Final Review
Multiple Choice & Problems Test
Cost Accounting
Multiple Choice & Problems Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. The word “variance” refers to
a. the difference in estimated and actual costs
b. if a cost is budgeted or actual
c. period costs only
d. the difference in budgeted and estimated costs
Answer
A. A variance is the difference between what actually happens and what was expected to happen. Variances can be computed for both product and period costs. Budgeted and estimated mean the same thing (d.) See Variable Cost Variance Analysis
2. A responsibility accounting system should provide reports that
a. include only revenue of the company
b. include all revenues and costs under a manager’s control
c. do not reflect the organization chart of management
d. includes costs only
Answer
B. The responsibility accounting system provides reports that give revenues and costs related to different units of the company managed by different managers. The system should be set up to report according to the organization chart of the company. See Allocating Costs
3. Costs that become part of inventory are called
a. variable costs
b. product costs
c. period costs
d. period and product costs
Answer
B. By definition, costs that become part of inventory are product costs. Product costs are both fixed and variable. Period costs are expensed when incurred and do not become part of inventory. See Product and Period Costs
4. For process costing, the difference in equivalent units using FIFO and equivalent units using weighted average is
a. equivalent units in ending inventory
b. units started
c. equivalent units in beginning inventory
d. there is no difference, equivalent units are the same
Answer
C. The FIFO method does not include work done on beginning inventory in the prior period. Weighted average assumes all work done on beginning inventory occurred in the current period. See Process Costing
5. Incremental revenues and incremental costs are considered when using which method to allocate joint costs?
a. relative sales value
b. quantity
c. net realizable value
d. approximate net realizable value
Answer
D. Approximate net realizable value considers that the final sale price will be higher (incremental revenue) and further processing costs will be added (incremental cots) along with costs to dispose in determining allocation % to each product. Quantity does not consider revenue at all (b.) Relative sales value and net realizable value uses sales a split-off and does not consider further processing after split-off. See Joint Products
6. The balance in Work in Process in a process cost system is recorded with
a. only a transfer of good products to finished goods
b. only costs added during this period
c. beginning inventory costs plus costs added during this period
d. the balance is not recorded
Answer
D. The balance to Work in Process is not recorded, it is the result of costs added and costs transferred to finished goods. See Process Costing – Spoilage
7. Under applied manufacturing overhead means
a. actual overhead costs are higher than estimated overhead costs
b. actual overhead costs are lower than estimated overhead costs
c. actual overhead costs this period are higher than last years
d. budgeted overhead costs are higher than estimated overhead costs
Answer
A. Overhead is applied using an estimate. When under applied the estimate was lower than actual which is the same thing as actual higher than estimated. Over and under is relative only to the current period. Budgeted is the same as estimated. See Job Costing
8. Income for a variable costing income statement and income for an absorption costing income statement will be equal when
a. sales are different
b. the volume of production is different
c. raw materials inventory does not change for the current period
d. finished goods inventory does not change for the current period
Answer
D. The difference in the two statements is the fixed manufacturing overhead in the change in finished goods inventory on the balance sheet. When inventory does not change, there is no difference. The statements are for the same company so sales and production will always be the same. (a. & b.) Raw materials inventory impacts the balance sheet only. See Variable and Absorption Cost Income Statements
9. Contribution margin is an indication of
a. the amount from sales before variable costs
b. sales less fixed costs
c. fixed costs less variable cost
d. sales dollars available to cover fixed costs
Answer
D. By definition, contribution margin is the amount that is available to cover fixed costs. The CM income statement format is: Sales – VC = CM – FC = Profit. See Cost Volume Profit Analysis
10. Activity based costing provides valuable analysis for a company with
a. one product and one customer
b. one product, one very large customer and two very small customers
c. many services which require very little support
d. many products which require a high level of support
Answer
D. Activity based costing identifies the cost every time an activity occurs and then determines the cost of making and supporting a product or providing a service. No allocation is necessary if the company has one product or spends very little in support of the product or service provided. See Activity Based Costing
