[Question]16. Activity-based costing first assigns costs to products and then uses these product costs to assign costs to manufacturing activities.Answer: False
Blooms Taxonomy: UnderstandAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 2 Medium Learning Objective: 17-C2Topic: Activity Based Costing
[Question]17. Multiple cost pools are used when allocating overhead using the plantwide overhead rate method.Answer: False
[Question]20. The usefulness of overhead allocations based on a plantwide overhead rate depends on two crucial assumptions: (1) the overhead cost is correlated with the allocation base; and (2) all products use overhead cost in dissimilar proportions. Answer: False
[Question]25. Compared to the departmental overhead rate method, the plantwide overhead rate method usually results in more accurate overhead allocations.Answer: False
[Question]26. Because departmental overhead costs are allocated based on measures closely related to production volume, they accurately assign overhead, such as utility costs.Answer: False
[Question]32. Kinetic Company estimates that overhead costs for the next year will be $1,600,000 for indirect labor and $400,000 for factory utilities. The company uses direct labor hours as its overhead allocation base. If 50,000 direct labor hours are planned for this next year, then the plantwide overhead rate is $.025 per direct labor hour.Answer: FalseFeedback: ($1,600,000 + $400,000)/50,000 direct labor hours = $40 per direct labor hour
[Question]33. A company estimates that costs for the next year will be $600,000 for indirect labor, $40,000 for factory utilities, and $1,000,000 for the CEO’s salary. The company uses machine hours as its overhead allocation base. If 80,000 machine hours are planned for this next year, then the plantwide overhead rate is $8 per machine hour.Answer: TrueFeedback: ($600,000 + $40,000)/80,000 machine hours = $8 per machine hour
[Question]34. A company estimates total overhead costs for the next year to be $1,500,000 and wishes to use direct labor hours as its overhead allocation base. This company makes two products: (1) Fancy X , which requires three direct labor hours per unit, and (2) Plain X, which requires one direct labor hour per unit. If the company plans to make 20,000 units of Fancy X and 20,000 units of Plain X, then each unit produced will be allocated the same amount of overhead.Answer: FalseFeedback: ($1,500,000)/[(3 x 20,000) + (1 x 20,000)] DL hours = $18.75 per DL hourOverhead allocated to 1 unit of Fancy X = $18.75 x 3 DLH = $56.25Overhead allocated to 1 unit of Plain X = $18.75 x 1 DLH = $18.75
Reference: 17_01Kudzu Company sells two products Big X and Little X. Current direct material and direct labor costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year’s overhead is estimated to be $525,000. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $20 per hour and the company expects to manufacture 16,000 units of Big X and 18,000 units of Little X next year.
DirectMaterialper Unit
DirectLabor Dollars
per UnitBig X $5 $20Little X $3 $10
[Question]35. Kudzu has 34,000 total estimated direct labor hours for next year.Answer: FalseReference : 17_01Feedback: Direct labor hours per unit of Big X = $20/$20 = 1 DLHDirect labor hours per unit of Little X = $10/$20 = .5 DLHEstimated direct labor hours = (1 x 16,000) + (.5 x 18,000) = 25,000 direct labor hours
[Question]36. Kudzu’s plantwide overhead rate will be $21 per direct labor hour next year.Answer: TrueReference: 17_01Feedback: Direct labor hours per unit of Big X = $20/$20 = 1 DLHDirect labor hours per unit of Little X = $10/$20 = .5 DLHEstimated direct labor hours = (1 x 16,000) + (.5 x 18,000) = 25,000 direct labor hoursPlantwide overhead rate = $525,000/25,000 DLH = $21 per DLH
[Question]37. If the direct labor time estimates are met, Kudzu will allocate $10.50 of overhead cost to each unit of Little X.Answer: TrueReference: 17_01Feedback: Direct labor hours per unit of Big X = $20/$20 = 1 DLHDirect labor hours per unit of Little X = $10/$20 = .5 DLHEstimated direct labor hours = (1 x 16,000) + (.5 x 18,000) = 25,000 direct labor hoursPlantwide overhead rate = $525,000/25,000 DLH = $21 per DLH2 units of Little X are produced each hour.$21/2 = $10.50
[Question]38. The first step in using the departmental overhead rate method requires that overhead be traced to each of the company’s departments.Answer: True
[Question]39. The departmental overhead rate method traces costs to each department and then determines an allocation base for each department. Answer: True
Chapter 17 – Activity-Based Costing and Analysis[Question]40. Turtle Company produces t-shirts that go through two operations, cutting and sewing, before they are complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for the cutting department based on direct labor hours is $2.69 per direct labor hour (rounded to two decimals).
Cutting SewingDirect labor hours 250,000
DLH75,000 DLH
Machine hours 125,000 MH
150,000 MH
Overhead costs $500,000 $375,000
Answer: FalseFeedback: $500,000/250,000 DLH = $2 per DLH
[Question]41. A company produces heating elements that go through two operations, casting and assembling, before they are complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for the assembling department based on direct labor hours is $5 per direct labor hour.
Chapter 17 – Activity-Based Costing and Analysis42. A company produces paint that goes through two operations, operation A and operation B, before it is complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for Department B based on machine hours is $4 per machine hour.
[Question]43. A company produces computer chips that go through two operations, operation A1 and operation B2, before they are complete. Expected costs and activities for the two departments are shown below. Departmental overhead rates are based on machine hours in department A1 and direct labor hours in department B2. Therefore, the overhead rates for department A1 and department B2 are $3.62 per machine hour and $5.73 per direct labor hour, respectively.
Chapter 17 – Activity-Based Costing and Analysis44. A company produces garden benches that go through two operations, operation 1A1 and operation 2B2, before they are complete. Expected costs and activities for the two departments are shown below. Both departments have departmental overhead rates based on machine hours. Therefore, the overhead rates for department 1A1 and department 2B2 are the same.
[Question]45. A company produces surgical equipment that goes through threes processes, 1A1, 2B2, and 3C3, before they are complete. Expected costs and activities for the three departments are shown below. All departments have departmental overhead rates based on direct labor hours. Therefore, the overhead rate for each department is $5 per direct labor hour.
Chapter 17 – Activity-Based Costing and Analysis46. Activity-based costing involves four steps: (1) identify activities and the costs they cause, (2) group similar activities into cost pools, (3) determine an activity rate for each activity cost pool, and (4) allocate overhead costs to products using those activity rates.Answer: True
[Question]49. Activities causing overhead cost in an organization are typically separated into four levels: (1) direct activities, (2) indirect activities, (3) batch level activities, and (4) facility level activities. Answer: False
Chapter 17 – Activity-Based Costing and Analysis54. Activity-based costing often shifts overhead costs from large volume, standardized products to low-volume, specialty products that consume disproportionate resources. Answer: True
[Question]59. A method of assigning overhead costs to a product using a single overhead rate is:A. Plantwide overhead rate method.B. Cost pool overhead rate method.C. Departmental overhead rate method.D. Activity-based costing.E. Overhead cost allocation method. Answer: A
[Question]60. Which types of overhead allocation methods result in the use of more than one overhead rate during the same time period?A. Plantwide overhead rate method and departmental overhead rate method.B. Cost pool overhead rate method and plantwide overhead rate method.C. Departmental overhead rate method and activity-based costing.D. Activity-based costing and plantwide overhead rate method. E. Departmental overhead rate method and cost pool overhead rate method. Answer: C
Chapter 17 – Activity-Based Costing and Analysis[Question]61. Which of the following would not be considered a product cost?A. Direct labor costs.B. Factory supervisor’s salary.C. Factory line worker’s salary.D. Cost accountant’s salary.E. Manufacturing overhead costs. Answer: D
[Question]62. Overhead costs:A. Are directly related to production.B. Can be traced to units of product in the same way that direct materials can.C. Cannot be traced to units of product in the same way that direct labor can.D. Are period costs.E. Include only fixed costs.Answer: C
[Question]63. The cost object of the plantwide overhead rate method is:A. The unit of product.B. The production departments of the company.C. The production activities of the company.D. Manufacturing cost pools.E. the time period. Answer: A
Chapter 17 – Activity-Based Costing and Analysis[Question]64. Which of the following statements is true with regard to the plantwide overhead rate method?A. The rate is determined using volume-related measures.B. It is logical to use this method when overhead costs are not closely tied to volume-related measures.C. This method uses multiple overhead rates.D. The rate is determined using measures that are not closely related to volume.E. The method provides the most accurate means of allocating overhead costs. Answer: A
[Question]65. The cost object(s) of the departmental overhead rate method is:A. The unit of product.B. The production departments of the company.C. The production departments in the first stage and the unit of product in the second stage.D. The unit of product in the first stage and the production departments in the second stage.E. The production activities of the company. Answer: C
[Question]66. Which of the following statements is true with regard to the departmental overhead rate method?A. It is logical to use this method when overhead resources are consumed by various products in substantially the same way throughout multiple departments.B. It is logical to use this method when overhead resources are consumed by various products in substantially different ways throughout multiple departments.C. Each department has the same rate for the same activity pool.D. It requires one overhead cost pool and one rate.E. It is synonymous with activity-based costing. Answer: B
[Question]67. The cost object(s) of the activity-based costing method is(are):A. The unit of product.B. The production departments of the company.C. The production activities of the company.D. The production activities in the first stage and the unit of product in the second stage. E. The unit of product in the first stage and the production activities in the second stage. Answer: D
[Question]68. From an ABC perspective, what causes costs to be incurred?A. Financial transactions.B. The volume of units produced.C. Debits and credits.D. Management decisions.E. Activities. Answer: E
Chapter 17 – Activity-Based Costing and AnalysisA. The premise of ABC is that activities are what cause costs to be incurred.B. ABC is another way to refer to a multiple departmental rate situation.C. There one basic stage to ABC.D. ABC is simpler and less expensive to implement than other traditional methods of allocating overhead costs.E. All cost drivers used to determine the rates will be unit-level drivers. Answer: A
[Question]70. What is the reason for pooling costs?A. To shift costs from low-volume to high-volume products.B. It is a budgeting technique designed to accurately track fixed costs.C. Determining a pool rate for all costs incurred by the same activity reduces the number of cost assignments required.D. This procedure helps to determine which costs are directly related to production volume. E. It simplifies departmental overhead costing procedures. Answer: C
[Question]71. Which of the following are advantages of using the plantwide overhead rate method?A. The use of cost pools is considerably more accurate than other overhead allocations.B. The necessary information is readily available.C. It is more accurate than traditional overhead allocations.D. Each department has its own overhead rate and its own allocation base.E. It takes into account that when products differ in batch size and complexity, they usually consume different amounts of overhead resources. Answer: B
[Question]72. Which of the following companies would be best served by a plantwide overhead rate?A. A company that manufactures many different products and whose operations are an equal mix of labor and mechanized work.B. A company that manufactures few products and whose operations are labor intensive.C. A company that manufactures many different products and whose operations are highly mechanized.D. A company whose products use overhead resources in very different ways.E. A company whose products differ in batch size and complexity and consume different amounts of overhead resources. Answer: B
[Question]73. Which of the following is true?A. Overhead costs are often affected by many issues and are frequently too complex to be explained by any one factor.B. The departmental overhead rate is not usually based on measures closely related to production volume.C. The departmental overhead rate is most accurate in assigning overhead costs that are not driven by production volume.D. Allocated overhead costs will be the same no matter which allocation method is used.E. When cost analysts are able to logically trace cost objects to costs, costing accuracy is improved. Answer: A
Chapter 17 – Activity-Based Costing and AnalysisA. The departmental overhead rate method assigns overhead on the basis of volume-related measures.B. The departmental overhead rate method is more refined than the plantwide overhead rate method.C. The departmental overhead rate method does not assign overhead on the basis of volume-related measures.D. The departmental overhead rate method is simpler and less costly to implement than the plantwide rate method.E. There are no disadvantages of the departmental overhead rate method. Answer: A
[Question]75. Which of the following is not true?A. The departmental overhead method assigns overhead on the basis of volume-related measures.B. The departmental overhead rate method is more refined than the plantwide overhead rate method.C. Overhead costing accuracy is improved by the use of multiple departmental rates rather than a single overhead rate.D. The departmental overhead rate method does not assign overhead on the basis of volume-related measures.E. The departmental overhead rate method is more costly to implement than the traditional overhead rate method.Answer: D
Chapter 17 – Activity-Based Costing and Analysismethods? A. Ease of use, more accurate product costing, and more effective cost control.B. Fewer allocation bases, ease of use, and a direct correlation to production volume.C. More accurate product costing, more effective cost control, and better focus on the relevant factors for decision making.D. More accurate product costing, fewer cost objects, and a direct correlation to production volume.E. More accurate product costing, ease of use, less costly to implement.Answer: C
[Question]77. What are the main advantages of traditional volume-based allocation methods compared to activity-based costing?A. Traditional volume-based methods are easier to use and less costly to implement and maintain.B. Traditional volume-based methods are more accurate and allowed by GAAP.C. Traditional volume-based methods are less accurate and easier to use.D. Traditional volume-based methods are harder to use and more costly to implement and maintain.E. There are no advantages to using traditional volume-based methods.Answer: A
Chapter 17 – Activity-Based Costing and Analysislabor and $800,000 for factory utilities. The company uses direct labor hours as its overhead allocation base. If 80,000 direct labor hours are planned for this next year, what is the company’s plantwide overhead rate?A. $.02 per direct labor hour.B. $46.25 per direct labor hour.C. $36.25 per direct labor hour.D. $10 per direct labor hour.E. $.10 per direct labor hour. Answer: B Feedback: ($2,900,000 + $800,000)/80,000 direct labor hours = $46.25 per direct labor hour
[Question]79. Ridley Company estimates that overhead costs for the next year will be $6,870,000 for indirect labor and $450,000 for factory utilities. The company uses machine hours as its overhead allocation base. If 160,000 machine hours are planned for this next year, what is the company’s plantwide overhead rate?A. $.02186 per machine hour.B. $42.9375 per machine hour.C. $45.75 per machine hour.D. $2.8125 per machine hour.E. $.3555 per machine hour.Answer: CFeedback: ($6,870,000 + $450,000)/160,000 machine hours = $45.75 per machine hour
[Question]80. A company estimates that overhead costs for the next year will be $9,234,000 for indirect labor and $156,800 for factory utilities. The company uses machine hours as its overhead
Chapter 17 – Activity-Based Costing and Analysisallocation base. If 500,000 machine hours are planned for this next year, what is the company’s plantwide overhead rate? (Round to two decimal places)A. $0.05 per machine hour.B. $18.47 per machine hour.C. $18.78 per machine hour.D. $0.31 per machine hour.E. $3.19 per machine hour. Answer: CFeedback: ($9,234,000 + $156,800)/500,000 machine hours = $18.78 per machine hour
What is the company’s plantwide overhead rate if direct labor hours are the allocation base?(Round to two decimal places)A. $3.43 per direct labor hour.B. $2.14 per direct labor hour.C. $4.36 per direct labor hour.D. $.29 per direct labor hour.E. $.47 per direct labor hour. Answer: AFeedback: ($1,200,000 + $3,400,000)/(560,000 + 780,000)DLH = $3.43 per DLH
What is the company’s plantwide overhead rate if machine hours are the allocation base?(Round to two decimal places.)A. $200.00 per MHB. $150.00 per MHC. $100.00 per MHD. $4.29 per MHE. $5.00 per MHAnswer: BFeedback: ($200,000 + $400,000)/(1,000 + 3,000)MH = $150 per MH
What is the company’s plantwide overhead rate if direct labor hours are the allocation base?(Round to two decimal places.)A. $3.89 per DLHB. $3.00 per DLHC. $0.33 per DLHD. $0.26 per DLHE. $0.20 per DLH Answer: DFeedback: ($50,000 + $40,000)/(150,000 + 200,000) DLH = $0.26 per DLH
[Question]84. Lake Prairie Company uses a plantwide overhead rate with machine hours as the allocation base. Next year, 500,000 units are expected to be produced taking .75 machine hours each. How much overhead will be assigned to each unit produced given the following estimated amounts?
Estimated: Department 1 Department 2Manufacturing overhead costs
A. $12.34 per unitB. $7.77 per unitC. $9.25 per unitD. $15.20 per unitE. $10.36 per unitAnswer: CFeedback: ($3,107,500 + $1,520,000)/(200,000 + 175,000) MH = $12.34 per MH $12.34 x .75 = $9.25 per unit
[Question]85. Rain Maker Company uses a plantwide overhead rate with direct labor hours as the allocation base. Next year, 350,000 units are expected to be produced taking .80 direct-labor hours each. How much overhead will be assigned to each unit produced given the following estimated amounts?
Estimated: Department 1 Department 2Manufacturing overhead costs
Chapter 17 – Activity-Based Costing and AnalysisAnswer: BFeedback: ($2,730,000 + $910,000)/(168,000 + 112,000) DLH = $13 per DLH $13 x .80 = $10.40 per unit
[Question]86. Case Company allocates $5.00 overhead to each unit produced. The company uses a plantwide overhead rate with machine hours as the allocation base. Given the amounts below, how many machine hours does the company expect in department 2?
Estimated: Department 1 Department 2Manufacturing overhead costs
[Question]87. A company allocates $7.50 overhead to each unit produced. The company uses a plantwide overhead rate with direct labor hours as the allocation base. Given the amounts below, how many direct labor hours does the company expect in department 2?
Estimated: Department 1 Department 2Manufacturing overhead costs
[Question]88. Orange Company uses a plantwide overhead rate with machine hours as the allocation base. Use the following information to solve for the amount of machine hours estimated per unit of product Q.
Direct material cost per unit of Q $10Total estimated manufacturing overhead $100,000Total cost per unit of Q $65Total estimated machine hours 200,000
Chapter 17 – Activity-Based Costing and AnalysisA. 35 MH per unit of Q.B. .50 MH per unit of Q.C. 70 MH per unit of Q.D. 17.5 MH per unit of Q.E. 30 MH per unit of Q.
Answer: CFeedback: Total cost per unit of Q: $65 = DM + DL + OH$65 = $10 + $20 + XX = $35 overhead per unit of QPlantwide overhead rate: $100,000/200,000 MH = $0.50 per MHMH per unit of Q: $35/$0.50 = 70 MH per unit of Q
[Question]89. Yellow Company uses a plantwide overhead rate with machine hours as the allocation base. Use the following information to solve for the amount of machine hours estimated per unit of product RST.
Direct material cost per unit of RST $12Total estimated manufacturing overhead $200,000Total cost per unit of RST $75Total estimated machine hours 100,000
MHDirect labor cost per unit of RST $23
A. 40 MH per unit of RST.B. 2 MH per unit of RST.C. 20 MH per unit of RST.D. 37.5 MH per unit of RST.E. 80 MH per unit of RST.Answer: CFeedback: Total cost per unit of RST: $75 = DM + DL + OH$75 = $12 + $23 + XX = $40 overhead per unit of RSTPlantwide overhead rate: $200,000/100,000 MH = $2 per MHMH per unit of RST: $40/$2 = 20 MH per unit of RST
[Question]90. Greene Company uses a plantwide overhead rate with direct labor hours as the allocation base. Use the following information to solve for the amount of direct labor hours estimated per unit of product G2.
Direct material cost per unit of G2 $7Total estimated manufacturing overhead $795,000Total cost per unit of G2 $20Total estimated direct labor hours 530,000
DLHDirect labor cost per unit of G2 $3.70
A. 1.5 DLH per unit of G2.B. 6.2 DLH per unit of G2.C. 9.3 DLH per unit of G2.D. .66 DLH per unit of G2.E. 14.09 DLH per unit of G2. Answer: B Feedback: Total cost per unit of G2:$20 = DM + DL + OH$20 = $7 + $3.70 + XX = $9.30 overhead per unit of G2Plantwide overhead rate: $795,000/530,000 DLH = $1.50 per DLHDLH per unit of G2: $9.30/$1.50 = 6.2 DLH per unit of G2
[Question]91. Kamper Company sells two products Big Z and Little Z. Current direct material and direct labor costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year’s overhead is estimated to be $475,000. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $20 per hour and the company expects to manufacture 32,000 units of Big Z and 9,000 units of Little Z next year.
DirectMaterialper Unit
DirectLabor Dollars
per UnitBig Z $6 $17Little Z $12 $8
What are total estimated direct labor hours for this next year?A. 30,800 total DLH.B. 616,000 total DLH.C. 300,000 total DLH.D. 1,025,000 total DLH.E. 916,000 total DLH. Answer: AFeedback: $17/$20 = .85 DLH per unit of Big Z$8/$20 = .4 DLH per unit of Little Z.85 DLH x 32,000 units of Big Z + .4 DLH x 9,000 units of Little Z = 30,800 total DLH
[Question]92. Crinkle Cut Clothes Company manufactures two products CC1 and CC2. Current direct material and direct labor costs are detailed below. Next year the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year’s overhead is estimated to be $338,250. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $28 per hour and the company expects to manufacture 22,000 units of CC1 and 91,000 units of CC2 next year.
DirectMaterialper Unit
DirectLabor Dollars
per UnitCC1 $37.10 $22.40CC2 $25.20 $15.40
Compute the plantwide overhead rate for next year.A. $28.00 per DLH.B. $37.80 per DLH.C. $1.35 per DLH.D. $5.00 per DLH.E. $.20 per DLH. Answer: DFeedback: $22.40/$28 = .80 DLH per unit of CC1$15.40/$28 = .55 DLH per unit of CC2.80 DLH x 22,000 units of CC1 + .55 DLH x 91,000 units of CC2 = 67,650 Total DLH$338,250/67,650 DLH = $5 per DLH
Reference: 17_02Aztec Industries produces bread which goes through two operations, mixing and baking, before it is ready to be packaged. Next year’s expected costs and activities are shown below.
