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## All Problems Test

1. A company sells one product. The following data relates to the product:

 Sales                                   18,000 units \$360,000 Direct material costs \$  72,000 Direct labor costs \$  90,000 Fixed manufacturing overhead costs \$  50,000 Fixed selling and admin costs \$  20,000 Variable selling costs \$  36,000

A. Compute the number of units the company must sell to earn a profit of \$40,000.
B. Compute the break even point in sales dollars. (Use the formula for sales dollars.)
C. The company has a target profit of \$60,000 and expects to sell 15,000 units.
Compute the selling price that the company must charge to earn the target profit.

1st Compute the sales price at \$20 per unit – \$360,000 / 18,000 units

2nd Identify the variable costs as follows:

 direct materials \$72,000 direct labor \$90,000 variable selling \$36,000 total variable \$198,000 / 18,000 units = \$11 per unit

3rd Contribution margin per unit
\$20 sales – \$11 variable cost = \$9 per unit

4th Contribution margin ratio is
\$9 CM / \$20 sales = 0.45 or 45%

5th Total fixed costs are
\$50,000 + \$20,000 = \$70,000

A. Total fixed costs + Desired profit / CM per unit

\$70,000 + \$40,000 / \$9 = 12,222 units

B. Fixed Costs / CM %

\$70,000 / .45 = \$155,555

C. Use the contribution margin income statement – work up from desired income

 Sales \$    ? – all VC \$__11 per unit_ = CM \$    ? 130,000 – all FC \$    70,000 = Target Income \$    60,000

CM must be \$130,000 to get desired income

If sales will be 15,000 units, then CM per unit must be \$8.67 (\$130,000 / 15,000)

Variable costs are \$11 per unit.
In order to get CM per unit of \$8.67, the sales price must be \$19.67
(Sales – VC = CM)

? = 15,000 units

2. A Company incurred \$75,000 in overhead costs making 20,000 units in April. The company made 12,000 units and incurred \$47,000 in overhead costs in May. During the year, the company averaged 14,000 units at a cost of \$56,000 monthly.

A. Compute the fixed and variable components of the overhead cost.
B. Calculate the total cost that is expected to be incurred if 18,000 are produced.

A. Variable Cost

\$75,000 – \$47,000        = \$28,000    = \$3.50 per unit
20,000 – 12,000                 8,000

Use either the high or low total cost and the associated activity

Total Cost = \$FC + (\$VC per activity x # activity)

\$75,000 =     ? + (\$3.50 x 20,000) = 70,000

FC = \$5,000

B.

\$5,000 + (\$3.50 x 18,000) = \$68,000 total cost

3. A manufacturing company applies manufacturing overhead based on direct labor
dollars. Total annual estimated manufacturing overhead is \$600,000 and total
estimated direct labor hours for the year is 60,000 at a cost of \$800,000. Total
estimated machine hours for the year is 25,000 and many parts of the manufacturing are automated.

Record the following transactions.

A. Raw materials were purchased on account for \$23,000.
B. Labor was incurred: \$87,000 direct labor for 6,500 hours, \$26,000 executive and
administrative salaries, \$ 8,000 for warehouse salaries, \$15,000 for manufacturing
supervisor salaries
C. Actual factory overhead costs incurred: \$49,234. Included in this amount is \$3,600
depreciation expense.
D. Materials moved to the production line: \$18,000 direct and \$1,200 indirect.
E. \$99,000 of goods were completed
F. \$67,000 of finished goods were sold for \$95,000.

Compute the balance in Work in Process and finished goods at the end of the period.
The company has no beginning inventories.

a. raw materials purchased on account, \$23,000

Raw materials            \$23,000
Accounts Payable          \$23,000

b. Labor Incurred: \$87,000 direct labor for 4,500 hours, \$26,000 executive and administrative salaries, \$ 8,000 for warehouse salaries, \$15,000 for manufacturing supervisor salaries

 Work in Process \$87,000 Manufacturing Overhead \$15,000 Administrative salary expense \$26,000 Warehouse salary expense \$ 8,000 Salaries payable \$136,000

c. Actual factory overhead costs incurred: \$49,234. Included in this amount is \$3,600 depreciation expense.