11. The division that is producing at full capacity should set transfer prices that consider
a. only incremental variable costs
b. the normal contribution margin from selling externally
c. only added fixed costs to produce to demand
d. none of the above
Answer
B. A division producing at capacity must consider that sale to external customers at a higher price will be lost and should consider the lost contribution margin when setting the transfer price. In addition to lost contribution margin, all incremental costs should be considered. See Transfer Pricing
12. The method used to record by products where no value is assigned to the by-product until it is sold is
a. net realizable value at split off
b. approximate net realizable value
c. other revenue method
d. realized value
Answer
D. Realized value records value only after the scrap/by product is sold. The cost of further processing is recorded to Work in Process which is not recorded as an expense until sold. Net realizable value at split-off (a.) and approximate net realizable value (b.) are joint cost allocation methods. Joint costs are not allocated to scrap or by products. The “other revenue” method is not a method used to record scrap or by products. See Joint Products and By Products
13. A variable cost per unit is always
a. different for different levels of activity
b. constant for different levels of activity
c. a period cost
d. a product cost
Answer
B. By definition, a variable cost per unit remains constant. The total variable costs will change with changes in activity, but the cost per unit will not change (a., c. & d.) Variable costs can be either product or period costs. See Cost Behavior, Variable and Fixed
14. The difference in a direct and an indirect cost can be described as
a. all period costs are indirect and all product costs are direct
b. direct can be easily traced to a product and indirect can not
c. indirect is always a manufacturing overhead cost
d. indirect can be easily traced to a product and direct can not
Answer
B. Direct costs can be easily and conveniently traced to the product and indirect costs can not. Most period costs are indirect, however, not all are direct. Manufacturing overhead, a product cost, is indirect. (a.) Most administrative costs are indirect (c.) See Product and Period Costs
15. The major difference in activity based costing and traditional costing is
a. activity based costing defines product costs differently than GAAP
b. activity based costing only uses product costs in the analysis
c. only manufacturing costs are assigned to products in activity-based costing
d. more than one activity base is used with traditional costing
Answer
A. ABC defines a product cost as any cost associated with the product or service, not just the cost of making the product. The concept behind ABC is that the price must cover all costs, not just the cost of making the product. ABC allocates both product and period costs to the product or service. GAAP requires that only product costs be allocated to the product as the cost of inventory.
See Activity Based Costing
16. When the level of activity decreases within a relevant range
a. fixed cost per unit will increase
b. fixed cost in total will increase
c. total variable costs in total will increase
d. variable cost per unit will decrease
Answer
A. Fixed cost per unit moves the opposite direction that the level of activity moves. When activity decreases, the cost per unit increases. Fixed costs in total do not change. (b.) Variable costs do not change per unit with changes in activity (d.) and the total variable costs will move the same direction as the activity (c.). See Cost Behavior, Variable and Fixed
17. What is included in the cost of goods manufactured?
a. only direct costs
b. direct product costs plus manufacturing overhead
c. product costs, beginning Work in Process and ending Work in Process
d. only indirect costs
Answer
B. Direct material and direct labor are direct product costs. Direct material, direct labor, and manufacturing overhead are included in cost of goods manufactured. All product costs are included in beginning Work in Process. Ending work in process is subtracted and not included in cost of goods manufactured. (c.) See Cost of Goods Manufactured
18. A company uses standard costs to
a. estimate the cost of manufacturing the products
b. eliminate the need to record actual costs
c. replace the master budgeting process
d. allow management to compare actual current year to prior year costs
Answer
A. A standard cost is an estimate. Management estimates at the beginning of the year so that they can compare actual costs to the original estimate and control costs. Actual costs must always be recorded and reported on the income statement as cost of goods sold and on the balance sheet as inventory. Normally, developing standard costs is a separate part of the budgeting process. See Variable Cost Variance Analysis
19. A significant variance is allocated on the basis of
a. cost of goods sold as a percentage of sales
b. percentage of total inventory costs
c. how much raw material cost is included in the product
d. product costs as a percentage of period costs
Answer
B. Significant variance amounts are allocat4d to all inventory accounts (RM, WIP, FG, CGS) based on the percentage of the total of the inventory accounts. See Recording Variances
