CHAPTER 9 PROFIT PLANNING
Learning Objectives
 Understand why organizations budget and the processes they use to create
budgets.
 Describe the behavioral aspects of budgeting.
 Prepare budgets.
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for acquiring and using financial and other
resources over a specified forthcoming time period.
1. The act of preparing a budget is called budgeting.
2. The use of budgets to control an organization’s activities is known as budgetary
control.
Planning and Control
Planning – involves developing objectives and preparing various budgets to achieve
those objectives.
Control – involves the steps taken by management to increase the likelihood that the
objectives set down while planning are attained and that all parts of the organization are
working together toward that goal.
Advantages of Budgeting
Page 1
Responsibility Accounting
Managers should be held responsible for those items - and only those items - that they
can actually control to a significant extent.
Choosing the Budget Period
Self-Imposed Budget
Page 2
Top Management
Middle
Management
Supervisor
Supervisor
Middle
Management
Supervisor
Supervisor
A self-imposed budget or participative budget is a budget that is prepared with the full
cooperation and participation of managers at all levels.
Advantages of Self-Imposed Budgets
a. Individuals at all levels of the organization are viewed as members of the team
whose judgments are valued by top management.
b. Budget estimates prepared by front-line managers are often more accurate than
estimates prepared by top managers.
c. Motivation is generally higher when individuals participate in setting their own goals
than when the goals are imposed from above.
d. A manager who is not able to meet a budget imposed from above can claim that it
was unrealistic. Self-imposed budgets eliminate this excuse.
Self-Imposed Budgets
 Self-imposed budgets should be reviewed by higher levels of management to
prevent “budgetary slack.”
 Most companies issue broad guidelines in terms of overall profits or sales. Lower
level managers are directed to prepare budgets that meet those targets.
Human Factors in Budgeting
The success of a budget program depends on three important factors:
1. Top management must be enthusiastic and committed to the budget process.
2. Top management must not use the budget to pressure employees or blame them
when something goes wrong.
3. Highly achievable budget targets are usually preferred when managers are
rewarded based on meeting budget targets.
The Budget Committee
A standing committee responsible for
 overall policy matters relating to the budget
 coordinating the preparation of the budget
 resolving disputes related to the budget
 approving the final budget
Page 3
The Master Budget: An Overview
Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash received from financing;
2. Cash disbursements section consists of all cash payments excluding repayments of
principal and interest;
3. Cash excess or deficiency section determines if the company will need to borrow
money or if it will be able to repay funds previously borrowed; and
4. Financing section details the borrowings and repayments projected to take place
during the budget period.
Page 4
Reference
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc
For further discussion please refer to the link provided:
Chapter 9-The Basic Framework of Budgeting- https://youtu.be/pCwLhz0ltlE
Chapter 9-Profit Planning: Preparing Budgets- https://youtu.be/eoyOlK0dr2M
Chapter 9- Master budget process Managerial Accounting-https://youtu.be/2Wbr7cScyOA
Page 5
CHAPTER 10 PROFIT PLANNING PROBLEM DISCUSSION
Learning Objectives:
Perform the basic operations of profit planning.
Learn to analyze and calculate problems.
Applying the methods of accounting.
True/False Questions
1. The direct labor budget begins with sales in units from the sales budget.
Ans: False
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 5 Level: Easy
AICPA BB: Critical Thinking
2. The selling and administrative expense budget lists all costs of production
other than direct materials and direct labor.
Ans: False
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 6,7 Level: Easy
AICPA BB: Critical Thinking
3. In the manufacturing overhead budget, the non-cash charges (such as
depreciation) are deducted from the total budgeted manufacturing overhead to
determine the expected cash disbursements for manufacturing overhead.
Ans: True
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
4. The selling and administrative expense budget lists the budgeted expenses for
areas other than manufacturing.
Ans: True
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
5. The disbursements section of a cash budget consists of all cash payments for
the period except cash payments for dividends.
Ans: False
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 8 Level: Medium
Multiple Choice Questions
Page 1
AICPA BB: Critical Thinking
Use the following to answer the next four questions:
Information on the actual sales and inventory purchases of the Law Company for the
first quarter follow:
Sales
Inventory Purchases
January ...............
$120,000
$60,000
February .............
$100,000
$78,000
March ..................
$130,000
$90,000
Collections from Law Company's customers are normally 60% in the month of sale,
30% in the month following sale, and 8% in the second month following sale. The
balance is uncollectible. Law Company takes full advantage of the 3% discount allowed
on purchases paid for by the end of the following month.
The company expects sales in April of $150,000 and inventory purchases of $100,000.
Selling and administrative expenses for the month of April are expected to be $38,000,
of which $15,000 is salaries and $8,000 is depreciation. The remaining selling and
administrative expenses are variable with respect to the amount of sales in dollars.
Those selling and administrative expenses requiring a cash outlay are paid for during
the month incurred. Law Company's cash balance on March 1 was $43,000, and on
April 1 was $35,000.
6. The expected cash collections from customers during April would be:
A) $150,000
B) $137,000
C) $139,000
D) $117,600
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
April sales ($150,000 × 60%) ........
March sales ($130,000 × 30%)......
February sales ($100,000 × 8%) ...
Expected cash collections .............
$ 90,000
39,000
8,000
$137,000
7. The expected cash disbursements during April for inventory purchases would
be:
Page 2
A)
B)
C)
D)
$100,000
$97,000
$90,000
$87,300
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Easy
AICPA BB: Critical Thinking
Solution:
Expected cash disbursements for April for inventory purchases = March inventory
purchases × (100% − discount percentage for paying by end of month)
= $90,000 × (100% − 3%) = $90,000 × 97% = $87,300
8. The expected cash disbursements during April for selling and administrative
expenses would be:
A) $38,000
B) $30,000
C) $23,000
D) $15,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
Solution:
Expected cash disbursements during April for selling and administrative
expenses = Total selling and administrative expenses − Depreciation
= $38,000 − $8,000 = $30,000
9. The expected cash balance on April 30 would be:
A) $54,700
B) $62,700
C) $19,700
D) $28,700
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Hard
Solution:
April sales ($150,000 × 60%) ........
March sales ($130,000 × 30%)......
February sales ($100,000 × 8%) ...
Expected cash collections .............
Page 3
$ 90,000
39,000
8,000
$137,000
AICPA BB: Critical Thinking
Expected cash disbursements for April for inventory purchases = March inventory
purchases × (100% − discount percentage for paying by end of month)
= $90,000 × (100% − 3%) = $90,000 × 97% = $87,300
Expected cash disbursements = Total selling and administrative expenses −
Depreciation = $38,000 − $8,000 = $30,000
Expected cash balance = Beginning cash balance + Total cash receipts −
Expected cash disbursements for inventory purchases − Expected cash
disbursements for selling and administrative expenses
= $35,000 + $137,000 − $87,300 − $30,000
= $35,000 + $19,700 = $54,700
Use the following to answer the next two questions:
The LaPann Company has obtained the following sales forecast data:
Cash sales ..........
July
$80,000
August
$70,000
September
$50,000
October
$60,000
Credit sales .........
$240,000
$220,000
$180,000
$200,000
The regular pattern of collection of credit sales is 20% in the month of sale, 70% in the
month following the month of sale, and the remainder in the second month following the
month of sale. There are no bad debts.
10. The budgeted accounts receivable balance on September 30 is:
A) $126,000
B) $148,000
C) $166,000
D) $190,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
September sales ($180,000 × 80%*)
August sales ($220,000 × 10%**) .
Total..............................................
*100% − 20%
**100% − 20% − 70%
11. The budgeted cash receipts for October are:
Page 4
$144,000
22,000
$166,000
A)
B)
C)
D)
$188,000
$248,000
$226,000
$278,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
$
October cash sales ................................... 60,000
October credit sales ($200,000 × 20%) .... 40,000
September credit sales ($180,000 ×
70%) ...................................................... 126,000
August credit sales ($220,000 × 10%) ...... 22,000
$248,00
Total ......................................................... 0
Use the following to answer the next two questions:
Sarafiny Corporation is in the process of preparing its annual budget. The following
beginning and ending inventory levels are planned for the year.
Finished goods (units) ...
Raw material (grams) ....
Beginning
Inventory
20,000
50,000
Ending
Inventory
30,000
40,000
Each unit of finished goods requires 7 grams of raw material.
12. If the company plans to sell 270,000 units during the year, the number of units
it would have to manufacture during the year would be:
A) 300,000 units
B) 270,000 units
C) 260,000 units
D) 280,000 units
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Units produced = Ending inventory + Units sold − Beginning inventory
Page 5
= 30,000 + 270,000 − 20,000 = 280,000
13. How much of the raw material should the company purchase during the year?
A) 1,960,000 grams
B) 1,950,000 grams
C) 1,970,000 grams
D) 2,000,000 grams
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
Materials purchased = Ending inventory + Materials to be used − Beginning
inventory = 40,000 + (280,000 × 7) − 50,000
= 40,000 + 1,960,000 − 50,000 = 1,950,000
Use the following to answer the next two questions:
LBC Corporation makes and sells a product called Product WZ. Each unit of Product
WZ requires 3.5 hours of direct labor at the rate of $14.50 per direct labor-hour.
Management would like you to prepare a Direct Labor Budget for June.
14. The budgeted direct labor cost per unit of Product WZ would be:
A) $50.75
B) $14.50
C) $4.14
D) $18.00
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Budgeted direct labor cost per unit = Direct labor-hours per unit × Direct labor
rate
= 3.5 × $14.50 = $50.75
15. The company plans to sell 39,000 units of Product WZ in June. The finished
goods inventories on June 1 and June 30 are budgeted to be 200 and 100
units, respectively. Budgeted direct labor costs for June would be:
A) $1,984,325
B) $1,974,175
C) $1,979,250
D) $564,050
Page 6
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
AICPA BB: Critical Thinking
Solution:
Units produced = Ending inventory + Units sold − Beginning inventory
= 100 + 39,000 − 200 = 38,900
Budgeted direct labor cost per unit = Direct labor-hours per unit × Direct labor
rate
= 3.5 × $14.50 = $50.75
Budgeted direct labor cost = Units produced × Budgeted direct labor cost per unit
= 38,900 × $50.75 = $1,974,175
Use the following to answer the next two questions:
Barley Enterprises has budgeted unit sales for the next four months as follows:
October ...............
4,800 units
November ...........
5,800 units
December ...........
6,400 units
January ...............
5,200 units
The ending inventory for each month should be equal to 15% of the next month's sales
in units. The inventory on September 30 was below this level and contained only 600
units.
16. The total units to be produced in October are:
A) 4,530
B) 5,070
C) 5,670
D) 5,890
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Units produced = Ending inventory + Units sold − Beginning inventory
= (15% × 5,800) + 4,800 − 600 = 870 + 4,800 − 600 = 5,070
Page 7
17. The desired ending inventory for December is:
A) 960
B) 870
C) 780
D) 690
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Desired ending inventory for December = 15% of January’s sales in units
= 15% × 5,200 = 780
Use the following to answer the next two questions:
Harden, Inc., has budgeted sales in units for the next five months as follows:
June ....................
7,000 units
July .....................
5,300 units
August ................
7,100 units
September ..........
6,800 units
October ...............
4,900 units
Past experience has shown that the ending inventory for each month should be equal to
15% of the next month's sales in units. The inventory on May 31 contained 1,050 units.
The company needs to prepare a production budget for the next five months.
18. The beginning inventory for September should be:
A) 1,020 units
B) 1,050 units
C) 1,065 units
D) 735 units
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Page 8
AICPA BB: Critical Thinking
The beginning inventory for September is equal to the ending inventory for
August.
Desired ending inventory for August = 15% × September’s sales in units
= 15% × 6,800 = 1,020
19. The total number of units produced in July should be:
A) 5,300 units
B) 6,365 units
C) 5,570 units
D) 5,030 units
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Units produced = Ending inventory + Units sold − Beginning inventory
= (7,100 × 15%) + 5,300 − (5,300 × 15%)
= 1,065 + 5,300 − 795 = 5,570
Use the following to answer questions 78-79:
Caspion Corporation makes and sells a product called a Miniwarp. One Miniwarp
requires 2.5 kilograms of the raw material Jurislon. Budgeted production of Miniwarps
for the next five months is as follows:
August ................
22,600 units
September ..........
21,300 units
October ...............
22,700 units
November ...........
23,900 units
December ...........
23,600 units
The company wants to maintain monthly ending inventories of Jurislon equal to 20% of
the following month's production needs. On July 31, this requirement was not met since
only 10,800 kilograms of Jurislon were on hand. The cost of Jurislon is $18.00 per
kilogram. The company wants to prepare a Direct Materials Purchase Budget for the
next five months.
20. The desired ending inventory of Jurislon for the month of September is:
A) $81,720
B) $76,680
Page 9
C)
D)
$191,700
$204,300
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
Desired ending inventory = 20% × Direct materials needed for October × Cost
per kilogram of Jurislon = 20% × (22,700 × 2.5) × $18 = 11,350 × $18 = $204,300
21. The total cost of Jurislon to be purchased in August is:
A) $1,839,600
B) $1,014,300
C) $1,208,700
D) $1,017,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
Materials purchased = Ending inventory + Materials used − Beginning inventory
= (20% × 21,300 × 2.5) + (22,600 × 2.5) − 10,800
= 10,650 + 56,500 − 10,800 = 56,350
Total cost of purchase = 56,350 × $18 = $1,014,300
Use the following to answer the next four questions:
The International Company makes and sells only one product, Product SW. The
company is in the process of preparing its Selling and Administrative Expense Budget
for the last half of the year. The following budget data are available:
Sales commissions........................
Shipping ........................................
Advertising.....................................
Executive salaries .........................
Depreciation on office equipment ..
Other .............................................
Variable Cost Monthly
Per Unit Sold
Cost
$0.70
$1.10
$0.20
$14,000
$34,000
$11,000
$0.25
$19,000
Fixed
All expenses other than depreciation are paid in cash in the month they are incurred.
22. If the company has budgeted to sell 25,000 units of Product SW in July, then
Page 10
the total budgeted selling and administrative expenses for July will be:
A) $56,250
B) $78,000
C) $134,250
D) $123,250
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Medium
Solution:
AICPA BB: Critical Thinking
Variable cost per unit = ($0.70 + $1.10 + $0.20 + $0.25) = $2.25
Fixed cost = $14,000 + $34,000 + $11,000 + $19,000 = $78,000
Total budgeted selling and administrative expenses = Variable cost + Fixed cost
= ($2.25 × 25,000) + $78,000 = $56,250 + $78,000 = $134,250
23. If the company has budgeted to sell 20,000 units of Product SW in October
then the total budgeted variable selling and administrative expenses for
October will be:
A) $45,000
B) $40,000
C) $56,250
D) $78,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Medium
AICPA BB: Critical Thinking
Solution:
Variable cost per unit = ($0.70 + $1.10 + $0.20 + $0.25) = $2.25
Total budgeted variable selling and administrative expenses = Variable cost per
unit × Units sold = $2.25 × 20,000 = $45,000
24. If the budgeted cash disbursements for selling and administrative expenses
for November total $123,250, then how many units of Product SW does the
company plan to sell in November (rounded to the nearest whole unit)?
A) 33,444 units
B) 25,000 units
C) 22,952 units
D) 20,111 units
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Hard
Solution:
Page 11
AICPA BB: Critical Thinking
Variable cost per unit = ($0.70 + $1.10 + $0.20 + $0.25) = $2.25
Cash disbursements = Variable cost + (Fixed cost − Depreciation)
$123,250 = ($2.25 × Units sold) + ($78,000 − $11,000)
$123,250 = ($2.25 × Units sold) - $67,000
Units sold = ($123,250 − $67,000) ÷ $2.25
Units sold = $56,250 ÷ $2.25
Units sold = 25,000 units
25. If the company has budgeted to sell 24,000 units of Product SW in September,
then the total budgeted fixed selling and administrative expenses for
September would be:
A) $54,000
B) $48,000
C) $67,000
D) $78,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Advertising .....................................
Executive salaries ..........................
Depreciation on office equipment ..
Other..............................................
Total...............................................
Monthly Fixed
Cost
$14,000
34,000
11,000
19,000
$78,000
Use the following to answer questions 84-86:
Davis Corporation is preparing its Manufacturing Overhead Budget for the fourth quarter
of the year. The budgeted variable factory overhead rate is $1.70 per direct labor-hour;
the budgeted fixed factory overhead is $116,000 per month, of which $30,000 is factory
depreciation.
26. If the budgeted direct labor time for October is 8,000 hours, then the total
budgeted factory overhead for October is:
A) $129,600
B) $43,600
C) $99,600
D) $86,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Page 12
AICPA BB: Critical Thinking
Total budgeted factory overhead = Variable manufacturing overhead + Fixed
manufacturing overhead = (8,000 × $1.70) + $116,000 = $13,600 + $116,000
= $129,600
27. If the budgeted direct labor time for November is 7,000 hours, then the total
budgeted cash disbursements for November must be:
A) $41,900
B) $127,900
C) $86,000
D) $97,900
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Medium
AICPA BB: Critical Thinking
Solution:
Cash disbursements = Variable manufacturing overhead + Fixed manufacturing
overhead − Depreciation = (7,000 × $1.70) + $116,000 − $30,000
= $11,900 + $116,000 − $30,000 = $97,900
28. If the budgeted direct labor time for December is 4,000 hours, then the
predetermined factory overhead per direct labor-hour for December would be:
A) $9.20
B) $30.70
C) $23.20
D) $1.70
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Medium
AICPA BB: Critical Thinking
Solution:
Predetermined factory overhead rate = Variable overhead rate per direct labor
hour + Fixed factory overhead rate per hour = $1.70 + ($116,000 ÷ 4,000)
= $1.70 + $29 = $30.70
Use the following to answer the next two questions:
Cartier Inc. bases its manufacturing overhead budget on budgeted direct labor-hours.
The variable overhead rate is $5.80 per direct labor-hour. The company's budgeted
fixed manufacturing overhead is $39,930 per month, which includes depreciation of
$12,870. All other fixed manufacturing overhead costs represent current cash flows.
The direct labor budget indicates that 3,300 direct labor-hours will be required in April.
29. The
April
cash
disbursements
for
Page 13
manufacturing
overhead
on
the
manufacturing overhead budget should be:
A) $59,070
B) $46,200
C) $27,060
D) $19,140
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Cash disbursements for April = (Variable overhead rate × Number of direct-labor
hours) + (Fixed manufacturing overhead less depreciation)
= ($5.80 × 3,300) + ($39,930 − $12,870) = $19,140 + $27,060 = $46,200
30. The company recomputes its predetermined overhead rate every month. The
predetermined overhead rate for April should be:
A) $14.00
B) $5.80
C) $17.90
D) $12.10
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Predetermined factory overhead rate = Variable overhead rate per direct labor
hour + Fixed factory overhead rate per hour = $5.80 + ($39,930 ÷ 3,300)
= $5.80 + $12.10 = $17.90
Use the following to answer the next two question:
Avril Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The
variable overhead rate is $4.60 per direct labor-hour. The company's budgeted fixed
manufacturing overhead is $54,080 per month, which includes depreciation of $3,840.
All other fixed manufacturing overhead costs represent current cash flows. The direct
labor budget indicates that 3,200 direct labor-hours will be required in October.
31. The October cash disbursements for manufacturing overhead on the
manufacturing overhead budget should be:
A) $68,800
B) $64,960
C) $14,720
D) $50,240
Page 14
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Cash disbursements for October = (Variable overhead rate × Number of directlabor hours) + (Fixed manufacturing overhead less depreciation)
= ($4.60 × 3,200) + ($54,080 − $3,840) = $14,720 + $50,240 = $64,960
32. The company recomputes its predetermined overhead rate every month. The
predetermined overhead rate for October should be:
A) $4.60
B) $21.50
C) $20.30
D) $16.90
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Predetermined factory overhead rate = Variable overhead rate per direct labor
hour + Fixed factory overhead rate per hour
= $4.60 + ($54,080 ÷ 3,200) = $4.60 + $16.90 = $21.50
Use the following to answer the next two questions:
The manufacturing overhead budget at Cardera Corporation is based on budgeted
direct labor-hours. The direct labor budget indicates that 2,300 direct labor-hours will be
required in January. The variable overhead rate is $1.00 per direct labor-hour. The
company's budgeted fixed manufacturing overhead is $28,060 per month, which
includes depreciation of $4,600. All other fixed manufacturing overhead costs represent
current cash flows.
Page 15
33. The company recomputes its predetermined overhead rate every month. The
predetermined overhead rate for January should be:
A) $1.00
B) $12.20
C) $11.20
D) $13.20
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Predetermined factory overhead rate = Variable overhead rate per direct labor
hour + Fixed factory overhead rate per hour
= $1 + ($28,060 ÷ 2,300) = $1 + $12.20 = $13.20
34. The January cash disbursements for manufacturing overhead on the
manufacturing overhead budget should be:
A) $30,360
B) $2,300
C) $23,460
D) $25,760
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Cash disbursements for January = (Variable overhead rate × Number of directlabor hours) + (Fixed manufacturing overhead less depreciation)
= (2,300 × $1) + ($28,060 − $4,600) = $2,300 + $23,460 = $25,760
Use the following to answer the next two questions:
The manufacturing overhead budget at Polich Corporation is based on budgeted direct
labor-hours. The direct labor budget indicates that 1,600 direct labor-hours will be
required in February. The variable overhead rate is $3.40 per direct labor-hour. The
company's budgeted fixed manufacturing overhead is $28,320 per month, which
includes depreciation of $3,680. All other fixed manufacturing overhead costs represent
current cash flows.
35. The company recomputes its predetermined overhead rate every month. The
predetermined overhead rate for February should be:
A) $3.40
B) $21.10
C) $17.70
Page 16
D)
$18.80
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Predetermined factory overhead rate = Variable overhead rate per direct labor
hour + Fixed factory overhead rate per hour = $3.40 + ($28,320 ÷ 1,600)
= $3.40 + $17.70 = $21.10
36. The February cash disbursements for manufacturing overhead on the
manufacturing overhead budget should be:
A) $24,640
B) $33,760
C) $30,080
D) $5,440
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Cash disbursements for February = (Variable overhead rate × Number of directlabor hours) + (Fixed manufacturing overhead less depreciation)
= (1,600 × $3.40) + ($28,320 − $3,680) = $5,440 + $24,640 = $30,080
Use the following to answer the next three questions:
Porter Corporation makes and sells a single product called a Yute. The company is in
the process of preparing its Selling and Administrative Expense Budget for the last
quarter of the year. The following budget data are available:
Sales commissions ..........................
Shipping ...........................................
Advertising .......................................
Executive salaries ............................
Depreciation on office equipment .....
Other ................................................
Variable Cost Monthly Fixed
Per Yute Sold Cost
$5.90
$5.30
$8.90
$32,000
$178,000
$7,000
$0.60
$20,000
Page 17
All of these expenses (except depreciation) are paid in cash in the month they are
incurred.
37. If the company has budgeted to sell 14,000 Yutes in November, then the total
budgeted selling and administrative expenses for November would be:
A) $526,800
B) $289,800
C) $237,000
D) $519,800
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Total budgeted selling and administrative expenses = Variable cost + Fixed cost
= [14,000 × ($5.90 + $5.30 + $8.90 + $ 0.60)] + ($32,000 + $178,000 + $7,000 +
$20,000) = (14,000 × $20.70) + $237,000 = $526,800
38. If the company has budgeted to sell 12,000 Yutes in December, then the
budgeted total cash disbursements for selling and administrative expenses for
December would be:
A) $237,000
B) $485,400
C) $248,400
D) $478,400
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Variable cost per unit = $5.90 + $5.30 + $8.90 + $0.60 = $20.70
Fixed cost total = $32,000 + $178,000 + $7,000 + $20,000 = $237,000
Cash disbursements for December = (Variable selling and administrative cost ×
Number of direct-labor hours) + (Fixed manufacturing overhead less
depreciation)
= (12,000 × $20.70) + ($237,000 − $7,000) = $248,400 + $230,000 = $478,400
39. If the budgeted cash disbursements for selling and administrative expenses
for October total $518,520, then how many Yutes does the company plan to
sell in October?
A) 13,300 units
B) 14,100 units
Page 18
C)
D)
13,800 units
13,600 units
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Hard
AICPA BB: Critical Thinking
Solution:
($20.70 × Units sold) + $237,000 = $518,520
($20.70 × Units) = $518,520 − $237,000
Units = $281,520 ÷ $20.70 = 13,600
Use the following to answer the next three questions:
The Bandeiras Company, a merchandising firm, has budgeted its activity for December
according to the following information:







Sales at $550,000, all for cash.
Merchandise inventory on November 30 was $300,000.
Budgeted depreciation for December is $35,000.
The cash balance at December 1 was $25,000.
Selling and administrative expenses are budgeted at $60,000 for December and are
paid in cash.
The planned merchandise inventory on December 31 is $270,000.
The invoice cost for merchandise purchases represents 75% of the sales price. All
purchases are paid for in cash.
40. The budgeted cash receipts for December are:
A) $412,500
B) $137,500
C) $585,000
D) $550,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Since all sales are on a cash basis, the cash receipts for December will be equal
to the sales in December of $550,000.
41. The budgeted cash disbursements for December are:
A) $382,500
B) $442,500
C) $472,500
Page 19
D)
$477,500
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Hard
AICPA BB: Critical Thinking
Solution:
Purchases = Ending inventory + Cost of goods sold − Beginning inventory
= $270,000 + ($550,000 × 75%) − $300,000 = $382,500
Cash disbursements = Purchases + Selling and administrative expenses
= $382,500 + $60,000 = $442,500
42. The budgeted net income for December is:
A) $107,500
B) $137,500
C) $42,500
D) $77,500
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Hard
AICPA BB: Critical Thinking
Solution:
Sales..................................................................
$550,000
Cost of goods sold ($550,000 × 75%) ...............
Gross margin .....................................................
Depreciation expense ........................................
412,500
137,500
35,000
Selling and administrative expense ...................
60,000
Net income ........................................................
$ 42,500
Use the following to answer the next two questions:
Rogers Corporation is preparing its cash budget for July. The budgeted beginning cash
balance is $25,000. Budgeted cash receipts total $141,000 and budgeted cash
disbursements total $139,000. The desired ending cash balance is $30,000.
43. The excess (deficiency) of cash available over disbursements for July is:
A) $23,000
B) $2,000
C) $166,000
D) $27,000
Page 20
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Excess cash available over disbursements = Beginning cash balance +
Budgeted cash receipts - Budgeted cash disbursements
= $25,000 + $141,000 - $139,000 = $27,000
44. To attain its desired ending cash balance for July, the company should
borrow:
A) $30,000
B) $0
C) $3,000
D) $57,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Excess cash available over disbursements = Beginning cash balance +
Budgeted cash receipts - Budgeted cash disbursements = $25,000 + $141,000 −
$139,000 = $27,000
Borrowing = Desired ending cash balance − Excess cash available over
disbursements = $30,000 − $27,000 = $3,000
Use the following to answer the next two questions:
Bries Corporation is preparing its cash budget for January. The budgeted beginning
cash balance is $18,000. Budgeted cash receipts total $183,000 and budgeted cash
disbursements total $188,000. The desired ending cash balance is $30,000.
45. The excess (deficiency) of cash available over disbursements for January is:
A) $23,000
B) $13,000
C) ($5,000)
D) $201,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Excess cash available over disbursements = Beginning cash balance +
Budgeted cash receipts − Budgeted cash disbursements = $18,000 + $183,000 −
Page 21
$188,000 = $13,000
46. To attain its desired ending cash balance for January, the company should
borrow:
A) $17,000
B) $0
C) $30,000
D) $43,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Excess cash available over disbursements = Beginning cash balance +
Budgeted cash receipts − Budgeted cash disbursements = $18,000 + $183,000 −
$188,000 = $13,000
Borrowing = Desired ending cash balance − Excess cash available over
disbursements = $30,000 − $13,000 = $17,000
Use the following to answer the next two questions:
Muecke Inc. is working on its cash budget for April. The budgeted beginning cash
balance is $40,000. Budgeted cash receipts total $150,000 and budgeted cash
disbursements total $158,000. The desired ending cash balance is $50,000.
47. The excess (deficiency) of cash available over disbursements for April will be:
A) $32,000
B) $190,000
C) $48,000
D) ($8,000)
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Excess cash available over disbursements = Beginning cash balance +
Budgeted cash receipts − Budgeted cash disbursements = $40,000 + $150,000 −
$158,000 = $32,000
48. To attain its desired ending cash balance for April, the company needs to
borrow:
A) $18,000
B) $0
C) $50,000
Page 22
D)
$82,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Excess cash available over disbursements = Beginning cash balance +
Budgeted cash receipts - Budgeted cash disbursements = $40,000 + $150,000 $158,000 = $32,000
Borrowing = Desired ending cash balance − Excess cash available over
disbursements = $50,000 − $32,000 = $18,000
Use the following to answer the next two questions:
Varughese Inc. is working on its cash budget for March. The budgeted beginning cash
balance is $33,000. Budgeted cash receipts total $182,000 and budgeted cash
disbursements total $191,000. The desired ending cash balance is $40,000.
49. The excess (deficiency) of cash available over disbursements for March will
be:
A) $215,000
B) $42,000
C) $24,000
D) ($9,000)
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Excess cash available over disbursements = Beginning cash balance +
Budgeted cash receipts − Budgeted cash disbursements = $33,000 + $182,000 −
$191,000 = $24,000
50. To attain its desired ending cash balance for March, the company needs to
borrow:
A) $40,000
B) $0
C) $16,000
D) $64,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Page 23
AICPA BB: Critical Thinking
Excess cash available over disbursements = Beginning cash balance +
Budgeted cash receipts − Budgeted cash disbursements = $33,000 + $182,000 −
$191,000 = $24,000
Borrowing = Desired ending cash balance − Excess cash available over
disbursements = $40,000 − $24,000 = $16,000
Use the following to answer the next five questions:
Carver Lumber sells lumber and general building supplies to building contractors in a
medium-sized town in Montana. Data regarding the store's operations follow:







Sales are budgeted at $350,000 for November, $320,000 for December, and
$300,000 for January.
Collections are expected to be 90% in the month of sale, 8% in the month following
the sale, and 2% uncollectible.
The cost of goods sold is 75% of sales.
The company purchases 60% of its merchandise in the month prior to the month of
sale and 40% 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 $24,700.
Monthly depreciation is $16,000.
Ignore taxes.
Statement of Financial Position
October 31
Assets:
Cash ......................................................................................
$
19,000
Accounts receivable (net of allowance for uncollectible accounts)
77,000
Inventory ...............................................................................
157,500
Property, plant and equipment (net of $502,000 accumulated
depreciation) ......................................................................
1,002,000
Total assets ...........................................................................
$1,255,500
Liabilities and Stockholders’ Equity:
Accounts payable ..................................................................
Common stock ......................................................................
$ 272,000
780,000
Retained earnings .................................................................
203,500
Total liabilities and stockholders’ equity ................................
$1,255,500
51. The net income for December would be:
A) $32,900
Page 24
B)
C)
D)
$42,300
$39,300
$55,300
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Hard
AICPA BB: Critical Thinking
Solution:
Net sales [$320,000 × (100% − 2%)] .................
$313,600
Cost of goods sold ($320,000 × 75%) ................
Gross margin .....................................................
Depreciation expense ........................................
240,000
73,600
16,000
Selling and administrative expense....................
24,700
Net income .........................................................
$ 32,900
52. The cash balance at the end of December would be:
A) $19,000
B) $156,600
C) $61,300
D) $137,600
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 10 Level: Hard
AICPA BB: Critical Thinking
Solution:
November
October Accounts Receivable Balance .............
$ 77,000
Collection of November Sales ...........................
$350,000 × 90% .............................................
315,000
$350,000 × 8% ...............................................
Collection of December Sales ...........................
$320,000 × 90% .............................................
December
$ 28,000
288,000
October Accounts Payable Balance ..................
(272,000)
Payment for November Purchases ....................
($350,000 × 75%) × 40% ................................
($320,000 × 75%) × 60% ................................
Other cash monthly expenses ...........................
(24,700)
Page 25
(105,000)
(144,000)
(24,700)
$ 42,300
Net cash inflow(outflow) per month....................
$ 95,300
Beginning cash balance, October 31 .................
Add November net cash inflow ..........................
Add December net cash inflow ..........................
$ 19,000
95,300
42,300
Ending cash balance, December 31 ..................
$156,600
53. The accounts receivable balance, net of uncollectible accounts, at the end of
December would be:
A) $53,600
B) $83,400
C) $25,600
D) $32,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 10 Level: Hard
AICPA BB: Critical Thinking
Solution:
54. Accounts payable at the end of December would be:
A) $231,000
B) $96,000
C) $135,000
D) $240,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 10 Level: Hard
AICPA BB: Critical Thinking
Solution:
Cost
of
Goods Sold
Sales
$262,500
November .....................................
$350,000
$240,000
December .....................................
$320,000
January .........................................
$300,000
$225,000
Purchases in December = ($225,000 × 60%) + ($240,000 × 40%)
= $135,000 + $96,000 = $231,000
55. Retained earnings at the end of December would be:
A) $289,600
Page 26
B)
C)
D)
$276,200
$236,400
$203,500
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 10 Level: Hard
AICPA BB: Critical Thinking
Solution:
Net income calculation for November:
Net sales ($350,000 × 98%) ..............................
$343,000
Less cost of goods sold ($350,000 × 75%) ........
Gross margin .....................................................
Less depreciation expense ................................
262,500
80,500
16,000
Less selling and administrative expense............
24,700
Net income .........................................................
$ 39,800
Net income calculation for December:
Net sales [$320,000 × (100% − 2%)] .................
$313,600
Less cost of goods sold ($320,000 × 75%) ........
Gross margin .....................................................
Less depreciation expense ................................
240,000
73,600
16,000
Less selling and administrative expense ...........
24,700
Net income ........................................................
$ 32,900
Retained earnings in December = Retained earnings in October + Net income in
November + Net income in December = $203,500 + $39,800 + $32,900 =
$276,200
Essay Questions
56. 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.
Page 27





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 Position
October 31
Assets:
Cash...................................................................................... $ 22,000
Accounts receivable (net of allowance for uncollectible
accounts) ........................................................................... 83,000
Inventory ............................................................................... 158,400
Property, plant and equipment (net of $594,000 accumulated
depreciation) ......................................................................
1,004,000
Total assets
$1,267,400
Liabilities and Stockholders’ Equity:
Accounts payable ..................................................................
Common stock ......................................................................
$ 196,000
620,000
Retained 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.
Ans:
a.
Sales ...................................................
Page 28
November
December
$330,000
$300,000
Schedule of Expected Cash Collections
Accounts receivable ............................
November sales ..................................
December sales ..................................
$ 83,000
280,500
Total cash collections ..........................
$363,500
$ 46,200
255,000
$301,200
b.
November
December
Cost of goods sold ...............................
$198,000
$180,000
Merchandise Purchases Budget
November sales ..................................
December sales ..................................
January sales ......................................
$ 39,600
144,000
Total purchases ...................................
$183,600
$189,600
Disbursements for merchandise ..........
$196,000
$183,600
c.
November
Cash receipts ......................................
$363,500
Cash disbursements:
Disbursements for merchandise ......
196,000
Other monthly expenses ..................
21,200
Total cash disbursements ................
217,200
Excess (deficiency) of cash available
over disbursements .........................
$146,300
d
.
Sales...................................................
Bad debt expense ...............................
Cost of goods sold ..............................
Gross margin ......................................
Other monthly expenses .....................
Depreciation........................................
Net operating income ..........................
Page 29
$ 36,000
153,600
Decembe
r
$301,200
183,600
21,200
204,800
$ 96,400
November
Decembe
r
$330,000
3,300
198,000
128,700
21,200
21,000
$ 86,500
$300,000
3,000
180,000
117,000
21,200
21,000
$ 74,800
e.
Statement of Financial Position
December 31
Assets:
Cash ..................................................................
$ 264,700
Accounts receivable (net of allowance for
uncollectible accounts) ...................................
42,000
Inventory............................................................
153,600
Property, plant and equipment (net of $636,000
accumulated depreciation) .............................
962,000
Total assets .......................................................
$1,422,300
Liabilities and Stockholders’ Equity:
Accounts payable ..............................................
Common stock...................................................
$ 189,600
620,000
Retained earnings .............................................
612,700
Total liabilities and stockholders’ equity .............
$1,422,300
AACSB: Analytic
AICPA FN: Reporting, Measurement
AICPA BB: Critical Thinking
LO: 2,3,8,9,10 Level: Hard
57. At March 31 Streuling Enterprises, a merchandising firm, had an inventory of
38,000 units, and it had accounts receivable totaling $85,000. Sales, in units,
have been budgeted as follows for the next four months:
April ....................
60,000
May .....................
75,000
June ....................
90,000
July .....................
81,000
Streuling's board of directors has established a policy to commence in April that
the inventory at the end of each month should contain 40% of the units required
for the following month's budgeted sales.
The selling price is $2 per unit. One-third of sales are paid for by customers in
Page 30
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.
Ans:
a.
April
Budgeted sales, in units.........
60,000
Desired ending inventory (40%)
...........................................
30,000
Total needs ............................
90,000
Less beginning inventory .......
38,000
Required purchases...............
52,000
May
June
75,000
90,000
36,000
111,000
30,000
81,000
32,400
122,400
36,000
86,400
May
June
July
81,00
0
b.
April
Budgeted sales, at $2 per unit
$120,000 $150,000 $180,000
March 31 accounts receivable
$ 85,000
April sales...............................
May sales ...............................
June sales ..............................
Total cash collections .............
40,000
AACSB: Analytic
AICPA FN: Reporting, Measurement
$ 80,000
50,000
$100,000
60,000
$125,000 $130,000 $160,000
LO: 2,3
AICPA BB: Critical Thinking
Level: Medium
58. 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
Page 31


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
December
Sales .................................................
$390,000
$360,000
Schedule of Expected Cash Collections
Accounts receivable ..........................
November sales ................................
December sales ................................
$ 77,000
331,500
Total cash collections........................
$408,500
$ 39,000
306,000
$345,000
b.
November
December
Cost of goods sold ............................
$312,000
$288,000
Merchandise Purchases Budget
November sales ................................
$187,200
December sales ................................
January sales ....................................
115,200
$172,800
108,800
Total purchases ................................
$302,400
$281,600
Disbursements for merchandise .......
$320,000
$302,400
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 2,3
Page 32
AICPA BB: Critical Thinking
Level: Medium
59. Clay Company has projected sales and production in units for the second
quarter of the coming year as follows:
April
May
June
Sales...................
50,000
40,000
60,000
Production ..........
60,000
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.
Page 33
Ans:
a.
Production units .....................
Cash required per unit ............
April
60,000
× $5
May
50,000
× $5
June
50,000
× $5
Production costs.....................
$300,000
$250,000
$250,000
April
May
June
Production this month (40%) ..
Production prior month (60%)
$120,000
190,000
$100,000
180,000
$100,000
150,000
Selling and administrative ......
100,000
100,000
100,000
Total disbursements ...............
$410,000
$380,000
$350,000
Cash disbursements:
Payments relating to the prior month (March) in April represent the balance of
accounts payable at March 31.
b.
Sales units .............................
Sales price .............................
April
50,000
× $14
May
40,000
× $14
June
60,000
× $14
Total sales .............................
$700,000
$560,000
$840,000
April
May
June
Cash receipts:
February sales .......................
$ 90,000
March sales............................
307,500
$102,500
April sales ..............................
420,000
210,000
$ 70,000
336,000
168,000
May sales...............................
June sales..............................
504,000
Total receipts .........................
AACSB: Analytic
AICPA FN: Reporting, Measurement
$817,500
LO: 2,4
Page 34
$648,500
$742,000
AICPA BB: Critical Thinking
Level: Hard
118. The Doley Company has planned the following sales for the next three months:
Budgeted sales ...
Jan
Feb
Mar
$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 .........
Second month following sale....
Uncollectible .............................
30%
8%
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) .....................
Selling and administrative expenses (all paid in March)
................................................................................
Depreciation expense for March ................................
Dividends paid in March.............................................
$28,000
$40,000
$5,000
$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.
Ans:
a.
Cash sales, March: $70,000 × 20% ..
Collections on account:
Jan. sales: $40,000 × 80% × 8% ......
Feb. sales: $50,000 × 80% × 30% ....
Mar. sales: $70,000 × 80% × 60% ....
Page 35
$14,000
2,560
12,000
33,600
Total cash receipts............................
$62,160
b.
Cash balance, beginning ..................
Add cash receipts from sales............
Total cash available ..........................
$ 6,000
62,160
68,160
Less disbursements:
Inventory purchases .........................
Selling and administrative expenses
Dividends..........................................
Total disbursements .........................
Cash excess (deficiency) ..................
Financing–borrowing ........................
Cash balance, ending .......................
28,000
40,000
4,000
72,000
(3,840)
8,840
$ 5,000
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 2,8
AICPA BB: Critical Thinking
Level: Medium
60. A sales budget is given below for one of the products manufactured by the
Key Co.:
January ...............
21,000 units
February..............
36,000 units
March ..................
61,000 units
April .....................
41,000 units
May .....................
31,000 units
June ....................
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
Page 36
for January, February, and March and in total for the quarter.
Ans:
Januar
y
21,000
7,200
28,200
4,000
24,200
Budgeted sales (units) .............
Add: Desired ending inventory .
Total needs ..............................
Deduct: Beginning inventory ....
Units to be produced ................
Februar
y
36,000
12,200
48,200
7,200
41,000
March
61,000
8,200
69,200
12,200
57,000
April
41,000
6,200
47,200
8,200
39,000
January
February March
Quarter
Units to be produced
Switches per unit
24,200
×3
41,000
×3
57,000
×3
122,200
×3
Production needs
72,600
123,000
171,000 366,600
Add: Desired ending inventory
36,900
51,300
35,100
Total needs
109,500 174,300
206,100 401,700
Deduct: Beginning inventory
21,780
36,900
51,300
Required purchases
87,720
137,400
154,800 379,920
35,100
21,780
Beginning inventory, January 1: 72,600 × 0.3 = 21,780
Ending inventory, March 31: (39,000 × 3) × 0.3 = 35,100
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 4
AICPA BB: Critical Thinking
Level: Hard
61. 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
Required production bottles .....
May
June
July
5,000 8,000 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
Page 37
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
Required production (bottles) .......
Seasoning required per bottle
(grams) .....................................
Production needs (grams) ............
Add desired ending inventory of
seasoning .................................
Total needs ..................................
Less
beginning
inventory
of
seasoning .................................
Seasoning to be purchased (grams)
..................................................
Cost of seasoning per gram .........
Cost of seasoning to be purchased
..................................................
AACSB: Analytic
AICPA FN: Reporting, Measurement
April
May
June
Total
5,000
8,000
15,000 28,000
×0.25
1,250
×0.25
2,000
×0.25
3,750
×0.25
7,000
400
1,650
750
2,750
500
4,250
500
7,500
250
400
750
250
1,400
× $16
2,350
× $16
3,500
× $16
7,250
× $16
$22,400 $37,600 $56,00 $116,000
LO: 4
AICPA BB: Critical Thinking
Level: Easy
62. 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:
February
Page 38
March
Required production in units ....
Direct labor-hours per unit........
Total direct labor-hours needed
7,100
0.05
355
6,800
0.05
340
Direct labor cost per hour .........
$11.80
$11.80
Total direct labor cost ...............
$4,189
$4,012
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 5
AICPA BB: Critical Thinking
Level: Easy
63. 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:
Required production in units ....
Direct labor-hours per unit........
Total direct labor-hours needed
Total direct labor-hours paid ....
Direct labor cost per hour .........
April
8,000
0.34
2,720
2,840
$11.10
May
8,300
0.34
2,822
2,840
$11.10
Total direct labor cost ...............
