ACC 342 Lecture Notes - Lecture 11: Fixed Cost, Income Statement, Variable Cost
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Related Questions
1) All of the following are examples of product costs except:
depreciation on the company's administrative offices.
salary of the plant manager.
insurance on the factory equipment.
rental costs of the factory facility.
2) Period costs:
are treated as expenses in the period they are incurred
are directly traceable to products
include direct labor
are also referred to as manufacturing overhead costs
.
3) Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:
Direct materials $30
Direct manufacturing labor 5
Variable manufacturing overhead 10
Fixed manufacturing overhead 40
Total manufacturing costs $85
The plant has capacity for 2,000 axles and is considering expanding production to 1,500 axles. What is the total cost of producing 1,500 axles?
a. $85,000
b. $170,000
c. $107,500
d. $102,500
4) In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:
overstate period expenses on the income statement.
overstate the cost of goods sold on the income statement.
understate the cost of goods manufactured.
have no effect on the cost of goods manufactured.
5) In CVP analysis, focusing on target net income rather than operating income:
a. will increase the breakeven point
b. will decrease the breakeven point
c. will not change the breakeven point
d. does not allow calculation of breakeven point
6) A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases.
a. True
b. False
7) As activity increases within the relevant range, fixed costs remain constant on a per unit basis.
a. True
b. False
8) Which of the following statements is correct with regard to a CVP graph?
A CVP graph shows the maximum possible profit.
A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.
A CVP graph assumes that total expense varies in direct proportion to unit sales.
A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.
9) How would the following costs be classified (product or period) under variable costing at a retail clothing store?
| Cost of purchasing clothing | Sales commissions | |
| a. | Product | Product |
| b. | Product | Period |
| c. | Period | Product |
| d. | Period | Period |
10) The principal difference between variable costing and absorption costing centers on:
whether variable manufacturing costs should be included as product costs.
whether fixed manufacturing costs should be included as product costs.
whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.
none of these.
11) Joe has a hot dog cart that he parks on the NY sidewalk and sells hotdogs during the day. The variable cost of a hot dog is $.90. The selling price of the hot dog is $2.00. The fixed cost is $3,000 per month which covers the loan for the cart and the salary Joe needs to make to live. How many hotdogs must Joe sell in one month in order to break even?
3,300 hot dogs
3,000 hot dogs
2,727.27 hot dogs
2,728 hot dogs
12) Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:
| Unit product cost under variable costing.......................... | $5.20 per unit | |
| Fixed manufacturing overhead cost for the year.............. | $260,000 | |
| Fixed selling and administrative cost for the year............ | $180,000 | |
| Units (calculators) produced and sold.............................. | 400,000 |
What is Shun's unit product cost under absorption costing for last year?
$4.10
$4.55
$5.85
$6.30.
Use the following information to answer questions 13 to 15:
Barnett Company uses the weighted-average method in its process costing system. The company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete with respect to the 4,000 units in work in process at May 1 and 50% complete with respect to the 6,000 units in work in process at May 31. During May, 14,000 units were started, 12,000 units were completed and transferred to the next department.
13) Calculate the number of equivalent units for materials.
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
14) Calculate the number of equivalent units for conversion?
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
15) An analysis of the costs relating to work in process at May 1 and to production activity for May follows:
| Materials | Conversion | ||
| Work in process 5/1....................... | $13,800 | $3,740 | |
| Costs added during May................ | $42,000 | $26,260 |
The total cost per equivalent unit for May was:
$5.02
$5.10
$5.12
$5.25
LOOKING FOR SOLUTION TO PART 2,3,4
Section I: Cost-Volume-Profit Analysis
The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:
Direct Materials: $3.00
Direct Labor: $1.50
Variable Manufacturing Overhead:$0.40
Variable Selling Expenses: $1.10
Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below. All CVP calculations shouldbe completed in the Hampshire Company Spreadsheet. Note:The CVP analysis satisfies Part A of Section I.
Compute net income before tax.
Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.
Calculate the break-even point in units and dollars of revenue.Note: This is a required part of the CVP analysis andsatisfies Part C of Section I.
Calculate the margin of safety:
In units
In sales dollars
As a percentage
Calculate the degree of operating leverage.
Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.
Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.
A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.
Additionally, complete Parts B and D of Section I as outlined inthe Final Project Guidelines and Rubric document.
Section II: Inventory Management
The information below represents the beginning and endinginventory amounts along with the production and sales for the monthin umbrella units.
Beginning Inventory: 0 Umbrellas
Production: 80,000 Umbrellas
Sales: 60,000 Umbrellas
Ending Inventory: 20,000Umbrellas
Using the information provided above and the costs and salesinformation provided in Section I, complete the following in theHampshire Company Spreadsheet in order to assist you in respondingto all components of Section II:
Prepare a variable costing income statement.
Prepare an absorption costing income statement.