20. Which of the following costs are not reported as cost of goods sold on the income statement?
a. labor incurred to run the machine that makes the product
b. material that becomes part of the product
c. indirect labor
d. warehouse costs
Answer
D. Product costs become inventory which become cost of goods sold when the product is sold. Product costs are direct labor (a.), direct material (b.) and manufacturing overhead (c.). Indirect labor is part of manufacturing overhead (c.) Warehouse costs are operating costs that are expensed as incurred and not part of inventory. See Cost of Goods Manufactured
21. Actual overhead costs equaled estimated overhead costs. Actual dir4ect labor hours were higher than budgeted direct labors. Overhead will be
a. under applied
b. over applied
c. equal to $0
d. The answer cannot be determined from the information provided
Answer
B. Overhead is applied by taking the actual direct labor hours x rate per hour. When actual hours are higher than estimated, the amount applied will be higher than actual incurred. This is over applied. See Job Costing
22. Which of the following is not a price variance?
a. labor rate variance
b. overhead spending variance
c. overhead budget variance
d. overhead volume variance
Answer
D. The overhead volume variance comes from a difference in the actual quantity used to produce products and the quantity expected to be used. The standard price is held constant in the volume variance and the difference is not due to price. a., b., and c, are all variances that occur because the actual price is different than the standard price. See Fixed Overhead Variance Analysis and Variable Cost Variances
23. An unfavorable difference between the standard quantity allowed and the quantity actually used for one unit of output is recorded as
a. a debit to price variance
b. a debit to efficiency variance
c. a credit to efficiency variance
d. a credit to spending variance
Answer
B. An unfavorable variance is always is always recorded with a debit. A debit adds costs to increase the standard costs to actual costs. Differences in quantity used is the efficiency variance (or quantity variance which is not listed). See Recording Variances
24. The accountant who prepares an absorption costing income statement must know
a. the difference between product and period costs
b. the difference between fixed and variable costs
c. how variable cost per unit change as sales volume changes
d. how costs behave in relation to volume changes
Answer
A. An absorption cost income statement is sorted by product (CGS) and period (operating) costs. For this statement, it does not matter if a cost is variable or fixed. Fixed and variable costs behave differently when volume changes (d.) See Variable and Absorption Costing Income Statements
25. If the selling price per unit decreases, units that must be sold to achieve break-even will
a. increase
b. decrease
c. not change
d. not enough information to be able to tell
Answer
A. The number of units required to break even will be higher because the contribution margin from each unit will be lower if the selling price is higher. See Cost Volume Profit Analysis
26. The company produced 50,000 units and the sales price is $24 each. The following costs were reported on the income statement:
| Rent at the manufacturing plant | $ 89,000 |
| Utilities at the manufacturing plant | $ 34,000 |
| General business insurance | $ 12,000 |
| Direct materials | $288,000 |
| Plant manager’s salary | $ 56,000 |
| Direct labor | $156,000 |
| Glue used to put together products | $ 6,000 |
| Total advertising paid at a weekly rate | $ 28,000 |
| Sales commissions | $ 10,000 |
| Salesman travel that is planned each year | $ 39,000 |
| Executive and administrative salaries | $162,000 |
| Inventory follows: | Beginning | Ending |
| Finished Goods | 84,000 | 96,000 |
| Raw Materials | 126,000 | 143,000 |
| Work in Process | 10,000 | 12,000 |
Determine:
a. Contribution margin per unit and contribution margin ratio
b. Break – even in units and sales dollars
c. Units and sales dollars sold to have before tax profit of $50,000
d. Operating leverage
e. The expected income if sales increase 10%
f. How many sales dollars are required to give a $0 profit if variable costs increase by 10%?
Answer
Begin this problem by identifying variable and fixed costs:
| Variable | Fixed | |||
| Utilities – manufacturing | 34,000 | Rent – manufacturing | 89,000 | |
| Direct materials | 288,000 | General bus. insur | 12,000 | |
| Direct labor | 156,000 | Plant mgr. sal | 56,000 | |
| Glue | 6,000 | Advertising | 28,000 | |
| Sales commissions | 10,000 | Salesman travel | 39,000 | |
| Total | 494,000 | Executive adm. sal. | 162,000 | |
| Total | 386,000 | |||
| Beginning FG units | 84,000 |
| + Units Made | 50,000 |
| – Ending FG units | (96,000) |
| = Units sold | 38,000 |
Variable cost per unit:
$494,000 / 38,000 = $13 per unit
A. Contribution margin per unit:
$24 sales – $13 variable cost = $11 per unit
A. Contribution margin ratio:
$11 CM / $24 sales = 0.458 or 45.8%
B. Units to Break-even
$386,000 = 35,091
$11 per unit
B. Sales to Break-even
$386,000 = $ 842,795
0.458
C. Units to Earn $50,000
$386,000 + $50,000 = 39,636
$11 per unit
C. Sales Dollars to Earn $50,000
$386,000 + $50,000 = $951,965
0.458
D. Operating Leverage:
Sales $912,000
– All VC ($494,000)
= CM $418,000
– All FC ($386,000)
= Income $32,000
$418,000 = 13.06 x
$ 32,000
E. Income from a Sales Increase
Sales % increase 10%
x Operating Leverage Factor 13.06
= % income will increase 130.6%
32,000 X 2.306 = $73,792 Income
(1+1.306 = 2.306)
F. A zero profit is just another way of saying break even. Use the break-even formula with the new contribution margin after the 10% increase in variable costs.