$31,524
$31,524
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 5
Page 39
AICPA BB: Critical Thinking
Level: Medium
64. 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.
Budgeted direct labor-hours ...................................
Variable overhead rate ...........................................
July
6,100
$8.60
Variable manufacturing overhead ..........................
$ 52,460
Fixed manufacturing overhead ...............................
Total manufacturing overhead................................
107,970
160,430
Less depreciation ...................................................
9,760
Cash disbursement for manufacturing overhead ....
$150,670
b.
Total manufacturing overhead (a) ..........................
Budgeted direct labor-hours (b) .............................
Predetermined overhead rate for the month (a)/(b)
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 6
$160,430
6,100
$26.30
AICPA BB: Critical Thinking
Level: Easy
65. 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.
Page 40
Show your work!
b. Determine the predetermined overhead rate for February. Show your work!
Ans:
a.
Budgeted direct labor-hours...................................
Variable overhead rate...........................................
February
5,800
$4.60
Variable manufacturing overhead ..........................
Fixed manufacturing overhead...............................
Total manufacturing overhead ...............................
Less depreciation ...................................................
$ 26,680
82,360
109,040
16,820
Cash disbursement for manufacturing overhead ...
$ 92,220
Total manufacturing overhead (a) ..........................
Budgeted direct labor-hours (b) .............................
Predetermined overhead rate for the month (a)/(b)
$109,040
5,800
$18.80
b.
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 6
AICPA BB: Critical Thinking
Level: Easy
66. 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:
Budgeted unit sales ........................................................
Variable selling and administrative expense per unit ......
Budgeted variable expense.............................................
July
8,000
$8.20
$ 65,600
Budgeted fixed selling and administrative expense ........
Total budgeted selling and administrative expense ........
132,800
198,400
Page 41
Less depreciation ............................................................
Cash disbursements for selling and administrative expenses
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 7
14,400
$184,000
AICPA BB: Critical Thinking
Level: Easy
67. 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:
Budgeted unit sales .........................................................
Variable selling and administrative expense per unit .......
October
1,800
$2.00
Budgeted variable expense..............................................
$ 3,600
Budgeted fixed selling and administrative expense .........
Total budgeted selling and administrative expense .........
22,680
26,280
Less depreciation .............................................................
7,020
Cash disbursements for selling and administrative expenses
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 7
$19,260
AICPA BB: Critical Thinking
Level: Easy
68. 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.
Page 42
Ans:
Cash balance, beginning.................................................
Add cash receipts ...........................................................
Total cash available ........................................................
Less cash disbursements................................................
$ 46,000
160,000
206,000
152,000
Excess (deficiency) of cash available over disbursements
Borrowings ......................................................................
Cash balance, ending .....................................................
54,000
16,000
$ 70,000
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 8
AICPA BB: Critical Thinking
Level: Easy
69. 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..............................................
Add cash receipts ........................................................
Total cash available .....................................................
Less cash disbursements.............................................
$ 42,000
178,000
220,000
175,000
Excess (deficiency) of cash available over disbursements
Borrowings ...................................................................
Cash balance, ending ..................................................
45,000
5,000
$ 50,000
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 8
Page 43
AICPA BB: Critical Thinking
Level: Easy
Reference
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc
For further discussion please refer to the link provided:
Chapter 10-Profit Planning & Flexible Budgets in Management Accounting-https://youtu.be/2--n5qf-tf0
Chapter 10-Profit Planning computation-https://youtu.be/4vFqqR3SioY
Chapter 10-Computations on Master Budget-https://youtu.be/W_xHrnwJnFM
Page 44
CHAPTER 8 ACTIVITY-BASED COSTING: A TOOL TO AID DECISION MAKING
PROBLEM DISCUSSION
Learning Objectives:
Perform the basic operations of activity-based costing.
Learn to analyze and calculate problems.
Applying the methods of accounting.
True/False Questions
1. Activity-based costing involves a two-stage allocation in which overhead costs
are first assigned to departments and then to jobs on the basis of direct labor
hours.
Ans: False
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,4 Level: Medium
2. In activity-based costing, some costs may be broken down and assigned to
two activity cost pools. For example, part of a supervisor's salary may be
classified as a product-level activity and part of it may be classified as a batchlevel activity.
Ans: True
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
3. Activity rates in activity-based costing are computed by dividing costs from the
first-stage allocations by the activity measure for each activity cost pool.
Ans: True
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
4. In the second-stage allocation in activity-based costing, activity rates are used
to apply costs to products, customers, and other cost objects.
Ans: True
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
5. When a company shifts from a traditional cost system in which manufacturing
overhead is applied based on direct labor-hours to an activity-based costing
system in which there are batch-level and product-level costs, the unit product
costs of high volume products typically decrease whereas the unit product
costs of low volume products typically increase.
Ans: True
AACSB: Analytic
Page 1
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 8
Level: Medium
Multiple Choice Questions
Use the following to answer the next two questions:
Meade Nuptial Bakery makes very elaborate wedding cakes to order. The company has
an activity-based costing system with three activity cost pools. The activity rate for the
Size-Related activity cost pool is $1.13 per guest. (The greater the number of guests,
the larger the cake.) The activity rate for the Complexity-Related cost pool is $43.52 per
tier. (Cakes with more tiers are more complex.) Finally, the activity rate for the OrderRelated activity cost pool is $61.44 per order. (Each wedding involves one order for a
cake.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs,
and shortening. The activity rates do not include the costs of purchased decorations
such as miniature statues and wedding bells, which are accounted for separately.
Data concerning two recent orders appear below:
Number of reception guests ..............
Number of tiers on the cake ..............
Ericson Wedding
60
4
Haupt Wedding
162
3
Cost of purchased decorations for cake
$16.89
$38.61
6. Assuming that all of the costs listed above are avoidable costs in the event
that an order is turned down, what amount would the company have to charge
for the Ericson wedding cake to just break even?
A) $61.44
B) $387.45
C) $16.89
D) $320.21
Ans: D
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4,5 Level: Medium
Solution:
Total Cost for Ericson Wedding Cake Order:
(b)
(a)
Activity Cost Pool
Activity Rate
Total Activity
60 guests
Size-related
$1.13 per guest
4 tiers
Complexity-related
$43.52 per tier
Page 2
(a) × (b)
ABC Cost
$ 67.80
174.08
$61.44
per 1 order
Order-related
order
Cost of purchased decorations for cake ...................
.................................................................................
Total cost .................................................................
Page 3
61.44
16.89
$320.21
7. Assuming that the company charges $500.54 for the Haupt wedding cake,
what would be the overall margin on the order?
A) $86.87
B) $413.67
C) $148.31
D) $125.48
Ans: A
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4,5 Level: Medium
Solution:
(b)
Total Activity
162 guests
Activity Cost Pool
(a)
Activity Rate
Size-related
$1.13 per guest
3 tiers
$43.52 per tier
$61.44
per 1 order
Order-related
order
Cost of purchased decorations for cake ...................
.................................................................................
Total cost .................................................................
(a) × (b)
ABC Cost
$183.06
130.56
Complexity-related
Sales...........................
$500.54
Total cost ....................
413.67
Margin on order ..........
$ 86.87
61.44
38.61
$413.67
Use the following to answer the next three questions:
(Appendix 8A) Espinoza Company is a wholesale distributor that uses activity-based
costing for all of 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
$220,000
Other expenses .....
160,000
Total ......................
$380,000
Page 4
Distribution of resource consumption:
Activity Cost Pools
Filling
Orders
Customer
Support
Other
Total
Wages and salaries..
35%
55%
10%
100%
Other expenses ........
15%
65%
20%
100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs.
The amount of activity for the year is as follows:
Activity Cost Pool
Filling orders .............
Activity
4,000
orders
Customer support .....
20
customers
8. What would be the total overhead cost per order according to the activity
based costing system? In other words, what would be the overall activity rate
for the filling orders activity cost pool? (Round to the nearest whole cent.)
A) $25.25
B) $23.75
C) $33.25
D) $14.25
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Medium
AICPA BB: Critical Thinking
Solution:
Filling Orders Cost:
Wages and salaries: 35% × $220,000
$ 77,000
Other expenses: 15% × $160,000 .....
24,000
Total...................................................
$101,000
(b)
(a)
Page 5
(a) ÷ (b)
Activity Cost Pool
Filling orders
Total Cost
$101,000
Total Activity
Activity Rate
4,000 order
$25.25 per order
9. What would be the total overhead cost per customer according to the activity
based costing system? In other words, what would be the overall activity rate
for the customer support activity cost pool? (Round to the nearest whole
dollar.)
A) $10,450
B) $11,250
C) $12,350
D) $11,400
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Medium
AICPA BB: Critical Thinking
Solution:
Customer Support Cost:
Wages and salaries: 55% × $220,000
$121,000
Other expenses: 65% × $160,000 .....
104,000
Total ..................................................
$225,000
(a)
Activity Cost Pool
Customer support
(b)
Total Activity
(a) ÷ (b)
Activity Rate
20 customers
$11,250
customer
Total Cost
$225,000
per
10. To the nearest whole dollar, how much wages and salaries cost would be
allocated to a customer who made 6 orders in a year?
A) $5,745
B) $10,650
C) $6,166
D) $5,325
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Hard
AICPA BB: Critical Thinking
Solution:
Wages and Salaries Cost:
Allocated to Filling Orders: 35% × $220,000 ...........................
$77,000
Page 6
Allocated to Customer Support: 55% × $220,000 ...................
$121,000
(a)
Activity Cost Pool
Filling orders
Total Cost
$77,000
Customer support
$121,000
(b)
Total Activity
(a) ÷ (b)
Activity Rate
4,000 orders
20 customers
$19.25 per order
$6,050 per customer
(a)
Activity Cost Pool
Filling orders
Activity Rate
$19.25 per order
Customer support
$6,050 per customer
(b)
Total Activity
(a) × (b)
ABC Cost
6 orders
1 customer
$ 116
6,050
$6,166
Use the following to answer the next three questions:
(Appendix 8A) Groats Catering uses activity-based costing for its overhead costs. The
company has provided the following data concerning the activity rates in its activitybased costing system:
Activity Cost Pools
Preparing Meals Arranging Functions
Wages ...................
$1.15
$180.00
Supplies ................
$0.40
$320.00
Other expenses .....
$0.15
$130.00
The number of meals served is the measure of activity for the Preparing Meals activity
cost pool. The number of functions catered is used as the activity measure for the
Arranging Functions activity cost pool.
Management would like to know whether the company made any money on a recent
function at which 150 meals were served. The company catered the function for a fixed
price of $18.00 per meal. The cost of the raw ingredients for the meals was $12.40 per
meal. This cost is in addition to the costs of wages, supplies, and other expenses
detailed above.
For the purposes of preparing action analyses, management has assigned ease of
adjustment codes to the costs as follows: wages are classified as a Yellow cost;
supplies and raw ingredients as a Green cost; and other expenses as a Red cost.
11. According to the activity-based costing system, what was the total cost
Page 7
(including the costs of raw ingredients) of the function mentioned above?
(Round to the nearest whole dollar.)
A) $2,945
B) $2,745
C) $2,095
D) $2,245
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Medium
AICPA BB: Critical Thinking
Solution:
Cost of preparing meals [($1.15 + $0.40 + $0.15) ×
150]......................................................................................
$ 255
Cost of arranging functions ($180 + $320 + $130) ..................
630
Cost of raw ingredients ($12.40 × 150) ...................................
1,860
Total ........................................................................................
$2,745
12. Suppose an action analysis report is prepared for the function mentioned
above. What would be the “red margin” in the action analysis report? (Round
to the nearest whole dollar.)
A) $(45)
B) $(195)
C) $(145)
D) $105
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Hard
AICPA BB: Critical Thinking
Solution:
Sales ($18.00 × 150) ...........................................
Green costs:
Supplies−Preparing meals ($0.40 × 150) .........
Supplies−Arranging functions ..........................
Raw ingredients ($12.40 × 150) .......................
Green margin ......................................................
Yellow costs:
Wages−Preparing meals ($1.15 × 150) ...........
Wages−Arranging functions .............................
Yellow margin......................................................
Red costs:
Other expenses−Preparing meals ($0.15 ×
150)..................................................................
Page 8
$2,700.00
$ 60.00
320.00
1,860.00
172.50
180.00
22.50
2,240.00
460.00
352.50
107.50
Other expenses−Arranging functions ...............
Red margin..........................................................
130.00
152.50
$(45.00)
13. Suppose an action analysis report is prepared for the function mentioned
above. What would be the “yellow margin” in the action analysis report?
(Round to the nearest whole dollar.)
A) $183
B) $288
C) $233
D) $108
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Hard
AICPA BB: Critical Thinking
Solution:
Sales ($18.00 × 150) ...........................................
Green costs:
Supplies−Preparing meals ($0.40 × 150) .........
Supplies−Arranging functions ..........................
Raw ingredients ($12.40 × 150) .......................
Green margin ......................................................
Yellow costs:
Wages−Preparing meals ($1.15 × 150) ...........
Wages−Arranging functions .............................
Yellow margin ......................................................
$2,700
$ 60
320
1,860
173
180
2,240
460
353
$ 108
Use the following to answer the next four questions:
(Appendix 8B) Addison Company has two products: A and B. Annual production and
sales are 800 units of Product A and 700 units of Product B. The company has
traditionally used direct labor-hours as the basis for applying all manufacturing overhead
to products. Product A requires 0.2 direct labor hours per unit and Product B requires
0.6 direct labor hours per unit. The total estimated overhead for next period is $71,286.
The company is considering switching to an activity-based costing system for the
purpose of computing unit product costs for external reports. The new activity-based
costing system would have three overhead activity cost pools—Activity 1, Activity 2, and
General Factory--with estimated overhead costs and expected activity as follows:
Expected Activity
Activity Cost Pool
Activity 1 ..............
Estimated
Overhead Costs
$20,272
Product A
300
Page 9
Product B
500
Total
800
Activity 2 ..............
General Factory...
Total ....................
29,380
21,634
$71,286
800
160
500
420
1,300
580
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct
labor hours.)
14. The predetermined overhead rate under the traditional costing system is
closest to:
A) $25.34
B) $22.60
C) $37.30
D) $122.91
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Total Direct Labor-Hours
Product A: 800 units × .2 DLHs per unit ..................................
160 DLHs
Product B: 700 units × .6 DLHs per unit ..................................
420 DLHs
Total ........................................................................................
580 DLHs
Predetermined overhead rate = $71,286 ÷ 580 DLHs = $122.91
Page 10
15. The overhead cost per unit of Product B under the traditional costing system is
closest to:
A) $22.38
B) $13.56
C) $73.74
D) $15.20
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Total Direct Labor-Hours
Product A: 800 units × .2 DLHs per unit ..................................
160 DLHs
Product B: 700 units × .6 DLHs per unit ..................................
420 DLHs
Total ........................................................................................
580 DLHs
Predetermined overhead rate = $71,286 ÷ 580 DLHs = $122.9069
Total overhead cost applied to Product B using traditional costing: $122.9069 ×
420 DLHs = $51,621 (rounded)
Overhead cost per unit = $51,621 ÷ 700 units = $73.74
16. The predetermined overhead rate (i.e., activity rate) for Activity 2 under the
activity-based costing system is closest to:
A) $22.60
B) $54.84
C) $58.76
D) $36.73
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
(a)
Activity Cost Pool
Activity 2
Estimated Cost
$29,380
(b)
Estimated Activity
(a) ÷ (b)
Activity Rate
1,300
$22.60
17. The overhead cost per unit of Product B under the activity-based costing
system is closest to:
A) $73.74
B) $56.62
C) $22.38
Page 11
D)
$47.52
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Hard
AICPA BB: Critical Thinking
Solution:
(a)
Activity Cost Pool
Activity 1
Activity 2
General Factory
Estimated Cost
$20,272
$29,380
$21,634
(b)
Estimated Activity
(a) ÷ (b)
Activity Rate
800
1,300
580
$25.34
$22.60
$37.30
Total Cost of Product B:
(a)
Activity Cost Pool
Activity 1
Activity 2
General Factory
Activity Rate
$25.34
$22.60
$37.30
(b)
Activity
(a) × (b)
ABC Cost
500
500
420
$12,670
11,300
15,666
$39,636
Overhead cost per unit = $39,636 ÷ 700 units = $56.62 per unit (rounded)
Use the following to answer the next two questions:
(Appendix 8B) Koszyk 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,
P85G and C43S, about which it has provided the following data:
P85G
C43S
Direct materials per unit ......
$36.50
$63.10
Direct labor per unit .............
Direct labor-hours per unit...
$20.80
0.80
$31.20
1.20
Annual production ...............
35,000
10,000
The company’s estimated total manufacturing overhead for the year is $2,264,000 and
the company’s estimated total direct labor-hours for the year is 40,000.
Page 12
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:
Estimated Overhead
Activities and Activity Measures
Cost
Supporting direct labor (DLHs) .
$1,160,000
Setting up machines (setups) ...
288,000
Parts administration (part types)
Total .........................................
DLHs ...........
Setups .........
Part types ....
816,000
$2,264,000
Expected Activity
P85G
C43S
Total
28,000
1,480
1,880
40,000
2,400
2,720
12,000
920
840
18. The manufacturing overhead that would be applied to a unit of product P85G
under the company's traditional costing system is closest to:
A) $89.67
B) $45.28
C) $44.39
D) $23.20
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Predetermined overhead rate = $2,264,000 ÷ 40,000 DLHs = $56.60 per DLH
Applied overhead per unit =
$56.60 per DLH × 0.80 DLHs per unit = $45.28 per unit
19. The manufacturing overhead that would be applied to a unit of product C43S
under the activity-based costing system is closest to:
A) $71.04
B) $138.96
C) $67.92
D) $11.04
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
Page 13
AICPA BB: Critical Thinking
Solution:
Activity Cost Pool
(a)
Estimated
Cost
(b)
Estimated
Activity
40,000 DLHs
(a) ÷ (b)
Activity Rate
$29 per DLH
Supporting direct labor $1,160,000
2,400 setups
$120 per setup
Setting up machines
$288,000
2,720
part $300 per part type
types
Parts administration
$816,000
Total Overhead applied to Product C43S:
(a)
Activity Cost Pool
(a) × (b)
ABC Cost
12,000 DLHs
$348,000
920 setups
840 part types
110,400
252,000
Activity Rate
Supporting direct labor $29 per DLH
Setting up machines
$120 per setup
Parts administration
(b)
Expected Activity
$300 per part type
$710,400
Applied overhead per unit = $710,400 ÷ 10,000 units = $71.04 per unit
Use the following to answer the next two questions:
(Appendix 8B) Binegar 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,
R58G and R09O, about which it has provided the following data:
R58G
R09O
Direct materials per unit ......
$15.90
$52.40
Direct labor per unit ............
Direct labor-hours per unit ..
$1.30
0.10
$27.30
2.10
Annual production ...............
30,000
10,000
The company’s estimated total manufacturing overhead for the year is $1,617,600 and
the company’s estimated total direct labor-hours for the year is 24,000.
Page 14
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:
Estimated Overhead
Activities and Activity Measures
Cost
Assembling products (DLHs) ..........
$ 696,000
Preparing batches (batches) ...........
252,000
Product support (product variations)
Total ................................................
DLHs ........................
Batches ....................
Product variations.....
669,600
$1,617,600
Expected Activity
R58G
R09O
Total
3,000
528
1,056
24,000
1,680
2,232
21,000
1,152
1,176
20. The manufacturing overhead that would be applied to a unit of product R58G
under the company's traditional costing system is closest to:
A) $6.74
B) $16.10
C) $22.84
D) $2.90
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Predetermined overhead rate = $1,617,600 ÷ 24,000 DLHs = $67.40 per DLH
Total applied overhead = 3,000 DLHs × $67.40 per DLH = $202,200
Applied overhead per unit = $202,200 ÷ 30,000 units = $6.74 per unit
21. The manufacturing overhead that would be applied to a unit of product R09O
under the activity-based costing system is closest to:
A) $113.46
B) $255.00
C) $141.54
D) $17.28
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
Page 15
AICPA BB: Critical Thinking
Solution:
Activity Cost Pool
(a)
Estimated
Cost
Assembling products
Preparing batches
Product support
$696,000
$252,000
$669,600
(b)
Estimated Activity
24,000 DLHs
Product support
Activity Rate
$29 per DLH
1,680 batches
$150 per batch
2,232
product $300 per product
variations
variation
Total Overhead applied to Product R09O:
(a)
Activity Cost Pool
Activity Rate
Assembling products
Preparing batches
(a) ÷ (b)
(b)
Expected Activity
21,000 DLHs
(a) × (b)
ABC Cost
$
609,000
172,800
$29 per DLH
$150 per batch
1,152 batches
product
$300
per 1,176
variations
product
352,800
variation
$1,134,60
0
Applied overhead per unit = $1,134,600 ÷ 10,000 units = $113.46 per unit
Use the following to answer the next two questions:
(Appendix 8B) Kebort 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,
U86Y and M91F, about which it has provided the following data:
U86Y
M91F
Direct materials per unit ......
$19.80
$45.80
Direct labor per unit .............
Direct labor-hours per unit ...
Annual production ...............
$18.20
0.70
40,000
$49.40
1.90
10,000
The company’s estimated total manufacturing overhead for the year is $2,541,760 and
the company’s estimated total direct labor-hours for the year is 47,000.
Page 16
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:
Estimated Overhead
Cost
$1,175,000
407,960
958,800
$2,541,760
Activities and Activity Measures
Direct labor support (DLHs) ........
Setting up machines (setups) .....
Part administration (part types) ...
Total ............................................
DLHs ..............
Setups ...........
Part types.......
Expected Activity
U86Y
M91F
Total
28,000
2,256
1,034
47,000
2,914
3,196
19,000
658
2,162
22. The unit product cost of product U86Y under the company's traditional costing
system is closest to:
A) $71.15
B) $55.50
C) $75.86
D) $38.00
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Predetermined overhead rate = $2,541,760 ÷ 47,000 DLHs = $54.08 per DLH
Applied overhead = [(40,000 units × 0.70 DLHs per unit) × $54.08 per DLH] ÷
40,000 units = $37.86 per unit
Unit Product Cost:
Direct materials ..........................
Direct labor.................................
Applied manufacturing overhead
Total ...........................................
$19.80
18.20
37.86
$75.86
23. The unit product cost of product M91F under the activity-based costing system
is closest to:
Page 17
A)
B)
C)
D)
$95.20
$121.57
$216.77
$197.95
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
(a)
Estimated
Cost
Activity Cost Pool
Direct
labor
support
$1,175,000
Setting
up
machines
$407,960
Part administration $958,800
(b)
Expected
Activity
47,000 DLHs
(a) ÷ (b)
2,914 setups
$140 per setup
Activity Rate
$25 per DLH
3,196 part types $300
type
Total Overhead applied to Product M91F:
(a)
Activity Cost Pool
Activity Rate
Direct labor support
Setting up machines
$25 per DLH
$140 per setup
Part administration
$300 per part
type
(b)
Expected Activity
19,000 DLHs
658 setups
2,162 part types
per
(a) × (b)
ABC Cost
$
475,000
92,120
648,600
$1,215,72
0
Overhead Cost per unit = $1,215,720 ÷ 10,000 units = $121.57 per unit
Unit Product Cost:
Direct materials .........................
Direct labor ................................
$ 45.80
49.40
Applied manufacturing overhead
121.57
Total ..........................................
$216.77
Page 18
part
Use the following to answer the next two questions:
(Appendix 8B) Pacchiana 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,
R21V and D00B, about which it has provided the following data:
R21V
D00B
Direct materials per unit ...........
$19.60
$61.70
Direct labor per unit..................
Direct labor-hours per unit .......
$3.90
0.30
$19.50
1.50
Annual production ....................
45,000
15,000
The company’s estimated total manufacturing overhead for the year is $1,262,880 and
the company’s estimated total direct labor-hours for the year is 36,000.
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:
Estimated
Activities and Activity Measures
Overhead Cost
Assembling products (DLHs) ...............
$ 108,000
Preparing batches (batches) ...............
362,880
Product support (product variations) ...
792,000
Total ....................................................
$1,262,880
DLHs .....................
Batches .................
Product variations ..
Expected Activity
R21V
D00B
Total
13,500
1,440
1,404
36,000
2,592
1,980
22,500
1,152
576
24. The unit product cost of product R21V under the company's traditional costing
system is closest to:
A) $34.02
B) $24.40
C) $41.36
D) $23.50
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
Page 19
AICPA BB: Critical Thinking
Solution:
Predetermined overhead rate = $1,262,880 ÷ 36,000 DLHs = $35.08 per DLH
Applied overhead = [(45,000 units × 0.30 DLHs per unit) × $35.08 per DLH] ÷
45,000 units = $10.52 per unit
Unit Product Cost:
Direct materials ......................... $19.60
Direct labor ................................ 3.90
Applied
manufacturing
overhead ................................ 10.52
Total .......................................... $34.02
25. The unit product cost of product D00B under the activity-based costing system
is closest to:
A) $111.81
B) $133.82
C) $81.20
D) $30.61
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Activity Cost Pool
Assembling
products
Preparing batches
Product support
(a)
Estimated
Cost
$108,000
$362,880
$792,000
(b)
Expected
Activity
36,000 DLHs
(a) ÷ (b)
2,592 batches
$140 per batches
1,980
product $400 per product
variations
variation
Total Overhead applied to Product D00B:
(a)
Activity Cost Pool
Activity Rate
Assembling products
$3 per DLH
Preparing batches
$140 per batch
Product support
Activity Rate
$3 per DLH
(b)
(a) × (b)
Expected Activity ABC Cost
22,500 DLHs
$ 67,500
1,152 batches
161,280
576
product
variations
230,400
$400
per
product variation
Page 20
$459,180
Overhead Cost per unit = $459,180 ÷ 15,000 units = $30.61 per unit
Unit Product Cost:
Direct materials ..........................
Direct labor ................................
$ 61.70
19.50
Applied manufacturing overhead
30.61
Total ...........................................
$111.81
Essay Questions
26. Beckley Corporation has provided the following data from its activity-based
costing accounting system:
Indirect factory wages............... $16,000
Factory
equipment $193,00
depreciation........................... 0
Distribution of Resource Consumption across Activity Cost Pools:
Activity Cost Pools
Indirect factory wages ..............
Custome
r Orders
48%
Product
Processin
g
47%
Other
5%
Total
100%
Factory equipment depreciation
61%
25%
14%
100%
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:
Page 21
a. Allocations to the Product Processing activity cost pool:
Indirect factory wages (47% × $16,000).................
$ 7,520
Factory 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) ...................
$
Factory equipment depreciation (14% × $193,000)
27,020
Total .......................................................................
$27,820
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 1,2 Level: Easy
800
AICPA FN: Reporting
27. Desilets Corporation has provided the following data from its activity-based
costing accounting system:
Supervisory wages ........
$94,000
Factory utilities ..............
$128,000
Distribution of Resource Consumption across Activity Cost Pools:
Unit
Batch
Processin
Activity Cost Pools
Set-Ups
g
Other
Total
Supervisory wages ...
34%
64%
2%
100%
Factory utilities .........
49%
35%
16%
100%
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 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!
Page 22
Ans:
a. Allocations to the Unit Processing activity cost pool:
Supervisory wages (64% × $94,000) ..
$ 60,160
Factory 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).....
$ 1,880
Factory utilities (16% × $128,000) .......
20,480
Total ....................................................
$22,360
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 1,2 Level: Easy
AICPA FN: Reporting
28. The following data have been provided by Hooey Corporation from its activitybased costing accounting system:
Supervisory wages .........
$46,000
Factory utilities ...............
$199,000
Distribution of Resource Consumption across Activity Cost Pools:
Activity Cost Pools
Supervisory wages...
Factory utilities .........
Product
Change-Overs
59%
18%
Machining
33%
69%
Other
8%
13%
Total
100%
100%
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 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
Page 23
that would NOT be assigned to products. Show your work!
Ans:
a. Allocations to the Machining activity cost pool:
Supervisory wages (33% × $46,000)...
$ 15,180
Factory 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) ....
$ 3,680
Factory utilities (13% × $199,000) ......
25,870
Total....................................................
$29,550
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 1,2 Level: Easy
AICPA FN: Reporting
29. 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 .......
Travel expenses ............
$620,000
140,000
Other expenses .............
120,000
Total ...............................
$880,000
Distribution of resource consumption:
Working On
Engagemen
Activity Cost Pools
ts
Wages and salaries .. 60%
Travel expenses ....... 50%
Other expenses ........ 35%
Business
Developme
nt
10%
40%
25%
Page 24
Other
30%
10%
40%
Total
100%
100%
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.
Wages and salaries
Travel expenses.....
Working On Business
Engagements Development Other
$186,00
$372,000
$ 62,000
0
70,000
56,000
14,000
Other expenses......
42,000
30,000
Total .......................
$484,000
$148,000
AACSB: Analytic
LO: 2 Level: Easy
AICPA BB: Critical Thinking
48,000
$248,00
0
Total
$620,00
0
140,000
120,00
0
$880,00
0
AICPA FN: Reporting
30. 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 Pool
Cleaning ................
Job support............
Client support ........
Other .....................
Total ......................
Total Cost
$263,784
145,180
4,774
170,000
$583,738
Total Activity
34,800
hours
7,000
jobs
220
clients
Not
applicable
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.
Page 25
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.
Ans:
a. The computation of the activity rates follow:
Total Cost
Total Activity
Activity Rates
Cleaning ........
Job support....
$263,784
$145,180
34,800 hours
7,000 jobs
$7.58 per hour
$20.74 per job
Client support
$4,774
220 clients
$21.70 per client
b. The customer margin for the family is computed as follows:
Client charges ..........
Costs:
$2,000.00
Cleaning ................
Job support ...........
$682.20
933.30
Client support ........
21.70
Customer margin .....
1,637.20
$ 362.80
Computations for costs:
Cleaning: 90 hours × $7.58 per hour = $682.20
Job support: 45 jobs × $20.74 per job = $933.30
Client 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................
$2,000.00
Page 26
Allocated costs* .............
1,509.30
Customer margin ...........
$ 490.70
* 90 hours × $16.77 per hour = $1,509.30
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 3,4,5 Level: Medium
AICPA FN: Reporting
31. 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 activitybased costing system.
Activity Cost Pool
Cleaning ..............
Job support .........
Client support ......
Total Cost
$185,752
171,532
15,124
Other ...................
Total ....................
240,000
$612,408
Total Activity
hours
21,700
jobs
6,100
clients
760
applicable
Not
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.
Ans:
a. The first step is to compute activity rates:
Cleaning..............
Total Cost
Total Activity
Activity Rates
$185,752
21,700 hours
$8.56 per hour
Page 27
Job support .........
$171,532
6,100 jobs
$28.12 per job
Client support ......
$15,124
760 clients
$19.90 per client
The customer margin for the family is computed as follows:
Client charges ..........
Costs:
$1,170.00
Cleaning ................
Job support ...........
$513.60
421.80
Client support ........
19.90
Customer margin .....
955.30
$ 214.70
Computations for costs:
Cleaning: 60 hours × $8.56 per hour = $513.60
Job support: 15 jobs × $28.12 per job = $421.80
Client 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...........
$1,170.00
Allocated costs* ........
1,693.20
Customer margin ......
($523.20)
* 60 hours × $28.22 per hour = $1,693.20
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 3,4,5 Level: Medium
Page 28
AICPA FN: Reporting
32. 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 D
units
Estimated volume .....................
400
Direct labor hours per unit.........
Direct materials cost per unit ....
Direct labor cost per unit ...........
1.20
$4.00
$12.00
units
3,000
hours
hour
1.30
$22.80
$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
Machine setups ...
Purchase orders ..
General factory ...
Total ....................
Estimated
Overhead
Costs
$ 10,440
78,000
30,660
$119,100
Product C
60
820
480
Product D
120
1,180
3,900
Total
180
2,000
4,380
Determine the unit product cost of each product for the current period using the
activity-based costing approach.
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 hours
Product D: 3,000 units × 1.3 hours per unit
Total direct labor hours ...............................
3,900 hours
4,380 hours
Page 29
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
$ 4.00
12.00
32.63
$48.63
Direct materials...................
Direct labor .........................
Manufacturing overhead .....
Total unit product cost ........
Product D
$22.80
13.00
35.35
$71.15
b. The activity rates for each activity cost pool are as follows:
Machine setups ..
Purchase orders .
General factory ...
Estimated
Overhead
Costs
$10,440
$78,000
$30,660
Expected
Activity
180
2,000
4,380
Activity
Rate
$58.00
$39.00
$7.00
The overhead cost charged to each product is:
Product C
Product D
Activity
Amount
Activity
Amount
Machine setups......
Purchase orders ....
60
820
$ 3,480
31,980
120
1,180
$ 6,960
46,020
General factory ......
480
3,360
3,900
27,300
Total overhead cost
$38,820
$80,280
Overhead cost per unit:
Product C: $38,820 ÷ 400 units = $97.05 per unit
Product 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
Page 30
Product D
Direct materials .........................
Direct labor ...............................
Manufacturing overhead ...........
Total unit product cost ..............
AACSB: Analytic
LO: 7 Level: Hard
$ 4.00
12.00
97.05
$113.05
$22.80
13.00
26.76
$62.56
AICPA BB: Critical Thinking
AICPA FN: Reporting
33. 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
Machine setups ...
Purchase orders ..
General factory....
Estimated
Overhead
Costs
$13,720
$74,730
$15,000
Product F
140
630
600
Product G
140
960
2,400
Total
280
1,590
3,000
Required:
Using the activity-based costing approach, determine the overhead cost per unit
for each product.
Ans:
The activity rates for each activity cost pool are as follows:
Activity Cost Pool
Machine setups ........
Purchase orders .......
General factory .........
Overhea
d
Estimate
d Costs
$13,720
$74,730
$15,000
Expecte
d
Activity
280
1,590
3,000
Activity
Rate
$49.00
$47.00
$5.00
The overhead cost charged to each product is:
Product F
Machine setups........
Product G
Activity
Amount
Activity
Amount
140
$ 6,860
140
$ 6,860
Page 31
Purchase orders ......
630
29,610
General factory ........
600
3,000
Total overhead cost .
960
45,120
2,400
12,000
$39,470
$63,980
Overhead cost per unit:
Product F: $39,470 ÷ 600 units = $65.78 per unit
Product G: $63,980 ÷ 3,000 units = $21.33 per unit
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 3,4 Level: Medium
AICPA FN: Reporting
34. Kretlow Corporation has provided the following data from its activity-based
costing accounting system:
Activity Cost Pools
Total Cost
Total Activity
Designing products ..
Setting up batches ...
Assembling products
$700,502
$12,400
$125,440
3,746
620
8,960
product design hours
batch set-ups
assembly hours
Required:
Compute the activity rates for each of the three cost pools. Show your work!
Ans:
Activity Cost Pools
Designing products ........
Setting up batches .........
Assembling products ......
AACSB: Analytic
LO: 3 Level: Easy
Total Cost
$700,502
$12,400
$125,440
Total Activity
3,746
620
8,960
AICPA BB: Critical Thinking
Activity Rate
$187
$20
$14
AICPA FN: Reporting
35. Data concerning three of Kilmon Corporation's activity cost pools appear
below:
Activity Cost Pools
Assembling products......
Total Cost
$150,300
Total Activity
8,350
assembly hours
Designing products ........
$1,177,535
7,597
Page 32
product design hours
Setting 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
Assembling products ......
Total Cost
$150,300
Total Activity
8,350
Activity Rate
$18
Designing products ........
Setting up batches .........
$1,177,535
$14,400
7,597
600
$155
$24
AACSB: Analytic
LO: 3 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
36. Doles Corporation uses the following activity rates from its activity-based
costing to assign overhead costs to products.
Activity Cost Pools
Setting up batches ..............
Activity Rate
$98.54
per batch
Processing customer orders
$42.00
per customer order
Assembling products ..........
$3.53
per assembly hour
Data concerning two products appear below:
Product K52W
55
9
697
Number of batches ...................
Number of customer orders ......
Number of assembly hours .......
Product X94T
73
17
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
Page 33
Product X94T
Setting up batches .................
Processing customer orders ..
Assembling products ..............
Total overhead cost ...............
AACSB: Analytic
LO: 4 Level: Easy
$5,419.70
378.00
2,460.41
$8,258.11
$7,193.42
714.00
1,419.06
$9,326.48
AICPA BB: Critical Thinking
AICPA FN: Reporting
37. Desjarlais Corporation uses the following activity rates from its activity-based
costing to assign overhead costs to products.
Activity Cost Pools
Setting up batches ....................
Activity Rate
$32.22
per batch
Assembling products ................
$6.13
per assembly hour
Processing customer orders .....
$72.75
per customer order
Data concerning two products appear below:
Number of batches ...................
Number of assembly hours .......
Number of customer orders ......
Product S96U
78
412
53
Product Q06F
24
178
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 S96U
Setting up batches (78 batches × $32.22 per batch)
$2,513.16
Assembling products (412 assembly hours × $6.13 per
assembly hour) ...................................................
2,525.56
Processing customer orders (53 customer orders × $72.75
per customer order) ............................................
3,855.75
Total overhead cost ...............................................
b. Product Q06F
Page 34
$8,894.47
Setting up batches (24 batches × $32.22 per batch)
$ 773.28
Assembling products (178 assembly hours × $6.13 per
assembly hour) ...................................................
1,091.14
Processing customer orders (18 customer orders × $72.75
per customer order) ............................................
1,309.50
Total overhead cost ...............................................
AACSB: Analytic
LO: 4 Level: Easy
AICPA BB: Critical Thinking
$3,173.92
AICPA FN: Reporting
38. Archie Corporation uses the following activity rates from its activity-based
costing to assign overhead costs to products.
Activity Cost Pools
Setting up batches ..............
Activity Rate
$16.68
per batch
Processing customer orders
$98.60
per customer order
Assembling 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)
$ 300.24
Processing customer orders (4 customer orders × $98.60
per customer order) ............................................
394.40
Assembling products (103 assembly hours × $7.89 per
assembly hour) ...................................................
812.67
Total overhead cost ...............................................
AACSB: Analytic
LO: 4 Level: Easy
AICPA BB: Critical Thinking
$1,507.31
AICPA FN: Reporting
39. IGL Draperies makes custom draperies for homes and businesses. The
company uses an activity-based costing system for its overhead costs. The
Page 35
company has provided the following data concerning its annual overhead
costs and its activity cost pools.
Overhead costs:
Production overhead
$140,000
Office expense .........
140,000
Total .........................
$280,000
Distribution of resource consumption:
Activity Cost Pools
Making Drapes
Job Support
Other
Total
Production 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
Making drapes.....
Job support .........
Annual Activity
3,000
yards
140
jobs
Other ...................
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 overhead
Office expense .........
Total .........................
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
Page 36
Job
Support
Production overhead
Office expense .........
Total .........................
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 allocation
Making
Drapes
Job
Support
Production overhead
Office expense .........
$84,000
21,000
$28,000
77,000
Total .........................
Activity ......................
$105,000
3,000 yards
$105,000
140 jobs
Other
$28,00
0
42,000
$70,00
0
Total
$140,00
0
140,000
$280,00
0
b. Activity rates (costs divided by activity)
Making
Drapes
Job
Support
Activity ......................
3,000 yards
140 jobs
Production overhead.
Office expense ..........
Total..........................
$28.00
7.00
$35.00
$200.00
550.00
$750.00
c. Overhead cost of the job.
Activity............................
Production overhead ......
Office expense ...............
Total ...............................
Making Drapes
85
$2,380
595
$2,975
Sales.........................................
Page 37
Job Support
1
$200
550
$750
$6,000
Total
$2,580
1,145
$3,725
Green costs:
Direct materials and labor ......
Green margin ............................
Yellow costs:
Office expense .......................
Yellow margin ...........................
Red costs:
Production overhead ..............
Red margin ...............................
2,990
3,010
1,145
1,865
2,580
($ 715)
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 8A LO: 6 Level: Hard
AICPA FN: Reporting
40. 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 .....
$120,000
Office expense ..............
140,000
Total ..............................
$260,000
Distribution of resource consumption:
Installing
Job
Activity Cost Pools
Floors
Support
Other
Total
Production overhead ......
55%
25%
20%
100%
Office expense ...............
20%
50%
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
Installing floors....
Annual Activity
800 squares
Page 38
Job support.........
Other ..................
100 jobs
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
Floors
Job
Support Other
Total
Production overhead ......
Office expense ...............
Total ...............................
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
Floors
Job
Support
Production overhead .....
Office expense ..............
Total ..............................
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 allocation
Production overhead
Installing
Floors
Job
Support
Other
$66,000
$ 30,000
$24,000 $120,000
Office expense .........
28,000
Total .........................
$94,000
b. Activity rates (costs divided by activity)
Activity ...........................
Page 39
Total
70,000 42,000
140,000
$100,000 $66,000 $260,000
Installing
Floors
Job
Support
800 squares
100 jobs
Production overhead .....
$ 82.50
$ 300.00
Office expense ..............
35.00
700.00
Total ..............................
$117.50
$1,000.00
c. Overhead cost of the job.
Job
Support
1
Total
Activity ......................
Installing
Floors
3.2
Production overhead
$264.00
$ 300.00
$ 564.00
Office expense..........
112.00
700.00
812.00
Total .........................
$376.00
$1,000.00
$1,376.00
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 8A LO: 6 Level: Medium
AICPA FN: Reporting
41. 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 .
$680,000
Nonwage expenses .
120,000
Total .........................
$800,000
Distribution of resource consumption:
Filling
Product
Activity Cost Pools
Orders
Support
Other
Total
Wages and salaries .......
15%
75%
10%
100%
Page 40
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
Filling orders ..........
Product support .....
Other .....................
Annual Activity
4,000 orders
40 products
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
Orders
Product
Support
Other
Total
Wages and salaries .......
Nonwage expenses .......
Ans:
First-stage allocation
Filling
Orders
Product
Support
Other
Total
Wages and salaries .
$102,000
$510,000
$68,000
$680,000
Nonwage expenses .
30,000
66,000
24,000
120,000
Total .........................
$132,000
$576,000
$92,000
$800,000
Filling
Orders
Product
Support
Activity ...................................
4,000 orders
40 products
Wages and salaries ...............
Nonwage expenses ...............
Total .......................................
$25.50
7.50
$33.00
$12,750
1,650
$14,400
AACSB: Analytic
AICPA BB: Critical Thinking
Page 41
AICPA FN: Reporting
Appendix: 8A
LO: 6
Level: Medium
42. 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
Painting overhead ..........
Job support ....................
Other ..............................
Square meters
Jobs
None
Annual Activity
square meters
10,000
jobs
200
applicable
Not
The “Other” activity cost pool consists of the costs of idle capacity and
organization-sustaining costs.
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:
Painting
Job
Support
Other
Total
Painting overhead ..
$ 99,000
$ 45,000
$36,000
$180,000
Office expense .......
6,000
78,000
36,000
120,000
Total .......................
$105,000
$123,000
$72,000
$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.
Painting
Job
Support
Painting overhead .
Office expense ......
Total ......................
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.
Page 42
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.
Ans:
a. Activity rates (costs divided by activity)
Job
Painting
Support
Painting overhead .
$ 9.90
$225.00
Office expense ......
0.60
390.00
Total ......................
$10.50
$615.00
b. Overhead cost of the job.
Job
Painting
71
Support
1
Total
Activity .....................
Painting overhead ....
$702.90
$225.00
$ 927.90
Office expense .........
42.60
390.00
432.60
Total .........................
$745.50
$615.00
$1,360.50
Sales ........................................
Green costs:
$3,800.00
Direct materials and labor ......
Green margin ...........................
Yellow costs:
2,410.00
1,390.00
Office expense .......................
Yellow margin ...........................
Red costs:
432.60
957.40
Painting overhead ..................
