Essay Questions

Chapter 06 - Variable Costing and Segment Reporting: Tools for Management

Essay Questions

201. Candice Corporation has decided to introduce a new product. The product can be manufactured using either a capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows:

The company's market research department has recommended an introductory selling price of $30 per unit for the new product. The annual fixed selling and administrative expenses of the new product are $500,000. The variable selling and administrative expenses are $2 per unit regardless of how the new product is manufactured.Required:a. Calculate the break-even point in units if Candice Corporation uses the:1. capital-intensive manufacturing method.2. labor-intensive manufacturing method.b. Determine the unit sales volume at which the net operating income is the same for the two manufacturing methods.c. Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the:1. capital-intensive manufacturing method.2. labor-intensive manufacturing method.d. What is your recommendation to management concerning which manufacturing method should be used?

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a. 1. Capital-intensive:Unit sales to break even = Fixed expenses Unit CM= ($2,440,000 + $500,000) ($30 per unit - $14 per unit - $2 per unit)= $2,940,000 $14 per unit= 210,000 units2. Labor-intensive:Unit sales to break even = Fixed expenses Unit CM= ($1,320,000 + $500,000) ($30 per unit - $17.60 per unit - $2 per unit)= $1,820,000 $10.40 per unit= 175,000 unitsb. Profit = Sales - Variable expenses - Fixed expensesCapital-intensive:Profit = $30Q - $16Q - $2,940,000 = $14Q - $2,940,000Labor-intensive:Profit = $30Q - $19.60Q - $1,820,000 = $10.40Q - $1,820,000The profits are equal when:$14Q - $2,940,000 = $10.40Q - $1,820,000$3.60Q = $1,120,000Q = $1,120,000 $3.60Q = 311,111c. 1. Capital-intensive:

Degree of operating leverage = Contribution margin Net operating income= $3,500,000 $560,000 = 6.252. Labor-intensive:

Degree of operating leverage = Contribution margin Net operating income= $2,600,000 $780,000 = 3.33d. The decision hinges upon the expected sales of the new product. If management is confident that sales will be in excess of 311,111 units, then the capital-intensive method should be used. If sales are likely to fall below this number, then the labor-intensive method should be used. Management should also be aware that net operating income will be more volatile with the capital-intensive method since it has higher operating leverage.

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AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-06 Determine the break-even pointLearning Objective: 05-08 Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating incomeLevel: Hard

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202. The following monthly data in contribution format are available for the MN Company and its only product, Product SD:

The company produced and sold 300 units during the month and had no beginning or ending inventories.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 SD. This change would reduce variable expenses by $18 per unit. The company's sales 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 250 units per month. Should this change be made?c. Assume that MN Company is currently selling 300 units of Product SD per month. Management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50 percent. Should these changes be made?d. Assume that MN Company is currently selling 300 units of Product SD. Management wants to automate a portion of the production process for Product SD. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SD thus resulting in an increase in monthly sales of 12%. Should these changes be made?

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a. The total contribution margin would be $40,000 since it is equal to the fixed expenses at the break-even point.b. The $18 decrease in variable costs will cause the contribution margin per unit to increase from $170 to $188.

The less costly components should not be used in the manufacture of Product SD. Net operating income will decrease by $4,000.c. The decrease in selling price per unit will cause the unit contribution margin to decrease from $170 to $148.

The changes should not be made.d. The use of the automated process would affect both fixed and variable costs. Fixed expenses will increase by $10,000 from $40,000 to $50,000. Variable costs will decrease by $20 from $109 to $89, and the unit contribution margin will increase from $170 to $190.

The changes should be made.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-06 Determine the break-even pointLevel: Hard

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203. Guitian Corporation produces and sells a single product. The company's contribution format income statement for June appears below:

Required:Redo the company's contribution format income statement assuming that the company sells 5,700 units.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLevel: Easy

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204. Jalonen Inc., which produces and sells a single product, has provided the following contribution format income statement for October:

Required:Redo the company's contribution format income statement assuming that the company sells 4,500 units.


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205. Colen Corporation produces and sells a single product. In January, the company sold 1,700 units. Its total sales were $153,000, its total variable expenses were $79,900, and its total fixed expenses were $56,800.Required:a. Construct the company's contribution format income statement for January in good form.b. Redo the company's contribution format income statement assuming that the company sells 1,600 units.


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206. In September, Pino Corporation sold 2,100 units of its only product. Its total sales were $195,300, its total variable expenses were $84,000, and its total fixed expenses were $98,700.Required:a. Construct the company's contribution format income statement for September in good form.b. Redo the company's contribution format income statement assuming that the company sells 2,300 units.


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207. Iron Decor manufactures decorative iron railings. In preparing for next year's operations, management has developed the following estimates:

Required:Compute the following items:a. Unit contribution margin.b. Contribution margin ratio.c. Break-even in dollar sales.d. Margin of safety percentage.e. If the sales volume increases by 20% with no change in total fixed expenses, what will be the change in net operating income?f. If the per unit variable production costs increase by 15%, and if fixed selling and administrative expenses increase by 12%, what will be the new break-even point in dollar sales?

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b. CM ratio = Unit CM Selling price = $29.00 per unit $50.00 per unit = 58%

Dollar sales to break even = Fixed expenses CM ratio = $110,000 0.58 = $189,655 (rounded)

Margin of safety percentage = Margin of safety in dollars Current sales= $810,345 $1,000,000 = 81.03%

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CM ratio = $26.60 $50.00 = 53.2%

New break-even in dollars = $113,600 0.532 = $213,534 (rounded)

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-03 Use the contribution margin ratio (cm ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-06 Determine the break-even pointLearning Objective: 05-07 Compute the margin of safety and explain its significanceLevel: Medium

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208. Bumpass Corporation's contribution margin ratio is 74% and its fixed monthly expenses are $43,000. Assume that the company's sales for July are expected to be $102,000.Required:Estimate the company's net operating income for July, assuming that the fixed monthly expenses do not change. Show your work!

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-03 Use the contribution margin ratio (cm ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeLevel: Easy

209. The management of Paye Corporation expects sales in April to be $130,000. The company's contribution margin ratio is 65% and its fixed monthly expenses are $54,000.Required:Estimate the company's net operating income for April, assuming that the fixed monthly expenses do not change. Show your work!


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210. Schlag Inc. expects its sales in January to be $111,000. The company's contribution margin ratio is 65% and its fixed monthly expenses are $64,000.Required:Estimate the company's net operating income for January, assuming that the fixed monthly expenses do not change. Show your work!


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211. Parkins Company produces and sells a single product. The company's income statement for the most recent month is given below:

There are no beginning or ending inventories.Required:a. Compute the company's monthly break-even point in units of product.b. What would the company's monthly net operating income be if sales increased by 25% and there is no change in total fixed expenses?c. What dollar sales must the company achieve in order to earn a net operating income of $50,000 per month?d. The company has decided to automate a portion of its operations. The change will reduce direct labor costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new break-even point in units.

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a. The company's income statement in contribution format would be:

The break-even point in units would be: $72,000 $16 per unit = 4,500 unitsb. 6,000 units 125% = 7,500 units

c. ($72,000 + $50,000) 0.40 = $305,000d. Direct labor costs are presently $10 per unit ($60,000 6,000 units) and will decrease by $4 per unit ($10 40%). Therefore, the company's new cost structure will be:

((2 $30,000) + $42,000) $20 per unit = 5,100 units

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-05 Determine the level of sales needed to achieve a desired target profitLearning Objective: 05-06 Determine the break-even pointLevel: Medium

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212. Almo company manufactures and sells adjustable canopies that attach to motor homes and trailers. Almo developed its budget for the current year assuming that the canopies would sell at a price of $400 each. The variable expenses for each canopy were forecasted to be $200 and the annual fixed expenses were forecasted to be $100,000. Almo had targeted a profit of $400,000. While Almo's sales usually rise during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five months of the year, only 350 units had been sold at the established price, with variable expense as planned, and it was clear that the target profit for the year would not be reached unless some actions were taken. Almo's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following three alternatives were presented to the president, only one of which can be selected.1. Reduce the selling price by $40. The marketing department forecasts that with the lower price, 2,700 units could be sold during the remainder of the year.2. Lower variable expenses per unit by $25 through the use of less expensive materials. Because of the difference in materials, the selling price would have to be lowered by $30 and sales of 2,200 units for the remainder of the year are forecast.3. Cut fixed expenses by $10,000 and lower the selling price by 5 percent. Sales of 2,000 units would be expected for the remainder of the year.Required:a. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to break even.b. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to attain the target profit of $400,000.c. Determine which of the alternatives Almo's president should select to maximize profit.

