Mas-review-all-problems.docx

Variable and Absoprtion Costing 1.

Lee Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ Units Units Units Units

P95

in beginning inventory ............. 100 produced ........................... 6,200 sold ............................... 5,900 in ending inventory ................ 400

Variable costs per unit: Direct materials ....................... P42 Direct labor ........................... 28 Variable manufacturing overhead ........ Variable selling and administrative ....

1 5

Fixed costs: Fixed manufacturing overhead ........... P62,000 Fixed selling and administrative ....... 35,400 The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Required: a. What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing? c. Prepare an income statement for the month using the contribution format and the variable costing method. d. Prepare an income statement for the month using the absorption costing method. e. Reconcile the variable costing and absorption costing net incomes for the month. 2.

Pabbatti Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ Units Units Units Units

P112

in beginning inventory ............. 500 produced ........................... 2,800 sold ............................... 2,900 in ending inventory ................ 400

Variable costs per unit: Direct materials ....................... P37 Direct labor ........................... 19 Variable manufacturing overhead ........ Variable selling and administrative ....

7 5

Fixed costs: Fixed manufacturing overhead ........... P109,200 Fixed selling and administrative ....... 5,800

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.

Required: a. What is the unit product cost for the month under variable b. Prepare an income statement for the month using the variable costing method. c. Without preparing an income statement, determine the for the month. (Hint: Use the reconciliation method.)

costing? contribution format and the absorption costing net income

Profit Planning 1.

Tilson Company has projected sales and production in units for the second quarter of the coming year as follows:

April May June Sales ............ 55,000 45,000 65,000 Production ....... 65,000 55,000 55,000 Cash-related production costs are budgeted at $7 per unit produced. Of these production costs, 40% are paid in the month in which they are incurred and the balance in the following month. Selling and administrative expenses will amount to $110,000 per month. The accounts payable balance on March 31 totals $193,000, which will be paid in April. All units are sold on account for $16 each. Cash collections from sales are budgeted at 60% in the month of sale, 30% in the month following the month of sale, and the remaining 10% in the second month following the month of sale. Accounts receivable on April 1 totaled $520,000 ($100,000 from February's sales and the remainder from March). Required: a. Prepare a schedule for each month showing budgeted cash disbursements for the Tilson Company. b. Prepare a schedule for each month showing budgeted cash receipts for Tilson Company. At March 31 Streuling Enterprises, a merchandising firm, had an inventory of 38,000 units, and it had accounts receivable totaling $85,000. Sales, in units, have been budgeted as follows for the next four months: April ............... 60,000 May ................. 75,000 June ................ 90,000 July ................ 81,000 Streuling's board of directors has established a policy to commence in April that the inventory at the end of each month should contain 40% of the units required for the following month's budgeted sales. The selling price is $2 per unit. One-third of sales are paid for by customers in the month of the sale, the balance is collected in the following month. Required: a. Prepare a merchandise purchases budget showing how many purchased for each of the months April, May, and June.

units should be

b. Prepare a schedule of expected cash collections for each of the months April, May, and June.

TabComp Inc. is a retail distributor for MZB-33 computer hardware and related software. TabComp prepares annual sales forecasts of which the first six months of the coming year are presented below. Hardware Hardware Units Dollars Software January ....... February ...... March ......... April ......... May ........... June ..........

130 120 110 90 100 125

Total Sales

$390,000 $160,000 $550,000 360,000 140,000 500,000 330,000 150,000 480,000 270,000 130,000 400,000 300,000 125,000 425,000 375,000 225,000 600,000

Cash sales account for 25% of TabComp's total sales, 30% of the total sales are paid by bank credit card, and the remaining 45% are on open account (TabComp's own charge accounts). The cash and bank credit card sale payments are received in the month of the sale. Bank credit card sales are subject to a four percent discount which is deducted immediately. The cash receipts for sales on open account are 70% in the month following the sale, 28% in the second month following the sale, and the remaining are uncollectible. TabComp's month-end inventory requirements for computer hardware units are 30% of the next month's sales. The units must be ordered two months in advance due to long lead times quoted by the manufacturer.