927.90
Red margin ...............................
AACSB: Analytic
$
AICPA BB: Critical Thinking
Page 43
29.50
AICPA FN: Reporting
Appendix: 8A
LO: 6
Level: Medium
43. 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
L48S
Direct materials per unit ...........
$11.50
$62.90
Direct labor per unit ..................
Direct labor-hours per unit ........
$2.00
0.20
$13.00
1.30
Annual 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
Supporting direct labor (DLHs) ......
Setting up machines (setups) ........
Parts administration (part types) ....
Total ...............................................
Estimated Overhead Cost
$ 352,000
201,960
968,000
$1,521,960
Activities
W82R
L48S
Total
Supporting direct labor ..
Setting up machines ......
Parts administration .......
9,000
814
924
13,000
374
1,012
22,000
1,188
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.
Page 44
Ans:
a. Traditional Unit Product Costs
Predetermined overhead rate = $1,521,960 ÷ 22,000 DLHs = $69.18 per DLH
Direct materials ......................................................
Direct labor ............................................................
Manufacturing overhead (0.2 DLHs × $69.18 per
DLH; 1.3 DLHs × $69.18 per DLH) .....................
Unit product cost ....................................................
W82R
$11.5
0
2.00
L48S
13.84
$27.3
4
89.93
$165.8
3
$ 62.90
13.00
b. ABC Unit Product Costs
Supporting direct labor
Estimated
Overhead Total
Cost
Activity
$352,000 22,000
Setting up machines ...
$201,960
1,188
Parts administration ....
$968,000
1,936
Expected
DLHs
setups
part
types
Activity Rate
$16 per DLH
$17
0
per setup
$50 per
part
0
type
Overhead cost for W82R
Supporting direct labor
Setting up machines....
Parts administration ....
Activity Rate
per DLH
$16
$17 per setup
0
$50 per
part
0
type
Activity
DLHs
9,000
ABC
Cost
$144,00
0
setups
814
924
138,380
part
types
Total ............................
462,000
$744,38
0
Overhead cost for L48S
Supporting direct labor
Setting up machines ...
Activity Rate
per DLH
$16
$17 per setup
0
Page 45
Activity
13,00 DLHs
0
setups
374
ABC
Cost
$208,000
63,580
Parts administration ....
$50
0
per part type
part types
1,012
506,000
Total ............................
$777,580
Direct materials ......................................................
Direct labor ............................................................
Manufacturing overhead ($744,400 ÷ 45,000 units;
$777,600 ÷ 10,000 units) ....................................
Unit product cost ....................................................
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 8B LO: 7 Level: Medium
W82R
$11.5
0
2.00
L48S
16.54
$30.0
4
77.76
$153.6
6
$62.90
13.00
AICPA FN: Reporting
44. 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
C63J
Direct materials per unit......
$34.90
$63.70
Direct labor per unit ............
Direct labor-hours per unit ..
$20.80
0.80
$62.40
2.40
Annual production...............
35,000
15,000
The company’s estimated total manufacturing overhead for the year is
$2,656,000 and the company’s estimated total direct labor-hours for the year is
64,000.
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
Assembling products (DLHs) .........
Preparing batches (batches) ..........
Milling (MHs) ..................................
Page 46
Estimated Overhead Cost
$1,216,000
480,000
960,000
Total ...............................................
$2,656,000
Activities
B40W
C63J
Total
Assembling products .....
Preparing batches .........
Milling ............................
28,000
2,304
1,088
36,000
2,496
2,112
64,000
4,800
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.
Ans:
a. Traditional Unit Product Costs
Predetermined overhead rate = $2,656,000 ÷ 64,000 DLHs = $41.50 per DLH
Direct materials ......................................................
Direct labor ............................................................
Manufacturing overhead (0.8 DLHs × $41.50 per
DLH; 2.4 DLHs × $41.50 per DLH) .....................
Unit product cost ....................................................
B40W
$34.9
0
20.80
C63J
33.20
$88.9
0
99.60
$225.7
0
$ 63.70
62.40
b. ABC Unit Product Costs
Assembling products
Estimated
Overhead
Cost
$1,216,00
0
Preparing batches ....
Milling .......................
$480,000
$960,000
Overhead cost for B40W
Activity Rate
Assembling products
Preparing batches ....
Milling .......................
Total Expected
Activity
DLHs
64,000
batch
4,800 es
3,200 MHs
Activity
per
$19 DLH
$10 per
0
setup
$30 per MH
Page 47
Activity Rate
$19
$100
$300
per DLH
per
setup
per MH
ABC Cost
28,000
2,304
1,088
DLHs
batch
es
MHs
$ 532,00
0
230,400
326,40
0
0
$1,088,80
0
Total .........................
Overhead cost for C63J
Activity Rate
Assembling products
Preparing batches ....
Milling.......................
Activity
$19
$10
0
$30
0
ABC Cost
per DLH 36,000
per
setup
2,496
DLHs
batche
s
per MH
MHs
2,112
Total .........................
B40W
$34.9
Direct materials ...................................................... 0
Direct labor............................................................. 20.80
Manufacturing overhead ($1,088,800 ÷ 35,000 31.1
units; $1,567,200 ÷ 15,000 units) ........................ 1
$86.8
Unit product cost .................................................... 1
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 8B LO: 7 Level: Medium
$ 684,00
0
249,600
633,60
0
$1,567,20
0
C63J
$ 63.7
0
62.40
104.4
8
$230.5
8
AICPA FN: Reporting
45. 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
P25P
Direct materials per unit ...........
Direct labor per unit ..................
Direct labor-hours per unit ........
$10.20
$8.40
0.40
$50.50
$25.20
1.20
Annual production ....................
30,000
10,000
The company’s estimated total manufacturing overhead for the year is
$1,464,480 and the company’s estimated total direct labor-hours for the year is
24,000.
Page 48
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
Supporting direct labor (DLHs) ............
Setting up machines (setups) ..............
Parts administration (part types)..........
Total ....................................................
Supporting direct labor...
Setting up machines ......
Parts administration .......
Estimated Overhead Cost
$ 552,000
132,480
780,000
$1,464,480
H16Z
P25P
Total
12,000
864
600
12,000
240
960
24,000
1,104
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.
Ans:
a. Traditional Manufacturing Overhead Costs
Predetermined overhead rate = $1,464,480 ÷ 24,000 DLHs = $61.02 per DLH
Direct labor-hours ................................
H16Z
0.40
P25P
1.20
Predetermined overhead rate per DLH
$61.02
$61.02
Manufacturing overhead cost per unit .
$24.41
$73.22
b. ABC Manufacturing Overhead Costs
Estimate
d
Overhea
d Cost
Supporting direct labor $552,000
Setting up machines.... $132,480
Page 49
Total Expected
Activity
Activity Rate
24,00
0
DLHs
$23 per DLH
1,104 setups
$12 per setup
Parts administration .... $780,000
1,560
0
$50
0
part
types
per
type
part
Overhead cost for H16Z
Activity Rate
Supporting direct labor
Setting up machines ...
Parts administration ....
$23
$12
0
$50
0
per DLH
Activity
12,00
0
DLHs
per setup
864
per
part
type
600
setups
part
types
Total ............................
Annual production .......
Manufacturing
overhead cost per
unit...........................
ABC
Cost
$276,00
0
103,680
300,000
$679,68
0
30,000
$22.66
Overhead cost for P25P
Activity Rate
Supporting direct labor
Setting up machines....
Parts administration ....
$23
$12
0
$50
0
per DLH
Activity
12,00
0
DLHs
per setup
240
per
part
type
960
setups
part
types
Total ............................
Annual production .......
Manufacturing
overhead cost per
unit ...........................
ABC
Cost
$276,00
0
28,800
480,000
$784,80
0
10,000
$78.48
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 8B LO: 7 Level: Medium
AICPA FN: Reporting
46. 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
Page 50
U75X
Direct materials per unit ......
$29.20
$47.40
Direct labor per unit .............
Direct labor-hours per unit ...
$1.10
0.10
$23.10
2.10
Annual production ...............
35,000
15,000
The company’s estimated total manufacturing overhead for the year is
$1,147,650 and the company’s estimated total direct labor-hours for the year is
35,000.
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
Assembling products (DLHs) ....
Preparing batches (batches) .....
Axial milling (MHs) ....................
Total..........................................
Estimated Overhead Cost
$ 140,000
241,150
766,500
$1,147,650
D31X
U75X
Total
Assembling products .....
Preparing batches .........
3,500
560
31,500
1,295
35,000
1,855
Axial 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.
Ans:
a. Traditional Manufacturing Overhead Costs
Predetermined overhead rate = $1,147,650 ÷ 35,000 DLHs = $32.79 per DLH
Direct labor-hours ................................
Page 51
D31X
0.10
U75X
2.10
Predetermined overhead rate per DLH
$32.79
$32.79
Manufacturing overhead cost per unit .
$3.28
$68.86
b. ABC Manufacturing Overhead Costs
Estimated
Overhead
Cost
Assembling products
$140,000
Preparing batches ....
Axial milling ..............
$241,150
$766,500
Total Expected
Activity
35,00
0
DLHs
batch
1,855 es
2,555 MHs
Activity Rate
$4
per DLH
per
$130 batch
$300 per MH
Overhead cost for D31X
Activity Rate
Activity
Assembling products ....
$4
3,500
Preparing batches ........
Axial milling ..................
$130
$300
per DLH
per
batch
per MH
560
1,540
DLHs
batch
es
MHs
Total .............................
Annual production ........
Manufacturing overhead
cost per unit ..............
ABC
Cost
$ 14,00
0
72,800
462,000
$548,80
0
35,000
$15.68
Overhead cost for U75X
Activity Rate
Assembling products ....
$4
Preparing batches ........
Axial milling ..................
$130
$300
per DLH
per
batch
per MH
Activity
31,50
0
DLHs
batch
1,295 es
1,015 MHs
Total .............................
Annual production ........
Manufacturing overhead
cost per unit ..............
ABC
Cost
$126,00
0
168,350
304,500
$598,85
0
15,000
$39.92
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 8B LO: 7 Level: Medium
Page 52
AICPA FN: Reporting
Reference
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc
For further discussion please refer to the link provided:
Chapter 8- Activity Based Costing System-https://youtu.be/KRwCVDVSdgQ
Chapter 8- Activity-Based Costing and Service Cost Allocation Methods- https://youtu.be/5hOU7c3-vVo
Chapter 8- ABC method Problem solving- https://youtu.be/7BtUTx3ZIT4
Page 53
CHAPTER 7 ACTIVITY-BASED COSTING:A TOOL TO AID DECISION MAKING
Learning Objectives
 Understand activity-based costing and how it differs from a
traditional costing system.
 Compute activity rates for cost pools.
 Assign costs to a cost object using a second-stage allocation.
 Hard The overhead cost charged to Product an interim financial
report.
Activity–Based Costing (ABC)
ABC is designed to provide managers with cost information for strategic and other
decisions that potentially affect capacity and therefore affect “fixed”
as well as variable costs.
How Costs are Treated Under Activity–Based Costing
Page 1
Page 2
Page 3
Page 4
Characteristics of Successful ABC Implementations
Targeting Process Improvement
Activity-Based Costing and External Reporting
Most companies do not use ABC for external reporting because
1. Exernal reports are less detailed than internal reports.
2. It may be difficult to make changes to the company’s accounting system.
3. ABC does not conform to GAAP.
4. Auditors may be suspect of the subjective allocation process based on interviews
with employees.
Page 5
ABC Limitations
a. Substantial resources required to implement and maintain.
b. Resistance to unfamiliar numbers and reports.
c. Desire to fully allocate all costs to products.
d. Potential misinterpretation of unfamiliar numbers.
e. Does not conform to GAAP.Two costing systems may be needed.
Appendix 8A: ABC Action Analysis
Conventional ABC analysis does not identify potentially relevant costs. An action
analysis report helps because it:
 Shows what costs have been assigned to a cost object.
 Indicates how difficult it would be to adjust those costs in response to changes in
the level of activity.
Appendix 8B
A modified form of activity-based costing can be used to develop product costs for
external financial reports.
ABC product costs:
 Include organization-sustaining costs and unused capacity costs.
 Exclude nonmanufacturing costs even if they are caused by the products.
Reference
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc
For further discussion please refer to the link provided:
Chapter 7-Define Activity-Based Costing (ABC)-https://youtu.be/fDekWUvNgm4
Chapter 7- Activity Based Costing Systems for Overhead - https://youtu.be/0m0Ob81nd9g
Chapter 7- Explain and Example of Activity-Based Costing (ABC)-https://youtu.be/9zDFeI0qCOs
Page 6
CHAPTER 6 VARIABLE COSTING: A TOOL FOR MANAGEMENT RPOBLEM
DISCUSSION
Learning Objectives:
Perform the basic operations of variable costing.
Learn to analyze and calculate problems
Applying the methods of accounting.
True/False Questions
1. Absorption costing net operating income is closer to the net cash flow of a
period than is variable costing net operating income.
Ans: False
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
2. Variable costing is not permitted for income tax purposes, but it is widely
accepted for external financial reports.
Ans: False
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
3. A basic concept of the contribution approach and variable costing is that fixed
costs are not important in an organization.
Ans: False
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
4. Variable costing is better suited to cost-volume-profit calculations than
absorption costing.
Ans: True
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
5. When lean production is introduced, the difference in net operating income
computed under the absorption and variable costing methods is reduced.
Ans: True
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
Multiple Choice Questions
Page 1
AICPA BB: Critical Thinking
Use the following to answer the next four questions:
Hopkins Company manufactures a single product. The following data pertain to the
company's operations last year:
Selling price per unit ............................
Variable costs per unit:
Production ........................................
Selling and administration ................
Fixed costs in total:
$24
$8
$2
Production ........................................
$48,000
Selling and administration ................
$36,000
At the beginning of the year there were no units in inventory. A total of 12,000 units
were produced during the year, and 10,000 units were sold.
6. Under variable costing, the unit product cost is:
A) $8.00
B) $10.00
C) $12.00
D) $14.00
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Production cost = $8
7. Under absorption costing, the unit product cost is:
A) $8.00
B) $10.00
C) $12.00
D) $15.00
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $48,000 ÷ 12,000 = $4
Unit product cost = $8 + $4 = $12
8. The net operating income under variable costing would be:
A) $64,000
Page 2
B)
C)
D)
$60,000
$56,000
$52,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales revenue ($24 × 10,000)........................
Variable costs:
Variable cost of goods sold ($8 × 10,000)...
$240,000
$80,000
Variable selling and administrative ($2 × 10,000)
.................................................................
20,000
Contribution margin........................................
Fixed costs:
Fixed manufacturing overhead ....................
$48,000
100,000
140,000
84,000
Fixed selling and administrative ..................
36,000
$ 56,000
Net operating income .....................................
9. The net operating income under absorption costing would be:
A) the same as the income under variable costing.
B) $8,000 greater than the income under variable costing.
C) $12,000 greater than the income under variable costing.
D) $8,000 less than the income under variable costing.
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead × Change in number of units in ending
inventory = $4 × (12,000 − 10,000) = $4 × 2,000
= $8,000 greater than the income under variable costing since inventory
increased
Page 3
Use the following to answer the next three questions:
Phearsum Corporation manufactures a parachute. Shown below is Phearsum's cost
structure:
Manufacturing cost ..............
Selling and administrative ...
Variable cost per Total fixed cost for
parachute
the year
$160
$342,000
$10
$171,000
In its first year of operations, Phearsum produced and sold 4,000 parachutes. The
parachutes sold for $310 each.
10. If Phearsum would have sold only 3,800 parachutes in its first year, what total
amount of cost would have been assigned to the 200 parachutes in finished
goods inventory under the variable costing method?
A) $28,000
B) $32,000
C) $34,000
D) $49,100
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit product cost = $160
Total cost of ending finished goods inventory = $160 × 200 = $32,000
11. Refer back to the original data. How would Phearsum's absorption costing net
operating income been affected in its first year if only 3,800 parachutes were
sold instead of 4,000?
A) net operating income would have been $2,350 lower
B) net operating income would have been $10,900 lower
C) net operating income would have been $12,900 lower
D) net operating income would have been $28,000 lower
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1,2 Level: Hard
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $342,000 ÷ 4,000 = $85.50
Unit product cost under absorption costing = $160 + $85.50 = $245.50
Unit gross margin = $310 − $245.50 = $64.50
Page 4
Cost savings ($10 × 200) ............................
$
Less: decrease in gross margin ($64.50 × 200)
2,000
12,900
Net operating income increase (decrease) .
($10,900)
12. Refer back to the original data. How would Phearsum's variable costing net
operating income been affected in its first year if 4,500 parachutes were
produced instead of 4,000 and Phearsum still sold 4,000 parachutes?
A) net operating income would not have been affected
B) net operating income would have been $38,000 higher
C) net operating income would have been $57,000 higher
D) net operating income would have been $75,000 lower
Ans: A
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Medium
Use the following to answer the next four questions:
Feery Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price .........................................
$110
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
Units in ending inventory .....................
0
3,800
3,700
100
Variable costs per unit:
Direct materials.................................
Direct labor .......................................
Variable manufacturing overhead .....
Variable selling and administrative ...
$32
$34
$6
$11
Fixed costs:
Fixed manufacturing overhead .........
$68,400
Fixed selling and administrative........
$14,800
13. What is the unit product cost for the month under variable costing?
A) $72
B) $90
C) $83
D) $101
Page 5
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Direct materials + Direct labor + Variable manufacturing overhead
= $32 + $34 + $6 = $72
14. What is the unit product cost for the month under absorption costing?
A) $83
B) $90
C) $72
D) $101
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $68,400 ÷ 3,800 = $18
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead = $32 + $34 + $6 + $18 = $90
15. What is the net operating income for the month under variable costing?
A) $1,800
B) $16,700
C) $9,500
D) $18,500
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales revenue ($110 × 3,700) ........................
Variable costs:
Variable cost of goods sold ($72 × 3,700) ...
Variable selling and administrative ($11 × 3,700)
.................................................................
Contribution margin ........................................
Fixed costs:
Page 6
$407,000
$266,400
307,100
40,700
99,900
Fixed manufacturing overhead ....................
$ 68,400
83,200
Fixed selling and administrative ..................
14,800
$ 16,700
Net operating income .....................................
Page 7
16. What is the net operating income for the month under absorption costing?
A) $18,500
B) $1,800
C) $9,500
D) $16,700
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales revenue ($110 × 3,700) .......................
$407,000
333,000
Cost of goods sold ($90 × 3,700)...................
Gross margin .................................................
Selling and administrative expenses costs:
Variable selling and administrative ($11 ×
3,700) ......................................................
$40,700
74,000
55,500
Fixed selling and administrative ..................
14,800
$ 18,500
Net operating income .....................................
Use the following to answer the next four questions:
Jarbo Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ........................................
$129
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
Units in ending inventory .....................
500
3,600
3,800
300
Variable costs per unit:
Direct materials ................................
Direct labor .......................................
Variable manufacturing overhead.....
Variable selling and administrative ...
$13
$59
$4
$8
Fixed costs:
Page 8
Fixed manufacturing overhead .........
$97,200
Fixed selling and administrative .......
$64,600
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.
17. What is the unit product cost for the month under variable costing?
A) $76
B) $103
C) $84
D) $111
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead = $13 + $59 + $4 = $76
18. What is the unit product cost for the month under absorption costing?
A) $84
B) $76
C) $103
D) $111
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $97,200 ÷ 3,600 = $27
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead = $13 + $59 + $4 + $27 = $103
19. What is the net operating income for the month under variable costing?
A) $3,800
B) $24,400
C) $9,200
D) $8,100
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
Page 9
AICPA BB: Critical Thinking
Solution:
Sales revenue ($129 × 3,800) .......................
Variable costs:
$490,200
Variable cost of goods sold ($76 × 3,800) ..
$288,800
Variable selling and administrative ($8 × 3,800)
................................................................
Contribution margin .......................................
Fixed costs:
319,200
30,400
171,000
Fixed manufacturing overhead ...................
$ 97,200
Fixed selling and administrative ..................
64,600
161,800
$ 9,200
Net operating income.....................................
20. What is the net operating income for the month under absorption costing?
A) $8,100
B) $9,200
C) $3,800
D) $24,400
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales revenue ($129 × 3,800) ........................
$490,200
391,400
Cost of goods sold ($103 × 3,800) .................
Gross margin .................................................
Selling and administrative expenses costs:
Variable selling and administrative ($8 × 3,800)
.................................................................
$30,400
98,800
95,000
Fixed selling and administrative ..................
Net operating income .....................................
Page 10
64,600
$ 3,800
Use the following to answer the next three questions:
Beach Corporation, which produces a single product, budgeted the following costs for
its first year of operations. These costs are based on a budgeted volume of 30,000
towels produced and sold:
Direct materials ...................................
$96,000
Direct labor .........................................
$48,000
Variable manufacturing overhead .......
$72,000
Fixed manufacturing overhead ...........
$60,000
Variable selling and administrative .....
$12,000
Fixed selling and administrative ..........
$36,000
During the first year of operations, Beach Towel actually produced 30,000 towels but
only sold 24,000 towels. Actual costs did not fluctuate from the cost behavior patterns
described above. The 24,000 towels were sold for $16 per towel. Assume that direct
labor is a variable cost.
21. What is the total cost that would be assigned to Beach Towel's finished goods
inventory at the end of the first year of operations under the variable costing
method?
A) $43,200
B) $45,600
C) $55,200
D) $64,800
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit product cost = (Direct materials + Direct labor + Variable manufacturing
overhead) ÷ 30,000 units = ($96,000 + $48,000 + $72,000) ÷ 30,000 = $7.20
Total cost of ending finished goods inventory = Unit product cost × Ending
inventory = $7.20 × (30,000 − 24,000) = $7.20 × 6,000 = $43,200
22. Under the absorption costing method, what is Beach Towel's actual net
operating income for its first year?
A) $60,000
B) $115,200
Page 11
C)
D)
$117,600
$124,800
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit product cost = (Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead) ÷ 30,000 units
= ($96,000 + $48,000 + $72,000 + $60,000) ÷ 30,000 = $9.20
Unit variable selling and administrative cost = $12,000 ÷ 30,000 = $0.40
Sales revenue ($16 × 24,000) .......................
$384,000
220,800
Cost of goods sold ($9.20 × 24,000) ..............
Gross margin .................................................
Selling and administrative expenses:
Variable selling and administrative ($0.40 ×
24,000) ....................................................
$ 9,600
163,200
45,600
Fixed selling and administrative ..................
36,000
$117,600
Net operating income .....................................
23. Assuming no change in cost structure, which of the following would have
increased Beach Towel's net operating income under the variable costing
method in its first year of operations?
A) an increase in sales volume with no increase in production volume
B) an increase in production volume with no increase in sales volume
C) both A and B above
D) none of the above
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Use the following to answer the next four questions:
Blake Corporation, which produces a single product, has provided the following
absorption costing income statement for the month of June:
Blake Corporation
Income Statement
For the month ended June 30
Page 12
Sales (9,500 units) ..............................
Cost of goods sold:
Beginning inventory..........................
Add cost of goods manufactured......
Goods available for sale ...................
Less ending Inventory ......................
$285,000
$ 16,000
160,000
176,000
24,000
Cost of goods sold ..............................
Gross margin ......................................
Selling and administrative expenses:
152,000
133,000
Fixed ................................................
$ 75,000
Variable ............................................
19,000
Net operating income ..........................
94,000
$ 39,000
During June, the company's variable production costs were $10 per unit and its fixed
manufacturing overhead totaled $60,000. A total of 10,000 units were produced during
June and the company had 1,000 units in the beginning inventory. The company uses
the LIFO method to value inventories.
24. The contribution margin per unit during June was:
A) $20
B) $18
C) $16
D) $14
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Selling price ($285,000 ÷ 9,500) ....................
$30
Less variable product cost .............................
10
Less unit variable selling and administrative ($19,000
÷ 9,500) ......................................................
2
Unit contribution margin
$18
25. The carrying value on the balance sheet of the company's inventory on June
30 under the variable costing method would be:
A) $10,000
B) $12,000
C) $15,000
D) $24,000
Page 13
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
AICPA BB: Critical Thinking
Solution:
Ending inventory = Beginning inventory + Units produced − Units sold
= 1,000 + 10,000 − 9,500 = 1,500
Carrying value = Ending inventory in units × Variable production cost
= 1,500 × $10 = $15,000
26. Net operating income under the variable costing method for June would be:
A) $36,000
B) $40,000
C) $53,000
D) $60,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales revenue (9,500 units) ...........................
Variable costs:
Variable cost of goods sold ($10 × 9,500) ...
$285,000
$95,000
114,000
Variable selling and administrative ..............
Contribution margin ........................................
Fixed costs:
Fixed manufacturing overhead ....................
19,000
171,000
$60,000
135,000
Fixed selling and administrative ..................
75,000
$ 36,000
Net operating income .....................................
27. The break-even point in units for the month under variable costing would be:
A) 6,000 units
B) 6,750 units
C) 7,500 units
D) 9,000 units
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
Page 14
AICPA BB: Critical Thinking
Solution:
Sales revenue (9,500 units) ...........................
Variable costs:
Variable cost of goods sold ($10 × 9,500) ...
$285,00
0
$95,000
114,000
$171,00
0
Contribution margin ........................................
Fixed costs ÷ Unit contribution margin = (Fixed manufacturing overhead + Fixed
selling and administrative) ÷ Unit contribution margin = ($60,000 + $75,000) ÷
($171,000 ÷ 9,500) = $135,000 ÷ $18 per unit = 7,500 units
Variable selling and administrative ..............
19,000
Use the following to answer the next four questions:
Haaikon Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price .........................................
$86
Units in beginning inventory ................
Units produced ....................................
Units sold.............................................
Units in ending inventory .....................
0
3,400
3,300
100
Variable costs per unit:
Direct materials.................................
Direct labor .......................................
Variable manufacturing overhead .....
Variable selling and administrative ...
$17
$39
$1
$8
Fixed costs:
Fixed manufacturing overhead .........
$40,800
Fixed selling and administrative........
$23,100
28. What is the unit product cost for the month under variable costing?
A) $77
B) $57
C) $69
D) $65
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
Page 15
AICPA BB: Critical Thinking
Solution:
Unit product cost = Direct materials + Direct Labor + Variable manufacturing
overhead = $17 + $39 + $1 = $57
29. The total contribution margin for the month under the variable costing
approach is:
A) $56,100
B) $28,500
C) $95,700
D) $69,300
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales revenue ($86 × 3,300)..........................
Variable costs:
$283,800
Variable cost of goods sold ($57 × 3,300) ...
$188,100
Variable selling and administrative ($8 × 3,300)
.................................................................
214,500
26,400
$ 69,300
Contribution margin........................................
30. What is the total period cost for the month under the variable costing
approach?
A) $40,800
B) $90,300
C) $49,500
D) $63,900
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Hard
AICPA BB: Critical Thinking
Solution:
Period cost = Variable selling and administrative cost + Fixed manufacturing
overhead + Fixed selling and administrative cost
= ($8 × 3,300) + $40,800 + $23,100
= $26,400 + $40,800 + $23,100 = $90,300
Page 16
31. What is the net operating income for the month under variable costing?
A) $6,600
B) $(300)
C) $5,400
D) $1,200
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales revenue ($86 × 3,300) .........................
Variable costs:
$283,800
Variable cost of goods sold ($57 × 3,300) ..
$188,100
214,500
Variable selling and administrative ($8 × 3,300)
................................................................
Contribution margin .......................................
Fixed costs:
26,400
69,300
Fixed manufacturing overhead ...................
$ 40,800
Fixed selling and administrative ..................
23,100
63,900
$ 5,400
Net operating income.....................................
Use the following to answer the next two questions:
Ibarra Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price .........................................
$81
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
Units in ending inventory .....................
0
6,900
6,600
300
Variable costs per unit:
Direct materials.................................
Direct labor .......................................
Variable manufacturing overhead .....
Variable selling and administrative ...
$22
$28
$6
$5
Page 17
Fixed costs:
Fixed manufacturing overhead .........
$69,000
Fixed selling and administrative........
$66,000
32. What is the unit product cost for the month under variable costing?
A) $71
B) $66
C) $56
D) $61
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $22 + $28 + $6 = $56
33. What is the net operating income for the month under variable costing?
A) $0
B) $(19,800)
C) $(3,000)
D) $3,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales revenue ($81 × 6,600) .........................
Variable costs:
Variable cost of goods sold ($56 × 6,600) ...
Variable selling and administrative ($5 × 6,600)
.................................................................
Contribution margin .......................................
Fixed costs:
Fixed manufacturing overhead....................
$534,600
$369,600
402,600
33,000
132,000
$ 69,000
135,000
Fixed selling and administrative ..................
Page 18
66,000
$ (3,000)
Net operating income .....................................
Use the following to answer the next three questions:
Yankee Company manufactures a single product. The company has the following cost
structure:
Variable costs per unit:
Production .............................
Selling and administrative ......
Fixed costs in total:
$4
$1
Production .............................
Selling and administrative ......
$12,000
$8,000
Last year, 4,000 units were produced and 3,500 units were sold. There were no
beginning inventories.
34. Under variable costing, the unit product cost would be:
A) $4
B) $5
C) $7
D) $8
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Production cost = $4
35. The carrying value on the balance sheet of the ending finished goods
inventory under variable costing would be:
A) the same as under absorption costing
B) $1,500 less than under absorption costing
C) $2,000 higher than under absorption costing
D) $2,000 less than under absorption costing
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3
Difference in carrying value of ending finished goods inventory = Unit fixed
manufacturing overhead × Change in inventory in units
Page 19
= $3 × (4,000 − 3,500)
= $1,500 less than under absorption costing
36. Under absorption costing, the cost of goods sold for the year would be:
A) $28,000
B) $24,500
C) $17,500
D) $14,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3
Product cost = $4 + $3 = $7
Cost of goods sold = $7 × 3,500 = $24,500
Use the following to answer the next two questions:
Peterson Company produces a single product. Data from the company's records for last
year follow:
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
0
70,000
60,000
Sales ...................................................
Manufacturing costs:
Variable ............................................
Fixed ................................................
Selling and administrative expenses:
Variable ............................................
Fixed ................................................
$1,400,000
$630,000
$315,000
$98,000
$140,000
37. The carrying value on the balance sheet of the ending finished goods
inventory under variable costing would be:
A) $90,000
B) $104,000
C) $105,000
D) $135,000
Ans: A
AACSB: Analytic
Page 20
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 1
Level: Easy
Source: CPA, adapted
Solution:
Unit variable product cost = $630,000 ÷ 70,000 = $9
Change in inventory in units = 70,000 − 60,000 = 10,000
Carrying value of ending inventory = $9 × 10,000 = $90,000
38. Under the absorption costing method, Peterson's net operating income would
be:
A) $217,000
B) $307,000
C) $352,000
D) $374,500
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Source: CPA, adapted
Solution:
Product cost = $9 + $4.50 = $13.50
Sales revenue .............................................
Cost of goods sold ($13.50 × 60,000) .........
Gross margin ..............................................
Selling and administrative expenses:
Variable selling and administrative ...........
$1,400,000
810,000
590,000
$ 98,000
238,000
Fixed selling and administrative ...............
140,000
$ 352,000
Net operating income ..................................
Use the following to answer the next three questions:
McCoy Corporation manufactures a computer monitor. Shown
structure:
Variable cost per
monitor
Manufacturing cost...................
$75.20
Selling and administrative ........
$14.60
Page 21
below is McCoy's cost
Total fixed cost for
the year
$912,000
$456,000
In its first year of operations, McCoy produced 100,000 monitors but only sold 95,000.
McCoy's gross margin in this first year was $2,629,600. McCoy's contribution margin in
this first year was $2,109,000.
39. Under the variable costing method, what is McCoy's net operating income for
its first year?
A) $266,000
B) $741,000
C) $1,261,600
D) $2,173,600
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
$2,109,000
Contribution margin .......................................
Fixed costs:
Fixed manufacturing overhead....................
$912,000
1,368,000
Fixed selling and administrative ..................
456,000
$ 741,000
Net operating income .....................................
40. Under the absorption costing method, what is McCoy's net operating income
for its first year?
A) $266,000
B) $786,600
C) $1,261,600
D) $2,173,600
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
$2,629,600
Gross margin .................................................
Selling and administrative expenses:
Variable selling and administrative ($14.60 ×
95,000) .....................................................
$1,387,000
1,843,000
Fixed selling and administrative ..................
Page 22
456,000
$ 786,600
Net operating income .....................................
41. If McCoy produces 100,000 monitors and sells 100,000 monitors in the
second year of operations, which of the following statements will be true?
(Assume no change in cost structure or selling price.)
A) McCoy's variable costing net operating income in its second year will be
greater than its absorption costing net operating income
B) McCoy's absorption costing unit product cost will decrease in the second
year
C) McCoy's gross margin will be equal to its contribution margin in its second
year
D) Both A and B above
E) none of the above
Ans: E
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Hard
AICPA BB: Critical Thinking
Use the following to answer the next three questions:
Mediocre Manufacturing Company produces a single product. Management budgeted
the following costs for its first year of operations. These costs are based on a budgeted
volume of 4,000 units produced and sold:
Direct materials ........................
$28,000
Direct labor ..............................
Manufacturing overhead:
$14,000
Variable .................................
$56,000
Fixed .....................................
Selling and administrative:
Variable .................................
$63,000
Fixed .....................................
$42,000
$7,000
During the first year of operations, Mediocre actually produced 4,000 units but only sold
3,500 units. Actual costs did not fluctuate from the cost behavior patterns described
above. The 3,500 units were sold for $72 per unit. Assume that direct labor is a variable
cost.
42. What is the total cost that would be assigned to Mediocre's finished goods
inventory at the end of the first year of operations under the absorption costing
method?
A) $12,250
B) $20,125
Page 23
C)
D)
$23,000
$26,250
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
AICPA BB: Critical Thinking
Solution:
Product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead
= $28,000 + $14,000 + $56,000 + $63,000 = $161,000
Unit product cost = $161,000 ÷ 4,000 = $40.25
Total cost of ending finished goods inventory = Unit product cost × Ending
inventory in units = $40.25 × (4,000 − 3,500) = $20,125
43. Under the variable costing method, what is Mediocre's actual net operating
income for its first year?
A) $42,000
B) $54,250
C) $55,125
D) $63,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit product cost = (Direct materials + Direct labor + Variable manufacturing
overhead) ÷ 4,000 units = ($28,000 + $14,000 + $56,000) ÷ 4,000 = $24.50
Sales revenue ($72 × 3,500) ..........................
Variable costs:
Variable cost of goods sold ($24.50 × 3,500)
$252,000
$85,750
Variable selling and administrative ($1.75 ×
3,500) .......................................................
6,125
Contribution margin ........................................
Fixed costs:
Fixed manufacturing overhead ....................
$63,000
91,875
160,125
105,000
Fixed selling and administrative ..................
42,000
$ 55,125
Net operating income .....................................
Page 24
44. Assuming no change in cost structure, which of the following would have
increased Mediocre's net operating income under the absorption costing
method in its first year of operations?
A) an increase in sales volume with no increase in production volume
B) an increase in production volume with no increase in sales volume
C) both A and B above
D) none of the above
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Use the following to answer the next two questions:
JV Company produces a single product that sells for $7.00 per unit. Last year, 100,000
units were produced and 80,000 units were sold. There were no beginning inventories.
The company has the following cost structure:
Fixed Costs
Variable Costs
Raw materials ..........................
--
$1.50 per unit produced
Direct labor ...............................
--
$1.00 per unit produced
Factory overhead .....................
Selling and administrative ........
$150,000
$80,000
$0.50 per unit produced
$0.50 per unit sold
45. The unit product cost under absorption costing is:
A) $2.50
B) $3.00
C) $3.50
D) $4.50
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Source: CPA, adapted
Solution:
Unit fixed overhead = $150,000 ÷ 100,000 = $1.50
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead
= $1.50 + $1.00 + $0.50 + $1.50 = $4.50
46. The net operating income under variable costing is:
A) $50,000
Page 25
B)
C)
D)
$80,000
$90,000
$120,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Source: CPA, adapted
Solution:
Product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $1.50 + $1 + $0.50 = $3
Sales revenue ($7 × 80,000)..........................
Variable costs:
Variable cost of goods sold ($3 × 80,000) ...
$560,000
$240,000
Variable selling and administrative ($0.50 ×
80,000).....................................................
40,000
Contribution margin........................................
Fixed costs:
Fixed manufacturing overhead ....................
150,000
280,000
280,000
230,000
Fixed selling and administrative ..................
80,000
$ 50,000
Net operating income .....................................
Use the following to answer the next four questions:
Gadepelli Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price.........................................
$106
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
Units in ending inventory .....................
0
1,600
1,400
200
Variable costs per unit:
Direct materials ................................
Direct labor .......................................
Variable manufacturing overhead .....
Variable selling and administrative ...
$15
$14
$6
$4
Page 26
Fixed costs:
Fixed manufacturing overhead .........
$51,200
Fixed selling and administrative .......
$23,800
47. The total contribution margin for the month under the variable costing
approach is:
A) $54,600
B) $99,400
C) $93,800
D) $42,600
Ans: C
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Medium
Solution:
Unit product cost = $15 + $14 + $6 = $35
Sales revenue ($106 × 1,400) .......................
Variable costs:
Variable cost of goods sold ($35 × 1,400)...
$148,400
$49,000
Variable selling and administrative ($4 × 1,400)
.................................................................
54,600
5,600
$ 93,800
Contribution margin .......................................
48. The total gross margin for the month under the absorption costing approach is:
A) $25,200
B) $54,600
C) $68,000
D) $93,800
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $51,200 ÷ 1,600 = $32
Unit product cost = $15 + $14 + $6 + $32 = $67
Page 27
Sales revenue ($106 × 1,400)........................
Cost of goods sold ($67 × 1,400) ...................
Gross margin .................................................
$148,400
93,800
$ 54,600
105. What is the total period cost for the month under the variable costing approach?
A) $75,000
B) $80,600
C) $29,400
D) $51,200
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Hard
AICPA BB: Critical Thinking
Solution:
Period cost = Variable selling and administrative cost + Fixed manufacturing
overhead + Fixed selling and administrative cost
= $4 × 1,400 + $51,200 + $23,800
= $5,600 + $51,200 + $23,800 = $80,600
49. What is the total period cost for the month under the absorption costing
approach?
A) $29,400
B) $80,600
C) $23,800
D) $51,200
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Hard
AICPA BB: Critical Thinking
Solution:
Period cost = Variable selling and administrative cost + Fixed selling and
administrative cost = $4 × 1,400 + $23,800 = $29,400
Use the following to answer questions 107-109:
During its first year of operations, Carlos Manufacturing Company incurred the following
costs to produce 8,000 units of its product:
Direct materials ...................................
Direct labor..........................................
Variable manufacturing overhead .......
Fixed manufacturing overhead............
Page 28
$7 per unit
$3 per unit
$18 per unit
$450,000 in total
The company also incurred the following costs in the sale of 7,500 units of product
during its first year:
Variable selling and administrative ......
Fixed selling and administrative ..........
$2 per unit
$60,000 in total
Assume that direct labor is a variable cost.
50. What is the total cost that would be assigned to Carlos' finished goods
inventory at the end of the first year of operations under the absorption costing
method?
A) $15,000
B) $42,125
C) $44,000
D) $47,125
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $450,000 ÷ 8,000 = $56.25
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead = $7 + $3 + $18 + $56.25 = $84.25
Total cost of ending finished goods inventory = Unit product cost × Ending
inventory in units = $84.25 × (8,000 − 7,500) = $84.25 × 500 = $42,125
51. What is the total cost that would be assigned to Carlos' finished goods
inventory at the end of the first year of operations under the variable costing
method?
A) $15,000
B) $42,125
C) $44,000
D) $14,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead = $7 + $3 + $18 = $28
Total cost of ending finished goods inventory = Unit product cost × Ending
inventory in units = $28 × (8,000 − 7,500) = $28 × 500 = $14,000
Page 29
52. If Carlos' absorption costing net operating income for this first year is
$118,125, what would its variable costing net operating income be for this first
year?
A) $86,000
B) $90,000
C) $104,125
D) $146,250
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Variable costing net income = Absorption costing net income – (Unit fixed
manufacturing overhead × Change in inventory in units)
= $118,125 − ($56.25 × 500) = $118,125 − $28,125 = $90,000
Use the following to answer questions 110-111:
Kern Company produces a single product. Selected information concerning the
operations of the company follow:
Units in beginning inventory ..........................
Units produced ..............................................
Units sold.......................................................
0
10,000
9,000
Direct materials .............................................
$40,000
Direct labor
$20,000
Variable factory overhead .............................
$12,000
Fixed factory overhead ..................................
Variable selling and administrative expenses
$25,000
$4,500
Fixed selling and administrative expenses ....
$30,000
Assume that direct labor is a variable cost.
53. The carrying value on the balance sheet of the ending finished goods
inventory under variable costing would be:
A) $7,200
B) $7,650
Page 30
C)
D)
$8,000
$9,700
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Source: CPA, adapted
Solution:
Unit product cost = ($40,000 + $20,000 + $12,000) ÷ 10,000
= $72,000 ÷ 10,000 = $7.20
Ending inventory = Units produced − Units sold = 10,000 − 9,000 = 1,000
Carrying value of ending finished goods inventory = Unit product cost × Units in
ending inventory = $7.20 × 1,000 = $7,200
54. Which costing method, absorption or variable costing, would show a higher
operating income for the year and by what amount?
A) Absorption costing net operating income would be higher than variable
costing net operating income by $2,500.
B) Variable costing net operating income would be higher than absorption
costing net operating income by $2,500.
C) Absorption costing net operating income would be higher than variable
costing net operating income by $5,500.
D) Variable costing net operating income would be higher than absorption
costing net operating income by $5,500.
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Source: CPA, adapted
Solution:
Unit fixed manufacturing overhead = $25,000 ÷ 10,000 = $2.50
Difference between absorption costing net income and variable costing net
income = Unit fixed manufacturing overhead × Change in ending inventory in
units = $2.50 × (10,000 − 9,000) = $2,500
Since inventory has increased (production exceeds sales), absorption costing net
income would be higher than variable costing net income.
Use the following to answer the next two questions:
Lina Co. produced 100,000 units of its single product during the month of June. Costs
incurred during June were as follows:
$100,00
Direct materials .............................................. 0
Direct labor .................................................... $80,000
Variable manufacturing overhead .................. $40,000
Page 31
Fixed manufacturing overhead ...................... $50,000
Variable selling and administrative expenses $12,000
Fixed selling and administrative expenses..... $45,000
Assume that direct labor is a variable cost.
55. The unit product cost under absorption costing would be:
A) $3.27
B) $2.70
C) $2.20
D) $1.80
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Source: CPA, adapted
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead
= ($100,000 + $80,000 + $40,000 + $50,000) ÷ 100,000
= $270,000 ÷ 100,000 = $2.70
56. The unit product cost under variable costing would be:
A) $2.82
B) $2.70
C) $2.32
D) $2.20
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Source: CPA, adapted
Solution:
Unit product cost = (Direct materials + Direct labor + Variable manufacturing
overhead) ÷ 100,000 units = ($100,000 + $80,000 + $40,000) ÷ 100,000 =
$220,000 ÷ 100,000 = $2.20
Use the following to answer the next two questions:
Bauxar Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price.........................................
$98
Units in beginning inventory ................
Units produced ....................................
0
2,200
Page 32
Units sold ............................................
Units in ending inventory .....................
2,100
100
Variable costs per unit:
Direct materials ................................
Direct labor .......................................
Variable manufacturing overhead .....
Variable selling and administrative ...
$29
$17
$5
$9
Fixed costs:
Fixed manufacturing overhead .........
Fixed selling and administrative .......
