JOB ORDER COSTING (Chapter 3)/COST SYSTEMS AND ANALYSIS
(WRITE ANSWERS IN YOUR NOTEBOOK)
1. The difference between sales and variable expenses is called the ______________________.
ANSWER: contribution margin.
2. The ________________________ is the point where total revenue equals total cost.
ANSWER: break-even point
3. The ______________________ is the proportion of each sales dollar that must be used to cover variable
costs.
ANSWER: variable cost ratio
4. The _________________________ is the proportion of each sales dollar available to cover fixed costs and
provide for profit.
ANSWER: contribution margin ratio
5. ___________________________________ is the income statement format that is based on the separation
of costs into fixed and variable components.
ANSWER: Contribution margin income statement
6. ______________ gives us a way to determine how many units must be sold, or how much sales revenue
must be generated to earn a particular target income.
ANSWER: CVP analysis
7. Assuming that fixed costs remain unchanged, the _____________________ can be used to find the profit
impact of a change in sales revenue.
ANSWER: contribution margin ratio
8. The amount of income an organization is trying to achieve during a particular period is known as the
_____________.
ANSWER: target income
9. __________ is the relative combination of products being sold by a firm.
ANSWER: Sales mix
10. The _________________ is the units sold or the revenue earned above the break-even volume.
ANSWER: margin of safety
11. _____________________ is the use of fixed costs to extract higher percentage changes in profits as sales
activity changes.
ANSWER: Operating leverage
12. The _________________________________ can be measured for a given level of sales by taking the ratio
of contribution margin to operating income.
ANSWER: degree of operating leverage
13. If actual sales equal break-even sales
a. the margin of safety is negative.
b. the margin of safety is positive.
c. it is impossible to say anything about the margin of safety.
d. the margin of safety equals zero.
e. the margin of safety is negative or positive.
ANSWER: d
14. If fixed costs increase, the break-even point in units will
a. increase.
b. decrease.
c. remain the same.
d. remain the same; however, contribution per unit will decrease.
ANSWER: a
15. The ratio of fixed expenses to the unit contribution margin is the:
A. break-even point in unit sales.
B. profit margin.
C. contribution margin ratio.
D. margin of safety.
16. The margin of safety is equal to:
A. Sales - Net operating income.
B. Sales - (Variable expenses/Contribution margin).
C. Sales - (Fixed expenses/Contribution margin ratio).
D. Sales - (Variable expenses + Fixed expenses).
17. The left side of the Manufacturing Overhead account is used to accumulate:
A. actual manufacturing overhead costs incurred throughout the accounting period.
B. overhead applied to Work-in-Process Inventory.
C. underapplied overhead.
D. predetermined overhead.
E. overapplied overhead.
18. Throughout the accounting period, the credit side of the Manufacturing Overhead account is used to
accumulate:
A. actual manufacturing overhead costs.
B. overhead applied to Work-in-Process Inventory.
C. overapplied overhead.
D. underapplied overhead.
E. predetermined overhead.
19. An accountant recently debited Work-in-Process Inventory and credited Manufacturing Overhead at a
company that uses normal costing. The accountant was:
A. applying a predetermined overhead amount to production.
B. recognizing receipt of the factory utilities bill.
C. recording a year-end adjustment for an insignificant amount of underapplied overhead.
D. recognizing actual overhead incurred during the period.
E. recognizing the completion of production.
20. The final step in recognizing the completion of production requires a company to:
A. debit Finished-Goods Inventory and credit Work-in-Process Inventory.
B. debit Work-in-Process Inventory and credit Finished-Goods Inventory.
C. add direct labor to Work-in-Process Inventory.
D. add direct materials, direct labor, and manufacturing overhead to Work-in-Process Inventory.
E. add direct materials to Finished-Goods Inventory.
21. If the amount of effort and attention to products varies substantially throughout a company's various
manufacturing operations, the company might consider the use of:
