Unformatted text preview: Exam 3 Review Exam 3 Review
This review does not cover every thing, use it with your books, notes, handouts, and quizzes. Chapter 9 Chapter 9
• You need to know:
– The only difference between variable and absorption costing. – Fixed overhead is treated a period cost under costing, while it is treated as product cost under costing. – When we produce more than we sell, the operating income will be higher under costing. – The inventory buildup (producing for inventory). – The effect of inventory buildup on the operating income. Chapter 9 Chapter 9
• You need to know:
– That under the throughput costing only direct material costs are included as inventoriable costs. – How to calculate the production volume variance. Chapter 9 Chapter 9
• • • • • • • • • • For 20x4, Nichols, Inc. had sales of 75,000 units and production of 100,000 units. Other information for the year included: Direct manufacturing labor $187,500 Variable manufacturing overhead 100,000 Direct materials 150,000 Variable selling expenses 100,000 Fixed administrative expenses 100,000 Fixed manufacturing overhead 200,000 There was no beginning inventory. Required: a. Compute the ending finished goods inventory under both absorption and variable costing. Chapter 9 Chapter 9
•
Absorption Direct materials $150,000 Direct manufacturing labor 187,500 Variable MOH 100,000 Fixed MOH overhead 200,000 Total $637,500 Variable $150,000 187,500 100,000 0 $437,500 Chapter 9 Chapter 9
• Morse Corporation incurred fixed manufacturing costs of • • • • •
$7,200 during 20x4. Other information for 20x4 includes: The budgeted denominator level is 800 units. Units produced total 1,000 units. Units sold total 950 units. Beginning inventory was zero. The fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. Chapter 9 Chapter 9
• Under absorption costing, fixed manufacturing • • • • •
• costs expensed on the income statement (excluding adjustments for variances) total a. $8,550. b. $9,000. c. $7,200. d. zero.
Answer: a $7,200 / 800 units = $9 x 950 = $8,550 Chapter 9 Chapter 9
• Under absorption costing, the production • • • • •
• volume variance is a. $450. b. $1,350. c. $1,800. d. zero. Answer: c $7,200 / 800 units = $9 x 200 = $1,800 Chapter 9 Chapter 9
• • • • • •
Under variable costing, the fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total a. $8,550. b. $7,200. c. $9,000. d. zero.
Answer: b as a lump sum. $7,200 of fixed manufacturing costs is expensed Chapter 9 Chapter 9
• Operating income using absorption costing will • • • • • •
be __________ operating income if using variable costing. a. $450 higher than b. $900 higher than c. $1,350 lower than d. the same as Answer: a Chapter 9 Chapter 9
• At the end of the accounting period Bumsted Corporation reports operating income of $30,000 and the fixed overhead cost rate is $20 per unit. Under variable costing, if this company produces 100 more units of inventory, then operating income a. will increase by $2,000. b. will increase by $2,000 only if the 100 additional units of inventory are sold. c. will not be affected. d. cannot be determined using only the above information. Answer: c • • • • • Chapter 9 Chapter 9
• Jarvis Golf Company sells a special putter for $20 each. In March, it sold • • • • • • •
28,000 putters while manufacturing 30,000. There was no beginning inventory on March 1. Production information for March was: Direct manufacturing labor per unit 15 minutes Fixed selling and administrative costs $ 40,000 Fixed manufacturing overhead 132,000 Direct materials cost per unit 2 Direct manufacturing labor per hour 24 Variable manufacturing overhead per unit 4 Variable selling expenses per unit 2 Chapter 9 Chapter 9
• Required: a. Compute the cost per unit under •
both absorption and variable costing. b. Compute the ending inventories • under both absorption and variable costing. Chapter 9 Chapter 9
• a. • b.
