,000)

= $173,600 + $69,600 = $243,200



The excess (deficiency) of cash available over disbursements for December would be:

$46,600

$19,200

$32,900

$13,700

Solution:- Computation of excess (deficiency) of cash available over disbursements for December

Cash collections − Cash disbursements − Other monthly expenses= $297,200 − $243,200 − $21,100 = $32,900



The net income for December would be:

$32,900

$13,700

$19,900

$40,900

Solution:- Computation of Net Income for December

Sales $310,000Less uncollectible ($310,000 × 2%) 6,200 Net sales 303,800Cost of goods sold ($310,000 × 80%). 248,000Other expenses 21,100Depreciation expenses 21,000 Net income $ 13,700



The cash balance at the end of December would be:

$63,300

$57,900

$25,000

$38,300

Solution:- computation of cash balance at the end of December

November DecemberOctober Accounts Receivable Balance ..... $ 77,000Collection of November Sales................... $290,000 × 65%...................................... 188,500 $290,000 × 33%...................................... $ 95,700Collection of December Sales.................... $310,000 × 65%...................................... 201,500

October Accounts Payable Balance........... (239,000)Payment for November Purchases............. ($290,000 × 80%) × 30%........................ (69,600) ($310,000 × 80%) × 70%........................ (173,600)Other cash monthly expenses..................... (21,100) (21,100)Net cash inflow(outflow) per month.......... $ 5,400 $ 32,900

Beginning cash balance, October 31.......................... $25,000Add November net cash inflow.................................. 5,400Add December net cash inflow.................................. 32,900Ending cash balance, December 31............................ $63,300



The accounts receivable balance, net of uncollectible accounts, at the end of December would be:

$108,500

$198,000

$102,300

$83,200

Solution:- Computation of accounts receivable balance, net of uncollectible accounts

From December sales ($310,000 × 33%): $102,300



Accounts payable at the end of December would be:

$248,000

$192,000

$117,600

$74,400

Solution:- Computation of Accounts payable at the end of December

SalesCost of

Goods SoldNovember............................................ $290,000 $232,000December............................................ $310,000 $248,000January................................................ $210,000 $168,000

Merchandise purchases = Ending inventory + Cost of goods sold − Beginning inventory = ($168,000 × 70%) + $248,000 − ($248,000 × 70%)= $117,600 + $248,000 − $173,600 = $192,000



Retained earnings at the end of December would be:

$311,400

$347,200

$325,100

$335,200

Solution:- Computation of Retained earnings at the end of December Net income in November:

Sales.................................................... $290,000Less uncollectible ($290,000 × 2%).... 5,800 Net sales.............................................. 284,200Cost of goods sold ($290,000 × 80%). 232,000Other expenses.................................... 21,100Depreciation expenses......................... 21,000 Net income.......................................... $ 10,100

Retained earnings in December = Retained earnings in October + Net income in November + Net income in December = $311,400 + $10,100 + $13,700 = $335,200

Question 22: Bramble Corporation is a small wholesaler of gourmet food products. Data regarding the store's operations follow:


Expected cash collections in December are:

$256,000

$310,400

$54,400

$320,000

Solution :- Computation of Expected cash collections in December

December sales ($320,000 × 80%) $256,000November sales ($340,000 × 16%) 54,400 Total $310,400



The cost of December merchandise purchases would be:

$240,000

$235,500

$139,500

$255,000

Solution ;- Computation of cost of December merchandise purchases

:

SalesCost of

Goods Sold

November $340,000 $255,000December $320,000 $240,000January $310,000 $232,500

Merchandise purchases = Ending inventory + Cost of goods sold − Beginning inventory = ($232,500 × 60%) + $240,000 − ($240,000 × 60%)

= $139,500 + $240,000 − $144,000 = $235,500



December cash disbursements for merchandise purchases would be:

$246,000

$235,500

$139,500

$240,000

Solution:- computation of December cash disbursements for merchandise purchases

November purchases = Ending inventory + Cost of good sold − Beginning inventory = ($240,000 × 60%) + $255,000 − ($255,000 × 60%)= $144,000 + $255,000 − $153,000 = $246,000December cash disbursements = November purchases = $246,000