A. a plant-wide overhead rate.
B. departmental overhead rates.
C. actual overhead rates instead of predetermined overhead rates.
D. direct labor hours to determine the overhead rate.
E. machine hours to determine the overhead rate.
22. CVP analysis can be used to study the effect of:
A. changes in selling prices on a company's profitability.
B. changes in variable costs on a company's profitability.
C. changes in fixed costs on a company's profitability.
D. changes in product sales mix on a company's profitability.
E. All of these.
23. Which of the following would produce the largest increase in the contribution margin per unit?
A. A 7% increase in selling price.
B. A 15% decrease in selling price.
C. A 14% increase in variable cost.
D. A 17% decrease in fixed cost.
E. A 23% increase in the number of units sold.
24. Which of the following would take place if a company experienced an increase in fixed costs?
A. Net income would increase.
B. The break-even point would increase.
C. The contribution margin would increase.
D. The contribution margin would decrease.
E. More than one of the above events would occur.
PART II. APPLICATION OF CONCEPTS (SHOW SOLUTIONS)
25. Boston Company charges manufacturing overhead to products by using a predetermined application
rate, computed on the basis of machine hours. The following data pertain to the current year:
Budgeted manufacturing overhead:
$480,000
Actual manufacturing overhead:
$440,000
Budgeted machine hours:
20,000
Actual machine hours:
16,000
Overhead applied to production totaled:
A. $352,000.
B. $384,000.
C. $550,000.
D. $600,000.
E. some other amount.
Predetermined = Budgeted Manufacturing Overhead
Overhead rate
Budgeted Machine Hours
= $480,000
20,000
= $24
Applied
Manufacturing
Overhead
Actual machine hours x
Predetermine Overhead rate
16,000 hours x $24
= $384,000
26. Simone uses a predetermined overhead application rate of $8 per direct labor hour. A review of the
company's accounting records for the year just ended discovered the following:
Underapplied manufacturing overhead: $7,200
Actual manufacturing overhead: $392,000
Budgeted labor hours: 50,000
Simone's actual labor hours worked totaled:
A. 48,100.
B. 49,100.
C. 49,900.
D. 50,900.
E. cannot be determined based on the information presented.
27. Tiffany charges manufacturing overhead to products by using a predetermined application rate, computed
on the basis of labor hours. The following data pertain to the current year:
Which of the following choices is the correct status of manufacturing overhead at year-end?
A. Overapplied by $10,000.
B. Underapplied by $10,000.
C. Overapplied by $35,000.
D. Underapplied by $35,000.
E. Overapplied by $45,000.
Predetermined Manufacturing
Overhead
Applied Manufacturing Overhead
Actual Manufacturing Overhead
Overapplied manufacturing overhead
= Budgeted Manufacturing Overhed
Budgeted labor hours
= $1,800,000
60,000
= $
30.00
($30 x 61,500)
$
1,845,000
1,810,000
$
35,000
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 28-32
Morrow Company applies overhead based on direct labor hours. At the beginning of the year, Morrow
estimates overhead to be $620,000, machine hours to be 180,000, and direct labor hours to be 40,000. During
February, Morrow has 4,200 direct labor hours and 8,000 machine hours.
28. What is the predetermined overhead rate?
a. $3.44 per machine hour
b. $147.62 per direct labor hour
c. $15.50 per direct labor hour
d. $77.50 per machine hour
e. None of these are correct.
ANSWER: C
Predetermined overhead rate = $620,000 / 40,000 = $15.50 per direct labor hour
29. What is the amount of overhead applied for February?
a. $65,100
b. $42,000
c. $24,000
d. $78,200
e. $66,410
ANSWER: A
:
Predetermined Overhead rate = $15.50 per direct labor hour
Applied overhead
= $15.50 × 4,200 = $65,100
30. If the actual overhead for February is $64,700, what is the overhead variance and is it overapplied or
underapplied?