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a. Unit sales to break even = Fixed expenses Unit CM= $100,000 ($400 per unit - $200 per unit) = $100,000 $200 per unit = 500 unitsb. Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($400,000 + $100,000) $200 per unit = 2,500 unitsc. Which alternative should be selected?Profit = Sales - Variable expenses - Fixed expensesAlternative 1:Sales = ($400 per unit 350 units) + ($360 per unit 2,700 units) = $1,112,000Variable expenses = ($200 per unit 350 units) + ($200 per unit 2,700 units) = $610,000Fixed expenses = $100,000Profit = Sales - Variable expenses - Fixed expenses = $1,112,000 - $610,000 - $100,000= $402,000Alternative 2:Sales = ($400 per unit 350 units) + ($370 per unit 2,200 units) = $954,000Variable expenses = ($200 per unit 350 units) + ($175 per unit 2,200 units) = $455,000Fixed expenses = $100,000Profit = Sales - Variable expenses - Fixed expenses = $954,000 - $455,000 - $100,000= $399,000Alternative 3:Sales = ($400 per unit 350 units) + ($380 per unit 2,000 units) = $900,000Variable expenses = ($200 per unit 350 units) + ($200 per unit 2,200 units) = $510,000Fixed expenses = $90,000Profit = Sales - Variable expenses - Fixed expenses = $900,000 - $510,000 - $90,000= $300,000

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-05 Determine the level of sales needed to achieve a desired target profitLearning Objective: 05-06 Determine the break-even pointLevel: Hard

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213. Zeeb Corporation produces and sells a single product. Data concerning that product appear below:

Fixed expenses are $355,000 per month. The company is currently selling 5,000 units per month.Required:The marketing manager believes that a $12,000 increase in the monthly advertising budget would result in a 160 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLevel: Easy

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214. Data concerning Lantieri Corporation's single product appear below:

Fixed expenses are $162,000 per month. The company is currently selling 3,000 units per month.Required:The marketing manager believes that a $10,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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215. Calderon Corporation produces and sells a single product. Data concerning that product appear below:

Fixed expenses are $110,000 per month. The company is currently selling 1,000 units per month.Required:Management is considering using a new component that would increase the unit variable cost by $56. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? Show your work!

Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin.


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216. Data concerning Goulbourne Corporation's single product appear below:

Fixed expenses are $444,000 per month. The company is currently selling 7,000 units per month.Required:Management is considering using a new component that would increase the unit variable cost by $2. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? Show your work!

Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin.


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217. Tapp Corporation produces and sells a single product. Data concerning that product appear below:

Fixed expenses are $226,000 per month. The company is currently selling 2,000 units per month.Required:The marketing manager would like to cut the selling price by $12 and increase the advertising budget by $13,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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218. Data concerning Maline Corporation's single product appear below:

Fixed expenses are $55,000 per month. The company is currently selling 1,000 units per month.Required:The marketing manager would like to cut the selling price by $6 and increase the advertising budget by $2,700 per month. The marketing manager predicts that these two changes would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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219. Dubitsky Corporation produces and sells a single product. Data concerning that product appear below:

Fixed expenses are $516,000 per month. The company is currently selling 7,000 units per month.Required:The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $55,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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220. Data concerning Tietz Corporation's single product appear below:

Fixed expenses are $1,044,000 per month. The company is currently selling 9,000 units per month.Required:The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $14 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $110,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 400 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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221. Churchwell Corporation produces and sells a single product. Data concerning that product appear below:

Required:a. Assume the company's monthly target profit is $69,000. Determine the unit sales to attain that target profit. Show your work!b. Assume the company's monthly target profit is $41,400. Determine the dollar sales to attain that target profit. Show your work!

a. Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($621,000 + $69,000) $138.00 per unit = 5,000 unitsb. Dollar sales to attain target profit = (Target profit + Fixed expenses) CM ratio= ($621,000 + $41,400) 0.60 = $1,104,000

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-05 Determine the level of sales needed to achieve a desired target profitLevel: Easy

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222. Guagliano Corporation produces and sells a single product whose selling price is $110.00 per unit and whose variable expense is $29.70 per unit. The company's monthly fixed expense is $345,290.Required:a. Assume the company's monthly target profit is $16,060. Determine the unit sales to attain that target profit. Show your work!b. Assume the company's monthly target profit is $40,150. Determine the dollar sales to attain that target profit. Show your work!

a. Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($345,290 + $16,060) $80.30 per unit = 4,500 unitsb. Dollar sales to attain target profit = (Target profit + Fixed expenses) CM ratio= ($345,290 + $40,150) 0.73 = $528,000


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223. Arzola Corporation produces and sells a single product. Data concerning that product appear below:

Required:Assume the company's monthly target profit is $17,080. Determine the unit sales to attain that target profit. Show your work!

Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($461,160 + $17,080) $85.40 = 5,600


224. The selling price of Bayard Corporation's only product is $230.00 per unit and its variable expense is $80.50 per unit. The company's monthly fixed expense is $792,350.Required:Assume the company's monthly target profit is $29,900. Determine the unit sales to attain that target profit. Show your work!

Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($792,350 + $29,900) $149.50 per unit = 5,500 units


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225. Dagnan Corporation produces and sells a single product whose contribution margin ratio is 66%. The company's monthly fixed expense is $667,920 and the company's monthly target profit is $72,600.Required:Determine the dollar sales to attain the company's target profit. Show your work!

Dollar sales to attain target profit = (Target profit + Fixed expenses) CM ratio= ($667,920 + $72,600) 0.66 = $1,122,000


226. The contribution margin ratio of Thronson Corporation's only product is 69%. The company's monthly fixed expense is $455,400 and the company's monthly target profit is $41,400.Required:Determine the dollar sales to attain the company's target profit. Show your work!

Dollar sales to attain target profit = (Target profit + Fixed expenses) CM ratio= ($455,400 + $41,400) 0.69 = $720,000


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227. Penury Company offers two products. At present, the following represents the usual results of a month's operations:

Required:a. Find the break-even point in dollars.b. Find the margin of safety in dollars.c. The company is considering decreasing product K's unit sales to 80,000 and increasing product L's unit sales to 180,000, leaving unchanged the selling price per unit, variable expense per unit, and total fixed expenses. Would you advise adopting this plan?d. Refer to (c) above. Under the new plan, find the break-even point in dollars.e. Under the new plan in (c) above, find the margin of safety in dollars.

a. CM ratio = Contribution margin Sales revenue = $80,000 $200,000 = 40%Dollar sales to break even = Fixed expenses CM ratio = $50,000 0.40 = $125,000b. Margin of safety = Sales revenue - Sales at break-even = $200,000 - $125,000 = $75,000

Yes, the new arrangement is more profitable.d. CM ratio = Contribution margin Sales revenue = $84,000 $240,000 = 35%Dollar sales to break even = Fixed expense CM ratio = $50,000 0.35 = $142,857e. Margin of safety = Sales revenue - Sales at break-even = $240,000 - $142,857 = $97,143

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AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-06 Determine the break-even pointLearning Objective: 05-07 Compute the margin of safety and explain its significanceLearning Objective: 05-09 Compute the break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the break-even pointLevel: Medium

228. Aziz Corporation produces and sells a single product. Data concerning that product appear below:

Required:Determine the monthly break-even in either unit or total dollar sales. Show your work!

Unit sales to break even = Fixed expenses Unit CM = $165,347 $102.70 per unit = 1,610 unitsDollar sales to break even = Fixed expenses CM ratio = $165,347 0.79 = $209,300

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-06 Determine the break-even pointLevel: Easy

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229. Madlem, Inc., produces and sells a single product whose selling price is $240.00 per unit and whose variable expense is $86.40 per unit. The company's fixed expense is $720,384 per month.Required:Determine the monthly break-even in either unit or total dollar sales. Show your work!

Unit sales to break even = Fixed expenses Unit CM = $720,384 $153.60 per unit = 4,690 unitsDollar sales to break even = Fixed expenses CM ratio = $720,384 0.64 = $1,125,600


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230. Heckaman Corporation produces and sells a single product. Data concerning that product appear below:

Required:Determine the monthly break-even in unit sales. Show your work!

Unit sales to break even = Fixed expenses Unit CM = $239,292 $117.30 per unit = 2,040


231. Titlow, Inc., produces and sells a single product. The product sells for $220.00 per unit and its variable expense is $57.20 per unit. The company's monthly fixed expense is $713,064.Required:Determine the monthly break-even in unit sales. Show your work!

Unit sales to break even = Fixed expenses Unit CM = $713,064 $162.80 per unit = 4,380 units


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232. Longiotti Corporation produces and sells a single product. Data concerning that product appear below:

Required:Determine the monthly break-even in total dollar sales. Show your work!

Dollar sales to break even = Fixed expenses CM ratio = $159,600 0.76 = $210,000


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233. Sperazza International, Inc., produces and sells a single product. The product sells for $240.00 per unit and its variable expense is $96.00 per unit. The company's monthly fixed expense is $699,840.Required:Determine the monthly break-even in total dollar sales. Show your work!

Dollar sales to break even = Fixed expenses CM ratio = $699,840 0.60 = $1,166,400


234. Swem Corporation makes a product that sells for $110 per unit. The product's current sales are 17,700 units and its break-even sales are 14,337 units.Required:Compute the margin of safety in both dollars and as a percentage of sales.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-07 Compute the margin of safety and explain its significanceLevel: Easy

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235. Suermann Corporation's only product sells for $140 per unit. Its current sales are 17,500 units and its break-even sales are 14,350 units.Required:Compute the margin of safety in both dollars and as a percentage of sales.