• Total cost per unit
• Ending inventory Absorption Absorption
$ 32,800 $16.40 Variable
$12.00 Variable
$ 24,000 Chapter 9 Chapter 9
• Veach Corporation incurred fixed manufacturing costs of $6,000 during • • • • • • • • • •
20x4. Other information for 20x4 includes: The budgeted denominator level is 1,000 units. Units produced total 750 units. Units sold total 600 units. Beginning inventory was zero. The company uses VARIABLE COSTING and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. Fixed manufacturing costs included in ending inventory total a. $1,200. b. $1,500. c. $900. d. zero. Chapter 9 Chapter 9
• Answer: d •
Under variable costing no fixed manufacturing costs are included in inventory, and all are expensed on the income statement as a lump sum. Chapter 10 Chapter 10
• You need to know:
– What is a cost function? – The relevant range of activities. – Cost estimation – Industrial engineering method – Conference method – Account analysis method Chapter 10 Chapter 10
• You need to know:
– – – Under high low method; unit variable cost = ?/? FC = F + V (x) Advantages and disadvantages of each estimation method. – Criteria to evaluate and choose cost driver – How do we interpret the “r2” (coefficient of determination) and the “r” (correlation coefficient). – How to interpret the regression equation into a cost function. Chapter 10 Chapter 10
• You need to know:
– A nonlinear cost function. – A step function. – The learning curve. Chapter 10 Chapter 10
• The cost function y = 1,000 + 5X a. has a slope coefficient of 1,000. • b. has an intercept of 5. • c. is a straight line. • d. represents a fixed cost. • Answer: c • Chapter 10 Chapter 10
• At the Jordan Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs. Total personnel department costs are $160,000. Department A B C Number of employees 30 270 100 The number of new hires 8 12 5 • • • • Chapter 10 Chapter 10
• If number of new hires is considered the cost • • • • •
driver, what amount of personnel costs will be allocated to Department A? a. $12,000 b. $5,333 c. $51,200 d. $20,000 Answer: c [8 / (8 + 12 + 5)] x $160,000 = $51,200 Chapter 10 Chapter 10
• Which cost estimation method is being • • • • •
used by Jordan Company? a. The industrial engineering method b. The conference method c. The account analysis method d. The quantitative analysis method Answer: b Chapter 10 Chapter 10
• For Carroll Company, laborhours are 12,500 and wages • • • • • • •
$47,000 at the high point of the relevant range, and laborhours are 7,500 and wages $35,000 at the low point of the relevant range. 88. What is the slope coefficient per laborhour? a. $4.67 b. $3.76 c. $2.40 d. $0.42 Answer: c Slope = ($47,000 35,000)/(12,500 – 7,500) = $2.40 per laborhour Chapter 10 Chapter 10
• What is the estimate of total labor costs at • • • • •
Carroll Company when 10,000 laborhours are used? a. $17,000 b. $41,000 c. $21,167 d. $27,000 Answer: b Chapter 10 Chapter 10
• Arfaei Company manufactures chairs. Because the efforts of manufacturing are approximately equal between labor and machinery, management is considering other possible cost drivers. By considering different cost drivers, it is anticipated that the estimating process can be improved. The following cost estimating equations with their r2 values have been determined for 20x3: 1. X = cutting time y = $19,500 + $20X r2 = 0.65 2. X = labor y = $5,000 + $25X r2 = 0.49 3. X = machinery y = $44,500 + $5X r2 = 0.55 Chapter 10 Chapter 10
• Required: a. Which equation should be • selected for the analysis? b. What other factors should be • included in the selection of the estimating equation? Chapter 10 Chapter 10
A Equation 1 for cutting time is slightly better than the other two equations based on r2 values. B Other factors to be considered are economic plausibility, the significance of independent variables, and specification analysis. The best cost drivers of the dependent variables are those that meet all these criteria plus that of best coefficient of determination Chapter 10 Chapter 10
• Patrick Ross, the president of Ross’s Wild Game Company, has asked for information about the cost behavior of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available. Month Machinehours Overhead Costs February 1,700 $20,500 March 2,800 22,250 April 1,000 19,950 May 2,500 21,500 June 3,500 23,950 • • • • • • Chapter 10 Chapter 10
• Using the highlow method, determine the overhead cost equation. Use machine hours as your cost driver.
Estimated cost equation: y = $18,350 + $1.60 (1,000) • Chapter 3 Chapter 3
• You need to know:
– The purpose of costvolumeprofit analysis. – Breakeven point in units = ? – Breakeven point in $ = ? – Contribution margin = ?? – Target operating income. – After taxes target net income. – Sensitivity analysis. Chapter 3 Chapter 3
• You need to know:
– – Operating leverage describes The higher the proportion of fixed cost the ? the operating leverage. – The degree of operating leverage = ?/? – In what way you can use the degree of operating leverage? – If sales volume increased by %10 and the degree of operating leverage is 2, how much the increase in net income? Chapter 3 Chapter 3
• Costvolumeprofit analysis is used • • • • •
PRIMARILY by management a. as a planning tool. b. for control purposes. c. to prepare external financial statements. d. to attain accurate financial results. Chapter 3 Chapter 3
• Costvolumeprofit analysis is used • • • • •
PRIMARILY by management a. as a planning tool. b. for control purposes. c. to prepare external financial statements. d. to attain accurate financial results. Answer: a Chapter 3 Chapter 3