a. $400 underapplied
b. $200 overapplied
c. $1,000 underapplied
d. $400 overapplied
e. $600 overapplied
ANSWER: D
Actual Manufacturing Overhead
$64,700
Applied Manufacturing Overhead
65,100
Overapplied manufacturing overhead $ 400
31. Smith has applied overhead of $73,000 and actual overhead of $87,600 for the month of November. It
applies overhead based on direct labor hours and those equaled 14,600 in November. Overhead for the year
was estimated to be $900,000. How many direct labor hours were estimated for the year?
a. 175,200
b. 180,000
c. $5
d. 150,000
e. $6
ANSWER: B
:
Predetermined overhead rate = $73,000 / 14,600 = $5 per direct labor hour
Direct labor hours = $900,000 / $5 per direct labor hour = 180,000
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 32-36.
Warwick Company has the following transactions for the month of September:
Purchased materials on account for
$220,384.
Materials requisitioned for
$91,562.
Direct labor for the month was incurred (but not yet paid) of
$69,000.
Actual overhead for the month was $41,000. It has not been paid yet. (Charge to various
payables.)
Overhead is applied to production at the rate of 65% of direct labor.
Jobs totaling $42,500 were transferred from Work-in-Process to Finished Goods.
Jobs costing $23,000 were sold.
Balances at the beginning of the month were:
Materials
Work-in-Process
Finished Goods
22,760
0
10,040
32. Calculate the Ending Balance of Raw Materials.
a. $220,384
b. $151,582
c. $185,320
d. $22,760
e. 91,562
ANSWER: B
Raw Materials, beginning
Purchases
Materials available
Requisitioned/used in production
Raw Materials, ending
$
$
$
22,760.00
220,384
243,144.00
91,562
151,582
33. What is the ending balance in Work-in-Process?
a. $162,912
b. $113,083
c. $166,414
d. $123,870
e. $0
Work in process, beginning
Direct Materials
Direct Labor
Manufacturing overhead applied
Total work in process
Transferred to Finished Goods/
Cost of goods manufactured
Work in process, ending
$
$
91,562
69,000
44,850
205,412
$
42,500
162,912
34. What is the correct journal entry to record actual overhead for the month?
a. Overhead Control
41,000
Various Payables
41,000
b. Work-in-Process
41,000
Various Payables
41,000
c. Various Payables
41,000
Work-in-Process
41,000
d. Various Payable
41,000
Overhead Control
41,000
e. none of these are correct
ANSWER: a
35. What is the journal entry to record applied overhead for the month?
a. Work-in-Process
44,850
Overhead Control
44,850
b. Various Payables
44,850
Overhead Control
44,850
c. Overhead Control
44,850
Work-in-Process
44,850
d. Overhead Control
44,850
Various Payables
44,850
ANSWER: a
36. What is the ending balance of Finished Goods?
a. $23,321
b. $29,540
c. $64,321
d. $0
e. $10,040
Finished boods, beginning
Cost goods manufactured
Toal goods available
Goods sold
Finished goods, end
$
$
$
10,040
42500
52,540
23,000
29,540
37. Mcgarey Inc. has provided the following data for the month of November. There were no beginning
inventories; consequently, the direct materials, direct labor, and manufacturing overhead applied listed
below are all for the current month.
Manufacturing overhead for the month was underapplied by $12,000.
The company allocates any underapplied or overapplied overhead among work in process, finished goods, and
cost of goods sold at the end of the month on the basis of the overhead applied during the month in those
accounts.
The cost of goods sold for November after allocation of any underapplied or overapplied overhead for the
month is closest to:
A. $253,350
B. $275,310
C. $255,390
D. $277,350
Unadjusted cost of goods sold
Allocation of underapplied Manufacturing
Overhead ($74,700/$90,000)x$12,000
Adjusted cost of goods sold
265,350
9,960
275,310
38. Reddy Company has the following cost formulas for overhead:
Based on these cost formulas, the total overhead cost at 600 machine hours is expected to be:
A. $4,500
B. $5,200
C. $5,620
D. $5,340
39. Bakken Corporation has provided the following production and average cost data for two levels of monthly
production volume. The company produces a single product.