Sales $912,000
– New variable costs $543,400
= New Contribution margin $368,600
New CM ratio 0.404
$494,000 x 1.1 = $543,400
$368,600 / $912,000 = 0.404
Fixed Costs $386,000 = $955,446
CM ratio 0.404
$955,446 sales to break even if variable costs increase 10%
27. This is the company’s first month of operations. During the first month: raw materials of $226,000 were purchased, direct labor was paid $149,000 for 8,101 hours worked and plant management was paid $72,000. Company depreciation expense was $11,000 related to the manufacturing plant and $18,000 related to corporate offices. Other costs to operate the manufacturing facility were $266,000. Raw materials moved to the production line totaled $99,000 for direct materials and $6,400 for indirect materials. Machine hours used during the month totaled 1,074. Corporate expenses were $117,000. Sales for the period were $727,000 at a gross profit percent of 35%. At the beginning of the year, the company estimated that it would use 15,000 machine hours, use 100,000 direct labor hours and incur $5,000,000 in total manufacturing overhead costs for the year. The company uses machine hours to allocate manufacturing overhead costs. Work in Process at the end of the first month
is $14,923.
A. Record all transactions for the company for the first month of operations.
B. Calculate Cost of Goods Manufactured for the first month of operations.
C. Calculate Cost of Goods Sold for the first month of operations.
D. Prepare an income statement for the first month of operations.
Answer
All transactions manufacturing companies do:
Purchase materials
Use materials; requisition (move) to the production line
Incur actual manufacturing overhead (included indirect costs)
Pay labor (direct and indirect)
Apply overhead using the predetermined manufacturing overhead rate
Get manufacturing overhead to 0 (make applied = to actual MOH)
Transfer completed goods to finished goods
Record cost of goods sold and sales
Record period expenses
Purchase materials
| Raw materials | $226,000 |
| Accounts Payable/Cash | $226,000 |
Use materials, move materials to the production line
| Work in Process | $99,000 |
| Manufacturing O/H | $ 6,400 |
| Raw materials | $105,400 |
Incur manufacturing overhead (included indirect costs)
| Manufacturing overhead | $ 11,000 |
| Manufacturing overhead | $266,000 |
| Cash/Accounts Payable | $266,000 |
| Accumulated depreciation | $ 11,000 |
Pay labor – direct and indirect
| Work in Process | $149,000 |
| Manufacturing overhead | $ 72,000 |
| Salaries Payable | $221,000 |
Apply overhead
| Work in Process | $357,996 |
| Manufacturing Overhead | $357,996 |
$5,000,000 /15,000 = $333.33 per machine hour x 1,074 machine hours
Get manufacturing overhead to 0 (make applied = to actual)
Actual $355,400
Applied $357,996
Over applied $2,596
Actual = 6,400 + 11,000 + 266,000 +72,000 = $355,400
Take back costs and decrease CGS with a credit (amount is not material)
| Manufacturing Overhead | $2,596 |
| Cost of Goods Sold | $2,596 |
Transfer completed goods to finished goods
Record period expense
| Administrative expenses $135,000 Accounts Payable/Cash $117,000 Accumulated Depreciation $ 18,000 |
B. Compute Cost of Goods Manufactured
| + Direct material added to WIP | 99,000 |
| + Direct labor added to WIP | 149,000 |
| + manufacturing overhead – actual | 355,400 |
| + Beginning WIP | 0 |
| – Ending WIP | (14,923) |
| = Transferred to Finished Goods (CGM) | 588,477 |
| Finished Goods | $588,477 |
| Work in Process | $588,477 |
C. Record cost of goods sold and sales
Sales 727,000
– CGS 65%
Gross Profit 35%
Sales x 65% = Cost of goods sold
$727,000 x 65% = $472,550
| Cost of Goods Sold | $472,550 |
| Finished Goods | $472,550 |
| Accounts Receivable (cash) | $727,000 |
| Sales | $727,000 |
D.