• The contribution income statement a. reports gross margin. • b. is allowed for external reporting to • • • • shareholders. c. categorizes costs as either direct or indirect. d. can be used to predict future profits at different levels of activity. Chapter 3 Chapter 3
• The contribution income statement a. reports gross margin. • b. is allowed for external reporting to • • • • shareholders. c. categorizes costs as either direct or indirect. d. can be used to predict future profits at different levels of activity. Answer: d Chapter 3 Chapter 3
• Ruben intends to sell his customers a special roundtrip airline ticket package. He is able to purchase the package from the airline carrier for $150 each. The roundtrip tickets will be sold for $200 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,000 in advertising costs. Chapter 3 Chapter 3
• What is the contribution margin per ticket • • • • •
package? a. $50 b. $100 c. $150 d. $200 Answer: a $200 $150 = $50 Chapter 3 Chapter 3
• How many ticket packages will Ruben • • • • •
need to sell in order to break even? a. 34 packages b. 50 packages c. 100 packages d. 150 packages Answer: c 200X – 150X – 5,000 = 0; X = 100 Chapter 3 Chapter 3
• How many ticket packages will Ruben need to • • • • •
sell in order to achieve $60,000 of operating income? a. 367 packages b. 434 packages c. 1,100 packages d. 1,300 packages Answer: d 200X – 150X – 5,000 = 60,000; X = 1,300 Chapter 3 Chapter 3
• For every $25,000 of ticket packages sold, • • • • • •
operating income will increase by a. $6,250. b. $12,500. c. $18,750. d. impossible to compute. Answer: a $25,000 x ($50 / $200) = $6,250 Chapter 3 Chapter 3
• The strategy MOST likely to reduce the breakeven point • • • • •
would be to a. increase both the fixed costs and the contribution margin. b. decrease both the fixed costs and the contribution margin. c. decrease the fixed costs and increase the contribution margin. d. increase the fixed costs and decrease the contribution margin. Answer: c Chapter 3 Chapter 3
• Cheaney Manufacturing produces a single product that sells for $200. Variable costs per unit equal $50. The company expects total fixed costs to be $120,000 for the next month at the projected sales level of 2,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Chapter 3 Chapter 3
• Suppose that management believes that a $24,000 • • • • •
increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by how much to justify this additional expenditure? a. 320 units b. 480 units c. 160 units d. none of the above Answer: c 200X – 50X – 24,000 = 0; X = 160 units to cover the expenditures Chapter 3 Chapter 3
• Suppose that management believes that a 20% reduction in the • • • • • • • •
selling price will result in a 20% increase in sales. If this proposed reduction in selling price is implemented, a. operating income will decrease by $36,000. b. operating income will increase by $36,000. c. operating income will decrease by $80,000. d. operating income will increase by $44,000. Answer: a $200 x 20% = $40 x 2,000 units = ($80,000) 2000 units x 20% = 400 units x ($160 $50) = 44,000 Change in operating income ($36,000) Chapter 3 Chapter 3
• Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling price of an arrangement is $30 and the average cost of each sale is $18. A new mall is opening where Karen wants to locate a store, but the location manager is not sure about the rent method to accept. The mall operator offers the following three options for its retail store rentals: 1. paying a fixed rent of $15,000 a month, 2. paying a base rent of $9,000 plus 10% of revenue received, or 3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of $25,000. • • • Chapter 3 Chapter 3
• a. For each option, compute the breakeven sales and the monthly rent paid at breakeven. b. Beginning at zero sales, show the • sales levels at which each option is preferable up to 5,000 units. Chapter 3 Chapter 3
• a. • • • • • • • • •
Option 1 N = Breakeven units $30N $18N $15,000 = 0 $12N $15,000 = 0 N = $15,000/$12 = 1,250 units Rent at breakeven = $15,000 Option 2 N = Breakeven units $30N $18N 0.10($30N) $9,000 = 0 $9N $9,000 = 0 N = $9,000/$9 = 1,000 units Rent at breakeven = $9,000 + (0.10 x $30 x 1,000) = $12,000 Chapter 3 Chapter 3
• • • • •
Option 3 N = Breakeven units $30N $18N 0.20($30N) $4,800 = 0 $6N $4,800 = 0 N = $4,800/$6 = 800 units Rent at breakeven = $4,800 + (0.20 x $30 x 800) = $9,600 Chapter 3 Chapter 3
• b. • • • • • •
Option 3 from 0 to 1,400 units for $4,800 plus $6 per unit. Option 2 from 1,401 to 2,000 for $9,000 plus $3 per unit. Option 1 above 2,000 for $15,000. Option 1 equals Option 2 when sales are 2,000 and favors Option 1 above 2,000 units. $15,000 = $9,000 + 0.10($30N); $6,000 = $3N; N = 2,000 Option 1 equals Option 3 when sales are 1,700 and favors Option 1 above 1,700 units. $15,000 = $4,800 + 0.20($30N); $10,200 = $6N; N = 1,700 units Chapter 3 Chapter 3
• • • • • •
If the contribution‑margin ratio is 0.30, targeted net income is $76,800, and targeted sales volume in dollars is $480,000, then total fixed costs are a. $23,000. b. $44,160. c. $67,200. d. $144,000. Answer: c Chapter 3 Chapter 3
• Good luck. ...
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This note was uploaded on 04/13/2011 for the course FINANCE 101 taught by Professor Richard during the Spring '11 term at UCLA.
 Spring '11
 Richard

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