[QUESTION]93. Compute Aztec’s departmental overhead rate for the mixing department based on direct labor hours.A. $1.50 per DLH.B. $5.00 per DLH.C. $0.75 per DLH.D. $0.50 per DLH.E. $2.08 per DLH. Answer: AFeedback: $600,000/400,000 DLH = $1.50 per DLHReference: 17_02
[Question]94. Compute Aztec’s departmental overhead rate for the mixing department based on machine hours.A. $1.50 per MH.B. $5.00 per MH.C. $0.75 per MH.D. $0.50 per MH.E. $2.08 per MH. Answer: CFeedback: $600,000/800,000 MH = $0.75 per MHReference: 17_02
[Question]95. Compute Aztec’s departmental overhead rate for the baking department based on direct labor hours.A. $1.50 per DLHB. $5.00 per DLHC. $0.75 per DLHD. $0.50 per DLHE. $2.08 per DLH Answer: BFeedback: $400,000/80,000 DLH = $5.00 per DLHReference: 17_02
[Question]96. Compute Aztec’s departmental overhead rate for the baking department based on machine hours.A. $1.50 per MHB. $5.00 per MHC. $0.75 per MHD. $0.50 per MHE. $2.08 per MH Answer: DFeedback: $400,000/800,000 MH = $0.50 per MH Reference: 17_02
Reference: 17_03Heritage Industries produces miniature models of farm equipment. These collectibles are in great demand. It takes two operations, molding and finishing, to complete the miniatures. Next year’s expected activities are shown in the following table:
[Question]97. Heritage Industries uses departmental overhead rates and is planning on a $3 per direct labor hour overhead rate for the molding department. Compute the estimated manufacturing overhead cost for the molding department given the information shown in the table.A. $487,500B. $195,000C. $292,500D. $243,750E. $692,500Answer: BFeedback: $3 x 65,000 DLH = $195,000Reference: 17_03
[Question]98. Heritage Industries uses departmental overhead rates and is planning on a $1.60 per direct labor hour overhead rate for the finishing department. Compute the estimated manufacturing overhead cost for the finishing department given the information shown in the table.A. $104,000B. $156,000C. $260,000D. $130,000E. $286,000 Answer: CFeedback: $1.60 x 162,500 DLH = $260,000Reference: 17_03
[Question]99. Heritage Industries uses departmental overhead rates and is planning on a $2 per machine hour overhead rate for the molding department. Compute the estimated manufacturing overhead cost for the molding department given the information shown in the table.A. $195,000B. $162,500C. $130,000D. $325,000E. $357,500Answer: AFeedback:$2 x 97,500 DLH = $195,000Reference: 17_03
[Question]100. Heritage Industries uses departmental overhead rates and is planning on a $3.20 per machine hour overhead rate for the finishing department. Compute the estimated manufacturing overhead cost for the finishing department given the information shown in the table.A. $208,000B. $312,000C. $520,000D. $260,000E. $572,000Answer: DFeedback:$3.20 x 81,250 MH = $260,000Reference: 17_03
Reference: 17_04Wall Nuts, Inc. produces paneling that requires two processes, A and B, to complete. Oak is the best-selling of all the many types of paneling produced. Information related to the 40,000 units of oak paneling produced annually is shown in the following table:
Direct materials $380,000Direct laborDepartment A (6,000 DLH x $25 per DLH) $150,000Department B (35,125 DLH x $16 per DLH) $562,000Machine HoursDepartment A 24,000 MHDepartment B 32,000 MH
Wall Nuts’ total expected overhead costs and related overhead data are shown below.
Department A Department BDirect labor hours 67,000 DLH 170,000 DLHMachine hours 100,000 MH 80,000 MHManufacturing overhead costs
$450,000 $600,000
[Question]101. Use the data for Wall Nuts, Inc. to compute departmental overhead rates based on machine hours in Department A and machine hours in Department B. A. $4.50 per MH in Dept A; $4.50 per MH in Dept B.B. $7.50 per MH in Dept A; $7.50 per MH in Dept. B.C. $4.50 per MH in Dept A; $7.50 per MH in Dept B.D. $2.70 per MH in Dept A; $6.00 per MH in Dept B.E. $0.60 per MH in Dept A; $0.80 per MH in Dept B. Answer: CFeedback: Department A: $450,000/100,000 MH = $4.50 per MHDepartment B: $600,000/80,000 MH = $7.50 per MHReference: 17_04
[Question]102. Use the data for Wall Nuts, Inc. to compute the dollar amount of overhead applied to each unit of oak paneling, assuming the company uses departmental overhead rates based on machine hours in Department A and machine hours in Department B.A. $8.70B. $1.40C. $14.40D. $26.25E. $41.00 Answer: AFeedback: Department A: 24,000 MH/40,000 oak units = .6 MH per unit of oak.6 MH x $4.50 = $2.70Department B: 32,000 MH/40,000 oak units = .8 MH per unit of oak.8 MH x $7.50 = $6Total overhead applied = $2.70 + $6.00 = $8.70Reference: 17_04
[Question]103. Use the above data for Wall Nuts, Inc. to compute the total manufacturing cost per unit of oak paneling assuming the company uses departmental overhead rates based on machine hours in Department A and machine hours in Department B.A. $8.70B. $18.20C. $21.95D. $27.30E. $36.00Answer: EFeedback: $380,000 + $150,000 + $562,000 = $1,092,000/40,000 = $27.30Total manufacturing cost (per unit) = $27.30 + $8.70 (total overhead applied) = $36.00 per unitReference: 17_04
Chapter 17 – Activity-Based Costing and AnalysisDifficulty: 3 HardLearning Objective: 17-P2 Topic: Departmental Overhead RateRefer To: 17_04
[Question]104. Aurora Corporation produces outdoor security lighting products. All products go through three processes before completion. Use the expected overhead costs and related data shown below to compute departmental overhead rates based on machine hours in Department A1A; based on direct labor hours in Department B2B; and machine hours in Department C3C.
[Question]105. Consider the following activities that take place in a veterinary clinic.(a.) Cleaning cages.(b.) Heating and air conditioning the clinic.(c.) Sending blood work to a lab.(d.) Dispensing medicine.Which of the following statements is true?A. Service entities cannot use ABC for overhead allocation.B. Cleaning cages is a facility level activity. C. Dispensing medicine is a facility level activity.D. Heating and air conditioning the clinic is a facility level activity.E. Sending blood work to a lab is a facility level activity. Answer: D
[Question]106. Consider the following activities that take place in a medical clinic.(a.) Cleaning exam rooms.(b.) Heating and air conditioning the clinic.(c.) Sending blood work to a lab.(d.) Dispensing medicine.Which of the following statements is true?A. Cleaning rooms and heating the clinic are both unit level activities.B. Sending blood work to the lab is a batch level activity. C. Sending blood work and dispensing medicine are both batch level activities.D. Cleaning rooms and dispensing medication are both product or service level activities.E. Heating the clinic and dispensing medication are both batch level activities. Answer: B
[Question]107. All of the following are examples of facility sustaining costs except:A. Costs of cleaning the workplace.B. Costs of custodial work.C. Costs of personnel support.D. Costs of sampling product quality.E. Costs of employee recreational facilities. Answer: D
[Question]108. A company uses activity-based costing to determine the costs of its three products: A, B, and C. The budgeted cost and activity for each of the company’s three activity cost pools are shown in the following table:
Which of the following statements is true regarding this company’s activity rates?A. The activity rate under the activity-based costing system for Activity 2 is $2.00.B. The activity rate under the activity-based costing system for Activity 2 is $16.00.C. The activity rate under the activity-based costing system for Activity 2 is $1.50.D. The activity rate under the activity-based costing system for Activity 2 is $19.50.E. The activity rate under the activity-based costing system for Activity 2 is $2.81.Answer: CFeedback: $45,000/(7,000 + 15,000 + 8,000) = $1.50
[Question]109. A company uses activity-based costing to determine the costs of its three products: A, B, and C. The budgeted cost and activity for each of the company’s three activity cost pools are shown in the following table:
What are the activity rates for the three activities under activity based costing?A. (1) $2.00; (2) $3.00; (3) $3.50.B. (1) $3.50; (2) $1.50; (3) $32,80.C. (1) $3.50; (2) $3.00; (3) $16.00.
[Question]110. A company uses activity-based costing to determine the costs of its three products: A, B and C. The budgeted cost and activity for each of the company’s three activity cost pools are shown in the following table:
How much overhead will be assigned to Product B using activity-based costing?A. $56,500B. $78,000C. $62,500D. $197,000E. $70,000Answer: AFeedback: (9,000)($2.00) + (15,000)($1.50) + (1,000)($16.00) = $56,500
[Question]111. A company has two products: A and B. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools:
Annual production and sales level of Product A is 34,300 units, and the annual production and sales level of Product B is 69,550 units. What is the approximate overhead cost per unit of Product B under activity-based costing?A. $3.00B. $2.00C. $10.28D. $15.00E. $2.33Answer: BFeedback: Activity 1 allocated to Product B line: $87,000 x 2,800/5,800 = $42,000Activity 2 allocated to Product B line: $62,000 x 5,500/10,000 = $34,100Activity 3 allocated to Product B line: $93,000 x 5,250/7,750 = $63,000Total overhead allocated to Product B = $139,100Overhead per unit of Product B: $139,100/69,550 = $2.00
[Question]112. A company has two products: A and B. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools:
Annual production and sales level of Product A is 34,300 units, and the annual production and sales level of Product B is 69,550 units. What is the approximate overhead cost per unit of Product A under activity-based costing?A. $3.00B. $2.00C. $10.28D. $15.00E. $2.33Answer: AFeedback: Activity 1 allocated to Product A line: $87,000 x 3,000/5,800 = $45,000Activity 2 allocated to Product A line: $62,000 x 4,500/10,000 = $27,900Activity 3 allocated to Product A line: $93,000 x 2,500/7,750 = $30,000Total overhead allocated to Product B = $102,900Overhead per unit of Product B: $102,900/34,300 = $3.00
[Question]113. A company has two products: A1 and B2. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools:
Annual production and sales level of Product A1 is 8,480 units, and the annual production and sales level of Product B2 is 22,310 units. What is the approximate overhead cost per unit of Product A1 under activity-based costing?A. $8.00B. $9.00C. $10.00D. $12.00E. $4.00Answer: DFeedback: Activity 1 allocated to Product A1 line: $48,000 x 1,200/6,000 = $9,600Activity 2 allocated to Product A1 line: $63,000 x 2,240/7,000 = $20,160Activity 3 allocated to Product A1 line: $80,000 x 7,200/8,000 = $72,000Total overhead allocated to Product A1 = $101,760Overhead per unit of Product A1: $101,760/8,480 = $12.00
[Question]114. A company has two products: A1 and B2. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools:
Annual production and sales level of Product A1 is 8,480 units, and the annual production and sales level of Product B2 is 22,310 units. What is the approximate overhead cost per unit of Product B2 under activity-based costing?A. $8.00B. $9.00C. $10.00D. $12.00E. $4.00Answer: E
Reference: 17_05Assume that a pet food manufacturer is considering adding two types of pet food to its existing product line. Research had determined that good demand exists for dog food in 40-pound bags and cat food in 1/2pound cans.The company identified the following partial list of activities, costs, and activity drivers expected for the next year:
Activity Expected Costs Cost DriverHandling materials $105,000 Number of batches madeStorage costs $820,000 Weight of finished product
Dog Food Cat FoodProduction volume 100,000 units 200,000 unitsBatches made 200 batches 150 batches
[Question]115. Refer to the data above. What are the overhead rates used to apply material handling (MH) and storage costs (SC) using activity-based costing?A. MH $300/batch; SC $2.73/unit.B. MH $300/batch; SC $.20/lb.C. MH $525/batch; SC $.205/unit.D. MH $700/batch; SC $.205/lb.E. MH $700/batch; SC $8.20/lb.Answer: BFeedback: MH = $105,000/350 batches = $300/batch; SC = $820,000/[(100,000 u. x 40lbs) + (200,000 x .5)] = $.20/lbReference: 17_05
Chapter 17 – Activity-Based Costing and AnalysisTopic: Activity Based CostingRefer To: 17_05
[Question]116. Refer to the data in the preceding tables. How much overhead cost will be assigned to each product line using activity-based costing (ABC)?A. Dog food: $462,500; cat food: $462,500.B. Dog food: $860,000; cat food: $65,000.C. Dog food: $60,000; cat food: $45,000.D. Dog food: $800,000; cat food: $20,000.E. Dog food: $320; cat food: $320.Answer: BFeedback: Dog food:Handling materials = $105,000 x (200 batches/350 total batches) = $60,000 per batch producedStorage costs = $820,000 x (4,000,000 lbs./4,100,000 lbs.) = $800,000 per unit producedPounds of product = (100,000 x 40 lbs.)/[(100,000 x 40 lbs.) + (200,000 x 0.5 lb.)]Overhead cost assigned for dog food = $60,000 + $800,000 = $860,000 Cat food:Handling materials = $105,000 x 150/(200 + 150) = $45,000 per batch producedStorage costs = $820,000 x (100,000 lbs./4,100,000 lbs.) = $20,000 per unit producedPounds of product = (200,000 x 0.5 lb.)/[(100,000 x 40 lbs.) + (200,000 x 0.5 lb.)]Overhead cost assigned for cat food = $45,000 + $20,000 = $65,000 Reference: 17_05
[Question]117. Refer to the data above. How much overhead cost will be assigned to each unit of product using activity-based costing (ABC)?A. Dog food: $4.62; cat food: $4.62.B. Dog food: $2.64; cat food: $2.64.C. Dog food: $8.60; cat food: $0.33.D. Dog food: $0.26; cat food: $8.60.E. Dog food: $0.12; cat food: $3.85.Answer: CFeedback: Dog food: $860,000/100,000 units = $8.60 per unit of dog foodCat food: $65,000/200,000 units = $0.33 per unit of cat foodReference: 17_05
Chapter 17 – Activity-Based Costing and AnalysisDifficulty: 3 HardLearning Objective: 17-P3 Topic: Activity Based CostingRefer To: 17_05
Reference: 17_06Assume that the Oregon Ice Cream Company is considering the costs of two of their product lines—ice cream sandwiches and dessert bars. The company identified the following partial list of activities, costs, and activity drivers expected for the next year.
Activity Expected Costs Cost DriverExtrusion costs $637,500 Number batches madePackaging costs $44,000 Number of units made
Ice Cream Sandwiches Dessert BarsProduction volume 350,000 units 200,000 unitsBatches made 400 batches 350 batches
[Question]118. Refer to the data in the preceding tables. How much overhead cost will be assigned to the ice cream sandwich product line using activity-based costing (ABC)?A. $340,000B. $368,000C. $28,000D. $850.08E. $433,682Answer: BFeedback: Extrusion activity rate: $637,500/(400 +350) batches = $850 per batchPackaging activity rate: $44,000/(350,000 + 200,000) units = $0.08 per unitIce cream sandwich product line allocations:Extrusion: $850 x 400 batches = $340,000Packaging: $.08 x 350,000 units = $ 28,000Total = $368,000 Reference: 17_06
Blooms Taxonomy: ApplyAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 17-P3 Topic: Activity Based CostingRefer To: 17_06
[Question]119. Refer to the data above. How much overhead cost will be assigned to the dessert bar product line using activity-based costing (ABC)?A. 340,750B. $247,818C. $16,000D. $297,500E. $313,500Answer: EFeedback: Extrusion activity rate: $637,500/(400 +350) batches = $850 per batchPackaging activity rate: $44,000/(350,000 + 200,000) units = $0.08 per unitDessert bar product line allocations:Extrusion: $850 x 350 batches = $297,500Packaging: $.08 x 200,000 units = $ 16,000Total overhead cost assigned = $313,500 Reference: 17_06
Blooms Taxonomy: ApplyAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 17-P3Topic: Activity Based CostingRefer To: 17_06
[Question]120. A company identified the following partial list of activities, costs, and activity drivers expected for the next year:
Activity Expected Costs Cost DriverExtrusion costs $83,600 Number batches madeHandling costs $8,800 Number of orders filledPackaging costs $40,500 Number of units made
Product A Product BProduction volume 750,000 units 600,000 unitsBatches made 200 batches 750 batchesOrders filled 75 200
Calculate activity rates for each of the three activities using activity-based costing (ABC).A. Extrusion: $304 per batch; handling: $32 per unit; packaging: $.03 per unit.B. Extrusion: $88 per batch; handling: $32 per order; packaging: $.03 per unit. C. Extrusion: $88 per order; handling: $32 per unit; packaging: $.03 per batch.D. Extrusion: $418 per batch; handling: $117.33 per order; packaging: $.054 per unit.E. Extrusion: $118.13 per batch; handling: $44 per order; packaging: $.0675 per unit.Answer: BFeedback: Extrusion activity rate: $83,600/ (200 +750) batches = $88 per batch
[Question]121. A company identified the following partial list of activities, costs, and activity drivers expected for the next year:
Activity Expected Costs Cost DriverExtrusion costs $83,600 Number batches madeHandling costs $8,800 Number of orders filledPackaging costs $40,500 Number of units made
Product A Product BProduction volume 750,000 units 600,000 unitsBatches made 200 batches 750 batchesOrders filled 75 200
How much overhead in total will be assigned to the Product A line using activity based costing?A. $42,500.B. $132,900. C. $90,400.D. $66,000.E. $66,450.Answer: AFeedback: Extrusion activity: ($88/batch)(200 ) = $17,600Handling costs: ($32/order)(75 orders) = $2,400Packaging activity: ($.03/unit)(750,000 units) = $22,500Total overhead cost = $42,500
Chapter 17 – Activity-Based Costing and AnalysisMatching Questions
[Question]122. Match each of the following terms a through j with the appropriate definitions 1 through 10.(a) Cost object(b) Activity(c) Cost driver(d) Activity-based costing(e) Batch level activities(f) Activity-based management(g) Pool rate(h) Activity cost driver(i) Activity driver(j) Cost pool_____ (1) A measure of activity level._____ (2) Actions which cause resources to be used._____ (3) A collection of costs that are related to the same or similar activity._____ (4) An outgrowth of ABC that draws on the link between activities and cost incurrence for better management._____ (5) The target of a cost assignment._____ (6) Actions performed only on groups of units._____ (7) Variable that causes an activity’s cost to go up or down._____ (8) An allocation rate used to assign a collection of related costs to a cost object._____ (9) A cost allocation method that focuses on activities performed. _____(10) Variable that causes a cost to go up or down. Answer: (1) i, (2) b, (3) j, (4) f, (5) a, (6) e, (7) h, (8) g, (9) d, (10) c
Chapter 17 – Activity-Based Costing and Analysis[Question]123. Identify each of the following activities as unit level (U), batch level (B), product level (P), or facility level (F) to indicate the way each is incurred with respect to production._____ (1) Providing electricity_____ (2) Sampling product quality_____ (3) Cutting parts_____ (4) Receiving shipments_____ (5) Organizing production_____ (6) Printing checks_____ (7) Providing personnel support_____ (8) Calibrating machines_____ (9) Cleaning workplace_____ (10) Assembling componentsAnswer: (1) F, (2) B, (3) U, (4) B, (5) P, (6) U, (7) F, (8) B, (9) F, (10) U
[Question]124. Direct labor, direct materials, and manufacturing overhead are all product costs. Why is overhead more difficult to account for than either direct labor or direct materials?Answer: Overhead costs are not directly related to production volume and therefore cannot be traced to units of product in the same way that direct materials and direct labor can.
Chapter 17 – Activity-Based Costing and Analysis[Question]125. Name and briefly describe three overhead rate methods. Answer: The plantwide overhead rate method uses a single rate for allocating overhead costs to products. This rate is a volume-based measure such as direct labor hours, direct labor dollars, or machine hours. The departmental overhead rate method uses multiple volume-based measures to allocate overhead costs to products. Activity-based costing focuses on activities and the cost of carrying out activities. Rates based on these activities are then used to assign overhead to products in proportion to the amount of activity required to produce them.
[Question]126. Explain cost flows for the plantwide overhead rate method. Answer: The plantwide overhead rate method combines all overhead costs. Total overhead is then allocated based on one allocation base.
[Question]127. Explain cost flows for the departmental overhead rate method. Answer: The departmental overhead rate method uses a different overhead rate for each production department. This is usually done through a two-stage assignment process each with its different cost objects. In the first stage, the departments are the cost objects, and in the second stage, the products are the cost objects.
Chapter 17 – Activity-Based Costing and Analysis[Question]128. Explain cost flows for activity-based costing. Answer: There are two basic stages to activity-based costing. The first stage in cost assignment is to identify the activities involved in manufacturing products and match those activities with the costs they cause. The second stage is to compute an activity rate for each cost pool and then use this rate to allocate overhead costs to products
Blooms Taxonomy: UnderstandAACSB: Communication AICPA BB: IndustryAICPA FN: Measurement Difficulty: 2 MediumLearning Objective: 17-C2Topic: Activity Based Costing
[Question]129. What is the basic principle underlying activity-based costing?Answer: The basic principle underlying activity-based costing is that an activity is what causes costs to be incurred.
