Additional Exercises
Management Accounting
Exercise 1
Vega Foods, Inc., has recently purchased a small mill that it intends to operate as one of its
subsidiaries. The newly acquired mill has three products that it offers for sale—wheat cereal,
pancake mix, and flour. Each product sells for $10 per package. Materials, labor, and other
variable production costs are $3.00 per bag of wheat cereal, $4.20 per bag of pancake mix, and
$1.80 per bag of flour. Sales commissions are 10% of sales for any product. All other costs are
fixed. The mill’s income statement for the most recent month is given below:
The following additional information is available about the company:
a. The same equipment is used to mill and package all three products. In the above income
statement, equipment depreciation has been allocated on the basis of sales dollars. An analysis
of equipment usage indicates that it is used 40% of the time to make wheat cereal, 50% of the
time to make pancake mix, and 10% of the time to make flour.
b. All three products are stored in the same warehouse. In the above income statement, the
warehouse rent has been allocated on the basis of sales dollars. The warehouse contains
24,000 square feet of space, of which 8,000 square feet are used for wheat cereal, 14,000
square feet are used for pancake mix, and 2,000 square feet are used for flour. The warehouse
space costs the company $0.50 per square foot per month to rent.
c. The general administration costs relate to the administration of the company as a whole. In
the above income statement, these costs have been divided equally among the three product
lines.
d. All other costs are traceable to the product lines. Vega Foods’ management is anxious to
improve the mill’s 2.5% margin on sales.
Required
Prepare a new contribution format segmented income statement for the month. Adjust the
allocation of equipment depreciation and warehouse rent as indicated by the additional
information provided.
Solution
Sales ........................................
Variable expenses:
Materials, labor & other .........
Sales commissions................
Total variable expenses ............
Contribution margin ..................
Traceable fixed expenses:
Advertising ............................
Salaries .................................
Equipment depreciation* .......
Warehouse rent** ..................
Total traceable fixed expenses .
Product line segment margin ....
Common fixed expenses:
General administration ..........
Net operating income ...............
Total
Company
$600,000
Wheat
Cereal
$200,000
Pancake
Mix
$300,000
Flour
$100,000
204,000
60,000
264,000
336,000
60,000
20,000
80,000
120,000
126,000
30,000
156,000
144,000
18,000
10,000
28,000
72,000
123,000
66,000
30,000
12,000
231,000
105,000
48,000
34,000
12,000
4,000
98,000
$ 22,000
60,000
21,000
15,000
7,000
103,000
$ 41,000
15,000
11,000
3,000
1,000
30,000
$ 42,000
90,000
$ 15,000
* $30,000 × 40%, 50%, and 10% respectively
** $0.50 per square foot × 8,000 square feet, 14,000 square feet, and 2,000
square feet respectively
Exercise 6-23
Given the following information of a company:
Cost of goods sold, and shipping expenses are both variable; other costs are all fixed. Brabant
NV purchases cheeses at auction and from farmers’ cooperatives, and it distributes them in the
three territories listed above. Each of the three sales territories has its own manager and sales
staff. The cheeses vary widely in profitability; some have a high margin, and some have a low
margin. (Certain cheeses, after having been aged for long periods, are the most expensive and
carry the highest margins.)
Required
Prepare a new segmented contribution format income statement for May. Show a Total column
as well as data for each territory. In addition, for the company as a whole and for each sales
territory, show each item on the segmented income statement as a percent of sales.
Solution
Assignments
Exercise 5 (assignment1)
Heritage Company manufactures a beautiful bookcase that enjoys widespread popularity. The
company has a backlog of orders that is large enough to keep production going indefinitely at
the plant’s full capacity of 4,000 bookcases per year. Annual cost data at full capacity follow:
Required:
1. Prepare an answer sheet with the column headings shown below. Enter each cost item on
your answer sheet, placing the dollar amount under the appropriate headings. As examples,
this has been done already for the first two items in the list above. Note that each cost item
is classified in two ways: first, as either variable or fixed with respect to the number of units
produced and sold; and second, as either a selling and administrative cost or a product cost.
(If the item is a product cost, it should also be classified as either direct or indirect as
shown.)
2. Total the dollar amounts in each of the columns in (1) above. Compute the average product
cost per bookcase.
3. Due to a recession, assume that production drops to only 2,000 bookcases per year. Would
you expect the average product cost per bookcase to increase, decrease, or remain
unchanged? Explain. No computations are necessary.
Solution
Cost Behavior
Cost Item
Direct materials used (wood,
glass) .................................
Variable
$430,000
Fixed
Administrative office salaries .
$110,000
Factory supervision ...............
70,000
Sales commissions ................
60,000
105,000
Depreciation, admin. office
equipment ..........................
2,000
18,000
Factory labor (cutting and
assembly) ..........................
90,000
Insurance, factory ..................
6,000
4,000
45,000
Total costs .............................
$647,000
2.
$110,000
$ 70,000
105,000
2,000
100,000
6,000
4,000
20,000
Utilities, factory ......................
Indirect
90,000
100,000
Property taxes, factory ...........
Direct
$430,000
18,000
Advertising.............................
Administrative office supplies
Product Cost
60,000
Depreciation, factory building
Indirect materials, factory.......
Selling or
Administrati
ve
Cost
20,000
45,000
$413,000
$276,000
$520,000
$264,000
The average product cost per bookcase will be:
Direct
$520,000
Indirect
264,000
Total
$784,000
$784,000 ÷ 4,000 bookcases = $196 per bookcase
3. The average product cost per bookcase would increase if the production drops. This is
because the fixed costs would be spread over fewer units, causing the average cost per unit
to rise.
PROBLEM 6–19 (Assignment 2)
The most recent monthly contribution format income statement for Reston Company is given
below:
Reston Company
Income Statement
For the Month Ended May 31
Sales . . . . . . . . . . . . . . . . . . . . . .
Variable expenses . . . . . . . . . . . .
Contribution margin . . . . . . . . . . .
Fixed expenses . . . . . . . . . . . . . .
$900,000
408,000
492,000
465,000
100.0%
45.3
54.7
51.7
Net operating income . . . . . . . . .
$ 27,000
3.0%
Management is disappointed with the company’s performance and is wondering what can be
done to improve profits. By examining sales and cost records, you have determined the
following:
a. The company is divided into two sales territories — Central and Eastern. The Central
Territory recorded $400,000 in sales and $208,000 in variable expenses during May. The
remaining sales and variable expenses were recorded in the Eastern Territory. Fixed
expenses of $160,000 and $130,000 are traceable to the Central and Eastern Territories,
respectively. The rest of the fixed expenses are common to the two territories.
b. The company is the exclusive distributor for two products—Awls and Pows. Sales of Awls
and Pows totaled $100,000 and $300,000, respectively, in the Central Territory during
May. Variable expenses are 25% of the selling price for Awls and 61% for Pows. Cost
records show that $60,000of the Central Territory’s fixed expenses are traceable to Awls
and $54,000 to Pows, with the remainder common to the two products.
Required:
Prepare contribution format segmented income statements, first showing the total company
broken down between sales territories and then showing the Central Territory broken down by
product line. In addition, for the company as a whole and for each segment, show each item on
the segmented income statements as a percentage of sales.