Chapter 1
What is the difference between direct and indirect costs? Give an example.
Direct costs are costs that can be easily and conveniently traced back to a specific cost object, whereas indirect costs cannot. An example of a direct cost is the cost of the sugar that goes into making one cupcake (assuming that the cupcake is the cost object), and an example of an indirect cost is the bakery manager’s salary.
How is predetermined overhead rate calculated?
By adding together all estimated manufacturing overhead costs and dividing by the estimated amount of a specific cost driver.
Describe the difference between job order and process costing, and when each would be used.
Sales are 200 and variable expenses are 100. Calculate the contribution margin ratio.
A company produces 200,000 units and sells 150,000. Will income under absorption costing be greater than or less than under variable costing?
What is included in product costs, and what is the difference between product and period costs?
Product costs are (mainly) consisted of direct material, direct labor, and manufacturing overhead. These are also known as manufacturing costs. Period costs generally consist of selling, general, and administrative (SG&A) costs, and the difference between the two is how they are expensed. Product costs start on the balance sheet as inventory (raw materials -> WIP -> finished goods, depending on what stage of production they’re in), and are expensed on the income statement as cost of goods sold once the product is sold. Period costs are expensed straight to the income statement as an expense in the period the cost is incurred.
How is applied overhead calculated?
The beginning WIP on March 1 has 5,000 units. During March, 12,000 units are started. On March 31, 3,000 units remain in ending WIP. Calculate the number of units completed and transferred out during March.
If fixed expenses are 20,000, sales are $150,000, and variable expenses are $40,000, what is the net operating income?
A company produces cookies. The product is sold in boxes of 5. Each unit has the following prices and variable costs:
Selling price = $10
Direct material cost = $3
Direct labor cost = $2
Variable mfg. OH = $1
Fixed manufacturing overhead is $200,000. The company produced 150,000 units and sold 125,000 units during the year.
The company reported a fixed selling and administrative cost of $50,000 and a variable selling cost of $1 per container sold.
What is the per unit product cost under absorption and variable costing?
How do variable and fixed costs behave as production increases on a per unit AND total level? Give an example.
Variable costs – as production increases, total variable costs increase but per unit variable costs stay the same. For example, let’s say I want to increase production from 100 to 200 cupcakes and each cupcake costs me $3 to make. Whether I make 100 or 200 cupcakes, each cupcake will still cost me $3, that cost doesn’t change. But my total variable costs increase from $300 ($3 x 100) to $600 ($3 x 200).
Fixed costs – as production increases, total fixed costs stay the same but per unit fixed costs decrease. If I pay my bakery manager $100,000, I pay him that same amount of money regardless of if I make 100 or 200 cupcakes. But if I make 100 cupcakes, each cupcake has $1000 of fixed cost allocated to it (100,000 / 100), whereas if I make 200 cupcakes, each cupcake only has $500 of fixed cost allocated to it.
A company computes its plantwide PDOHR annually based on the rate of machine hours. At the beginning of the year, they estimate that 35,000 machine hours and 43,000 direct labor hours are required. Additionally, they estimate $78,000 of fixed MOH cost as well as $3.5 per machine hour. Their actual MOH cost for the year was $210,000, actual machine hours were 37,714, and actual DL hours were 45,000. Calculate the PDOHR.
During the month, 15,000 units were completed and transferred out. The following information about the ending WIP inventory has been given:
Direct Materials: 2,000 units 60% complete
Conversion: 1,500 units 80% complete
Calculate the total amount of equivalent units.
A company sells products for $100 per product. Each product also incurs $40 of variable expenses and the company has $15,000 of fixed expenses in total. If the company wants to make a profit of $10,000, what is the amount of sales that they need?
A company produces cookies. The product is sold in boxes of 5. Each unit has the following prices and variable costs:
Selling price = $10
Direct material cost = $3
Direct labor cost = $2
Variable mfg. OH = $1
Fixed manufacturing overhead is $200,000. The company produced 150,000 units and sold 125,000 units during the year.
The company reported a fixed selling and administrative cost of $50,000 and a variable selling cost of $1 per container sold.
What is the difference between absorption and variable NOI?
A company reported the following per unit costs and expenses for the month after selling 1,500 units:
DM - $17
DL - $13
Total MOH - $22
Variable - $15
Fixed - $17
Total Selling - $14
Variable - $6
Fixed - $8
Total Administrative - $10
Variable - $7
Fixed - $3
What is the total fixed cost per unit sold if the company increases production to 2,000 units?
