ACCT1501 Lecture Notes - Lecture 12: Cost Driver, Maximum Capacity, Fixed Cost
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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
| #1 | Which of the following correctly describes fixed and variable cost behavior as total volume increases? | ||
| A. | Unit fixed costs stay the same and unit variable costs increase. | ||
| B. | Total fixed costs stay the same and total variable costs increase. | ||
| C. | Unit fixed costs decrease and total variable costs decrease. | ||
| D. | Unit fixed costs decrease and unit variable costs decrease. | ||
| #2 | The incremental profit generated by the sale of one additional unit is equal to the | ||
| A. | contribution margin per unit. | ||
| B. | selling price. | ||
| C. | margin of safety. | ||
| D. | incremental cost. | ||
| #3 | Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity. The company is currently selling 40,000 units at $19.60 per unit. Each unit has a variable cost of $9. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge? | ||
| A. | $15.25 | ||
| B. | $21.35 | ||
| C. | $19.60 | ||
| D. | $27.44 | ||
| #4 | ABC company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units. If the company uses cost-plus 20% for pricing, which of the following should the company use to determine the price? | ||
| A. | The company should use a unit cost of $8.70 per unit only at a volume of 40,000 units. | ||
| B. | The company should use a unit cost of $8.70 at any volume level. | ||
| C. | The company should use a unit price of $10.44 at any volume level. | ||
| D. | The company should ignore fixed costs for cost-plus pricing. | ||
| #5 | Which of the following is a grouping of overhead costs whose total is allocated using one allocation base? | ||
| A. | Cost objective | ||
| B. | Cost pool | ||
| C. | Direct cost | ||
| D. | Cost driver | ||
| #6 | Which one of the following is the preferred alternative when deciding between two options? | ||
| A. | Incremental profit is greater than under the other alternatives. | ||
| B. | Revenues are greater than under the other alternatives. | ||
| C. | Expenses are less than under the other alternatives. | ||
| D. | No opportunity or sunk costs exist. | ||
| #7 | The required rate of return used to calculate an investmentâs net present value is related to the firmâs | |||
| A. | contribution margin. | |||
| B. | cost of capital. | |||
| C. | total assets. | |||
| D. | Price/Earnings ratio. | |||
| #8 | A company is trying to decide whether to keep or drop the organic foods department in its grocery store. If organic foods are dropped, the manager will be laid off. What is the manager's salary in relation to the decision to keep or drop the department? | |||
| A. | A variable cost and therefore relevant | |||
| B. | Avoidable and therefore incremental | |||
| C. | Sunk and therefore not relevant | |||
| D. | A fixed cost and therefore not relevant | |||
| #9 | The following information relates to Ajax Widgets during the year. There was no beginning inventory. | |||
| Units produced | 11,000 | |||
| Units sold | 10,000 | |||
| Units in ending inventory | 1,000 | |||
| Fixed manufacturing overhead | $220,000 | |||
| How much fixed manufacturing overhead will be expensed during the year (included in Cost of Goods Sold) using full costing? | ||||
| A. | $220,000 | |||
| B. | $200,000 | |||
| C. | $20,000 | |||
| D. | $10,000 | |||
| #10 | If the required rate of return is greater than the internal rate of return of a potential investment, the company should judge the investment as acceptable. | |||
| A. | This is a True statement | |||
| B. | This is a False statement | |||
| C. | Not enough information provided. | |||
| #11 | The basic concept involved in time value of money calculations is that | |||
| A. | it is better to receive a dollar in the future than to receive a dollar today | |||
| B. | incremental revenues must exceed incremental costs. | |||
| C. | it is better to receive a dollar today than to receive a dollar in the future. | |||
| D. | it can only be applied to positive cash flows | |||
| #12 | Hanson Sports has three product lines: footballs, basketballs, and bats. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2016 follows: | ||||
| Footballs | Basketballs | Bats | Total | ||
| Sales | $600,000 | $800,000 | $400,000 | $1,800,000 | |
| Cost of goods sold | 260,000 | 400,000 | 230,000 | 890,000 | |
| Gross margin | 340,000 | 400,000 | 170,000 | 910,000 | |
| Less other variable costs | 85,000 | 120,000 | 80,000 | 285,000 | |
| Contribution margin | 255,000 | 280,000 | 90,000 | 625,000 | |
| Less direct salaries | 50,000 | 60,000 | 45,000 | 155,000 | |
| Less common fixed costs | 85,000 | 100,000 | 55,000 | 240,000 | |
| Net income | $120,000 | $120,000 | -$10,000 | $230,000 | |
| Since the profit for bats is a net loss, the company is considering dropping this product line. What is the incremental $ effect on total net income of dropping the Bats line? | |||||
| #13 | Right Air Supply sells a specialized air filter that has a variable cost of $10 each. | ||||
| Fixed costs are estimated to be $700,000 across all levels of sales shown below. | |||||
| Units Sold | Unit Price | CM per unit x Qty | Fixed Costs | Profit | |
| 90,000 | $33 | 700,000 | |||
| 100,000 | $31 | 700,000 | |||
| 110,000 | $30 | 700,000 | |||
| 120,000 | $28 | 700,000 | |||
| Which price should Right Air Supply charge to maximize profits? | |||||
| #14 | Randolph Corporation sells a single product at a price of $275 per unit. Variable cost per unit is $135 and fixed costs total $356,860. If sales are expected to be $825,000, what is the companyâs margin of safety? | ||||
| #15 | Roger Excavating Company experienced the following costs in 2016: | ||||
| Direct materials | $1.75 per unit | ||||
| Direct labor | $2.00 per unit | ||||
| Variable manufacturing overhead | $2.50 per unit | ||||
| Variable selling | $0.75 per unit | ||||
| Fixed manufacturing overhead | $50,000 | ||||
| Fixed selling | $15,000 | ||||
| Fixed administrative | $5,000 | ||||
| During 2016, the company manufactured 100,000 units and sold 80,000 units. If the average selling price per unit was $22.65, what is the amount of the companyâs contribution margin per unit? | |||||