 Manufacturing Overhead \$49,234 Accounts Payable \$45,634 Accumulated Depreciation \$ 3,600

d. Materials moved to the production line: \$18,000 direct and \$1,200 indirect

 Work in Process \$18,000 Manufacturing O/H \$ 1,200 Raw materials \$19,200

Apply overhead and make the overhead account = 0 before moving WIP to FG.
Do not automatically use direct labor hours to allocate MOH
Direct labor dollars are used in this problem.

MOH Rate
\$600,000  = 0.75 per direct labor dollars
\$800,000

 Actual direct labor hours used 87,000 x rate per direct labor hour x        .75 = manufacturing overhead applied \$65,250
 Work in Process \$65,250 Manufacturing Overhead \$65,250

Actual Overhead = (\$15,000 + \$49,234 + \$1,200)

 Cost of Goods Sold \$184 Manufacturing Overhead \$184

Add costs when under applied with a debit to CGS since it is not significant.

e. \$99,000 of goods were completed

 Finished Goods \$99,000 Work in Process \$99,000

f. \$67,000 of finished goods were sold for \$95,000.

 Cost of Goods Sold \$67,000 Finished Goods \$67,000 Accounts Receivable \$95,000 Sales \$95,000

Compute the balance in Work in Process and finished goods at the end of the period.

4. A company has three service departments: facilities (allocate costs based on square feet), computer service (allocate costs based on reports generated), and accounting (allocate costs based on customers). Human resources is considered the highest ranked service that begins the allocation. It has 2 revenue producing units: East and West. Information gathered to do the allocation follows:

 Unit Direct Costs Customers Reports Square Feet Facilities \$620,000 3,042 142 2,500 Computer Services \$420,000 152 58 6,750 Accounting \$289,000 805 115 1,450 East \$495,000 2,320 439 21,780 West \$636,000 3,956 642 16,845

Required:

A. Allocate costs using the direct method.
B. Allocate costs using the step method.
C. Determine operating income for the East Division given sales are \$1,100,000, using the step method.

A. Direct method – all costs go to revenue producing units only:

Facilities –       (1st)               (2nd)

 East 21,780 = .564 x 620,000 = 349,680 West 16,845 = .436 x 620,000 = 270,320 Total 38,625

Computer Services –

 East (1)                     (2)439 = .406 x 420,000 = 170,520 West 642 = .594 x 420,000 = 249,480 Total 1,081

Accounting – (1)                  (2)

 East 2,320 = .370 x 289,000 = 106,930 West 3,956 = .630 x 289,000 = 182,070 Total 6,276

B. Step Method – begin allocation with human resources and allocate to cost units and revenue producing units

Facilities – based on square feet

 Computer 6,750 = .144 x 620,000 = 89,280 Accounting 1,450 = .031 x 620,000 = 19,220 East 21,780 = .465 x 620,000 = 288,300 West 16,845 = .360 x 620,000 = 223,200 Total 46,825

Computer Services – \$420,000 + \$89,280 = \$509,280 to allocate

 Accounting 115 = .096 x 509,280 = 48,891 East 439 = .367 x 509,280 = 186,906 West 642 = .537 x 509,280 = 273,483 Total 1,196

Accounting – \$289,000 + \$19,220 + 48,891 = \$357,111 to allocate

 East 2,320 = .37 x 357, 111 = 132,131 West 3,956 = .63 x 357,111 = 224,980 Total 6,276

C. Operating Income for East Division:

 Sales Revenue 1,100,000 Direct Costs (495,000) Facilities (288,300) Computer Services (186,906) Accounting (132,131) Operating Income (2,337)

5. A company produces 3 products from the same process. The following information is related to the 3 products.

 Product 1 Product 2 Product 3 Units produced: 500 6,000 2,000 Ounces per unit 1 4 3 Further processing costs \$0.20 \$3 \$2 Sales price at split-off \$1 \$8 \$10 Selling costs \$0.15 \$0.25 \$0.50 Final Sales price \$1 \$12 \$15

The company incurred \$72,000 in joint product costs, \$50,000 selling and administrative, and \$22,000 in research and development costs. Product 1 is considered a by product. The direct net realizable approach is used to record scrap and by products.

A. Allocate joint costs and determine the cost per pound for products 1, 2 and 3 based on
1. net realizable value
2. approximated net realizable value
3. sales value at split-off
4. ounces produced

B. Determine the gross profit from selling product 3 given the net realizable value method of allocating joint costs is used given 1,900 units were processed further and sold.