Blooms Taxonomy: UnderstandAACSB: Communication AICPA BB: IndustryAICPA FN: Measurement Difficulty: 2 MediumLearning Objective: 17-C2Topic: Activity Based Costing
[Question]130. How does ABC differ from using multiple departmental rates? Answer: ABC differs from using multiple departmental rates in how overhead cost pools are identified and how overhead cost in each pool is allocated. When using departmental rates, each department is a cost pool and overhead cost allocated to each department is assigned to products using a volume-based factor. This assumes that overhead costs in each department are directly proportional to the volume-based factor. ABC recognizes that costs are more complex. Under ABC, only costs related to the same activity are grouped into a cost pool. Therefore, ABC is usually better at reflecting the complex nature of overhead costs and how these costs are used in making products.
Blooms Taxonomy: ApplyAACSB: Communication AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 17-C2Topic: Activity Based Costing
Chapter 17 – Activity-Based Costing and Analysis[Question]131. What are the major advantages of using a plantwide overhead rate? Answer: The major advantages of using a plantwide overhead rate are: (1) required information is readily available, and (2) system implementations relatively easy. In addition, the plantwide overhead rate method is often sufficient to meet external reporting needs.
[Question]132. Explain some of the disadvantages of the departmental overhead rate method. Answer: Even though the departmental overhead rate method allows each department to have its own overhead rate, it relies on the premise that different products are similar in volume, complexity, and batch size and that departmental overhead costs are directly proportional to the department’s allocation base. Because departmental overhead costs are still allocated based on measures closely related to production volume, they fail to accurately assign many overhead costs that are not driven by production volume.
Blooms Taxonomy: UnderstandAACSB: Communication AICPA BB: IndustryAICPA FN: Measurement Difficulty: 2 Medium Learning Objective: 17-A1Topic: Departmental Overhead Rate
[Question]133. Why is overhead allocation under ABC usually more accurate than either the plantwide overhead allocation method or the departmental overhead allocation method? Answer: Overhead allocation under ABC is more accurate because (1) there are more cost pools, (2) costs in each pool are more similar, and (3) allocation is based on activities that cause costs.
Blooms Taxonomy: UnderstandAACSB: Communication AICPA BB: IndustryAICPA FN: Measurement Difficulty: 2 MediumLearning Objective: 17-A2 Topic: Activity Based Costing
Chapter 17 – Activity-Based Costing and Analysis134. Identify and explain the four control levels associated with activity-based costing. Answer: The four control levels associated with activity-based costing are:(1) Unit level activities are performed on each product unit.(2) Batch level activities are performed only on each group of activities.(3) Product level activities are performed on each product line and are not affected by either the numbers of units or batches.(4) Facility level activities are performed to sustain facility capacity as a whole and are not caused by any specific product.
[Question]135. A company estimates that overhead costs for the next year will be $7,200,000 for indirect labor, $400,000 for factory utilities, and $43,000 for depreciation on factory machinery. The company uses direct labor hours as its overhead allocation base. If 955,375 direct labor hours are planned for this next year, what is the company’s plantwide overhead rate?Answer: ($7,200,000 + $400,000 + $43,000)/955,375 DLH = $8 per DLH
[Question]136. A company estimates that overhead costs for the next year will be $3,600,000 for indirect labor, $200,000 for factory utilities, and $21,500 for depreciation on factory machinery. The company uses machine hours as its overhead allocation base. If 764,300 machine hours are planned for this next year, what is the company’s plantwide overhead rate?Answer: ($3,600,000 + $200,000 + $21,500)/764,300 MH = $5 per MH
Chapter 17 – Activity-Based Costing and Analysis[Question]137. A company has two products: A and B. It uses a plantwide overhead allocation method based on activity 2 and has prepared the following analysis showing budgeted costs and activities. Use this information to compute (a) the company’s plantwide overhead rate and (b) the amount of overhead allocated to Product A.
Activity Cost PoolBudgeted
Overhead Cost
Budgeted Activity
Product A Product B TotalActivity 1 $160,000 400 1,600 2,000Activity 2 $110,000 2,000 1,000 3,000Activity 3 $180,000 1,200 10,800 12,000
Total budgeted overhead
$450,000
Answer: (a) $450,000/3,000 units of activity 2 = $150 per unit of activity 2(b) (2000 units)*($150/unit) = $300,000
[Question]138. A company has two products: A and B. It uses activity-based costing and has prepared the following analysis showing budgeted costs and activities. Use this information to compute (a) the company’s overhead rates for each of the three activities and (b) the amount of overhead allocated to Product A.
Activity Cost PoolBudgeted
Overhead CostBudgeted Activity
Product A Product B TotalActivity 1 $160,000 400 1,600 2,000Activity 2 $110,000 2,000 1,000 3,000Activity 3 $180,000 1,200 10,800 12,000
Chapter 17 – Activity-Based Costing and AnalysisAICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 17-P3Topic: Activity Based Costing
[Question]139. A company has two products: AA and BB. It uses a plantwide overhead allocation method based on activity 33 and has prepared the following analysis showing budgeted costs and activities. Use this information to compute the company’s plantwide overhead rate.
[Question]140. A company expects next year’s overhead costs to be $400,000. During this time, the company also expects to produce 1,000,000 units, have 200,000 direct labor hours, and 800,000 machine hours.Make the following independent calculations.a. Compute a plantwide overhead rate using units of production as the allocation base.b. Compute a plantwide overhead rate using direct labor hours as the allocation base.c. Compute a plantwide overhead rate using machine hours as the allocation base.Answer: a.) $400,000/1,000,000 units = $0.40 per unit of productb. $400,000/200,000 direct labor hours = $2 per DLHc. $400,000/800,000 machine hours = $0.50 per MH
Chapter 17 – Activity-Based Costing and Analysis[Question]141. Superior Products Manufacturing identified the following data in its two production departments.
Assembly FinishingManufacturing overhead costs $225,000 $420,000Direct labor hours worked 6,600 DLH 9,000 DLHMachine hours used 2,400 MH 5,200 MH
Make the following independent calculations (Round to two decimals).a. Compute a plantwide overhead rate using machine hours as the allocation base.b. Compute a plantwide overhead rate using direct labor hours as the allocation base.Answer: a. ($225,000 +$420,000)/(2,400 + 5,200) MH = $84.87 per MHb. ($225,000 + $420,000)/(6,600 + 9,000) DLH = $41.35 per DLH
[Question]142. Superior Products Manufacturing identified the following data in its two production departments:
Assembly FinishingManufacturing overhead costs $225,000 $420,000Direct labor hours worked 6,600 DLH 10,000 DLHMachine hours used 2,400 MH 5,200 MH
Compute departmental overhead rates assuming the Assembly rate is based on machine hours and the Finishing rate is based on direct labor hours. Answer: Assembly: $225,000/2,400 MH = $93.75/MHFinishing: $420,000/10,000 DLH = $42.00/DLH
a. Compute a plantwide overhead rate assuming the company assigns overhead based on 70,000 budgeted direct labor hours (Round to two decimals).b. Compute separate rates for each of the four activities using the activity based costing. Answer: a. ($425,000 + $390,000 + $220,000 + $230,000)/70,000 DLH = $18.07 per DLH b. Handling: $425,000/25,000 parts = $17/partInspecting: $390,000/940 batches = $414.89/batchProcessing: $220,000/440 orders = $500/orderDesigning: $230,000/5 models = $46,000/model
Chapter 17 – Activity-Based Costing and Analysis144. Assume New Belgium Brewing Company manufactures and distributes three types of beer and that estimated per unit product costs and related information for the next year are shown in the following table:
Blue Paddle Somersault
Cocoa Mole Ale
Cost data per unit:Direct materials $100,000 $500,000 $750,000Direct labor $3,600 $4,800 $6,000Overhead $12,000 $16,000 $20,000 Total product cost per unit $115,600 $520,800 $776,000
Machine hours per unit 30 MH 40 MH 50 MHNumber of units produced per year 30 units 20 units 10 units
a. If New Belgium Brewing Company uses a plantwide overhead rate based on machine hours, what is the total product cost per unit of Cocoa Mole Ale?b. Blue Paddle is a traditional brew made in large quantities with long production runs. Somersault is a seasonal beer made in small batches. Cocoa Mole Ale is a specialty beer also made in small batches. Which of the overhead allocation methods studied in this chapter would you recommend that New Belgium Brewing Company use and why?Answer: a. Total overhead: = ($12,000 x 30 units) + ($16,000 x 20 units) + ($20,000 x 10 units) = $880,000Total machine hours:= (30 units x 30 MH) + (20 units x 40 MH) + (10 units x 50 MH) = 2,200 MHPlantwide overhead rate based on MH: $880,000/2,200 MH = $400 per MHTotal product cost per unit of Cocoa Mole Ale:$750,000 DM + $6,000 DL + (50 MH x $400 per MH) MOH = $776,000 cost per unit of Cocoa Mole Aleb. Activity-based costing is particularly useful in companies like New Belgium Brewing where different products require different processes and varying levels of overhead.
[Question]145. Time Bender Company makes watches and clocks. The following estimated data are available for the company’s next fiscal year:Total direct labor costs: $1,700,000
Determine the setup cost per unit for the watches and the clocks if setup costs are assigned using a plantwide overhead rate based on direct labor hours. (Round to two decimal places.)Answer: Watches: 68,000 DLH/85,000 DLH x $190,000 = $152,000 setup costs to watch line$152,000/800,000 units = $0.19 per watchClocks: 17,000 DLH/85,000 DLH x $190,000 = $38,000 setup costs to clock line$38,000/100,000 units = $0.38 per clock
[Question]146. Base Runner, Inc. manufactures baseball bats that go through two operations, cutting and sanding, before they are complete. Expected costs and activities for the two departments are shown in the following table:
a. Compute a departmental overhead rate for the cutting department based on machine hours.b. Compute a departmental overhead rate for the sanding department based on machine hours.Answer: a. $50,000/25,000 MH = $2 per MHb. $37,500/50,000 MH = $0.75 per MH
Chapter 17 – Activity-Based Costing and Analysis[Question]147. Blast Rocket Company manufactures candy-coated popcorn treats that go through two operations, popping and baking, before they are complete. Expected costs and activities for the two departments are shown in the following table:
a. Compute a departmental overhead rate for the popping department based on direct labor hours.b. Compute a departmental overhead rate for the baking department based on machine hours.Answer: a. $357,000/238,000 DLH = $1.50 per DLHb. $452,800/141,500 MH = $3.20 per MH
[Question]148. Freeze Frame, Inc. produces cameras that require three processes, A, B, and C, to complete. Digital camera model #789 is the best-selling of all the many types of cameras produced. Information related to the 550,000 units of digital camera model #789 produced annually is shown below.
Direct materials $450,000Direct labor Department A (7,000 DLH x $21 per DLH) $147,000 Department B (25,000 DLH x $19 per DLH) $475,000 Department C (10,000 DLH x $26 per DLH) $260,000Machine Hours Department A 42,000 MH Department B 23,000 MH Department C 38,000 MH
Freeze Frame’s total expected overhead costs and related overhead data are shown below:
a. Compute a departmental overhead rate for department A based on direct labor hours.b. How much overhead is associated with model 789 from department A?c. Compute a departmental overhead rate for department B based on direct labor hours.d. How much overhead is associated with model 789 from department B?e. Compute a departmental overhead rate for department C based on direct labor hours.f. How much overhead is associated with model 789 from department C?g What is the per unit cost of the 550,000 units of model 789? Answer: a. $540,000/90,000 DLH = $6 per DLHb. ($6/hr)(7,000 DLH) = $42,000c. $675,000/75,000 DLH = $9 per DLHd. ($9/hr)(25,000 DLH) = $225,000e. $399,000/42,000 DLH = $9.50 per DLHf. ($9.50/hr)(10,000 DLH) = $95,000g ($450,000+$147,000+$475,000+$260,000+$42,000+$225,000+$95,000)/550,000 units = $3.08 per unit
[Question]149. Freeze Frame, Inc. produces cameras that require three processes, A, B, and C, to complete. Digital camera model #789 is the best-selling of all the many types of cameras produced. Information related to the 550,000 units of digital camera model #789 produced annually is shown below:
Direct materials $450,000Direct Labor Department A (7,000 DLH x $21 per DLH) $147,000 Department B (25,000 DLH x $19 per DLH) $475,000 Department C (10,000 DLH x $26 per DLH) $260,000Machine Hours Department A 42,000 MH Department B 23,000 MH Department C 38,000 MH
Freeze Frame’s total expected overhead costs and related overhead data are shown in the following table:
Department A Department B Department CDirect labor hours 90,000 DLH 75,000 DLH 42,000 DLH
a. Compute a departmental overhead rate for department A based on machine hours.b. How much overhead is associated with model 789 from department A?c. Compute a departmental overhead rate for department B based on direct labor hours.d. How much overhead is associated with model 789 from department B?e. Compute a departmental overhead rate for department C based on machine hours.f. How much overhead is associated with model 789 from department C?g What is the per unit cost of the 550,000 units of model 789? Answer: a. $540,000/67,500 MH = $8 per MHb. ($8/hr)(42,000 MH) = $336,000c. $675,000/75,000 DLH = $9 per DLHd. ($9/hr)(25,000 DLH) = $225,000e. $399,000/53,200 MH = $7.50 per MHf. ($7.50/hr)(38,000 MH) = $285,000g ($450,000 + $147,000 + $475,000 + $260,000 + $336,000 + $225,000 + $285,000)/550,000 units = $3.96 per unit
[Question]150. Outer Limits, Inc. produces fencing units which require two processes, A and B, to complete. The best-selling type of fence is made of pvc. Information related to the 8,000 units of pvc fencing produced annually is shown below.
Direct materials $450,000Direct labor Department A (5,000 DLH x $23 per DLH) $115,000 Department B (4,000 DLH x $25 per DLH) $100,000Machine hours Department A 2,000 MH Department B 3,000 MH
Outer Limits’ total expected overhead costs and related overhead data are shown below. The company uses departmental overhead rates based on machine hours in department A and direct labor hours in department B.
Department A Department BDirect labor hours 9,000 DLH 7,000 DLHMachine hours 6,500 MH 13,000 MH
Determine the total amount of overhead assigned to each unit of pvc fencing.Answer: Dept. A rate: $54,600/6,500 MH = $8.40 per MHDept. B rate: $67,060/7,000 DLH = $9.58 per DLHDept. A MH per unit: 2,000 MH/8,000 units = .25 MH per unitDept. B DLH per unit: 4,000 DLH/8,000 units = .50 DLH per unitDept. A overhead assigned: .25 MH x $8.40 per MH = $2.10 per unit Dept. B. overhead assigned: .50 DLH x $9.58 per DLH = $4.79 per unitTotal overhead assigned: $2.10 + $4.79 = $6.89 per unitAlternate calculation:Dept. A: [(2,000 MH/6,500 MH) x $54,600]/8,000 units = $2.099 per unitDept. B: [(4,000 DLH/7,000 DLH) x $67,060]/8,000 units = $4.789 per unitTotal overhead assigned: $2.10 + $4.79 = $6.89 per unit
[Question]151. A company’s total expected overhead costs and related overhead data are shown below.
Department A Department BDirect labor hours 75,000 DLH 30,000 DLHMachine hours 3,000 MH 6,000 MHManufacturing overhead costs
? ?
Departmental overhead rate
$2.40 per DLH $36 per MH
a. Compute estimated manufacturing overhead costs for Department A.b. Compute estimated manufacturing overhead costs for Department B.Answer: a. $2.40 per DLH x 75,000 DLH = $180,000 estimated Dept. A manufacturing overhead costsb. $36 per MH x 6,000 MH = $216,000 estimated Dept. B manufacturing overhead costs
Chapter 17 – Activity-Based Costing and Analysis152. A company’s total expected overhead costs and related overhead data are shown in the following table:
Department A Department BDirect labor hours 85,000 DLH 72,000 DLHMachine hours 79,050 MH 37,395 MHManufacturing overhead costs
? ?
Departmental overhead rate
$4 per MH $8.31 per DLH
a. Compute estimated manufacturing overhead costs for Department A.(b. Compute estimated manufacturing overhead costs for Department B.c. Compute the departmental overhead rate based on direct labor hours for Department A.d. Compute the departmental overhead rate based on machine hours for Department B.Answer: a. $4 per MH x 79,050 MH = $316,200 estimated Department A manufacturing overhead costsb. $8.31 per DLH x 72,000 DLH = $598,320 estimated Department B manufacturing overhead costsc. $316,200/ 85,000 DLH = $3.72 per DLH for Department Ad. $598,320/ 37,395 MH = $16 per MH for Department B
[Question]153. Rising Sun, Inc. produces granola that requires two processes, mixing and baking, to complete. The best-selling type of granola is cherry almond delight. Information related to the 100,000 units of cherry almond delight produced annually is shown in the following table:
Machine hours Mixing Department 200 MH Baking Department 300 MH
Rising Sun’s total expected overhead costs and related overhead data are shown below. The company uses departmental overhead rates based on machine hours in the mixing department and direct labor hours in the baking department.
Determine the total product cost of this product line and each unit of cherry almond delight.Answer: Mixing Dept. overhead: $80,000/4,000 MH = $20 per MH$20 per MH x 200 MH = $4,000 for cherry almond product lineBaking Dept. overhead: $12,500/5,000 DLH = $2.50 per DLH$2.50 per DLH x 400 DLH = $1,000 for cherry almond product line
Total Product Line100,000 Units
Per Unit
Direct materials $230,000 $230,000/100,000 units = $2.30 per unit
[Question]154. Slosh, Inc. produces washing machines that require two processes, assembling and finishing, to complete. The company’s bestselling machine is the commercial washer.
Chapter 17 – Activity-Based Costing and AnalysisInformation related to the 500 commercial washers produced annually is shown below.
Direct materials $161,000Direct labor Assembling Department (1,000 DLH x $25 per DLH)
$25,000
Finishing Department (250 DLH x $22 per DLH)
$5,500
Machine hours Assembling Department 1,500 MH Finishing Department 400 MH
Slosh’s total expected overhead costs and related overhead data are shown below. The company uses departmental overhead rates based on direct labor hours in the Assembling Department and machine hours in the Finishing Department.
Determine the total product cost of this product line and each individual commercial washer.Answer: Assembling Dept. overhead: $4,000,000/50,000 DLH = $80 per DLH$80 per DLH x 1,000 DLH = $80,000 for commercial washer product lineFinishing Dept. overhead: $60,000/8,000 MH = $7.50 per MH$7.50 per MH x 400 MH = $3,000 for commercial washer product line
[Question]155. Lemon Yellow Company produces children’s clothing that requires two processes, cutting and sewing, to complete. The company is concerned about one product, a hooded jacket, which hasn’t been selling as well as it had in past years. Information related to the 20,000 jackets produced annually is shown in the following table:
Direct materials $26,000Direct labor Cutting Department (200 DLH x $20 per DLH) $4,000 Sewing Department (2,000 DLH x $22 per DLH) $44,000Machine hours Cutting Department 160 MH Sewing Department 1,500 MH
Lemon Yellow’s total expected overhead costs and related overhead data are shown below. The company uses departmental overhead rates based on direct labor hours in the Cutting Department and machine hours in the Sewing Department.
Assume this jacket currently sells for $10. How much profit does the company make per jacket? Answer: Cutting Dept. overhead: $480,000/16,000 DLH = $30 per DLH$30 per DLH x 200 DLH = $6,000 for the hooded jacket product lineSewing Dept. overhead: $240,000/30,000 MH = $8 per MH$8 per MH x 1,500 MH = $12,000 for the hooded jacket product line
Total Product Line20,000 units Per Unit
Direct materials $26,000 $26,000/20,000 units = $1.30 per unit
Direct labor $4,000 + $44,000 = $48,000/20,000 units =
[Question]156. A company uses activity-based costing to determine the costs of its three products: A, B, and C. The budgeted cost and activity for each of the company’s three activity cost pools are shown below.
[Question]157. A company uses activity-based costing to determine the costs of its three products: A, B, and C. The budgeted cost and activity for each of the company’s three activity cost pools are shown in the following table:
[Question]158. A company uses activity-based costing to determine the costs of its three products: A, B, and C. The activity rates and activity levels for each of the company’s three activity cost pools are shown below.
Budgeted ActivityActivity Cost Pool Activity Rate Product A Product B Product CActivity 1 $19 700 1,150 650Activity 2 $27 2,400 2,100 1,500Activity 3 $62 600 1,350 1,050
Compute the company’s budgeted cost for each of the three activities under activity-based costing.Answer:
[Question]159. A company uses activity-based costing to determine the costs of its three products: A, B and C. The activity rates and activity levels for each of the company’s three activity cost pools are shown in the following table:
Budgeted ActivityActivity Cost Pool Activity Rate Product A Product B Product C
[Question]160. A company has two products: X and Y. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools.