236. Dampf Inc. has provided the following data concerning its only product:

Required:Compute the margin of safety in both dollars and as a percentage of sales.


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237. Mitzel Corporation has provided its contribution format income statement for May.

Required:a. Compute the degree of operating leverage to two decimal places.b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from an 18% increase in sales.

a. Degree of operating leverage = Contribution margin Net operating income= $34,800 $8,300 = 4.19b. Percent increase in net operating income = Percent increase in sales Degree of operating leverage= 18% 4.19 = 75.42%

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-08 Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating incomeLevel: Easy

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238. Butremovic Corporation's contribution format income statement for the most recent month follows:

Required:a. Compute the degree of operating leverage to two decimal places.b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from an 8% increase in sales.



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239. In the most recent month, Eckstrom Corporation's total contribution margin was $208,000 and its net operating income $39,400.Required:a. Compute the degree of operating leverage to two decimal places.b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 1% increase in sales.



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240. Stanger Inc. produces and sells two products. Data concerning those products for the most recent month appear below:

Fixed expenses for the entire company were $17,570.Required:a. Determine the overall break-even point for the company. Show your work!b. If the sales mix shifts toward Product N16S with no change in total sales, what will happen to the break-even point for the company? Explain.

Overall CM ratio = Total contribution margin Total sales = $21,730 $41,000 = 0.53Break-even point in total sales dollars = Fixed expenses Overall CM ratio= $17,570 0.53 = $33,151

Since Product N16S's CM ratio is less than Product X07D's, a shift in the sales mix toward Product N16S will result in an increase in the company's overall break-even point.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-09 Compute the break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the break-even pointLevel: Easy

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241. Torri Inc. produces and sells two products. During the most recent month, Product C34M's sales were $25,000 and its variable expenses were $5,750. Product Y03Z's sales were $40,000 and its variable expenses were $9,850. The company's fixed expenses were $48,310.Required:a. Determine the overall break-even point for the company. Show your work!b. If the sales mix shifts toward Product C34M with no change in total sales, what will happen to the break-even point for the company? Explain.

Overall CM ratio = Total contribution margin Total sales = $49,400 $65,000 = 0.76Break-even point in total sales dollars = Fixed expenses Overall CM ratio= $48,310 0.76 = $63,566

Since Product C34M's CM ratio is greater than Product Y03Z's, a shift in the sales mix toward Product C34M will result in a decrease in the company's overall break-even point.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-09 Compute the break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the break-even pointLevel: Easy

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180. The EG Company produces and sells one product. The following data refer to the year just completed:

Assume that direct labor is a variable cost.

Required:

a. Compute the cost of a single unit of product under both the absorption costing and variable costing approaches.b. Prepare an income statement for the year using absorption costing.c. Prepare a contribution format income statement for the year using variable costing.d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

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a. Cost per unit under absorption costing:

b. Absorption costing income statement:

c. Variable costing income statement:

d.

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AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLearning Objective: 06-02 Prepare income statements using both variable and absorption costingLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Medium

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

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 a contribution format income statement for the month using variable costing.d. Prepare an income statement for the month using absorption costing.e. Reconcile the variable costing and absorption costing net operating incomes for the month.

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a. & b. Unit product costs

c. & d. Income statements

e. Reconciliation

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

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 a contribution format income statement for the month using variable costing.d. Prepare an income statement for the month using absorption costing.e. Reconcile the variable costing and absorption costing net operating incomes for the month.

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a. & b. Unit product costs

c. & d. Income statements

e. Reconciliation

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AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLearning Objective: 06-02 Prepare income statements using both variable and absorption costingLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Hard

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

Required:

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

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a. Variable costing unit product cost

b. Variable costing income statement

c. Computation of absorption costing net operating income


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


Required:

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

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a. Variable costing unit product cost

b. Variable costing income statement

c. Computation of absorption costing net operating income

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLearning Objective: 06-02 Prepare income statements using both variable and absorption costingLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Hard

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185. Hubiak Corporation produces a single product and has the following cost structure:

Required:

Compute the unit product cost under absorption costing. Show your work!

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Easy

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186. Hudalla Corporation produces a single product and has the following cost structure:

Required:

Compute the unit product cost under variable costing. Show your work!


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187. Fellner Corporation produces a single product and has the following cost structure:

Required:

a. Compute the unit product cost under absorption costing. Show your work!b. Compute the unit product cost under variable costing. Show your work!

a. Absorption costing:

b. Variable costing:


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188. Bertone Inc., which produces a single product, has provided the following data for its most recent month of operation:

The company had no beginning or ending inventories.

Required:

Compute the unit product cost under variable costing. Show your work!


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189. Krasnow Inc., which produces a single product, has provided the following data for its most recent month of operation:


Required:

Compute the unit product cost under absorption costing. Show your work!


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190. Cuffee Inc., which produces a single product, has provided the following data for its most recent month of operation:


Required:

a. Compute the unit product cost under absorption costing. Show your work!b. Compute the unit product cost under variable costing. Show your work!

a. Absorption costing:

b. Variable costing:


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191. UHF Antennas, Inc., produces and sells a unique television antenna. The company has just opened a new plant to manufacture the antenna, and the following cost and revenue data have been reported for the first month of the new plant's operation:

Management is anxious to see how profitable the new antenna will be and has asked that an income statement be prepared for the month. Assume that direct labor is a variable cost.

Required:

a. Assuming that the company uses absorption costing, compute the unit product cost and prepare an income statement.b. Assuming that the company uses variable costing, compute the unit product cost and prepare an income statement.c. Explain the reason for any difference in the ending inventories under the two costing methods and the impact of this difference on reported net operating income.

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a. Unit product cost under absorption costing:

b. Unit product cost under variable costing:

c.

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AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-02 Prepare income statements using both variable and absorption costingLevel: Medium

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192. O'Keefe Company, which has only one product, has provided the following data concerning its most recent month of operations:

Required:

a. Prepare a contribution format income statement for the month using variable costing.b. Prepare an income statement for the month using absorption costing.

a. Variable costing income statement

b. Absorption costing income statement

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AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-02 Prepare income statements using both variable and absorption costingLevel: Medium

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


Required:

a. Prepare a contribution format income statement for the month using variable costing.b. Prepare an income statement for the month using absorption costing.

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a. Variable costing income statement

b. Absorption costing income statement

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-02 Prepare income statements using both variable and absorption costingLevel: Hard

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194. Carvey Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:

Required:

a. Determine the absorption costing net operating income for last year. Show your work!b. Determine the absorption costing net operating income for this year. Show your work!

a. and b.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Medium

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195. Last year, Holroyd Corporation's variable costing net operating income was $95,000. The fixed manufacturing overhead costs deferred in inventory under absorption costing amounted to $29,000.

Required:

Determine the absorption costing net operating income last year. Show your work!

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Easy

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196. Last year, Teneyck Corporation's variable costing net operating income was $63,500 and ending inventory decreased by 200 units. Fixed manufacturing overhead cost per unit was $5.

Required:

Determine the absorption costing net operating income for last year. Show your work!


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197. Salonia Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:

Required:

a. Determine the absorption costing net operating income last year. Show your work!b. Determine the absorption costing net operating income this year. Show your work!

a and b.


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198. Cassin Corporation manufactures a variety of products. Last year, the company's variable costing net operating income was $86,300 and ending inventory decreased by 1,700 units. Fixed manufacturing overhead cost per unit was $8.

Required:

Determine the absorption costing net operating income for last year. Show your work!


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199. Gordy Corporation manufactures a variety of products. Last year, variable costing net operating income was $81,000. The fixed manufacturing overhead costs released from inventory under absorption costing amounted to $39,000.

Required:

Determine the absorption costing net operating income last year. Show your work!


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200. Camren Corporation has two major business segments-Apparel and Accessories. Data concerning those segments for December appear below:

Common fixed expenses totaled $357,000 and were allocated as follows: $161,000 to the Apparel business segment and $196,000 to the Accessories business segment.

Required:

Prepare a segmented income statement in the contribution format for the company. Omit percentages; show only dollar amounts.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Easy

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201. The IT Corporation produces and markets two types of electronic calculators: Model 11 and Model 12. The following data were gathered on activities last month:

Required:

Prepare a segmented income statement in the contribution format for last month.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium

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202. Data for May concerning Dorow Corporation's two major business segments-Fibers and Feedstocks-appear below:

Common fixed expenses totaled $345,000 and were allocated as follows: $186,000 to the Fibers business segment and $159,000 to the Feedstocks business segment.

Required:



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203. Mossor Corporation has two major business segments-Retail and Wholesale. In December, the Retail business segment had sales revenues of $510,000, variable expenses of $296,000, and traceable fixed expenses of $61,000. During the same month, the Wholesale business segment had sales revenues of $510,000, variable expenses of $240,000, and traceable fixed expenses of $82,000. Common fixed expenses totaled $191,000 and were allocated as follows: $113,000 to the Retail business segment and $78,000 to the Wholesale business segment.