1st – Subtract the NRV of the by product from the joint costs before to determine the joint cost that is allocated.

 Sales price \$1.00 – further processing costs \$0.20 – selling/disposal costs \$0.15 = net realizable value \$0.65 x units sold 500 = net realizable value \$325 Total Joint Costs \$72,000 less NRV By Product (325) Joint Costs to Allocate \$71,675

1. Net Realizable Value

Units x (sales price spl off – cost to sell) = NRV % x Joint costs = allocated

 (2)     6,000 x (\$8 – \$0.25) = 46,500 .710 x 71,675 = 50,889 (3)     2,000 x (\$10 – \$0.50) = 19,000 .290 x 71,675 = 20,786 Total 65,500

2. Approximate Net Realizable Value

Units x (final sales price – selling costs – further processing costs) = Appr. NRV

 (2)     6,000 x (\$12 – \$0.25 – \$3) = 52,500 .677 x 71,675 = 48,524 (3)     2,000 x (\$15 – \$0.50 – \$2) = 25,000 .323 x 71.675 = 23,151 Total 77,500

3. Sales Value at Split-off

Units x Split-off Price = Total sales % total x Joint Costs = Allocated

 (2)       6,000 x \$8 = 48,000 .706 x 71,675 = 50,603 (3)       2,000 x \$10 = 20,000 .294 x 71,675 = 21,072 Total 68,000

4. Ounces produced:

Units x ounces per = total ounces

 (2)      6,000 x 4 = 24,000 .80 x 71,675 = 57,340 (3)      2,000 x 3 =  6,000 .20 x 71,675 = 14,335 Total 30,000

B. Gross profit from selling product 3, net realizable method for allocating:

 Sales 28,500 – Joint Costs 20,786 – further processing 3,800 Gross Profit 3,914

Selling costs are operating expenses which are subtracted from gross profit

6. A company has two divisions, electronics and appliances. The electronics division manufactures an electronic computer chip that can be sold externally and is also used by the appliance division. The following information is available for the computer chip:

 List Selling Price: \$25.00 10% lower than competitors Variable Production Costs: \$11.00 Total Units Produced Annually: 200,000 Internal Requirements: 50,000 Units Sold Externally: 180,000 Fixed Selling Costs \$300,000

\$300,000 allocated on the basis of units produced

Variable Selling Costs
\$2; includes \$1 per unit in sales commissions

A. Determine the minimum transfer price using the incremental cost method
B. Determine the maximum transfer price:

A. For the units that there is excess capacity, the minimum transfer price should be the total of incremental costs. Incremental costs are all variable costs plus any fixed costs that must be added to service the division.

 Variable production costs \$11 Variable selling costs \$  1 Total incremental costs \$12

Minimum transfer price is \$12 for the first 20,000 units where there is capacity.

Advertising costs do not have to be incurred for internal sales

For 30,000: no excess capacity,
The minimum transfer price should be the price to external customers: \$25

B. The maximum transfer price should be the lowest price the division can purchase from an external supplier.

The electronics division currently sells at \$25 which is 10% lower than the external supplier cost of \$27.78 (\$25/.90)

The maximum transfer price should be \$27.78 which is higher than the current sales price – this maximum applies to both capacity and out of capacity.

The selling division could negotiate between \$25 and \$27.78

7. The following data relates to a product manufactured by TRW Corp.:

Standard Costs:

 Materials:                     2 pounds, \$3 per pound Labor:                           3 hours, \$12 per hour Variable Overhead: \$12 per pound of material used Budgeted fixed production costs \$140,000 Budgeted production for the year 4,000 units

Actual Costs:

 Material purchased: 8,000 pounds, total cost of \$23,200 Material used: 7,200 pounds Labor: 10,360 hours, total cost of \$129,500 Variable overhead \$84,700 Fixed overhead \$138,500 Units produced 3,200 units

A. Calculate all variable cost variances.
B. Calculate all fixed overhead variances.

8. Record the variances computed in problem 7 above.

 Raw Materials Inventory 24,000 RM purchase price variance 800 A/P 23,200 WIP 19,200 Material quantity variance 2,400 Raw Materials Inventory 21,600 WIP 115,200 Labor Efficiency Variance 9,120 Labor Rate Variance 5,180 Wages Payable 129,500 WIP 76,800 Efficiency Variance 9,600 Spending Variance 1,700 Manufacturing Overhead 84,700 WIP 112,000 Volume Variance 28,000 Budget Variance 1,500 Manufacturing Overhead 138,500