| Sales | $727,000 |
| – Cost of Goods Sold | (472,550) |
| = Gross Profit | 254,450 |
| – Operating Expenses | (135,000) |
| = Income | $119,450 |
28. A manufacturing company identified the following cost pools and total company cost drivers for the current period:
| Cost Pool | Cost Driver | |
| Machine set ups | $145,000 | 500 set ups |
| Material handling | $220,000 | 2,000 purchase orders |
| Inspection of products | $102,300 | 12,400 inspections |
Information on two jobs completed this month follows:
| Job 1 | Job 2 | |
| Direct materials | $ 12,000 | $ 16,300 |
| Direct labor | $ 9,450 | $ 4,590 |
| Units in the job | 100 | 50 |
| Set ups | 3 | 8 |
| Purchase orders | 7 | 2 |
| Inspections | 21 | 16 |
| Direct labor hours | 96 | 41 |
A. Determine how much overhead should be assigned to Job 2 using activity-based costing.
B. Determine the cost per unit for Job 1 using activity-based costing.
Answer
First step you must do is calculate the cost per activity:
Total Cost Pool $ / Total Cost Driver = Cost per Activity
| Set ups | 145,000 / 500 = $290.00 |
| Purchase Orders | 220,000 / 2,000 = $110.00 |
| Inspections | 102,300 /12,400 = $ 8.25 |
A. Overhead assigned to Job 2 is the quantity of activity in Job 2 x cost per activity
| Set ups | 8 x $290 = $ 2,320 |
| Purchase Orders | 2 x $110 = $ 220 |
| Inspections | 16 x $ 8.25 = $ 132 |
| Total O/H | $2,672 |
B. Calculate the total overhead for Job 1 and add it to the direct material and direct labor and then divide by units.
| Set ups | 3 x $290 = $ 870 |
| Purchase Orders | 7 x $110 = $ 770 |
| Inspections | 21 x $ 8.25 = $ 173.25 |
| Total O/H | $ 1,813.25 |
| Direct material | $12,000 |
| Direct labor | $ 9,450 |
| Overhead | $ 1,813.25 |
| Total | $ 23,263.25 |
| Divide by units | 100 |
| Cost per unit | $ 232.63 |
29. The company produces fruit juice in which spoilage takes place on a discrete basis with inspection occurring at 80% of conversion. Management considers normal spoilage to be 5% of gallons placed into production. 70% of materials are added at 25% conversion and 30% of materials are added at 90% conversion. The following operating statistics are available for the current month:
| Beginning Inventory – 30% complete for conversion | 2,000 gallons |
| Started during the month | 152,000 gallons |
| Ending Inventory – 30% complete for conversion | 4,000 gallons |
| Spoiled | 10,400 gallons |
Cost information:
| Material | Conversion | |
| Beginning | $ 17,903 | $ 33,406 |
| Added this period | $147,501 | $298,128 |
A. Calculate FIFO equivalent units of production for materials and conversion:
B. Compute the value of Work in Process and finished goods.
C. Compute the value of abnormal spoilage
D. Make all required journal entries for the current month
Answer
A. Equivalent units schedule- FIFO
| Quantity | |
| Beginning Inventory | 2,000 |
| +Started in to Production | 152,000 |
| =Total Units to be accounted for: | 154,000 |
| Equivalent Units | |||
| Quantity | Material | Conversion | |
| Beginning Inventory | 2,000 | 600 | 1,400 |
| +Started and Completed: | 137,600 | 137,600 | 137,600 |
| +Ending Inventory | 4,000 | 2,800 | 1,200 |
| Normal Spoilage | 7,600 | 5,320 | 6,080 |
| Abnormal Spoilage | 2,800 | 1,960 | 2,240 |
| =Total units accounted for | 154,000 | 148,280 | 148,520 |
Material equivalent units is based on what would have already been added at the given % of conversion. 70% would be added because the other 30% is added at 90% which has not yet occurred.