The excess (deficiency) of cash available over disbursements for December would be:

$68,600

$12,200

$28,200

$40,400

Solution:- Computation of excess (deficiency) of cash available over disbursements for December

December sales ($320,000 × 80%)..... $256,000November sales ($340,000 × 16%)..... 54,400 Total cash collections in December.. . . $310,400

November purchases = Ending inventory + Cost of good sold − Beginning inventory = ($240,000 × 60%) + $255,000 − ($255,000 × 60%)= $144,000 + $255,000 − $153,000 = $246,000December cash disbursements = November purchases = $246,000Cash collections − Cash disbursements − Other monthly expenses= $310,400 − $246,000 − $24,000 = $40,400

Question 26: An activity-based costing system that is designed for internal decision-making generally will not conform to generally accepted accounting principles. Which of the following is NOT a reason for this happening?

Some manufacturing costs (i.e., the costs of idle capacity and organization-sustaining costs) will not be assigned to products.

First-stage allocations may be based on subjective interview data.

Some nonmanufacturing costs are assigned to products.

Allocation bases other than direct labor-hours, direct labor cost, and machine-hours are used.

Question 27: Abel Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 200 units and of Product B is 400 units. There are three activity cost pools, with estimated costs and expected activity as follows:

The cost per unit of Product B is closest to:

$74.73

$17.69

$41.58

$81.53

Solution:-

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateActivity 1 $16,660 700 $23.80Activity 2 $18,450 1,800 $10.25Activity 3 $9,731 220 $44.23

Total Cost of Product B:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC CostActivity 1 $23.80 100 $ 2,380.00Activity 2 $10.25 700 7,175.00Activity 3 $44.23 160 7,076.80

$16,631.80

Cost per unit of Product B = $16,631.80 ÷ 400 units = $41.58 per unit

Question 28: (Appendix 8A) Groats Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools Preparing Meals Arranging Functions

Wages $1.15 $180.00

Supplies $0.40 $320.00

Other expenses $0.15 $130.00

The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool.Management would like to know whether the company made any money on a recent function at which 150 meals were served. The company catered the function for a fixed price of $18.00 per meal. The cost of the raw ingredients for the meals was $12.40 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above.

For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost.

Suppose an action analysis report is prepared for the function mentioned above. What would be the "red margin" in the action analysis report? (Round to the nearest whole dollar.)

$(195)

$105

$(45)

$(145)

Solution:- Computation of red margin

Sales ($18.00 × 150) $2,700.00Green costs:

Supplies−Preparing meals ($0.40 × 150) $ 60.00Supplies Arranging functions 320.00Raw ingredients ($12.40 × 150) 1,860.00 2,240.00

Green margin 460.00Yellow costs:

Wages Preparing meals ($1.15 × 150) 172.50Wages Arranging functions 180.00 352.50

Yellow margin 107.50Red costs:

Other expenses Preparing meals ($0.15 × 150) 22.50Other expenses Arranging functions 130.00 152.50

Red margin $(45.00)

Question 29: (Appendix 8A) Groats Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools Preparing Meals Arranging Functions

Wages $1.15 $180.00

Supplies $0.40 $320.00

Other expenses $0.15 $130.00

The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool.Management would like to know whether the company made any money on a recent function at which 150 meals were served. The company catered the function for a fixed price of $18.00 per meal. The cost of the raw ingredients for the meals was $12.40 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above.For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost.

Suppose an action analysis report is prepared for the function mentioned above. What would be the "yellow margin" in the action analysis report? (Round to the nearest whole dollar.)

$233

$108

$183

$288

Solution:- Computation of Yellow margin

Sales ($18.00 × 150) $2,700Green costs:

Supplies−Preparing meals ($0.40 × 150) $ 60Supplies Arranging functions 320Raw ingredients ($12.40 × 150) 1,860 2,240

Green margin 460Yellow costs:

Wages−Preparing meals ($1.15 × 150) 173Wages Arranging functions 180 353

Yellow margin $ 108

Question 30: (Appendix 8B) Addison Company has two products: A and B. Annual production and sales are 800 units of Product A and 700 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.2 direct labor hours per unit and Product B requires 0.6 direct labor hours per unit. The total estimated overhead for next period is $71,286.The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:

(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.)