The best estimate of the total variable manufacturing cost per unit is:
A. $16.50
B. $90.40
C. $45.50
D. $106.90
Manufacturing Overhead
No. of units
Per Unit
Amount
High
5000 $
108.50 $ 542,500.00
Low
4000 $
131.50 $ 526,000.00
1000
$
16,500.00
$
Variable Cost per unit
$
16,500
1,000
16.50
40. Slosh Cleaning Corporation services both residential and commercial customers. Slosh expects the
following operating results next year for each type of customer:
Slosh expects to have $18,000 in fixed expenses next year. What would Slosh's total dollar sales have to be
next year in order to generate a profit of $90,000?
A. $216,000
B. $250,000
C. $270,000
D. $300,000
Residential
Commercial
Total
Sales
60,000
140,000
200,000
Variable Cost
30,000
98,000
128,000
Contribution Margin
30,000
42,000
72,000
Contribution Margin
Ratio
50%
30%
36%
Break-even sales to achieve target
profit of $90,000
$18,000+$90,000
36%
$
300,000
41. Austin Manufacturing had the following operating data for the year just ended.
Management plans to improve the quality of its only product by: (1) replacing a component that costs
$3.50 with a higher-grade component that costs $5.50; and (2) renting a packing machine for $18,000 a
year. If the desired target profit is $288,000, the company must sell:
A. 19,300 units
B. 21,316 units
C. 22,500 units
D. 20,842 units
Increase in
Variable Cost
Selling Price per unit $
60.00
$
60.00
Variable Cost
22.00
2.00
24.00
$
38.00 $
-2.00 $
36.00
Number of units
to breakeven
$288,000+$504,000+$18,000
$36
22,500
42. The cost of goods sold in a retail store totaled $325,000. Fixed selling and administrative expenses totaled
$115,000 and variable selling and administrative expenses were $210,000. If the store's contribution
margin totaled $590,000, then sales must have been:
A. $1,125,000
B. $1,030,000
C. $915,000
D. $650,000
To solve this problem, work backwards. First, calculate what total variable expenses must be by adding the
variable cost of goods sold and the variable selling and administrative expenses, or $325,000 + $210,000 =
$535,000. Next, add the total variable expenses to the contribution margin to get sales, or $535,000 +
$590,000 = $1,125,000.
43-45 Hurst Co. manufacturers and sells a single product. Price and cost data regarding this product are as
follows:
43. The break-even point in units per year is:
A. 15,200 units
B. 26,600 units
C. 38,000 units
D. 40,000 units
Selling Price
Variable Manufacturing cost
Variable Selling and Admin expenses
Contribution margin per unit
Number of units to sell to break-even
Per Unit
$
40.00
-20
-6
$
14.00
$208,000+$324,000
$
14.00
38,000
44. How many units need to be sold to earn an annual net operating income equal to 10% of sales?
A. 44,000 units
B. 53,200 units
C. 54,500 units
D. 47,500 units
Variable expenses per unit = $20 + $6 = $26
Total fixed expenses = $208,000 + $324,000 = $532,000
$40Q = $26Q + $532,000 + ($40Q x 10%)
$40Q = $26Q + $532,000 + $4Q
$10Q = $532,000
Q = 53,200 units
45. In the current year, the company sold 43,000 units. Due to competition, management will be forced to
lower the selling price by 10% next year. How many units must be sold next year to earn the same income
as was earned in the current year?
A. 50,000 units
B. 53,200 units
C. 58,800 units
D. 60,200 units
Variable expenses per unit = $20 + $6 = $26
Total fixed expenses = $208,000 + $324,000 = $532,000
Last year's net operating income:
New selling price per unit = $40 - (10% x $40) = $36
New contribution margin per unit = $36 - $26 = $10
Sales to achieve target profit = ($532,000 + $70,000) $10 = 60,200 units
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