Required:



Essay Questions

84. Beckley Corporation has provided the following data from its activity-based costing accounting system:

Indirect factory wages $16,000Factory equipment depreciation $193,000

Distribution of Resource Consumption across Activity Cost Pools:

Activity Cost PoolsCustomer

OrdersProduct

Processing Other TotalIndirect factory wages 48% 47% 5% 100%Factory equipment depreciation 61% 25% 14% 100%

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The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs that are not assigned to products.

Required:

a. Determine the total amount of indirect factory wages and factory equipment depreciation costs that would be allocated to the Product Processing activity cost pool. Show your work!

b. Determine the total amount of indirect factory wages and factory equipment depreciation costs that would NOT be assigned to products. Show your work!

Ans:

a. Allocations to the Product Processing activity cost pool:Indirect factory wages (47% × $16,000) $ 7,520Factory equipment depreciation (25% × $193,000) 48,250 Total $55,770

b. As stated in the problem, the costs allocated to the “Other” cost pool are not assigned to products.Indirect factory wages (5% × $16,000) $ 800Factory equipment depreciation (14% × $193,000) 27,020 Total $27,820

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Easy

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85. Desilets Corporation has provided the following data from its activity-based costing accounting system:

Supervisory wages $94,000Factory utilities $128,000


Activity Cost PoolsBatch

Set-UpsUnit

Processing Other TotalSupervisory wages 34% 64% 2% 100%Factory utilities 49% 35% 16% 100%


Required:

a. Determine the total amount of supervisory wages and factory utilities costs that would be allocated to the Unit Processing activity cost pool. Show your work!

b. Determine the total amount of supervisory wages and factory utilities costs that would NOT be assigned to products. Show your work!

Ans:

a. Allocations to the Unit Processing activity cost pool:Supervisory wages (64% × $94,000) $ 60,160Factory utilities (35% × $128,000) 44,800 Total $104,960

b. As stated in the problem, the costs allocated to the “Other” cost pool are not assigned to products.Supervisory wages (2% × $94,000) $ 1,880Factory utilities (16% × $128,000) 20,480 Total $22,360


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86. The following data have been provided by Hooey Corporation from its activity-based costing accounting system:

Supervisory wages $46,000Factory utilities $199,000


Activity Cost PoolsProduct

Change-Overs Machining Other TotalSupervisory wages 59% 33% 8% 100%Factory utilities 18% 69% 13% 100%


Required:

a. Determine the total amount of supervisory wages and factory utilities costs that would be allocated to the Machining activity cost pool. Show your work!

b. Determine the total amount of supervisory wages and factory utilities costs that would NOT be assigned to products. Show your work!

Ans:

a. Allocations to the Machining activity cost pool:Supervisory wages (33% × $46,000) $ 15,180Factory utilities (69% × $199,000) 137,310 Total $152,490

b. As stated in the problem, the costs allocated to the “Other” cost pool are not assigned to products.Supervisory wages (8% × $46,000) $ 3,680Factory utilities (13% × $199,000) 25,870 Total $29,550


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87. Fidler & Jenkins 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 $620,000Travel expenses 140,000Other expenses 120,000 Total $880,000

Distribution of resource consumption:

Activity Cost PoolsWorking On Engagements

Business Development Other Total

Wages and salaries 60% 10% 30% 100%Travel expenses 50% 40% 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?

Ans:

All three parts can be answered using a first-stage allocation of costs.

Working On Engagements

Business Development Other Total

Wages and salaries $372,000 $ 62,000 $186,000 $620,000Travel expenses 70,000 56,000 14,000 140,000Other expenses 42,000 30,000 48,000 120,000 Total $484,000 $148,000 $248,000 $880,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

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88. Dane Housecleaning provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system.

Activity Cost PoolTotal Cost Total Activity

Cleaning $263,784 34,800 hoursJob support 145,180 7,000 jobsClient support 4,774 220 clientsOther 170,000 Not applicableTotal $583,738

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

One particular client, the Hoium family, requested 45 jobs during the year that required a total of 90 hours of housecleaning. For this service, the client was charged $2,000.

Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round off all calculations to the nearest whole cent.

b. Using the activity-based costing system, compute the customer margin for the Hoium family. Round off all calculations to the nearest whole cent.

c. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Hoium family. Round off all calculations to the nearest whole cent.

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Ans:

a. The computation of the activity rates follow:Total Cost Total Activity Activity Rates

Cleaning $263,784 34,800 hours $7.58 per hourJob support $145,180 7,000 jobs $20.74 per jobClient support $4,774 220 clients $21.70 per client

b. The customer margin for the family is computed as follows:Client charges $2,000.00Costs:

Cleaning $682.20Job support 933.30Client support 21.70 1,637.20

Customer margin $ 362.80

Computations for costs:Cleaning: 90 hours × $7.58 per hour = $682.20Job support: 45 jobs × $20.74 per job = $933.30Client support: 1 client × $21.70 per client = $21.70

c. The margin if all costs are allocated on the basis of cleaning hours:

Predetermined overhead rate = $583,738 ÷ 34,800 hours = $16.77 per hour

Client charges $2,000.00Allocated costs* 1,509.30 Customer margin $ 490.70

* 90 hours × $16.77 per hour = $1,509.30

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4,5 Level: Medium

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89. The Kamienski Cleaning Brigade Company provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system.

Activity Cost Pool Total Cost Total ActivityCleaning $185,752 21,700 hoursJob support 171,532 6,100 jobsClient support 15,124 760 clientsOther 240,000 Not applicableTotal $612,408

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.One particular client, the Whiddon family, requested 15 jobs during the year that required a total of 60 hours of housecleaning. For this service, the client was charged $1,170.

Required:

a. Using the activity-based costing system, compute the customer margin for the Whiddon family. Round off all calculations to the nearest whole cent.

b. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Whiddon family. Round off all calculations to the nearest whole cent.

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Ans:

a. The first step is to compute activity rates:Total Cost Total Activity Activity Rates

Cleaning $185,752 21,700 hours $8.56 per hourJob support $171,532 6,100 jobs $28.12 per jobClient support $15,124 760 clients $19.90 per client

The customer margin for the family is computed as follows:Client charges $1,170.00Costs:

Cleaning $513.60Job support 421.80Client support 19.90 955.30

Customer margin $ 214.70

Computations for costs:Cleaning: 60 hours × $8.56 per hour = $513.60Job support: 15 jobs × $28.12 per job = $421.80Client support: 1 client × $19.90 per client = $19.90

b. The margin if all costs are allocated on the basis of cleaning hours:

Predetermined overhead rate = $612,408 ÷ 21,700 hours = $28.22 per hour

Client charges $1,170.00Allocated costs* 1,693.20 Customer margin ($523.20)

* 60 hours × $28.22 per hour = $1,693.20

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4,5 Level: Medium

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90. Cabio Company manufactures two products, Product C and Product D. The company estimated it would incur $119,100 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor hours. Data concerning the current period's operations appear below:

Product C Product DEstimated volume 400 units 3,000 unitsDirect labor hours per unit 1.20 hours 1.30 hourDirect materials cost per unit $4.00 $22.80Direct labor cost per unit $12.00 $13.00

Required:

a. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.

b. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below:

Expected Activity

Activity Cost Pool

Estimated Overhead

Costs Product C Product D TotalMachine setups $ 10,440 60 120 180Purchase orders 78,000 820 1,180 2,000General factory 30,660 480 3,900 4,380Total $119,100

Determine the unit product cost of each product for the current period using the activity-based costing approach.

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Ans:

a. The expected total direct labor hours during the period are computed as follows:

Product C: 400 units × 1.2 hours per unit 480 hoursProduct D: 3,000 units × 1.3 hours per unit 3,900 hoursTotal direct labor hours 4,380 hours

Using these hours as a base, the predetermined overhead using direct labor hours would be:

Estimated overhead cost ÷ Estimated direct labor-hours = $119,100 ÷ 4,380 DLHs = $27.19 per DLH

Using this overhead rate, the unit product costs are:

Product C Product D

Direct materials $ 4.00 $22.80Direct labor 12.00 13.00Manufacturing overhead 32.63 35.35 Total unit product cost $48.63 $71.15

b. The activity rates for each activity cost pool are as follows:

Estimated Overhead

CostsExpected Activity

Activity Rate

Machine setups $10,440 180 $58.00Purchase orders $78,000 2,000 $39.00General factory $30,660 4,380 $7.00

The overhead cost charged to each product is:

Product C Product D

ActivityAmoun

t Activity AmountMachine setups 60 $ 3,480 120 $ 6,960Purchase orders 820 31,980 1,180 46,020General factory 480 3,360 3,900 27,300 Total overhead cost $38,820 $80,280

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Overhead cost per unit:Product C: $38,820 ÷ 400 units = $97.05 per unitProduct D: $80,280 ÷ 3,000 units = $26.76 per unit

Using activity based costing, the unit product cost of each product would be:

Product C Product DDirect materials $ 4.00 $22.80Direct labor 12.00 13.00Manufacturing overhead 97.05 26.76 Total unit product cost $113.05 $62.56

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Hard

91. Danton Company manufactures two products, Product F and Product G. The company expects to produce and sell 600 units of Product F and 3,000 units of Product G during the current year. The company uses activity-based costing to compute unit product costs for external reports. Data relating to the company's three activity cost pools are given below for the current year:

Expected Activity

Activity Cost Pool

Estimated Overhead

Costs Product F Product G TotalMachine setups $13,720 140 140 280Purchase orders $74,730 630 960 1,590General factory $15,000 600 2,400 3,000

Required:

Using the activity-based costing approach, determine the overhead cost per unit for each product.