$33,000
$29,400
57. What is the unit product cost for the month under variable costing?
A) $75
B) $66
C) $51
D) $60
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Direct materials + Direct labor + Variable manufacturing overhead
= $29 + $17 + $5 = $51
58. What is the unit product cost for the month under absorption costing?
A) $66
B) $51
C) $60
D) $75
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $33,000 ÷ 2,200 = $15
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead = $29 + $17 + $5 + $15 = $66
Page 33
Use the following to answer the next three questions:
Crossbow Corp. produces a single product. Data concerning June's operations follow:
Units in beginning inventory .....
Units produced .........................
Units sold .................................
0
6,000
5,000
Variable costs per unit:
Manufacturing .......................
Selling and administrative .....
$7
$3
Fixed costs in total:
Manufacturing .......................
Selling and administrative .....
$12,000
$3,000
59. Under variable costing, ending inventory on the balance sheet would be
valued at:
A) $10,000
B) $7,000
C) $9,000
D) $12,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit product cost = $7
Ending inventory = Beginning inventory + Units produced − Units sold
= 0 + 6,000 − 5,000 = 1,000
Value of ending inventory = Unit product cost × Units in ending inventory
= $7 × 1,000 = $7,000
60. Under absorption costing, ending inventory on the balance sheet would be
valued at:
A) $10,000
B) $7,000
C) $9,000
D) $12,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Easy
Page 34
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $12,000 ÷ 6,000 = $2
Unit product cost = $7 + $2 = $9
Value of ending inventory = Unit product cost × Units in ending inventory
= $9 × 1,000 = $9,000
61. For the year in question, net operating income under variable costing will be:
A) higher than net operating income under absorption costing.
B) lower than net operating income under absorption costing.
C) the same as net operating income under absorption costing.
D) none of these
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
AICPA BB: Critical Thinking
Use the following to answer the next two questions:
Dearne Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price .........................................
$67
Units in beginning inventory ................
Units produced ....................................
Units sold.............................................
Units in ending inventory .....................
0
5,200
4,900
300
Variable costs per unit:
Direct materials.................................
Direct labor .......................................
Variable manufacturing overhead .....
Variable selling and administrative ...
$20
$16
$3
$4
Fixed costs:
Fixed manufacturing overhead .........
$41,600
Fixed selling and administrative........
$73,500
62. What is the total period cost for the month under the variable costing
approach?
A) $41,600
B) $93,100
C) $115,100
D) $134,700
Page 35
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Hard
AICPA BB: Critical Thinking
Solution:
Period cost = Variable selling and administrative cost + Fixed manufacturing
overhead + Fixed selling and administrative cost
= $4 × 4,900 + $41,600 + $73,500
= $19,600 + $41,600 + $73,500 = $134,700
63. What is the total period cost for the month under the absorption costing
approach?
A) $93,100
B) $73,500
C) $134,700
D) $41,600
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Hard
AICPA BB: Critical Thinking
Solution:
Period cost = Variable selling and administrative cost + Fixed selling and
administrative cost = $4 × 4,900 + $73,500 = $93,100
Use the following to answer the next two questions:
Tat Corporation produces a single product and has the following cost structure:
Number of units produced each year .............
Variable costs per unit:
Direct materials ...........................................
Direct labor..................................................
Variable manufacturing overhead ...............
7,000
Variable selling and administrative expenses
Fixed costs per year:
$3
$77
$89
$5
Fixed manufacturing overhead....................
$532,000
Fixed selling and administrative expenses ..
$574,000
64. The unit product cost under absorption costing is:
A) $247
Page 36
B)
C)
D)
$166
$332
$171
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $532,000 ÷ 7,000 = $76
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead = $77 + $89 + $5 + $76 = $247
65. The unit product cost under variable costing is:
A) $169
B) $171
C) $247
D) $174
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead = $77 + $89 + $5 = $171
Use the following to answer the next two questions:
Caruso Inc., which produces a single product, has provided the following data for its
most recent month of operations:
Number of units produced .............................
Variable costs per unit:
Direct materials...........................................
Direct labor .................................................
Variable manufacturing overhead ...............
4,000
Variable selling and administrative expense
Fixed costs:
$8
$39
$71
$5
Fixed manufacturing overhead ...................
$220,000
Fixed selling and administrative expense ...
$308,000
Page 37
There were no beginning or ending inventories.
66. The unit product cost under absorption costing was:
A) $170
B) $115
C) $255
D) $110
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $220,000 ÷ 4,000 = $55
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead = $39 + $71 + $5 + $55 = $170
67. The unit product cost under variable costing was:
A) $115
B) $123
C) $118
D) $170
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead = $39 + $71 + $5 = $115
Use the following to answer questions 125-126:
Cloer Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price.........................................
$95
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
Units in ending inventory .....................
0
8,900
8,500
400
Variable costs per unit:
Direct materials ................................
$10
Page 38
Direct labor .......................................
Variable manufacturing overhead .....
Variable selling and administrative ...
$48
$5
$11
Fixed costs:
Fixed manufacturing overhead .........
Fixed selling and administrative .......
$106,800
$68,000
68. The total contribution margin for the month under the variable costing
approach is:
A) $178,500
B) $71,700
C) $272,000
D) $170,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit product cost = $10 + $48 + $5 = $63
Sales revenue ($95 × 8,500) .........................
Variable costs:
$807,500
Variable cost of goods sold ($63 × 8,500) ..
$535,500
Variable selling and administrative ($11 × 8,500)
................................................................
629,000
93,500
$178,500
Contribution margin .......................................
69. The total gross margin for the month under the absorption costing approach is:
A) $200,000
B) $170,000
C) $8,500
D) $178,500
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $106,800 ÷ 8,900 = $12
Page 39
Unit product cost = $10 + $48 + $5 + $12 = $75
Sales revenue ($95 × 8,500) .........................
Cost of goods sold ($75 × 8,500) ...................
Gross margin .................................................
$807,500
637,500
$ 170,000
Use the following to answer the next two questions:
Hirsch Company produces a single product. Variable manufacturing costs are $6 per
unit, and fixed manufacturing costs are $2 per unit based on 50,000 units produced
each year. In the current year, 50,000 units were produced, and 40,000 units were sold.
70. Under absorption costing, the amount of manufacturing cost (variable and
fixed) deducted from revenue in the current year would be:
A) $320,000
B) $400,000
C) $240,000
D) $300,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Total manufacturing cost deducted from revenue = Total per unit product cost ×
Units sold = ($6 + $2) × 40,000 = $320,000
71. Under variable costing, the amount of manufacturing cost (variable and fixed)
deducted from revenue in the current year would be:
A) $320,000
B) $240,000
C) $340,000
D) $400,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Total fixed cost = Per unit fixed cost × Units produced
Total fixed cost = $2 × 50,000 = $100,000
Total manufacturing cost deducted from revenue = (Variable per unit product cost
× Units sold) + Total fixed cost
= ($6 × 40,000) + $100,000
= $240,000 + $100,000 = $340,000
Page 40
Use the following to answer the next two questions:
Osawa Inc. manufactured 200,000 units of its only product in its first year of operations.
Variable manufacturing costs were $30 per unit. Fixed manufacturing costs were
$600,000 and selling and administrative costs totaled $400,000. Osawa sold 120,000
units at a selling price of $40 per unit.
72. Osawa's net operating income using absorption costing would be:
A) $200,000
B) $440,000
C) $600,000
D) $840,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Source: CMA, adapted
Solution:
Unit fixed manufacturing cost = $600,000 ÷ 200,000 = $3
Unit product cost = $30 + $3 = $33
Sales revenue ($40 × 120,000)......................
$4,800,000
3,960,000
Cost of goods sold ($33 × 120,000) ...............
Gross margin .................................................
840,000
400,000
Selling and administrative expenses cost ......
$ 440,000
Net operating income .....................................
73. Osawa's net operating income using variable costing would be:
A) $200,000
B) $440,000
C) $800,000
D) $600,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Source: CMA, adapted
Solution:
Sales revenue ($40 × 120,000) ......................
Page 41
$4,800,000
3,600,000
Variable cost of goods sold ($30 × 120,000) ..
Contribution margin ........................................
Fixed costs:
1,200,000
Fixed manufacturing costs ..........................
$600,000
Selling and administrative ...........................
400,000
1,000,000
$ 200,000
Net operating income .....................................
Use the following to answer the next two questions:
Eldrick Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ........................................
$85
Units in beginning inventory ................
Units produced....................................
Units sold ............................................
Units in ending inventory.....................
0
4,500
4,400
100
Variable costs per unit:
Direct materials ................................
Direct labor.......................................
Variable manufacturing overhead ....
Variable selling and administrative...
$29
$13
$7
$5
Fixed costs:
Fixed manufacturing overhead.........
Fixed selling and administrative .......
$117,000
$4,400
74. What is the net operating income for the month under variable costing?
A) $10,100
B) $2,600
C) $15,000
D) $17,600
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Page 42
AICPA BB: Critical Thinking
Unit product cost = $29 + $13 + $7 = $49
Sales revenue ($85 × 4,400) .........................
Variable costs:
$374,000
Variable cost of goods sold ($49 × 4,400) ...
$215,600
Variable selling and administrative ($5 × 4,400)
.................................................................
Contribution margin .......................................
Fixed costs:
237,600
22,000
136,400
Fixed manufacturing overhead....................
$117,000
Fixed selling and administrative ..................
4,400
121,400
$ 15,000
Net operating income .....................................
75. What is the net operating income for the month under absorption costing?
A) $17,600
B) $10,100
C) $15,000
D) $2,600
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead = $117,000 ÷ 4,500 = $26
Unit product cost = $29 + $13 + $7 + $26 = $75
Sales revenue ($85 ×4,400) ...........................
Cost of goods sold ($75 × 4,400) ...................
Gross margin .................................................
Selling and administrative expenses:
Variable selling and administrative ($5 ×
4,400) .......................................................
$22,000
Fixed selling and administrative ..................
4,400
Net operating income .....................................
Page 43
$374,000
330,000
44,000
26,400
$ 17,600
Use the following to answer the next two questions:
Kiefer Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ........................................
$133
Units in beginning inventory................
Units produced ...................................
Units sold ............................................
Units in ending inventory ....................
600
6,600
6,800
400
Variable costs per unit:
Direct materials ................................
Direct labor ......................................
Variable manufacturing overhead ....
Variable selling and administrative ..
$34
$52
$2
$11
Fixed costs:
Fixed manufacturing overhead ........
Fixed selling and administrative .......
$158,400
$61,200
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.
76. What is the net operating income for the month under variable costing?
A) $6,800
B) $9,600
C) $29,200
D) $11,600
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales revenue ($133 × 6,800)........................
Variable costs:
Variable cost of goods sold ($88 × 6,800) ...
$598,400
Variable selling and administrative ($11 × 6,800)
.................................................................
74,800
Contribution margin........................................
Page 44
$904,400
673,200
231,200
Fixed costs:
Fixed manufacturing overhead ....................
$158,400
Fixed selling and administrative ..................
61,200
219,600
$ 11,600
Net operating income .....................................
77. What is the net operating income for the month under absorption costing?
A) $11,600
B) $6,800
C) $29,200
D) $9,600
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 2 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit fixed manufacturing overhead= $24
Unit product cost = $34 + $52 + $2 + $24 = $112
Sales revenue ($133 × 6,800)........................
Cost of goods sold ($112 × 6,800) .................
Gross margin .................................................
Selling and administrative expenses:
Variable selling and administrative ($11 ×
6,800).......................................................
$74,800
Fixed selling and administrative ..................
61,200
Net operating income .....................................
$904,400
761,600
142,800
136,000
$ 6,800
Use the following to answer the next two questions:
Danahy Corporation manufactures a variety of products. The following data pertain to
the company's operations over the last two years:
Variable costing net operating income, last year ....
$52,000
Variable costing net operating income, this year ....
$68,000
Fixed manufacturing overhead costs released from inventory under
absorption costing, last year ................................
$4,000
Fixed manufacturing overhead costs deferred in inventory under
absorption costing, this year ................................
$6,000
Page 45
78. What was the absorption costing net operating income last year?
A) $50,000
B) $48,000
C) $52,000
D) $56,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Absorption costing net income = Variable costing net operating income – Fixed
manufacturing overhead released = $52,000 – $4,000 = $48,000
79. What was the absorption costing net operating income this year?
A) $62,000
B) $74,000
C) $70,000
D) $66,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $68,000 + $6,000 = $74,000
Use the following to answer the next two questions:
Helmers Corporation manufactures a variety of products. Variable costing net operating
income last year was $86,000 and this year was $103,000. Last year, $32,000 in fixed
manufacturing overhead costs were released from inventory under absorption costing.
This year, $12,000 in fixed manufacturing overhead costs were deferred in inventory
under absorption costing.
80. What was the absorption costing net operating income last year?
A) $106,000
B) $86,000
C) $54,000
D) $118,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
Page 46
AICPA BB: Critical Thinking
Solution:
Absorption costing net income = Variable costing net operating income – Fixed
manufacturing overhead released = $86,000 – $32,000 = $54,000
81. What was the absorption costing net operating income this year?
A) $81,000
B) $83,000
C) $115,000
D) $123,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $103,000 + $12,000 = $115,000
Use the following to answer the next two questions:
Norenberg Corporation manufactures a variety of products. The following data pertain to
the company's operations over the last two years:
Variable costing net operating income, last year ....
Variable costing net operating income, this year ....
Increase in ending inventory, last year....................
$88,600
$96,100
600 units
Decrease in ending inventory, this year ..................
Fixed manufacturing overhead cost per unit ...........
2,300 units
$7
82. What was the absorption costing net operating income last year?
A) $92,800
B) $88,600
C) $84,400
D) $76,700
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Fixed manufacturing overhead deferred = 600 × $7 = $4,200
Page 47
Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $88,600 + $4,200 = $92,800
83. What was the absorption costing net operating income this year?
A) $80,000
B) $100,500
C) $108,000
D) $112,200
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Fixed manufacturing overhead released = 2,300 × $7 = $16,100
Absorption costing net income = Variable costing net operating income − Fixed
manufacturing overhead released = $96,100 − $16,100 = $80,000
Use the following to answer the next two questions:
Rosal Corporation manufactures a variety of products. Variable costing net operating
income was $74,700 last year and was $82,300 this year. Last year, ending inventory
increased by 2,600 units. This year, ending inventory decreased by 1,400 units. Fixed
manufacturing overhead cost is $5 per unit.
84. What was the absorption costing net operating income last year?
A) $61,700
B) $74,700
C) $80,700
D) $87,700
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Fixed manufacturing overhead deferred = $5 × 2,600 = $13,000
Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $74,700 + $13,000 = $87,700
85. What was the absorption costing net operating income this year?
A) $75,300
B) $89,300
C) $76,300
D) $68,700
Page 48
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Fixed manufacturing overhead released = $5 × 1,400 = $7,000
Absorption costing net income = Variable costing net operating income − Fixed
manufacturing overhead released = $82,300 − $7,000 = $75,300
Essay Questions
86. Lehne Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ........................................
$112
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
Units in ending inventory.....................
500
2,600
3,000
100
Variable costs per unit:
Direct materials ................................
Direct labor.......................................
Variable manufacturing overhead ....
Variable selling and administrative ...
$13
$49
$6
$10
Fixed costs:
Fixed manufacturing overhead .........
$80,600
Fixed selling and administrative .......
$15,000
The company produces the same number of units every month, although the
sales in units vary from month to month. The company's variable costs per unit
and total fixed costs have been constant from month to month.
Required:
a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and
the variable costing method.
d. Prepare an income statement for the month using the absorption costing
method.
Page 49
e. Reconcile the variable costing and absorption costing net operating incomes
for the month.
Ans:
a. & b. Unit product costs
Variable costing:
Direct materials ...................................
Direct labor .........................................
Variable manufacturing overhead .......
$13
49
6
Unit product cost .................................
$68
Absorption costing:
Direct materials ...................................
Direct labor .........................................
Variable manufacturing overhead .......
Fixed manufacturing overhead ...........
$13
49
6
31
Unit product cost .................................
$99
c. & d. Income statements
Variable costing income statement
Sales .............................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory .................................
Add variable manufacturing costs ............
Goods available for sale ..........................
Less ending inventory ..............................
Variable cost of goods sold.........................
Variable selling and administrative .............
Contribution margin .......................................
Less fixed expenses:
Fixed manufacturing overhead ...................
Fixed selling and administrative..................
Net operating income ....................................
Page 50
$336,000
$ 34,00
0
176,80
0
210,800
6,80
0
204,000
30,00
0
80,600
15,00
0
234,000
102,000
95,600
$ 6,400
Absorption costing income statement
Sales .............................................................
Cost of goods sold:
$336,000
Add cost of goods manufactured ................
$ 49,50
0
257,40
0
Goods available for sale .............................
306,900
Less ending inventory .................................
Gross margin .................................................
9,900
Beginning inventory ....................................
Selling and administrative expenses expenses:
Variable selling and administrative ..............
Fixed selling and administrative ..................
Net operating income .....................................
30,000
15,00
0
e. Reconciliation
Variable costing net operating income ...................
297,000
39,000
45,000
$( 6,000)
$ 6,400
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing .............
(12,400)
Absorption costing net operating income ...............
$(6,000)
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 1,2,3
AICPA BB: Critical Thinking
Level: Hard
87. Maffei Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price.........................................
$138
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
Units in ending inventory .....................
0
7,200
7,000
200
Variable costs per unit:
Direct materials ................................
Direct labor .......................................
$42
$32
Page 51
Variable manufacturing overhead.....
Variable selling and administrative ...
$1
$8
Fixed costs:
Fixed manufacturing overhead .........
Fixed selling and administrative .......
$280,800
$98,000
Required:
a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and
the variable costing method.
d. Prepare an income statement for the month using the absorption costing
method.
e. Reconcile the variable costing and absorption costing net operating incomes
for the month.
Ans:
a. & b. Unit product costs
Variable costing:
Direct materials....................................
Direct labor ..........................................
Variable manufacturing overhead ........
Unit product cost..................................
$42
32
1
$75
Absorption costing:
Direct materials....................................
Direct labor ..........................................
Variable manufacturing overhead ........
Fixed manufacturing overhead ............
$ 42
32
1
39
Unit product cost..................................
$114
c. & d. Income statements
Variable costing income statement
Sales..............................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory.................................. $
0
Add variable manufacturing costs ............ 540,000
Page 52
$966,00
0
Goods available for sale........................... 540,000
Less ending inventory ..............................
15,000
Variable cost of goods sold ......................... 525,000
Variable selling and administrative..............
56,000
Contribution margin .......................................
Less fixed expenses:
Fixed manufacturing overhead.................... 280,800
Fixed selling and administrative ..................
98,000
Net operating income .....................................
581,000
385,000
378,800
$ 6,200
Absorption costing income statement ............
Sales .............................................................
Cost of goods sold:
Beginning inventory ....................................
Add cost of goods manufactured ................
Goods available for sale .............................
Less ending inventory .................................
Gross margin .................................................
Selling and administrative expenses expenses:
Variable selling and administrative .............
Fixed selling and administrative ..................
Net operating income ....................................
$966,000
$
0
820,800
820,800
22,800
56,000
98,000
798,000
168,000
154,000
$ 14,000
e. Reconciliation
Variable costing net operating income ...................
$ 6,200
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing .....................
7,800
Absorption costing net operating income ...............
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 1,2,3
Page 53
$14,000
AICPA BB: Critical Thinking
Level: Medium
88. The Dean Company produces and sells a single product. The following data
refer to the year just completed:
Beginning inventory ...............................................
Units produced .......................................................
Units sold ...............................................................
0
20,000
19,000
Selling price per unit ..............................................
Selling and administrative expenses:
Variable per unit ..................................................
$350
Fixed (total) .........................................................
Manufacturing costs:
Direct materials cost per unit ...............................
Direct labor cost per unit .....................................
Variable manufacturing overhead cost per unit ...
$225,000
Fixed manufacturing overhead (total) ..................
$250,000
$10
$190
$40
$25
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 an 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.
Ans:
a.
Cost per unit under absorption costing:
Direct materials ...........................................
Direct labor ..................................................
Variable overhead .......................................
$190.00
40.00
25.00
Fixed overhead ($250,000 / 20,000) ...........
12.50
Total cost per unit........................................
$267.50
Cost per unit under variable costing:
Direct materials ...........................................
Page 54
$190.00
Direct labor ..................................................
b
.
40.00
Variable overhead .......................................
25.00
Total cost per unit........................................
$255.00
Absorption costing income statement:
$6,650,00
0
Sales ......................................................................
Cost of goods sold:
$
Beginning inventory ............................................. 0
Add cost of goods manufactured (20,000 @ 5,350,00
$267.50) ........................................................... 0
Cost of goods available ....................................... 5,350,000
267,50
5,082,50
Less ending inventory (1,000 @ $267.50)........... 0
0
Gross profit ............................................................
1,567,500
Selling and administrative expenses expenses:
415,00
[($10 × 19,000) + $225,000] ................................
0
$1,152,50
Net operating income .............................................
0
c
.
Variable costing income statement:
$6,650,00
0
Sales ......................................................................
Cost of goods sold:
Beginning inventory .............................................
Cost of goods manufactured (20,000 @ $255) ....
Cost of goods available .......................................
Less ending inventory (1,000 @ $255) ................
Variable cost of goods sold ....................................
Variable selling and administrative expenses:
$
0
5,100,00
0
5,100,000
255,00
0
4,845,000
190,00
(19,000 @ $10) ...................................................
Contribution margin ................................................
Less fixed expenses:
Manufacturing overhead ......................................
Selling and administrative....................................
Page 55
0
5,035,00
0
1,615,000
250,000
225,00
475,00
0
0
$1,140,00
0
Net operating income .............................................
d.
Net operating income under variable costing .........
$1,140,000
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing (1,000 @ $12.50)
............................................................................
12,500
Net operating income under absorption costing .....
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 1,2,3
$1,152,500
AICPA BB: Critical Thinking
Level: Medium
89. Pacht Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price .........................................
$121
Units in beginning inventory ................
Units produced ....................................
Units sold.............................................
Units in ending inventory .....................
400
6,800
6,900
300
Variable costs per unit:
Direct materials.................................
Direct labor .......................................
Variable manufacturing overhead .....
Variable selling and administrative ...
$35
$36
$3
$4
Fixed costs:
Fixed manufacturing overhead .........
Fixed selling and administrative........
$197,200
$96,600
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. Prepare an income statement for the month using the contribution format and
the variable costing method.
c. Without preparing an income statement, determine the absorption costing net
Page 56
operating income for the month. (Hint: Use the reconciliation method.)
Ans:
a.
Variable costing unit product cost
Direct materials .................................
Direct labor .......................................
$35
36
Variable manufacturing overhead .....
3
Unit product cost ...............................
$74
b.
Variable costing income statement
Sales.................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory.....................
Add variable manufacturing costs
Goods available for sale..............
Less ending inventory .................
Variable cost of goods sold ............
Variable selling and administrative
Contribution margin ..........................
Less fixed expenses:
Fixed manufacturing overhead ......
Fixed selling and administrative .....
Net operating income........................
c
.
$834,900
$ 29,600
503,200
532,800
22,200
510,600
27,600
197,200
96,600
538,200
296,700
293,800
$ 2,900
Computation of absorption costing net operating
income
Fixed manufacturing overhead per unit ....................... $29.00
Change in inventories (units) ....................................... (100)
Variable costing net operating income ........................ $2,900
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing .................. (2,900)
Absorption costing net operating income .................... $
0
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 1,2,3
AICPA BB: Critical Thinking
Level: Hard
90. Qin Company, which has only one product, has provided the following data
Page 57
concerning its most recent month of operations:
Selling price.........................................
$77
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
Units in ending inventory .....................
0
6,700
6,500
200
Variable costs per unit:
Direct materials ................................
Direct labor .......................................
Variable manufacturing overhead.....
Variable selling and administrative ...
$27
$13
$5
$7
Fixed costs:
Fixed manufacturing overhead .........
Fixed selling and administrative .......
$100,500
$58,500
Required:
a. What is the unit product cost for the month under variable costing?
b. Prepare an income statement for the month using the contribution format and
the variable costing method.
c. Without preparing an income statement, determine the absorption costing net
operating income for the month. (Hint: Use the reconciliation method.)
Ans:
a.
Variable costing unit product cost
Direct materials .................................
Direct labor........................................
Variable manufacturing overhead .....
$27
13
5
Unit product cost ...............................
$45
b.
Variable costing income statement
Sales.................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory.....................
Page 58
$500,500
$
0
Add variable manufacturing costs
Goods available for sale ..............
Less ending inventory .................
Variable cost of goods sold ............
Variable selling and administrative.
Contribution margin ..........................
Less fixed expenses:
Fixed manufacturing overhead.......
Fixed selling and administrative .....
Net operating income........................
301,500
301,500
9,000
292,500
45,500
100,500
58,500
338,000
162,500
159,000
$ 3,500
c.
Computation of absorption costing net operating income
Fixed manufacturing overhead per unit .....................
Change in inventories (units) .....................................
Variable costing net operating income .......................
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing .........................
Absorption costing net operating income ...................
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 1,2,3
$15.0
0
200
$3,50
0
3,000
$6,50
0
AICPA BB: Critical Thinking
Level: Medium
91. Olguin Corporation produces a single product and has the following cost
structure:
Number of units produced each year .............
Variable costs per unit:
Direct materials ...........................................
Direct labor .................................................
Variable manufacturing overhead ...............
4,000
Variable selling and administrative expenses
Fixed costs per year:
$5
$15
$13
$7
Fixed manufacturing overhead ...................
$328,000
Fixed selling and administrative expenses..
$324,000
Required:
Page 59
a. Compute the unit product cost under absorption costing. Show your work!
b. Compute the unit product cost under variable costing. Show your work!
Ans:
a
.
Absorption Costing:
$ 1
Direct materials ........................................................................ 5
Direct labor............................................................................... 13
Variable manufacturing overhead ............................................
7
Total variable production cost .................................................. 35
Fixed manufacturing overhead ($328,000/4,000 units of
product).................................................................................
82
$11
Unit product cost ...................................................................... 7
b
.
Variable Costing:
Direct materials ........................................................................
Direct labor...............................................................................
Variable manufacturing overhead ............................................
Unit product cost ......................................................................
AACSB: Analytic
LO: 1 Level: Easy
AICPA BB: Critical Thinking
$15
13
7
$35
AICPA FN: Reporting
92. Quates Corporation produces a single product and has the following cost
structure:
Number of units produced each year .....................
Variable costs per unit:
Direct materials ...................................................
Direct labor ..........................................................
Variable manufacturing overhead .......................
Variable selling and administrative expenses .....
Fixed costs per year:
3,000
$27
$96
$1
$4
Fixed manufacturing overhead ............................
$219,000
Fixed selling and administrative expenses ..........
$153,000
Required:
Compute the unit product cost under absorption costing. Show your work!
Page 60
Ans:
$ 2
7
96
Direct materials .....................................................................
Direct labor ............................................................................
Variable manufacturing overhead .........................................
1
Total variable production cost ...............................................
124
Fixed manufacturing overhead ($219,000/3,000 units of product)
7
...........................................................................................
3
$19
Unit product cost ...................................................................
7
AACSB: Analytic
LO: 1 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
93. Davitt Corporation produces a single product and has the following cost
structure:
Number of units produced each year .....................
Variable costs per unit:
Direct materials ...................................................
Direct labor ..........................................................
Variable manufacturing overhead .......................
Variable selling and administrative expenses .....
Fixed costs per year:
1,000
$57
$20
$2
$3
Fixed manufacturing overhead ............................
$88,000
Fixed selling and administrative expenses ..........
$24,000
Required:
Compute the unit product cost under variable costing. Show your work!
Ans:
Direct materials ......................................................
Direct labor .............................................................
Variable manufacturing overhead ..........................
Unit product cost ....................................................
AACSB: Analytic
AICPA BB: Critical Thinking
Page 61
$5
7
20
2
$7
9
AICPA FN: Reporting
LO: 1
Level: Easy
94. Murphy Inc., which produces a single product, has provided the following data
for its most recent month of operation:
Number of units produced ......................................
Variable costs per unit:
Direct materials ...................................................
Direct labor ..........................................................
Variable manufacturing overhead .......................
Variable selling and administrative expenses......
Fixed costs:
Fixed manufacturing overhead ............................
7,000
$37
$43
$5
$1
$84,000
Fixed selling and administrative expenses ..........
$119,000
The company had no beginning or ending inventories.
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!
Ans:
a
.
b
.
Absorption costing:
Direct materials ...................................................................
Direct labor..........................................................................
Variable manufacturing overhead .......................................
Total variable production cost .............................................
Fixed manufacturing overhead ($84,000/7,000 units of
product)............................................................................
Unit product cost .................................................................
Variable costing:
Direct materials ...................................................................
Direct labor..........................................................................
Variable manufacturing overhead .......................................
Unit product cost .................................................................
AACSB: Analytic
LO: 1 Level: Easy
AICPA BB: Critical Thinking
$37
43
5
85
12
$97
$37
43
5
$85
AICPA FN: Reporting
95. Vancott Inc., which produces a single product, has provided the following data
for its most recent month of operation:
Page 62
Number of units produced.......................................
Variable costs per unit:
Direct materials ....................................................
Direct labor...........................................................
Variable manufacturing overhead ........................
Variable selling and administrative expenses ......
Fixed costs:
6,000
$93
$58
$1
$1
Fixed manufacturing overhead.............................
$192,000
Fixed selling and administrative expenses ...........
$348,000
The company had no beginning or ending inventories.
Required:
Compute the unit product cost under absorption costing. Show your work!
Ans:
Direct materials .......................................................................
$ 93
Direct labor ..............................................................................
58
Variable manufacturing overhead ...........................................
1
Total variable production cost .................................................
152
Fixed manufacturing overhead ($192,000/6,000 units of product)
.............................................................................................
32
$18
Unit product cost .....................................................................
4
AACSB: Analytic
LO: 1 Level: Easy
AICPA BB: Critical Thinking
Page 63
AICPA FN: Reporting
96. Schlenz Inc., which produces a single product, has provided the following data
for its most recent month of operation:
Number of units produced.......................................
Variable costs per unit:
Direct materials ....................................................
Direct labor...........................................................
Variable manufacturing overhead ........................
Variable selling and administrative expenses ......
Fixed costs:
6,000
$12
$34
$4
$2
Fixed manufacturing overhead .............................
$486,000
Fixed selling and administrative expenses ...........
$522,000
The company had no beginning or ending inventories.
Required:
Compute the unit product cost under variable costing. Show your work!
Ans:
Direct materials ...................................
Direct labor .........................................
Variable manufacturing overhead .......
$12
34
4
Unit product cost .................................
$50
AACSB: Analytic
LO: 1 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
97. Miller Company produces a single product. The company had the following
results for its first two years of operation:
Year 1
Year 2
Sales...................................................
$1,200,000
$1,200,000
Cost of goods sold ..............................
Gross margin ......................................
800,000
400,000
680,000
520,000
Selling and administrative expenses ...
300,000
300,000
Net operating income ..........................
$ 100,000
$ 220,000
Page 64
In Year 1, the company produced and sold 40,000 units of its only product; in
Year 2, the company again sold 40,000 units, but increased production to 50,000
units. The company's variable production cost is $5 per unit and its fixed
manufacturing overhead cost is $600,000 a year. Fixed manufacturing overhead
costs are applied to the product on the basis of each year's unit production (i.e., a
new fixed overhead rate is computed each year). Variable selling and
administrative expenses are $2 per unit sold.
Required:
a. Compute the unit product cost for each year under absorption costing and
under variable costing.
b. Prepare an income statement for each year, using the contribution approach
with variable costing.
c. Reconcile the variable costing and absorption costing income figures for each
year.
d. Explain why the net operating income for Year 2 under absorption costing
was higher than the net operating income for Year 1, although the same
number of units were sold in each year.
Ans:
a.
Cost per unit under absorption costing:
Variable production cost per unit .................
Fixed manufacturing overhead cost:
($600,000/40,000) .......................................
($600,000/50,000) .......................................
Unit product cost ..........................................
Year 1
$5
Year 2
$5
15
$20
12
$17
Year 1
$5
Year 2
$5
Cost per unit under variable costing:
Variable production cost per unit .................
b. Income statements for each year under variable costing:
Year 1
$1,200,00
Sales ..............................................................
0
Cost of goods sold ($5 × 40,000) ...................
200,000
Variable selling and administrative expense
($2 × 40,000) ..............................................
80,000
Contribution margin........................................
920,000
Fixed expenses:
Page 65
Year 2
$1,200,00
0
200,000
80,000
920,000
Fixed manufacturing overhead ....................
600,000
600,000
Fixed selling and administrative expense ....
220,000
220,000
Net operating income .....................................
$ 100,000
$ 100,000
c. Reconciliation of absorption costing and variable costing net operating
incomes:
Net operating income under variable costing ..........
Fixed manufacturing overhead deferred in
(released from) inventory: Year 2 (10,000 units ×
$12 per unit) ........................................................
Net operating income under absorption costing......
Year 1
$100,00
0
Year 2
$100,00
0
120,00
$100,00
0
0
$220,00
0
d. The increase in production in Year 2, in the face of level sales, caused a
buildup of inventory and a deferral of a portion of the overhead costs of Year
2 to the next year. This deferral of cost relieved Year 2 of $120,000 of fixed
manufacturing overhead. Income for Year 2 was $120,000 higher than
income of Year 1, even though the same number of units was sold each year.
By increasing production and building up inventory, the company was able to
increase profits without increasing sales. This is major criticism of the
absorption costing approach.
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 2,3,4 Level: Medium
AICPA FN: Reporting
98. Neukirchen Company, which has only one product, has provided the following
data concerning its most recent month of operations:
Selling price ........................................
$140
Units in beginning inventory ................
Units produced ....................................
Units sold ............................................
Units in ending inventory .....................
300
4,300
4,500
100
Variable costs per unit:
Direct materials ................................
Direct labor .......................................
Variable manufacturing overhead ....
Variable selling and administrative ...
$25
$51
$7
$6
Page 66
Fixed costs:
Fixed manufacturing overhead .........
Fixed selling and administrative .......
$150,500
$72,000
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. Prepare an income statement for the month using the contribution format and
the variable costing method.
b. Prepare an income statement for the month using the absorption costing
method.
Ans:
a. Variable costing income statement
Sales ...................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory .......................
Add variable manufacturing costs .
Goods available for sale ................
Less ending inventory....................
Variable cost of goods sold ...........
$630,000
$ 24,900
356,900
381,800
8,300
373,500
Variable selling and administrative ...
Contribution margin .............................
Less fixed expenses:
Fixed manufacturing overhead .........
27,000
150,500
Fixed selling and administrative .......
72,000
Net operating income ..........................
400,500
229,500
222,500
$ 7,000
b. Absorption costing income statement
$630,00
0
Sales ...................................................
Cost of goods sold:
Beginning inventory ..........................
Add cost of goods manufactured ......
Goods available for sale ...................
$ 35,400
507,400
542,800
Less ending inventory ......................
11,800
Page 67
531,000
Gross margin.......................................
Selling and administrative expenses
expenses:
Variable selling and administrative ...
27,000
Fixed selling and administrative .......
99,000
72,000
99,000
Net operating income ..........................
AACSB: Analytic
LO: 2 Level: Hard
$
AICPA BB: Critical Thinking
0
AICPA FN: Reporting
99. Oates Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ........................................
$120
Units in beginning inventory ................
Units produced....................................
Units sold ............................................
Units in ending inventory ....................
0
7,600
7,400
200
Variable costs per unit:
Direct materials ................................
Direct labor ......................................
Variable manufacturing overhead ....
Variable selling and administrative...
$15
$48
$7
$10
Fixed costs:
Fixed manufacturing overhead.........
Fixed selling and administrative .......
$228,000
$66,600
Required:
a. Prepare an income statement for the month using the contribution format and
the variable costing method.
b. Prepare an income statement for the month using the absorption costing
method.
Ans:
a. Variable costing income statement
Sales ...................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory .......................
Page 68
$888,000
$
0
Add variable manufacturing costs..
Goods available for sale ................
Less ending inventory....................
Variable cost of goods sold ..............
Variable selling and administrative ...
Contribution margin .............................
Less fixed expenses:
Fixed manufacturing overhead .........
Fixed selling and administrative .......
Net operating income ..........................
532,000
532,000
14,000
518,000
74,000
592,000
296,000
228,000
66,600
294,600
$ 1,400
b. Absorption costing income statement
Sales ..............................................................
Cost of goods sold:
Beginning inventory .....................................
Add cost of goods manufactured .................
Goods available for sale ..............................
Less ending inventory..................................
Gross margin..................................................
Selling and administrative expenses expenses:
Variable selling and administrative ..............
Fixed selling and administrative ..................
Net operating income .....................................
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 2 Level: Medium
$888,00
0
$
0
760,000
760,000
20,000
740,000
148,000
74,000
66,600
140,600
$ 7,400
AICPA FN: Reporting
100. Succulent Juice Company manufactures and sells premium tomato juice
by the gallon. Succulent just finished its first year of operations. The following
data relates to this first year:
Number of gallons produced ..................................
Number of gallons sold ..........................................
75,000
70,000
Sales price .............................................................
$3.00 per gallon
Unit product cost under variable costing ................
Total contribution margin........................................
Total fixed manufacturing overhead cost ...............
Total fixed selling and administrative expense .......
$1.45 per gallon
$84,000
$63,000
$10,500
Page 69
Required:
Using the absorption costing method, prepare Succulent Juice Company's
income statement for the year.
Ans:
Sales (70,000 × $3.00) ...........................................
Cost of goods sold:
$210,000
Beginning inventory .............................................
$
Add cost of goods manufactured (75,000 × $2.29*)
Goods available for sale ......................................
171,750
171,750
Less ending inventory (5,000 × $2.29) ................
Gross margin .........................................................
0
11,450
160,300
49,700
Selling and administrative expenses** ...................
35,000
Net operating income .............................................
$ 14,700
* $1.45 + ($63,000/75,000)
** Total variable cost = $210,000 - $84,000 = $126,000;
Variable selling and administrative = $126,000 - ($1.45 × 70,000) = $24,500
Total selling and administrative = $24,500 + $10,500
AACSB: Analytic
LO: 2 Level: Hard
AICPA BB: Critical Thinking
AICPA FN: Reporting
101. Worrel Corporation manufactures a variety of products. The following data
pertain to the company's operations over the last two years:
Variable costing net operating income, last year....
$71,000
Variable costing net operating income, this year....
$92,000
Fixed manufacturing overhead costs deferred in inventory
under absorption costing, last year .....................
$2,000
Fixed manufacturing overhead costs released
inventory under absorption costing, this year .....
from
$11,000
Required:
a. Determine the absorption costing net operating income last year. Show your
Page 70
work!
b. Determine the absorption costing net operating income this year. Show your
work!
Ans:
a. and b.
Last Year
Variable costing net operating income ................... $71,000
Add fixed manufacturing overhead costs deferred
in inventory under absorption costing ................. 2,000
Deduct fixed manufacturing overhead costs
released from inventory under absorption
costing.................................................................
0
Absorption costing net operating income ............... $73,000
AACSB: Analytic
LO: 3 Level: Easy
AICPA BB: Critical Thinking
This Year
$92,000
0
(11,000)
$81,000
AICPA FN: Reporting
102. Corbett Corporation manufactures a variety of products. Last year,
variable costing net operating income was $72,000. 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!
Ans:
Variable costing net operating income ....................
$72,000
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing ......................
29,000
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing ..............
Absorption costing net operating income ................
AACSB: Analytic
LO: 3 Level: Easy
AICPA BB: Critical Thinking
0
$101,000
AICPA FN: Reporting
103. Last year, Rasband Corporation's variable costing net operating income
was $57,000. The fixed manufacturing overhead costs deferred in inventory
Page 71
under absorption costing amounted to $30,000.
Required:
Determine the absorption costing net operating income last year. Show your
work!
Ans:
Variable costing net operating income ...................
$57,000
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing .....................
30,000
Deduct fixed manufacturing overhead costs released from
inventory under absorption costing .....................
Absorption costing net operating income ...............
AACSB: Analytic
LO: 3 Level: Easy
AICPA BB: Critical Thinking
0
$87,000
AICPA FN: Reporting
104. Phinisee Corporation manufactures a variety of products. The following
data pertain to the company's operations over the last two years:
Variable costing net operating income, last year ....
$82,700
Variable costing net operating income, this year ....
Increase in ending inventory, last year ...................
Decrease in ending inventory, this year ..................
Fixed manufacturing overhead cost per unit ...........
$87,800
900
3,100
$2
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!
Ans:
a. and b.
Change in units in ending inventory ...................
Fixed manufacturing overhead cost per unit ......
Page 72
Last Year
$900
$2
This Year
($3,100)
$2
Change in fixed manufacturing overhead in ending
inventory .........................................................
$1,800
($6,200)
Variable costing net operating income ...............
$87,800
$82,700
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing .................
1,800
Deduct fixed manufacturing overhead costs
released from inventory under absorption costing
........................................................................
0
Absorption costing net operating income ...........
$84,500
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 3 Level: Medium
0
(6,200)
$81,600
AICPA FN: Reporting
105. Last year, Denogean Corporation's variable costing net operating income
was $64,200 and ending inventory increased by 1,900 units. Fixed
manufacturing overhead cost per unit was $4.
Required:
Determine the absorption costing net operating income for last year. Show your
work!
Ans:
Change in units in ending inventory ............................
$1,900
Fixed manufacturing overhead cost per unit ...............
$4
Change in fixed manufacturing overhead in ending
inventory ..................................................................
$7,600
Variable costing net operating income ........................
$64,200
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing ..........................
7,600
Deduct fixed manufacturing overhead costs released from
inventory under absorption costing ..........................
0
Absorption costing net operating income ....................
$71,800
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 3 Level: Medium
Reference
Page 73
AICPA FN: Reporting
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc
For further discussion please refer to the link provided:
Chapter 6- Variable vs Absorption Costing Income Statement Demonstration Problem-https://youtu.be/klM3CnaxDdM
Chapter 6- Absorption Costing and Variable Costing Problem solving- https://youtu.be/a-9aumcblaI
Chapter 6- Comparing Absorption Income and Variable Costing Income- https://youtu.be/LmgJ4d9qiJ0
Page 74
CHAPTER 5 VARIABLE COSTING: A TOOL FOR MANAGEMENT
Learning Objectives
 Explain how variable costing differs from absorption costing and compute unit
product costs under each method.
 Prepare income statements using both variable and absorption costing.
 Reconcile variable costing and absorption costing net operating incomes and
explain why the two amounts differ.
 Understand the advantages and disadvantages of both variable and absorption
costing.
Overview of Absorption and Variable Costing
Page 1
Unit Cost Computations
Income Comparison of Absorption and Variable Costing
Page 2
Page 3
Page 4
Page 5
Unit Cost Computations
Page 6
Summary of Key Insights
Page 7
CVP Analysis, Decision Making and Absorption costing
Absorption costing does not dovetail with CVP analysis, nor does it support decision
making. It treats fixed manufacturing overhead as a variable cost. It assigns per unit
fixed manufacturing overhead costs to production.
Page 8
External Reporting and Income Taxes
Advantages of Variable Costing and the Contribution Approach
Impact of Lean Production
Page 9
Reference
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc
For further discussion please refer to the link provided:
Chapter 5-Overview of Absorption and Variable Costing-https://youtu.be/WEsFr79xh2s
Chapter 5- Formula of Absorption and Variable Costing https://youtu.be/iihGkCEjyqo
Chapter 5-Lean Production (Overview)-https://youtu.be/PEZGGsi_dDE
Page 10
CHAPTER 4 COST-VOLUME-PROFIT RELATIONSHIPS PROBLEM DISCUSSION
Learning Objectives:
Perform the basic operations of cost-volume-profit relationships.
Learn to calculate problems.