Cost Volume Profit The following is Arkadia Corporation's contribution format income statement for last month: Sales ....................... Less variable expenses ...... Contribution margin ......... Less fixed expenses ......... Net income ........................

P1,200,000 800,000 400,000 300,000 P 100,000

The company has no beginning or ending inventories and produced and sold 20,000 units during the month. Required: a. What is the company's contribution margin ratio? b. What is the company's break-even in units? c. If sales increase by 100 units, by how much should net income increase? d. How many units would the company have to sell to attain target profits of P125,000? e. What is the company's margin of safety in dollars? f. What is the company's degree of operating leverage? The following monthly data are available for the Challenger Company and its only product, Product SW: Total Per Unit Sales (400 units)..... P110,000 P275 Variable expenses..... 44,000 110 Contribution margin... P 66,000 P165 Fixed expenses........ 52,800

Net income............ P 13,200 Required: a. Without resorting to calculations, what is the total

contribution margin at the break-even point?

b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs by P15. The company’s marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made? c. Assume that Challenger Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels this can be done by cutting the selling price by P25 per unit and increasing the advertising budget by P20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made? d. Assume that Challenger Company is currently selling 400 units of Product SW. Management wants to automate a portion of the production process for Product SW. The new equipment would reduce direct labor costs by P20 per unit but would result in a monthly rental cost for the new robotic equipment of P10,000. Management believes that the new equipment will increase the reliability of Product SW thus resulting in an increase in monthly sales of 12%. Should these changes be made? Tanner Company's most recent contribution format income statement is presented below: Sales .................... P75,000 Less variable expenses ... 45,000 Contribution margin ...... 30,000 Less fixed expenses ...... 36,000 Net loss ................. P(6,000) The company sells its only product for P15 per unit. There were no beginning or ending inventories. Required: a. Compute the company's break-even point in units sold. b. Compute the total variable expenses at the break-even point. c. How many units would have to be sold to earn a target profit

of P9,000?

d. The sales manager is convinced that a P6,000 increase in the advertising budget would increase total sales by P25,000. Would you advise the increased advertising outlay?

Flexible Budgets The Moore Company produces and sells a single product. A standard cost card for the product follows: Standard Cost Card--per unit of product: Direct materials, 4 yards at $4.00 ........ $16.00 Direct labor, 1.5 hours at $10.00 ......... 15.00 Variable overhead, 1.5 hours at $3.00 ..... 4.50 Fixed overhead, 1.5 hours at $7.00 ........ 10.50 Standard cost per unit .................... $46.00 The company manufactured and sold 18,000 units of product during the year. A total of 70,200 yards of material was purchased during the year at cost of $4.20 per yard. All of this material was used to manufacture the 18,000 units. The company records showed no beginning or ending inventories for the year. The company worked 29,250 direct labor-hours during the year at a cost of $9.75 per hour. Overhead cost is applied to products on the basis of direct laborhours. The denominator activity level (direct laborhours) was 22,500 hours. Budgeted fixed overhead costs as shown on the flexible budget were $157,500, while actual fixed overhead costs were $156,000. Actual variable overhead costs were $90,000. Required: a. Compute the variances b. Compute the variances for c. Compute the efficiency d. Compute the variances for

direct materials price and quantity for the year. direct labor rate and efficiency the year. variable overhead spending and variances for the year. fixed overhead budget and volume the year.

Flick Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of direct labor-hours. The company's total budgeted variable and fixed manufacturing overhead costs at the denominator level of activity are $20,000 for variable overhead and $30,000 for fixed overhead. The predetermined overhead rate, including both fixed and variable components, is $2.50 per direct labor-hour. The standards call for two direct labor-hours per unit of output produced. Last year, the company produced 11,500 units of product and worked 22,000 direct labor-hours. Actual costs were $22,500 for variable overhead and $31,000 for fixed overhead. Required: a. What is the denominator level of activity? b. What were the standard hours allowed for the output last year? c. What was the variable overhead spending variance? d. What was the variable overhead efficiency variance? e. What was the fixed overhead budget variance? f. What was the fixed overhead volume variance?

