Final Review
Comprehensive Case Problems
Final Review – Comprehensive Case Test
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 |
| Actual | |
| Beginning Raw Materials | $342,000 |
| Ending Raw Materials | $369,738 |
| 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 budget fixed manufacturing overhead.
2. Prepare a budget variable cost 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 variances 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 $250,000 (Use estimated cost)
7. If sales increase by $400,000, what percentage do you expect net income to increase? Use the operating leveraging formula.
8. Prepare a budgeted income statement using absorption cost.
9. Reconcile the difference in budgeted income for the variable cost statement and the absorption cost statement.
10. Prepare an actual income statement using absorption cost.
Answer
1. Compute total budgeted fixed manufacturing overhead.
Units budgeted to be manufactured x rate per unit = Total Manufacturing O/H $
110,000 x $3 = $330,000
or alternative calculation:
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 contribution margin (variable cost) 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.
Material:
| AQ x AP AQ x SP AQ x SP SQ x SP Purch Purch Used Used
$784,320 337,500 x $2.25 325,440 x $2.25 106,000 x 3 x $2.25 Variance $24,945 U $16,740 U |
Labor:
|
AQ x AP AQ x SP SQ x SP $352,100 29,590 x $12 106,000 x .30 x $12 Variance $2,980 F $ 26,520 F |
Variable Overhead
|
AQ x AP AQ x SP SQ x SP $173,985 29,590 x $6 106,000 x .3 x $6 Variance $3,555 F $13,260 F |
Fixed Overhead:
|
Actual Budget Applied $309,875 $330,000 106,000 x .3 x $10 Variance $20,125 F $12,000 U |
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: .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).
Fixed Costs + Desired Profit
Contribution Margin Ratio
| $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.
From problem 1, use your computed contribution margin and operating income
| Contribution Margin $1,125,000 = 2.528 Operating Income $ 445,000
Sales % increase: 400,000 / 2,600,000 = 15.38% Sales % Increase 15.38% |
8. Prepare a budgeted income statement using absorption cost.
| 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 |
9. Reconcile the difference in budgeted income for the variable cost statement and the absorption cost 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 cost income – problem 2. | $445,000 |
| Absorption cost income – problem 9 | $475,000 |
| Difference in Income | $ 30,000 |
Inventory increased, 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.
10. Prepare an actual income statement using absorption cost.
| 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 |