The overhead cost per unit of Product B under the activity-based costing system is closest to:

$56.62

$22.38

$73.74

$47.52

Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Estimated Cost Estimated Activity Activity RateActivity 1 $20,272 800 $25.34Activity 2 $29,380 1,300 $22.60General Factory $21,634 580 $37.30

Total Cost of Product B:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Activity ABC CostActivity 1 $25.34 500 $12,670Activity 2 $22.60 500 11,300General Factory $37.30 420 15,666

$39,636

Overhead cost per unit = $39,636 ÷ 700 units = $56.62 per unit (rounded)

Question 31: (Appendix 8B) Kebort Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, U86Y and M91F, about which it has provided the following data:

U86Y M91F

Direct materials per unit $19.80 $45.80

Direct labor per unit $18.20 $49.40

Direct labor-hours per unit 0.70 1.90

Annual production 40,000 10,000

The company's estimated total manufacturing overhead for the year is $2,541,760 and the company's estimated total direct labor-hours for the year is 47,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

Activities and Activity MeasuresEstimated Overhead

Cost

Direct labor support (DLHs) $1,175,000

Setting up machines (setups) 407,960

Part administration (part types) 958,800

Total $2,541,760

Expected Activity

U86Y M91F Total

DLHs 28,000 19,000 47,000

Setups 2,256 658 2,914

Part types 1,034 2,162 3,196

The unit product cost of product M91F under the activity-based costing system is closest to:

$95.20

$121.57

$197.95

$216.77

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Estimated CostExpected Activity Activity Rate

Direct labor support $1,175,000 47,000 DLHs $25 per DLHSetting up machines $407,960 2,914 setups $140 per setupPart administration $958,800 3,196 part types $300 per part

type

Total Overhead applied to Product M91F:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Expected Activity ABC CostDirect labor support $25 per DLH 19,000 DLHs $ 475,000Setting up machines $140 per setup 658 setups 92,120

Part administration$300 per part

type2,162 part types

648,600 $1,215,720

Overhead Cost per unit = $1,215,720 ÷ 10,000 units = $121.57 per unit

Unit Product Cost:Direct materials............................... $ 45.80Direct labor...................................... 49.40Applied manufacturing overhead.... 121.57 Total................................................. $216.77

Question 32: (Appendix 8B) Pacchiana Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R21V and D00B, about which it has provided the following data:

The unit product cost of product R21V under the company's traditional costing system is closest to:

$23.50

$24.40

$41.36

$34.02

Solution:

Predetermined overhead rate = $1,262,880 ÷ 36,000 DLHs = $35.08 per DLH

Applied overhead = [(45,000 units × 0.30 DLHs per unit) × $35.08 per DLH] ÷ 45,000 units = $10.52 per unit

Unit Product Cost:Direct materials $19.60Direct labor 3.90Applied manufacturing overhead 10.52 Total $34.02

Question 33: (Appendix 8B) Pacchiana Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R21V and D00B, about which it has provided the following data:

The unit product cost of product D00B under the activity-based costing system is closest to:

$111.81

$81.20

$30.61

$133.82

Solution:(a) (b) (a) ÷ (b)

Activity Cost Pool Estimated CostExpected Activity Activity Rate

Assembling products

$108,000 36,000 DLHs $3 per DLH

Preparing batches $362,880 2,592 batches $140 per batchesProduct support $792,000 1,980 product

variations$400 per product

variation

Total Overhead applied to Product D00B:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Expected Activity ABC CostAssembling products $3 per DLH 22,500 DLHs $ 67,500Preparing batches $140 per batch 1,152 batches 161,280

Product support$400 per product

variation576 product

variations 230,400 $459,180

Overhead Cost per unit = $459,180 ÷ 15,000 units = $30.61 per unit

Unit Product Cost:Direct materials............................... $ 61.70Direct labor...................................... 19.50Applied manufacturing overhead.... 30.61 Total................................................. $111.81

Question 34: Under the variable costing method, which of the following is always expensed in its entirety in the period in which it is incurred?

fixed manufacturing overhead cost

fixed selling and administrative expense

variable selling and administrative expense

all of the above

Question 35:

Net operating income under absorption costing may differ from net operating income determined under variable costing. How is this difference calculated?

number of units produced during the period times the fixed manufacturing overhead rate per unit.

number of units produced during the period times the variable manufacturing cost per unit.

change in the quantity of units in inventory times the variable manufacturing cost per unit.

change in the quantity of units in inventory times the fixed manufacturing overhead rate per unit.