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Ans:

The activity rates for each activity cost pool are as follows:

Activity Cost Pool

Overhead Estimated

CostsExpected Activity

Activity Rate

Machine setups $13,720 280 $49.00Purchase orders $74,730 1,590 $47.00General factory $15,000 3,000 $5.00

The overhead cost charged to each product is:

Product F Product GActivity Amount Activity Amount

Machine setups 140 $ 6,860 140 $ 6,860Purchase orders 630 29,610 960 45,120General factory 600 3,000 2,400 12,000 Total overhead cost $39,470 $63,980

Overhead cost per unit:Product F: $39,470 ÷ 600 units = $65.78 per unitProduct G: $63,980 ÷ 3,000 units = $21.33 per unit

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Medium

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92. Kretlow Corporation has provided the following data from its activity-based costing accounting system:

Activity Cost Pools Total Cost Total ActivityDesigning products $700,502 3,746 product design hoursSetting up batches $12,400 620 batch set-upsAssembling products $125,440 8,960 assembly hours

Required:

Compute the activity rates for each of the three cost pools. Show your work!

Ans:

Activity Cost Pools Total Cost Total Activity Activity RateDesigning products $700,502 3,746 $187Setting up batches $12,400 620 $20Assembling products $125,440 8,960 $14


93. Data concerning three of Kilmon Corporation's activity cost pools appear below:

Activity Cost Pools Total Cost Total ActivityAssembling products $150,300 8,350 assembly hours

Designing products$1,177,53

5 7,597 product design hoursSetting up batches $14,400 600 batch set-ups

Required:

Compute the activity rates for each of the three cost pools. Show your work!

Ans:

Activity Cost Pools Total Cost Total Activity Activity RateAssembling products $150,300 8,350 $18Designing products $1,177,535 7,597 $155Setting up batches $14,400 600 $24


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94. Doles Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products.

Activity Cost Pools Activity RateSetting up batches $98.54 per batchProcessing customer orders $42.00 per customer orderAssembling products $3.53 per assembly hour

Data concerning two products appear below:

Product K52W Product X94T

Number of batches 55 73Number of customer orders 9 17Number of assembly hours 697 402

Required:

How much overhead cost would be assigned to each of the two products using the company's activity-based costing system?

Ans:

Product K52W Product X94TSetting up batches $5,419.70 $7,193.42Processing customer orders 378.00 714.00Assembling products 2,460.41 1,419.06 Total overhead cost $8,258.11 $9,326.48


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95. Desjarlais Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products.

Activity Cost Pools Activity RateSetting up batches $32.22 per batchAssembling products $6.13 per assembly hourProcessing customer orders $72.75 per customer order

Data concerning two products appear below:

Product S96U Product Q06FNumber of batches 78 24Number of assembly hours 412 178Number of customer orders 53 18

Required:

a. How much overhead cost would be assigned to Product S96U using the company's activity-based costing system? Show your work!

b. How much overhead cost would be assigned to Product Q06F using the company's activity-based costing system? Show your work!

Ans:

a. Product S96USetting up batches (78 batches × $32.22 per batch) $2,513.16Assembling products (412 assembly hours × $6.13 per

assembly hour) 2,525.56Processing customer orders (53 customer orders ×

$72.75 per customer order) 3,855.75 Total overhead cost $8,894.47

b. Product Q06FSetting up batches (24 batches × $32.22 per batch) $ 773.28Assembling products (178 assembly hours × $6.13 per

assembly hour) 1,091.14Processing customer orders (18 customer orders ×

$72.75 per customer order) 1,309.50 Total overhead cost $3,173.92


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96. Archie Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products.

Activity Cost Pools Activity RateSetting up batches $16.68 per batchProcessing customer orders $98.60 per customer orderAssembling products $7.89 per assembly hour

Last year, Product X26X involved 18 batches, 4 customer orders, and 103 assembly hours.

Required:

How much overhead cost would be assigned to Product X26X using the company's activity-based costing system? Show your work!

Ans:

Setting up batches (18 batches × $16.68 per batch) $ 300.24Processing customer orders (4 customer orders ×

$98.60 per customer order) 394.40Assembling products (103 assembly hours × $7.89 per

assembly hour) 812.67 Total overhead cost $1,507.31


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97. IGL Draperies makes custom draperies 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 $140,000Office expense 140,000 Total $280,000


Activity Cost Pools Making Drapes Job SupportOthe

r TotalProduction overhead 60% 20% 20% 100%Office expense 15% 55% 30% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.The amount of activity for the year is as follows:

Activity Cost Pool Annual ActivityMaking drapes 3,000 yardsJob support 140 jobsOther Not applicable

Required:

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

Making Drapes

Job Support Other Total

Production overheadOffice expenseTotal

b. Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes and Job Support activity cost pools by filling in the table below:

Making Drapes Job Support


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c. Prepare an action analysis report in good form of a job that involves making 85 yards of drapes and has direct materials and direct labor cost of $2,990. The sales revenue from this job is $6,000. 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.

Ans:

a. First-stage allocationMaking Drapes Job Support Other Total

Production overhead $84,000 $28,000 $28,000 $140,000Office expense 21,000 77,000 42,000 140,000Total $105,000 $105,000 $70,000 $280,000Activity 3,000 yards 140 jobs

b. Activity rates (costs divided by activity)Making JobDrapes Support

Activity 3,000 yards 140 jobs

Production overhead $28.00 $200.00Office expense 7.00 550.00 Total $35.00 $750.00

c. Overhead cost of the job.

Making Drapes Job Support TotalActivity 85 1Production overhead $2,380 $200 $2,580Office expense 595 550 1,145 Total $2,975 $750 $3,725

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Sales $6,000Green costs:

Direct materials and labor 2,990 Green margin 3,010Yellow costs:

Office expense 1,145 Yellow margin 1,865Red costs:

Production overhead 2,580Red margin ($ 715 )

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 8A LO: 6 Level: Hard

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98. Haskell Hardwood Floors installs oak and other hardwood floors in 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 based costing system:

Overhead costs:Production overhead $120,000Office expense 140,000 Total $260,000


Installing JobActivity Cost Pools Floors Support Other Total

Production overhead 55% 25% 20% 100%Office expense 20% 50% 30% 100%


The amount of activity for the year is as follows:

Activity Cost Pool Annual ActivityInstalling floors 800 squaresJob support 100 jobsOther Not applicable

A “square” is a measure of area that is roughly equivalent to 1,000 square feet.

Required:

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

Installing JobFloors Support Other Total


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b. Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors and Job Support activity cost pools by filling in the table below:

Installing JobFloors Support


c. Compute the overhead cost, according to the activity-based costing system, of a job that involves installing 3.2 squares.

Ans:

a. First-stage allocationInstalling Job

Floors Support Other Total

Production overhead $66,000 $ 30,000$24,00

0 $120,000Office expense 28,000 70,000 42,000 140,000

Total $94,000 $100,000$66,00

0 $260,000

b. Activity rates (costs divided by activity)

Installing JobFloors Support

Activity 800 squares 100 jobs

Production overhead $ 82.50 $ 300.00Office expense 35.00 700.00 Total $117.50 $1,000.00

c. Overhead cost of the job.Installin

g JobFloors Support Total

Activity 3.2 1

Production overhead $264.00 $ 300.00 $ 564.00Office expense 112.00 700.00 812.00 Total $376.00 $1,000.00 $1,376.00

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 8A LO: 6 Level: Medium

6-100


99. Golden Company, a wholesale distributor, uses activity-based costing for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:Wages and salaries $680,000Nonwage expenses 120,000 Total $800,000


Filling Product

Activity Cost Pools OrdersSuppor

t Other TotalWages and salaries 15% 75% 10% 100%Nonwage expenses 25% 55% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.The amount of activity for the year is as follows:

Activity Cost Pool Annual ActivityFilling orders 4,000 ordersProduct support 40 productsOther Not applicable

Required:

Compute the activity rates (i.e., cost per unit of activity) for the Filling Orders and Product Support activity cost pools by filling in the table below:

Filling ProductOrders Support Other Total

Wages and salariesNonwage expenses

6-101


Ans:

First-stage allocationFilling ProductOrders Support Other Total

Wages and salaries$102,00

0 $510,000 $68,000 $680,000

Nonwage expenses 30,00

0 66,000 24,000 120,000

Total$132,00

0 $576,000 $92,000 $800,000

Filling ProductOrders Support

Activity 4,000 orders 40 products

Wages and salaries $25.50 $12,750Nonwage expenses 7.50 1,650 Total $33.00 $14,400


6-102


100. Jared Painting paints the interiors and exteriors of homes and commercial buildings. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its activity-based costing system.