Annual production and sales level of Product X is 161,100 units, and the annual production and sales level of Product Y is 275,200 units.a. Compute the approximate overhead cost per unit of Product X under activity-based costing.b. Compute the approximate overhead cost per unit of Product Y under activity-based costing.Answer:
[Question]161. A company has two products: Big and Little. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools:
Annual production and sales level of big product is 62,525 units, and the annual production and sales level of little product is 251,900 units.a. Compute the approximate overhead cost per unit of big product under activity-based costing.b. Compute the approximate overhead cost per unit of little product under activity-based costing.Answer:
[Question]162. Bark Mode, Incorporated produces and distributes two types of security systems, Standard and Deluxe. Budgeted cost and activity for each of its three activity cost pools are shown below.The company plans to produce and sell 120,000 standard units and 80,000 deluxe units.
a. Compute the approximate overhead cost per unit of standard under activity-based costing.b. Compute the approximate overhead cost per unit of deluxe under activity-based costing.Answer:
[Question]163. Sparks Company produces and distributes two types of garden sculptures, Plain and Fancy. Budgeted cost and activity for each of its three activity cost pools are shown below. The company plans to produce and sell 64,000 plain units and 49,150 fancy units.
a. Compute the approximate overhead cost per unit of Plain under activity-based costing.b. Compute the approximate overhead cost per unit of Fancy under activity-based costing.Answer:
[Question]164. Upside Down, Incorporated designs custom storage spaces to eliminate clutter in both residential and business settings. The following data pertain to a recent reporting period:
Requireda. Use ABC to compute overhead rates for each activity.b. Assign costs to a 3,000 square foot job that requires 70 contact hours, 20 design hours, and 14 days to complete.Answer:
[Question]165. Inside Out, Company designs custom showroom spaces in interior design marts across the country. The following data pertain to a recent reporting period.
Design Department Client consultation 750 contact hours $127,500 Drawing 1,200 design hours $96,000 Models 15,000 square feet $21,000Project Management Supervision 225 days $40,500 Billings 150 jobs $54,000
Requireda. Use ABC to compute overhead rates for each activity.b. Assign costs to a 3,000 square-foot job that requires 70 contact hours, 20 design hours, and 14 days to complete.Answer:
a. Client consultation $127,500/750 contact hours $170/contact hour Drawing $96,000/1,200 design hours $80/design hour Models $21,000/15,000 sq. ft. $1.40/sq. ft. Supervision $40,500/225 days $180/day Billings $54,000/150 jobs $360/job
[Question]167. In competitive markets, price is established through the forces of _______________ and _______________.Answer: supply; demand (either order)
[Question]169. Overhead costs cannot be ________________________ in the same way that direct materials and direct labor can. Answer: directly traced to units of product
[Question]176. The departmental overhead rate method allows each department to have its own overhead rate and its own ____________________. Answer: allocation base
[Question]178. The _______________ stage of ABC is to compute an activity rate for each cost pool and then use this rate to allocate overhead costs to products. Answer: second
[Question]180. The major advantages of using a single plantwide overhead rate are ____________________ and ____________________. Answer: readily available information; ease of implementation (either order)
[Question]182. When products differ in batch size and complexity, they usually consume different amounts of ____________________________.Answer: overhead resources
[Question]183 ____________________________ is an outgrowth of ABC that draws on the link between activities and cost incurrence for better management. Answer: Activity-based management
[Question]3. Dividing a mixed cost into its separate fixed and variable cost components makes it more difficult to do cost-volume-profit analysis. Answer: False
[Question]10. Cost-volume-profit analysis is a precise tool for perfectly predicting the profit consequences of cost changes, price changes, and volume changes. Answer: False
[Question]12. Cost-volume-profit analysis provides approximate, but not precise, answers to questions about the relations among costs, volume, and profits. Answer: True
[Question]13. Cost-volume-profit analysis can be used to predict the effects of reduced selling prices, increased fixed costs, and reduced variable costs on break-even points. Answer: True
[Question]15. The dollar amount of sales needed to achieve a targeted after-tax income is computed by dividing the sum of fixed costs plus the desired after-tax income plus income taxes by the contribution margin ratio. Answer: True
[Question]30. The high-low method is used to derive an estimated line of cost behavior by graphically connecting the two cost amounts identified with the highest and lowest volume levels. Answer: True
[Question]39. A cost-volume-profit (CVP) chart is a graph that plots volume on the horizontal axis and costs and sales on the vertical axis. Answer: True
[Question]40. On a typical cost-volume-profit graph, unit sales are shown on the horizontal axis and both dollars of sales and dollars of costs are represented on the vertical axis. Answer: True
[Question]44. A cost that remains the same in total even when volume of activity varies is a:A. Fixed costB. Curvilinear costC. Variable costD. Step-wise variable costE. Standard cost Answer: A
[Question]45. A cost that changes in total proportionately to changes in volume of activity is a(n):A. Differential costB. Fixed costC. Incremental costD. Variable costE. Product costAnswer: D
[Question]47. A cost that remains constant over a limited range of volume but increases by a lump sum when volume increases beyond a maximum amount is a(n):A. Step-wise costB. Fixed costC. Curvilinear costD. Incremental costE. Opportunity costAnswer: A
[Question]48. A cost that can be separated into fixed and variable components is called a:A. Mixed costB. Step-variable costC. Composite costD. Curvilinear costE. Differential cost Answer: A
Chapter 17 – Activity-Based Costing and AnalysisC. When management performs break-even analysis.D. When volume increases but not at a constant rate.E. On a per unit basis when volume of activity goes down.Answer: D
[Question]50. Which one of the following statements is not true?A. Total fixed costs remain the same regardless of volume. B. Total variable costs change with volume.C. Total variable costs decrease as the volume increases.D. Fixed costs per unit increase as the volume decreases.E. Variable costs per unit remain the same regardless of the volume. Answer: C
[Question]51. An important tool in predicting the volume of activity, the costs to be incurred, the sales to be earned, and the profit to be received is:A. Target income analysis.B. Cost-volume-profit analysis.C. Least-squares regression of costs.D. Variance analysis.E. Process costing. Answer: B
Chapter 17 – Activity-Based Costing and Analysis52. A company's normal operating range, which excludes extremely high and low volumes that are not likely to occur, is called the:A. Margin of safety.B. Contribution range.C. Break-even point.D. Relevant range.E. High-low point. Answer: D
[Question]53. A term describing a firm's normal range of operating activities is:A. Relevant range of operations.B. Break-even level of operations.C. Margin of safety of operations.D. Relevant operating analysis.E. High-low level of operations. Answer: A
[Question]54. Cost-volume-profit analysis is based on three basic assumptions. Which of the following is not one of these assumptions?A. Total fixed costs remain constant over changes in volume.B. Curvilinear costs change proportionately with changes in volume throughout the relevant range.C. Variable costs per unit of output remain constant as volume changes.D. Sales price per unit remains constant as volume changes.E. The relationship between volume, costs, and profits do not necessarily hold outside the relevant range. Answer: B
Chapter 17 – Activity-Based Costing and AnalysisTopic: Cost-Volume-Profit Analysis
[Question]55. A target income refers to:A. Income at the break-even point.B. Income from the most recent period.C. Income planned for a future period.D. Income only in a multiproduct environment.E. Income at the minimum contribution margin. Answer: C
[Question]56. The margin of safety is the excess of:A. Break-even sales over expected sales.B. Expected sales over variable costs.C. Expected sales over fixed costs.D. Fixed costs over expected sales.E. Expected sales over break-even sales. Answer: E
Chapter 17 – Activity-Based Costing and Analysis57. If a firm's forecasted sales are $250,000 and its break-even sales are $190,000, the margin of safety (in dollars) is:A. $60,000B. $250,000C. $190,000D. $440,000E. $24,000Answer: AFeedback: $250,000 - $190,000 = $60,000
[Question]58. A product sells for $30 per unit and has variable costs of $18 per unit. The fixed costs are $720,000. If the variable costs per unit were to decrease to $15 per unit and fixed costs increase to $900,000, and the selling price does not change, break-even point in units would:A. Increase by 20,000B. Equal 6,000C. Increase by 6,000D. Decrease by 20,000E. Not changeAnswer: EFeedback: Old break-even point in units = $720,000/($30 - $18) = 60,000 unitsNew break-even point in units = $900,000/($30 - $15) = 60,000 units
[Question]59. The excess of expected sales over the sales level at the break-even point is known as the:A. Sales turnover.B. Profit margin.C. Contribution margin.D. Relevant range.E. Margin of safety.Answer: E
[Question]60. A firm expects to sell 25,000 units of its product at $11 per unit. Pretax income is predicted to be $60,000. If the variable costs per unit are $6, total fixed costs must be:A. $65,000B. $90,000C. $125,000D. $215,000E. $275,000 Answer: AFeedback: Pretax income = Contribution margin -Fixed costs$60,000 = (25,000 x $5) - Fixed costsFixed costs = $65,000
[Question]61. Hartman Co. has fixed costs of $36,000 and a contribution margin ratio of 24%. If expected sales are $200,000, what is the margin of safety as a percentage of sales?A. 6%B. 25%C. 33%D. 50%E. 75%Answer: B
[Question]62. A product sells for $200 per unit, and its variable costs per unit are $130. The fixed costs are $420,000. If the firm wants to earn $35,000 pretax income, how many units must be sold?A. 6,500B. 6,000C. 500D. 5,000E. 5,500 Answer: AFeedback: Units required to earn target pre-tax income of $35,000 = ($35,000 + $420,000)/$70 = 6,500 units
[Question]63. A product sells for $210 per unit, and its variable costs per unit are $130. The fixed costs are $420,000. If the firm wants to earn $35,000 after tax income (assume a 30% tax rate), how many units must be sold?A. 6,500B. 6,275C. 500D. 5,875E. 5,500 Answer: D
Chapter 17 – Activity-Based Costing and AnalysisFeedback: Units required to earn target after-tax income of $35,000 = [($35,000/.7) + $420,000]/$80 = 5,875 units
[Question]64. Management anticipates fixed costs of $72,500 and variable costs equal to 40% of sales. What will pretax income equal if sales are $325,000?A. $57,500B. $122,500C. $130,000D. $181,250E. $252,500Answer: BFeedback: Pretax income = $325,000 - (40% x $325,000) - $72,500 = $122,500
[Question]65. Conan Company has total fixed costs of $112,000. Its product sells for $35 per unit and variable costs amount to $25 per unit. Next year Conan Company wishes to earn a pretax income that equals 10% of fixed costs. How many units must be sold to achieve this target income level?A. 1,120B. 8,214C. 11,200D. 12,320E. 14,080Answer: D
[Question]66. Mueller Corp. manufactures compact discs that sell for $5. Fixed costs are $28,000 and variable costs are $3.60 per unit. Mueller can buy a newer production machine that will increase fixed costs by $8,000 per year but will decrease variable costs by $0.40 per unit. What effect would the purchase of the new machine have on Mueller's break-even point in units?A. 4,444 unit increase.B. 9,850 unit decrease.C. 5,714 unit increase.D. 4,444 unit decrease.E. No effect on the break-even point in units. Answer: EFeedback: Break-even point with old machine = $28,000/($5.00 - $3.60) = 20,000 unitsBreak-even point with new machine = ($28,000 + $8,000)/[$5.00 - ($3.60 -$0.40)] = 20,000 units
[Question]67. Schmidt Inc, manufactures inexpensive cameras that sell for $50. Fixed costs are $720,000 and variable costs are $30.00 per unit. Schmidt can buy a newer production machine that will
Chapter 17 – Activity-Based Costing and Analysisincrease fixed costs by $14,400 per year but will increase variable costs by 10% per unit. What are the original and the new break-even points in this situation?A. Original $43,200; New $36,720.B. Original $36,000; New $36,720.C. Original $36,000; New $42,353.D. Original $36,000; New $43,200. E. Original $24,000; New $41,506.Answer: DFeedback: Original break-even point = $720,000/($50 - $30) = 36,000 unitsBreak-even point with new machine = ($720,000+14,400)/($50.00 - $33.00) = 43,200 units
[Question]68. Ivan Company has a goal of earning $70,000 after-tax income. Ivan would need to pay $20,000 of income taxes at the target level of income. The contribution margin ratio is 30%. What amount of dollar sales must be achieved to reach the goal if fixed costs are $36,000?A. $23,333B. $36,000C. $300,000D. $353,333E. $420,000 Answer: EFeedback: Dollar sales at target income = ($36,000 + $70,000 + $20,000)/0.30 = $420,000
[Question]70. A company wishes to earn a pretax income equal to 35% of total fixed costs. Its product sells for $50.75 per unit. Total fixed costs equal $156,800 and variable costs per unit are $32.50. How many units must this company sell to meet its goal? (Round answer to complete units.)A. 11,599B. 8,592C. 4,171D. 6,513E. 11,047Answer: AFeedback: Desired pretax income = 35% x $156,800 = $54,880Units required = ($156,800 + $54,880)/($50.75 - $32.50) = 11,599 units
[Question]71. During the past year a company had total fixed costs of $700,000. Its product sold for $93 per unit. Variable costs during this time equaled $45 per unit. Next year the company is anticipating a 10% increase in total fixed costs and a $3 per unit decrease in variable costs but would like to maintain its current selling price per unit. How many units must the company sell
[Question]72. During the past year a company had total fixed costs of $70,000. Its product sold for $9 per unit. Variable costs during this time equaled $5 per unit. Next year the company is anticipating a 4% increase in total fixed costs and a $1 per unit decrease in variable costs but would like to maintain its current selling price per unit. How many units must the company sell next year to earn $1 million? (Round answer to complete units.)A. 119,200B. 200,000C. 214,560D. 268,200E. 18,200Answer: CFeedback: New total fixed costs: $70,000 x 1.04 = $72,800New variable costs per unit: $5 – $1 = $4Units required = ($72,800+ $1,000,000)/($9 – 4) = 214,560 units
Chapter 17 – Activity-Based Costing and Analysis73. Management of a company is evaluating two potential orders. Due to limited capacity only one of these orders can be accepted. Incremental fixed costs are the same for either option. Based on the information in the table below, which of the following statements is true?
Option A Option BNumber of units 30 40Contribution margin ratio 35% 45%Selling price per unit $400 $300
A. Option B has the highest contribution margin per unit.B. Option A has the highest total contribution margin.C. Option B has the lowest contribution margin ratio.D. Option B has the highest total contribution margin.E. Option A has the highest amount per dollar of sales to contribute to contribution margin and profit.Answer: DFeedback:Option A: Contribution margin per unit $400 * .35 = $140Option B: Contribution margin per unit $300 * .45 = $135Option A: Total contribution margin $140 * 30 = $4,200Option B: Total contribution margin $135 * 40 = $5,400
[Question]74. Total contribution margin in dollars divided by pretax income is the:A. Degree of operating leverage.B. Contribution margin ratio.C. Margin of safety.D. Sales mix.E. Break-even point in units. Answer: A
Chapter 17 – Activity-Based Costing and Analysis75. A statistical method for deriving an estimated line of cost behavior is the:A. Scatter diagram method.B. High-low method.C. Composite method.D. CVP charting method.E. Least-squares regression method. Answer: E
[Question]76. A graph used to analyze past cost behaviors by displaying costs and volume levels for each period as points on the diagram is called a:A. Least-squares diagram.B. Step-wise diagram.C. Scatter diagram.D. Break-even diagram.E. Composite diagram. Answer: C
[Question]77. The least-squares regression method is:A. A graphical method to identify cost behavior.B. An algebraic method to identify cost behavior.C. A statistical method to identify cost behavior.D. The only identify cost estimation method allowed by GAAP.E. A cost estimation method that only uses the two extreme values. Answer: C
Chapter 17 – Activity-Based Costing and Analysis[Question]78. A line on a scatter diagram that is intended to reflect the past relation between cost and volume is the:A. Margin of safety line. B. Break-even line.C. Contribution margin line.D. Estimated line of cost behavior.E. Standard cost line. Answer: D
[Question]79. A method that estimates cost behavior by connecting the costs linked to the highest and lowest volume levels on a scatter diagram with a straight line is called the:A. Scatter method.B. High-low method.C. Least-squares method.D. Break-even method.E. Step-wise method. Answer: B
Reference: 18_01Willco Inc. manufactures electronic parts. They are analyzing their monthly maintenance costs to determine the best way to budget these costs in the future. They have collected the following data for the last six months:
Chapter 17 – Activity-Based Costing and Analysis80. Using the high-low method and the Willco data, calculate the variable maintenance cost per machine hour (round to three decimal places). A. $1.016/hr.B. $0.976/hr.C. $1.863/hr.D. $1.250/hr.E. $0.907/hr.Answer: BFeedback: ($74,000 – 62,000)/(42,300 – 30,000 hrs.) = $.976/hr.Reference: 18_01
[Question]81. Using the high-low method and the Willco data above, what is the approximate fixed cost component of the monthly maintenance costs?A. $33,860B. $24,500C. $32,755D. $32,715E. $30,686Answer: DFeedback: Variable per hour ($74,000 – 62,000)/(42,300 – 30,000 hrs.) = $.976/hr.42,300 hrs.($.976/hr.) + FC = $74,000FC = 32,715Reference: 18_01
Chapter 17 – Activity-Based Costing and AnalysisRefer To: 18_01
[Question]82. If Willco Inc. expects to operate the machines for a total of 32,000 hours in the next month, calculate the expected maintenance costs? A. $31,232B. $32,512C. $64,755D. $63,947E. $65,227Answer: DFeedback: Variable per hour ($74,000 – 62,000)/(42,300 – 30,000 hr.) = $.976/hr.(32,000 hrs.)(.976/hr.) + $32,715 = $63,947Reference: 18_01
[Question]83. Using the high-low method, calculate the variable cost component of these overhead costs (round to the nearest two decimal places).A. $14.90/hr.B. $10.00/hr.C. $11.25/hr.D. $ 7.65/hr.E. $ 6.56/hr.