Question 36: Blake Company produces a single product. Last year, Blake's net operating income under absorption costing was $3,600 lower than under variable costing. The company sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1 was variable selling expense. If production cost was $11 per unit under absorption costing, then how many units did the company produce during the year?

8,200 units

11,800 units

11,200 units

8,800 units

Solution:Direct material + Direct labor + Variable manufacturing overhead= Variable unit product cost = $9 – $1 = $8Unit fixed manufacturing overhead = $11 – $8 = $3Difference in net income between methods ÷ Unit fixed manufacturing overhead = ($3,600) ÷ $3 per unit = (1,200) unitsUnits produced = Units sold + Change in inventory = 10,000 + (1,200) = 8,800

Question 37: Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations:

Pungent's cost structure and selling price were the same for both years. What is Pungent's variable costing net operating income for Year 2?

$54,000

$48,000

$56,000

$50,000

Solution:

Unit fixed manufacturing overhead = Difference in net income ÷ Change in inventory = ($44,000 – $38,000) ÷ (40,000 – 37,000) = $6,000 ÷ 3,000 = $2Variable costing net operating income = Absorption costing net income − Difference in net operating income= $52,000 − [(40,000 − 41,000) × $2)]= $52,000 − ($2,000) = $54,000

Question 38: Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000 units and sold 12,000 units. Production costs for the year were as follows:

Sales totaled $840,000 for the year, variable selling expenses totaled $60,000, and fixed selling and administrative expenses totaled $180,000. There were no units in the beginning inventory. Assume that direct labor is a variable cost.

The contribution margin per unit would be:

$25

$39

$34

$35

Solution:- Computation of contribution margin

Unit selling price ($840,000 ÷ 12,000).................. $70Less direct materials ($150,000 ÷ 15,000)............. $10Less direct labor ($180,000 ÷ 15,000)................... 12Less variable manufacturing overhead ($135,000

÷ 15,000)............................................................ 9Less variable selling and administrative ($60,000

÷ 12,000)............................................................ 5 36 Contribution margin............................................... $34

Question 39: Abdi Company, which has only one product, has provided the following data concerning its most recent month of operations:

What is the total period cost for the month under the variable costing approach?

$86,700

$65,700

$98,000

$163,700

Solution:

Variable selling and administrative cost + Fixed costs= ($11 × 7,000) + ($65,700 + $21,000)= $77,000 + $86,700 = $163,700

Question 40: Abdi Company, which has only one product, has provided the following data concerning its most recent month of operations:

What is the total period cost for the month under the absorption costing approach?

$65,700

$163,700

$21,000

$98,000

Solution:

Variable selling and administrative cost + Fixed selling and administrative cost= $11 × 7,000 + $21,000= $77,000 + $21,000 = $98,000

Question 41: Hopi Corporation expects the following operating results for next year:

What is Hopi expecting total fixed expenses to be next year?

$75,000

$200,000

$225,000

$100,000

Solution:

Current sales - Breakeven sales = Margin of safetySubstituting the given information into the above equation, we will have:$400,000 − Breakeven sales = $100,000

Breakeven sales = $300,000Breakeven sales = Fixed expenses ÷ Contribution margin ratioSubstituting the given information into the above equation, we will have:$300,000 = Fixed expenses ÷ 0.75

Fixed expenses = $225,000

Question 42: The margin of safety in the Flaherty Company is $24,000. If the company's sales are $120,000 and its variable expenses are $80,000, its fixed expenses must be:

$32,000

$8,000

$24,000

$16,000

Solution:

Current sales - Breakeven sales = Margin of safetySubstituting the given information into the above equation, we will have:$120,000 - Breakeven sales = $24,000Breakeven sales = $96,000Sales - Variable expenses = Contribution margin$120,000 - $80,000 = $40,000Contribution margin ratio = Contribution margin ÷ SalesContribution margin ratio = $ 40,000 ÷ $120,000Contribution margin ratio = 0.33333Breakeven sales = Fixed costs ÷ Contribution margin ratioSubstituting the given information into the above equation, we will have:$96,000 = Fixed costs ÷ 0.33333Fixed costs = $32,000