Applying the methods of accounting.
True/False Questions
1. All other things the same, the margin of safety in dollars at a given level of
sales will tend to be lower for a capital-intensive company than for a laborintensive company with high variable expenses.
Ans: True
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
2. The margin of safety in dollars equals the excess of budgeted (or actual) sales
over the break-even volume of sales.
Ans: True
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
3. A company with high operating leverage will experience a lower reduction in
net operating income in a period of declining sales than will a company with
low operating leverage.
Ans: False
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Medium
AICPA BB: Critical Thinking
4. If Q is the quantity of a product sold, P is the price per unit, V is the variable
expense per unit, and F is the total fixed expense, then the degree of
operating leverage is equal to: [Q(P-V)] ÷ [Q(P-V)-F]
Ans: True
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Hard
AICPA BB: Critical Thinking
5. A shift in the sales mix from products with high contribution margin ratios
toward products with low contribution margin ratios will raise the break-even
point.
Ans: True
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Medium
Page 1
AICPA BB: Critical Thinking
Multiple Choice Questions
6. The margin of safety can be calculated by:
A) Sales − (Fixed expenses/Contribution margin ratio).
B) Sales − (Fixed expenses/Variable expense per unit).
C) Sales − (Fixed expenses + Variable expenses).
D) Sales − Net operating income.
Ans: A
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
7. If the degree of operating leverage is 4, then a one percent change in quantity
sold should result in a four percent change in:
A) unit contribution margin.
B) revenue.
C) variable expense.
D) net operating income.
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Source: CMA; adapted
8. Which of the following is the correct calculation for the degree of operating
leverage?
A) net operating income divided by total expenses.
B) net operating income divided by total contribution margin.
C) total contribution margin divided by net operating income.
D) variable expense divided by total contribution margin.
Ans: C
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
9. Which of the following is an assumption underlying standard CVP analysis?
A) In multiproduct companies, the sales mix is constant.
B) In manufacturing companies, inventories always change.
C) The price of a product or service is expected to change as volume changes.
D) Fixed expenses will change as volume increases.
Ans: A
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 9 Level: Easy
AICPA BB: Critical Thinking
10. The Saginaw Ice Company had sales of $400,000, with variable expenses of
$162,000 and fixed expenses of $98,000. Which of the following is closest to
Saginaw's break-even point?
A) $260,000
B) $165,000
Page 2
C)
D)
$140,000
$238,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
AICPA BB: Critical Thinking
Solution:
Total
$400,000
162,000
Sales...................................................
Variable expenses ..............................
Contribution margin and contribution
margin ratio ..................................... $ 238,000
Percent
Sales
100.0%
40.5%
of
59.5%
Break-even in total sales dollars = Fixed expenses/CM ratio
= $98,000/0.595 = $164,705.88
11. Product Y sells for $15 per unit, and has related variable expenses of $9 per
unit. Fixed expenses total $300,000 per year. How many units of Product Y
must be sold each year to yield an annual profit of $90,000:
A) 50,000 units
B) 65,000 units
C) 15,000 units
D) 43,333 units
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$15Q = $9Q + $300,000 + $90,000
$6Q = $390,000
Q = $390,000 ÷ $6 per unit = 65,000 units
12. Caneer Corporation produces and sells a single product. Data concerning that
product appear below:
Selling price per unit .................
Variable expense per unit .........
$240.00
$81.60
Fixed expense per month .........
$997,920
The unit sales to attain the company's monthly target profit of $44,000 is closest
to:
Page 3
A)
B)
C)
D)
7,896
12,769
6,578
4,341
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$240.00Q = $81.60Q + $997,920 + $44,000
$158.40Q = $1,041,920
Q = $1,041,920 ÷ $158.40 per unit = 6,578 units (rounded)
13. Data concerning Bedwell Enterprises Corporation's single product appear
below:
The
to:
A)
B)
C)
D)
Selling price per unit .................
Variable expense per unit.........
$160.00
$65.60
Fixed expense per month .........
$387,040
unit sales to attain the company's monthly target profit of $17,000 is closest
6,159
4,280
2,525
4,321
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$160.00Q = $65.60Q + $387,040 + $17,000
$94.40Q = $404,040
Q = $404,040 ÷ $94.40 per unit = 4,280 units (rounded)
14. Hettrick International Corporation's only product sells for $120.00 per unit and
its variable expense is $52.80. The company's monthly fixed expense is
$396,480 per month. The unit sales to attain the company's monthly target
profit of $13,000 is closest to:
A) 7,755
B) 6,093
C) 5,753
Page 4
D)
3,412
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$120.00Q = $52.80Q + $396,480 + $13,000
$67.20Q = $409,480
Q = $409,480 ÷ $67.20 per unit = 6,093 units (rounded)
15. Logsdon Corporation produces and sells a single product whose contribution
margin ratio is 63%. The company's monthly fixed expense is $720,720 and
the company's monthly target profit is $28,000. The dollar sales to attain that
target profit is closest to:
A) $471,694
B) $454,054
C) $1,188,444
D) $1,144,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($720,720 + $28,000)/0.63 = $1,188,444 (rounded)
16. The contribution margin ratio of Mountain Corporation's only product is 52%.
The company's monthly fixed expense is $296,400 and the company's
monthly target profit is $7,000. The dollar sales to attain that target profit is
closest to:
A) $570,000
B) $157,768
C) $583,462
D) $154,128
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($296,400 + $7,000)/0.52 = $583,462 (rounded)
Page 5
AICPA BB: Critical Thinking
17. Majid Corporation sells a product for $240 per unit. The product's current
sales are 41,300 units and its break-even sales are 36,757 units.
What is the margin of safety in dollars?
A) $8,821,680
B) $6,608,000
C) $9,912,000
D) $1,090,320
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
Solution:
Margin of safety in dollars:
Break-even sales = $240 per unit × 36,757 = $8,821,680
Current sales = $240 per unit × 41,300 = $9,912,000
Margin of safety in dollars = Sales - Break-even sales
= $9,912,000 - $8,821,680 = $1,090,320
18. Mcmurtry Corporation sells a product for $170 per unit. The product's current
sales are 10,000 units and its break-even sales are 8,100 units. The margin of
safety as a percentage of sales is closest to:
A) 23%
B) 81%
C) 19%
D) 77%
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
Solution:
Margin of safety in dollars:
Break-even sales = $170 per unit × 8,100 = $1,377,000
Current sales = $170 per unit × 10,000 = $1,700,000
Margin of safety in dollars = Sales - Break-even sales
= $1,700,000 - $1,377,000 = $323,000
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current
sales = $323,000 ÷ $1,700,000 = 19%
19. Cubie Corporation has provided the following data concerning its only product:
Selling price...................
$100 per unit
Page 6
Current sales .................
Break-even sales ..........
10,600 units
9,540 units
What is the margin of safety in dollars?
A) $1,060,000
B) $106,000
C) $954,000
D) $706,667
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
Solution:
Margin of safety in dollars:
Break-even sales = $100 per unit × 9,540 = $954,000
Current sales = $100 per unit × 10,600 = $1,060,000
Margin of safety in dollars = Sales - Break-even sales
= $1,060,000 - $954,000 = $106,000
20. Ensley Corporation has provided the following data concerning its only
product:
Selling price ...................
$200 per unit
Current sales..................
30,300 units
Break-even sales ...........
21,816 units
The margin of safety as a percentage of sales is closest to:
A) 61%
B) 28%
C) 72%
D) 39%
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
Solution:
Margin of safety in dollars:
Break-even sales = $200 per unit × 30,300 = $6,060,000
Current sales = $200 per unit × 21,816 = $4,363,200
Page 7
Margin of safety in dollars = Sales - Break-even sales
= $6,060,000 - $4,363,200 = $1,696,800
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current
sales = $1,696,800 ÷ $4,363,200 = 39% (rounded)
21. The following is Noble Company's contribution format income statement last
month:
Sales (12,000 units) .......
$600,000
Variable expenses .........
Contribution margin .......
375,000
225,000
Fixed expenses..............
150,000
Net operating income .....
$ 75,000
What is the company's margin of safety percentage to the nearest whole
percent?
A) 42%
B) 38%
C) 33%
D) 25%
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales = Sales price × Units sold
$600,000 = 12,000 × Sales price
$50 = Sales price
Variable expenses = Per-unit cost × Units sold
$375,000 = 12,000 × Per-unit cost
$31.25 = Per-unit cost
Break-even sales:
Sales = Variable expenses + Fixed expenses + Profit
$50.00Q = $31.25Q + $150,000 + $0
$18.75Q = $150,000
Q = 8,000 units
Margin of safety in dollars:
Break-even sales = $50 per unit × 8,000 = $400,000
Current sales = $50 per unit × 12,000 = $600,000
Margin of safety in dollars = Sales - Break-even sales
= $600,000 - $400,000 = $200,000
Page 8
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current
sales = $200,000 ÷ $600,000 = 33% (rounded)
22. Ostler Company's net operating income last year was $10,000 and its
contribution margin was $50,000. Using the operating leverage concept, if the
company's sales increase next year by 8 percent, net operating income can
be expected to increase by:
A) 20%
B) 16%
C) 160%
D) 40%
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Degree of operating leverage = Contribution margin ÷ Net operating income
Degree of operating leverage = $50,000 ÷ $10,000 = 5
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 8% × 5 = 40%
23. The February contribution format income statement of Mcabier Corporation
appears below:
a. Degree of operating leverage = Contribution margin/Net operating income
= $251,100/$41,300 = 6.08
b. Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 19% × 6.08 = 115.52%
Sales..............................
$211,200
Variable expenses .........
Contribution margin .......
96,000
115,200
Fixed expenses..............
84,100
Net operating income .....
$ 31,100
The degree of operating leverage is closest to:
A) 0.27
B) 6.79
C) 3.70
D) 0.15
Page 9
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $115,200/$31,100 = 3.70
24. Serfass Corporation's contribution format income statement for July appears
below:
Sales ..............................
$260,000
Variable expenses .........
Contribution margin........
176,000
84,000
Fixed expenses ..............
71,800
Net operating income .....
$ 12,200
The degree of operating leverage is closest to:
A) 0.05
B) 0.15
C) 21.31
D) 6.89
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $84,000/$12,200 = 6.89
25. Rushenberg Corporation's operating leverage is 10.8. If the company's sales
increase by 14%, its net operating income should increase by about:
A) 151.2%
B) 14.0%
C) 77.1%
D) 10.8%
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Page 10
AICPA BB: Critical Thinking
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 14% × 10.8 = 151.2%
26. Bendel Inc. has an operating leverage of 7.3. If the company's sales increase
by 3%, its net operating income should increase by about:
A) 243.3%
B) 7.3%
C) 21.9%
D) 3.0%
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 3% × 7.3 = 21.9%
27. E.D. Manufacturing, Inc. produces and sells ice skates. The current net
operating income is $40,000, with a degree of operating leverage of 3. If sales
increase by 10%, how much total net operating income should be expected?
A) $12.000
B) $52,000
C) $44,000
D) None of the above.
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 10% × 3 = 30%
Current net operating income × Percent increase = Increase in net operating
income
$40,000 × 30% = $12,000 Increase in net operating income
Current net operating income + Increase in net operating income = Expected net
operating income = $40,000 + $12,000 = $52,000
28. Mcdale Inc. produces and sells two products. Data concerning those products
for the most recent month appear below:
Page 11
Sales .............................
Variable expenses .........
Product
I49V
$15,000
$3,300
Product
Z50U
$14,000
$2,790
The fixed expenses of the entire company were $18,460. The break-even point
for the entire company is closest to:
A) $23,367
B) $10,540
C) $24,550
D) $18,460
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Easy
AICPA BB: Critical Thinking
Solution:
Multi B/E Solution:
Sales ..............................
Variable expenses..........
Contribution margin ........
Product I49V
$15,000
3,300
$11,700
Product Z50U
$14,000
2,790
$11,210
Total
$29,000
6,090
22,910
Fixed expenses ..............
18,460
Net operating income .....
$ 4,450
Overall CM ratio = Total contribution margin/Total sales
= $22,910/$29,000 = 0.79
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $18,460/0.79 = $23,367 (rounded)
29. Roddam Corporation produces and sells two products. Data concerning those
products for the most recent month appear below:
Sales .............................
Variable expenses .........
Product
K09E
$28,000
$11,200
Product
G17B
$38,000
$8,600
The fixed expenses of the entire company were $41,970. If the sales mix were to
shift toward Product K09E with total sales remaining constant, the overall breakeven point for the entire company:
A) would increase.
Page 12
B)
C)
D)
could increase or decrease.
would not change.
would decrease.
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Easy
AICPA BB: Critical Thinking
30. Newham Corporation produces and sells two products. In the most recent
month, Product R10L had sales of $28,000 and variable expenses of $6,440.
Product X96N had sales of $22,000 and variable expenses of $7,560. And the
fixed expenses of the entire company were $32,710. The break-even point for
the entire company is closest to:
A) $32,710
B) $45,431
C) $46,710
D) $17,290
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Easy
AICPA BB: Critical Thinking
Solution:
Multi B/E Solution:
Sales .............................
Variable expenses .........
Contribution margin .......
Fixed expenses .............
Net operating income ....
Product
R10L
$28,000
6,440
$21,560
Product
X96N
$22,000
7,560
$14,440
Total
$50,000
14,000
36,000
32,710
$ 3,290
Overall CM ratio = Total contribution margin/Total sales
= $36,000/$50,000 = 0.72
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $32,710/0.72 = $45,431 (rounded)
31. Flesch Corporation produces and sells two products. In the most recent
month, Product C90B had sales of $24,000 and variable expenses of $6,480.
Product Y45E had sales of $29,000 and variable expenses of $11,010. And
the fixed expenses of the entire company were $32,280. If the sales mix were
to shift toward Product C90B with total sales remaining constant, the overall
break-even point for the entire company:
A) would decrease.
B) would increase.
C) could increase or decrease.
D) would not change.
Page 13
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Easy
Page 14
AICPA BB: Critical Thinking
32. Zachary's Bike Shop sells two products. Sales and contribution margin ratios
for the two products follow:
Sales in dollars ........................
Contribution margin ratio..........
Product A
$10,000
25%
Product B
$40,000
75%
Given these data, the contribution margin ratio for the company as a whole would
be:
A) 25%
B) 50%
C) 65%
D) It is impossible to determine from the given data.
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Medium
AICPA BB: Critical Thinking
Solution:
Multi B/E Solution:
Product A
Product B
Total
Sales ..................................................
$10,000
$40,000
$50,000
Contribution margin (Sales × CM ratio)
$2,500
$30,000
$32,500
Overall CM ratio = Total contribution margin/Total sales
= $32,500/$50,000 = 0.65
Use the following to answer questions 84-86:
A cement manufacturer has supplied the following data:
Tons of cement produced and sold ................ 680,000
$2,788,00
Sales revenue ................................................ 0
$1,156,00
Variable manufacturing expense ................... 0
Fixed manufacturing expense ........................ $760,000
Variable selling and administrative expense .. $272,000
Fixed selling and administrative expense ...... $294,000
Net operating income ..................................... $306,000
Page 15
33. What is the company's unit contribution margin?
A) $0.45
B) $2.10
C) $2.00
D) $4.10
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Contribution margin = Sales - Variable expenses
Contribution margin = $2,788,000 - ($1,156,000 + $272,000)
Contribution margin = $1,360,000
Unit contribution margin = Contribution margin ÷ Tons of cement
Unit contribution margin = $1,360,000 ÷ 680,000
Unit contribution margin = $2.00
34. The company's contribution margin ratio is closest to:
A) 39.0%
B) 51.2%
C) 11.0%
D) 48.8%
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Contribution margin = Sales - Variable expenses
Contribution margin = $2,788,000 - ($1,156,000 + $272,000)
Contribution margin = $1,360,000
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $1,360,000 ÷ $2,788,000
Contribution margin ratio = 48.8%
35. If the company increases its unit sales volume by 4% without increasing its
fixed expenses, then total net operating income should be closest to:
A) $12,240
B) $318,240
C) $360,400
D) $311,973
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
Page 16
AICPA BB: Critical Thinking
Solution:
New contribution margin ($1,360,000 × 1.04) ....
$1,414,400
Fixed expenses ($760,000 + $294,000) ............
1,054,000
Net operating income .........................................
$ 360,400
Use the following to answer questions 87-89:
Righway Corporation has supplied the following data:
Sales per period........................ 1,000 units
Selling price .............................. $50 per unit
Variable manufacturing cost ..... $20 per unit
$10,000 plus 5% of
Selling expenses....................... sales
$5,000 plus 15% of
Administration expenses ........... sales
36. The total contribution margin per period is:
A) $22,500
B) $27,500
C) $30,000
D) $20,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales (1,000 units × $50) .........
Variable expenses* ..................
Contribution margin ..................
$50,000
30,000
$20,000
*
Variable manufacturing cost (1,000 units × $20) ...
Selling expenses ($50,000 × 5%) ..........................
$20,000
2,500
Administration expenses ($50,000 × 15%) ............
7,500
Total variable expenses .........................................
$30,000
37. The break-even point per period is (round to nearest unit):
A) 750 units
Page 17
B)
C)
D)
545 units
500 units
667 units
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$50Q = $30Q* + $15,000 + $0
$20Q = $15,000
Q = $15,000 ÷ $20 per unit = 750 units
*Variable expense per unit = $20 + (5% × $50) + (15% × $50) = $30
38. If the selling price is changed to $55 per unit, the break-even point will be
(round to nearest unit):
A) 667 units
B) 545 units
C) 625 units
D) 500 units
Ans: C
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4; 5 Level: Medium
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$55Q = $31Q* + $15,000 + $0
$24Q = $15,000
Q = $15,000 ÷ $24 per unit = 625 units
*Variable expense per unit = $20 + (5% × $55) + (15% × $55) = $31
Use the following to answer the next three questions:
Biskra Corporation is a single product firm that expects the following operating results
next year:
Sales ..............................
Variable expenses .........
Fixed expenses ..............
In Total
Per Unit
$288,000
$172,800
$72,000
$0.80
$0.48
$0.20
Page 18
39. Every unit that Biskra sells next year after the break-even point will increase
net operating income by:
A) $0.12
B) $0.20
C) $0.32
D) $0.60
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1; 5 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales per unit - Variable expenses per unit = Contribution margin per unit
= $0.80 - $0.48 = $0.32
40. What would Biskra's total sales dollars have to be next year to generate
$180,000 of net operating income?
A) $450,000
B) $630,000
C) $588,000
D) $787,500
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
CM ratio
= (Sales - Variable expenses) ÷ Sales
= ($288,000 - $172,800) ÷ $288,000 = 40%
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($72,000 + $180,000)/0.40 = $630,000
41. What is Biskra's margin of safety percentage?
A) 15%
B) 24%
C) 37.5%
D) 40%
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Page 19
AICPA BB: Critical Thinking
Break-even sales:
Sales = Variable expenses + Fixed expenses + Profit
$0.80Q = $0.48Q* + $72,000 + $0
$0.32Q = $72,000
Q = $72,000 ÷ $0.32 per unit = 225,000 units
Margin of safety in dollars:
Break-even sales = $0.80 per unit × 360,000 = $288,000
Current sales = $0.80 per unit × 225,000 = $180,000
Margin of safety in dollars = Sales − Break-even sales
= $288,000 − $180,000 = $108,000
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current
sales = $108,000 ÷ $288,000 = 37.5%
Use the following to answer the next three questions:
A manufacturer of premium wire strippers has supplied the following data:
Units produced and sold................................
580,000
Sales revenue ...............................................
$4,176,000
Variable manufacturing expense ...................
Fixed manufacturing expense .......................
Variable selling and administrative expense .
Fixed selling and administrative expense ......
Net operating income ....................................
$2,871,000
$778,000
$348,000
$104,000
$75,000
42. The company's margin of safety in units is closest to:
A) 234,222
B) 564,242
C) 45,455
D) 457,500
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Break-even sales in units:
Sales = Variable expenses + Fixed expenses + Profit
$7.20Q* = $5.55Q** + $882,000 + $0
$1.65Q = $882,000
Q = $882,000 ÷ $1.65 per unit = 534,545 units
Margin of safety in units:
Margin of safety in units = Sales in units − Break-even sales in units
Page 20
= 580,000 − 534,545 = 45,455 units
*
$4,176,000 ÷ 580,000 units = $7.20 per unit
**
Manufacturing expense ($2,871,000 ÷ 580,000 units) .......
$4.95
Selling and administrative expense ($348,000 ÷ 580,000
units) ...............................................................................
0.60
Total variable expenses per unit ........................................
$5.55
43. The company's unit contribution margin is closest to:
A) $2.25
B) $5.55
C) $1.65
D) $6.60
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales .............................
$4,176,000
Variable expenses.........
3,219,000
Contribution margin .......
$ 957,000
$957,000 ÷ 580,000 units = $1.65
44. The company's degree of operating leverage is closest to:
A) 55.68
B) 3.65
C) 7.73
D) 12.76
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales ............................. $4,176,000
Variable expenses .........
3,219,000
Contribution margin ....... $ 957,000
Degree of operating leverage = Contribution margin/Net operating income
= $957,000/$75,000 = 12.76
Page 21
Use the following to answer the next two questions:
Keomuangtai Corporation produces and sells a single product. The company has
provided its contribution format income statement for October.
Sales (4,600 units) .........
$266,800
Variable expenses .........
Contribution margin........
179,400
87,400
Fixed expenses ..............
62,200
Net operating income .....
$ 25,200
45. If the company sells 4,500 units, its total contribution margin should be closest
to:
A) $85,500
B) $24,652
C) $87,400
D) $81,600
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales price per unit = $266,800 ÷ 4,600 units = $58
Variable expense per unit = $179,400 ÷ 4,600 units = $39
Sales (4,500 units) .........
$261,000
Variable expenses .........
175,500
Contribution margin .......
$ 85,500
46. If the company sells 4,200 units, its net operating income should be closest to:
A) $17,600
B) $23,009
C) $25,200
D) $2,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
Page 22
AICPA BB: Critical Thinking
Solution:
Sales price per unit = $266,800 ÷ 4,600 units = $58
Variable expense per unit = $179,400 ÷ 4,600 units = $39
Sales (4,200 units) .........
$243,600
Variable expenses .........
Contribution margin .......
163,800
79,800
Fixed expenses..............
62,200
Net operating income .....
$ 17,600
Use the following to answer the next two questions:
Souza Inc, which produces and sells a single product, has provided its contribution
format income statement for October.
Sales (4,000 units) ........
$88,000
Variable expenses .........
Contribution margin .......
40,000
48,000
Fixed expenses .............
41,700
Net operating income ....
$ 6,300
47. If the company sells 3,600 units, its total contribution margin should be closest
to:
A) $39,200
B) $5,670
C) $43,200
D) $48,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales price per unit = $88,000 ÷ 4,000 units = $22
Variable expense per unit = $40,000 ÷ 4,000 units = $10
Sales (3,600 units) .........
$79,200
Variable expenses..........
36,000
Page 23
Contribution margin ........
$43,200
48. If the company sells 3,500 units, its net operating income should be closest to:
A) $5,513
B) $6,300
C) $300
D) -$4,700
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales price per unit = $88,000 ÷ 4,000 units = $22
Variable expense per unit = $40,000 ÷ 4,000 units = $10
Sales (3,500 units) .........
$77,000
Variable expenses .........
35,000
Contribution margin ........
42,000
Fixed expenses ..............
41,700
Net operating income .....
$ 300
Use the following to answer questions 100-101:
Wight Corporation has provided its contribution format income statement for June. The
company produces and sells a single product.
Sales (9,600 units) ........
$336,000
Variable expenses .........
Contribution margin .......
144,000
192,000
Fixed expenses .............
137,000
Net operating income ....
$ 55,000
49. If the company sells 9,100 units, its total contribution margin should be closest
to:
A) $174,500
B) $192,000
C) $52,135
D) $182,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
Page 24
AICPA BB: Critical Thinking
Solution:
Sales price per unit = $336,000 ÷ 9,600 units = $35
Variable expense per unit = $144,000 ÷ 9,600 units = $15
Sales (9,100 units).........
$318,500
Variable expenses .........
136,500
Contribution margin .......
$182,000
50. If the company sells 9,700 units, its net operating income should be closest to:
A) $57,000
B) $55,000
C) $55,573
D) $58,500
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales price per unit = $336,000 ÷ 9,600 units = $35
Variable expense per unit = $144,000 ÷ 9,600 units = $15
Sales (9,700 units) ........
$339,500
Variable expenses .........
Contribution margin .......
145,500
194,000
Fixed expenses .............
137,000
Net operating income ....
$ 57,000
Use the following to answer the next two questions:
The following information relates to Francisca Company:
Degree of operating leverage ...
2.5
Profit margin percentage ..........
24%
Margin of safety percentage .....
40%
Page 25
Contribution margin ratio ..........
60%
51. If Francisca's sales increase by 20%, by what percentage will its net operating
income increase?
A) 4.8%
B) 8%
C) 12%
D) 50%
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Medium
AICPA BB: Critical Thinking
Solution:
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 20% × 2.5 = 50%
52. Francisca wants to give its sales staff a $60,000 increase in salary but still
wants to make the same net operating income. If Francisca gives this
increase, by how much would sales at Francisca have to increase in order for
the company to maintain its current net operating income level?
A) $60,000
B) $100,000
C) $150,000
D) $250,000
Ans: B
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3; 4 Level: Medium
Solution:
Increase in sales dollars = Additional fixed expenses ÷ Contribution margin ratio
= $60,000 ÷ 0.60 = $100,000
Use the following to answer the next five questions:
The following data relate to a company that produces and sells a travel guide that is
updated monthly:
Fixed costs:
Copy editing .....................................
Art work............................................
Typesetting ......................................
Variable costs:
Page 26
$6,000
$2,000
$72,000
Printing and binding .........................
$3.20 per copy
Bookstore discounts ........................
$4.00 per copy
Salespersons’ commissions.............
$0.50 per copy
Author’s royalties .............................
$2.00 per copy
Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books
in July.
104. The unit contribution margin per book is:
A) $10.30
B) $14.30
C) $10.80
D) $8.30
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit contribution margin = Unit sales price - Variable expense per unit
= $20.00 - ($3.20 + $4.00 + $0.50 + $2.00) = $10.30
53. The contribution margin ratio for the book is:
A) 71.5%
B) 54.0%
C) 51.5%
D) 51.9%
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Unit contribution margin = Unit sales price - Variable expense per unit
= $20.00 - ($3.20 + $4.00 + $0.50 + $2.00) = $10.30
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $10.30 ÷ $20.00
Contribution margin ratio = 51.5%
54. The break-even point in units is:
A) 8,247 books
B) 7,767 books
Page 27
C)
D)
7,407 books
6,504 books
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
AICPA BB: Critical Thinking
Solution:
Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70
Sales = Variable expenses + Fixed expenses + Profit
$20.00Q = $9.70Q + $80,000 + $0
$10.30Q = $80,000
Q = $80,000 ÷ $10.30 per unit = 7,767 units (rounded)
55. The degree of operating leverage for July is:
A) the same as that for June
B) higher than that for June
C) lower than that for June
D) not determinable
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Hard
AICPA BB: Critical Thinking
Solution:
For June:
Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70
Sales (8,000 units) .........
$160,000
Variable expenses .........
Contribution margin ........
77,600
82,400
Fixed expenses ..............
80,000
Net operating income .....
$ 2,400
Degree of operating leverage = Contribution margin/Net operating income
= $82,400/$2,400 = 34.33
For July:
Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70
Sales (10,000 units).......
$200,000
Variable expenses .........
Contribution margin .......
97,000
103,000
Page 28
Fixed expenses .............
80,000
Net operating income ....
$ 23,000
Degree of operating leverage = Contribution margin/Net operating income
= $103,000/$23,000 = 4.48
As sales increase past the breakeven point, the degree of operating leverage will
decrease.
56. The degree of operating leverage for July is closest to:
A) 4.48
B) 3.48
C) 4.22
D) 8.70
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Medium
AICPA BB: Critical Thinking
Solution:
Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70
Sales (10,000 units) .......
$200,000
Variable expenses .........
Contribution margin .......
97,000
103,000
Fixed expenses..............
80,000
Net operating income .....
$ 23,000
Degree of operating leverage = Contribution margin/Net operating income
= $103,000/$23,000 = 4.48
Use the following to answer the next three questions:
A manufacturer of cedar shingles has supplied the following data:
Bundles of cedar shakes produced and sold .
360,000
Sales revenue ................................................
$2,412,000
Variable manufacturing expense....................
Fixed manufacturing expense ........................
Variable selling and administrative expense ..
$1,170,000
$714,000
$414,000
Page 29
Fixed selling and administrative expense.......
Net operating income .....................................
$82,000
$32,000
57. The company's break-even in unit sales is closest to:
A) 118,806
B) 206,957
C) 346,087
D) 14,775
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales price per unit = $2,412,000 ÷ 360,000 units = $6.70
Variable expense per unit = ($1,170,000 + $414,000) ÷ 360,000 units = $4.40
Sales = Variable expenses + Fixed expenses + Profit
$6.70Q = $4.40Q + $796,000 + $0
$2.30Q = $796,000
Q = $796,000 ÷ $2.30 per unit = 346,087 units (rounded)
58. The company's contribution margin ratio is closest to:
A) 72.6%
B) 65.7%
C) 34.3%
D) 27.4%
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Contribution margin = Sales - Variable expenses
Contribution margin = $2,412,000 - $1,584,000 = $828,000
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $828,000 ÷ $2,412,000
Contribution margin ratio = 34.3%
59. The company's degree of operating leverage is closest to:
A) 11.25
B) 25.88
C) 1.99
D) 75.38
Ans: B
AACSB: Analytic
Page 30
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 8
Level: Medium
Solution:
Sales .............................
$2,412,000
Variable expenses .........
1,584,000
Contribution margin .......
828,000
Fixed expenses .............
796,000
Net operating income ....
$ 32,000
Degree of operating leverage = Contribution margin/Net operating income
= $828,000/$32,000 = 25.88
Use the following to answer the next two questions:
Carr Inc. produces small motors that sell for $15 each. Cost data on the motors are
provided below:
Sales in units per year .........................
7,000
Variable production cost ......................
$5.00 per unit
Variable selling expense......................
$2.00 per unit
Variable administrative expense ..........
Fixed expenses per year:
Building rent ......................................
Equipment depreciation ....................
Selling expense ................................
Administrative expense.....................
Total fixed expenses............................
$1.50 per unit
$10,000
4,000
8,000
15,000
$37,000
60. The contribution margin ratio is (round to nearest tenth of a percent):
A) 56.7%
B) 43.3%
C) 66.7%
D) 53.3%
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Unit contribution margin = $15.00 - ($5.00 + $2.00 + $1.50) = $6.50
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $6.50 ÷ $15.00
Page 31
Contribution margin ratio = 43.3%
61. If the selling price is increased by 10 percent, what will be the new break-even
point in units (round to the nearest unit)?
A) 3,895 units
B) 4,625 units
C) 3,700 units
D) 3,217 units
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable expense per unit = $5.00 + $2.00 + $1.50 = $8.50
Sales = Variable expenses + Fixed expenses + Profit
$16.50Q = $8.50Q + $37,000 + $0
$8.00Q = $37,000
Q = $37,000 ÷ $8.00 per unit = 4,625 units
Use the following to answer the next two questions:
(CPA, adapted) The Maxwell Company manufactures and sells a single product.
Budgeted data follow:
Forecasted annual sales volume ........
Selling price per unit ...........................
Variable expenses per unit:
Raw materials ..................................
Direct labor.......................................
Manufacturing overhead ..................
Selling expenses ..............................
Total variable expenses per unit .........
Annual fixed expenses:
Manufacturing overhead ..................
Selling and administrative ................
Total fixed expenses ...........................
120,000 units
$25.00
$11.00
5.00
2.50
1.30
$19.80
$192,000
276,000
$468,000
62. Maxwell's break-even point in units is:
A) 76,667
B) 90,000
C) 130,000
D) 72,000
Ans: B
AACSB: Analytic
Page 32
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 3
Level: Easy
Source: CPA; adapted
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$25.00Q = $19.80Q + $468,000 + $0
$5.20Q = $468,000
Q = $468,000 ÷ $5.20 per unit = 90,000 units
63. If Maxwell Company's direct labor costs increase 8 percent, what selling price
per unit of product must it charge to maintain the same contribution margin
ratio?
A) $25.51
B) $27.00
C) $25.40
D) $26.64
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3; 5 Level: Hard
AICPA BB: Critical Thinking
Source: CPA; adapted
Solution:
Current contribution margin per unit = Selling price per unit − Total
variable expenses per unit = $25.00 − $19.80 = $5.20
Current contribution margin ratio = Contribution margin ÷ Selling price per unit
$5.20 ÷ $25.00 = 20.8%
Direct labor per unit × 0.08 = Increase in variable expense
$5.00 × 0.08 = $0.40
New total variable expenses per unit = $19.80 + $0.40 = $20.20
0.208 = (Selling price − $20.20) ÷ Selling price
0.208 × Selling price = Selling price − $20.20
$20.20 = Selling price − 0.208 × Selling price
$20.20 = 0.792 × Selling price
Selling price = $25.51
Use the following to answer the next two questions:
The following data was provided by Green Corporation:
Sales in dollars.........................
Contribution margin ratio ..........
Product A
Product B
Product C
$80,000
30%
$120,000
45%
$100,000
27%
Page 33
64. The contribution margin ratio for the company as a whole is:
A) 34%
B) 65%
C) 35%
D) 66.7%
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales .............................
Product A
Product B
Product C Total
$80,000
$120,000
$100,000
$300,000
$54,000
$27,000
105,000
Contribution margin (Sales
× Contribution margin
ratio)...........................
$24,000
Overall CM ratio = Total contribution margin/Total sales
= $105,000/$300,000 = 35%
65. If total units sold remain unchanged, but the sales mix shifts more heavily
toward Product B, one would expect the overall contribution margin ratio to:
A) increase
B) decrease
C) remain unchanged
D) none of these
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Easy
AICPA BB: Critical Thinking
Use the following to answer the next three questions:
Next year, Mudd Face Cosmetics, a single product company, expects to sell 9,000 jars
of miracle glaze. Mudd Face is budgeting the following operating results for next year:
Sales..............................
$450,000
Variable expenses .........
Contribution margin .......
135,000
315,000
Fixed expenses..............
Net operating income .....
252,000
$ 63,000
Page 34
66. How many jars of glaze would Mudd Face have to sell next year in order to
break-even?
A) 2,700
B) 5,040
C) 6,750
D) 7,200
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales ...............................................................
Total
$450,000
Variable expenses ...........................................
135,000
Contribution margin and contribution margin ratio
.....................................................................
$ 315,000
Percent of
Sales
100.0%
30.0%
70.0%
Break-even in total sales dollars = Fixed expenses/CM ratio
= $252,000/0.700 = $360,000
Selling price per unit = $450,000 ÷ 9,000 jars = $50 per jar
Break-even in units = Break-even sales dollars ÷ Selling price per unit
= $360,000 ÷ $50 = 7,200 jars
67. What would Mudd Face's total sales dollars have to be next year in order to
increase its projected net operating income by 25%?
A) $465,750
B) $472,500
C) $499,500
D) $562,500
Ans: B
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4; 6 Level: Medium
Solution:
Contribution margin ratio = $315,000 ÷ $450,000 = 70%
Desired net operating income = ($63,000 × 1.25) = $78,750
Sales dollars needed to earn $78,750 = (Fixed expenses + Target net operating
income) ÷ Contribution margin ratio = ($252,000 + $78,750) ÷ 0.70 = $472,500
Page 35
68. If sales next year at Mudd Face are 10% higher than expected, its net
operating income should be:
A) $4,410 higher than expected.
B) $6,300 higher than expected.
C) $31,500 higher than expected.
D) $44,100 higher than expected.
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
Degree of operating leverage = Contribution margin ÷ Net operating income
= $315,000 ÷ $63,000 = 5
Therefore, increase in net operating income will be 5 × 10%, or 50%, higher.
Current net operating income × 50% = $63,000 × 50% = $31,500 increase
Use the following to answer the next two questions:
Mrs. Rafter has supplied the following data for her small business:
Selling price ...................
Variable expenses .........
$10 per unit
$6 per unit
Rent ...............................
$400 per week
Salaries ..........................
$600 per week
Other fixed expenses .....
$200 per week
69. If 500 units are sold in a week, the net operating income (loss) would be:
A) $1,800
B) $(2,000)
C) $2,000
D) $800
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Sales .............................
Variable expenses .........
Contribution margin .......
Fixed expenses .............
Net operating income ....
$5,000
3,000
2,000
1,200
$ 800
Page 36
AICPA BB: Critical Thinking
70. If sales commissions $(1.00 per unit) are discontinued in favor of a $300
increase in salaries, the break-even point in units would:
A) increase
B) decrease
C) remain the same
D) none of these
Ans: C
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4; 5 Level: Medium
Use the following to answer the next four questions:
Next year, Rad Shirt Company expects to sell 32,000 shirts. Rad is budgeting the
following operating results for next year:
Sales ........................................
$800,000
Variable expenses ....................
Contribution margin ..................
288,000
512,000
Fixed expenses ........................
192,000
Net operating income ...............
$320,000
71. What is Rad's margin of safety for next year?
A) $480,000
B) $500,000
C) $512,000
D) $608,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Medium
AICPA BB: Critical Thinking
Solution:
Total
Sales .......................................................
$800,000
Variable expenses ...................................
288,000
Contribution margin and contribution margin
ratio ......................................................
$ 512,000
Break-even in total sales dollars = Fixed expenses/CM ratio
= $192,000/0.64 = $300,000
Page 37
Percent
Sales
100.0%
36%
64%
of
Margin of safety in dollars = Sales − Break-even sales
= $800,000 − $300,000 = $500,000
72. What is Rad's degree of operating leverage for next year?
A) 1.50
B) 1.56
C) 1.60
D) 2.50
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $512,000/$320,000 = 1.60
73. How many shirts would Rad have to sell next year in order to generate
$480,000 of net operating income?
A) 38,400
B) 48,000
C) 60,000
D) 42,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales price = $800,000 ÷ 32,000 units = $25
Variable expense per unit = $288,000 ÷ 32,000 units = $9
Sales = Variable expenses + Fixed expenses + Target profit
$25Q = $9Q + $192,000 + $480,000
$16Q = $672,000
Q = $672,000 ÷ $16 per unit = 42,000 units
74. Rad is considering increasing its advertising by $48,000 next year. By how
much would sales have to increase in order for Rad to still generate a
$320,000 net operating income?
A) $48,000
B) $75,000
C) $76,800
D) $120,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Hard
Page 38
AICPA BB: Critical Thinking
Solution:
Proposed
Current
Sales.........................................
$800,000
Variable expenses ....................
288,000
Contribution margin ..................
512,000
Fixed expenses ........................
192,000
$560,000
*
240,000
$320,000
Net operating income................
$320,000
*Work backwards to obtain the number.
Sales price = $800,000 ÷ 32,000 units = $25
Variable expense per unit = $288,000 ÷ 32,000 units = $9
Contribution margin per unit = $25 − $9 = $16
$560,000 ÷ $16 = 35,000 units
35,000 − 32,000 = 3,000 unit increase
3,000 × $25 = $75,000 increase in sales
Use the following to answer the next four questions:
Houpe Corporation produces and sells a single product. Data concerning that product
appear below:
Selling price ...................
Variable expenses .........
Contribution margin........
Per Unit
$140
42
$ 98
Percent of Sales
100%
30%
70%
Fixed expenses are $490,000 per month. The company is currently selling 6,000 units
per month. Consider each of the following questions independently.
75. This question is to be considered independently of all other questions relating
to Houpe Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $14,000 increase in the monthly
advertising budget would result in a 150 unit increase in monthly sales. What
should be the overall effect on the company's monthly net operating income of
this change?
A) increase of $700
B) increase of $14,700
C) decrease of $14,000
Page 39
D)
decrease of $700
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
Solution:
6,000 units
Sales (6,000 units × $140, 6,150 units × $140)
$840,000
Variable expenses (6,000 units × $42, 6,150
units × $42) ..................................................
252,000
Contribution margin .........................................
588,000
Fixed expenses ...............................................
490,000
Net operating income ......................................
$ 98,000
6,150 units
$861,000
258,300
602,700
504,000
$ 98,700
Increase in net operating income: $98,700 − $98,000 = $700
76. This question is to be considered independently of all other questions relating
to Houpe Corporation. Refer to the original data when answering this question.
Management is considering using a new component that would increase the unit
variable cost by $5. Since the new component would increase the features of the
company's product, the marketing manager predicts that monthly sales would
increase by 300 units. What should be the overall effect on the company's
monthly net operating income of this change?
A) decrease of $2,100
B) decrease of $27,900
C) increase of $2,100
D) increase of $27,900
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
Solution:
6,000 units
Sales (6,000 units × $140, 6,300 units × $140)
$840,000
Variable expenses (6,000 units × $42, 6,300
units × $47) ...............................................
252,000
Contribution margin ......................................
588,000
Fixed expenses ............................................
490,000
Net operating income ...................................
$ 98,000
Page 40
6,300 units
$882,000
296,100
585,900
490,000
$ 95,900
Decrease in net operating income: $98,000 − $95,900 = $2,100
77. This question is to be considered independently of all other questions relating
to Houpe Corporation. Refer to the original data when answering this question.
The marketing manager would like to cut the selling price by $7 and increase the
advertising budget by $28,000 per month. The marketing manager predicts that
these two changes would increase monthly sales by 500 units. What should be
the overall effect on the company's monthly net operating income of this change?
A) decrease of $17,500
B) increase of $17,500
C) decrease of $24,500
D) increase of $38,500
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
6,000 units
Sales (6,000 units × $140, 6,500 units ×
$133).......................................................
$840,000
Variable expenses (6,000 units × $42, 6,500
units × $42) .............................................
252,000
Contribution margin ....................................
588,000
Fixed expenses ..........................................
490,000
Net operating income .................................
$ 98,000
6,500 units
$864,500
273,000
591,500
518,000
$ 73,500
Decrease in net operating income: $98,000 − $73,500 = $24,500
78. This question is to be considered independently of all other questions relating
to Houpe Corporation. Refer to the original data when answering this question.
The marketing manager would like to introduce sales commissions as an
incentive for the sales staff. The marketing manager has proposed a commission
of $11 per unit. In exchange, the sales staff would accept a decrease in their
salaries of $58,000 per month. (This is the company's savings for the entire sales
staff.) The marketing manager predicts that introducing this sales incentive would
increase monthly sales by 100 units. What should be the overall effect on the
company's monthly net operating income of this change?
A) increase of $700
B) increase of $56,900
C) decrease of $115,300
D) increase of $588,700
Page 41
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
6,000 units
Sales (6,000 units × $140, 6,100 units × $140)
$840,000
Variable expenses (6,000 units × $42, 6,100 units
× $53) .........................................................
252,000
Contribution margin ........................................
588,000
Fixed expenses ..............................................
490,000
Net operating income .....................................
$ 98,000
6,100 units
$854,000
323,300
530,700
432,000
$ 98,700
Increase in net operating income: $98,700 − $98,000 = $700
Use the following to answer questions 131-134:
Data concerning Lemelin Corporation's single product appear below:
Selling price ..............................
Variable expenses ....................
Contribution margin ..................
Per Unit
$230
115
$115
Percent of Sales
100%
50%
50%
The company is currently selling 7,000 units per month. Fixed expenses are $581,000
per month. Consider each of the following questions independently.
79. This question is to be considered independently of all other questions relating
to Lemelin Corporation. Refer to the original data when answering this
question.
Management is considering using a new component that would increase the unit
variable cost by $3. Since the new component would increase the features of 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?
