EXAM ONE REVIEW – Questions & SOLUTIONS – Revised

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EXAM ONE REVIEW – Questions & SOLUTIONS – Revised Question 1: Nish Corporation has provided the following data for the month of April: Sales Raw materials purchases Direct labor cost Selling expense Manufacturing overhead cost $220,000 $50,000 $23,000 $59,000 $18,000 . Administrative expense Inventories: Raw materials Work in process Finished goods $42,000

Required:

$43,000 Beginning $26,000 $18,000 $29,000

Ending

$35,000 $22,000 a. Prepare a Schedule of Cost of Goods Manufactured in good form for April. b. Prepare Income Statement in good form for April.

Question 2: Dodge Products uses a job-costing system for its units, which pass from the Machining Department, to the Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in contrast, the Assembly Department performs a number of manual-assembly activities. The following information relates to the Machining Department for the year just ended: Budgeted manufacturing overhead $12,000,000 Actual manufacturing overhead Budgeted machine hours Actual machine hours 794,000 The Machining Department data that follow pertain to job no. 775, the only job in production at year-end. Direct materials $125,000 12,142,000 800,000 Direct labor cost 61,800 Machine hours 550

Required:

A. Assuming the use of normal costing, calculate the predetermined overhead rate that is used in the Machining Department. B. Compute the cost of the Machining Department's year-end work-in-process inventory. C. Determine whether overhead was under- or over-applied during the year in the Machining Department. D. If Dodge disposes of the Machining Department's under- or over-applied overhead as an adjustment to Cost of Goods Sold, would the company's Cost-of-Goods-Sold account increase or decrease? Explain. E. How much overhead would have been charged to the Machining Department's Work-in- Process account during the year? F. Comment on the appropriateness of direct labor cost to apply manufacturing overhead in the Assembly Department.

Question 3: Pitney Corporation manufactures two types of transponders -- no. 156 and no. 157 – and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows. Anticipated volume (units) Direct material cost No. 156 6,000 14.000 $40 $65 No. 157 Direct labor cost $25 $25 The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities' three respective cost drivers, follow. No. 156 No. 157 Total Setups Machine hours worked 60 15,000 40 25,000 100 40,000 Outgoing shipments 120 80 200 The firm's total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000. Required: A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system. B. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 156 and 157 if the expected manufacturing volume is attained. C. Assuming use of activity-based costing, compute the total cost per unit of product no. 156. D. If the company's selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156? Show computations.

Question 4: Lewis Company needs to determine the variable utilities rate per machine hour in order to estimate cost for August. Relevant information is as follows. Machine Hours Month Worked Cost April 4,500 $ 9,560 Utilities May June 4,200 6,500 9,440 10,725 July 7,000 11,400 Lewis anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine time. The company uses the high-low method to analyze costs. Required: A. Calculate the variable and fixed components of the utilities cost. B. Using the data calculated above, estimate the utilities cost for August. C. Compare the high-low method versus the visual-fit method with respect to (1) number of data observations used in the analysis and (2) objectivity of the results.

Question 5: Belli-Pitt, Inc. produces a single product. The results of the company's 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.

Question 6: Beachcraft Corporation has fixed manufacturing cost of $12 per unit. Consider the three independent cases that follow. Case A: Absorption- and variable costing net income each totaled $240,000 in a period when the firm produced 18,000 units. Case B: Absorption-costing net income totaled $320,000 in a period when finished-goods inventory levels rose by 7,000 units. Case C: Absorption-costing net income and variable-costing net income respectively totaled $220,000 and $250,000 in a period when the beginning finished-goods inventory was 14,000 units.

Required:

A. In Case A, how many units were sold during the period? B. In Case B, how much income would Beachcraft report under variable costing? C. In Case C, how many units were in the ending finished-goods inventory?

Question 7: Segment Reporting O’Mara’s, Incorporated's income statement for the most recent month is given below. For each of the following questions, refer back to the original data. (a) If Store B sales increase by $20,000 with no change in traceable fixed expenses, by what should the overall company net operating income increase? (b) The marketing department believes that a promotional campaign at Store A costing $5,000 will increase sales by $15,000. If its plan is adopted, what impact will this have on overall company net operating income? (c) A proposal has been made that will lower variable expenses in Store A to 62% of sales. However, this reduction can only be accomplished by an increase in fixed expenses of $8,000. If this proposal is implemented and sales remain constant, by what amount would overall company net operating income increase? (d) If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed expenses, what would the impact be on the segment margin? (e) Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal has been made to change from a fixed salary to a sales commission of 5%. Assume that this proposal is adopted, and that as a result sales increase by $20,000. What would be the new segment margin for Store B?

Solution to Question 7: Segment Reporting - Page 1 of 2 O’Mara’s, Incorporated's income statement for the most recent month is given below. For each of the following questions, refer back to the original data. (f) If Store B sales increase by $20,000 with no change in traceable fixed expenses, by what should the overall company net operating income increase? Answer: Increase by $8,000 Store B contribution margin ratio = $80,000 $200,000 = 40% Additional net operating income = $20,000 40% = $8,000 (g) The marketing department believes that a promotional campaign at Store A costing $5,000 will increase sales by $15,000. If its plan is adopted, what impact will this have on overall company net operating income? Answer: Decrease by $800 Store A contribution margin ratio = $28,000 $100,000 = 28% Change in net operating income = ($15,000 28%) $5,000 = $4,200 $5,000 = $800 decrease (h) A proposal has been made that will lower variable expenses in Store A to 62% of sales. However, this reduction can only be accomplished by an increase in fixed expenses of $8,000. If this proposal is implemented and sales remain constant, by what amount would overall company net operating income increase? Answer: increase by $2,000

New amount for Store A variable expenses = $100,000 62% = $62,000 Change in net operating income = ($72,000 $62,000) $8,000 = $10,000 $8,000 = $2,000 increase (i) If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed expenses, what would the impact be on the segment margin? Answer: the segment margin should increase by $5,000 Store B contribution margin ratio = $80,000 $200,000 = 40% Change in segment margin = ($30,000 40%) $7,000 = $12,000 $7,000 = $5,000 increase (j) Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal has been made to change from a fixed salary to a sales commission of 5%. Assume that this proposal is adopted, and that as a result sales increase by $20,000. What would be the new segment margin for Store B? Answer: $29,000

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