[Question]85. If Tanner expects to have 65 hours of machine time in a future week, what overhead costs could they expect to incur?A. $ 967B. $ 981C. $ 834D. $ 968E. $ 908Answer: CReference: 18_02Feedback:($1,025-710)/(94-46 hrs.) = $6.56/hr. $408 + 65 hrs.(6.56/hrs.) = $834
[Question]86. The sales level at which a company neither earns a profit nor incurs a loss is the:A. Relevant range.B. Margin of safety.C. Step-wise variable level.D. Break-even point.E. Contribution margin. Answer: D
Chapter 17 – Activity-Based Costing and AnalysisDifficulty: 2 MediumLearning Objective: 18-A1Topic: Contribution Margin Refer To: 18_03
[Question]88. The break-even point in units is:A. 5,158B. 7,000C. 8,167D. 14,000E. 19,600 Answer: DReference: 18_03Feedback: $12 - $5 = $7$98,000/$7 = 14,000 units
Blooms Taxonomy: ApplyAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 18-P2Topic: Break-Even Point Refer To: 18_03
[Question]89. Brown Company's contribution margin ratio is 24%. Total fixed costs are $84,000. What is Brown's break-even point in sales dollars?A. $20,160B. $110,526C. $350,000D. $240,000E. $84,000 Answer: CFeedback: $84,000/0.24 = $350,000
Chapter 17 – Activity-Based Costing and Analysis[Question]90. A product sells for $200 per unit, and its variable costs per unit are $130. The fixed costs are $420,000. What is the break-even point in dollar sales?A. $2,100B. $6,000C. $420,000D. $646,154E. $1,200,000 Answer: EFeedback: Contribution margin ratio = ($200 - $130)/$200 = 35%Break-even point in sales dollars = $420,000/0.35 = $1,200,000
[Question]91. The difference between sales price per unit and variable cost per unit is the:A. Gross profit from sales.B. Gross margin per unit.C. Fixed cost per unit.D. Margin of safety per unit.E. Contribution margin per unit. Answer: E
[Question]92. The contribution margin per unit expressed as a percentage of the product's selling price is the:A. Volume variance.B. Margin of safety.C. Contribution margin ratio.D. Break-even point.E. Rate of return on sales. Answer: C
Chapter 17 – Activity-Based Costing and AnalysisAICPA BB: IndustryAICPA FN: Measurement Difficulty: 1 EasyLearning Objective: 18-A1Topic: Contribution Margin Ratio
[Question]93. A special case of cost-volume-profit analysis is:A. Least-squares point.B. Step-wise point.C. Composite margin point.D. Break-even point.E. Cost point. Answer: D
[Question]94. A company manufactures and sells a product for $120 per unit. The company's fixed costs are $68,760, and its variable costs are $90 per unit. The company's break-even point in units is: A. 2,292B. 573C. 764D. 327E. 840Answer: AFeedback: $68,760/($120 - $90) = 2,292 units
[Question]95. A company manufactures and sells a product for $91 per unit. The company's fixed costs are $859,716 and its variable costs are $25 per unit. The company's break-even point in units is:A. 7,412B. 34,389C. 9,448D. 13,026E. 66 Answer: DFeedback: $859,716/($91 - $25) = 13,026 units
[Question]96. A company manufactures and sells a product for $120 per unit. The company's fixed costs are $68,760, and its variable costs are $90 per unit. The company's break-even point in dollars is:A. $91,680B. $68,760C. $2,2921D. $275,040E. $206,280 Answer: DFeedback: Contribution margin ratio = ($120 - $90)/$120 = 25%Break-even point in sales dollars = $68,760/0.25 = $275,040
Chapter 17 – Activity-Based Costing and AnalysisDifficulty: 3 HardLearning Objective: 18-P2Topic: Break-Even Point
[Question]97. A company manufactures and sells a product for $150 per unit. The company's fixed costs are $68,200, and its variable costs are $95 per unit. The company's break-even point in units is:A. 718 unitsB. 455 unitsC. 1,240 unitsD. 1,364 unitsE. 1,137 unitsAnswer: CFeedback: $68,200/($150-$95) = 1,240 units
[Question]98. A company manufactures and sells a product for $150 per unit. The company's fixed costs are $68,200, and its variable costs are $95 per unit. The company's break-even point in dollars is:A. $107,700B. $125,000C. $136,450D. $186,000E. $170,550Answer: DFeedback: BE units = $68,200/($150-$95) = 1,240 units(1,240 units)($150) = $186,000
Chapter 17 – Activity-Based Costing and AnalysisAICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 18-P2Topic: Break-Even Point
[Question]99. A company manufactures and sells a product for $91 per unit. The company's fixed costs are $859,716 and its variable costs are $25 per unit. What is the company's break-even point in dollars? (Round all calculations to 2 decimal places.)A. $627,592.68 B. $1,177,693.15 C. $622,982.60 D. $1,091,839.30 E. $66.00 Answer: BFeedback: Contribution margin ratio = ($91 - $25)/$91 = .73Break-even point = $859,716/0.73 = $1,177,693.15
[Question]100. A company has fixed costs of $90,000. Its contribution margin ratio is 30% and the product sells for $75 per unit. What is the company's break-even point in dollar sales?A. $ 60,000B. $128,571C. $180,000D. $210,000E. $300,000Answer: EFeedback: Break-even point in dollar sales = $90,000/0.30 = $300,000
Chapter 17 – Activity-Based Costing and AnalysisAICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 18-P2Topic: Break-Even Point
[Question]101. Lee Company manufactures and sells widgets for $2 per unit. Its variable cost per unit is $1.70. Lee's total fixed costs are $10,500. How many widgets must Lee Company sell to break even?A. 5,250B. 6,176C. 35,000D. 52,500E. 61,760 Answer: CFeedback: $10,500/($2.00 - $1.70) = 35,000 units
[Question]102. The Haskins Company manufactures and sells radios. Each radio sells for $23.75 and the variable cost per unit is $16.25. Haskin's total fixed costs are $25,000, and budgeted sales are 8,000 units. What is the contribution margin per unit?A. $7.50B. $16.25C. $23.75D. $60,000E. $1.25Answer: AFeedback: $23.75 - $16.25 = $7.50
[Question]103. Ginger Company's product has a contribution margin per unit of $11.25 and a contribution margin ratio of 22.5%. What is the selling price of the product?A. $5B. $20C. $30D. $40E. $50 Answer: EFeedback: $11.25 = 22.5% of selling priceSelling price = $11.25/.225 = $50
[Question]104. A company has a contribution margin per unit of $8.25 and a contribution margin ratio of 12%. What is the selling price of the product?A. $68.75B. $9.24C. $9.77D. $60.50E. $129.25Answer: AFeedback: $11.25 = 12% of selling priceSelling price = $8.25/.12 = $68.75
[Question]105. At Flint Company's break-even point of 9,000 units, fixed costs are $180,000, and variable costs are $540,000 in total. The unit sales price is:A. $20B. $40C. $60D. $80E. $100Answer: DFeedback: Total cost = $180,000 + $540,000 = $720,000At break-even point, total cost = total selling priceTotal selling price = $720,000Selling price per unit = $720,000/9,000 units = $80 per unit
[Question]106. Jet Company’s break-even point is 5,000 units. The company’s fixed costs are $240,000, and its total variable costs are $85,000. The unit sales price is:A. $20B. $40C. $60D. $65E. $100Answer: DFeedback: Total cost = $240,000 + $85,000 = $325,000At break-even point, total cost = total selling priceTotal selling price = $325,000
[Question]107. Assume that sales are predicted to be $3,750, the expected contribution margin is $1,500, and a net loss of $250 is anticipated. The break-even point in sales dollars is:A. $1,750B. $2,500C. $4,000D. $4,250E. $4,375Answer: EFeedback: Contribution margin $1,500 - Fixed costs = $(250)Fixed costs = $1,750Contribution margin ratio = $1,500/$3,750 = 40%Break-even point in dollar sales = $1,750/0.40 = $4,375
[Question]108. Assume Moe’s Southwest Grill has a break-even point of 24,000 units. At this point, total sales are $1,800,000 and total variable costs are $1,200,000. Compute total fixed costs at the break-even point.A. $1,800,000B. $1,200,000C. $3,000,000D. $25E. $ 600,000 Answer: EFeedback: At the break-even point, total contribution margin = total fixed costs.Total fixed costs = $1,800,000 - $1,200,000 = $600,000
[Question]109. When graphing cost-volume-profit data on a CVP chart:A. Units are plotted on the horizontal axis; costs on the vertical axis.B. Units are plotted on the vertical axis; costs on the horizontal axis.C. Both units and costs are plotted on the horizontal axis.D. Both units and cost are plotted on the vertical axis.E. Data points always represent expected future points. Answer: A
[Question]110. A CVP graph presents data on:A. Profit and loss on a unit basis.B. Profit, loss, and break-even on a total basis.C. Profit, loss, and break-even on a unit basis.D. Only profit and loss on a total basis.E. Profit and loss on a budget and actual basis. Answer: B
[Question]111. A cost-volume-profit chart is also known as a(n)A. Operating profit chart.B. Operating leverage chart.C. Break-even chart.D. Margin of safety chart.E. Sales chart.Answer: C
Reference: 18_04A firm sells two products, A and B. For every unit of A the firm sells, two units of B are sold. The firm's total fixed costs are $1,612,000. Selling prices and cost information for both products follow:
Unit VariablesSales Costs
Product Price per UnitA $20 $8B 24 4
[Question]112. The contribution margin per composite unit is:A. $12B. $20C. $32D. $44E. $52Answer: EFeedback: ($20 - $8) + (2)($24 - $4) = $52Reference: 18_04
[Question]114. What is the firm's break-even point in units of A and B?A. 31,000 of A and 31,000 of B.B. 31,000 of A and 62,000 of B.C. 10,333 of A and 20,667 of B.D. 36,167 of A and 72,333 of B.E. 62,000 of A and 31,000 of B. Answer: BFeedback: Contribution margin per composite unit = ($20 - 8) + (2)($24 - $4) = $52Break-even point in composite units = $1,612,000/$52 = 31,000 composite units31,000 composite units = 31,000 units of A and 62,000 units of B (2 x 31,000)Reference: 18_04
[Question]115. The ratio of the sales volume for the various products sold by a company is called the:A. Current product mix.B. Relevant mix.C. Sales mix.D. Inventory cost ratio.E. Production ratio.
[Question]116. Baker Company's sales mix is 3 units of A, 2 units of B, and 1 unit of C. Selling prices for each product are $20, $30, and $40, respectively. Variable costs per unit are $12, $18, and $24, respectively. Fixed costs are $320,000. What is the break-even point in composite units?A. 1,111B. 1,600C. 2,666D. 4,000E. 5,000 Answer: EFeedback: Contribution margin of composite units = ($20 - $12)(3) + ($30 - $18)(2) + ($40 – $24)(1)= $8(3) + $12(2) + $16(1) = $24 + $24 + $16 = $64Break-even in composite units = $320,000/$64 = 5,000 units
[Question]117. Baker Company's sales mix is 3 units of A, 2 units of B, and 1 unit of C. Selling prices for each product are $20, $30, and $40, respectively. Variable costs per unit are $12, $18, and $24,
Chapter 17 – Activity-Based Costing and Analysisrespectively. Fixed costs are $320,000. What is the break-even point in units of A, B, and C?A. A 15,000; B 10,000; C 5,000.B. A 12,000; B 8,000; C 4,000.C. A 18,000; B 12,000; C 6,000.D. A 5,000; B 10,000; C 15,000.E. A 4,000; B 8,000; C 12,000.Answer: AFeedback: Contribution margin of composite units = ($20 - $12)(3) + ($30 - $18)(2) + ($40 – 24)(1)= $8(3) + $12(2) + $16(1) = $24 + $24 + $16 = $64Break-even in composite units = $320,000/$64 = 5,000 units A = 5,000x3 = 15,000B = 5,000x2 = 10,000C = 5,000x1 = 5,000
[Question]118. Camden Corporation sells three products (M, N, and O) in the following mix: 3:1:2. Unit price and cost data are:
M N OUnit sales price $7 $4 $6Unit variable costs 3 2 3
Total fixed costs are $340,000. The break-even point in sales dollars for the current sales mix is:A. $20,000B. $289,000C. $400,000D. $629,000E. $740,000Answer: D
Reference: 18_05Thomas Company has total fixed costs of $360,000 and variable costs of $14 per unit. If the unit sales price is reduced from $24 to $20 and advertising is increased by $10,000, sales will increase from 40,000 to 65,000 units. [Question]119. What are the contribution margin and net income under the current conditions? A. $650,000 and $280,000 respectively.B. $400,000 and $40,000 respectively.C. $280,000 and $40,000 respectively.D. $390,000 and $20,000 respectively.E. $400,000 and $20,000 respectively.Answer: BFeedback: CM = 40,000($24 – $14) = $400,000NI = $400,000 – $360,000 = $40,000Reference: 18_05
[Question]120. What are the contribution margin and net income under the revised conditions? A. $650,000 and $280,000 respectively.B. $400,000 and $40,000 respectively.C. $280,000 and $40,000 respectively.
Chapter 17 – Activity-Based Costing and Analysis121. Shown below are terms or phrases preceded by letters a through j followed by a list of definitions. Match the terms or phrases 1 through 10 with the correct definitions by placing the letter of the term or phrase in the answer space provided at the beginning of each definition.(a) Contribution margin per unit(b) Fixed cost(c) Mixed cost(d) Curvilinear cost(e) Variable cost(f) Step-wise cost(g) Relevant range of operations(h) Estimated line of cost behavior(i) Least-squares regression(j) Cost-volume-profit analysis__________(1) The amount that the sale of one unit contributes toward recovering fixed costs and earning profit.__________(2) A cost that changes in proportion to changes in volume of activity.__________(3) A cost that includes both fixed and variable costs.__________(4) A cost that changes with volume but not at a constant rate.__________(5) A line drawn on a graph to fit the past relation between cost and sales.__________(6) A statistical method for deriving an estimated line of cost behavior that is more precise than the high-low method and a scatter diagram.__________(7) A company's normal operating range; excludes extremely high and low volumes that are not likely to be encountered.__________(8) A cost that remains constant over limited ranges of volumes of activity but changes by a lump sum when volume changes occur outside these limited ranges.__________(9) Useful in business planning; includes predicting the volume of activity, the costs incurred, sales earned, and profits received.__________(10) A cost that remains unchanged in total amount even when the volume of activity varies. Answer: (1) a (2) e (3) c (4) d (5) h (6) i (7) g (8) f (9) j (10) b
[Questions]122. Define variable cost, fixed cost, and mixed cost. Answer: Variable cost: a cost that changes in proportion to changes in volume of activity.Fixed cost: a cost that remains unchanged in total even when volume changes within the relevant range.Mixed cost: a cost that includes both fixed and variable costs.
[Question]123. What are the basic assumptions of CVP analysis with regard to variable cost, fixed cost, and selling price per unit. (Assume a single product). Answer: Variable costs per unit are constant. Fixed costs are constant in total. Selling price per unit is constant.
[Question]124. Discuss how CVP analysis can be useful in planning. Answer: CVP analysis is useful in determining the relation of costs to sales and the impact of sales volume on profit or loss. With insight on the relations, CVP analysis can be used to predict costs and selling prices. This can help management plan operations and formulate strategies.
Chapter 17 – Activity-Based Costing and Analysis125. What is an important feature that must be remembered when using cost estimation methods? Answer: All three methods of estimation (scatter graphs, high-low method, and least-squares regression) use past data. This means that the cost estimations are only as good as the data used for estimates, and managers must establish that the data are reliable to use for deriving costs for future periods.
[Question]126. What do unit contribution margin and contribution margin ratio reveal about a company’s cost structure? Answer: Unit contribution margin is the amount received from each sale that contributes to fixed costs and income. The contribution margin ratio shows what portion of each sales dollar is available as contribution to fixed costs and income.
Blooms Taxonomy: UnderstandAACSB: Communication AICPA BB: IndustryAICPA FN: Measurement Difficulty: 2 MediumLearning Objective: 18-A1Topic: Contribution MarginTopic: Contribution Margin Ratio
[Question]127. What is operating leverage? How can the degree of operating leverage be used in analyzing changes in sales? Answer: Operating leverage is the extent or relative size of fixed costs in the total cost structure. Degree of operating leverage – total contribution margin in dollars divided by pretax income – can be used to predict how changes in sales will affect pretax income. Degree of operating leverage times the percentage change in sales will equal the change in pretax income.
Chapter 17 – Activity-Based Costing and Analysis128. What is a scatter diagram? How is a scatter diagram used to estimate cost behavior? Answer: A scatter diagram displays past cost data on a graphical form, with the volume on the horizontal axis and the cost on the vertical axis. Using one's best judgment, the estimated line of cost behavior is drawn on the scatter diagram to estimate the relation between costs and volume.
[Question]129. What is the high-low method? Briefly describe how it is applied. Answer: The high-low method is a way to estimate cost behavior. Specifically, the costs related to the highest and lowest volume levels on a scatter diagram are connected with a straight line.
[Question]130. Define the break-even point of a company. Answer: The break-even point of a company is the sales level at which the company neither earns a profit nor incurs a loss for the planning period. Alternatively stated, the company's sales level equals the total of variable and fixed costs.
Blooms Taxonomy: RememberAACSB: Communication AICPA BB: IndustryAICPA FN: Measurement Difficulty: 1 EasyLearning Objective: 18-P2Topic: Break-Even Point
[Question]131. Briefly describe a CVP chart, including its major components. Answer: The vertical axis of a CVP chart plots total dollars of costs and sales. The horizontal axis plots the volume of activity. Specifically, fixed cost is represented as a point on the vertical axis and the total cost line is plotted from the fixed cost point rising upward at a slope equal to the unit variable cost. Sales are plotted from zero at a slope equal to the unit sales price. Break-even is where the total cost line intercepts the sales line.
Blooms Taxonomy: UnderstandAACSB: Communication AICPA BB: IndustryAICPA FN: Measurement Difficulty: 2 Medium
[Question]132. Describe how a cost-volume-profit analysis would be performed for a company that sells more than one product. (Assume that the sales mix is known.) Answer: Since the sales mix is known, the contribution margin per composite unit is determined as the difference between the composite selling price (sales price of the sales mix) and the composite variable costs per unit. The break-even analysis is then calculated in terms of composite units. Using the sales mix, the composite units are translated into units and dollars of the individual products.
[Question]133. Leather Head Sports operates on a small production scale using expensive, top-quality materials. How does cost-volume-profit analysis benefit this company?Answer: Understanding cost behavior is an extremely important concern for all successful companies. Identifying fixed and variable costs is key to understanding break-even points and maintaining the right product mix. The small but diverse product line of Leather Head Sports has considerably different selling prices and costs.
[Question]134. A company has total fixed costs of $200,000. Its product sells for $25 per unit and variable costs amount to $15 per unit. The company wishes to earn an after-tax income of $35,000. Assume that the company has a 30% tax rate. How many units must be sold to achieve this after-tax income level? Answer: Targeted pretax income = $35,000/(1 – 30%) = $50,000Targeted sales in units = ($200,000 + $50,000)/($25 - $15) = 25,000 units
Chapter 17 – Activity-Based Costing and AnalysisDifficulty: 3 HardLearning Objective: 18-C2Topic: Target Income
[Question]135. A company has a goal of earning $100,000 in after-tax income. The company must pay $28,000 in income tax if it achieves the goal. The contribution margin ratio is 30%. What dollar amount of sales must be achieved to reach the goal if fixed costs are $64,000? Answer: Targeted dollar sales = ($64,000 + $100,000 + $28,000)/0.30 = $640,000
[Question]136. Davison Company has fixed costs of $315,000 and a contribution margin ratio of 24%. If sales are expected to be $1,500,000, what is the margin of safety in percent? Answer: Break-even point in dollars sales = $315,000/0.24 = $1,312,500Margin of safety in percent = ($1,500,000 - $1,312,500)/$1,500,000 = 12.5%
[Question]137. Hiller Co. anticipates total fixed costs of $120,000 and variable costs equal to 40% of sales. What is the pretax income if sales are $650,000? Answer: $650,000 - (.40 x $650,000) – $120,000 = $270,000
Chapter 17 – Activity-Based Costing and Analysis[Question]138. Hess Co. manufactures a product that sells for $12 per unit. Total fixed costs are $96,000 and variable costs are $7 per unit. Hess can buy a newer production machine that will increase total fixed costs by $22,800 but variable costs will be decreased by $0.40 per unit. What effect would the purchase of the new machine have on Hess's break-even point in units? Answer: Current break-even point in units = $96,000/($12 - $7) = 19,200 unitsNew break-even point in units = ($96,000 + $22,800)/($12 - $6.60) = 22,000 unitsIncrease in break-even point in units = 22,000 – 19,200 = 2,800 unit increase
[Question]139. Legacy Company is considering the production and sale of a new product with the following sales and cost data: unit sales price $18; unit variable costs $8.10; and total fixed costs of $8,250. Legacy is subject to a 25% tax rate. Determine the dollar sales needed to generate an after-tax income of $33,000. Answer: Target pretax income = $33,000/(1-.25) = $44,000Target income tax expense = $44,000 - $33,000 = $11,000Contribution margin ratio = ($18 - $8.10)/$18 = 55%Targeted dollar sales = ($8,250 + $33,000 + $11,000)/0.55 = $95,000
Chapter 17 – Activity-Based Costing and Analysis[Question]140. Benny and Frieda are art students who often received compliments on the t-shirts they designed and made themselves. In need of funds for fall semester, they decide to sell these t-shirts at a small stand at the South Haven Beach during the summer. Rent on the beach stand is $1,600 per month. Variable costs per t-shirt are $4.75.a. Complete the following table which estimates total costs and cost per t-shirt at the indicated levels of activity for this t-shirt stand. Round the costs per t-shirt to two decimal places.
Number of t-shirts sold in one month 1,000 1,500 2,000
Total fixed costTotal variable costTotal costCost per t-shirt sold
b. Benny and Frieda need to each earn $5,000 before the fall term starts. They plan to sell the t-shirts for $15. 1. Will they be able to meet their goal? Support your comments with computations.2. What other factors might affect this business venture?Answer:a.
b1.Assuming the estimates of variable costs and volume are accurate, Benny and Frieda should be able to meet their goal in one or two months.
Number of t-shirts sold in one month 1,000 1,500 2,000
Sales per unit $15 $15 $15Total sales 15,000 22,500 30,000Total cost 6,350 8,725 11,100Profit 8,650 13,775 18,900
Number of t-shirts sold in one month 1,000 1,500 2,000
Total fixed cost $1,600 $1,600 $1,600Total variable cost 4,750 7,125 9,500Total cost 6,350 8,725 11,100Cost per t-shirt sold 6.35 5.82 5.55
17-144
Chapter 17 – Activity-Based Costing and AnalysisBenny and Frieda may have estimated the number of units to be sold incorrectly.If there is no demand for their product, they will not be able to meet their goal.Weather and gasoline costs will affect the number of visitors traveling to the beach. Fewer visitors may mean fewer sales.Benny and Frieda may have estimated the variable costs incorrectly or there may be a sudden change in the price of the needed materials. If variable costs are higher, profit will be lower.Benny and Frieda may find it more difficult than they anticipated to make 1,000 – 2,000 shirts. If the shirts are not available to sell, Benny and Frieda will not be able to achieve their goal.Will they have $1,600 for the first month’s rent and the inventory to start this business?
[Question]141. Boston Co. is considering the production and sale of a new product with the following sales and cost data: unit sales price, $300; unit variable costs, $180; total fixed costs, $270,000; and projected sales, $900,000. What is the margin of safety:a. In dollar sales?b. As a percentage of sales? Answer: Contribution margin ratio = ($300 - $180)/$300 = 40%Break-even point in dollar sales = $270,000/0.40 = $675,000
Margin of safety:a. In sales dollars = Sales – Break-even sales
[Question]142. Herriot Co. has total fixed costs of $180,000 and a contribution margin ratio of 40%. Assume that an additional advertising expenditure of $4,000 would increase sales by $8,000. Should the company spend this additional amount on advertising? (Support your answer with calculations.) Answer:
Increase in sales $8,000Contribution margin ratio x .40Increase in contribution margin $3,200Increase in costs (4,000)Net decrease in income $ (800)
Therefore, the increased advertising should not be purchased.
[Question]143. Abrams Co. has total fixed costs of $240,000 and a contribution margin ratio of 40%. If rent expense increases by $5,000, how much will sales have to increase to cover this increase in costs? Answer: To cover the cost increase, the increased fixed costs must be countered with an increase in contribution margin. Specifically:
Sales increase x Contribution margin ratio
= Increased contribution margin
Sales increase x .40 = $5,000Sales increase = $5,000/.40
[Question]144. Thomas Company has total fixed costs of $360,000 and variable costs of $14 per unit. If the unit sales price is reduced from $24 to $20 and advertising is increased by $10,000, sales will increase from 40,000 to 65,000 units. Should Thomas reduce its per unit sales price and pay for the additional advertising? (Support your answer with calculations.) Answer:
Current: Proposed:Sales (40,000 x $24) $960,000 Sales (65,000 x $20) $1,300,000Variable costs Variable costs (40,000 x $14) (560,000) (65,000 x $14) (910,000)Contribution margin $400,000 Contribution margin $ 390,000
Fixed costsFixed costs (360,000) (360,000 + $10,000) (370,000)Net income $ 40,000 Net income $ 20,000
Since there is a $20,000 decrease in income from the proposed strategy, the additional advertising and reduced selling price should not be implemented.