You have just been hired as the controller of the Eastern Division of Global Manufacturing. Performance records for last year are incomplete, with only the following data available: Variable overhead rate .......... Budgeted fixed overhead ......... Total actual overhead cost ...... Fixed overhead budget variance .. Variable overhead efficiency variance ........... Actual direct labor-hours worked Denominator activity level ...... Standard hours per unit .........

$3.00 per direct labor-hour $84,800 $262,500 $7,200 unfavorable $15,000 unfavorable 55,000 direct labor-hours 53,000 direct labor-hours 2 direct labor-hours

Required: Prepare a complete analysis of manufacturing overhead for the past year. Indicate actual, standard, and denominator activity levels; variable overhead spending and efficiency variances; and fixed overhead budget and volume variances.

Standard Costing (Appendix) Albert Manufacturing Company manufactures a single product. The standard cost of one unit of this product is: Direct materials: 6 feet at P1.50 ........... P 9.00 Direct labor: 1 hour at P6.75 ............... 6.75 Variable overhead: 1 hour at P4.50 .......... 4.50 Total standard variable cost per unit ....... P20.25 During the month of October, 6,000 units were produced. Selected cost data relating to the month's production follow: Material purchased: 60,000 feet at P1.43 .... P85,800 Material used in production: 38,000 feet ... Direct labor: ?__ hours at P ?__ per hr .. P41,925 Variable overhead cost incurred ............. P30,713 Variable overhead efficiency variance ....... P 2,250 There was no beginning inventory of raw materials. The variable overhead rate is based on direct labor-hours. Required: a. For direct materials, compute the price and quantity variances for the month, and prepare journal entries to record activity for the month. b. For direct labor, compute the rate and efficiency variances for the month, and prepare a journal entry to record labor activity for the month. c. For variable overhead, compute the spending variance for the month, and prove the efficiency variance given above.

(Appendix) Vernon Mills, Inc. is a large producer of men's and women's clothing. The company uses standard costs for all of its products. The standard costs and actual costs per unit of product for a recent period are given below for one of the company's product lines: Standard Actual Cost Cost Standard: 4.0 yards at P5.40 per yard ...... P21.60 Actual: 4.4 yards at P5.05 per yard ......... P22.22 Direct labor: Standard: 1.6 hours at P6.75 per hour ....... P10.80 Actual: 1.4 hours at P7.30 per hour ......... P10.22 Variable overhead: Standard: 1.6 hours at P2.70 per hour ....... P 4.32 Actual: 1.4 hours at P3.25 per hour ......... P 4.55 Total cost per unit ....................... P36.72 P36.99

During this period, the company produced 4,800 units of this product. A comparison of standard and actual costs for the period on a total cost basis is given below: Actual costs: 4,800 units at P36.99 ...... P177,552 Standard costs: 4,800 units at P36.72 .... 176,256 Difference in cost--unfavorable .......... P 1,296 There was no inventory of materials on hand at the beginning of the period. During the period, 21,120 yards of materials were purchased, all of which were used in production. Required: a. For direct materials, compute the price and quantity variances for the period and prepare journal entries to record all activity relating to direct materials for the period. b. For direct labor, compute the rate and efficiency variances and prepare a journal entry to record the incurrence of direct labor cost for the period. c. For variable overhead, compute the spending and efficiency variances.

ABC Fife & Jones PLC, a consulting firm, uses an activity-based costing in which there are three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Costs: Wages and salaries ... P540,000 Travel expenses ...... P100,000 Other expenses ....... P140,000 Total .............. P780,000 Distribution of resource consumption: Activity Cost Pools Working On Business Engagements Development Other Total Wages and salaries 50% 20% 30% 100% Travel expenses ... 60% 30% 10% 100% Other expenses .... 35% 25% 40% 100% Required: a. How much cost, in total, would be allocated to the Working On Engagements activity cost pool? b. How much cost, in total, would be allocated to the Business Development activity cost pool? c. How much cost, in total, would be allocated to the Other activity cost pool?