A) decrease of $22,400
B) decrease of $1,400
C) increase of $22,400
D) increase of $1,400
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
Page 42
AICPA BB: Critical Thinking
Solution:
7,000 units
7,200 units
Sales (7,000 units × $230, 7,200 units × $230)
$1,610,000
Variable expenses (7,000 units × $115, 7,200
units × $118) ............................................
805,000
Contribution margin .....................................
805,000
$1,656,000
849,600
806,400
Fixed expenses ...........................................
581,000
581,000
Net operating income ..................................
$ 224,000
$ 225,400
Increase in net operating income: $225,400 − $224,000 = $1,400
80. This question is to be considered independently of all other questions relating
to Lemelin Corporation. Refer to the original data when answering this
question.
The marketing manager believes that a $11,000 increase in the monthly
advertising budget would result in a 100 unit increase in monthly sales. What
should be the overall effect on the company's monthly net operating income of
this change?
A) decrease of $11,000
B) increase of $11,500
C) decrease of $500
D) increase of $500
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
Solution:
7,000 units
7,100 units
Sales (7,000 units × $230, 7,100 units × $230)
$1,610,000
Variable expenses (7,000 units × $115, 7,100
units × $115) ...........................................
805,000
Contribution margin ....................................
805,000
$1,633,000
816,500
816,500
Fixed expenses ..........................................
581,000
592,000
Net operating income .................................
$ 224,000
$ 224,500
Page 43
Increase in net operating income: $224,500 − $224,000 = $500
81. This question is to be considered independently of all other questions relating
to Lemelin Corporation. Refer to the original data when answering this
question.
The marketing manager would like to introduce sales commissions as an
incentive for the sales staff. The marketing manager has proposed a commission
of $20 per unit. In exchange, the sales staff would accept a decrease in their
salaries of $113,000 per month. (This is the company's savings for the entire
sales staff.) The marketing manager predicts that introducing this sales incentive
would increase monthly sales by 300 units. What should be the overall effect on
the company's monthly net operating income of this change?
A) decrease of $224,500
B) increase of $107,000
C) increase of $1,500
D) increase of $806,500
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
7,000 units
7,300 units
Sales (7,000 units × $230, 7,300 units × $230)
$1,610,000
Variable expenses (7,000 units × $115, 7,300
units × $135) ............................................
805,000
Contribution margin .....................................
805,000
$1,679,000
985,500
693,500
Fixed expenses ...........................................
581,000
468,000
Net operating income ..................................
$ 224,000
$ 225,500
Increase in net operating income: $225,500 − $224,000 = $1,500
82. This question is to be considered independently of all other questions relating
to Lemelin Corporation. Refer to the original data when answering this
question.
The marketing manager would like to cut the selling price by $18 and increase
the advertising budget by $37,000 per month. The marketing manager predicts
that these two changes would increase monthly sales by 1,600 units. What
should be the overall effect on the company's monthly net operating income of
this change?
Page 44
A)
B)
C)
D)
increase of $118,200
increase of $302,200
decrease of $118,200
decrease of $7,800
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
7,000 units
8,600 units
Sales (7,000 units × $230, 8,600 units × $212)
$1,610,000
Variable expenses (7,000 units × $115, 8,600
units × $115) ...........................................
805,000
Contribution margin ....................................
805,000
$1,823,200
989,000
834,200
Fixed expenses ..........................................
581,000
618,000
Net operating income .................................
$ 224,000
$ 216,200
Decrease in net operating income: $224,000 − $216,200 = $7,800
Use the following to answer questions 135-138:
Thornbrough Corporation produces and sells a single product with the following
characteristics:
Selling price ...................
Variable expenses .........
Contribution margin........
Per Unit
$220
44
$176
Percent of Sales
100%
20%
80%
The company is currently selling 7,000 units per month. Fixed expenses are $901,000
per month. Consider each of the following questions independently.
83. This question is to be considered independently of all other questions relating
to Thornbrough Corporation. Refer to the original data when answering this
question.
Management is considering using a new component that would increase the unit
variable cost by $11. Since the new component would increase the features of
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?
Page 45
A)
B)
C)
D)
increase of $82,500
decrease of $5,500
decrease of $82,500
increase of $5,500
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
Solution:
7,000 units
7,500 units
Sales (7,000 units × $220, 7,500 units × $220)
$1,540,000
Variable expenses (7,000 units × $44, 7,500
units × $55) .............................................
308,000
Contribution margin ....................................
1,232,000
$1,650,000
412,500
1,237,500
Fixed expenses ..........................................
901,000
901,000
Net operating income .................................
$ 331,000
$ 336,500
Increase in net operating income: $336,500 − $331,000 = $5,500
84. This question is to be considered independently of all other questions relating
to Thornbrough Corporation. Refer to the original data when answering this
question.
The marketing manager believes that a $28,000 increase in the monthly
advertising budget would result in a 190 unit increase in monthly sales. What
should be the overall effect on the company's monthly net operating income of
this change?
A) decrease of $28,000
B) increase of $33,440
C) increase of $5,440
D) decrease of $5,440
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales (7,000 units × $220, 7,190 units × $220)
Page 46
7,000 units
7,190 units
$1,540,000
$1,581,800
Variable expenses (7,000 units × $44, 7,190
units × $44) .............................................
308,000
Contribution margin ....................................
1,232,000
316,360
1,265,440
Fixed expenses ..........................................
901,000
929,000
Net operating income .................................
$ 331,000
$ 336,440
Increase in net operating income: $336,440 − $331,000 = $5,440
85. This question is to be considered independently of all other questions relating
to Thornbrough Corporation. Refer to the original data when answering this
question.
The marketing manager would like to cut the selling price by $18 and increase
the advertising budget by $53,000 per month. The marketing manager predicts
that these two changes would increase monthly sales by 1,000 units. What
should be the overall effect on the company's monthly net operating income of
this change?
A) decrease of $105,000
B) increase of $149,000
C) increase of $105,000
D) decrease of $21,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
7,000 units
8,000 units
Sales (7,000 units × $220, 8,000 units × $202) $1,540,000 $1,616,000
Variable expenses (7,000 units × $44, 8,000
units × $44) ...............................................
308,000
352,000
Contribution margin ......................................
1,232,000 1,264,000
Fixed expenses ............................................
Net operating income ...................................
901,000
954,000
$ 331,000 $ 310,000
Decrease in net operating income: $331,000 − $310,000 = $21,000
86. This question is to be considered independently of all other questions relating
to Thornbrough Corporation. Refer to the original data when answering this
question.
Page 47
The marketing manager would like to introduce sales commissions as an
incentive for the sales staff. The marketing manager has proposed a commission
of $11 per unit. In exchange, the sales staff would accept a decrease in their
salaries of $65,000 per month. (This is the company's savings for the entire sales
staff.) The marketing manager predicts that introducing this sales incentive would
increase monthly sales by 300 units. What should be the overall effect on the
company's monthly net operating income of this change?
A) increase of $1,269,500
B) increase of $37,500
C) increase of $61,700
D) decrease of $92,500
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
7,000 units
7,300 units
Sales (7,000 units × $220, 7,300 units × $220)
$1,540,000
Variable expenses (7,000 units × $44, 7,300
units × $55) .................................................
308,000
Contribution margin ........................................
1,232,000
$1,606,000
401,500
1,204,500
Fixed expenses ..............................................
901,000
836,000
Net operating income .....................................
$ 331,000
$ 368,500
Increase in net operating income: $368,500 − $331,000 = $37,500
Use the following to answer the next two questions:
Tricia Corporation is a single product firm that sells its product for $2.50 per unit.
Variable expense per unit at Tricia is $1.00. Tricia expects fixed expenses to total
$18,000 for next year.
87. How many units would Tricia have to sell next year in order to break-even?
A) 7,200
B) 12,000
C) 30,000
D) 45,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
Page 48
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$2.50Q = $1.00Q + $18,000 + $0
$1.50Q = $18,000
Q = $18,000 ÷ $1.50 per unit = 12,000 units
88. What would Tricia's total sales dollars have to be next year in order to
generate $45,000 of net operating income?
A) $30,000
B) $42,000
C) $75,000
D) $105,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Contribution margin = Sales price - Variable expense per unit
Contribution margin = $2.50 - $1.00 = $1.50
CM ratio = $1.50 ÷ $2.50 = 0.60
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($18,000 + $45,000)/0.60 = $105,000
Use the following to answer the next two questions:
Zanetti Corporation produces and sells a single product. Data concerning that product
appear below:
Selling price per unit .................
Variable expense per unit .........
$110.00
$34.10
Fixed expense per month .........
$132,066
89. The break-even in monthly unit sales is closest to:
A) 3,873
B) 1,740
C) 1,201
D) 2,271
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Page 49
AICPA BB: Critical Thinking
Sales = Variable expenses + Fixed expenses + Profit
$110.00Q = $34.10Q + $132,066 + $0
$75.90Q = $132,066
Q = $132,066 ÷ $75.90 per unit = 1,740 units
90. The break-even in monthly dollar sales is closest to:
A) $191,400
B) $249,810
C) $426,030
D) $132,110
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
AICPA BB: Critical Thinking
Solution:
Per Unit
Percent of
Sales
Sales ................................................................
$110.00
100.0%
Variable expenses............................................
34.10
31.0%
$ 75.90
69.0%
Contribution margin and contribution margin ratio
Break-even in total sales dollars = Fixed expenses/CM ratio
= $132,066/0.69 = $191,400
Use the following to answer questions 143-144:
Data concerning Sinisi Corporation's single product appear below:
Selling price per unit ................. $200.00
Variable expense per unit ......... $58.00
$407,54
Fixed expense per month ......... 0
91. The break-even in monthly unit sales is closest to:
A) 2,038
B) 7,027
C) 2,870
D) 3,978
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
Page 50
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$200Q = $58Q + $407,540 + $0
$142Q = $407,540
Q = $407,540 ÷ $142 per unit = 2,870 units
92. The break-even in monthly dollar sales is closest to:
A) $407,600
B) $1,405,400
C) $574,000
D) $795,600
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
AICPA BB: Critical Thinking
Solution:
Per Unit
Sales ...............................................................
$200
Variable expenses ...........................................
58
Contribution margin and contribution margin ratio
.....................................................................
$142
Percent of
Sales
100.0%
29.0%
71.0%
Break-even in total sales dollars = Fixed expenses/CM ratio
= $407,540/0.71 = $574,000
Use the following to answer the next two questions:
Heathman Inc. produces and sells a single product. The selling price of the product is
$230.00 per unit and its variable cost is $89.70 per unit. The fixed expense is $308,660
per month.
93. The break-even in monthly unit sales is closest to:
A) 2,328
B) 1,342
C) 3,441
D) 2,200
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$230.00Q = $89.70Q + $308,660 + $0
Page 51
$140.30Q = $308,660
Q = $308,660 ÷ $140.30 per unit = 2,200 units
94. The break-even in monthly dollar sales is closest to:
A) $791,436
B) $535,365
C) $506,000
D) $308,660
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Easy
AICPA BB: Critical Thinking
Solution:
Per Unit
Sales ...............................................................
$230.00
Variable expenses ...........................................
89.70
Contribution margin and contribution margin ratio
.....................................................................
$140.30
Percent
of Sales
100.0%
39.0%
61.0%
Break-even in total sales dollars = Fixed expenses/CM ratio
= $308,660/0.61 = $506,000
Use the following to answer the next two questions:
Maziarz Corporation produces and sells a single product. Data concerning that product
appear below:
Selling price per unit ................. $220.00
Variable expense per unit ......... $72.60
$548,32
Fixed expense per month ......... 8
95. Assume the company's monthly target profit is $14,000. The unit sales to
attain that target profit is closest to:
A) 7,746
B) 2,556
C) 4,706
D) 3,815
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
Page 52
$220.00Q = $72.60Q + $548,328 + $14,000
$147.40Q = $562,328
Q = $562,328 ÷ $147.40 per unit = 3,815 units (rounded)
96. Assume the company's monthly target profit is $16,000. The dollar sales to
attain that target profit is closest to:
A) $564,328
B) $1,710,085
C) $1,038,898
D) $842,281
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Contribution margin per unit = Sales price - Variable expense per unit
Contribution margin per unit = $220.00 - $72.60 = $147.40
CM ratio = $147.40 ÷ $220.00 = 0.67
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($548,328 + $16,000)/0.67 = $842,281 (rounded)
Use the following to answer the next two questions:
Data concerning Strite Corporation's single product appear below:
Selling price per unit.................
Variable expense per unit ........
$150.00
$42.00
Fixed expense per month .........
$421,200
97. Assume the company's monthly target profit is $17,000. The unit sales to
attain that target profit is closest to:
A) 5,804
B) 2,921
C) 4,057
D) 10,433
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$150Q = $42Q + $421,200 + $17,000
Page 53
$108Q = $438,200
Q = $438,200 ÷ $108 per unit = 4,057 units (rounded)
98. Assume the company's monthly target profit is $8,000. The dollar sales to
attain that target profit is closest to:
A) $596,111
B) $1,532,857
C) $852,723
D) $429,200
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Contribution margin per unit = Sales price - Variable expense per unit
Contribution margin per unit = $150.00 - $42.00 = $108.00
CM ratio = $108.00 ÷ $150.00 = 0.72
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($421,200 + $8,000)/0.72 = $596,111 (rounded)
Use the following to answer the next two questions:
Speckman Enterprises, Inc., produces and sells a single product whose selling price is
$200.00 per unit and whose variable expense is $68.00 per unit. The company's
monthly fixed expense is $514,800.
99. Assume the company's monthly target profit is $11,000. The unit sales to
attain that target profit is closest to:
A) 2,629
B) 3,983
C) 4,781
D) 7,732
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$200.00Q = $68.00Q + $514,800 + $11,000
$132.00Q = $525,800
Q = $525,800 ÷ $132 per unit = 3,983 units (rounded)
100.
Assume the company's monthly target profit is $12,000. The dollar sales
Page 54
to attain that target profit is closest to:
A) $1,549,412
B) $798,182
C) $526,800
D) $958,131
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 6 Level: Easy
AICPA BB: Critical Thinking
Solution:
Contribution margin per unit = Sales price - Variable expense per unit
Contribution margin per unit = $200.00 - $68.00 = $132.00
CM ratio = $132.00 ÷ $200.00 = 0.66
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($514,800 + $12,000)/0.66 = $798,182 (rounded)
Use the following to answer the next two questions:
Jerrel Corporation sells a product for $230 per unit. The product's current sales are
24,000 units and its break-even sales are 17,280 units.
101.
A)
B)
C)
D)
What is the margin of safety in dollars?
$5,520,000
$1,545,600
$3,974,400
$3,680,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
Solution:
Margin of safety in dollars:
Break-even sales = $230 per unit × 17,280 units = $3,974,400
Current sales = $230 per unit × 24,000 units = $5,520,000
Margin of safety in dollars = Sales − Break-even sales
= $5,520,000 − $3,974,400 = $1,545,600
102.
A)
B)
C)
D)
The margin of safety as a percentage of sales is closest to:
61%
28%
72%
39%
Page 55
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
Solution:
Margin of safety in dollars:
Break-even sales = $230 per unit × 17,280 units = $3,974,400
Current sales = $230 per unit × 24,000 units = $5,520,000
Margin of safety in dollars = Sales − Break-even sales
= $5,520,000 − $3,974,400 = $1,545,600
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current
sales = $1,545,600 ÷ $5,520,000 = 28%
Use the following to answer the next two questions:
Maruska Corporation has provided the following data concerning its only product:
Selling price ...................
$180 per unit
Current sales..................
29,800 units
Break-even sales ...........
25,032 units
103.
A)
B)
C)
D)
What is the margin of safety in dollars?
$4,505,760
$858,240
$3,576,000
$5,364,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
Solution:
Margin of safety in dollars:
Break-even sales = $180 per unit × 25,032 = $4,505,760
Current sales = $180 per unit × 29,800 = $5,364,000
Margin of safety in dollars = Sales − Break-even sales
= $5,364,000 − $4,505,760 = $858,240
104. The margin of safety as a percentage of sales is closest to:
A) 19%
B) 16%
C) 84%
Page 56
D)
81%
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 7 Level: Easy
AICPA BB: Critical Thinking
Solution:
Margin of safety in dollars:
Break-even sales = $180 per unit × 25,032 = $4,505,760
Current sales = $180 per unit × 29,800 = $5,364,000
Margin of safety in dollars = Sales − Break-even sales
= $5,364,000 − $4,505,760 = $858,240
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current
sales = $858,240 ÷ $5,364,000 = 16%
Use the following to answer the next two questions:
Bois Corporation has provided its contribution format income statement for January.
Sales .............................
$426,400
Variable expenses.........
Contribution margin .......
260,000
166,400
Fixed expenses .............
120,900
Net operating income ....
$ 45,500
105.
A)
B)
C)
D)
The degree of operating leverage is closest to:
0.11
9.37
0.27
3.66
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $166,400/$45,500 = 3.66
106. If the company's sales increase by 7%, its net operating income should
increase by about:
Page 57
A)
B)
C)
D)
26%
7%
66%
11%
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $166,400/$45,500 = 3.66
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 7% × 3.66 = 26%
Use the following to answer the next two questions:
The July contribution format income statement of Doxtater Corporation appears below:
Sales ........................................
$564,400
Variable expenses ....................
Contribution margin ..................
312,800
251,600
Fixed expenses ........................
193,800
Net operating income ...............
$ 57,800
107.
A)
B)
C)
D)
The degree of operating leverage is closest to:
0.23
0.10
4.35
9.76
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $251,600/$57,800 = 4.35
108.
If the company's sales increase by 19%, its net operating income should
Page 58
increase by about:
A) 10%
B) 19%
C) 83%
D) 186%
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 8 Level: Easy
AICPA BB: Critical Thinking
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $251,600/$57,800 = 4.35
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 19% × 4.35 = 83%
Use the following to answer the next two questions:
Taylor, Inc. produces only two products, Acdom and Belnom. These account for 60%
and 40% of the total sales dollars of Taylor, respectively. The unit variable expense as a
percentage of the selling price is 60% for Acdom and 85% for Belnom. Total fixed
expenses are $150,000. There are no other costs.
109.
A)
B)
C)
D)
What is Taylor's break-even point in sales dollars?
$150,000
$214,286
$300,000
$500,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Hard
AICPA BB: Critical Thinking
Solution:
Each product’s contribution margin rate is (1 − variable expense percentage)
Acdom = 1 − 0.6 = 0.4
Belnom = 1 − 0.85 = 0.15
To calculate the weighted average contribution margin, multiply each product’s
contribution margin ratio by its percentage of total sales dollars:
(60% × 0.4%) + (40% × 0.15%) =
0.24% + 0.06% = 0.30%
To calculate the break-even point in sales dollars:
Fixed expenses ÷ Weighted average contribution margin ratio
= $150,000 ÷ 0.30 = $500,000
Page 59
110. Assuming that the total fixed expenses of Taylor increase by 30% and the
sales mix remains constant, what amount of sales dollars would be necessary
to generate a net operating income of $9,000?
A) $204,000
B) $464,000
C) $659,000
D) $680,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Hard
AICPA BB: Critical Thinking
Solution:
Each product’s contribution margin rate is (1 − variable expense percentage)
Acdom = 1 − 0.6 = 0.4
Belnom = 1 − 0.85 = 0.15
To calculate the weighted average contribution margin, multiply each product’s
contribution margin ratio by its percentage of total sales dollars:
(60% × 0.4%) + (40% × 0.15%) = 0.24 + 0.06 = 0.30
New fixed expenses = ($150,000 × 1.30) = $195,000
Sales dollars needed = (Fixed expenses + Target net operating income) ÷
Weighted average contribution margin ratio
= ($195,000 + $9,000) ÷ 0.30 = $680,000
Use the following to answer the next two questions:
Dietrick Corporation produces and sells two products. Data concerning those products
for the most recent month appear below:
Sales .............................
Variable expenses .........
Product B32L
$46,000
$13,800
Product K84B
$27,000
$14,670
Fixed expenses for the entire company were $42,550.
111.
A)
B)
C)
D)
The break-even point for the entire company is closest to:
$42,550
$71,020
$69,754
$30,450
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Easy
Solution:
Page 60
AICPA BB: Critical Thinking
Sales .............................
Variable expenses .........
Contribution margin .......
Product
B32L
$46,000
13,800
$32,200
Product
K84B
$27,000
14,670
$12,330
Total
$73,000
28,470
44,530
Fixed expenses .............
42,550
Net operating income ....
$ 1,980
Overall CM ratio = Total contribution margin/Total sales
= $44,530/$73,000 = 0.61
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $42,550/0.61 = $69,754 (rounded)
112. If the sales mix were to shift toward Product B32L with total sales
remaining constant, the overall break-even point for the entire company:
A) could increase or decrease.
B) would decrease.
C) would not change.
D) would increase.
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Medium
AICPA BB: Critical Thinking
Use the following to answer the next two questions:
Ingrum Corporation produces and sells two products. In the most recent month, Product
R38T had sales of $20,000 and variable expenses of $7,400. Product X08S had sales
of $39,000 and variable expenses of $6,170. And the fixed expenses of the entire
company were $41,160.
113.
A)
B)
C)
D)
The break-even point for the entire company is closest to:
$41,160
$17,840
$53,455
$54,730
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales ..............................
Variable expenses .........
Product
R38T
$20,000
7,400
Page 61
Product
X08S
$39,000
6,170
Total
$59,000
13,570
Contribution margin........
Fixed expenses ..............
Net operating income .....
$12,600
$32,830
45,430
41,160
$ 4,270
Overall CM ratio = Total contribution margin/Total sales
= $45,430/$59,000 = 0.77
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $41,160/0.77 = $53,455 (rounded)
114. If the sales mix were to shift toward Product R38T with total sales
remaining constant, the overall break-even point for the entire company:
A) would not change.
B) would increase.
C) would decrease.
D) could increase or decrease.
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 9 Level: Medium
AICPA BB: Critical Thinking
Essay Questions
115. The following is Arkadia Corporation's contribution format income
statement for last month:
Sales ........................................
$1,200,000
Variable expenses ....................
Contribution margin ..................
800,000
400,000
Fixed expenses ........................
300,000
Net operating income ...............
$ 100,000
The company has no beginning or ending inventories and produced and sold
20,000 units during the month.
Required:
a. What is the company's contribution margin ratio?
b. What is the company's break-even in units?
c. If sales increase by 100 units, by how much should net operating income
increase?
d. How many units would the company have to sell to attain target profits of
$125,000?
e. What is the company's margin of safety in dollars?
Page 62
f. What is the company's degree of operating leverage?
Ans:
a. Contribution margin ratio:
CM ratio = Contribution margin ÷ Sales = $400,000 ÷ $1,200,000 = 0.333
b. Break-even units:
Selling price ($1,200,000 ÷ 20,000 units) = $60 per unit
Variable expenses ($800,000 ÷ 20,000 units) = $40 per unit
Sales = Variable expenses + Fixed expenses + Profit
$60Q = $40Q + $300,000 + $0
$20Q = $300,000
Q = $300,000 ÷ $20 per unit = 15,000 units
c. Increase in net operating income from additional sales of 100 units:
Selling price ........................................
$60 per unit
Variable expenses ..............................
$40 per unit
Unit contribution margin ......................
$20 per unit
Additional sales ...................................
Increase in net operating income ........
× 100 units
$2,000
d. Sales to attain target profit:
Sales = Variable expenses + Fixed expenses + Profit
$60Q = $40Q + $300,000 + $125,000
$20Q = $425,000
Q = $425,000 ÷ $20 per unit = 21,250 units
e. Margin of safety in dollars:
Break-even sales = $60 per unit × 15,000 units = $900,000
Margin of safety in dollars = Sales − Break-even sales
= $1,200,000 − $900,000 = $300,000
f. Degree of operating leverage = Contribution margin ÷ Net operating income
= $400,000 ÷ $100,000 = 4.0
AACSB: Analytic
LO: 1; 3; 5; 6; 7; 8
AICPA BB: Critical Thinking
Level: Easy
AICPA FN: Reporting
116. The Garry Corporation's most recent contribution format income statement
is shown below:
Page 63
Total
Per unit
Sales (15,000 units) .................
$225,000
$15
Variable expenses ...................
Contribution margin ..................
135,000
90,000
9
$6
Fixed expenses ........................
35,000
Net operating income ...............
$ 55,000
Required:
Prepare a new contribution format income statement under each of the following
conditions (consider each case independently):
a. The sales volume increases by 10% and the price decreases by $0.50 per
unit.
b. The selling price decreases $1.00 per unit, fixed expenses increase by
$15,000, and the sales volume decreases by 5%.
c. The selling price increases by 25%, variable expense increases by $0.75 per
unit, and the sales volume decreases by 15%.
d. The selling price increases by $1.50 per unit, variable cost increases by $1.00
per unit, fixed expenses decrease by $15,000, and sales volume decreases
by 12%.
Ans:
a.
Total
Volume ........................
Sales ...........................
Variable expenses.......
Contribution margin .....
Fixed expenses ...........
Net operating income ..
16,500 units
$239,250
148,500
90,750
35,000
$ 55,750
b.
Volume ........................
Sales ...........................
Variable expenses.......
Contribution margin .....
Page 64
Per unit
$14.50
9.00
$ 5.50
Total
Per unit
14,250 units
$199,500
128,250
71,250
$14.00
9.00
$ 5.00
Fixed expenses ...........
Net operating income ..
50,000
$ 21,250
c.
Total
Volume ........................
Sales ...........................
Variable expenses.......
Contribution margin .....
Fixed expenses ...........
Net operating income ..
Per unit
12,750 units
$239,063
124,313
114,750
35,000
$79,750
$18.75
9.75
$9.00
d.
Total
Volume ........................
Sales ...........................
Variable expenses .......
Contribution margin .....
Fixed expenses ...........
Net operating income ..
Per unit
13,200 units
$217,800
132,000
85,800
20,000
$ 65,800
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 1; 4 Level: Easy
$16.50
10.00
$ 6.50
AICPA FN: Measurement
117. McConkey Corporation produces and sells a single product. The
company's contribution format income statement for July appears below:
Sales (5,500 units) .........
$357,500
Variable expenses .........
Contribution margin ........
236,500
121,000
Fixed expenses ..............
102,200
Net operating income .....
$ 18,800
Required:
Redo the company's contribution format income statement assuming that the
company sells 5,800 units.
Ans:
Page 65
Sales (5,800 units) ........
$377,000
Variable expenses .........
Contribution margin .......
249,400
127,600
Fixed expenses .............
102,200
Net operating income ....
$ 25,400
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 1 Level: Easy
AICPA FN: Measurement
118. Giannini Inc., which produces and sells a single product, has provided the
following contribution format income statement for March:
Sales (5,900 units) ........
$477,900
Variable expenses .........
Contribution margin .......
206,500
271,400
Fixed expenses .............
190,800
Net operating income ....
$ 80,600
Required:
Redo the company's contribution format income statement assuming that the
company sells 5,500 units.
Ans:
Sales (5,500 units).........
$445,500
Variable expenses .........
Contribution margin .......
192,500
253,000
Fixed expenses .............
190,800
Net operating income ....
$ 62,200
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 1 Level: Easy
Page 66
AICPA FN: Measurement
119. Mechem Corporation produces and sells a single product. In April, the
company sold 2,100 units. Its total sales were $205,800, its total variable
expenses were $107,100, and its total fixed expenses were $82,400.
Required:
a. Construct the company's contribution format income statement for April in
good form.
b. Redo the company's contribution format income statement assuming that the
company sells 2,200 units.
Ans:
a.
b.
Sales (2,100 units).......
$205,800
Variable expenses .......
Contribution margin .....
107,100
98,700
Fixed expenses ...........
82,400
Net operating income ..
$ 16,300
Sales (2,200 units) ......
$215,600
Variable expenses ......
Contribution margin ....
112,200
103,400
Fixed expenses...........
82,400
Net operating income ..
$ 21,000
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 1 Level: Easy
AICPA FN: Measurement
120. In July, Meers Corporation sold 3,700 units of its only product. Its total
sales were $107,300, its total variable expenses were $66,600, and its total
fixed expenses were $34,800.
Required:
a. Construct the company's contribution format income statement for July in
good form.
b. Redo the company's contribution format income statement assuming that the
company sells 3,400 units.
Page 67
Ans:
a.
Sales (3,700 units) ......
$107,300
Variable expenses .......
Contribution margin .....
66,600
40,700
Fixed expenses ...........
34,800
Net operating income ..
$ 5,900
Sales (3,400 units) ......
$98,600
Variable expenses .......
Contribution margin .....
61,200
37,400
Fixed expenses ...........
34,800
Net operating income ..
$ 2,600
b.
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 1 Level: Easy
AICPA FN: Measurement
121. Spencer Company's most recent monthly contribution format income
statement is given below:
Sales .............................
Variable expenses .........
Contribution margin .......
Fixed expenses .............
Net operating loss .........
$60,000
45,000
15,000
18,000
($3,000)
The company sells its only product for $10 per unit. There were no beginning or
ending inventories.
Required:
a.
b.
c.
d.
What are total sales in dollars at the break-even point?
What are total variable expenses at the break-even point?
What is the company's contribution margin ratio?
If unit sales were increased by 10% and fixed expenses were reduced by
Page 68
$2,000, what would be the company's expected net operating income?
(Prepare a new income statement.)
Ans:
a. The contribution margin ratio is $15,000 ÷ $60,000 = 25%. Therefore, the
break-even in sales dollars is $18,000 ÷ 25% = $72,000.
b. The variable cost ratio is $45,000 ÷ $60,000 = 75%. Therefore, the variable
expenses at the break-even point are $72,000 × 75% = $54,000.
c. 25% See part (a) above.
d.
Sales ($60,000 × 1.1) .......................
Variable expenses ($45,000 × 1.1) ..
Contribution margin ..........................
Fixed expenses ($18,000 − $2,000) .
Net operating income .......................
$66,000
49,500
16,500
16,000
$500
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 3; 4; 5 Level: Medium
AICPA FN: Reporting
122. Sarratt Corporation's contribution margin ratio is 62% and its fixed monthly
expenses are $91,000. Assume that the company's sales for May are
expected to be $193,000.
Required:
Estimate the company's net operating income for May. Assume that the fixed
monthly expenses do not change. Show your work!
Ans:
Sales .........................................................................
Contribution margin ratio ...........................................
$193,000
62%
Contribution margin (sales × contribution margin ratio)
$119,660
Fixed expenses .........................................................
91,000
Net operating income ................................................
$ 28,660
AACSB: Analytic
LO: 3 Level: Easy
AICPA BB: Critical Thinking
Page 69
AICPA FN: Reporting
123. The management of Merklin Corporation expects sales in May to be
$105,000. The company's contribution margin ratio is 70% and its fixed
monthly expenses are $48,000.
Required:
Estimate the company's net operating income for May. Assume that the fixed
monthly expenses do not change. Show your work!
Ans:
Sales ...........................................................................
Contribution margin ratio .............................................
$105,000
70%
Contribution margin (sales × contribution margin ratio)
Fixed expenses ...........................................................
Net operating income ..................................................
$73,500
48,000
$25,500
AACSB: Analytic
LO: 3 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
124. Huitron Inc. expects its sales in September to be $143,000. The
company's contribution margin ratio is 65% and its fixed monthly expenses are
$62,000.
Required:
Estimate the company's net operating income for September. Assume that the
fixed monthly expenses do not change. Show your work!
Ans:
Sales ..............................................................................
Contribution margin ratio ................................................
Contribution margin (sales × contribution margin ratio)..
Fixed expenses ..............................................................
Net operating income .....................................................
AACSB: Analytic
LO: 3 Level: Easy
125.
AICPA BB: Critical Thinking
$143,000
65%
$92,950
62,000
$30,950
AICPA FN: Reporting
Belli-Pitt, Inc, produces a single product. The results of the company's
Page 70
operations for a typical month are summarized in contribution format as
follows:
Sales .............................
$540,000
Variable expenses .........
Contribution margin .......
360,000
180,000
Fixed expenses .............
120,000
Net operating income ....
$ 60,000
The company produced and sold 120,000 kilograms of product during the month.
There were no beginning or ending inventories.
Required:
a. Given the present situation, compute
1. The break-even sales in kilograms.
2. The break-even sales in dollars.
3. The sales in kilograms that would be required to produce net operating
income of $90,000.
4. The margin of safety in dollars.
b. An important part of processing is performed by a machine that is currently
being leased for $20,000 per month. Belli-Pitt has been offered an
arrangement whereby it would pay $0.10 royalty per kilogram processed by
the machine rather than the monthly lease.
1. Should the company choose the lease or the royalty plan?
2. Under the royalty plan compute break-even point in kilograms.
3. Under the royalty plan compute break-even point in dollars.
4. Under the royalty plan determine the sales in kilograms that would be
required to produce net operating income of $90,000.
Ans:
a.
Per kg.
Sales............................
$4.50
100.0%
Variable expense .........
3.00
66.7%
Contribution margin .....
$1.50
33.3%
1. Sales = Variable expenses + Fixed expenses + Target profit
Page 71
$4.50Q = $3.00Q + $120,000 + $0
$1.50Q = $120,000
Q = $120,000 ÷ $1.50 per unit = 80,000 units
2. 80,000 units × $4.50 per unit = $360,000
3. Sales = Variable expenses + Fixed expenses + Target profit
$4.50Q = $3.00Q + $120,000 + $90,000
$1.50Q = $210,000
Q = $210,000 ÷ $1.50 per unit = 140,000 units
4. Margin of safety = Sales − Sales at breakeven = $540,000 − $360,000
= $180,000
b.
1.
As Is
Proposed
Per Unit
Amount
Per Unit
Amount
Sales ...........................
$540,000
$4.50
$540,000
$4.50
Variable expense .........
Contribution margin .....
360,000
180,000
3.00
1.50
372,000
168,000
3.10
1.40
Fixed expense .............
120,000
1.00
100,000
0.83
Net operating income ..
$ 60,000
$0.50
$ 68,000
$0.57
Since net operating income increases by $8,000 the royalty is a good plan,
provided sales remains at the same level.
2. Sales = Variable expenses + Fixed expenses + Target profit
$4.50Q = $3.10Q + $100,000 + $0
$1.40Q = $100,000
Q = $100,000 ÷ $1.40 per unit = 71,429 units
3. 71,429 units × $4.50 unit = $321,429
4. Sales = Variable expenses + Fixed expenses + Target profit
$4.50Q = $3.10Q + $100,000 + $90,000
$1.40Q = $190,000
Q = $190,000 ÷ $1.40 per unit = 135,714 units
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 4; 5; 6 Level: Medium
Page 72
AICPA FN: Reporting
Page 73
126. Shelhorse Corporation produces and sells a single product. Data
concerning that product appear below:
Selling price...................
Variable expenses.........
Contribution margin .......
Per Unit
$140
56
$ 84
Percent of Sales
100%
40%
60%
Fixed expenses are $275,000 per month. The company is currently selling 4,000
units per month.
Required:
The marketing manager believes that a $13,000 increase in the monthly
advertising budget would result in a 150 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!
Ans:
Increase in total contribution margin ($84 per unit × 150
units) ............................................................................... $12,600
Less incremental fixed expenses ....................................... 13,000
Change in net operating income ......................................... ($ 400)
AACSB: Analytic
LO: 4 Level: Easy
127.
AICPA BB: Critical Thinking
AICPA FN: Reporting
Data concerning Cavaluzzi Corporation's single product appear below:
Selling price ...................
Variable expenses .........
Contribution margin .......
Per Unit
$110
44
$ 66
Percent of Sales
100%
40%
60%
Fixed expenses are $440,000 per month. The company is currently selling 8,000
units per month.
Required:
The marketing manager believes that a $8,000 increase in the monthly
advertising budget would result in a 150 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!
Page 74
Ans:
Increase in total contribution margin ($66 per unit × 150 units)
$9,900
Less incremental fixed expenses .............................................
8,000
Change in net operating income ..............................................
$1,900
AACSB: Analytic
LO: 4 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
128. Naumann Corporation produces and sells a single product. Data
concerning that product appear below:
Selling price...................
Variable expenses.........
Contribution margin .......
Per Unit
$100
30
$ 70
Percent of Sales
100%
30%
70%
Fixed expenses are $234,000 per month. The company is currently selling 4,000
units per month.
Required:
Management is considering using a new component that would increase the unit
variable cost by $7. 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!
Ans:
New variable cost per unit ($30 + $7) .................................
New contribution margin per unit ($100 − $37) ...................
New unit monthly sales (4,000 units + 500 units) ................
$37
$63
4,500
New total contribution margin: 4,500 units × $63 per unit ...
$283,500
Current total contribution margin: 4,000 units × $70 per unit
280,000
Change in total contribution margin and in net operating income
$ 3,500
Page 75
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.
AACSB: Analytic
LO: 4 Level: Easy
129.
AICPA BB: Critical Thinking
AICPA FN: Reporting
Data concerning Milian Corporation's single product appear below:
Per Unit
$130
39
$ 91
Selling price ...................
Variable expenses .........
Contribution margin .......
Percent of Sales
100%
30%
70%
Fixed expenses are $66,000 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 $15. 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!
Ans:
New variable cost per unit ($39 + $15)....................................
New contribution margin per unit ($130 − $54) .......................
New unit monthly sales (1,000 units + 200 units) ....................
$54
$76
1,200
New total contribution margin: 1,200 units × $76 per unit .......
$91,200
Current total contribution margin: 1,000 units × $91 per unit ...
91,000
Change in total contribution margin and in net operating income
.............................................................................................
$ 200
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.
AACSB: Analytic
LO: 4 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
130. Bethard Corporation produces and sells a single product. Data concerning
that product appear below:
Page 76
Selling price ...................
Variable expenses .........
Contribution margin .......
Per Unit
$120
24
$ 96
Percent of Sales
100%
20%
80%
Fixed expenses are $354,000 per month. The company is currently selling 5,000
units per month.
Required:
The marketing manager would like to cut the selling price by $8 and increase the
advertising budget by $23,000 per month. The marketing manager predicts that
these two changes would increase monthly sales by 600 units. What should be
the overall effect on the company's monthly net operating income of this change?
Show your work!
Ans:
New selling price ($120 − $8)..........................................
New contribution margin ($112 − $24) ............................
New unit monthly sales (5,000 units + 600 units) ............
$112
$88
5,600
New total contribution margin: 5,600 units × $88 per unit
$492,800
Present total contribution margin: 5,000 units × $96 per unit
Change in total contribution margin.................................
Less increase in advertising budget ................................
Change in net operating income .....................................
480,000
12,800
23,000
($10,200)
AACSB: Analytic
LO: 4 Level: Easy
131.
AICPA BB: Critical Thinking
AICPA FN: Reporting
Data concerning Neuner Corporation's single product appear below:
Selling price...................
Variable expenses .........
Contribution margin .......
Per Unit
$220
88
$132
Percent of Sales
100%
40%
60%
Fixed expenses are $425,000 per month. The company is currently selling 4,000
units per month.
Required:
Page 77
The marketing manager would like to cut the selling price by $11 and increase
the advertising budget by $23,700 per month. The marketing manager predicts
that these two changes 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!
Ans:
New selling price ($220 − $11).............................................
New contribution margin ($209 − $88) .................................
New unit monthly sales (4,000 units + 400 units) .................
$209
$121
4,400
New total contribution margin: 4,400 units × $121 per unit ..
$532,400
Present total contribution margin: 4,000 units × $132 per unit
Change in total contribution margin......................................
Less increase in advertising budget .....................................
Change in net operating income ..........................................
528,000
4,400
23,700
($19,300)
AACSB: Analytic
LO: 4 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
132. Hamiel Corporation produces and sells a single product. Data concerning
that product appear below:
Selling price ...................
Variable expenses .........
Contribution margin .......
Per Unit
$240
168
$72
Percent of Sales
100%
70%
30%
Fixed expenses are $301,000 per month. The company is currently selling 5,000
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 $16 per unit. In exchange, the sales staff would accept an overall decrease in
their salaries of $68,000 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!
Ans:
Page 78
New contribution margin ($72 − $16) .................................
New unit monthly sales (5,000 units + 200 units) ...............
$56
5,200
New total contribution margin: 5,200 units × $56 per unit ..
$291,200
Present total contribution margin: 5,000 units × $72 per unit
Change in total contribution margin....................................
Plus savings in salespersons’ salaries ...............................
Change in net operating income ........................................
360,000
(68,800)
68,000
($ 800)
AACSB: Analytic
LO: 4 Level: Easy
133.
AICPA BB: Critical Thinking
AICPA FN: Reporting
Data concerning Wislocki Corporation's single product appear below:
Per Unit
$130
26
$104
Selling price ...................
Variable expenses..........
Contribution margin ........
Percent of Sales
100%
20%
80%
Fixed expenses are $466,000 per month. The company is currently selling 6,000
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 $11 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 100 units. What
should be the overall effect on the company's monthly net operating income of
this change? Show your work!
Ans:
New contribution margin ($104 − $11) ...............................
New unit monthly sales (6,000 units + 100 units) ...............
$93
6,100
New total contribution margin: 6,100 units × $93 per unit ..
$567,300
Present total contribution margin: 6,000 units × $104 per unit
Change in total contribution margin....................................
Plus savings in salespersons’ salaries ...............................
624,000
(56,700)
55,000
Page 79
Change in net operating income ........................................
AACSB: Analytic
LO: 4 Level: Easy
AICPA BB: Critical Thinking
($ 1,700)
AICPA FN: Reporting
134. Merlin Enterprises manufactures a cellular telephone. The company's
partial contribution format income statement for the most recent year is below.
Sales .............................
Variable expenses .........
Contribution margin .......
Fixed expenses .............
Net operating income ....
Total
Per Unit
$300,000
$60
Ratio
55%
108,000
Required:
a. Complete the contribution income statement above.
b. Determine the breakeven sales and units using either the equation or the
contribution approach.
c. Determine the sales necessary to earn a profit of $54,000.
d. Determine the margin of safety percentage for the year above.
Ans:
a. Variable expenses = 0.55 × $300,000 = $165,000
Variable expenses per unit = 0.55 × $60 = $33
Total
Per Unit
Ratio
Sales .............................
$300,000
$60
100%
Variable expenses.........
Contribution margin .......
165,000
135,000
33
$27
55%
45%
Fixed expenses .............
108,000
Net operating income ....
$ 27,000
b. Break-even in unit sales = $108,000/$27 per unit = 4,000 units
Break-even in dollar sales = $108,000/0.45 = $240,000
Page 80
c. Dollar sales to attain target profit = ($108,000 + $54,000)/0.45 = $360,000
d. Margin of safety = $300,000 − $240,000 = $60,000
Margin of safety percentage = $60,000/$300,000 = 20%
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 5; 6; 7 Level: Easy
AICPA FN: Reporting
135. Frisch Corporation produces and sells a single product. Data concerning
that product appear below:
Selling price per unit ......
$170.00
Variable expense per unit
$83.30
Fixed expense per month
$138,720
Required:
Determine the monthly break-even in either unit or total dollar sales. Show your
work!
Ans:
Per Unit
Selling price per unit .....................................................
$170.00
Variable expense per unit .............................................
83.30
Contribution margin per unit and contribution margin ratio
...................................................................................
$ 86.70
Percent
of Sales
100%
49%
51%
Break-even in unit sales = Fixed expenses/Unit contribution margin
= $138,720/$86.70 = 1,600
Break-even in total sales dollars = Fixed expenses/CM ratio
= $138,720/0.51 = $272,000
AACSB: Analytic
LO: 5 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
136. Hamernik, Inc., produces and sells a single product whose selling price is
$240.00 per unit and whose variable expense is $72.00 per unit. The
company's fixed expense is $372,960 per month.
Page 81
Required:
Determine the monthly break-even in either unit or total dollar sales. Show your
work!
Ans:
Percent
Per Unit of Sales
Selling price per unit .....................................................
$240.00 100%
Variable expense per unit .............................................
72.00
30%
Contribution margin per unit and contribution margin ratio
...................................................................................