B. Value WIP and FG
1st—Compute cost per unit using FIFO: use only the $ added this period/ equiv. units
| Material | Conversion | |
| Added this Period | $147,501 | $298,128 |
| Equivalent Units | 148,280 | 148,520 |
| Cost per Eq. Unit | $0.99 | $2.01 |
2nd– Value WIP: Eq. units from WIP row x Cost per Eq. Unit above
Material: 2,800 x $0.99 = $2,772
Conversion: 1,200 x $2.01 = $2,412
Total Value of WIP $5,184
3rd—Value FG in 4 parts:
Beginning Inventory $ (17,903 + 33,406) $51,309
Beginning Inventory completed:
| Material 600 x $0.99 | $ 594 |
| Conversion 1,400 x $2.01 | $ 2,814 |
Started/Completed this period:
| Material 137,600 x $0.99 | $136,224 |
| Conversion 137,600 x $2.01 | $276,576 |
| (or together 137,600 x $3.00) |
Normal Spoilage:
| Material 5,320 x $0.99 | $ 5,269 |
| Conversion 6,080 x $2.01 | $12,221 |
| Total Finished Goods | $485,007 |
C. Abnormal Spoilage:
| Material 1,960 x $0.99 | $ 1,941 |
| Conversion 2,240 x $2.01 | $ 4,502 |
| $ 6,443 |
D. All Journal Entries:
| Work in Process | 445,629 |
| Raw Materials | 147,501 |
| Salaries Payable, Cash | 298,128 |
| Finished Goods | 485,007 |
| Work in Process | 485,007 |
| Loss on Abnormal Spoilage | 6,443 |
| Work in Process | 6,443 |
30. A manufacturing company produced 150,000 units. The selling price per unit is $13.25. Beginning finished goods inventory was 37,000 units and ending finished goods inventory is 25,000 units. The information is to be reported on the income statement:
| Rent at the manufacturing plant | $129,000 |
| Utilities at the manufacturing plant | $ 68,000 |
| Materials used in the product | $438,000 |
| Plant manager’s and supervisors’ salaries | $112,000 |
| Labor assembling the product | $156,000 |
| Labor operating machines that make product | $ 38,000 |
| String used to put together products | $ 8,000 |
| Selling expense as a % of sales | $270,000 |
| Selling expense – doesn’t vary with sales | $160,000 |
| Executive and administrative salaries | $175,000 |
| Other fixed administrative expenses | $ 65,000 |
A. Prepare an income statement using variable costing
B. Prepare an income statement using absorption costing
C. Reconcile the difference in income for the two statements.
Answer
First determine the units sold:
| Beginning Inventory | 37,000 |
| + Made | 150,000 |
| – Ending Inventory | (25,000) |
| Sold | 162,000 |
Then determine variable and fixed costs, variable costs per unit, the fixed manufacturing overhead cost per unit, and total period costs
| Beginning Inventory | Fixed | Variable | Variable Per Unit |
| Rent at the manufacturing plant | $129,000 | ||
| Utilities at the manufacturing plant | $ 68,000 | .45 | |
| Materials used in the product | $438,000 | 2.92 | |
| Plant manager’s and supervisors’ salaries | $112,000 | ||
| Labor assembling the product | $156,000 | 1.04 | |
| Labor operating machines that make product | $ 38,000 | .25 | |
| String used to put together products | $ 8,000 | .05 | |
| Selling expense as a % of sales | $270,000 | 1.667 | |
| Selling expense – doesn’t vary with sales | $160,000 | ||
| Executive and administrative salaries | $175,000 | ||
| Other fixed administrative expenses | $65,000 |
||
| Total | $641,000 | ||
Variable production costs – divide by units produced to get variable cost per unit
Total variable production costs = $4.71 (0.45 + 2.92 + 1.04 + 0.25 + 0.05)
Variable selling costs – divide by units sold to get the variable cost per unit = $1.667
Fixed O/H is rent at manufacturing plant + Plant manager’s and supervisors’ salaries
| Fixed Manufacturing overhead costs | $241,000 = $1.61 FMOH per unit |
| Units produced | 150,000 |
A. Variable costing income statement
| Sales ($13.25 x 162,000 units sold) | $2,146,500 |
| – Variable Product Costs ($4.71 x # sold) | $ 763,020 |
| – Variable Period ($1.667 x # sold) | $ 270,000) |
| = Total Contribution Margin | $1,113,480 |
| – All Fixed Expenses: | |
| Selling, G& A | $ 400,000 |
| Fixed Manufacturing O/H | $ 241,000 |
| = Total Operating Income | $ 472,480 |
B. Absorption costing income statement:
| Sales ($13.25 x 162,000 units sold) | $ 2,146,500 |
| – Cost of Goods Sold: | |
| Variable product cost per unit ($4.71 x # sold) | $ 763,020 |
| Fixed product cost per unit ($1.61 x # sold) | $ 260,820 |
| = Gross Profit | $ 1,122,660 |
| – All variable period expenses ($1.67 x # sold) | $ 270,000 |
| All fixed period expenses | $ 400,000 |
| = Income Before Taxes | $ 452,660 |
C.
