Chapter 4
True or False: The absorption costing income statement classifies costs based on behavior rather than function.
False
True or False: Examples of units for activity rates could include dollars, miles, batches, or units.
False
True or False: Contribution margin lost from a decline in sales is an opportunity cost.
True
Distinguish between a traceable fixed cost and a common fixed cost. Give an example of each.
Traceable - directly related to a particular product
Common - not directly related to a product
PP2: During the first 3 months of the year, Jackson Company had the following relationships between units sold and units produced. January = units produced equal to units sold. February = units produced exceeds units sold. March = units produced less than units sold. In each month, will fixed MOH be deferred or released from inventory?
January: Neither
February: Deferred
March: Released
See Session Slides - Ch. 5 for 200, Part A.
$0.61 per machine hour, $25.10 per batch
MC12: Wishnell Toys can make 1,000 toy robots with the following costs: DM = $70,000, DL = 26,000, VMOH = $15,000, FMOH = $15,000. The company can purchase the robots externally for $120,000. The avoidable fixed costs are $5000 if the units are purchased externally. What is the cost savings if the company makes the robots?
$4000
Why is direct labor a poor base for allocating overhead in many companies?
Direct labor hours may not correctly allocate costs to products. For example, a product that uses expensive technology may only take 2 hours to make, while products made by hand with no technology take 20 hours.
MC4: Under absorption costing, a company had the following unit costs for 8,000 units. DL = $8.50, DM = $9.00, VMOH = $6.75, FMOH = $7.50. Calculate production cost per unit if 30,000 units had been produced.
$26.25
See Session Slides - Ch. 5 for 300, Part B.
Product C7 = $19,034
Product P8 = $18,266
MC17: North Division has the following information: Sales = $900,000, Variable Expenses = $480,000, Fixed Expenses = $465,000
If this division is eliminated, the fixed expenses will be allocated to the company's other divisions. What is the incremental effect on NOI if the division is dropped?
$465,000 decrease
A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the capacity. Which of the following costs should be ignored when deciding whether to produce a special order?
Variable selling expenses, fixed factory overhead, direct labor, contribution margin of additional units
Fixed factory overhead
PP3: Castaway Company reports the following first year production cost information. 53,000 units produced, 50,000 units sold. Sales price = $150/unit, DL = $8/unit, DM = $4/unit, VMOH = $2,173,000, FMOH = $3,339,000, Operating Expenses = $1,000,000.
What is NOI under variable costing?
$511,000
See Session Slides - Ch. 5 for 400, Part C.
Product C7 = $2,766
Product P8 = $2,934
See Session Slide - Chapter 6, 400
$130,000 disadvantage/loss/reduction in profits
Give 3 examples of a constraint.
Time, money, labor, material, travel, technological
PP3: Castaway Company reports the following first year production cost information. 53,000 units produced, 50,000 units sold. Sales price = $150/unit, DL = $8/unit, DM = $4/unit, VMOH = $2,173,000, FMOH = $3,339,000, Operating Expenses = $1,000,000.
What is NOI under absorption costing?
$700,000
MC6: Buhl manufactures a product that uses $15 in DM and $5 in DL per unit. Under traditional costing, manufacturing overhead applied to each unit is $12. Buhl is considering switching to an ABC system, under which the total activity cost would be $25. What is the total manufacturing cost per unit under ABC costing?
$45
See Session Slide - Ch. 6, 500
Z, X, Y
What is lean production? How does it reduce or eliminate differences in income between absorption and variable costing?
Lean production aims to create as little waste as possible - practically, this means producing only as many units as will be bought so that units produced and units sold will be approximately the same.