Additionally, complete Parts A through E of Section II asoutlined in the Final Project Guidelines and Rubric document.
Section III: Benchmarking
The management of the Hampshire Company would like to implementbenchmarking. Standard costs have been established and arepresented below. You will want to complete a variance analysis toinclude efficiency and price variances for materials (cloth andhandle assemblies) and labor based on the following data:
Units Produced = 80,000
Units Sold = 60,000
Direct Materials Purchased and Used
Actual square yards of cloth purchased and used: 128,000
Actual price incurred per yard: $1.25
Actual handles purchased and used: 80,808
Actual price per handle/rib/stretcher assembly: $0.99
Direct Manufacturing Labor Used
Actual direct labor hours used: 15,748
Actual price per hour: $7.62
Direct labor costs: $120,000
Standard Rates
Standard labor hours per unit: 0.20
Standard labor price per hour: $7.50
Square yards material per unit: 1.50
Standard price per yard: $1.15
Handle/rib/stretcher assembly per unit: 1
Standard price per handle assembly: $1.05
Companies can use variance analysis and benchmarking to measureperformance within their own company and against competitors. Thiscan be done by setting standards/budgets and comparing a completedvariance analysis to results from prior periods or comparing themto competitorsâ results. Using the information provided above,complete the following calculations (steps 1 and 2) in theHampshire Company Spreadsheet. This will assist you in respondingto all components of Section III.
Calculate price variances for material and labor and denotewhether they are favorable or unfavorable.
Calculate efficiency variances for material and labor and denotewhether they are favorable or unfavorable.
In order to measure performance and make use of the varianceanalysis completed, management understands the need to compareresults with their competitors. Following the steps outlined below,you will research benchmarking and propose the most effectiveapproach for your company. Respond to Parts A through C of SectionIII as outlined in the Final Project Guidelines and Rubricdocument.
Section IV: Alternative Costing Method
Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:
Direct Materials: $9,300
Direct Labor Hours: 600
Hourly Rate of Direct labor:$8.00
In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.
An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:
Stick | Collapsible | |
Units Sold | 60,000 | 3,000 |
Selling Price | $12.50 | $14.00 |
Direct Material Cost per Unit | $3 | $3.10 |
Direct Labor Cost per Hour | $7.50 | $8.00 |
Variable Manufacturing Overhead | $0.40 | $0.40 |
Variable Selling Costs | $1.10 | $1.10 |
Labor Hours per Unit | 0.2 | 0.2 |
Sales Orders | 120 | 1 |
Purchase Orders | 50 | 3 |
Production Runs | 45 | 6 |
Material Moves | 86 | 10 |
Machine Setups | 130 | 6 |
Machine Hours | 525 | 32 |
Inspections | 200 | 10 |
Shipments | 60 | 3 |
Table 1: Direct Cost Information and Activities
Activity | Activity Cost | Activity Cost Driver |
Order Processing | $35,000 | Number of Sales Orders |
Purchasing | $36,000 | Number of Purchase Orders |
Material Handing | $28,000 | Material Moves |
Machine Setup | $14,000 | Machine Setups |
Production | $99,000 | Production Runs |
Assembly | $80,000 | Machine Hours |
Inspecting | $11,000 | Number of Inspections |
Shipping | $7,500 | Number of Shipments |
Table 2: Activity Cost Pools and Cost Drivers
Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.
Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:
1.Calculate the allocation rates foreach cost driver using ABC.
2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.
3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.
4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.
Based on your calculations from steps 1â4, respond to Parts Athrough C in Section IV as outlined in the Final Project Guidelinesand Rubric document.
Section V: Memo to Management
The management of the Hampshire Company is very interested inmeasuring performance. They would like you to recommend a strategyto increase business performance. They are not sure whether theyshould focus on product differentiation or cost leadership.Research additional performance tools to include the balancedscorecard. During your research, consider what performancemeasurements you would use based on the four perspectives. Provideexamples.
In your recommendation, you will want to include the outcome ofyour previous quantitative analysis and research performed relatedto cost-volume-profit (CVP), variable and absorption costing,just-in-time (JIT), standard costs, variances, and benchmarking.You will want to review key points and make recommendations basedon your current research and prior analysis completed and researchperformed.
Your two- to three-page memo to management must be submitted asa Word document and must include your responses to Parts A throughC of Section V as outlined in the Final Project Guidelines andRubric document.