9. Amos Corp. sells a single product for \$30 and had no beginning inventories.
Information for the year is as follows:

 Sales 24,000 units \$720,000 Production costs: Variable costs per unit \$16 Fixed costs – total \$150,000 Administrative costs: Variable costs per unit \$5 Fixed costs – total \$50,000 Actual units produced 26,000 units Budgeted production 25,000 units

A. Prepare a variable costing income statement
B. Prepare an absorption costing income statement
C. Reconcile the difference between the two income statements.

A.

 Sales (\$30 x 24,000 units sold) \$720,000 – Variable production costs (\$16) \$384,000 – Variable admin costs (\$5) \$120,000 = Total Contribution Margin \$216,000 – All Fixed Expenses: Administrative \$  50,000 Fixed Production costs \$150,000 = Total Operating Income \$  16,000

B.

 Sales (\$30 x 24,000 units sold) \$720,000 – Variable production costs (\$16) \$384,000 – Fixed production costs (\$5.77) \$138,480 = Gross Profit \$197,520 – Variable admin costs (\$5) \$120,000 – Fixed administrative \$  50,000 = Total operating income \$  27,520

Fixed production cost per unit = \$150,000 / 26,000 = \$5.77 per unit

C. Reconcile the difference between variable costing income and absorption costing income

 Units Made 26,000 – Units sold (24,000) = Inventory Change in Units 2,000 x Fixed M O/H rate per unit x \$5.77 – Variable admin costs (\$5) and variable costing income \$11,540

Difference in two statements: \$11,520
\$20 difference due to rounding

Inventory increased absorption costing is higher income than variable costing

10. Authentic Furniture, Inc. applies overhead on the basis of direct labor cost.

At the beginning of the period the following amounts were budgeted:

 Direct labor costs   \$4,000,000 Direct labor hours  425,000 Total Overhead      \$5,000,000 Machine hours        125,000

The first two jobs manufactured in the current year were job no. X5-01 and X5-02.
The cost of the jobs and the production status on January 31st are as follows:

 X5-01 X5-02 Direct Materials \$22,000 \$48,000 Direct labor \$40,000 \$75,000 Direct labor hours 4,000 7,500 Status: In process Finished, not yet sold

At the end of the current year, actual direct labor hours totaled 442,000, actual direct labor costs totaled \$4,200,000 and actual overhead incurred totaled \$5,180,000.

A. Compute the total cost of each job as of January 31st
B. Calculate the amount of over or under applied overhead for the year. State over or under applied.

1st – Calculate the predetermined overhead rate for the year:

\$5,000,000 / \$4,000,000 = 1.25 x Direct Labor \$

 A. X5-01 X5-02 Direct Materials \$22,000 \$48,000 Direct labor \$40,000 \$75,000 Manufacturing O/H (1.25 x DL\$) \$50,000 \$93,750 Total cost of the job \$112,000 \$216,750

B.

 Actual direct labor \$ \$4,200,000 x Manuf. O/H rate x 1.25__ = Amount applied \$5,250,000 – Actual Manuf. O/H \$5,180,000 = Over applied \$     70,000

11. The following data was taken from the cost records of a manufacturing company:

 Utilities, factory 8,000 Sales commissions 20,000 Indirect labor 59,000 Rent, factory building 70,000 Purchases of raw materials 264,000 Assembly labor cost 90,000 Advertising expense 40,000 Supplies, factory 1,500 Corporate office rent expense 42,000 Warehouse rent expense 33,000 Maintenance, factory equipment 10,000 Shipping to customers 21,000 Depreciation – sales autos 4,000
 Inventories Beginning Ending Raw Materials 39,000 45,000 Work in Process 16,000 29,000 Finished Goods 199,000 132,000

A. Prepare a schedule of cost of goods manufactured
B. Calculate cost of goods sold

A.

 Beginning Raw Materials Inventory 39,000 + Purchases of Raw Materials 264,000 – Ending Raw Materials Inventory (45,000) Materials Used in Production 258,000 Direct labor 90,000 Supplies, factory 1,500 Indirect Labor 59,000 Maintenance, factory equipment 10,000 Utilities, factory 8,000 Warehouse rent expense 33,000 Rent, factory building 70,000 Total manufacturing overhead 148,500 + Beginning WIP 16,000 – Ending WIP (29,000) Cost of Goods Manufactured 483,500

B.