| Units Made | 150,000 |
| – Units Sold | (162,000) |
| = Change in Inventory | (12,000) |
| x Fixed M O/H rate per unit | x $1.61 |
| = Difference in the two statements | $19,320 |
| Variable Costing Income | $472,480 |
| Absorption Costing Income | $452,660 |
| Difference in Income | $19,820 |
500 difference is due to rounding on the cost per units.
Inventory is lower and absorption income should be lower
31. A manufacturing company has Division A has the ability to currently manufactures a part that can be used as a unit of raw material in one of its products manufactured by Division B. The cost to make this part by Division A is:
| Per unit | |
| Direct materials | $ 6.75 |
| Direct labor | $12.50 |
| Variable manufacturing overhead | $ 1.50 |
| Fixed manufacturing overhead -allocated | $ 4.00 |
| Benefits for direct labor who make the part | $ 1.80 |
| Supervisors salary – direct to the part | $30,000 |
| not needed if not sold to Division B |
Two outside suppliers have bid to supply the part at a cost of $22 and $24. Division B currently purchases 50,000 units per year.
A. Determine the minimum transfer price that should be charged by A to B.
B. Determine the maximum transfer price that should be charged by A to B.
C. Given that Division B is currently purchasing the part for $22, how much will profit increase for the total company if Division B purchases for Division
Answer
A. Minimum:
Determine the incremental costs for Division A
| Direct materials | $ 6.75 |
| Direct labor | $ 7.50 |
| Variable manufacturing overhead | $ 1.50 |
| Benefits for direct labor who make the part | $ 1.80 |
| Supervisors salary-direct to the part | $ 2.00 |
| Total incremental costs | $19.55 |
Minimum Transfer Price: $19.55
B. Maximum: The lowest external selling price: $22
C.
| The current total company cost is | $22.00 |
| – Cost to manufacture Division A | $19.55 |
| = Decrease in cost per unit | $ 2.45 |
| X Unit required | 50,000 |
| = Total cost savings, profit increase | $122,500 |
Compute all manufacturing cost variances, label and state favorable or unfavorable
Answer
Material:
|
AQ x AP AQ x SP AQ x SP SQ x SP $1,912,500 226,000 x $8.40 211,250 x $8.40 104,000 x 2 x $8.40 Variance $14,100 U $27,300 U |
Labor:
|
AQ x AP AQ x SP SQ x SP $1,426,008 81,254 x $17 104,000 x .75 x $17 Variance $44,690 U $ 55,318 U |
Actual hours: $1,426,008 / $17.55 = 81,254 hours
Variable Overhead
|
AQ x AP AQ x SP SQ x SP $163,095 211,250 x $0.90 104,000 x 2 x $0.90 Variance $27,030 F $2,925 U |
Predetermined standard variable manufacturing overhead rate is computed:
$180,000 / (100,000 x 2 pounds each) = $0.90 per pound
Fixed Overhead:
|
Actual Budget Applied $311,065 $300,000 104,000 x 2 x $1.50 Variance $11,065 U $12,000 F |
Predetermined standard fixed manufacturing overhead rate:
$300,000 / 100,000 x 2 pounds each = $1.50 per pound
33. Record the variances computed in problem 32, given the company uses a standard costing system.
Answer