Integrative Exercise
Cost Behavior and Cost-Volume-Profit Analysis for Many GlacierHotel
Using the High-Low Method to Estimate Variable and FixedCosts
Located on Swiftcurrent Lake in Glacier National Park, ManyGlacier Hotel was built in 1915 by the Great Northern Railway. Inan effort to supplement its lodging revenue, the hotel decided in20X1 to begin manufacturing and selling small wooden canoesdecorated with symbols hand painted by Native Americans living nearthe park. Due to the great success of the canoes, the hotel beganmanufacturing and selling paddles as well in 20X3. Many hotelguests purchase a canoe and paddles for use in self-guided tours ofSwiftcurrent Lake. Because production of the two products began indifferent years, the canoes and paddles are produced in separateproduction facilities and employ different laborers. Each canoesells for $500, and each paddle sells for $50. A 20X3 firedestroyed the hotelâs accounting records. However, a new system putinto place before the 20X4 season provides the following aggregateddata for the hotelâs canoe and paddle manufacturing and marketingactivities:
| Manufacturing Data: | ||||||||||||||
| Year | Number of Canoes Manufactured | Total Canoe Manufacturing Costs | Year | Number of Paddles Manufactured | Total Paddle Manufacturing Costs | |||||||||
| 20X9 | 250 | $103,000 | 20X9 | 900 | $38,500 | |||||||||
| 20X8 | 275 | 128,000 | 20X8 | 1,200 | 49,000 | |||||||||
| 20X7 | 240 | 108,000 | 20X7 | 1,000 | 44,000 | |||||||||
| 20X6 | 310 | 114,000 | 20X6 | 1,100 | 45,500 | |||||||||
| 20X5 | 350 | 141,500 | 20X5 | 1,400 | 52,000 | |||||||||
| 20X4 | 400 | 140,000 | 20X4 | 1,700 | 66,500 | |||||||||
| Marketing Data: | ||||||||||||||
| Year | Number of Canoes Sold | Total Canoe Marketing Costs | Year | Number of Paddles Sold | Total Paddle Marketing Costs | |||||||||
| 20X9 | 250 | $45,000 | 20X9 | 900 | $7,500 | |||||||||
| 20X8 | 275 | 43,000 | 20X8 | 1,200 | 9,000 | |||||||||
| 20X7 | 240 | 44,000 | 20X7 | 1,000 | 8,000 | |||||||||
| 20X6 | 310 | 51,000 | 20X6 | 1,100 | 8,500 | |||||||||
| 20X5 | 350 | 62,000 | 20X5 | 1,400 | 10,000 | |||||||||
| 20X4 | 400 | 60,000 | 20X4 | 1,700 | 11,500 | |||||||||
Required:
1. High-Low Cost Estimation Method
a. Use the high-low method to estimate the per-unit variablecosts and total fixed costs for the canoe productline.
| Variable cost per unit | $ |
| Total fixed cost | $ |
b. Use the high-low method to estimate the per-unit variablecosts and total fixed costs for the paddle productline.
| Variable cost per unit | $ |
| Total fixed cost | $ |
2. Cost-Volume-Profit Analysis, Single-ProductSetting
Use CVP analysis to calculate the break-even point in units for
a. The canoe product line only (i.e.,single-product setting)
| BE units | canoes |
b. The paddle product line only (i.e.,single-product setting)
| BE units | paddles |
3. Cost-Volume-Profit Analysis,Multiple-Product Setting
The hotel's accounting system data show an average sales mix ofapproximately 300 canoes and 1,200 paddles each season.Significantly more paddles are sold relative to canoes because someinexperienced canoe guests accidentally break one or more paddles,while other guests purchase additional paddles as presents forfriends and relatives. In addition, for this multiple-product CVPanalysis, assume the existence of an additional $30,000 of commonfixed costs for a customer service hotline used for both canoe andpaddle customers. Use CVP analysis to calculate the break-evenpoint in units for both the canoe and paddle product lines combined(i.e., the multiple-product setting).
| Canoe BE units | canoes |
| Paddle BE units | paddles |
4. Cost Classification
a. Classify the manufacturing costs, marketing costs, andcustomer service hotline costs either as production costs or periodcosts.
All manufacturing costs are costs. All marketing costs andcustomer hotline costs are costs
b. For the period costs, further classify them into eitherselling expenses or general and administrative expenses.
Marketing costs are selling oriented; therefore, the marketingperiod costs would be further classified as . Customer hotlinecosts relate to the customer service section of the value chain andwould be further classified as .
5. Sensitivity Cost-Volume-Profit Analysis andProduction Versus Period Costs, Multiple- Product Setting
If both the variable and fixed production costs (refer to youranswer to Requirement 1) associated with the canoe product lineincreased by 5% (beyond the estimate from the high-low analysis),how many canoes and paddles would need to be sold in order to earna target income of $96,000? Assume the same sales mix andadditional fixed costs as in Requirement 3.
| Canoe target income units | canoes |
| Paddle target income units | paddles |
6. Margin of Safety
Calculate the hotelâs margin of safety (both in units and insales dollars) for Many Glacier Hotel, assuming the same facts asin Requirement 3, and assuming that it sells 700 canoes and 2,500paddles next year.
total MOS units above total BE units
$ MOS in sales dollars