Your company estimates $150,000 of total manufacturing overhead for an estimated activity level of 13,000 direct labor hours. The company actually incurred $115,000 of manufacturing overhead and 11,000 direct labor-hours during the period. Determine the amount of underapplied or overapplied manufacturing overhead for the period and how it affects the company's gross margin.
The beginning WIP on April 1 has 4,000 units. During April, 14,500 units are started. The following information has been given about costs incurred:
Materials Conversion
Beginning WIP: $5,000 $4,000
Added during month: $65,000 $36,000
Additionally, the ending WIP inventory has 2,000 units. The following information has been given:
Direct Materials: 70% complete
Conversion: 75% complete
Calculate the total amount of equivalent units.
A firm’s fixed expenses are $560,000 per year. The variable expense per product is $35. The selling price of each product is $85. The company sold 20,000 products last year. The sales manager believes that a reduction in the sales price to $75 per product will result in new sales of 3,000 products next year. What will be the break-even point in dollars if the price is changed?
A company produces cookies. The product is sold in boxes of 5. Each unit has the following prices and variable costs:
Selling price = $10
Direct material cost = $3
Direct labor cost = $2
Variable mfg. OH = $1
Fixed manufacturing overhead is $200,000. The company produced 150,000 units and sold 125,000 units during the year.
The company reported a fixed selling and administrative cost of $50,000 and a variable selling cost of $1 per container sold.
Prepare a traditional and contribution income statement.
Traditional
Sales
1,250,000
COGS
912,500
Gross Margin
337,500
SG&A
175,000
NOI
162,500
Contribution
Sales
1,250,000
Variable Expenses
875,000
Contribution Margin
375,000
Fixed Expenses
250,000
NOI
125,000
The following information is reported based on 2,000 units sold:
Sales - $400,000
Direct materials - $50,000
Direct labor – $75,000
Fixed MOH – $20,000
Variable MOH - $30,000
Fixed advertising expense - $35,000
Fixed administrative expense - $15,000
Variable sales commission - $15,000
Variable administrative expense - $45,000
Prepare a contribution margin income statement.
Sales - $400,000
Less Variable Expenses - $215,000
DM + DL + VMOH + Variable sales + variable admin
Gross Margin - $185,000
Less Fixed Expenses - $70,000
FMOH + Fixed advertising + fixed admin
Net Income - $115,000
Estimated data
Machining
Assembly
Total
DL hours
16,000
38,000
54,000
Machine hours
65,000
5,000
70,000
MOH
$550,000
$150,00
$700,000
Job A
Machining
Assembly
Total
DL hours
7
15
22
Machine hours
13
4
17
Assume the company uses a plantwide PDOHR on the basis of DL hours. How much MOH cost is applied to job A?
The beginning WIP on September 1 has 7,000 units. During September, 33,500 units are started. On September 30, 5,800 units remain in ending WIP. The following information has been given about costs incurred:
Materials Conversion
Beginning WIP: $10,000 $7,500
Added during month: $130,000 $105,000
Additionally, the following information about the beginning and ending WIP inventories has been given:
Beginning:
Direct Materials: 70% complete
Conversion: 75% complete
Ending:
Direct Materials: 65% complete
Conversion: 55% complete
Calculate the equivalent units for direct materials and the equivalent units for conversion.
The following information is provided:
Variable expense ratio: 40%
Sales: $200,000
Fixed expenses: $70,000
What is the operating leverage and how would a 15% increase in sales affect NOI?
Gabor Company manufactures two products: R1 and R2. The income statement for the most recent year is given below:
Revenues
$8,700,000
Less: Cost of goods sold
(2,420,000)
Gross margin
6,280,000
Less: Selling and administrative expenses
(6,135,000)
Operating Income before taxes
$145,000
Gabor spent a total of $1,250,000 on fixed costs that are not traceable to either one of the products and common to both products. Of this amount, $650,000 is related to manufacturing and $600,000 is related to SG&A expenses.
The company has made available the following data for both the products, again from the most recent year.
Product R1
Product R2
# of units sold
90,000
1,000,000
Unit selling price
$30
$6
Variable manufacturing cost per unit
$3
$1
Variable SG&A cost per unit
$4
$4
Traceable fixed mfg. OH costs
$250,000
$250,000
Traceable fixed SG&A costs
$500,000
$675,000
Create a segmented contribution margin statement for R1 and R2.
answer on the key