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## Comprehensive Case Problems

You are the managerial accountant for Picnic, Incorporated which sells one product, a woven picnic basket for \$26 each. Following is the information you have gathered:

 Standard Cost Sheet – Per Unit Direct Material 3 yards at \$2.25 per yard    \$  6.75 Direct Labor .30 hours at \$12 per hour    \$  3.60 Variable Overhead .30 hours at \$6 per hour    \$  1.80 Fixed Overhead .30 hours at \$10 per hour    \$  3.00 Total Cost for 1 \$15.15

Sales of the product are estimated to be 100,000 units. Budgeted production is 110,000 units. Actual sales for the year are were 96,000 units. Actual units produced totaled 106,000. Actual direct labor costs for the year were \$352,100, actual direct hours worked were 29,590. Actual yards of material purchased were 337,500 at a cost of \$784,320. Actual material used was 325,440 yards. Actual variable overhead for the year was \$173,985. Actual fixed overhead for the year was \$309,875.

 Total period costs: Budget Actual Fixed Selling \$200,000 \$218,650 Fixed Administrative \$150,000 \$162,400 Variable Selling \$260,000 \$249,600
 Beginning Raw Materials \$342,000 Ending Raw Materials \$369,738 budgeted 40% of next months required Beginning Work in Process \$  12,000 Ending Work in Process \$    8,000 Beginning Finished Goods \$  50,700 Ending Finished Goods \$202,200

Using the above information, do all of the following:

1. Compute total budgeted fixed manufacturing overhead.

2. Prepare a budget variable costing income statement in total dollars for the company (use budget and standard for all amounts).

3. Calculate the actual Cost of Goods Manufactured for the total company.

4. Calculate all product cost variances for the company. Name each variance and state favorable or unfavorable.

5. Compute the number of units that must be sold for the company to break even.
(Use budgeted costs)

6. Compute the dollar sales required for the company to make a profit of \$250,000
(Use estimated costs).

7. If sales increase by \$400,000, what percentage do you expect net income to increase? Use the operating leverage formula.

8. Record all transactions related to manufacturing the product for the year.
A. Record the variances using a standard cost system.
B. Close out the variances to cost of goods sold.

9. Prepare a budgeted income statement using absorption costing.

10. Reconcile the difference in budgeted income for the variable costing statement and the absorption costing statement.

11. Prepare an actual income statement using absorption costing.

1. Compute total budgeted fixed manufacturing overhead.

Budgeted Units to be made x rate per unit = Total Manufacturing O/H \$

110,000 x \$3 = \$330,000

or :

Total budgeted direct labor hours x rate per hour

110,000 units x .3 hours each = 33,000 hours x \$10 per hour = \$330,000

2. Prepare a budget variable costing income statement in total dollars for
the company (use budget and standard for all amounts).

 Sales (\$26 x 100,000 units sold) \$2,600,000 – Variable Product Costs (\$12.15 x units sold) \$1,215,000 – Variable Selling \$   260,000 = Total Contribution Margin \$1,125,000 – All Fixed Expenses: Selling \$   200,000 Admin \$   150,000 Manufacturing O/H \$   330,000 = Total Operating Income \$   445,000

Fixed Manufacturing O/H: 110,000 units x \$3 per unit

3. Calculate the actual Cost of Goods Manufactured for the total company.

 Beginning Raw Materials Inventory 342,000 + Purchases of Raw Materials 784,320 – Ending Raw Materials Inventory (369,738) = Materials Used in Production 756,582 + Direct labor 352,100 + Fixed Manufacturing Overhead 309,875 + Variable Manufacturing Overhead 173,985 + Beginning WIP 12,000 – Ending WIP (8,000) Cost of Goods Manufactured 1,596,542