$168.00 70%
Break-even in unit sales = Fixed expenses/Unit contribution margin
= $372,960/$168 = 2,220
Break-even in total sales dollars = Fixed expenses/CM ratio
= $372,960/0.70 = $532,800
AACSB: Analytic
LO: 5 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
137. Yamakawa Corporation produces and sells a single product. Data
concerning that product appear below:
Selling price per unit.................
Variable expense per unit ........
$200.00
$64.00
Fixed expense per month .........
$670,480
Required:
Determine the monthly break-even in unit sales. Show your work!
Ans:
Selling price per unit .................
$200.00
Variable expense per unit .........
64.00
Contribution margin per unit .....
$136.00
Page 82
Break-even in unit sales = Fixed expenses/Unit contribution margin
= $670,480/$136 = 4,930
AACSB: Analytic
LO: 5 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
138. Liz, Inc., produces and sells a single product. The product sells for
$130.00 per unit and its variable expense is $48.10 per unit. The company's
monthly fixed expense is $223,587.
Required:
Determine the monthly break-even in unit sales. Show your work!
Ans:
Selling price per unit .................
$130.00
Variable expense per unit.........
48.10
Contribution margin per unit .....
$ 81.90
Break-even in unit sales = Fixed expenses/Unit contribution margin
= $223,587/$81.90 = 2,730
AACSB: Analytic
LO: 5 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
139. Cleghorn Corporation produces and sells a single product. Data
concerning that product appear below:
Selling price per unit .................
Variable expense per unit .........
$160.00
$70.40
Fixed expense per month .........
$153,216
Required:
Determine the monthly break-even in total dollar sales. Show your work!
Ans:
Selling price per unit ......................................................
Page 83
Per Unit
$160.00
Percent
of Sales
100%
Variable expense per unit ..............................................
70.40
Contribution margin per unit and contribution margin ratio
....................................................................................
$ 89.60
44%
56%
Break-even in total sales dollars = Fixed expenses/CM ratio
= $153,216/0.56 = $273,600
AACSB: Analytic
LO: 5 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
140. Malensek International, Inc., produces and sells a single product. The
product sells for $240.00 per unit and its variable expense is $55.20 per unit.
The company's monthly fixed expense is $249,480.
Required:
Determine the monthly break-even in total dollar sales. Show your work!
Ans:
Per Unit
Selling price per unit ......................................................
$240.00
Variable expense per unit ..............................................
55.20
Contribution margin per unit and contribution margin ratio
....................................................................................
$184.80
Percent
of Sales
100%
23%
77%
Break-even in total sales dollars = Fixed expenses/CM ratio
= $249,480/0.77 = $324,000
AACSB: Analytic
LO: 5 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
141. Brihon Corporation produces and sells a single product. Data concerning
that product appear below:
Selling price per unit .................
Variable expense per unit .........
$230.00
$103.50
Fixed expense per month .........
$518,650
Required:
a. Assume the company's monthly target profit is $12,650. Determine the unit
sales to attain that target profit. Show your work!
Page 84
b. Assume the company's monthly target profit is $63,250. Determine the dollar
sales to attain that target profit. Show your work!
Ans:
Per Unit
Percent of Sales
Selling price per unit ...................................
Variable expense per unit ...........................
$230.00
103.50
100%
45%
Contribution margin per unit and CM ratio ..
$126.50
55%
a. Unit sales to attain target profit
= (Fixed expenses + Target profit)/Unit contribution margin
= ($518,650 + $12,650)/$126.50 = 4,200
b. Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($518,650 + $63,250)/0.55 = $1,058,000
AACSB: Analytic
LO: 6 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
142. Rachal Corporation produces and sells a single product whose selling
price is $150.00 per unit and whose variable expense is $57.00 per unit. The
company's monthly fixed expense is $381,300.
Required:
a. Assume the company's monthly target profit is $9,300. Determine the unit
sales to attain that target profit. Show your work!
b. Assume the company's monthly target profit is $18,600. Determine the dollar
sales to attain that target profit. Show your work!
Ans:
Selling price per unit ...................................
Variable expense per unit ...........................
Contribution margin per unit and CM ratio ..
Per Unit
Percent of Sales
$150.00
57.00
$ 93.00
100%
38%
62%
a. Unit sales to attain target profit
= (Fixed expenses + Target profit)/Unit contribution margin
Page 85
= ($381,300 + $9,300)/$93.00 = 4,200
b. Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($381,300 + $18,600)/0.62 = $645,000
AACSB: Analytic
LO: 6 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
143. Hawver Corporation produces and sells a single product. Data concerning
that product appear below:
Selling price per unit .................
Variable expense per unit.........
$180.00
$81.00
Fixed expense per month .........
$594,000
Required:
Assume the company's monthly target profit is $19,800. Determine the unit sales
to attain that target profit. Show your work!
Ans:
Selling price per unit ................
$180.00
Variable expense per unit ........
81.00
Contribution margin per unit.....
$ 99.00
Unit sales to attain target profit
= (Fixed expenses + Target profit)/Unit contribution margin
= ($594,000 + $19,800)/$99.00 = 6,200
AACSB: Analytic
LO: 6 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
144. The selling price of Old Corporation's only product is $180.00 per unit and
its variable expense is $37.80 per unit. The company's monthly fixed expense
is $483,480.
Required:
Assume the company's monthly target profit is $56,880. Determine the unit sales
to attain that target profit. Show your work!
Page 86
Ans:
Selling price per unit ................
$180.00
Variable expense per unit ........
37.80
Contribution margin per unit .....
$142.20
Unit sales to attain target profit
= (Fixed expenses + Target profit)/Unit contribution margin
= ($483,480 + $56,880)/$142.20 = 3,800
AACSB: Analytic
LO: 6 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
145. Bussy Corporation produces and sells a single product whose contribution
margin ratio is 54%. The company's monthly fixed expense is $561,600 and
the company's monthly target profit is $34,560.
Required:
Determine the dollar sales to attain the company's target profit. Show your work!
Ans:
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($561,600 + $34,560)/0.54 = $1,104,000
AACSB: Analytic
LO: 6 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
146. The contribution margin ratio of Kuck Corporation's only product is 75%.
The company's monthly fixed expense is $585,000 and the company's
monthly target profit is $11,250.
Required:
Determine the dollar sales to attain the company's target profit. Show your work!
Ans:
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
Page 87
= ($585,000 + $11,250)/0.75 = $795,000
AACSB: Analytic
LO: 6 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
147. Knezevich Corporation makes a product that sells for $230 per unit. The
product's current sales are 36,900 units and its break-even sales are 32,103
units.
Required:
Compute the margin of safety in both dollars and as a percentage of sales.
Ans:
Sales (at the current volume of 36,900 units) (a) ....
$8,487,000
Break-even sales (at 32,103 units) .........................
7,383,690
Margin of safety (in dollars) (b) ...............................
Margin of safety as a percentage of sales, (b) ÷ (a)
$1,103,310
13%
AACSB: Analytic
LO: 7 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
148. Dickus Corporation's only product sells for $100 per unit. Its current sales
are 35,600 units and its break-even sales are 29,192 units.
Required:
Compute the margin of safety in both dollars and as a percentage of sales.
Ans:
Sales (at the current volume of 35,600 units) (a) ....
$3,560,000
Break-even sales (at 29,192 units) .........................
2,919,200
Margin of safety (in dollars) (b) ...............................
Margin of safety as a percentage of sales, (b) ÷ (a)
$ 640,800
18%
AACSB: Analytic
LO: 7 Level: Easy
149.
AICPA BB: Critical Thinking
AICPA FN: Reporting
Haslem Inc. has provided the following data concerning its only product:
Page 88
Selling price...................
$100 per unit
Current sales .................
37,300 units
Break-even sales ..........
26,483 units
Required:
Compute the margin of safety in both dollars and as a percentage of sales.
Ans:
Sales (at the current volume of 37,300 units) (a) ....
Break-even sales (at 26,483 units) .........................
$3,730,000
2,648,300
Margin of safety (in dollars) (b) ...............................
Margin of safety as a percentage of sales, (b) ÷ (a)
$1,081,700
29%
AACSB: Analytic
LO: 7 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
150. Mcquage Corporation has provided its contribution format income
statement for July.
Sales ........................................
$558,000
Variable expenses....................
Contribution margin ..................
306,900
251,100
Fixed expenses ........................
209,800
Net operating income ...............
$ 41,300
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 19% increase in sales.
Ans:
a. Degree of operating leverage = Contribution margin/Net operating income
= $251,100/$41,300 = 6.08
Page 89
b. Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 19% × 6.08 = 115.52%
AACSB: Analytic
LO: 8 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
151. Lubke Corporation's contribution format income statement for the most
recent month follows:
Sales .............................
$506,000
Variable expenses .........
Contribution margin .......
236,500
269,500
Fixed expenses .............
241,700
Net operating income ....
$ 27,800
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 3% increase in sales.
Ans:
a. Degree of operating leverage = Contribution margin/Net operating income
= $269,500/$27,800 = 9.69
b. Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 3% × 9.69 = 29.07%
AACSB: Analytic
LO: 8 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
152. In the most recent month, Sardella Corporation's total contribution margin
was $46,200 and its net operating income $13,200.
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 10% increase in sales.
Page 90
Ans:
a. Degree of operating leverage = Contribution margin/Net operating income
= $46,200/$13,200 = 3.50
b. Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 10% × 3.50 = 35.00%
AACSB: Analytic
LO: 8 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
153. Brancati Inc. produces and sells two products. Data concerning those
products for the most recent month appear below:
Sales..............................
Variable expenses .........
Product W07C
$25,000
$7,000
Product B29Z
$27,000
$8,600
Fixed expenses for the entire company were $32,860.
Required:
a. Determine the overall break-even point for the company. Show your work!
b. If the sales mix shifts toward Product W07C with no change in total sales,
what will happen to the break-even point for the company? Explain.
Ans:
a.
Product W07C
Product B29Z
Total
Sales ...........................
$25,000
$27,000
$52,000
Variable expenses.......
Contribution margin .....
7,000
$18,000
8,600
$18,400
15,600
36,400
Fixed expenses ...........
32,860
Net operating income ..
$ 3,540
Overall CM ratio = Total contribution margin/Total sales
= $36,400/$52,000 = 0.70
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $32,860/0.70 = $46,943
Page 91
b.
Sales (a) ......................
Contribution margin (b)
CM ratio (b)÷(a) ...........
Product W07C
$25,000
$18,000
0.720
Product B29Z
$27,000
$18,400
0.681
Since Product W07C’s CM ratio is greater than Product B29Z’s, a shift in the
sales mix toward Product W07C will result in a decrease in the company’s overall
break-even point.
AACSB: Analytic
LO: 9 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
154. Veren Inc. produces and sells two products. During the most recent
month, Product F73A's sales were $27,000 and its variable expenses were
$9,450. Product L75P's sales were $14,000 and its variable expenses were
$5,310. The company's fixed expenses were $21,060.
Required:
a. Determine the overall break-even point for the company. Show your work!
b. If the sales mix shifts toward Product F73A with no change in total sales, what
will happen to the break-even point for the company? Explain.
Ans:
a.
Product F73A
Product L75P
Total
Sales ............................
$27,000
$14,000
$41,000
Variable expenses .......
Contribution margin......
9,450
$17,550
5,310
$ 8,690
14,760
26,240
Fixed expenses ............
21,060
Net operating income ...
$ 5,180
Overall CM ratio = Total contribution margin/Total sales
= $26,240/$41,000 = 0.64
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $21,060/0.64 = $32,906
b.
Product F73A
Page 92
Product L75P
Sales (a) .....................
Contribution margin (b)
CM ratio (b)÷(a) ..........
$27,000
$17,550
0.650
$14,000
$8,690
0.621
Since Product F73A’s CM ratio is greater than Product L75P’s, a shift in the sales
mix toward Product F73A will result in a decrease in the company’s overall
break-even point.
AACSB: Analytic
LO: 9 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
Reference
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc
For further discussion please refer to the link provided:
Chapter 4- Cost-Volume-Profit (CVP) Analysis- Break-even Point-https://youtu.be/jbE2casrNW4
Chapter 4- Cost-Volume-Profit (CVP) Analysis (Multi-Product Break-Even Analysis)https://youtu.be/ucLZGDETk4Y
Chapter 4- Target Profit Analysis in Terms of Unit Sales https://youtu.be/MgY8Y7gRXK0
Page 93
CHAPTER 3 COST-VOLUME-PROFIT RELATIONSHIPS
Learning Objectives
 Explain how changes in activity affect contribution margin and net operating
income.
 Prepare and interpret a cost-volume-profit (CVP) graph.
 Use the contribution margin ratio (CM ratio) to compute changes in contribution
margin and net operating income resulting from changes in sales volume.
Basics of Cost-Volume-Profit Analysis
The Contribution Approach
Page 1
Page 2
Page 3
CVP Relationships in Equation Form
Preparing the CVP Graph
Page 4
Page 5
Contribution Margin Ratio (CM Ratio)
Page 6
The Formula Method
Target Profit Analysis in Terms of Unit Sales
Break-even in Unit Sales: Equation Method
Page 7
Break-even in Dollar Sales: Formula Method
The Margin of Safety in Dollars
The margin of safety in dollars is the excess of budgeted (or actual) sales over the
break-even volume of sales.
Margin of safety in dollars = Total sales - Break-even sales
Let’s look at Racing Bicycle Company and determine the margin of safety
Operating Leverage
Operating leverage is a measure of how sensitive net operating income is to
percentage changes in sales. It is a measure, at any given level of sales, of how a
percentage change in sales volume will affect profits.
Key Assumptions of CVP Analysis
1. Selling price is constant.
Page 8
2. Costs are linear and can be accurately divided into variable (constant per unit) and
fixed (constant in total) elements.
3. In multiproduct companies, the sales mix is constant.
4. In manufacturing companies, inventories do not change (units produced = units
sold)
Reference
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc
For further discussion please refer to the link provided:
Chapter 3- Cost Volume Profit Analysis Overview- https://youtu.be/17rqfXoqrxo
Chapter 3- Preparing Break Even Analysis Graph- https://youtu.be/aUnTVNzZwCw
Chapter 3-Operating Leverage: Calculation and Meaning- https://youtu.be/iQI2pTh-5rA
Page 9
CHAPTER 2 COST BEHAVIOR: ANALYSIS AND USE PROBLEM DISCUSSION
Learning Objectives:
Perform the basic operations of cost behavior.
Learn to analyze problems.
Applying the methods of accounting for analysis and use.
True/False Questions
1. The high and low points used in the high-low method tend to be unusual and
therefore the cost formula may not accurately represent all of the data.
Ans: True
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
2. Contribution margin and gross margin mean the same thing.
Ans: False
AACSB: Reflective Thinking
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Medium
3. Contribution margin equals revenue minus all variable costs.
Ans: True
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
4. The traditional income statement organizes costs on the basis of cost
behavior.
Ans: False
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement LO: 4 Level: Easy
5. It is necessary to break mixed costs into their variable and fixed cost
components in order to construct an income statement using the contribution
approach.
Ans: True
AACSB: Reflective Thinking
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
Multiple Choice Questions
1. Carcia Corporation has provided the following production and average cost
data for two levels of monthly production volume. The company produces a
Page 1
single product.
Production volume ...................
6,000 units
7,000 units
Direct materials ........................
$89.40 per unit
$89.40 per unit
Direct labor...............................
$11.20 per unit
$11.20 per unit
Manufacturing overhead ..........
$107.70 per unit
$95.70 per unit
The best estimate of the total cost to manufacture 6,300 units is closest to:
A) $1,274,490
B) $1,287,090
C) $1,312,290
D) $1,236,690
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1,3 Level: Hard
AICPA BB: Critical Thinking
Solution:
To calculate the variable manufacturing cost per unit:
High activity level ...
Production
Volume
(Units)
7,000
Low activity level ....
6,000
Average
Cost per
Unit
$95.70
$107.70
Total
Manufacturing
Overhead Cost (units ×
average cost per unit)
$669,900
$646,200
Variable
manufacturing
overhead
= Change in cost ÷ Change in activity
= ($669,900 − $646,200) ÷ (7,000 – 6,000) = $23.70
Fixed
cost
element
of
= Total cost − Variable cost element
= $669,900 − ($23.70 × 7,000) = $504,000
Direct materials .............................
Direct labor....................................
Variable manufacturing overhead .
manufacturing
cost
overhead
Per
Unit Number of
Units
Cost
Total Cost
6,300
$89.40
$ 563,220
6,300
$11.20
70,560
6,300
$23.70
149,310
Page 2
Fixed manufacturing overhead......
Total cost to manufacture 6,300 units
504,000
$1,287,090
2. Daar Corporation has provided the following production and total cost data for
two levels of monthly production volume. The company produces a single
product.
Production volume ....................
Direct materials .........................
Direct labor ...............................
Manufacturing overhead ...........
2,000 units
$188,400
$91,800
$110,400
3,000 units
$282,600
$137,700
$127,800
The best estimate of the total monthly fixed manufacturing cost is:
A) $75,600
B) $390,600
C) $469,350
D) $548,100
Ans: A
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
To calculate the variable manufacturing cost per unit:
High activity level ...
Low activity level ....
Production
Volume
(Units)
3,000
2,000
Total
Manufacturing
Overhead Cost
$127,800
$110,400
Variable
manufacturing
overhead
= Change in cost ÷ Change in activity
= ($127,800 − $110,400) ÷ (3,000 – 2,000) = $17.40
Fixed
cost
element
of
= Total cost − Variable cost element
= $127,800 − ($17.40 × 3,000) = $75,600
manufacturing
cost
overhead
3. Edde Corporation has provided the following production and total cost data for
two levels of monthly production volume. The company produces a single
product.
Page 3
Production volume ....................
Direct materials .........................
Direct labor ...............................
Manufacturing overhead ...........
4,000 units
$291,200
$219,600
$320,400
5,000 units
$364,000
$274,500
$343,000
The best estimate of the total variable manufacturing cost per unit is:
A) $127.70
B) $150.30
C) $22.60
D) $72.80
Ans: B
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Direct material cost per unit = $291,200 ÷ 4,000 = $72.80
(Alternatively, direct material cost per unit = $364,000 ÷ 5,000 = $72.80)
Direct labor cost per unit = $219,600 ÷ 4,000 = $54.90
(Alternatively, direct labor cost per unit = $274,500 ÷ 5,000 = $54.90)
Variable manufacturing overhead cost = Change in cost ÷ Change in activity
= ($343,000 − $320,400) ÷ (5,000 – 4,000) = $22.60
Total variable manufacturing cost per unit = $72.80 + $54.90 + $22.60 = $150.30
4. The Frandsen Company has estimated the following cost formulas for
overhead:
Cost Formula
Lubricants ...........
$1,500 plus $0.50 per machine-hour
Utilities ................
Depreciation ........
$2,000 plus $0.60 per machine-hour
$1,000
Maintenance .......
Machine setup.....
$200 plus $0.10 per machine-hour
$0.30 per machine-hour
Based on these cost formulas, the total overhead cost expected at an activity
level of 300 machine hours is:
A) $4,950
B) $5,000
Page 4
C)
D)
$4,700
$5,150
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable
Cost
Portion
Total Cost
$1,500
$150
$1,650
$2,000
$1,000
$180
2,180
1,000
$200
$30
230
$90
90
$5,150
Fixed
Cost
Portion
Lubricants
(variable cost = $0.50 × 300) ...
Utilities
(variable cost = $0.60 × 300) ...
Depreciation................................
Maintenance
(variable cost = $0.10 × 300) ...
Machine
setup
(variable cost = $0.30 × 300) ...
Total cost ....................................
5. Vicuna Wool Company manufactures and sells sweaters. Last year, Vicuna
operated at 100% of capacity and had the following cost formula for total
manufacturing costs:
Y = $50,000 + $400X
Assuming no change in cost structure, what would Vicuna's cost formula have
been last year if they only operated at 90% of production capacity?
A) Y = $45,000 + $360X
B) Y = $45,000 + $400X
C) Y = $50,000 + $360X
D) Y = $50,000 + $400X
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
6. Maintenance costs at a Straiton Corporation factory are listed below:
March ..................
April ....................
May .....................
Machine-Hours
3,627
3,588
3,637
Page 5
Maintenance Cost
$54,384
$53,980
$54,453
June ....................
July .....................
August ................
September ..........
October ...............
November ...........
3,638
3,572
3,611
3,644
3,609
3,669
$54,491
$53,843
$54,196
$54,550
$54,181
$54,767
Management believes that maintenance cost is a mixed cost that depends on
machine-hours. Using the high-low method to estimate the variable and fixed
components of this cost, these estimates would be closest to:
A) $0.10 per machine-hour; $54,382 per month
B) $15.00 per machine-hour; $54,316 per month
C) $9.12 per machine-hour; $21,309 per month
D) $9.53 per machine-hour; $19,801 per month
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($54,767 − $53,843) ÷ (3,669 − 3,572) = $9.53
Fixed cost element = Total cost − Variable cost element
= $54,767 − ($9.53 × 3,669) = $19,801
Therefore, the cost formula for total maintenance cost is $19,801 per period plus
$9.53 per machine-hour, or Y = $19,801 + $9.53X
7. Supply costs at Coulthard Corporation's chain of gyms are listed below:
March ..................
April .....................
May .....................
June ....................
July......................
August .................
September...........
October ...............
November............
Client-Visits
12,855
12,283
13,104
12,850
12,493
12,794
12,686
12,765
13,018
Supply Cost
$23,598
$23,278
$23,742
$23,607
$23,415
$23,562
$23,496
$23,541
$23,687
Management believes that supply cost is a mixed cost that depends on clientvisits. Using the high-low method to estimate the variable and fixed components
of this cost, those estimates would be closest to:
Page 6
A)
B)
C)
D)
$1.85 per client-visit; $23,547 per month
$1.77 per client-visit; $557 per month
$0.55 per client-visit; $16,579 per month
$0.57 per client-visit; $16,273 per month
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($23,742 − $23,278) ÷ (13,104 − 12,283) = $0.57
Fixed cost element = Total cost − Variable cost element
= $23,742 − ($0.57 × 13,104) = $16,273
Therefore, the cost formula for total maintenance cost is $16,273 per period plus
$0.57 per client visit, or Y = $16,273 + $0.57X
8. A jewelry manufacturer incurred the following costs: 15,000 units produced
with costs of $557,500, and 5,000 units produced with costs of $292,500.
Which cost formula would you estimate using the high-low method?
A) Y=$265,000+$37.17X
B) Y=$160,000+$17.67X
C) Y=$265,000+$58.50X
D) Y=$160,000+$26.50X
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($557,500 − $292,500) ÷ (15,000 − 5,000) = $26.50
Fixed cost element = Total cost − Variable cost element
= $557,500 − ($26.50 × 15,000) = $160,000
Therefore, the cost formula for total utility cost is $160,000 per period plus $26.50
per unit, or Y = $160,000 + $26.50X
9. Gudwill Corporation, a manufacturing company, has provided the following
financial data for April:
Page 7
Sales ..................................................
Variable production expense ..............
Variable selling expense .....................
Variable administrative expense .........
Fixed production expense...................
Fixed selling expense .........................
Fixed administrative expense .............
$340,000
$43,000
$21,000
$33,000
$62,000
$67,000
$88,000
The company had no beginning or ending inventories. The contribution margin
for April was:
A) $243,000
B) $235,000
C) $26,000
D) $123,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales ..................................................
Less variable expenses:
Variable production expense ...........
Variable selling expense ..................
$340,000
Variable administrative expense ......
33,000
Contribution margin ............................
$243,000
43,000
21,000
10. The management of Bushovisky Corporation, a manufacturing company, has
provided the following financial data for January:
Sales...................................................
Variable production expense ..............
Fixed production expense...................
Variable selling expense .....................
Fixed selling expense .........................
Variable administrative expense .........
Fixed administrative expense .............
The contribution margin for January was:
A) $15,000
B) $152,000
Page 8
$230,000
$31,000
$47,000
$19,000
$27,000
$26,000
$65,000
C)
D)
$91,000
$154,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
AICPA BB: Critical Thinking
Solution:
Sales ...................................................
Less variable expenses:
Variable production expense ............
Variable selling expense ...................
$230,000
Variable administrative expense .......
26,000
Contribution margin .............................
$154,000
31,000
19,000
11. The management of Gilmartin Corporation, a manufacturing company, has
provided the following data for February:
Sales ...................................................
$550,000
Variable production expense ...............
$104,000
Fixed production expense ...................
Variable selling expense .....................
$122,000
$24,000
Fixed selling expense ..........................
Variable administrative expense .........
$102,000
$56,000
Fixed administrative expense ..............
$116,000
The contribution margin for February was:
A) $366,000
B) $210,000
C) $26,000
D) $324,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Page 9
AICPA BB: Critical Thinking
Sales...................................................
Less variable expenses:
Variable production expense ...........
Variable selling expense ..................
$550,000
Variable administrative expense ......
56,000
Contribution margin ............................
$366,000
104,000
24,000
12. Stuart Company is a merchandising company. During the next month, the
company expects to sell 450 units. The company has the following revenue
and cost structure:
Selling price per unit ......
Cost per unit ..................
Sales commission ..........
$230
$120
12% of sales
Advertising expense.......
$18,000 per month
Administrative expense ..
$32,500 per month
What is the expected contribution margin next month?
A) $66,420
B) $37,080
C) $50,500
D) $53,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales ($230 × 450) .......................................
Less variable expenses:
Variable production expense ($120 × 450)
$103,500
Sales commissions (12% × $103,500) ......
12,420
Contribution margin ......................................
$ 37,080
54,000
13. Farah Corporation has provided the following production and total cost data
Page 10
for two levels of monthly production volume. The company produces a single
product.
Production volume ....................
Direct materials .........................
Direct labor ...............................
Manufacturing overhead ...........
2,000 units
$146,200
$37,200
$146,600
3,000 units
$219,300
$55,800
$158,100
The best estimate of the total cost to manufacture 2,300 units is closest to:
A) $332,120
B) $379,500
C) $355,810
D) $360,960
Ans: D
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
To calculate the variable manufacturing cost per unit:
High activity level ...
Low activity level ....
Production
Volume
(Units)
3,000
2,000
Total
Manufacturing
Overhead Cost
$158,100
$146,600
Variable
manufacturing
overhead
= Change in cost ÷ Change in activity
= ($158,100 − $146,600) ÷ (3,000 – 2,000) = $11.50
Fixed
cost
element
of
= Total cost − Variable cost element
= $158,100 − ($11.50 × 3,000) = $123,600
manufacturing
Per
Unit
Cost
$73.10*
$18.60**
$11.50
Direct materials .............................
Direct labor ....................................
Variable manufacturing overhead..
Fixed manufacturing overhead ......
Total cost to manufacture 2,300 units
*$219,300 ÷ 3,000 units = $73.10 per unit
Page 11
cost
overhead
Number of
Units
Total Cost
2,300
$168,130
2,300
42,780
2,300
26,450
123,600
$360,960
**$55,800 ÷ 3,000 units = $18.60 per unit
14. Gamad Corporation is a wholesaler that sells a single product. Management
has provided the following cost data for two levels of monthly sales volume.
The company sells the product for $131.00 per unit.
Sales volume (units) ......................
4,000
5,000
Cost of sales .................................
$262,800
$328,500
Selling and administrative costs ....
$230,400
$244,500
The best estimate of the total monthly fixed cost is:
A) $174,000
B) $533,100
C) $493,200
D) $573,000
Ans: A
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Variable component of cost of goods sold:
Variable cost = Change in costs/Change in units
Variable cost = ($328,500 − $262,800)/(5,000 − 4,000)
Variable cost = $65.70
Fixed cost:
High volume: $328,500 − $65.70 × 5,000 = $0
Low volume: $262,800 − $65.70 × 4,000 = $0
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($244,500 − $230,400)/(5,000 − 4,000)
Variable cost = $14.10 per unit
Fixed cost:
High volume: $244,500 − $14.10 × 5,000 = $174,000
Low volume: $230,400 − $14.10 × 4,000 = $174,000
Total variable cost per unit:
$65.70 + $14.10 = $79.80
Total fixed cost:
Page 12
$0 + $174,000 = $174,000
15. Harada Corporation is a wholesaler that sells a single product. Management
has provided the following cost data for two levels of monthly sales volume.
The company sells the product for $88.70 per unit.
Sales volume (units) ......................
4,000
5,000
Cost of sales..................................
Selling and administrative costs ....
$273,600
$56,800
$342,000
$68,000
The best estimate of the total variable cost per unit is:
A) $68.40
B) $79.60
C) $82.60
D) $82.00
Ans: B
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Variable component of cost of goods sold:
Variable cost = Change in costs/Change in units
Variable cost = ($342,000 − $273,600)/(5,000 − 4,000)
Variable cost = $68.40 per unit
Fixed cost:
High volume: $342,000 − $68.40 × 5,000 = $0
Low volume: $273,600 − $68.40 × 4,000 = $0
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($68,000 − $56,800)/(5,000 − 4,000)
Variable cost = $11.20
Fixed cost:
High volume: $68,000 − $11.20 × 5,000 = $12,000
Low volume: $56,800 − $11.20 × 4,000 = $12,000
Total variable cost per unit:
$68.40 + $11.20 = $79.60
Total fixed cost:
$0 + $12,000 = $12,000
Page 13
16. A company produces a single product. The following volume and average cost
data for two accounting periods have been provided by management:
Number of units........................
500
800
Direct materials ........................
$2.00
$2.00
Direct labor ..............................
$1.50
$1.50
Manufacturing overhead ..........
$2.50
$1.75
Other overhead ........................
$1.00
$0.625
The best estimate for the cost formula for the total cost of producing and selling
the product (where X is the number of units produced and sold in a period) is:
A) $1,000 + $1.125 X
B) $1,000 + $3.50 X
C) $1,500 + $3.50 X
D) $1,500 + $4.00 X
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
Variable component of manufacturing overhead:
Variable cost = Change in costs/Change in units
Variable cost = ($1,400* − $1,250**)/(800 − 500)
Variable cost = $0.50
*$1.75 × 800 = $1,400
**$2.50 × 500 = $1,250
Fixed cost:
High volume: $1,400 − $0.50 × 800 = $1,000
Low volume: $1,250 − $0.50 × 500 = $1,000
Variable component of other overhead:
Variable cost = Change in costs/Change in units
Variable cost = ($500* − $500**)/(800 − 500)
Variable cost = $0
*$0.625 × 800 = $500
**$1.00 × 500 = $500
Page 14
AICPA BB: Critical Thinking
Source: CIMA, adapted
Fixed cost:
High volume: $500 − $0 × 800 = $500
Low volume: $500 − $0 × 500 = $500
Total variable cost per unit (includes direct material, direct labor, variable
manufacturing overhead, and variable other overhead):
$2.00 + $1.50 + $0.50 + $0 = $4.00
Total fixed cost:
$1,000 + $500 = $1,500
17. The employees at Mobile Sun Lotion Company roam the beaches with a tank
of premium suntan lotion strapped on their backs. For a $2 charge, the
employees will spray sunbathers with suntan lotion. Last year, Mobile sprayed
250,000 customers and incurred the following costs:
Total variable costs .......
$175,000
Total fixed costs ............
50,000
Total costs .....................
$225,000
Assuming that this activity is within the relevant range, what would Mobile's total
contribution margin have been last year if only 240,000 customers were
sprayed?
A) $255,000
B) $262,000
C) $305,000
D) $312,000
Ans: D
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,4 Level: Medium
Solution:
Variable cost per unit: $175,000 ÷ 250,000 customers = $0.70 per customer
Sales ($2 × 240,000)................................... $480,000
Variable costs ($0.70 × 240,000) ................ 168,000
Contribution margin ..................................... $312,000
18. The following costs are budgeted for Ghana Corporation for next year:
Total variable costs ........
$350,000
Page 15
Total fixed costs .............
240,000
Total costs .....................
$590,000
The costs above are based on a level of activity of 10,000 units. Assuming that
this activity is within the relevant range, what would total costs be for Ghana if the
level of activity was 12,000 units?
A) $590,000
B) $638,000
C) $660,000
D) $708,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
AICPA BB: Critical Thinking
Solution:
Variable cost per unit: $350,000 ÷ 10,000 units = $35 per unit
The cost function is:
Y = $240,000 + $35X
Y = $240,000 + $35(12,000)
Y = $660,000
19. The following costs are budgeted for Harlow Corporation for next year:
Total variable costs ........
$270,000
Total fixed costs .............
630,000
Total costs......................
$900,000
The costs above are based on a level of activity of 20,000 units. Assuming that
this activity is within the relevant range, what would total cost per unit be for
Harlow if the level of activity was only 18,000 units?
A) $45.00
B) $46.50
C) $48.50
D) $50.00
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Page 16
AICPA BB: Critical Thinking
Variable cost per unit: $270,000 ÷ 20,000 units = $13.50 per unit
The cost function is:
Y = $630,000 + $13.50X
Y = $630,000 + $13.50(18,000)
Y = $873,000
Total cost ÷ number of units = total cost per unit
$873,000 ÷ 18,000 = $48.50
20. Cranbrook Company has the following data for the month of March:
Sales ...................................................
Fixed manufacturing overhead ............
Direct labor ..........................................
Fixed selling expense ..........................
Variable manufacturing overhead........
Variable administrative expense..........
Direct materials ...................................
Fixed administrative expense ..............
Variable selling expense .....................
$30,000
$5,500
$7,250
$4,625
$4,100
$4,800
$5,150
$4,450
$4,975
Assume that direct labor is variable and all units are produced and sold in the
same month. What was the total contribution margin in March for Cranbrook
Company?
A) $3,725
B) $8,875
C) $15,425
D) $16,125
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Medium
AICPA BB: Critical Thinking
Solution:
Sales ...................................................
Less variable expenses:
Direct materials ................................
Direct labor.......................................
Variable manufacturing overhead ....
Variable administrative expense ......
Variable selling expense ..................
Contribution margin.............................
Page 17
$30,000
5,150
7,250
4,100
4,800
4,975
$ 3,725
Use the following to answer the next three questions.
Comparative income statements for Boggs Sports Equipment Company for the last two
months are presented below:
Sales in units ............................................
July
11,000
August
10,000
Sales.........................................................
$165,000
$150,000
Cost of goods sold ....................................
72,600
66,000
Gross margin ............................................
Selling and administrative expenses:
Rent .......................................................
Sales commissions ................................
Maintenance expenses ..........................
92,400
84,000
12,000
13,200
13,500
12,000
12,000
13,000
Clerical expense ....................................
16,000
15,000
Total selling and administrative expenses
54,700
52,000
Net operating income ................................
$ 37,700
$ 32,000
All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed).
Assume that the relevant range includes all of the activity levels mentioned in this
problem.
21. Which of the selling and administrative expenses of the company is variable?
A) Rent
B) Sales Commissions
C) Maintenance Expense
D) Clerical Expense
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
22. The total monthly fixed cost for Boggs Sporting Equipment Company is:
A) $12,000
B) $22,500
C) $25,000
D) $40,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1,3 Level: Hard
Page 18
AICPA BB: Critical Thinking
Solution:
Variable component of sales commissions:
Variable cost = Change in costs/Change in units
Variable cost = ($13,200 − $12,000)/(11,000 − 10,000)
Variable cost = $1.20
Fixed cost of sales commissions:
High volume: $13,200 − $1.20 × 11,000 = $0 (answer will be zero fixed costs,
because these sales commissions are variable, not mixed)
Low volume: $12,000 − $1.20 × 10,000 = $0
Variable component of maintenance expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($13,500 − $13,000)/(11,000 − 10,000)
Variable cost = $0.50
Fixed cost of maintenance expenses:
High volume: $13,500 − $0.50 × 11,000 = $8,000
Low volume: $13,000 − $0.50 × 10,000 = $8,000
Variable component of clerical expense:
Variable cost = Change in costs/Change in units
Variable cost = ($16,000 − $15,000)/(11,000 − 10,000)
Variable cost = $1.00
Fixed cost of clerical expense:
High volume: $16,000 − $1.00 × 11,000 = $5,000
Low volume: $15,000 − $1.00 × 10,000 = $5,000
Total variable cost per unit:
$1.20 + $0.50 + $1.00 = $2.70
Total fixed cost:
$0 + $8,000 + $5,000 + $12,000* = $25,000
*Rent
23. If sales are projected to be 8,000 units in September, total expected selling
and administrative expenses would be:
A) $49,300
B) $41,600
C) $44,750
D) $46,600
Ans: D
AACSB: Analytic
Page 19
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 1,3
Level: Medium
Solution:
Variable component of sales commissions:
Variable cost = Change in costs/Change in units
Variable cost = ($13,200 − $12,000)/(11,000 − 10,000)
Variable cost = $1.20
Fixed cost of sales commissions:
High volume: $13,200 − $1.20 × 11,000 = $0 (answer will be zero fixed costs,
because these sales commissions are variable, not mixed)
Low volume: $12,000 − $1.20 × 10,000 = $0
Variable component of maintenance expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($13,500 − $13,000)/(11,000 − 10,000)
Variable cost = $0.50
Fixed cost of maintenance expenses:
High volume: $13,500 − $0.50 × 11,000 = $8,000
Low volume: $13,000 − $0.50 × 10,000 = $8,000
Variable component of clerical expense:
Variable cost = Change in costs/Change in units
Variable cost = ($16,000 − $15,000)/(11,000 − 10,000)
Variable cost = $1.00
Fixed cost of clerical expense:
High volume: $16,000 − $1.00 × 11,000 = $5,000
Low volume: $15,000 − $1.00 × 10,000 = $5,000
Total variable cost per unit:
$1.20 + $0.50 + $1.00 = $2.70
Total fixed cost:
$0 + $8,000 + $5,000 + $12,000* = $25,000
*Rent
Use the following to answer questions 85-87:
The following production and average cost data for two levels of monthly production
volume have been supplied by a company that produces a single product:
Production volume ...................
2,000 units
Page 20
5,000 units
Direct materials ........................
$75.70 per unit
$75.70 per unit
Direct labor ..............................
$28.40 per unit
$28.40 per unit
Manufacturing overhead ..........
$113.60 per unit
$58.10 per unit
24. The best estimate of the total monthly fixed manufacturing cost is:
A) $227,200
B) $185,000
C) $435,400
D) $290,500
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1,3 Level: Hard
AICPA BB: Critical Thinking
Solution:
To calculate the variable manufacturing cost per unit:
High activity level ...
Production
Volume
(Units)
5,000
Low activity level ....
2,000
Average
Cost per Total
Manufacturing
Unit
Overhead
Cost
(units × average cost per
unit)
$58.10
$290,500
$113.60
$227,200
Variable manufacturing overhead cost
= Change in cost ÷ Change in activity
= ($290,500 − $227,200) ÷ (5,000 – 2,000) = $21.10
Fixed cost element of manufacturing overhead
= Total cost − Variable cost element
= $290,500 − ($21.10 × 5,000) = $185,000
25. The best estimate of the total variable manufacturing cost per unit is:
A) $21.10
B) $125.20
C) $104.10
D) $75.70
Page 21
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1,3 Level: Hard
AICPA BB: Critical Thinking
Solution:
To calculate the variable manufacturing cost per unit:
High activity level ...
Production
Volume
(Units)
5,000
Low activity level ....
2,000
Average
Cost per Total
Manufacturing
Unit
Overhead
Cost
(units × average cost per
unit)
$58.10
$290,500
$113.60
$227,200
Variable manufacturing overhead cost
= Change in cost ÷ Change in activity
= ($290,500 − $227,200) ÷ (5,000 – 2,000) = $21.10
Fixed cost element of manufacturing overhead
= Total cost − Variable cost element
= $290,500 − ($21.20 × 5,000) = $185,000
Total variable manufacturing cost per unit
= (Direct materials + Direct labor + Manufacturing overhead)
= $75.70 + $28.40 + $21.10 = $125.20
26. The best estimate of the total cost to manufacture 2,200 units is closest to:
A) $356,840
B) $460,440
C) $417,890
D) $478,940
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1,3 Level: Hard
AICPA BB: Critical Thinking
Solution:
To calculate the variable manufacturing cost per unit:
Page 22
High activity level ...
Production
Volume
(Units)
5,000
Low activity level ....
2,000
Average
Cost per Total
Manufacturing
Unit
Overhead
Cost
(units × average cost per
unit)
$58.10
$290,500
$113.60
$227,200
Variable manufacturing overhead cost
= Change in cost ÷ Change in activity
= ($290,500 − $227,200) ÷ (5,000 – 2,000) = $21.10
Fixed cost element of manufacturing overhead
= Total cost − Variable cost element
= $290,500 − ($21.10 × 5,000) = $185,000
Total
variable
manufacturing
cost
= (Direct materials + Direct labor + Manufacturing overhead)
= $75.70 + $28.40 + $21.10 = $125.20
per
unit
Y = $185,000 + $125.20(2,200)
Y = $460,440
Use the following to answer the next four questions:
Gasson Company is a merchandising firm. Next month the company expects to sell 800
units. The following data describe the company's revenue and cost structure:
Selling price per unit ............................
Sales commission ...............................
Purchase price (cost) per unit .............
Advertising expense ............................
Administrative expense .......................
$40
5%
$18
$4,000 per month
$4,500 per month plus 15% of sales
Assume that all activity mentioned in this problem is within the relevant range.
27. The expected gross margin next month is:
A) $17,600
B) $11,200
C) $14,400
D) $16,000
Ans: A
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,4 Level: Medium
Page 23
Solution:
Sales...................................................
Cost of goods sold ..............................
Gross margin ......................................
$32,000
14,400
$17,600
28. The expected total administrative expense next month is:
A) $4,800
B) $13,300
C) $9,300
D) $14,900
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1,4 Level: Easy
AICPA BB: Critical Thinking
Solution:
Fixed administrative expenses (given) ...................
$4,500
Variable administrative expenses (15% × $32,000*)
4,800
Total administrative expenses ...............................
$9,300
*$40 × 800 = $32,000
29. The expected contribution margin next month is:
A) $17,600
B) $11,200
C) $14,400
D) $16,000
Ans: B
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,4 Level: Medium
Solution:
Sales ($40 × 800) ................................
Variable expenses:
Cost of goods sold ($18 × 800).........
Sales commissions (5% × $32,000) .
Page 24
$32,000
$14,400
1,600
Administrative (15% × $32,000)........
4,800
Contribution margin .............................
20,800
$11,200
30. The expected net operating income next month is:
A) $7,500
B) $5,100
C) $2,700
D) $11,200
Ans: C
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,4 Level: Medium
Solution:
Sales ($40 × 800) ................................
Variable expenses:
$32,000
Cost of goods sold ($18 × 800).........
Sales commissions (5% × $32,000) .
$14,400
1,600
Administrative (15% × $32,000)........
Contribution margin .............................
Fixed expenses:
Advertising expense .........................
4,800
Administrative ...................................
Net operating income ..........................
20,800
11,200
4,000
4,500
8,500
$ 2,700
Use the following to answer the next three questions:
In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours,
total overhead costs were $223,000. Of this amount, utilities were $48,000 (all variable)
and depreciation was $60,000 (all fixed). The balance of the overhead cost consisted of
maintenance cost (mixed). At 100,000 machine hours, maintenance costs were
$130,000. Assume that all of the activity levels mentioned in this problem are within the
relevant range.