Activity Cost Pool Activity Measure Annual ActivityPainting overhead Square meters 10,000 square metersJob support Jobs 200 jobsOther None Not applicable


The company has already finished the first stage of the allocation process in which costs were allocated to the activity cost centers. The results are listed below:

JobPainting Support Other Total

Painting overhead $ 99,000 $ 45,000$36,00

0 $180,000Office expense 6,000 78,000 36,000 120,000

Total $105,000 $123,000$72,00

0 $300,000

Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job Support activity cost pools by filling in the table below. Round off all calculations to the nearest whole cent.

JobPainting Support

Painting overheadOffice expenseTotal

b. Prepare an action analysis report in good form of a job that involves painting 71 square meters and has direct materials and direct labor cost of $2,410. The sales revenue from this job is $3,800.

For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; painting overhead as a Red cost; and office expense as a Yellow cost.

6-103


Ans:

a. Activity rates (costs divided by activity)Job

Painting SupportPainting overhead $ 9.90 $225.00Office expense 0.60 390.00 Total $10.50 $615.00

b. Overhead cost of the job.Job

Painting Support TotalActivity 71 1

Painting overhead $702.90 $225.00 $ 927.90Office expense 42.60 390.00 432.60 Total $745.50 $615.00 $1,360.50

Sales $3,800.00Green costs:

Direct materials and labor 2,410.00 Green margin 1,390.00Yellow costs:

Office expense 432.60 Yellow margin 957.40Red costs:

Painting overhead 927.90 Red margin $ 29.50


6-104


101. Werger Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, W82R and L48S, about which it has provided the following data:

W82R L48SDirect materials per unit $11.50 $62.90Direct labor per unit $2.00 $13.00Direct labor-hours per unit 0.20 1.30Annual production 45,000 10,000

The company’s estimated total manufacturing overhead for the year is $1,521,960 and the company’s estimated total direct labor-hours for the year is 22,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

Activities and Activity Measures Estimated Overhead CostSupporting direct labor (DLHs) $ 352,000Setting up machines (setups) 201,960Parts administration (part types) 968,000 Total $1,521,960

Activities W82R L48S TotalSupporting direct labor 9,000 13,000 22,000Setting up machines 814 374 1,188Parts administration 924 1,012 1,936

Required:

a. Determine the unit product cost of each of the company's two products under the traditional costing system.

b. Determine the unit product cost of each of the company's two products under activity-based costing system.

6-105


Ans:

a. Traditional Unit Product CostsPredetermined overhead rate = $1,521,960 ÷ 22,000 DLHs = $69.18 per DLH

W82R L48SDirect materials $11.50 $ 62.90Direct labor 2.00 13.00Manufacturing overhead (0.2 DLHs × $69.18 per DLH;

1.3 DLHs × $69.18 per DLH) 13.84 89.93 Unit product cost $27.34 $165.83

b. ABC Unit Product CostsEstimated Overhead

CostTotal Expected

Activity Activity RateSupporting direct labor $352,000 22,000 DLHs $16 per DLHSetting up machines $201,960 1,188 setups $170 per setupParts administration $968,000 1,936 part types $500 per part type

Overhead cost for W82R

Activity Rate ActivityABC Cost

Supporting direct labor $16 per DLH 9,000 DLHs $144,000Setting up machines $170 per setup 814 setups 138,380Parts administration $500 per part type 924 part types 462,000 Total $744,380

6-106


Overhead cost for L48S


Supporting direct labor $16 per DLH 13,000 DLHs $208,000Setting up machines $170 per setup 374 setups 63,580Parts administration $500 per part type 1,012 part types 506,000 Total $777,580

W82R L48SDirect materials $11.50 $62.90Direct labor 2.00 13.00Manufacturing overhead ($744,400 ÷ 45,000 units;

$777,600 ÷ 10,000 units) 16.54 77.76 Unit product cost $30.04 $153.66

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 8B LO: 7 Level: Medium

6-107


102. Torri Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, B40W and C63J, about which it has provided the following data:

B40W C63JDirect materials per unit $34.90 $63.70Direct labor per unit $20.80 $62.40Direct labor-hours per unit 0.80 2.40Annual production 35,000 15,000



Activities and Activity Measures Estimated Overhead CostAssembling products (DLHs) $1,216,000Preparing batches (batches) 480,000Milling (MHs) 960,000 Total $2,656,000

Activities B40W C63J Total

Assembling products28,00

0 36,000 64,000Preparing batches 2,304 2,496 4,800Milling 1,088 2,112 3,200

Required:

a. Determine the unit product cost of each of the company's two products under the traditional costing system.

b. Determine the unit product cost of each of the company's two products under activity-based costing system.

6-108


Ans:

a. Traditional Unit Product CostsPredetermined overhead rate = $2,656,000 ÷ 64,000 DLHs = $41.50 per DLH

B40W C63JDirect materials $34.90 $ 63.70Direct labor 20.80 62.40Manufacturing overhead (0.8 DLHs × $41.50 per DLH;

2.4 DLHs × $41.50 per DLH) 33.20 99.60 Unit product cost $88.90 $225.70

b. ABC Unit Product CostsEstimated Overhead

CostTotal Expected

Activity Activity RateAssembling products $1,216,000 64,000 DLHs $19 per DLHPreparing batches $480,000 4,800 batches $100 per setupMilling $960,000 3,200 MHs $300 per MH

Overhead cost for B40WActivity Rate Activity ABC Cost

Assembling products $19 per DLH 28,000 DLHs $ 532,000Preparing batches $100 per setup 2,304 batches 230,400Milling $300 per MH 1,088 MHs 326,400 Total $1,088,800

Overhead cost for C63JActivity Rate Activity ABC Cost

Assembling products $19 per DLH 36,000 DLHs $ 684,000Preparing batches $100 per setup 2,496 batches 249,600Milling $300 per MH 2,112 MHs 633,600 Total $1,567,200

B40W C63JDirect materials $34.90 $ 63.70Direct labor 20.80 62.40Manufacturing overhead ($1,088,800 ÷ 35,000 units;

$1,567,200 ÷ 15,000 units) 31.11 104.48 Unit product cost $86.81 $230.58


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103. Welk Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, H16Z and P25P, about which it has provided the following data:

H16Z P25PDirect materials per unit $10.20 $50.50Direct labor per unit $8.40 $25.20Direct labor-hours per unit 0.40 1.20Annual production 30,000 10,000



Activities and Activity Measures Estimated Overhead CostSupporting direct labor (DLHs) $ 552,000Setting up machines (setups) 132,480Parts administration (part types) 780,000 Total $1,464,480

H16Z P25P Total

Supporting direct labor12,00

0 12,000 24,000Setting up machines 864 240 1,104Parts administration 600 960 1,560

Required:

a. Determine the manufacturing overhead cost per unit of each of the company's two products under the traditional costing system.

b. Determine the manufacturing overhead cost per unit of each of the company's two products under activity-based costing system.

6-110


Ans:

a. Traditional Manufacturing Overhead CostsPredetermined overhead rate = $1,464,480 ÷ 24,000 DLHs = $61.02 per DLH

H16Z P25PDirect labor-hours 0.40 1.20Predetermined overhead rate per DLH $61.02 $61.02Manufacturing overhead cost per unit $24.41 $73.22

b. ABC Manufacturing Overhead Costs

Estimated Overhead

CostTotal Expected

Activity Activity RateSupporting direct labor $552,000 24,000 DLHs $23 per DLHSetting up machines $132,480 1,104 setups $120 per setupParts administration $780,000 1,560 part types $500 per part type

Overhead cost for H16Z


Supporting direct labor $23 per DLH 12,000 DLHs $276,000Setting up machines $120 per setup 864 setups 103,680Parts administration $500 per part type 600 part types 300,000 Total $679,680Annual production 30,000Manufacturing overhead

cost per unit $22.66

Overhead cost for P25P


Supporting direct labor $23 per DLH 12,000 DLHs $276,000Setting up machines $120 per setup 240 setups 28,800Parts administration $500 per part type 960 part types 480,000 Total $784,800Annual production 10,000Manufacturing overhead



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104. Bullie Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, D31X and U75X, about which it has provided the following data:

D31X U75XDirect materials per unit $29.20 $47.40Direct labor per unit $1.10 $23.10Direct labor-hours per unit 0.10 2.10Annual production 35,000 15,000



Activities and Activity Measures Estimated Overhead CostAssembling products (DLHs) $ 140,000Preparing batches (batches) 241,150Axial milling (MHs) 766,500 Total $1,147,650

D31X U75X Total

Assembling products 3,50031,50

0 35,000Preparing batches 560 1,295 1,855Axial milling 1,540 1,015 2,555

Required:

a. Determine the manufacturing overhead cost per unit of each of the company's two products under the traditional costing system.

b. Determine the manufacturing overhead cost per unit of each of the company's two products under activity-based costing system.

