### Comprehensive Case Problems

#### 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.

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                                 = \$759,375                    = \$732,240                   = \$715,500 Variance            \$24,945 U                                             \$16,740 U                                 price                                                   quantity

Labor:

 AQ x AP                   AQ x SP                         SQ x SP \$352,100             29,590 x \$12             106,000 x .30 x \$12                                = \$355,080                    = \$381,600 Variance            \$2,980 F                \$ 26,520 F                                rate                     efficiency

 AQ x AP                         AQ x SP                         SQ x SP \$173,985                    29,590 x \$6             106,000 x .3 x \$6                                     = \$177,540               = \$190,800 Variance              \$3,555 F                  \$13,260 F                              spending                 efficiency

 Actual                         Budget                         Applied \$309,875                 \$330,000                 106,000 x .3 x \$10                                                                          = \$318,000 Variance          \$20,125 F             \$12,000 U                            Budget                 Volume

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% x operating leverage         2.528 = Income % Increase         38.88%

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