 Beginning finished goods 199,000 + Cost of goods manufactured 483,500 – Ending finished goods (132,000) = Cost of goods sold 550,500

12. A company uses the FIFO method for its continuous process cost system.
The following data is relative to the operations of the company for January.

 Work in Process, Beginning: Units in process 1,000 Materials cost, 80% complete \$    27,500 Conversion cost, 60% complete \$    4,500 Units started into production during the month 60,000 Material added to production during January \$129,000 Conversion added to production during January \$  36,000

Work in Process, January 31st:
Materials, 50% complete
Conversion, 30% complete

Normal Spoilage is 3% of units started.
Total spoilage for January was 6,300.
Units transferred to finished goods were 52,700

A. Determine the equivalent units of production for material and conversion.
B. Determine the cost per equivalent unit for material and conversion.
C. Prepare a cost reconciliation report
D. Record all required journal entries for process costing

* When using FIFO, beginning inventory dollars are not included in the cost per
equivalent unit

C.

 Value WIP: Material: 1,000 x \$2.25 = \$ 2,250 Conversion: 600 x \$0.63   = \$     378 Total value \$2,628

Value FG:

 Beginning inventory dollars \$32,000 Beginning units: Material: 200 x \$2.25 =  \$   450 Conversion: 400 x \$0.63 =  \$   252 Started/Completed 51,700 x \$2.88 = \$148,896 Total Finished Goods \$ 181,598

Abnormal Spoilage:

Material + Conversion:
4,500 x \$2.88 = \$ 12,960

D. All required journal entries:

 Work in Process 165,000 Raw Materials 129,000 Cash, etc. 36,000
 Finished Goods 181,598 Work in Process 181,598
 Loss from Abnormal Spoilage 12,960 Work in Process 12,960

13. A company produces three products in a single production plant. Budgeted sales
and production information is as follows:

 Product X Product Y Product Z Units produced and sold 20,000 30,000 50,000 Selling price per unit \$12 \$32 \$50 Total Assembly Hours 10,000 30,000 60,000 Number of batches 50 100 350 Number of purchase orders 1,000 2,000 7,000 Direct Cost per unit \$ 7 \$ 14 \$28

Total paid to indirect labor is \$250,000. Total batch set-up costs for the company are \$290,000. Total cost to the company to purchase parts is \$350,000. Costs are allocated using the activity bases of assembly hours, batches, and parts as applicable.

A. Calculate the cost per unit of activity for each type of activity:
Assembly Hours       ______________
Batches                    ______________
Purchase Orders      ______________

B. Prepare a product income statement using activity-based costing for product Z.

1st Step: Add the activity of all three products together and get the company total

 Total company Assembly hours 100,000 Number of batches 500 Number of purchase orders 10,000

2nd step: Calculate rate per activity:

A.

 Indirect labor \$250,000 / 100,000 = \$2.50 Batches \$290,000 / 500         = \$580 Purchase Orders \$350,000 / 10,000   = \$   35

 B. Product Z Sales \$2,500,000   (\$50 x 50,000) Direct Costs \$1,400,000   (\$28 x 50,000) – Indirect labor \$ 150,000     (\$2.50 x 60,000) – batch costs \$ 203,000     (\$580 x 350) – purchase order \$ 245,000     (\$35 x 7,000) Product Income \$ 502,000

14. Determine if the following is a fixed or variable cost. Determine if the following
costs are product or period cost and the type of product or period cost. The company manufactures pancake syrup.

1. Rent on the manufacturing facility
2. Bottles the syrup is placed in
3. Corn syrup, an ingredient
4. Workers who operate the filling machine
5. Utilities at the manufacturing plant
6. Insurance on the manufacturing plant
7. Janitors salary at the plant
9. Supervisor at the manufacturing plant
10. Worker who place the labels on the syrup bottle
11. Depreciation on the machine that cooks the syrup
12. Manufacturing plant manager
13. Inspectors at the manufacturing plant
14. Salesmen travel expenses
15. Oil and parts for the manufacturing machines
16. Lids for the bottles
17. Shipping to customers
18. Advertising the syrup – a percent of sales dollars