31. The variable cost for maintenance per machine hour is:
A) $1.30
B) $1.44
C) $0.75
D) $1.35
Page 25
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Hard
AICPA BB: Critical Thinking
Solution:
Variable maintenance cost = Change in cost ÷ Change in activity
= ($130,000 – $115,000) ÷ (100,000 – 80,000) = $0.75
32. The total fixed overhead cost for O'Donnell is:
A) $115,000
B) $130,000
C) $60,000
D) $55,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Hard
AICPA BB: Critical Thinking
Solution:
Variable maintenance cost = Change in cost ÷ Change in activity
= ($130,000 − $115,000) ÷ (100,000 − 80,000) = $0.75
Fixed cost element of maintenance cost = Total cost − Variable cost element
= $115,000 − ($0.75 × 80,000) = $55,000
Total fixed overhead cost will be the total of the fixed maintenance cost and the
fixed depreciation cost, or $55,000 + $60,000 = $115,000
33. If 110,000 machine hours of activity are projected for next period, total
expected overhead cost would be:
A) $256,000
B) $263,500
C) $306,625
D) $242,500
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Hard
AICPA BB: Critical Thinking
Solution:
Variable maintenance cost = Change in cost ÷ Change in activity
= ($130,000 − $115,000) ÷ (100,000 − 80,000) = $0.75
Fixed cost element of maintenance cost = Total cost − Variable cost element
Page 26
= $115,000 − ($0.75 × 80,000) = $55,000
Total fixed overhead cost will be the total of the fixed maintenance cost and the
fixed depreciation cost, or $55,000 + $60,000 = $115,000
Variable utilities cost per machine hour = $48,000 ÷ 80,000 = $0.60
Total variable cost per machine hour is the total of the variable utilities cost per
machine hour and the variable maintenance cost per machine hour, or $0.60 +
$0.75 = $1.35
Y = $115,000 + $1.35 (110,000)
Y = $263,500
Use the following to answer questions 95-96:
Oerther Corporation reports that at an activity level of 5,000 units, its total variable cost
is $131,750 and its total fixed cost is $31,200.
34. What would be the total variable cost at an activity level of 5,200 units?
Assume that this level of activity is within the relevant range.
A) $137,020
B) $131,750
C) $162,950
D) $32,448
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost per unit: $131,750 ÷ 5,000= $26.35
Total variable cost = 5,200 × $26.35 = $137,020
35. What would be the average fixed cost per unit at an activity level of 5,200
units? Assume that this level of activity is within the relevant range.
A) $6.24
B) $6.00
C) $14.94
D) $32.59
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Page 27
AICPA BB: Critical Thinking
Average fixed cost per unit = Total fixed costs ÷ total units
Average fixed cost per unit = $31,200 ÷ 5,200 = $6.00
Use the following to answer questions 97-98:
At an activity level of 9,000 machine-hours in a month, Moffatt Corporation's total
variable maintenance cost is $390,240 and its total fixed maintenance cost is $368,280.
36. What would be the total variable maintenance cost at an activity level of 9,300
machine-hours in a month? Assume that this level of activity is within the
relevant range.
A) $758,520
B) $403,248
C) $390,240
D) $380,556
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost per unit: $390,240 ÷ 9,000 hours = $43.36 per hour
Total variable cost = 9,300 × $43.36 = $403,248
37. What would be the average fixed maintenance cost per unit at an activity level
of 9,300 units in a month? Assume that this level of activity is within the
relevant range.
A) $40.92
B) $84.28
C) $39.60
D) $54.93
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Average fixed cost per unit = Total fixed costs ÷ total units
Average fixed cost per unit = $368,280 ÷ 9,300 = $39.60
Use the following to answer the next two questions:
Schuler Inc. reports that at an activity level of 2,100 machine-hours in a month, its total
variable inspection cost is $69,846 and its total fixed inspection cost is $9,072.
Page 28
38. What would be the average fixed inspection cost per unit at an activity level of
2,400 units in a month? Assume that this level of activity is within the relevant
range.
A) $37.58
B) $4.32
C) $15.23
D) $3.78
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
Total fixed costs ÷ total units = Average fixed cost per unit
$9,072 ÷ 2,400 units = $3.78 per unit
39. What would be the total variable inspection cost at an activity level of 2,400
machine-hours in a month? Assume that this level of activity is within the
relevant range.
A) $78,918
B) $69,846
C) $79,824
D) $10,368
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 1 Level: Easy
AICPA BB: Critical Thinking
Solution:
First, calculate the variable inspection cost per hour by:
Total variable inspection costs ÷ total machine hours = variable inspection cost
per unit
$69,846 ÷ 2,100 machine-hours = $33.26 per machine-hour
Next, calculate the total variable inspection costs by:
Total variable inspection costs @ 2,400 machine-hours = $33.26 × 2,400 =
$79,824
Use the following to answer the next fur questions:
Johnson Company has provided the following data for the first five months of the year:
January ...............
February..............
Machine Hours
120
160
Lubrication Cost
$750
$800
Page 29
March ..................
April .....................
May .....................
200
150
170
$870
$790
$840
40. Using the high-low method of analysis, the estimated variable lubrication cost
per machine hour is closest to:
A) $1.40
B) $1.25
C) $0.67
D) $1.50
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($870 – $750) ÷ (200 – 120) = $1.50
41. Using the high-low method of analysis, the estimated monthly fixed
component of lubrication cost is closest to:
A) $570
B) $560
C) $585
D) $565
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($870 − $750) ÷ (200 − 120) = $1.50
Fixed cost element = Total cost − Variable cost element
= $870 − ($1.50 × 200) = $570
42. Using the least-squares regression method of analysis, the estimated variable
lubrication cost per machine hour is closest to:
A) $0.80
B) $1.56
C) $1.40
D) $1.28
Ans: B
AACSB: Analytic
AICPA FN: Reporting Appendix: 5A
Page 30
LO: 5
AICPA BB: Critical Thinking
Level: Hard
Solution:
The solution using Microsoft Excel functions is:
slope = $1.56 per machine-hour
43. Using the least-squares regression method of analysis, the estimated monthly
fixed component of lubrication cost is closest to:
A) $561
B) $580
C) $525
D) $572
Ans: A
AACSB: Analytic
AICPA FN: Reporting Appendix: 5A
LO: 5
AICPA BB: Critical Thinking
Level: Hard
Solution:
The solution using Microsoft Excel functions is:
intercept = $561 per month
Use the following to answer questions 105-106:
Wilson Company's activity for the first six of the current year is as follows:
Month
January...............
February .............
March .................
April ....................
May.....................
June....................
Machine Hours
2,000
3,000
2,400
1,900
1,800
2,100
Electrical Cost
$1,560
$2,200
$1,750
$1,520
$1,480
$1,600
44. Using the high-low method, the variable cost per machine hour would be:
A) $0.67
B) $0.64
C) $0.40
D) $0.60
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($2,200 – $1,480) ÷ (3,000 – 1,800) = $0.60
Page 31
AICPA BB: Critical Thinking
45. Using the high-low method, the fixed portion of the electrical cost each month
would be:
A) $400
B) $760
C) $280
D) $190
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Medium
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($2,200 − $1,480) ÷ (3,000 − 1,800) = $0.60
Fixed cost element = Total cost − Variable cost element
= $2,200 − ($0.60 × 3,000) = $400
Use the following to answer questions 107-108:
Electrical costs at one of Rome Corporation's factories are listed below:
March ..................
April .....................
May .....................
June ....................
July ......................
August .................
September ...........
October ...............
November ............
Machine-Hours
458
423
440
409
426
372
414
431
468
Electrical Cost
$1,007
$934
$979
$902
$952
$822
$926
$949
$1,025
Management believes that electrical cost is a mixed cost that depends on machinehours.
46. Using the high-low method, the estimate of the variable component of
electrical cost per machine-hour is closest to:
A) $2.11
B) $1.80
C) $2.21
D) $0.47
Ans: A
AACSB: Analytic
Page 32
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 3
Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($1,025 – $822) ÷ (468 – 372) = $2.11
47. Using the high-low method, the estimate of the fixed component of electrical
cost per month is closest to:
A) $822
B) $743
C) $38
D) $944
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($1,025 − $822) ÷ (468 − 372) = $2.11
Fixed cost element = Total cost − Variable cost element
= $1,025 − ($2.11 × 468) = $37.52 = $38 (rounded)
Use the following to answer the next two questions:
Inspection costs at one of Ratulowski Corporation's factories are listed below:
April ....................
May.....................
June....................
July .....................
August ................
September ..........
October...............
November ...........
December ...........
Units Produced
777
807
798
835
822
795
805
853
796
Inspection Cost
$10,176
$10,404
$10,355
$10,665
$10,542
$10,313
$10,409
$10,795
$10,310
Management believes that inspection cost is a mixed cost that depends on units
produced.
48. Using the high-low method, the estimate of the variable component of
inspection cost per unit produced is closest to:
Page 33
A)
B)
C)
D)
$8.14
$7.05
$0.12
$12.89
Ans: A
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($10,795 – $10,176) ÷ (853 – 777) = $8.14
49. Using the high-low method, the estimate of the fixed component of inspection
cost per month is closest to:
A) $10,344
B) $10,441
C) $3,852
D) $10,176
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($10,795 − $10,176) ÷ (853 − 777) = $8.14
Fixed cost element = Total cost − Variable cost element
= $10,795 − ($8.14 × 853) = $3,851.58 = $3,852 (rounded)
Use the following to answer questions 111-112:
Wuensch Inc., an escrow agent, has provided the following data concerning its office
expenses:
April.....................
May .....................
June ....................
July .....................
August.................
September ..........
October ...............
November ...........
Escrows Completed
53
94
37
87
40
38
82
35
Page 34
Office Expenses
$7,427
$9,201
$6,769
$8,902
$6,875
$6,797
$8,681
$6,678
December ...........
62
$7,836
Management believes that office expense is a mixed cost that depends on the number
of escrows completed. Note: Real estate purchases usually involve the services of an
escrow agent that holds funds and prepares documents to complete the transaction.
50. Using the high-low method, the estimate of the variable component of office
expense per escrow completed is closest to:
A) $45.44
B) $42.76
C) $88.22
D) $131.00
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($9,201 – $6,678) ÷ (94 – 35) = $42.76
51. Using the high-low method, the estimate of the fixed component of office
expense per month is closest to:
A) $7,685
B) $7,182
C) $6,678
D) $5,182
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 3 Level: Easy
AICPA BB: Critical Thinking
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($9,201 − $6,678) ÷ (94 − 35) = $42.76
Fixed cost element = Total cost − Variable cost element
= $9,201 − ($42.76 × 94) = $5,181.56 = $5,182 (rounded)
Page 35
Use the following to answer the next two questions:
The following information has been provided by the Evans Retail Stores, Inc., for the
first quarter of the year:
Sales ...................................................
Variable selling expense .....................
Fixed selling expenses ........................
$350,000
$35,000
$25,000
Cost of goods sold...............................
Fixed administrative expenses ............
Variable administrative expenses ........
$160,000
$55,000
$15,000
52. The gross margin of Evans Retail Stores, Inc. for the first quarter is:
A) $210,000
B) $140,000
C) $220,000
D) $190,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Easy
Solution:
Sales ..............................
Cost of goods sold .........
Gross margin .................
$350,000
160,000
190,000
53. The contribution margin of Evans Retail Stores, Inc. for the first quarter is:
A) $300,000
B) $140,000
C) $210,000
D) $190,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Easy
Solution:
Sales .............................
Variable expenses:
Cost of goods sold ......
Selling expense ..........
$350,000
$160,000
35,000
Page 36
Administrative expense
15,000
210,000
Contribution margin .......
$140,000
Use the following to answer the next three questions:
An income statement for Crandall's Bookstore for the first quarter of the current year is
presented below:
Sales ...................................................
$800,000
Cost of goods sold ..............................
Gross margin ......................................
Selling and administrative expenses:
560,000
240,000
Selling ..............................................
$98,000
Administrative...................................
98,000
Net operating income ..........................
196,000
$ 44,000
On average, a book sells for $50. Variable selling expenses are $5.50 per book, with
the remaining selling expenses being fixed. The variable administrative expenses are
3% of sales, with the remainder being fixed.
54. The contribution margin for Crandall's Bookstore for the first quarter is:
A) $688,000
B) $128,000
C) $152,000
D) $240,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Hard
Solution:
Sales ...................................................
Variable expenses:
Cost of goods sold ...........................
$560,000
Administrative (3% × $800,000) .......
24,000
Selling expense ($5.50 × 16,000*) ...
88,000
Contribution margin.............................
* $800,000 ÷ $50 average price per unit = 16,000 units sold
Page 37
$800,000
672,000
$128,000
55. The net operating income using the contribution approach for the first quarter
is:
A) $240,000
B) $152,000
C) $44,000
D) $128,000
Ans: C
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Medium
Solution:
Sales ...............................................................
Variable expenses:
Cost of goods sold ........................................
Administrative (3% × $800,000)....................
Selling expense ($5.50 × 16,000*) ................
Contribution margin .........................................
Fixed expenses:
$800,000
$560,000
24,000
88,000
Administrative expense ($98,000 − $24,000)
74,000
Selling expense ($98,000 − $88,000) ...........
10,000
Net operating income ......................................
* $800,000 ÷ $50 average price per unit = 16,000 units sold
672,000
128,000
84,000
$ 44,000
56. The cost formula for selling and administrative expenses with “X” equal to the
number of books sold is:
A) Y = $84,000 + $35X
B) Y = $84,000 + $42X
C) Y = $98,000 + $35X
D) Y = $98,000 + $42X
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 4 Level: Hard
AICPA BB: Critical Thinking
Solution:
Sales ............................................................
Variable expenses:
Cost of goods sold.....................................
Page 38
$800,000
$560,000
Administrative (3% × $800,000) ................
Selling expense ($5.50 × 16,000*) ............
Contribution margin ......................................
Fixed expenses:
24,000
88,000
Administrative expense ($98,000 − $24,000)
74,000
Selling expense ($98,000 − $88,000)........
10,000
Net operating income ...................................
* $800,000 ÷ $50 average sales price = 16,000 units sold
672,000
128,000
84,000
$ 44,000
Total variable cost per unit = $672,000 ÷ 16,000 units = $42 per unit
Total fixed costs = $10,000 + $74,000 = $84,000
Y = $84,000 + $42X
Use the following to answer the next two questions:
In December, Barkes Corporation, a manufacturing company, reported the following
financial data:
Sales ...................................................
Variable production expense ..............
Fixed production expense ...................
Variable selling expense .....................
Fixed selling expense .........................
Variable administrative expense .........
Fixed administrative expense .............
$270,000
$27,000
$42,000
$28,000
$43,000
$34,000
$64,000
The company had no beginning or ending inventories.
118. The contribution margin for December was:
A) $201,000
B) $181,000
C) $32,000
D) $121,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Easy
Solution:
Sales .............................
Variable expenses:
$270,000
Page 39
Production expense ....
Selling expense ..........
$27,000
28,000
Administrative expense
34,000
Contribution margin .......
89,000
$181,000
57. The gross margin for December was:
A) $121,000
B) $32,000
C) $181,000
D) $201,000
Ans: D
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Easy
Solution:
Sales...................................................
$270,000
Cost of goods sold ($27,000 + $42,000)
Gross margin ......................................
69,000
$201,000
Use the following to answer questions 120-121:
The management of Edrington Corporation, a manufacturing company, would like your
help in contrasting the traditional and contribution approaches to the income statement.
The company has provided the following financial data for April:
Sales ..................................................
Variable production expense ..............
Fixed production expense...................
Variable selling expense .....................
Fixed selling expense .........................
Variable administrative expense .........
Fixed administrative expense .............
The company had no beginning or ending inventories.
58. The gross margin for April was:
A) $193,000
B) $11,000
C) $102,000
Page 40
$280,000
$30,000
$57,000
$27,000
$48,000
$34,000
$73,000
D)
$189,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Easy
Solution:
Sales ..................................................
$280,000
Cost of goods sold ($30,000 + $57,000)
Gross margin ......................................
87,000
$193,000
59. The contribution margin for April was:
A) $102,000
B) $189,000
C) $11,000
D) $193,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Easy
Solution:
Sales .............................
Variable expenses:
$280,000
Cost of goods sold .....
Selling expense ..........
$30,000
27,000
Administrative expense
34,000
Contribution margin .......
91,000
$189,000
Use the following to answer the next two questions:
Monsivais Corporation, a manufacturing company, has provided the following financial
data for February:
Sales ...................................................
Variable production expense ...............
Variable selling expense .....................
Variable administrative expense .........
Fixed production expense ...................
Page 41
$470,000
$81,000
$11,000
$40,000
$86,000
Fixed selling expense..........................
$73,000
Fixed administrative expense ..............
$139,000
The company had no beginning or ending inventories.
60. The gross margin for February was:
A) $338,000
B) $303,000
C) $172,000
D) $40,000
Ans: B
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Easy
Solution:
Sales ...................................................
$470,000
Cost of goods sold ($81,000 + $86,000)
Gross margin ......................................
167,000
$303,000
61. The contribution margin for February was:
A) $338,000
B) $303,000
C) $172,000
D) $40,000
Ans: A
AACSB: Analytic
AICPA FN: Reporting, Measurement LO: 4
AICPA BB: Critical Thinking
Level: Easy
Solution:
Sales ...................................................
Variable expenses:
Cost of goods sold ...........................
Selling expense ................................
Administrative expense ....................
Contribution margin.............................
Page 42
$470,000
$81,000
11,000
40,000
132,000
$338,000
Use the following to answer the next two questions:
(Appendix 5A) Lacourse Inc.'s inspection costs are listed below:
January ...............
February .............
March ..................
April.....................
May .....................
June ....................
July .....................
August.................
Units Produced
647
724
694
645
696
665
718
699
Inspection Costs
$15,309
$15,965
$15,715
$15,271
$15,745
$15,442
$15,933
$15,739
Management believes that inspection cost is a mixed cost that depends on units
produced.
62. Using the least-squares regression method, the estimate of the variable
component of inspection cost per unit produced is closest to:
A) $22.80
B) $8.82
C) $8.27
D) $8.78
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
AICPA BB: Critical Thinking
Solution:
The solution using Microsoft Excel functions is:
slope = $8.82 per unit produced
63. Using the least-squares regression method, the estimate of the fixed
component of inspection cost per month is closest to:
A) $9,608
B) $15,640
C) $9,587
D) $15,271
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
Solution:
The solution using Microsoft Excel functions is:
Page 43
AICPA BB: Critical Thinking
intercept = $9,587 per month
Use the following to answer the next two questions:
(Appendix 5A) Recent maintenance costs of Divers Corporation are listed below:
February ..............
March ..................
April .....................
May .....................
June ....................
July ......................
August .................
September ...........
Machine-Hours
527
499
542
541
489
543
558
513
Maintenance Costs
$5,144
$5,033
$5,220
$5,196
$4,973
$5,200
$5,288
$5,060
Management believes that maintenance cost is a mixed cost that depends on machinehours.
64. Using the least-squares regression method, the estimate of the variable
component of maintenance cost per machine-hour is closest to:
A) $9.76
B) $6.00
C) $4.43
D) $4.57
Ans: C
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
AICPA BB: Critical Thinking
Solution:
The solution using Microsoft Excel functions is:
slope = $4.43 per machine-hour
65. Using the least-squares regression method, the estimate of the fixed
component of maintenance cost per month is closest to:
A) $5,139
B) $2,806
C) $4,973
D) $2,738
Ans: B
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
Solution:
Page 44
AICPA BB: Critical Thinking
The solution using Microsoft Excel functions is:
intercept = $2,806 per month
Use the following to answer the next two questions:
(Appendix 5A) Gaumer Corporation's recent utility costs are listed below:
May.....................
June....................
July .....................
August ................
September ..........
October...............
November ...........
December ...........
Machine-Hours
1,708
1,770
1,703
1,734
1,787
1,756
1,731
1,798
Utility Costs
$20,511
$21,016
$20,449
$20,699
$21,142
$20,912
$20,693
$21,252
Management believes that utility cost is a mixed cost that depends on machine-hours.
66. Using the least-squares regression method, the estimate of the variable
component of utility cost per machine-hour is closest to:
A) $8.45
B) $8.23
C) $11.92
D) $8.31
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
AICPA BB: Critical Thinking
Solution:
The solution using Microsoft Excel functions is:
slope = $8.31 per machine-hour
67. Using the least-squares regression method, the estimate of the fixed
component of utility cost per month is closest to:
A) $20,834
B) $20,449
C) $6,059
D) $6,314
Ans: D
AACSB: Analytic
AICPA FN: Reporting LO: 5 Level: Medium
Page 45
AICPA BB: Critical Thinking
Solution:
The solution using Microsoft Excel functions is:
intercept = $6,314 per month
Essay Questions
68. ABC Company's total overhead costs at various levels of activity are
presented below:
March .......
April ..........
May ..........
June .........
Machine Hours
60,000
50,000
70,000
80,000
Total Overhead Costs
$216,800
$194,000
$239,600
$262,400
Assume that the overhead costs above consist of utilities, supervisory salaries,
and maintenance. At the 50,000 machine-hour level of activity these costs are:
Utilities (V) ................................
Supervisory salaries (F) ...........
$ 54,000
62,000
Maintenance (M) ......................
78,000
Total overhead cost ..................
$194,000
V = Variable; F = Fixed; M = Mixed
The company wants to break down the maintenance cost into its basic variable
and fixed cost elements.
Required:
a. Estimate the maintenance cost for June.
b. Use the high-low method to estimate the cost formula for maintenance cost.
c. Estimate the total overhead cost at an activity level of 55,000 machine hours.
Ans:
Page 46
a.
Total overhead cost at 80,000 machine hours .............
Less:
Utilities ($54,000/50,000) × 80,000 ...........................
$262,400
86,400
Supervisory salaries (fixed).......................................
62,000
Portion of overhead for June that represents maintenance
.................................................................................
$114,000
b. High-low analysis of maintenance cost:
Maintenance Cost
High point .................
$114,000
Low point ..................
78,000
Change observed .....
$ 36,000
Machine-Hours
80,000
50,000
30,000
Variable cost:
Change in cost/Change in activity = $36,000/30,000 MHs = $1.20 per MHs
Total fixed cost:
Total maintenance cost at the low point .........................
$78,000
Less variable cost element (50,000 MHs × $1.20 per MH)
60,000
Fixed cost element .........................................................
$18,000
The cost formula is: Y = $18,000 + $1.20X
c. Total overhead at 55,000 machine hours:
Utilities ($54,000/50,000) × 55,000 ...........
$ 59,400
Supervisory salaries .................................
Maintenance cost:
62,000
Variable (55,000 MHs × $1.20 per MH) .
$66,000
Fixed ......................................................
18,000
Total overhead cost at 55,000 MH ............
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 1,3 Level: Hard
84,000
$205,400
AICPA FN: Reporting
69. Hinrichs Corporation reports that at an activity level of 2,400 units, its total
Page 47
variable cost is $174,504 and its total fixed cost is $55,080.
Required:
For the activity level of 2,700 units, compute: (a) the total variable cost; (b) the
total fixed cost; (c) the total cost; (d) the average variable cost per unit; (e) the
average fixed cost per unit; and (f) the average total cost per unit. Assume that
this activity level is within the relevant range.
Ans:
Variable cost = $174,504/2,400 units = $72.71 per unit
Activity level ............................................................
Total cost:
2,700
Variable cost (a) [2,700 units × $72.71 per unit] ..
$196,317
Fixed cost (b) .......................................................
55,080
Total (c) ................................................................
Cost per unit:
Variable cost (d) ...................................................
Fixed cost (e) [$55,080/2,700 units] .....................
Total (f).................................................................
$251,397
AACSB: Analytic
LO: 1 Level: Easy
AICPA BB: Critical Thinking
$72.71
20.40
$93.11
AICPA FN: Reporting
70. At an activity level of 6,800 units, Henkes Corporation's total variable cost is
$125,188 and its total fixed cost is $164,152.
Required:
For the activity level of 7,100 units, compute: (a) the total variable cost; (b) the
total fixed cost; (c) the total cost; (d) the average variable cost per unit; (e) the
average fixed cost per unit; and (f) the average total cost per unit. Assume that
this activity level is within the relevant range.
Ans:
Variable cost = $125,188/6,800 units = $18.41 per unit
Activity level ............................................................
Total cost:
Variable cost (a) [7,100 units × $18.41 per unit] ..
Page 48
7,100
$130,711
Fixed cost (b) .......................................................
164,152
Total (c) ................................................................
Cost per unit:
Variable cost (d) ...................................................
Fixed cost (e) [$164,152/7,100 units] ...................
Total (f) ................................................................
$294,863
AACSB: Analytic
LO: 1 Level: Easy
AICPA BB: Critical Thinking
$18.41
23.12
$41.53
AICPA FN: Reporting
71. The Pate Company reported the following:
Units sold....
Month 1
6,000
Month 2
8,000
Cost A.........
$35,000
$36,000
Cost B.........
Cost C ........
$16,000
$1,500
$16,000
$2,000
Cost D ........
Cost E.........
Cost F .........
Cost G ........
$12,000
$6,000
$2,000
$4,200
$16,000
$8,000
$2,000
$8,400
Cost H ........
$37,300
$44,600
Cost I ..........
$13,000
$13,500
Cost J .........
$10,000
$12,200
Required:
Indicate whether each of the costs above is probably a variable, mixed or fixed
cost.
Cost A _______________
Cost B _______________
Cost C _______________
Cost D _______________
Cost E _______________
Cost F _______________
Cost G _______________
Page 49
Cost H _______________
Cost I _______________
Cost J _______________
Ans:
Cost A: Mixed
Cost B: Fixed
Cost C: Variable
Cost D: Variable
Cost E: Variable
Cost F: Fixed
Cost G: Mixed
Cost H: Mixed
Cost I: Mixed
Cost J: Mixed
AACSB: Analytic
LO: 1 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
72. Stuart Manufacturing produces metal picture frames. The company's income
statements for the last two years are given below:
Units sold ............................................
Last year
50,000
This year
70,000
Sales...................................................
$800,000
$1,120,000
Cost of goods sold ..............................
Gross margin ......................................
550,000
250,000
710,000
410,000
Selling and administrative expense ....
150,000
190,000
Net operating income ..........................
$100,000
$ 220,000
The company has no beginning or ending inventories.
Required:
a. Estimate the company's total variable cost per unit and its total fixed costs per
year. (Remember that this is a manufacturing firm.)
b. Compute the company's contribution margin for this year.
Ans:
a. Variable component of cost of goods sold:
Page 50
Variable cost = Change in costs/Change in units
Variable cost = ($710,000 − $550,000)/(70,000 − 50,000)
Variable cost = $8.00
Fixed cost:
High volume: $710,000 − $8.00×70,000 = $150,000
Low volume: $550,000 − $8.00×50,000 = $150,000
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($190,000 − $150,000)/(70,000 − 50,000)
Variable cost = $2.00
Fixed cost:
High volume: $190,000 − $2.00×70,000 = $50,000
Low volume: $150,000 − $2.00×50,000 = $50,000
Total variable cost per unit:
$8.00 + $2.00 = $10.00
Total fixed cost:
$150,000 + $50,000 = $200,000
b.
Sales revenue..............................................
Variable expenses:
Variable cost of goods sold .......................
Variable selling and administrative expense
$1,120,000
$560,000
140,000
Contribution margin .....................................
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 3,4 Level: Medium
700,000
$ 420,000
AICPA FN: Reporting
73. Selected data about Pitkin Company's manufacturing operations at two levels
of activity are given below:
Number of units produced ........
10,000
15,000
Total manufacturing costs.........
Direct material cost per unit ......
Direct labor cost per unit ...........
$157,000
$4
$6
$225,000
$4
$6
Required:
Page 51
Using the high-low method, estimate the cost formula for manufacturing
overhead. Assume that both direct material and direct labor are variable costs.
Ans:
Low
High
Total manufacturing costs .................................................................
$157,000 $225,000
Less:
Direct
materials
($4 × 10,000 and $4 × 15,000, respectively) ...............................
40,000
60,000
Direct
labor
($6 × 10,000 and $6 × 15,000, respectively) ...............................
60,000
90,000
Manufacturing overhead cost
$ 57,000
$ 75,000
Cost
Activity
High level of activity .................
$75,000
15,000 units
Low level of activity ..................
57,000
10,000 units
Change ....................................
$18,000
5,000 units
$18,000 ÷ 5,000 units = $3.60 per unit
Total cost at the high level of activity ......................
$75,000
Less variable element ($3.60 per unit × 15,000 units)
Fixed cost element ..................................................
54,000
$21,000
Therefore, the cost formula for manufacturing overhead is $21,000 per period
plus $3.60 per unit produced, or Y = $21,000 + $3.60X.
AACSB: Analytic
AICPA BB: Critical Thinking
LO: 3 Level: Medium
AICPA FN: Reporting
74. Utility costs at one of Hannemann Corporation's factories are listed below:
March ..................
April.....................
May .....................
Machine-Hours
5,021
5,076
5,074
Page 52
Utility Cost
$52,824
$53,287
$53,263
June ....................
July .....................
August.................
September ..........
October ...............
November ...........
5,040
5,087
5,073
5,075
5,034
5,062
$52,991
$53,371
$53,251
$53,252
$52,916
$53,137
Management believes that utility cost is a mixed cost that depends on machinehours.
Required:
Estimate the variable cost per machine-hour and the fixed cost per month using
the high-low method. Show your work!
Ans:
High activity level ...
Low activity level ....
Machine-Hours
5,087
5,021
Utility Cost
$53,371
$52,824
Variable cost = Change in cost ÷ Change in activity
= ($53,371 − $52,824) ÷ (5,087 − 5,021) = $8.29
Fixed cost element = Total cost − Variable cost element
= $52,824 − ($8.29 × 5,021) = $11,200
AACSB: Analytic
LO: 3 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
75. Swofford Inc. has provided the following data concerning its maintenance
costs:
March..................
April ....................
May .....................
June ....................
July .....................
August ................
September ..........
October ...............
November ...........
Machine-Hours
4,440
4,431
4,412
4,460
4,414
4,433
4,443
4,415
4,391
Page 53
Maintenance Cost
$50,950
$50,877
$50,696
$51,113
$50,711
$50,900
$50,976
$50,730
$50,530
Management believes that maintenance cost is a mixed cost that depends on
machine-hours.
Required:
Estimate the variable cost per machine-hour and the fixed cost per month using
the high-low method. Show your work!
Ans:
High activity level ...........
Low activity level ............
Machine-Hours
4,460
4,391
Maintenance Cost
$51,113
$50,530
Variable cost = Change in cost ÷ Change in activity
= ($51,113 − $50,530) ÷ (4,460 − 4,391) = $8.45
Fixed cost element = Total cost − Variable cost element
= $50,530 − ($8.45 × 4,391) = $13,426
AACSB: Analytic
LO: 3 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
76. The management of Dethlefsen Corporation would like to have a better
understanding of the behavior of its inspection costs. The company has
provided the following data:
January ...............
February ..............
March ..................
April .....................
May .....................
June ....................
July......................
August .................
September...........
Direct Labor-Hours
5,089
5,042
5,026
5,073
5,029
5,040
5,070
5,027
4,995
Inspection Cost
$33,122
$32,929
$32,870
$33,065
$32,906
$32,913
$33,050
$32,875
$32,746
Management believes that inspection cost is a mixed cost that depends on direct
labor-hours.
Required:
Estimate the variable cost per direct labor-hour and the fixed cost per month
Page 54
using the high-low method. Show your work!
Ans:
High activity level ...........
Direct Labor-Hours
5,089
Inspection Cost
$33,122
Low activity level............
4,995
$32,746
Variable cost = Change in cost ÷ Change in activity
= ($33,122 − $32,746) ÷ (5,089 − 4,995) = $4.00
Fixed cost element = Total cost − Variable cost element
= $32,746 − ($4.00 × 4,995) = $12,766
AACSB: Analytic
LO: 3 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
77. The accounting department of Archer Company, a merchandising company,
has prepared the following analysis:
Cost of goods sold ...................
Sales commissions ..................
Cost Formula
$56 per unit
12% of sales
Advertising expense .................
$300,000 per month
Administrative salaries .............
Billing expense .........................
$160,000 per month
?
Depreciation expense ..............
$62,000 per month
The accounting department feels that billing expense is a mixed cost, containing
both fixed and variable cost elements. The billing expenses and sales in units
over the last several months follow:
Units Sold
Billing
(000)
Expense
January ...............
9
$30,000
February..............
11
$33,000
Page 55
March ..................
14
$36,000
April .....................
17
$42,000
May .....................
15
$39,000
June ....................
12
$35,000
The accounting department now plans to develop a cost formula for billing
expense so that a contribution format income statement can be prepared for
management's use.
Required:
a. Using the least-squares method, estimate the cost formula for billing expense.
b. Assume that the company plans to sell 30,000 units during July at a selling
price of $100 per unit. Prepare a budgeted income statement for the month,
using the contribution format.
Ans:
a. Using least-squares regression, the cost formula is Y = $16,952 + $1,452X,
where X is a thousand units
b
Sales ($100 × 30,000) ........................
Variable expenses:
$3,000,000
Cost of goods sold ($56 × 30,000) ...
Commissions (0.12 × $3,000,000) ...
$1,680,000
360,000
Billing expense ($1,452 × 30)...........
Contribution margin.............................
Fixed expenses:
Advertising expense .........................
Administrative salaries .....................
Billing expense .................................
43,560
300,000
160,000
16,952
Depreciation expense ......................
Net operating income ..........................
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 5A LO: 4,5 Level: Hard
Page 56
2,083,560
916,440
62,000
538,952
$ 377,488
AICPA FN: Reporting
78. In January, Verba Corporation, a manufacturing company, reported the
following financial data:
Sales ...................................................
Variable production expense...............
$460,000
$84,000
Fixed production expense ...................
Variable selling expense .....................
Fixed selling expense .........................
Variable administrative expense .........
$100,000
$12,000
$47,000
$33,000
Fixed administrative expense..............
$132,000
The company had no beginning or ending inventories.
Required:
a. Prepare an income statement in good form for January using the traditional
approach.
b. Prepare an income statement in good form for January using the contribution
approach.
Ans:
a. Traditional approach
Sales ...................................................
Cost of goods sold ..............................
Gross margin ......................................
Selling and administrative expenses:
$460,000
184,000
276,000
Selling ..............................................
$ 59,000
Administrative...................................
Net operating income ..........................
165,000
b. Contribution approach
Sales ...................................................
Variable expenses:
Variable production expense ............
Variable selling expense ..................
Variable administrative expense ......
Contribution margin.............................
Fixed expenses:
Page 57
224,000
$ 52,000
$460,000
$84,000
12,000
33,000
129,000
331,000
Fixed production expense ................
Fixed selling expense.......................
Fixed administrative expense ...........
Net operating income ..........................
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 4
100,000
47,000
132,000
279,000
$ 52,000
AICPA BB: Critical Thinking
Level: Easy
79. Novakovich Inc., a manufacturing company, has provided the following
financial data for January:
Sales ...................................................
Variable production expense ...............
Variable selling expense .....................
Variable administrative expense .........
$430,000
$84,000
$16,000
$28,000
Fixed production expense ...................
Fixed selling expense..........................
$102,000
$44,000
Fixed administrative expense ..............
$121,000
The company had no beginning or ending inventories.
Required:
a. Prepare an income statement in good form for January using the traditional
approach.
b. Prepare an income statement in good form for January using the contribution
approach.
Ans:
a. Traditional approach
Sales ...................................................
$430,000
Cost of goods sold ..............................
Gross margin ......................................
Selling and administrative expenses:
186,000
244,000
Selling ..............................................
$ 60,000
Administrative...................................
149,000
Page 58
209,000
Net operating income ..........................
$ 35,000
b. Contribution approach
Sales ...................................................
Variable expenses:
Variable production expense ............
Variable selling expense ..................
$430,000
$84,000
16,000
Variable administrative expense ......
Contribution margin.............................
Fixed expenses:
Fixed production expense ................
Fixed selling expense.......................
28,000
102,000
44,000
Fixed administrative expense ...........
121,000
Net operating income ..........................
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 4
128,000
302,000
267,000
$ 35,000
AICPA BB: Critical Thinking
Level: Easy
80. In July, Haertel Corporation, a manufacturing company, reported the following
financial data:
Sales ...................................................
Variable production expense ...............
Fixed production expense ...................
Variable selling expense .....................
Fixed selling expense ..........................
Variable administrative expense..........
Fixed administrative expense ..............
$390,000
$74,000
$67,000
$15,000
$72,000
$52,000
$86,000
Required:
Prepare an income statement in good form for July using the contribution
approach.
Ans:
Sales ...................................................
Variable expenses:
Variable production expense ............
Page 59
$390,000
$74,000
Variable selling expense ..................
15,000
Variable administrative expense ......
Contribution margin.............................
Fixed expenses:
Fixed production expense ................
Fixed selling expense.......................
52,000
67,000
72,000
Fixed administrative expense ...........
86,000
Net operating income ..........................
AACSB: Analytic
AICPA FN: Reporting, Measurement
LO: 4
141,000
249,000
225,000
$ 24,000
AICPA BB: Critical Thinking
Level: Easy
81. Crabbe Inc., a manufacturing company, has provided the following data for
October:
Sales ..................................................
Variable production expense ..............
Variable selling expense .....................
Variable administrative expense .........
Fixed production expense...................
Fixed selling expense .........................
Fixed administrative expense .............
$270,000
$53,000
$23,000
$16,000
$50,000
$34,000
$77,000
Required:
Prepare an income statement in good form for October using the contribution
approach.
Ans:
Sales...................................................
Variable expenses:
$270,000
Variable production expense............
Variable selling expense ..................
$53,000
23,000
Variable administrative expense ......
Contribution margin ............................
Fixed expenses:
Fixed production expense ................
16,000
Page 60
50,000
92,000
178,000
Fixed selling expense ......................
34,000
Fixed administrative expense...........
77,000
Net operating income ..........................
AACSB: Analytic
AICPA FN: Reporting, Measurement
161,000
$ 17,000
AICPA BB: Critical Thinking
Level: Easy
LO: 4
82. Below are cost and activity data for a particular cost over the last four periods.
Your boss has asked you to analyze this cost so that management will have a
better understanding of how this cost changes in response to changes in
activity.
Activity
Cost
Period 1 ...
40
$637
Period 2 ...
47
$693
Period 3 ...
45
$675
Period 4 ...
41
$646
Required:
Using the least-squares regression method, estimate the cost formula for this
cost.
Ans: Using least-squares regression, the cost formula is Y = $324 + $7.82X.
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 5A LO: 5 Level: Hard
AICPA FN: Reporting
83. Grawburg Inc. maintains a call center to take orders, answer questions, and
handle complaints. The costs of the call center for a number of recent months
are listed below:
April .....................
May .....................
June ....................
July......................
Calls Taken
9,030
9,017
9,035
9,065
Page 61
Call Center Cost
$112,323
$112,278
$112,341
$112,458
August .................
September...........
October ...............
November............
9,015
9,061
9,070
9,067
$112,290
$112,419
$112,463
$112,439
Management believes that the cost of the call center is a mixed cost that
depends on the number of calls taken.
Required:
Estimate the variable cost per call and fixed cost per month using the leastsquares regression method.
Ans:
The solution using Microsoft Excel functions is:
slope = $3.27 per call
intercept = $82,758 per month
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 5A LO: 5 Level: Hard
AICPA FN: Reporting
84. The management of Rutledge Corporation would like to better understand the
behavior of the company's warranty costs. Those costs are listed below for a
number of recent months:
March .................
April ....................
May .....................
June....................
July .....................
August ................
September ..........
October ...............
Product Returns
30
37
43
41
32
48
35
33
Warranty Cost
$3,648
$4,074
$4,460
$4,330
$3,756
$4,782
$3,932
$3,823
Management believes that warranty cost is a mixed cost that depends on the
number of product returns.
Required:
Estimate the variable cost per product return and the fixed cost per month using
the least-squares regression method.
Ans:
The solution using Microsoft Excel functions is:
Page 62
slope = $63.59 per product return
intercept = $1,724 per month
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 5A LO: 5 Level: Hard
AICPA FN: Reporting
85. Furlan Printing Corp., a book printer, has provided the following data:
May .....................
June ....................
July ......................
August .................
September ...........
October ...............
November ............
December ............
Titles Printed
40
38
25
28
33
27
39
36
Press Setup Cost
$6,649
$6,438
$5,307
$5,564
$6,030
$5,505
$6,551
$6,275
Management believes that the press setup cost is a mixed cost that depends on
the number of titles printed. (A specific book that is to be printed is called a “title”.
Typically, thousands of copies will be printed of each title. Specific steps must be
taken to setup the presses for printing each title-for example, changing the
printing plates. The costs of these steps are the press setup costs.)
Required:
Estimate the variable cost per title printed and the fixed cost per month using the
least-squares regression method.
Ans:
The solution using Microsoft Excel functions is:
slope = $88.21 per title printed
intercept = $3,107 per month
AACSB: Analytic
AICPA BB: Critical Thinking
Appendix: 5A LO: 5 Level: Hard
Page 63
AICPA FN: Reporting
Reference
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA,
FRIAcc
For further discussion please refer to the link provided:
Chapter 2 Analyzing Cost Behavior Example- https://youtu.be/U3XCfRgvGKE
Chapter 2- Estimating Costs Using the High-Low Method (Managerial/Cost - Estimating
Variable costs/Fixed Costs)- https://youtu.be/ZLnZxsiYUyU
Chapter 2- Variable Costing Example- https://youtu.be/h6YwBdqE2Oo
Page 64
CHAPTER 1 COST BEHAVIOR: ANALYSIS AND USE
Learning Objectives
 Analyze and identify different types of cost behavior.
 Compute the contribution margin.
 Compute the break-even point for a company in dollars and units.
 Analyze business decisions using cost-volume-profit analysis.
The Activity Base (also called a cost driver)
A measure of what causes the incurrence of a variable cost
a. Units produced
b. Machine hours
c. Miles driven
d. Labor hours
True Variable Cost – An Example
As an example of an activity base, consider overage charges on a cell phone bill. The
activity base is the number of minutes used above the allowed minutes in the calling
plan.
Page 1
Variable Cost Per Unit – An Example
Referring to the cell phone example, the cost per overage minute is constant, for
example 45 cents per overage minute.
Examples of Variable Costs
1. Merchandising companies – cost of goods sold.
2. Manufacturing companies – direct materials, direct labor, and variable overhead.
3. Merchandising and manufacturing companies – commissions, shipping costs,
and clerical costs such as invoicing.
4. Service companies – supplies, travel, and clerical.
True Variable Costs
The amount of a true variable cost used during the period varies in direct proportion to
the activity level. The overage charge on a cell phone bill was one example of a true
variable cost.
Page 2
Step-Variable Costs
A step-variable cost is a resource that is obtainable only in large chunks (such as
maintenance workers) and whose costs change only in response to fairly wide
changes in activity.
The Linearity Assumption and the Relevant Range
Total Fixed Cost – An Example
Page 3
For example, your cell phone bill probably includes a fixed amount related to the total
minutes allowed in your calling plan. The amount does not change when you use more
or less allowed minutes.
Fixed Cost Per Unit Example
For example, the fixed cost per minute used decreases as more allowed minutes are
used.
Is Labor a Variable or a Fixed Cost?
The behavior of wage and salary costs can differ across countries, depending on labor
regulations, labor contracts, and custom.
a. In France, Germany, China, and Japan, management has little flexibility in adjusting
the size of the labor force. Labor costs are more fixed in nature.
b. In the United States and the United Kingdom, management has greater latitude.
Labor costs are more variable in nature.
c. Within countries managers can view labor costs differently depending upon their
strategy. Most companies in the United States continue to view direct labor as a
variable cost.
Fixed Costs and the Relevant Range
Page 4
Mixed Costs
The Scattergraph Method
Page 5
The High-Low Method – An Example
Page 6
Least-Squares Regression Method
A method used to analyze mixed costs if a scattergraph plot reveals an approximately
linear relationship between the X and Y variables.
Page 7
Reference
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc
For further discussion please refer to the link provided:
Chapter 1-Introduction of cost behavior- https://youtu.be/YlYRKgULl_M
Chapter 1-Ways to determine cost behavior- https://youtu.be/M2M_FPFMb4k
Chapter1- Cost Classification- https://youtu.be/QQd1_gEF1yM
Page 8