Exam 3 Review

1
Exam 3 Review

• This review does not cover every thing, use it
  with your books, notes, handouts, and quizzes.

2
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.

3
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.

4
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.

5
Chapter 9

• Absorption Variable
• Direct materials 150,000 150,000
• Direct manufacturing labor 187,500 187,500
• Variable MOH 100,000 100,000
• Fixed MOH overhead 200,000 0
• Total 637,500 437,500

6
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.

7
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

8
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

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 7,200 of fixed manufacturing costs
  is expensed as a lump sum.

10
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

11
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

12
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

13
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.

14
Chapter 9

• a. Absorption Variable
• Total cost per unit 16.40 12.00
• b. Absorption Variable
• Ending inventory 32,800 24,000

15
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.

16
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.

17
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

18
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.

19
Chapter 10

• You need to know
• A nonlinear cost function.
• A step function.
• The learning curve.

20
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

21
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

22
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

23
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

24
Chapter 10

• For Carroll Company, labor-hours are 12,500 and
  wages 47,000 at the high point of the relevant
  range, and labor-hours are 7,500 and wages
  35,000 at the low point of the relevant range.
• 88. What is the slope coefficient per labor-hour?
• 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 labor-hour

25
Chapter 10

• What is the estimate of total labor costs at
  Carroll Company when 10,000 labor-hours are used?
• a. 17,000
• b. 41,000
• c. 21,167
• d. 27,000
• Answer b

26
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

27
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?

28
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

29
Chapter 10

• Patrick Ross, the president of Rosss 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 Machine-hours 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

30
Chapter 10

• Using the high-low method, determine the overhead
  cost equation. Use machine-hours as your cost
  driver.
• Estimated cost equation y 18,350 1.60
  (1,000)

31
Chapter 3

• You need to know
• The purpose of cost-volume-profit analysis.
• Breakeven point in units ?
• Breakeven point in ?
• Contribution margin ?-?
• Target operating income.
• After taxes target net income.
• Sensitivity analysis.

32
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?

33
Chapter 3

• Cost-volume-profit 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.

34
Chapter 3

• Cost-volume-profit 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

35
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.

36
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

37
Chapter 3

• Ruben intends to sell his customers a special
  round-trip airline ticket package. He is able to
  purchase the package from the airline carrier for
  150 each. The round-trip 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.

38
Chapter 3

• What is the contribution margin per ticket
  package?
• a. 50
• b. 100
• c. 150
• d. 200
• Answer a 200 - 150 50

39
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

40
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

41
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

42
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

43
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.

44
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

45
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)

46
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.

47
Chapter 3

• a. For each option, compute the breakeven sales
  and the monthly rent paid at break-even.
• b. Beginning at zero sales, show the sales
  levels at which each option is preferable up to
  5,000 units.

48
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

49
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

50
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

51
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

52
Chapter 3

• Good luck.