Question 43: The following data relate to a company that produces and sells a travel guide that is updated monthly:

Fixed costs:

Copy editing $6,000

Art work $2,000

Typesetting $72,000

Variable costs:

Printing and binding $3.20 per copy

Bookstore discounts $4.00 per copy

Salespersons’ commissions $0.50 per copy

Author’s royalties $2.00 per copy

Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July.

The degree of operating leverage for July is:

higher than that for June

lower than that for June

the same as that for June

not determinable

Solution:

For June:Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70

Sales (8,000 units).............. $160,000Variable expenses.............. 77,600 Contribution margin........... 82,400Fixed expenses................... 80,000 Net operating income......... $ 2,400

Degree of operating leverage = Contribution margin/Net operating income= $82,400/$2,400 = 34.33

For July:Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70

Sales (10,000 units)............ $200,000Variable expenses.............. 97,000 Contribution margin........... 103,000Fixed expenses................... 80,000 Net operating income......... $ 23,000

Degree of operating leverage = Contribution margin/Net operating income= $103,000/$23,000 = 4.48

As sales increase past the breakeven point, the degree of operating leverage will decrease.

Question 44: (CPA, adapted) The Maxwell Company manufactures and sells a single product. Budgeted data follow:

If Maxwell Company's direct labor costs increase 8 percent, what selling price per unit of product must it charge to maintain the same contribution margin ratio?

$27.00

$25.40

$25.51

$26.64

Solution:

Current contribution margin per unit = Selling price per unit − Total variable expenses per unit = $25.00 − $19.80 = $5.20Current contribution margin ratio = Contribution margin ÷ Selling price per unit$5.20 ÷ $25.00 = 20.8%Direct labor per unit × 0.08 = Increase in variable expense$5.00 × 0.08 = $0.40New total variable expenses per unit = $19.80 + $0.40 = $20.200.208 = (Selling price − $20.20) ÷ Selling price0.208 × Selling price = Selling price − $20.20$20.20 = Selling price − 0.208 × Selling price$20.20 = 0.792 × Selling priceSelling price = $25.51

Question 45: Next year, Rad Shirt Company expects to sell 32,000 shirts. Rad is budgeting the following operating results for next year:

Rad is considering increasing its advertising by $48,000 next year. By how much would sales have to increase in order for Rad to still generate a $320,000 net operating income?

$76,800

$120,000

$75,000

$48,000

Solution:

Current ProposedSales............................................... $800,000Variable expenses.......................... 288,000 Contribution margin....................... 512,000 $560,000 *Fixed expenses............................... 192,000 240,000 Net operating income..................... $320,000 $320,000

*Work backwards to obtain the number.Sales price = $800,000 ÷ 32,000 units = $25Variable expense per unit = $288,000 ÷ 32,000 units = $9Contribution margin per unit = $25 − $9 = $16$560,000 ÷ $16 = 35,000 units35,000 − 32,000 = 3,000 unit increase3,000 × $25 = $75,000 increase in sales

Question 46: Taylor, Inc. produces only two products, Acdom and Belnom. These account for 60% and 40% of the total sales dollars of Taylor, respectively. The unit variable expense as a percentage of the selling price is 60% for Acdom and 85% for Belnom. Total fixed expenses are $150,000. There are no other costs.

What is Taylor's break-even point in sales dollars?

$214,286

$150,000

$500,000

$300,000

Solution:

Each product’s contribution margin rate is (1 − variable expense percentage)Acdom = 1 − 0.6 = 0.4Belnom = 1 − 0.85 = 0.15To calculate the weighted average contribution margin, multiply each product’s contribution margin ratio by its percentage of total sales dollars:(60% × 0.4%) + (40% × 0.15%) =0.24% + 0.06% = 0.30%To calculate the break-even point in sales dollars:Fixed expenses ÷ Weighted average contribution margin ratio

= $150,000 ÷ 0.30 = $500,000

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