6-112


Ans:

a. Traditional Manufacturing Overhead CostsPredetermined overhead rate = $1,147,650 ÷ 35,000 DLHs = $32.79 per DLH

D31X U75XDirect labor-hours 0.10 2.10Predetermined overhead rate per DLH $32.79 $32.79Manufacturing overhead cost per unit $3.28 $68.86

b. ABC Manufacturing Overhead Costs

Estimated Overhead

CostTotal Expected

Activity Activity RateAssembling products $140,000 35,000 DLHs $4 per DLH

Preparing batches $241,150 1,855batches $130 per batch

Axial milling $766,500 2,555 MHs $300 per MH

Overhead cost for D31X


Assembling products $4 per DLH 3,500 DLHs $ 14,000Preparing batches $130 per batch 560 batches 72,800Axial milling $300 per MH 1,540 MHs 462,000 Total $548,800Annual production 35,000Manufacturing overhead


Overhead cost for U75X


Assembling products $4 per DLH 31,500 DLHs $126,000Preparing batches $130 per batch 1,295 batches 168,350Axial milling $300 per MH 1,015 MHs 304,500 Total $598,850Annual production 15,000Manufacturing overhead



Essay Questions

6-113


114. Weller Industrial Gas Corporation supplies acetylene and other compressed gases to industry. Data regarding the store's operations follow:

Sales are budgeted at $330,000 for November, $300,000 for December, and $320,000 for January.

Collections are expected to be 85% in the month of sale, 14% in the month following the sale, and 1% uncollectible.

The cost of goods sold is 60% of sales. The company purchases 80% of its merchandise in the month prior to the month of

sale and 20% in the month of sale. Payment for merchandise is made in the month following the purchase.

Other monthly expenses to be paid in cash are $21,200. Monthly depreciation is $21,000. Ignore taxes.

Statement of Financial PositionOctober 31

Assets:Cash $ 22,000Accounts receivable (net of allowance for uncollectible accounts) 83,000Inventory 158,400Property, plant and equipment (net of $594,000 accumulated

depreciation) 1,004,000 Total assets $1,267,400

Liabilities and Stockholders’ Equity:Accounts payable $ 196,000Common stock 620,000Retained earnings 451,400 Total liabilities and stockholders’ equity $1,267,400

Required:

a. Prepare a Schedule of Expected Cash Collections for November and December.b. Prepare a Merchandise Purchases Budget for November and December.c. Prepare Cash Budgets for November and December.d. Prepare Budgeted Income Statements for November and December.e. Prepare a Budgeted Balance Sheet for the end of December.

6-114


Ans:

a. November DecemberSales $330,000 $300,000

Schedule of Expected Cash CollectionsAccounts receivable $ 83,000November sales 280,500 $ 46,200December sales 255,000 Total cash collections $363,500 $301,200

b. November December

Cost of goods sold $198,000 $180,000

Merchandise Purchases BudgetNovember sales $ 39,600December sales 144,000 $ 36,000January sales 153,600 Total purchases $183,600 $189,600

Disbursements for merchandise $196,000 $183,600

c. November DecemberCash receipts $363,500 $301,200Cash disbursements:

Disbursements for merchandise 196,000 183,600Other monthly expenses 21,200 21,200 Total cash disbursements 217,200 204,800

Excess (deficiency) of cash available over disbursements $146,300 $ 96,400

d. November December

Sales $330,000 $300,000Bad debt expense 3,300 3,000Cost of goods sold 198,000 180,000 Gross margin 128,700 117,000 Other monthly expenses 21,200 21,200Depreciation 21,000 21,000 Net operating income $ 86,500 $ 74,800

6-115


e. Statement of Financial Position

December 31Assets:Cash $ 264,700Accounts receivable (net of allowance for

uncollectible accounts) 42,000Inventory 153,600Property, plant and equipment (net of $636,000

accumulated depreciation) 962,000 Total assets $1,422,300

Liabilities and Stockholders’ Equity:Accounts payable $ 189,600Common stock 620,000Retained earnings 612,700 Total liabilities and stockholders’ equity $1,422,300

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 2,3,8,9,10 Level: Hard

115. 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 60,000May 75,000June 90,000July 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 units should be purchased for each of the months April, May, and June.

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

6-116


Ans:

a. April May June JulyBudgeted sales, in units 60,000 75,000 90,000 81,000

Desired ending inventory (40%) 30,000 36,000 32,400 Total needs 90,000 111,000 122,400

Less beginning inventory 38,000 30,000 36,000 Required purchases 52,000 81,000 86,400

b. April May June

Budgeted sales, at $2 per unit $120,000 $150,000$180,00

0March 31 accounts receivable $ 85,000

April sales 40,000 $ 80,000

May sales 50,000 $100,00

0June sales 60,000

Total cash collections $125,000 $130,000$160,00

0

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 2,3 Level: Medium

6-117


116. Capes Corporation is a wholesaler of industrial goods. Data regarding the store's operations follow:

Sales are budgeted at $390,000 for November, $360,000 for December, and $340,000 for January.

Collections are expected to be 85% in the month of sale, 10% in the month following the sale, and 5% uncollectible.

The cost of goods sold is 80% of sales. The company purchases 40% of its merchandise in the month prior to the month of

sale and 60% in the month of sale. Payment for merchandise is made in the month following the purchase.

The November beginning balance in the accounts receivable account is $77,000. The November beginning balance in the accounts payable account is $320,000.

Required:

a. Prepare a Schedule of Expected Cash Collections for November and December.b. Prepare a Merchandise Purchases Budget for November and December.

Ans:

a. November DecemberSales $390,000 $360,000

Schedule of Expected Cash CollectionsAccounts receivable $ 77,000November sales 331,500 $ 39,000December sales 306,000 Total cash collections $408,500 $345,000

b. November December

Cost of goods sold $312,000 $288,000

Merchandise Purchases BudgetNovember sales $187,200December sales 115,200 $172,800January sales 108,800 Total purchases $302,400 $281,600

Disbursements for merchandise $320,000 $302,400


6-118


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

April May June

Sales50,00

0 40,000 60,000

Production60,00

0 50,000 50,000

Cash-related production costs are budgeted at $5 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 $100,000 per month. The accounts payable balance on March 31 totals $190,000, which will be paid in April.

All units are sold on account for $14 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 $500,000 $(90,000 from February's sales and the remainder from March).

Required:

a. Prepare a schedule for each month showing budgeted cash disbursements for the Clay Company.

b. Prepare a schedule for each month showing budgeted cash receipts for Clay Company.

6-119


Ans:

a. April May JuneProduction units 60,000 50,000 50,000Cash required per unit × $5 × $5 × $5

Production costs $300,000$250,00

0 $250,000

Cash disbursements:April May June

Production this month (40%) $120,000$100,00

0 $100,000Production prior month (60%) 190,000 180,000 150,000Selling and administrative 100,000 100,000 100,000

Total disbursements $410,000$380,00

0 $350,000

Payments relating to the prior month (March) in April represent the balance of accounts payable at March 31.

b. April May June

Sales units 50,000 40,000 60,000Sales price × $14 × $14 × $14

Total sales $700,000$560,00

0 $840,000

April May JuneCash receipts:February sales $ 90,000

March sales 307,500$102,50

0April sales 420,000 210,000 $ 70,000May sales 336,000 168,000June sales 504,000

Total receipts $817,500$648,50

0 $742,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 2,4 Level: Hard

6-120


118. The Doley Company has planned the following sales for the next three months:

Jan Feb MarBudgeted sales $40,000 $50,000 $70,000

Sales are made 20% for cash and 80% on account. From experience, the company has learned that a month’s sales on account are collected according to the following pattern:

Month of sale 60%First month following sale 30%Second month following sale 8%Uncollectible 2%

The company requires a minimum cash balance of $5,000 to start a month. The beginning cash balance in March is budgeted to be $6,000.

Required:

a. Compute the budgeted cash receipts for March.b. The following additional information has been provided for March:

Inventory purchases (all paid in March) $28,000Selling and administrative expenses (all paid in March) $40,000Depreciation expense for March $5,000Dividends paid in March $4,000

Prepare a cash budget in good form for the month of March, using this information and the budgeted cash receipts you computed for part (1) above. The company can borrow in any dollar amount and will not pay interest until April.