[Question]145. The following data relate to a product sold by Nelson Company:
Total variable costs $90,000Total fixed costs 27,000Predicted after-tax income (30% tax) 12,600Contribution margin per unit 5
(a) Calculate the number of units expected to be sold.(b) Calculate the expected total dollar sales. Answer: (a) [$27,000 + ($12,600/0.70)] / $5 = 9,000 units
[Question]146. A product is sold for $45 and has variable costs of $33 per unit. The total fixed costs for the firm are $180,600. If the firm desires to earn a pretax income of $77,400, how many units must be sold? Answer: Unit sales = (Fixed costs + Target pretax income)/(Contribution margin per unit) = ($180,600 + $77,400) / ($45 - $33) = 21,500 units Blooms Taxonomy: ApplyAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 18-C2Topic: Target Income
[Question]147. A firm produces and sells a product with a contribution margin of $32 per unit. The firm is presently selling 90,000 units and earning $240,000 in after-tax income. Taxes are $80,000 at a 25% tax rate. If the firm desires to increase its after-tax income to $300,000, how many more units must it sell? Answer: Target increase in pretax income = ($300,000 - $240,000)/(1.00 - .25) = $80,000Additional units = $80,000/$32 = 2,500 units
[Question]148. A company is looking into two alternative methods of producing its product. The following information about the two alternatives is available:
Chapter 17 – Activity-Based Costing and AnalysisAlternative #1 Alternative #2
Variable costs per unit $8 $12Fixed costs $240,000 $140,000Selling price per unit $20 $20
If the company's expected sales volume is 35,000 units, which alternative should be selected? Answer:
Alternative 1 Alternative 2:Sales (35,000 x $20) $700,000 Sales (35,000 x $20) $700,000Variable costs Variable costs(35,000 x $8) (280,000) (35,000 x $12) (420,000)Contribution margin $420,000 Contribution margin $280,000Fixed costs (240,000) Fixed costs (140,000)Income $180,000 Income $140,000Degree of operating leverage: Degree of operating leverage:
$420,000/$180,000 = 2.3 $280,000/$140,000 = 2.0
Feedback: Alternative 1 provides the higher income. In addition, it has a higher degree of operating leverage. This means that for every 1% of increase in sales, income before tax should increase by 2.3% for alternative 1, rather than 2% for alternative 2. Therefore, alternative 1 should be selected.
[Question]149. Duxbury Co. reports the following data for the current year:
Units sold 1,200Unit sales price $30Unit variable cost $10Total fixed cost $18,000
Required:a. Calculate the break-even point in units.b. Calculate Duxbury's pretax income.c. Calculate Duxbury's degree of operating leverage. d.) Calculate the margin of safety in units.Answer:
[Question]150. Outback Products reports the following information:
Total contribution margin $32,000Total fixed costs $28,000
Required:a. Calculate Outback Products’ degree of operating leverage (DOL).b. Outback Products forecasts a 6% increase in sales. What is the expected effect in percent on pretax income? Answer:
a. Contribution margin $32,000Fixed costs (28,000)Income before income taxes $ 4,000
Degree of operating leverage = $32,000/$4,000 = 8b. A 6% increase in sales will result in a 48% (6% x 8) increase in income before taxes.
[Question]151. Kelley Company and Mason Company each have sales of $200,000 and costs of $140,000. Kelley Company's costs consist of $40,000 fixed and $100,000 variable, while Mason Company's costs consist of $100,000 fixed and $40,000 variable. Which company will suffer the greatest decline in profits if sales volume declines by 15%? Answer:
Kelley Company Mason CompanySales $200,000 Sales $200,000Variable costs 100,000 Variable costs 40,000Contribution margin 100,000 Contribution margin 160,000Fixed costs 40,000 Fixed costs 100,000Income before tax $ 60,000 Income before tax $ 60,000Operating leverage 1.67 Operating leverage 2.67
Therefore, Mason Company will suffer the greatest decline in profits.
[Question]152. The following information describes a product expected to be produced and sold by Pepin Corporation:
Selling price $32 per unitVariable costs $27 per unitTotal fixed costs $850,000per year
Required:a. Calculate the contribution margin per unit.b. Calculate the break-even point in units. Answer: a. Contribution margin = $32 - $27 = $5 per unitb. Break-even point in units = $850,000/$5 per unit =170,000 units
[Question]153. A company manufactures and sells spotlights. Each spotlight sells for $145. The variable cost per unit is $98, and the company's total fixed costs are $235,000. Predicted sales are 15,000 units. What is the contribution margin per unit? Answer: Contribution margin = $145 – $98 = $47
[Question]154. A company has total fixed costs of $360,000. Its product sells for $40 per unit and variable costs amount to $25 per unit. What is the break-even point in dollar sales? Answer: Contribution margin ratio = ($40 - $25)/$40 = 37.5%Break-even point in dollar sales = $360,000/0.375 = $960,000
[Question]155. A company sells a single product that has a contribution margin ratio of 24%. If the company's total fixed costs are $84,000, what is the break-even point in dollar sales? Answer: Break-even point in dollar sales = $84,000/0.24 = $350,000
[Question]156. Macleod Company's product has a contribution margin per unit of $62.50 and a contribution margin ratio of 25%. What is the per unit selling price of the product?
[Question]157. Narrows Co. is considering the production and sale of a new product line with the following sales and cost data: unit sales price $125; unit variable costs $75; and total fixed costs of $140,000. Calculate the break-even point:a. In units.b. In dollar sales. Answer: a. Break-even point in units = $140,000/($125 - $75) = 2,800 unitsb. Contribution margin ratio = ($125 - $75)/$125 = 40%Break-even point in sales dollars = $140,000/0.40 = $350,000
[Question]158. A company manufactures a product and sells it for $120 per unit. The total fixed costs of manufacturing and selling the product are expected to be $155,250, and the variable costs are expected to be $75 per unit. What is the company's break-even point in (a) units and (b) dollar sales? Answer: Contribution margin = $120 - $75 = $45a. Break-even points in units $155,250/$45 = 3,450 unitsContribution margin ratio = $45/$120 = 37.5%b. Break-even point in dollar sales = $155,250/0.375 = $414,000
[Question]159. A product has a contribution margin per unit of $17 and sells at $25 per unit. If the break-even point is 82,000 units, calculate (a) the variable costs per unit and (b) the total fixed costs. Answer: a. Variable costs per unit = $25.00 - $17.00 = $8.00b. At the break-even point, the total contribution margin = total fixed costs.Contribution margin at the break-even point = 82,000 units x $17.00 = $1,394,000.Fixed costs = $1,394,000
[Question]160. A firm provides the following sales data:
Expected unit sales 5,000 Unit variable cost $10Unit selling price $16 Total fixed cost $12,000
Required:a. Calculate the break-even point in dollar sales.b. Calculate the margin of safety in dollar sales. Answer: a. Contribution margin ratio = ($16 – $10)/$16 = 37.5%Break-even point in dollar sales = $12,000/0.375 = $32,000b. Margin of safety in dollars = ($5,000 x $16) - $32,000 = $48,000
Chapter 17 – Activity-Based Costing and Analysis161. Wilson Co. is preparing next period's forecasts. Total fixed costs are expected to be $300,000 and the contribution margin ratio is expected to be 30%. The applicable income tax rate is 25%.a. Calculate the company's break-even point in dollar sales.b. If sales are $1,800,000 above the break-even point, what will income be pretax income and after-tax income?
Answer:
a. Break-even point in dollars
= Fixed costs/Contribution margin ratio
= $300,000/.30= $1,000,000
b. Income before taxes = (Sales x Contribution margin ratio) – Fixed costs= ($2,800,000* x .30) - $300,000= $540,000
*$1,000,000 + $1,800,000
Income after taxes = Pretax income x (1 – tax rate)= $540,000 x (1 - .25)= $405,000
[Question]162. The following information describes a product expected to be produced and sold by Hadley Company:
Selling price $80 per unitVariable costs $32 per unitTotal fixed costs $630,000
Required:a. Calculate the contribution margin ratio.b. Calculate the break-even point in dollar sales.c. What dollar amount of sales would be necessary to achieve a pretax income of $120,000?
Chapter 17 – Activity-Based Costing and AnalysisAnswer: a. CM Ratio = ($80 - $32)/($80) = 60%b. Break-even point in dollar sales = $630,000/(0.60) = $1,050,000c. $ of sales = ($630,000 + $120,000)/(0.60) = $1,250,000
[Question]164. The sales mix of Palm Company is 5 units of A, 3 units of B, and 1 unit of C. Per unit sales prices for each product are $30, $40, and $50, respectively. Variable costs per unit are $14, $24, and $34, respectively. Fixed costs are $597,600. What is the break-even point in composite units and in units of A, B, and C? Answer:
5 units of Product A @ $30 per unit = $1503 units of Product B @ $40 per unit = 1201 unit of Product C @ $50 per unit = 50Selling price of a composite unit $320
5 units of Product A @ $14 per unit = $ 703 units of Product B @ $24 per unit = 721 unit of Product C @ $34 per unit = 34Variable costs of a composite unit $176
Contribution margin of a composite unit = $320 - $176 = $144Break-even point in composite units = $597,600/$144 = 4,150 composite units4,150 x 5 = 20,750 units of A4,150 x 3 = 12,450 units of B4,150 x 1 = 4,150 units of C
[Question]165. A firm sells two different products, A and B. For each unit of B, the firm sells two units of A. Total fixed costs for this firm are $1,260,000. Additional selling prices and cost information for both products follow:
Chapter 17 – Activity-Based Costing and AnalysisProduct Price per
UnitCosts per
Unit A $72 $40 B 48 28
Required:a. Calculate the contribution margin per composite unit.b. Calculate the break-even point in units of each individual product.c. If pretax income before taxes of $294,000 is desired, how many units of A and B must be sold? Answer: a.
2 units of A at ($72 – 40) contribution margin per unit $641 unit of B at ($48 – 28) contribution margin per unit 20Contribution margin of a composite unit $84
c. Composite units to earn $294,000 in pretax income:($1,260,000 + $294,000)/$84 = 18,500 composite units18,500 composite units x 2 = 37,000 units of A15,500 composite units x 1 = 18,500 units of B
b. Break-even point in composite units = $1,260,000/$84 = 15,000 composite units
Breakeven Point: Unit A (15000 x 2) 30,000 units Unit B (15,000 x 1) 15,000 units
17-158
Chapter 17 – Activity-Based Costing and Analysis
[Question]166. Joseph Co. has three products A, B, and C, and its fixed costs are $69,000. The sales mix for its products are 3 units of A, 4 units of B, and 1 unit of C. Information about the three products follows:
A B CProjected sales in dollars $192,00
0$192,000 $64,000
Selling price per unit $40 $30 $40Contribution margin ratio 30% 35% 35%
a. Calculate the company's break-even point in composite units and sales dollars.b. Calculate the number of units of each individual product to be sold at the break-even point. Answer: Preliminary calculations:
3 units of A at $40 each $1204 units of B at $30 each 1201 unit of C at $40 each 40Selling price of a composite unit $280
Contribution margin of A ($120 x 30%) $36Contribution margin of B ($120 x 35%) 42Contribution margin of C ($40 x 35%) 14Contribution margin of composite unit $92
a. Break-even point in composite units = $69,000/$92 = 750 composite unitsBreak-even point in sales dollars = 750 x $280 = $210,000b. At break-even point: 750 x 3 = 2,250 units of A750 x 4 = 3,000 units of B750 x 1 = 750 units of C
Chapter 17 – Activity-Based Costing and Analysiscosts:
Month Units Produced Total CostJanuary 17,500 $ 20,500February 27,500 $ 21,500March 25,000 $ 25,000April 35,000 $ 21,500May 47,500 $ 25,500June 22,500 $18,500
a. Using the high-low method, calculate the variable cost per unit and the estimated fixed costs.b. Using the resulting relationship, predict the costs if they produce 28,000 units in a future period.
[Question]169. Gabel Industries has collected the following data in order to analyze the behavior of their costs:
Month Units Produced Total CostJanuary 8,750 $ 40,500February 13.750 $ 41,500March 12,500 $ 45,000April 17,500 $ 41,500May 23,750 $ 45,500June 11,500 $38,500
a. Using the high-low method, calculate the variable cost per unit and the estimated fixed costs.b. Using the resulting relationship, predict the costs if they produce 18,500 units in a future period.
[Question]170. A_______________ cost is one that remains unchanged in amount when volume of activity varies from period to period within a relevant range. A ______________ cost is one that changes in proportion to changes in volume of activity. Answer: fixed; variable
[Question]171. A __________ cost is one that includes both fixed and variable cost components; a ______________ cost is one that reflects a step pattern. Answer: mixed; step-wise
[Question]172. Three important assumptions in cost-volume-profit analysis is that (1) _______________per unit is constant, (2) _____________ per unit is constant, and (3) ______________ are constant in total. Answer: selling price; variable cost; fixed costs
[Question]173. Solving problems to determine the relationship of cost, volume, and profit often commences with the measurement of the _____________ point. Further analysis emphasizing profitability may be accomplished by measuring the _______________ and _________________. Answer: break-even; margin of safety; target net income.
[Question]174. There are at least three different methods to estimate costs. These methods are the _______________, _______________, and _______________methods. Answer: scatter diagram, high-low, least-squares regression
[Question]175. __________________ is the amount by which the unit selling price of a product exceeds its per unit variable cost.Answer: Unit contribution margin.
Chapter 17 – Activity-Based Costing and Analysis176. Contribution margin ratio is calculated as the ________________ divided by _____________.Answer: unit contribution margin; sales price per unit.
[Question]177. What-if analysis of cost, revenue, and volume changes is called _______________________. Further analysis of this nature may be achieved by measuring the degree of ______________________. Answer: sensitivity analysis; operating leverage.
[Question]178. One aid in measuring cost behavior involves creating a display of the data about past costs in graphical form. Such a visual display is called a ______________________. Answer: scatter diagram
[Question]179. When using the high-low method for estimating cost behavior, the slope, or variable cost per sales dollar, is calculated by ___________________________________.Answer: change in cost divided by change in sales
[Question]182. A graphic presentation of cost-volume-profit data is known as a __________________ graph (or chart); this presentation is also sometimes called a ______________ chart. Answer: CVP; break-even
[Question]8. Many companies link manager bonuses to income computed under absorption costing because this is how income is reported to shareholders.Answer: True
[Question]15. If a company has excess capacity, increases in production level will increase variable production costs but not fixed production costs.Answer: True
[Question]17. Variable costing separates the variable costs from fixed costs and therefore makes it easier to identify and assign control over costs.Answer: True
[Question]18. A company normally sells a product for $20 per unit. Variable per unit costs for this product are: $2 direct materials, $4 direct labor, and $1.50 variable overhead. The company is currently operating at 70% of capacity producing 14,000 units per year. Total fixed costs are $42,000 per year. The company should not accept a special order for 2,000 units which would be sold for $10 per unit because there would be an incremental loss on the order. Answer: FalseFeedback: 14,000/.7 – 14,000 = 6,000 unit capacity remainingPer unit variable costs = $2 DM + $4 DL + $1.50 VOH = $7.50Per unit incremental income = $10.00 - $7.50 = $2.50
[Question]19. A company normally sells a product for $25 per unit. Variable per unit costs for this product are: $3 direct materials, $5 direct labor, and $2 variable overhead. The company is currently operating at 100% of capacity producing 30,000 units per year. Total fixed costs are $75,000 per year. The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs. Answer: FalseFeedback: No unused capacity is available
[Question]20. During a given year if a company produces and sells the same number of units, then beginning inventory units equal ending inventory units.Answer: True
[Question]21. During a given year, if a company produces more units than it sells, then ending inventory units will be less than beginning inventory units.Answer: False
[Question]22. During a given year, if a company sells more units than it produces, then ending inventory units will be less than beginning inventory units. Answer: True
[Question]23. The data needed for cost-volume-profit analysis is readily available if the income statement is prepared under absorption costing.Answer: False
[Question]24. The data needed for cost-volume-profit analysis is readily available if the income statement is prepared using a contribution format.Answer: True
[Question]27. Given the following data, total product cost per unit under variable costing will be greater than total product cost under absorption costing.
Direct labor $2 per unitDirect materials $8 per unitOverhead Total variable overhead $37,500 Total fixed overhead $249,000
[Question]30. Given the following data, total product cost per unit under absorption costing will be greater than total product cost per unit under variable costing.
Direct labor $9 per unitDirect materials $7 per unitOverhead Total variable overhead $45,000 Total fixed overhead $27,000
[Question]31. Given the following data, total product cost per unit under absorption costing will be $400 greater than total product cost per unit under variable costing.
Direct labor $1.50 per unitDirect materials $1.50 per unitOverhead Total variable overhead $900,000 Total fixed overhead $1,200,000
Expected units to be produced 3,000 units
Answer: TrueFeedback: $1,200,000/3,000 = $400 per unit more because of fixed overhead.
[Question]35. A variable costing income statement focuses attention on the relationship between costs and sales that is not evident from the absorption costing format.Answer: True
[Question]47. Multiplying the contribution margin ratio by the expected change in sales equals the expected change in contribution margin. Answer: True
[Question]50. To convert variable costing income to absorption costing income, management will need to change the way fixed overhead costs are treated.Answer: True
[Question]51. Which of the following is not a product cost?A. Direct labor.B. Indirect manufacturing costs.C. Direct materials.D. Manufacturing overhead.E. Advertising costs.Answer: E
[Question]52. Using a traditional costing approach, which of the following manufacturing costs are assigned to products?A. Direct materials and direct labor.B. Direct labor and variable manufacturing overhead.C. Fixed manufacturing overhead, direct materials, and direct labor.D. Variable manufacturing overhead, direct materials, and direct labor.E. Variable manufacturing overhead, direct materials, direct labor, and fixed manufacturing overhead.Answer: E
[Question]53. Which of the following statements is true regarding absorption costing?A. It is a not the traditional costing approach.B. It is not permitted to be used for financial reporting.C. It is not permitted to be used for tax reporting.D. It assigns all manufacturing costs to products.E. It requires only variable costs to be treated as product costs. Answer: D
Blooms Taxonomy: UnderstandAACSB: Analytic AICPA BB: Industry
[Question]54. Which of the following statements is true regarding variable costing?A. It is a traditional costing approach.B. Only manufacturing costs that change in total with changes in production level are included in product costs.C. It is not permitted to be used for managerial reporting.D. It treats overhead in the same manner as absorption costing.E. It makes it easier to manipulate earnings with changes in production levels. Answer: B
[Question]55. Which of the following statements is true?A. Variable costing treats fixed overhead as a period cost.B. Absorption costing treats fixed overhead as a period cost.C. Absorption costing treats fixed overhead as an expense in the period it is incurred.D. Variable costing excludes all overhead from product costs.E. Managers can manipulate earnings more easily under variable costing by varying the production level.Answer: A
[Question]56. Which of the following statements is true?A. A per unit cost that is constant at all production levels is a variable cost per unit.B. Reported income under variable costing is affected by production level changes.C. A per unit cost that is constant at all production levels is a fixed cost per unit.D. Reported income under absorption costing is not affected by production level changes.E. A cost that is constant over all levels of production is a variable cost. Answer: A
[Question]57. Under absorption costing, which of the following statements is not true?A. Over production and inventory buildup can occur because of how managers are evaluated and rewarded.B. The fixed costs per unit decline as more units are produced.C. Variable inventory costs are treated in the same manner as they are under variable costing.D. Fixed inventory costs are treated in the same manner as they are under variable costing.E. All manufacturing costs are assigned to products.Answer: D
[Question]59. Under absorption costing, a company had the following unit costs when 8,000 units were produced.
Direct labor $8.50 per unit
Direct material $9.00 per unit
Variable overhead $6.75 per unit
Fixed overhead ($60,000/8,000 units)
$7.50 per unit
Total production cost $31.75 per unit
Compute the total production cost per unit under variable costing if 20,000 units had been produced.A. $31.75B. $27.25C. $26.25D. $24.25E. $17.50Answer: DFeedback: $8.50 DL + $9 DM + $6.75 VOH = $24.25
[Question]60. Under absorption costing, a company had the following unit costs when 8,000 units were produced.
Direct labor $8.50 per unit
Direct material $9.00 per unit
Variable overhead $6.75 per unit
Fixed overhead ($60,000/8,000 units)
$7.50 per unit
Total production cost $31.75 per unit
Compute the total production cost per unit under variable costing if 25,000 units had been produced.A. $31.75B. $27.25C. $26.25D. $24.25E. $17.50Answer: DFeedback: $8.50 DL + $9 DM + $6.75 VOH = $24.25
[Question]61. When evaluating a special order, management should:A. Only accept the order if the incremental revenue exceeds all product costs.B. Only accept the order if the incremental revenue exceeds fixed product costs.C. Only accept the order if the incremental revenue exceeds total variable product costs.