Huish Awnings makes custom awnings for homes and businesses. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity cost pools: Overhead costs: Production overhead .. P150,000 Office expense ....... P100,000 Total .............. P250,000 Distribution of resource consumption: Activity Cost Pools Making Job Awnings Support Other Total Production overhead .. 45% 40% 15% 100% Office expense ....... 8% 65% 27% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Annual Activity Making awnings ...... 5,000 yards Job support ......... 200 jobs Other ............... Not applicable Required: a. Prepare the first-stage allocation of overhead costs to the filling in the table below: Making Awnings Production overhead .. Office expense ....... Total ..............

Job Support

Other

activity cost pools by

Total

b. Compute the activity rates (i.e., cost per unit of activity) for the Making Awnings and Job Support activity cost pools by filling in the table below: Making Awnings Production overhead .. Office expense ....... Total ..............

Job Support

c. Prepare an action analysis report in good form of a job that involves making 80 yards of awnings and has direct materials and direct labor cost of P3,000. The sales revenue from this job is P4,000. For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost.

Relevant Costing Foster Company makes 20,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials ................. Direct labor ..................... Variable manufacturing overhead .. Fixed manufacturing overhead ..... Unit product cost ..............

$24.70 16.30 2.30 13.40 $56.70

An outside supplier has offered to sell the company all of these parts it needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $44,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a. How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part? b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year? Benjamin Signal Company produces products R, J, and C from a joint production process. Each product may be sold at the splitoff point or be processed further. Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced. Data for Benjamin's operations for the current year are as follows: Product R J C

Units Produced 8,000 10,000 5,000

Allocated Joint Production Cost $32,000 40,000 20,000

Sales Value at Split-off $76,000 71,000 48,000

Product R can be processed beyond the split-off point for an additional cost of $26,000 and can then be sold for $105,000. Product J can be processed beyond the split-off point for an

additional cost of $38,000 and can then be sold for $117,000. Product C can be processed beyond the split-off point for an additional cost of $12,000 and can then be sold for $57,000. Required: Which products should be processed beyond the split-off point? Answer: R Sales value after further processing..................... Sales value at split-off......... Added sales value from processing Added processing costs........... Net gain (loss) from further processing.....................

J

C

o

$105,000 76,000 29,000 26,000

$117,000 71,000 46,000 38,000

$57,000 48,000 9,000 12,000

$

$

$(3,000)

3,000

8,000

Products R and J should be processed beyond the split-off point. Product C should be sold at split-off. Joint production costs are not relevant to the decision to sell at split-off or to process further. Bowen Company produces products P, Q, and R from a joint production process. Each product may be sold at the split-off point or be processed further. Joint production costs of $81,000 per year are allocated to the products based on the relative number of units produced. Data for Bowen's operations for the current year are as follows: Product P Q R

Units Produced 4,000 7,000 2,000

Allocated Joint Production Cost $28,000 49,000 14,000

Sales Value at Split-off $38,000 47,000 16,000

Product P can be processed beyond the split-off point for an additional cost of $10,000 and can then be sold for $50,000. Product Q can be processed beyond the split-off point for an additional cost of $35,000 and can then be sold for $65,000. Product R can be processed beyond the split-off point for an additional cost of $6,000 and can then be sold for $25,000. Required: Which products should be processed beyond the split-off point? (Ignore income taxes and the time value of money in this problem.) Madison optometry is considering the purchase of a new lens grinder to replace a machine that was purchased several years ago. Selected information on the two machines is given below:

Original cost when new ............ Accumulated depreciation to date .. Current salvage value ............. Annual operating cost ............. Remaining useful life .............

Old Machine $80,000 32,000 26,000 4,000 4 years

New Machine $85,000 ----3,000 4 years

Required: Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years. Juett Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows: Direct materials ........................ Direct labor ............................ Variable manufacturing overhead ......... Fixed manufacturing overhead ............ Variable selling & administrative expense Fixed selling & administrative expense ..

$29.60 5.80 2.50 17.20 1.80 6.70

The normal selling price of the product is $72.90 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Required: a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $66.10 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,300 units for regular customers. What would be the minimum acceptable price per unit for the special order?