6-121


Ans:

a. Cash sales, March: $70,000 × 20% $14,000Collections on account:Jan. sales: $40,000 × 80% × 8% 2,560Feb. sales: $50,000 × 80% × 30% 12,000Mar. sales: $70,000 × 80% × 60% 33,600 Total cash receipts $62,160

b. Cash balance, beginning $ 6,000

Add cash receipts from sales 62,160 Total cash available 68,160

Less disbursements:Inventory purchases 28,000Selling and administrative expenses 40,000Dividends 4,000 Total disbursements 72,000 Cash excess (deficiency) (3,840)Financing–borrowing 8,840 Cash balance, ending $ 5,000


6-122


119. A sales budget is given below for one of the products manufactured by the Key Co.:

January 21,000 unitsFebruary 36,000 unitsMarch 61,000 unitsApril 41,000 unitsMay 31,000 unitsJune 25,000 units

The inventory of finished goods at the end of each month should equal 20% of the next month's sales. However, on December 31 the finished goods inventory totaled only 4,000 units.Each unit of product requires three specialized electrical switches. Since the production of these specialized switches by Key's suppliers is sometimes irregular, the company has a policy of maintaining an ending inventory at the end of each month equal to 30% of the next month's production needs. This requirement had been met on January 1 of the current year.

Required:Prepare a budget showing the quantity of switches to be purchased each month for January, February, and March and in total for the quarter.

Ans:January February March April

Budgeted sales (units) 21,000 36,000 61,000 41,000Add: Desired ending inventory 7,200 12,200 8,200 6,200 Total needs 28,200 48,200 69,200 47,200Deduct: Beginning inventory 4,000 7,200 12,200 8,200 Units to be produced 24,200 41,000 57,000 39,000

January February March QuarterUnits to be produced 24,200 41,000 57,000 122,200Switches per unit ×3 ×3 ×3 ×3Production needs 72,600 123,000 171,000 366,600Add: Desired ending inventory 36,900 51,300 35,100 35,100

Total needs109,50

0 174,300 206,100 401,700Deduct: Beginning inventory 21,780 36,900 51,300 21,780 Required purchases 87,720 137,400 154,800 379,920

Beginning inventory, January 1: 72,600 × 0.3 = 21,780Ending inventory, March 31: (39,000 × 3) × 0.3 = 35,100

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Hard

6-123


120. One quarter gram of a rare seasoning is required for each bottle of Dipping Oil, a very popular product sold through gourmet shops that is produced by The Lucas Company. The cost of the seasoning is $16 per gram. Budgeted production of Dipping Oil is given below for the second quarter, and the first month of the third quarter.

April May June July

Required production bottles 5,0008,00

0 15,000 10,000

The seasoning is so difficult to get that the company must have on hand at the end of each month 20% of the next month's production needs. A total of 250 grams will be on hand at the beginning of April.

Required:

Prepare a direct materials budget for the seasoning, by month and in total for the second quarter. Be sure to include both the quantity to be purchased and its cost for each month.

Ans:Lucas Company

Direct Materials Budget for the Second Quarter

April May June TotalRequired production (bottles) 5,000 8,000 15,000 28,000Seasoning required per bottle

(grams) ×0.25 ×0.25 ×0.25 ×0.25Production needs (grams) 1,250 2,000 3,750 7,000Add desired ending inventory of

seasoning 400 750 500 500 Total needs 1,650 2,750 4,250 7,500Less beginning inventory of

seasoning 250 400 750 250 Seasoning to be purchased (grams) 1,400 2,350 3,500 7,250Cost of seasoning per gram × $16 × $16 × $16 × $16Cost of seasoning to be purchased $22,400 $37,600 $56,00 $116,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

6-124


121. Whitmer Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.05 direct labor-hours. The direct labor rate is $11.80 per direct labor-hour. The production budget calls for producing 7,100 units in February and 6,800 units in March.

Required:

Construct the direct labor budget for the next two months, assuming that the direct labor work force is fully adjusted to the total direct labor-hours needed each month.

Ans:Februar

y MarchRequired production in units 7,100 6,800Direct labor-hours per unit 0.05 0.05Total direct labor-hours needed 355 340Direct labor cost per hour $11.80 $11.80Total direct labor cost $4,189 $4,012


122. Sthilaire Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.34 direct labor-hours. The direct labor rate is $11.10 per direct labor-hour. The production budget calls for producing 8,000 units in April and 8,300 units in May. The company guarantees its direct labor workers a 40-hour paid work week. With the number of workers currently employed, that means that the company is committed to paying its direct labor work force for at least 2,840 hours in total each month even if there is not enough work to keep them busy.

Required:

Construct the direct labor budget for the next two months.

Ans:April May

Required production in units 8,000 8,300Direct labor-hours per unit 0.34 0.34Total direct labor-hours needed 2,720 2,822Total direct labor-hours paid 2,840 2,840Direct labor cost per hour $11.10 $11.10Total direct labor cost $31,524 $31,524

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 5 Level: Medium

6-125


123. Brockney Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The variable overhead rate is $8.60 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $107,970 per month, which includes depreciation of $9,760. All other fixed manufacturing overhead costs represent current cash flows. The July direct labor budget indicates that 6,100 direct labor-hours will be required in that month.

Required:

a. Determine the cash disbursement for manufacturing overhead for July.b. Determine the predetermined overhead rate for July.

Ans:

a. JulyBudgeted direct labor-hours 6,100Variable overhead rate $8.60Variable manufacturing overhead $ 52,460Fixed manufacturing overhead 107,970 Total manufacturing overhead 160,430Less depreciation 9,760 Cash disbursement for manufacturing overhead $150,670

b. Total manufacturing overhead (a) $160,430Budgeted direct labor-hours (b) 6,100Predetermined overhead rate for the month (a)/(b) $26.30


6-126


124. The manufacturing overhead budget of Reigle Corporation is based on budgeted direct labor-hours. The February direct labor budget indicates that 5,800 direct labor-hours will be required in that month. The variable overhead rate is $4.60 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $82,360 per month, which includes depreciation of $16,820. All other fixed manufacturing overhead costs represent current cash flows.

Required:

a. Determine the cash disbursement for manufacturing overhead for February. Show your work!

b. Determine the predetermined overhead rate for February. Show your work!

Ans:

a. FebruaryBudgeted direct labor-hours 5,800Variable overhead rate $4.60Variable manufacturing overhead $ 26,680Fixed manufacturing overhead 82,360 Total manufacturing overhead 109,040Less depreciation 16,820 Cash disbursement for manufacturing overhead $ 92,220

b. Total manufacturing overhead (a) $109,040Budgeted direct labor-hours (b) 5,800Predetermined overhead rate for the month (a)/(b) $18.80


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125. Wala Inc. bases its selling and administrative expense budget on the number of units sold. The variable selling and administrative expense is $8.20 per unit. The budgeted fixed selling and administrative expense is $132,800 per month, which includes depreciation of $14,400. The remainder of the fixed selling and administrative expense represents current cash flows. The sales budget shows 8,000 units are planned to be sold in July.

Required:

Prepare the selling and administrative expense budget for July.

Ans:

JulyBudgeted unit sales 8,000Variable selling and administrative expense per unit $8.20Budgeted variable expense $ 65,600Budgeted fixed selling and administrative expense 132,800 Total budgeted selling and administrative expense 198,400Less depreciation 14,400 Cash disbursements for selling and administrative expenses $184,000


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126. The selling and administrative expense budget of Garney Corporation is based on the number of units sold, which are budgeted to be 1,800 units in October. The variable selling and administrative expense is $2.00 per unit. The budgeted fixed selling and administrative expense is $22,680 per month, which includes depreciation of $7,020. The remainder of the fixed selling and administrative expense represents current cash flows.

Required:

Prepare the selling and administrative expense budget for October.

Ans:October

Budgeted unit sales 1,800Variable selling and administrative expense per unit $2.00Budgeted variable expense $ 3,600Budgeted fixed selling and administrative expense 22,680 Total budgeted selling and administrative expense 26,280Less depreciation 7,020 Cash disbursements for selling and administrative expenses $19,260


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127. Romeiro Corporation is preparing its cash budget for September. The budgeted beginning cash balance is $46,000. Budgeted cash receipts total $160,000 and budgeted cash disbursements total $152,000. The desired ending cash balance is $70,000. The company can borrow up to $120,000 at any time from a local bank, with interest not due until the following month.

Required:

Prepare the company's cash budget for September in good form.

Ans:

Cash balance, beginning $ 46,000Add cash receipts 160,000 Total cash available 206,000Less cash disbursements 152,000 Excess (deficiency) of cash available over disbursements 54,000Borrowings 16,000 Cash balance, ending $ 70,000


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128. Zolezzi Inc. is preparing its cash budget for March. The budgeted beginning cash balance is $42,000. Budgeted cash receipts total $178,000 and budgeted cash disbursements total $175,000. The desired ending cash balance is $50,000. The company can borrow up to $160,000 at any time from a local bank, with interest not due until the following month.

Required:

Prepare the company's cash budget for March in good form. Make sure to indicate what borrowing, if any, would be needed to attain the desired ending cash balance.

Ans:

Cash balance, beginning $ 42,000Add cash receipts 178,000 Total cash available 220,000Less cash disbursements 175,000 Excess (deficiency) of cash available over disbursements 45,000Borrowings 5,000 Cash balance, ending $ 50,000


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