Chapter 17 – Activity-Based Costing and AnalysisD. Only accept the order if the incremental revenue exceeds full absorption product costs.E. Only accept the order if the incremental revenue exceeds regular sales revenue.Answer: C
Blooms Taxonomy: UnderstandAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 2 MediumLearning Objective: 19-C2Topic: Special Order
[Question]62. A company is currently operating at 80% capacity producing 5,000 units. Current cost information relating to this production is shown in the table below:
Per UnitSales price $34Direct material $2Direct labor $3Variable overhead
$4
Fixed overhead $5
The company has been approached by a customer with a request for a 100-unit special order. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?A. Any amount over $34 per unit.B. Any amount over $20 per unit.C. Any amount over $14 per unit.D. Any amount over $9 per unit.E. Any amount over $5 per unit.Answer: DFeedback: 5,000/.80 – 5,000 = 1,250 unit capacity available$2 + $3 + $4 = $9 incremental costs
Blooms Taxonomy: ApplyAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 19-C2 Topic: Special Order
[Question]63. A company is currently operating at 75% capacity and producing 3,000 units. Current cost information relating to this production is shown in the table below:
Per UnitSales price $43Direct material $7Direct labor $6Variable overhead
$4
Fixed overhead $4
The company has been approached by a customer with a request for a 200-unit special. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?A. Any amount over $43 per unit.B. Any amount over $17 per unit.C. Any amount over $21 per unit.D. Any amount over $13 per unit.E. Any amount over $22 per unit.Answer: BFeedback: 3,000/.75 – 3,000 = 1,000 unit capacity remaining$7 + $6 + $4 = $17 incremental costs
Blooms Taxonomy: ApplyAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 19-C2Topic: Special Order
[Question]64. Which of the following best describes costs assigned to the product under the absorption costing method?
[Question]65. Which of the following best describes costs assigned to the product under the variable costing method?Direct labor (DL)Direct materials (DM)Variable selling and administrativeVariable manufacturing overheadFixed selling and administrativeFixed manufacturing overheadA. DL, DM, variable selling and administrative costs, and variable manufacturing overhead.B. DL, DM, and variable manufacturing overhead.C. DL, DM, variable manufacturing overhead, and fixed manufacturing overhead.D. DL and DM.E. DL, DM, fixed selling and administrative, and fixed manufacturing overhead.Answer: B
[Question]66. Assume a company sells a given product for $75 per unit. How many units must be sold to break-even if variable selling costs are $12 per unit, variable production costs are $23 per unit, and total fixed costs are $700,000?
[Question]67. Assume a company sells a given product for $90 per unit. How many units must be sold to break even if variable selling costs are $2 per unit, variable production costs are $31 per unit, and total fixed costs are $1,799,946?A. 31,578 units.B. 19,995 units.C. 20,454 units.D. 14,634 units.E. 899,973 units.Answer: AFeedback: $1,799,946/($90 - $2 - $31) = 31,578 units
[Question]68. Assume a company sells a given product for $12 per unit. How many units must be sold to break even if variable selling costs are $0.50 per unit, variable production costs are $3.50 per unit, and total fixed costs are $4,500,000?A. 391,305 units.B. 562,500 units.C. 529,412 units.D. 281,250 units.E. 375,000 units.Answer: BFeedback: $4,500,000/($12 - $0.5 - $3.50) = 562,500 units
Blooms Taxonomy: ApplyAACSB: Analytic AICPA BB: Industry
Reference: 19_01Advanced Company reports the following information for the current year. All beginning inventory amounts equaled $0 this year.
Units produced this year 25,000 unitsUnits sold this year 15,000 unitsDirect materials $9 per unitDirect labor $11 per unitVariable overhead $75,000 in
totalFixed overhead $137,500 in
total
[Question]73. Given Advanced Company’s data, compute cost per unit of finished goods under variable costing.A. $20.00B. $25.00C. $21.88D. $23.00E. $28.50Answer: DFeedback: $9 DM + $11 DL + ($75,000/25,000) VOH = $23 Reference: 19_01
[Question]75. Given Advanced Company’s data, compute cost of finished goods in inventory under absorption costing.A. $285,000B. $712,500C. $427,500D. $230,000E. $345,000Answer: AFeedback: $9 DM + $11 DL + ($75,000/25,000) VOH + ($137,500/25,000) FOH= $28.50 per unit cost25,000 units -15,000 units = 10,000 units in ending inventory10,000 units x $28.50 = $285,000Reference: 19_01
Chapter 17 – Activity-Based Costing and Analysis[Question]76. Given Advanced Company’s data, compute cost of finished goods in inventory under variable costing.A. $285,000B. $712,500C. $427,500D. $230,000E. $345,000Answer: DFeedback: $9 DM + $11 DL + ($75,000/25,000) VOH = $2325,000 units -15,000 units = 10,000 units in ending inventory10,000 units x $23 = $230,000Reference: 19_01
[Question]77. Given Advanced Company’s data, and the knowledge that the product is sold for $50 per unit and operating expenses are $200,000, compute the net income under absorption costing. A. $55,000B. $67,500C. $80,500D. $122,500E. $205,000Answer: D Feedback: NI = ($50 – $28.50)(15,000 units) - $200,000 = $122,500
[Question]78. Given Advanced Company’s data, and the knowledge that the product is sold for $50 per unit and operating expenses are $200,000, compute the net income under variable costing. A. $55,000B. $67,500C. $80,500D. $122,500E. $205,000
[Question]79. Clear Company reports the following information for its first year of operations:
Units produced this year 50,000 unitsUnits sold this year 49,000 unitsDirect materials $7 per unitDirect labor $3 per unitVariable overhead $210,000 in
totalFixed overhead ? in total
If the company’s cost per unit of finished goods using absorption costing is $19.30, what is total fixed overhead?A. $350,000B. $255,000C. $150,000D. $249,900E. $147,000Answer: BFeedback: $19.30 = DM + DL + VOH + FOH$19.30 = $7 + $3 + ($210,000/50,000) + FOH$19.30 = $14.20 + FOHFOH = $5.10 per unit$5.10 per unit x 50,000 units = $255,000
[Question]80. Cloudy Company reports the following information for the current year:
Units produced this year 51,000 unitsUnits sold this year 53,000 unitsDirect materials $6 per unitDirect labor $3 per unitVariable overhead $255,000 in
totalFixed overhead ? in total
If the company’s cost per unit of finished goods using absorption costing is $18, what is total fixed overhead?A. $204,000B. $212,000C. $213,690D. $222,070E. $459,000Answer: AFeedback: $18 = DM + DL + VOH + FOH$18 = $6 + $3 + ($255,000/51,000) + FOH$18 = $14 + FOHFOH = $4 per unit$4 per unit x 51,000 units = $204,000
[Question]81. Gage Company reports the following information for its first year of operations:
Units produced this year 7,000 unitsUnits sold this year 6,500 unitsDirect materials $22 per unitDirect labor $30 per unitVariable overhead ? in totalFixed overhead $56,000 in
total
If the company’s cost per unit of finished goods using variable costing is $63, what is total variable overhead?A. $21,000B. $71,500C. $77,000D. $19,500E. $16,590Answer: CFeedback: $63 = DM + DL + VOH$63 = $22 + $30 + VOHVOH = $11 per unit$11 per unit x 7,000 units = $77,000
[Question]82. A company reports the following information for its first year of operations:
Units produced this year 650 unitsUnits sold this year 500 unitsDirect materials $750 per unitDirect labor $1,000 per
unitVariable overhead ? in totalFixed overhead $308,750 in
total
If the company’s cost per unit of finished goods using variable costing is $2,375, what is total variable overhead?A. $237,500B. $75,000C. $312,500D. $406,250E. $97,500Answer: DFeedback: $2,375 = DM + DL + VOH $2,375 = $750 + $1,000 + VOHVOH = $625 per unit
[Question]83. Magenta Inc. reports the following information for the current year which is its first year of operations:
Units produced this year 750,000 unitsUnits sold this year 740,000 unitsDirect materials $18.30 per
unitDirect labor $14.20 per
unitVariable overhead ? in totalFixed overhead $4,500,000 in
total
If the company’s cost per unit of finished goods using absorption costing is $39.75, what is total variable overhead?A. $925,000B. $877,500C. $937,500.D. $865,800E. $5,437,500Answer: C
[Question]84. A company reports the following information for its first year of operations:
Units produced this year 43,000 unitsUnits sold this year 39,000 unitsDirect materials $0.57 per unitDirect labor $0.83 per unitVariable overhead $26,660 in
totalFixed overhead ? in total
If the company’s cost per unit of finished goods using variable costing is $2.02, what is the amount of total fixed overhead?A. $26,660B. $35,690C. $24,510D. Some other amountE. Cannot be determined from the given data.Answer: E
[Question]85. A company reports the following information for its first year of operations:
Units produced this year ? unitsUnits sold this year 1,500 unitsDirect materials $9 per unitDirect labor $5 per unitVariable overhead $7 per unitFixed overhead $24,000 in
total
If the company’s cost per unit of finished goods using absorption costing is $27, how many units were produced?A. 4,000 units.B. 3,600 units.C. 1,846 units.D. 2,667 units.E. 2,000 units.Answer: AFeedback: $27 = DM + DL + VOH + FOH$27 = $9 + $5 + $7 + FOHFOH = $6 per unit$6 per unit x units produced = $24,000Units produced = 4,000
[Question]86. Romtech Company sold 43,000 units of its product at a price of $300 per unit. Total variable cost per unit is $175, consisting of $168 in variable production cost and $7 in variable selling and administrative cost. Compute the manufacturing margin for the company under variable costing.A. $5,375,000B. $5,676,000C. $12,599,000D. $12,900,000
[Question]87. Chance, Inc. sold 3,000 units of its product at a price of $72 per unit. Total variable cost per unit is $51, consisting of $32 in variable production cost and $19 in variable selling and administrative cost. Compute the manufacturing margin for the company under variable costing.A. $96,000B. $63,000C. $120,000D. $216,000E. ($90,000)Answer: CFeedback: ($72 - $32) x 3,000 units = $120,000
[Question]88. Vision Tester, Inc., a manufacturer of optical glass, began operations on February 1 of the current year. During this time, the company produced 900,000 units and sold 800,000 units at a sales price of $12 per unit. Cost information for this year is shown in the following table:
Production costs Direct materials $.80 per unit Direct labor $.70 per unit Variable overhead $500,000 in total Fixed overhead $450,000 in totalNon-production costs Variable selling and administrative $30,000 in total Fixed selling and administrative $490,000 in total
Given this information, which of the following is true?A. Net income under variable costing will exceed net income under absorption costing by
Chapter 17 – Activity-Based Costing and Analysis$50,000.B) Net income under absorption costing will exceed net income under variable costing by $50,000.C. Net income will be the same under both absorption and variable costing.D. Net income under variable costing will exceed net income under absorption costing by $60,000.E. Net income under absorption costing will exceed net income under variable costing by $60,000.Answer: BFeedback: 100,000 units x ($450,000/900,000 FOH) = $50,000 inventoried under absorption and expensed under variable costing.
Reference: 19_02Star Services, Inc., a manufacturer of telescopes, began operations on October 1 of the current year. During this time, the company produced 50,000 units and sold 35,000 units at a sales price of $500 per unit. Cost information for this year is shown in the following table:
Production costs Direct materials $85 per unit Direct labor $65 per unit Variable overhead $200,000 in total Fixed overhead $350,000 in totalNonproduction costs Variable selling and administrative $90,000 in total Fixed selling and administrative $500,000 in total
[Question]89. Given the Star Services, Inc. data, what is net income using absorption costing?A. $18,670,000
[Question]90. Given the Star Services Inc. data, what is net income using variable costing?A. $18,670,000B. $18,774,000C. $16,360,000D. $11,274,000E. $11,170,000Answer: EFeedback: Sales = $500 x 35,000 = $17,500,000Per unit cost of goods sold = $85 + $65 + ($200,000/50,000) = $154Other variable costs (nonproduction) = $90,000 Total fixed costs = $350,000 (production overhead) + $500,000 (nonproduction) = $850,000Net income using absorption costing = $17,500,000 - $154(35,000) – $90,000 – $850,000 = $11,170,000 Reference: 19_02
Reference: 19_03Scavenger Company, a manufacturer of recycling bins, began operations on January 1 of the current year. During this time, the company produced 60,000 units and sold 55,000 units at a sales price of $15 per unit. Cost information for this year is shown in the following table:
Production costs Direct materials $2.50 per unit Direct labor $3.00 per unit Variable overhead $45,000 in total Fixed overhead $240,000 in totalNonproduction costs Variable selling and administrative $10,000 in total Fixed selling and administrative $50,000 in total
[Question]91. Given the Scavenger Company data, what is net income using absorption costing?A. $201,250B. $181,250C. $150,000D. $177,600E. $276,250Answer: A
Feedback: Sales = $15(55,000) = $ 825,000COGS = DM + DL + VOH + FOHVariable overhead production costs per unit = $45,000/60,000 units = $0.75 per unitFixed overhead production costs per unit = $240,000/60,000 units = $4.00 per unit[($2.50 + $3.00 + $0.75 + $4.00) x 55,000 units] = $563,750Sales – COGS – non-production costs = Net Income$825,000 - $563,750 - $10,000 - $50,000 = $201,250Reference: 19_03
Reference: 19_04Cool Pools, a manufacturer of above ground pools, began operations on January 1 of the current year. During this time, the company produced 45,000 units and sold 44,000 units at a sales price of $60 per unit. Cost information for this year is shown in the following table:
Production costs Direct materials $11.25 per unit Direct labor $3.20 per unit Variable overhead $315,000 in total Fixed overhead $39,600 in totalNonproduction costs Variable selling and administrative $ 2,000 in total Fixed selling and administrative $ 6,000 in total
Chapter 17 – Activity-Based Costing and Analysis93. Given the Cool Pools Company data, what is net income using absorption costing?A. $1,649,480B. $1,648,600C. $1,627,150D. $1,709,480E. $1,708,600Answer: AFeedback: Sales = $60(44,000) = $2,640,000Variable overhead production costs per unit = $315,000/45,000 units = $7 per unitFixed overhead production costs per unit = $39,600/45,000 units = $0.88 per unitCOGS = DM + DL + VOH + FOH[($11.25 + $3.20 + $7.00 + $0.88) x 44,000 units] = $982,520Sales – COGS – Nonproduction costs = Net income$2,640,000 - $982,520 - $2,000 - $6,000 = $1,649,480Reference: 19_04
[Question]94. Given the Cool Pools Company data, what is net income using variable costing?A. $1,649,480B. $1,648,600C. $1,627,150D. $1,709,480E. $1,708,600Answer: B
Feedback: Sales = $60(44,000) = $2,640,000Variable overhead production costs per unit = $315,000/45,000 units = $7 per unitCOGS = DM + DL + VOH[($11.25 + $3.20 + $7.00) x 44,000 units] = $943,800Other variable cost (non-production) = $2,000Total fixed costs = $39,600 + $6,000 = $45,600Sales – Variable COGS – Fixed costs = Net income$2,640,000 - $943,800 - $2,000 - $45,600 = $1,648,600Reference: 19_04
Chapter 17 – Activity-Based Costing and AnalysisRefer To: 19_04
[Question]95. Sindler Corporation sold 3,000 units of its product at a price of $13 per unit. Total variable cost per unit is $7.50, consisting of $6.80 in variable production cost and $.70 in variable selling and administrative cost. Compute contribution margin for the company.A. $39,000B. $22,500C. $16,500D. $18,600E. $36,900Answer: CFeedback: $13.00 - $7.50 = $5.50 x 3,000 units = $16,500
[Question]96. Branwin Corporation sold 7,200 units of its product at a price of $35.60 per unit. Total variable cost per unit is $17.55, consisting of $10.50 in variable production cost and $7.05 in variable selling and administrative cost. Compute contribution margin for the company.A. $256,320B. $126,360C. $50,760D. $129,960E. $180,720Answer: D
Feedback: $35.60 - $17.55 = $18.05 x 7,200 units = $129,960
Chapter 17 – Activity-Based Costing and AnalysisVariable overhead $5.80 per unitFixed overhead $150,000 in total
This product is normally sold for $48 per unit. If Swisher increases its production to 50,000 units, while sales remain at the current 30,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing?A. $60,000 decrease.B. $90,000 decrease.C. There is no change in gross margin.D. $90,000 increase.E. $60,000 increase.Answer: EFeedback: $150,000/30,000 units = $5 FOH per unit at 30,000 unit level$150,000/50,000 units = $3 FOH per unit at 50,000 unit level$5 – 3 = $2 less FOH cost in each unit sold$2 x 30,000 = $60,000 gross margin increase
[Question]98. Swisher, Incorporated reports the following annual cost data for its single product:
Normal production level 30,000 unitsDirect materials $6.40 per unitDirect labor $3.93 per unitVariable overhead $5.80 per unitFixed overhead $150,000 in total
This product is normally sold for $48 per unit. If Swisher increases its production to 50,000 units, while sales remain at the current 30,000 unit level, by how much would the company’s gross margin increase or decrease under variable costing?A. $60,000 decrease.B. $90,000 decrease.
Chapter 17 – Activity-Based Costing and AnalysisC. There is no change in gross margin.D. $90,000 increase.E. $60,000 increase.Answer: CFeedback: There would be no change because fixed costs are not included in the cost of goods sold so changing the production level would have no effect on the calculation of gross margin.
[Question]99. Swola Company reports the following annual cost data for its single product.
Normal production level 75,000 unitsDirect materials $1.25 per unitDirect labor $2.50 per unitVariable overhead $3.75 per unitFixed overhead $300,000 in total
This product is normally sold for $25 per unit. If Swola increases its production to 200,000 units, while sales remain at the current 75,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing?A. $187,500 increase.B. $112,500 increase.C. There will be no change in gross margin.D. $112,500 decrease.E. $187,500 decrease.Answer: A
Feedback: $300,000/75,000 units = $4 FOH per unit at 75,000 unit level$300,000/200,000 units = $1.50 FOH per unit at 200,000 unit level$4 – 1.50 = $2.50 less FOH cost in each unit sold$2.50 x 75,000 = $187,500 gross margin increase
Normal production level 75,000 unitsDirect materials $1.25 per unitDirect labor $2.50 per unitVariable overhead $3.75 per unitFixed overhead $300,000 in total
This product is normally sold for $25 per unit. If Swola increases its production to 200,000 units, while sales remain at the current 75,000 unit level, by how much would the company’s gross margin increase or decrease under variable costing?A. $187,500 increase.B. $112,500 increase.C. There will be no change in gross margin.D. $112,500 decrease.E. $187,500 decrease.Answer: CFeedback: There would be no change because fixed costs are not included in the cost of goods sold so changing the production level would have no effect on the calculation of gross margin.
Red and White Company reported the following monthly data:Units produced 2,000 unitsSales price $25 per unitDirect materials $1 per unitDirect labor $2 per unitVariable overhead $3 per unitFixed overhead $8,000 in total
[Question]101. What is the Red and White’s contribution margin for this month if 980 units were sold?A. $38,000B. $18,620C. $24,500
[Question]102. What is Red and White’s net income under absorption costing if 980 units are sold and operating expenses are $12,000?A. $(1,380)B. $(2,000)C. $ 2,700D. $ 6,620E. $ 10,620Answer: CFeedback: CM = ($25 - $1 - $2 - $3) = $19 x 980 units = $18,620 NI = $18,620 – (980 units)($8,000/2000 units) FC - $12,000 = $2,700Reference to: 19_05
[Question]103. What is Red and White’s net income under variable costing if 980 units are sold and operating expenses are $12,000?A. $(1,380)B. $(2,000)C. $ 2,700D. $ 6,620E. $ 10,620Answer: AFeedback: CM = ($25 - $1 - $2 - $3) = $19 x 980 units = $18,620 NI = $18,620 – $8,000 FC - $12,000 = $(1,380)Reference to: 19_05
[Question]104. Decko Industries reported the following monthly data:
Units produced 52,000 unitsSales price $33 per unitDirect materials $1.50 per unitDirect labor $2.50 per unitVariable overhead $3.50 per unitFixed overhead $234,000 in total
What is the company’s contribution margin for this month if 50,000 units were sold?A. $1,326,000B. $1,716,000C. $1,275,000D. $1,650,000E. $1,450,000Answer: CFeedback: ($33 - $1.50 - $2.50 - $3.50) = $25.50 x 50,000 units = $1,275,000
[Question]105. Assume that the following information was available for Guy Brown Company. How would Maria Teresa Vazquez and the other owners evaluate this information based on contribution margin ratio?
Chapter 17 – Activity-Based Costing and AnalysisA. Recycled toner cartridges has the lowest contribution margin ratio.B. Furniture has the highest contribution margin ratio.C. Office supplies has the highest contribution margin ratio.D. Recycled toner cartridges has the highest contribution margin ratio.E. Based on contribution margin ratio, the owners should consider expanding the furniture line and scaling back on office supplies and recycled toner cartridges. Answer: DFeedback:
[Question]106. Assume that the following information was available for Daylight Enterprises, Inc. Which of the following statements is(are) true with regard to contribution margin ratio?
Chapter 17 – Activity-Based Costing and AnalysisC. Ceiling lights has the lowest contribution margin ratio.D. Stand-alone lights has the highest contribution margin ratio.E. Tabletop lights has the highest contribution margin ratio. Answer: EFeedback:
[Question]107. Wind Fall, a manufacturer of leaf blowers, began operations this year. During this year, the company produced 10,000 leaf blowers and sold 8,500. At year-end the company reported the following income statement using absorption costing:
Sales (8,500 x $45) $382,500Cost of goods sold (8,500 x $20) 170,000Gross margin $212,500Selling and administrative expenses 60,000Net income $152,500
Production costs per leaf blower total $20, which consists of $16 in variable production costs and $4 in fixed production costs (based on the 10,000 units produced). Fifteen percent of total selling
Chapter 17 – Activity-Based Costing and Analysisand administrative expenses are variable.Compute net income under variable costing.A. $146,500B. $158,500C. $237,500D. $206,500E. $246,500Answer: AFeedback: $152,500 – ($4 x 1,500 units) = $146,500
[Question]108. Aces, Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. At year-end, the company reported the following income statement using absorption costing.