4. Calculate all product cost variances for the company. Name each variance
and state favorable or unfavorable.

5. Compute the number of units that must be sold for the company to break even.
(Use budget information)

 Per Unit Sales \$ 26 – Variable Costs – Material (\$6.75) – Variable Costs – Labor (\$3.60) – Variable Overhead (\$1.80) – Variable Selling (\$2.60) Contribution Margin \$11.25 Contribution Margin Ratio: 0.433 (\$11.25 / \$26)
 Total Fixed Costs: Manufacturing O/H \$330,000 Selling \$200,000 Administrative \$150,000 Total \$680,000

Break-even = Total Fixed Costs / CM per unit

\$680,000 / \$11.25 = 60,445 units to break-even

6. Compute the dollar sales required for the company to make a profit of
\$250,000 (Use estimated costs).

\$680,000 + 250,000 = \$2,147,806
0.433

7. If sales increase by \$400,000, what percentage do you expect net income
to increase? Use the operating leverage formula.

\$1,125,000 = 2.528
\$   445,000

Sales % increase: 400,000 / 2,600,000 = 15.38%

 Sales % Increase 15.38% x Operating leverage 2.528 = Income % Increase 38.88%

8. Record all transactions related to manufacturing the product for the year.
A. Record the variances using a standard cost system.
B. Close out the variances to cost of goods sold.

 Raw Materials 759,375 Materials Price Variance 24,945 Accounts Payable (Cash) 784,320 Work in Process 715,500 Materials Quantity Variance 16,740 Raw Materials 732,240 Work in Process 381,600 Labor Rate Variance 2,980 Labor Efficiency Variance 26,520 Salaries Payable 352,100 Work in Process 190,800 VOH Spending Variance 3,555 VOH Efficiency Variance 13,260 Manufacturing O/H – Variable 173,985 Work in Process 318,000 FOH Volume Variance 12,000 FOH Budget Variance 20,125 Manufacturing O/H – Fixed 309,875 Finished Goods 1,605,900 Work in Process 1,605,900

B. Close out variance accounts:

 Labor Rate Variance 2,980 Labor Efficiency Variance 26,520 VOH Spending Variance 3,555 VOH Efficiency Variance 13,260 FOH Budget Variance 20,125 Materials Price Variance 24,945 Materials Quantity Variance 16,740 FOH Volume Variance 12,000 Cost of Goods Sold 12,755

9. Prepare a budgeted income statement using absorption costing.

 Sales (100,000 units x \$26) \$2,600,000 – Cost of goods sold: Variable Product costs (\$12.15) \$1,215,000 Fixed Manufacturing O/H (\$3) \$   300,000 = Gross Profit \$1,085,000 – All variable period expenses \$   260,000 – All fixed period expenses \$   350,000 = Income Before Taxes \$   475,000

10. Reconcile the difference in budgeted income for the variable costing
statement and the absorption costing statement.

 Units Made 110,000 –  Units Sold (100,000) = Change in Inventory 10,000 x Fixed O/H per unit x \$3 = Difference in the two statements \$30,000
 Variable costing income – problem 2. \$445,000 Absorption costing income – problem 13. \$475,000 Difference in Income \$ 30,000

Inventory increased and absorption income is higher because the fixed overhead for these units is in inventory on the balance sheet and not in cost of goods sold.

11. Prepare an actual income statement using absorption costing.

 Sales (96,000 x \$26) 2,496,000 – CGS (96,000 x 15.02) 1,445,760 see below Gross Profit 1,050,240 – All variable period expenses 249,600 – All fixed period expenses 381,050 = Income Before Taxes 419,590
 Direct Material – used (see 3.) \$ 756,582 Direct Labor \$ 352,100 Variable Manufacturing O/H \$ 173,985 Fixed Manufacturing O/H \$ 309,875 Total product costs \$1,592,542 + Beginning Work in Process \$ 12,000 – Ending Work in Process (\$ 8,000) = Total Cost of Goods Manuf. \$1,596,542 divided by units produced / 106,000 = product cost per unit \$ 15.06 x units sold 96,000 = Cost of goods sold \$1,445,760