Sales (4,900 x $90) $441,000Cost of goods sold (4,900 x $38) 186,200Gross margin $254,800Selling and administrative expenses 75,000Net Income $179,800
Production costs per tennis racket total $38, which consists of $25 in variable production costs
Chapter 17 – Activity-Based Costing and Analysisand $13 in fixed production costs (based on the 6,000 units produced). Ten percent of total selling and administrative expenses are variable. Compute net income under variable costing.A. $194,100B. $165,500C. $311,000D. $240,500E. $233,000Answer: BFeedback: $179,800 – ($13 x 1,100 units) = $165,500
[Question]109. Dent Corporation had net income of $182,000 based on variable costing. Beginning and ending inventories were 5,000 units and 8,000 units, respectively. Assume the fixed overhead per unit was $3 for both the beginning and ending inventory. What is net income under absorption costing?A. $173,000B. $221,000C. $191,000D. $143,000E. $185,000Answer: CFeedback: $182,000 + (8,000 units x $3) – (5,000 x $3) = $191,000
[Question]110. Fomtech, Inc. had net income of $750,000 based on variable costing. Beginning and ending inventories were 50,000 units and 48,000 units, respectively. Assume the fixed overhead per unit was $.75 for both the beginning and ending inventory. What is net income under absorption costing?A. $751,500B. $676,500C. $823,500D. $748,500
[Question]111. Pact Company had net income of $972,000 based on variable costing. Beginning and ending inventories were 7,800 units and 5,200 units, respectively. Assume the fixed overhead per unit was $3.61 for both the beginning and ending inventory. What is net income under absorption costing?A. $962,614B. $1,018,923C. $925,077D. $969,400E. $981,379Answer: AFeedback: $972,000 + (5,200 units x $3.61) – (7,800 x $3.61) = $962,614
[Question]112. Front Company had net income of $72,500 based on variable costing. Beginning and ending inventories were 800 units and 1,200 units, respectively. Assume the fixed overhead per unit was $7.90 for both the beginning and ending inventory. What is net income under absorption costing?A. $69,340B. $75,660C. $88,300D. $56,700E. $72,900Answer: BFeedback: $72,500 + (1,200 units x $7.90) – (800 x $7.90) = $75,660
[Question]113. Given the following data, calculate product cost per unit under variable costing.
Direct labor $7 per unitDirect materials $1 per unitOverhead Total variable overhead $20,000 Total fixed overhead $90,000
Expected units to be produced 40,000 units
A. $8 per unitB. $8.50 per unitC. $10.25 per unitD. $10.75 per unitE. $12 per unitAnswer: BFeedback: $7 DL + $1 DM + ($20,000/40,000 units) VOH = $8.50
[Question]115. Given the following data, calculate the total product cost per unit under variable costing.
Direct labor $3.50 per unitDirect materials $1.25 per unitOverhead Total variable overhead $41,400 Total fixed overhead $150,000
Expected units to be produced 18,000 units
A. $4.75 per unitB. $7.05 per unitC. $15.38 per unitD. $13.08 per unitE. $16 per unitAnswer: BFeedback: $3.50 DL + $1.25 DM + ($41,400/18,000 units) VOH = $7.05
[Question]117. Match each of the following terms (a) through (j) with the appropriate definitions 1 through 10.(a) Absorption costing(b) Variable costing(c) Contribution margin(d) Contribution format(e) Manufacturing margin(f) Contribution margin ratio(g) Break-even point(h) Product costs
Chapter 17 – Activity-Based Costing and Analysis(i) Period costs(j) Gross margin_____ (1) Sales less cost of goods sold._____ (2) A specific number of units sold that produces total income equal to zero._____ (3) Sales less variable production costs._____ (4) A costing method that includes all manufacturing costs._____ (5) Costs that are expensed in the period they are incurred._____ (6) Sales less variable expenses._____ (7) A costing method that includes only variable manufacturing costs._____ (8) Direct labor, direct materials, and manufacturing overhead._____ (9) An income statement format that focuses on cost behavior._____(10) Contribution margin divided by sales.Answer: (1) j, (2) g, (3) e, (4) a, (5) i, (6) c, (7) b, (8) h, (9) d, (10) (f)
1. Direct materials X X2. Direct labor X X3. Variable manufacturing overhead X X4. Fixed manufacturing overhead X X5. Variable selling X X6. Fixed selling X X7. Variable administrative X X8. Fixed administrative X X
[Question]119. What costs are treated as product costs under the absorption costing method?Answer: Under absorption costing, direct labor, direct materials, and all manufacturing overhead costs, both fixed and variable, are treated as product costs.
Chapter 17 – Activity-Based Costing and Analysis120. What costs are treated as product costs under the variable costing method? Answer: Under variable costing, direct labor, direct materials, and variable manufacturing overhead costs are treated as product costs. Fixed manufacturing overhead is treated as a period cost.
[Question]121. How can the use of absorption costing result in overproduction? Answer: Absorption costing treats fixed manufacturing overhead as a product cost. As a fixed cost, the amount per unit goes down as the total number of units produced is increased. If these excess units produced are not sold, the fixed overhead cost allocated to the units is not currently expensed. This reduction in cost per unit will decrease cost of goods sold and increase net income. Therefore, companies must guard against increasing production merely for the sake of increasing the current period net income.
[Question]122. When excess capacity exists, what is the minimum special order price a manager should accept to increase net income? Answer: With excess capacity, increases in production level would increase variable production costs, but not fixed costs. Therefore, managers should accept special orders provided the special order price exceeds total variable cost.
Blooms Taxonomy: UnderstandAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 2 MediumLearning Objective: 19-C2Topic: Special Order
Chapter 17 – Activity-Based Costing and Analysis123. What are the benefits of using variable costing when striving to control costs? Are these benefits available under absorption costing? Answer: Under absorption costing, both variable production costs and fixed production costs are combined. This makes it difficult to evaluate the effectiveness of cost controls by different levels of managers. Variable costing separates the variable costs from the fixed costs and, therefore, makes it easier to identify and assign control over costs.
[Question]124. What is the formula to compute break-even volume in units?Answer: Break-even volume in units equals total fixed costs divided by contribution margin per unit.
[Question]125. How does contribution margin differ from gross margin? Answer: Contribution margin equals sales less variable expenses. This is a subtotal used in variable costing where costs are grouped according to cost behavior. Gross margin equals sales less cost of goods sold. This is a subtotal used in absorption costing where expenses are grouped according to function.
[Question]126. How will net income under variable costing compare to net income under absorption costing in the following three situations? Explain briefly the cause of any differences.(a) Units produced equal units sold(b) Units produced exceed units sold(c) Units produced are less than units sold Answer: (a) Income is identical under variable costing and absorption costing when the units
Chapter 17 – Activity-Based Costing and Analysisproduced equal the units sold.(b) When units produced exceed units sold, income under variable costing is less than income under absorption costing. This is because some of fixed overhead was allocated to ending inventory under absorption costing, but all of fixed overhead was expensed under variable costing.(c) When units produced are less than units sold, income under variable costing is greater than income under absorption costing. This is because absorption costing is expensing some of a prior period’s fixed overhead in addition to the current period’s fixed overhead, while variable costing is only expensing the current period’s fixed overhead.
Blooms Taxonomy: ApplyAACSB: Communication AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 Hard Learning Objective: 19-P2Topic: Variable CostingTopic: Absorption CostingTopic: Production
[Question]127. What is a contribution margin report? Answer: A contribution margin report presents cost data in a manner that emphasizes the company’s contribution margin and contribution margin ratio. The basic format is to present sales less variable costs equaling contribution margin.
[Question]128. What are the limitations of using variable costing? Answer: Variable costing is not an acceptable basis for either external reporting or tax reporting.
[Question]129. What is the general procedure for converting variable costing net income to absorption costing net income? Answer: The general formula is variable costing net income plus fixed production cost in ending inventory less fixed production cost in beginning inventory.
[Question]130. A company is currently operating at 60% capacity producing 10,000 units. Cost information relating to this current production is shown in the following table:
Per UnitSales price $21Direct material $6Direct labor $4.12Variable overhead
$2.23
Fixed overhead $0.80
The company has been approached by a customer with a request for a special order for 5,000 units. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?Answer: 10,000/.6 – 10,000 = 6,666 unit remaining capacity $6 + $4.12 + $2.23 = $12.35 incremental costsAny sales price that exceeds the $12.35 incremental costs will increase current profits.
Blooms Taxonomy: Apply AACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 19-C2Topic: Special Order
[Question]131. A company is currently operating at 65% capacity producing 12,000 units. Cost information relating to this current production is shown in the following table:
Per UnitSales price $6Direct material $2.30Direct labor $0.87Variable overhead
The company has been approached by a customer with a request for a special order for 2,000 units. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?Answer: 12,000/.65 – 12,000 = 6,461 unit remaining capacity$2.30 + $0.87 + $0.91 = $4.08 incremental costsAny sales price that exceeds the $4.08 incremental costs will increase current profits.
Blooms Taxonomy: ApplyAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 19-C2Topic: Special Order
[Question]132. A company is currently operating at 70% capacity producing 8,000 units. Cost information relating to this current production is shown in the following table:
Per UnitSales price $15Direct material $3.20Direct labor $7.10Variable overhead
$0.05
Fixed overhead $0.60
The company has been approached by a customer with a request for a special order for 1,500 units. The sales price per unit for this special order is $10. Should the company accept the special order?Answer: 8,000/.7 – 8,000 = 3,428 unit remaining capacity The company should not accept this special order. Incremental costs exceed incremental income.
$3.20 + $7.10 + $0.05 = $10.35 incremental costs
Blooms Taxonomy: ApplyAACSB: Analytic AICPA BB: IndustryAICPA FN: Measurement Difficulty: 3 HardLearning Objective: 19-C2Topic: Special Order
[Question]133. Assume a company sells a given product for $33.28 per unit. How many units must the company sell to break-even if variable selling costs are $1.40 per unit, variable production costs are $23.56 per unit, and total fixed costs are $2,080,000? Answer: $2,080,000/($33.28 - $1.40 - $23.56) = 250,000 units
[Question]134. Assume a company sells a given product for $83 per unit. Variable selling costs are $20.75 per unit and variable production costs are $49.80 per unit. If the company breaks even when selling 300,000 units, what are total fixed costs?Answer: $83 - $20.75 - $49.80 = $12.45 contribution margin per unit$12.45 x 300,000 units = $3,735,000 total fixed costs
[Question]135. Assume a company sells a given product for $18 per unit. Variable selling costs are $0.70 per unit and variable production costs are $5.30 per unit. If the company breaks even when selling 4,000,000 units, what are total fixed costs?Answer: $18 - $0.70 - $5.30 = $12 contribution margin per unit$12 x 4,000,000 units = $48,000,000 total fixed costs
Chapter 17 – Activity-Based Costing and Analysisb. Compute production cost per unit under absorption costing.Answer: a. $13 DL + $17 DM + ($7,800,000/39,000) VOH = $230 per unit under variable costing b. $230 + ($9,750,000/39,000) FOH = $480 per unit under absorption costing
[Question]137. Triton Industries reports the following information regarding its production cost:
Units produced 77,000 unitsDirect labor $27 per unitDirect materials $12 per unitVariable overhead $2,541,000 in
totalFixed overhead $3,311,000 in
total
a. Compute production cost per unit under variable costing.b. Compute production cost per unit under absorption costing.Answer: a. $27 DL + $12 DM + ($2,541,000/77,000) VOH = $72 per unit under variable costing b. $72 + ($3,311,000/77,000) FOH = $115 per unit under absorption costing
[Question]138. Home Base, Inc. reports the following production cost information:
Beginning inventory 10,000 unitsUnits produced 97,000 unitsUnits sold 92,000 unitsDirect labor $17 per unitDirect materials $34 per unitVariable overhead $2,522,000 in
Chapter 17 – Activity-Based Costing and AnalysisFixed overhead $1,940,000 in
totalOperating costs $2,000,000 in
total
Assume that productions costs have remained the same since the previous period and all units are sold for $137.00 per unit.
a. Compute production cost per unit under variable costing.b. Compute production cost per unit under absorption costing.c. Determine net income using variable costing.d. Determine net income using absorption costing.Answer: a. $17 DL + $34 DM + ($2,522,000/97,000) VOH = $77 per unit under variable costing b. $77 + ($1,940,000/97,000) FOH = $97 per unit under absorption costingc. NI = ($137 - $77)(92,000 units) - $1,940,000 - $2,000,000 = $1,580,000d. NI = ($137 – $97)(92,000 units) - $2,000,000 = $1,680,000
[Question]139. Home Base, Inc. reports the following production cost information:
Units produced 97,000 unitsUnits sold 92,000 unitsDirect labor $17 per unitDirect materials $34 per unitVariable overhead $2,522,000 in
totalFixed overhead $1,940,000 in
total
a. Compute production cost per unit under variable costing.b. Compute production cost per unit under absorption costing.c. Determine the cost of ending inventory using variable costing.d. Determine the cost of ending inventory using absorption costing.Answer: a. $17 DL + $34 DM + ($2,522,000/97,000) VOH = $77 per unit under variable costing
b. $77 + ($1,940,000/97,000) FOH = $97 per unit under absorption costingc. (97,000 units – 92,000 units) x $77 per unit = $385,000 ending inventory under variable costing
[Question]140. Lukin Corporation reports the following first year production cost information.
Units produced 62,000 unitsUnits sold 59,000 unitsDirect labor $41 per unitDirect materials $15 per unitVariable overhead $9,300,000 in
totalFixed overhead $4,340,000 in
total
a. Compute production cost per unit under variable costing.b. Compute production cost per unit under absorption costing.c. Determine the cost of ending inventory using variable costing.d. Determine the cost of ending inventory using absorption costing.Answer: a. $41 DL + $15 DM + ($9,300,000/62,000) VOH = $206 per unit under variable costing b. $206 + ($4,340,000/62,000) FOH = $276 per unit under absorption costingc. (62,000 units – 59,000 units) x $206 per unit = $618,000 ending inventory under variable costing d. (62,000 units – 59,000 units) x $276 per unit = $828,000 ending inventory under absorption costing
Units produced 62,000 unitsUnits sold 59,000 unitsSales price $350 per unitDirect labor $41 per unitDirect materials $15 per unitVariable overhead $9,300,000 in
totalFixed overhead $4,340,000 in
totalOperating expenses $1,000,000
a. Compute production cost per unit under variable costing.b. Compute production cost per unit under absorption costing.c. Determine the net income using variable costing.d. Determine the net income using absorption costing.Answer: a. $41 DL + $15 DM + ($9,300,000/62,000) VOH = $206 per unit under variable costing b. $206 + ($4,340,000/62,000) FOH = $276 per unit under absorption costingc. NI = ($350 - $206)(59,000 units) - $4,340,000 - $1,000,000 = $3,156,000d. NI = ($350 - $276)(59,000 units) - $1,000,000 = $3,366,000
[Question]142. Castaway Company reports the following first year production cost information:
Units produced 53,000 unitsUnits sold 51,000 unitsDirect labor $8 per unitDirect materials $4 per unitVariable overhead $2,173,000 in
totalFixed overhead $3,339,000 in
total
a. Compute production cost per unit under variable costing.b. Compute production cost per unit under absorption costing.c. Determine the cost of ending inventory using variable costing.d. Determine the cost of ending inventory using absorption costing.
Answer: a. $8 DL + $4 DM + ($2,173,000/53,000) VOH = $53 per unit under variable costing b. $53 + ($3,339,000/53,000) FOH = $116 per unit under absorption costingc. (53,000 units – 51,000 units) x $53 per unit = $106,000 ending inv. under variable costing d. (53,000 units – 51,000 units) x $116 per unit = $232,000 ending inv. under absorption costing
[Question]143. Castaway Company reports the following first year production cost information:Units produced 53,000 unitsUnits sold 51,000 unitsSales price $150 per unitDirect labor $8 per unitDirect materials $4 per unitVariable overhead $2,173,000 in
totalFixed overhead $3,339,000 in
totalOperating expenses $1,000,000 in
total
a. Determine the net income using variable costing.b. Determine the net income using absorption costing.Answer: a. Product cost: $8 DL + $4 DM + ($2,173,000/53,000) VOH = $53 per unit under variable costing NI = ($150 - $53)(51,000 units) - $3,339,000 - $1,000,000 = $608,000b. Product cost: $53 + ($3,339,000/53,000) FOH = $116 per unit under absorption costingNI = ($150 - $116)(51,000 units) – $1,000,000 = $734,000
[Question]144. A company reports the following information regarding its production cost:
Units produced 14,000 unitsDirect labor $13 per unitDirect materials $3 per unitVariable overhead ? in totalFixed overhead $56,000 in
total
Required: Perform the following independent calculations.a. Compute total variable overhead cost if the production cost per unit under variable costing is $73.b. Compute total variable overhead cost if the production cost per unit under absorption costing is $73.Answer: a. $13 DL + $3 DM + (VOH/14,000) = $73 VOH/14,000 = $57Total VOH = ($57 x 14,000) = $798,000 b. $13 DL + $3 DM + (VOH/14,000) + ($56,000/14,000) FOH = $73VOH/14,000 = $53Total variable overhead = ($53 x 14,000) =$742,000
Chapter 17 – Activity-Based Costing and Analysisa. Compute total variable overhead cost if the production cost per unit under variable costing is $240.b. Compute total variable overhead cost if the production cost per unit under absorption costing is $240.Answer: a. $31 DL + $27 DM + (VOH/22,000) VOH = $240 VOH/22,000 = $182Total variable overhead = ($182 x 22,000) = $4,004,000 b. $31 DL + $27 DM + (VOH/22,000) + ($2,750,000/22,000) FOH = $240VOH/22,000 = $57Total variable overhead = ($57 x 22,000) $1,254,000 total variable overhead
[Question]146. Digby Company manufactured and sold 37,000 units of its product at a price of $93 per unit. Total variable cost per unit is $60, consisting of $58 in variable production cost and $2 in variable selling and administrative cost. Fixed costs of manufacturing are $350,000. a. Compute the manufacturing margin for the company under variable costing.b. Compute the contribution margin based on this data. c. Compute the gross margin under absorption costing. Answer: a. ($93 - $58) x 37,000 units = $1,295,000 b. ($93 - $60)(37,000 units) = $1,221,000c. ($93 - $58)(37,000 units) – $350,000 = $945,000
[Question]147. Planet Corporation sold 21,000 units of its product at a price of $250 per unit. Total variable cost per unit is $187, consisting of $104 in variable production cost and $83 in variable selling and administrative cost. Compute the manufacturing margin for the company under variable costing.Answer: ($250 - $104) x 21,000 units = $3,066,000
[Question]148. Stonehenge Inc., a manufacturer of landscaping blocks, began operations on April 1 of the current year. During this time, the company produced 750,000 units and sold 720,000 units at a sales price of $9 per unit. Cost information for this period is shown in the following table:
Production costs Direct materials $1.80 per unit Direct labor $.30 per unit Variable overhead $495,000 in total Fixed overhead $450,000 in totalNonproduction costs Variable selling and administrative $18,000 in total Fixed selling and administrative $53,000 in total
a. Prepare Stonehenge’s December 31 income statement for the current year under absorption costing.b. Prepare Stonehenge’s December 31 income statement for the current year under variable costing.Answer: a.
For the nine months ended December 31, xxSales (720,000 x $9) $6,480,000Cost of goods sold (720,000 x $3.36*) 2,419,200Gross margin 4,060,800Selling and administrative expenses($18,000 + $53,000) 71,000 Net income $3,989,800
[Question]149. Peapod Company, a manufacturer of slippers, began operations on May 1 of the current year. During this time, the company produced 200,000 units and sold 180,000 units at a sales price of $36 per unit. Cost information for this period is shown in the following table:
Production costs Direct materials $4.00 per unit Direct labor $5.75 per unit Variable overhead $286,000 in total Fixed overhead $420,000 in totalNon-production costs Variable selling and administrative $8,000 in total Fixed selling and administrative $30,000 in total
a. Prepare Peapod’s December 31 income statement for the current year under absorption costing.b. Prepare Peapod’s December 31 income statement for the current year under variable costing.
[Question]150. Wrap-It Company, a manufacturer of wrapping paper, began operations on June 1 of the current year. During this time, the company produced 370,000 units and sold 310,000 units at a sales price of $50 per unit. Cost information for this period is shown in the following table:
Production costs Direct materials $2.00 per unit Direct labor $.80 per unit Variable overhead $814,000 in total Fixed overhead $481,000 in totalNonproduction costs Variable selling and administrative $78,000 in total Fixed selling and administrative $210,000 in total
a. Prepare Wrap-It’s December 31t income statement for the current year under absorption costing.b. Prepare Wrap-It’s December 31 income statement for the current year under variable costing.
For the seven months ended December 31, xxSales (310,000 x $50) $15,500,000Cost of goods sold (310,000 x $6.30*) 1,953,000Gross margin 13,547,000Selling and administrative expenses($78,000 + $210,000) 288,000 Net income $13,259,000
[Question]151. 32 Degrees, Inc., a manufacturer of frozen food, began operations on July 1 of the current year. During this time, the company produced 140,000 units and sold 140,000 units at a sales price of $125 per unit. Cost information for this period is shown in the following table:
Production costs Direct materials $13.00 per unit Direct labor $6.00 per unit Variable overhead $2,100,000 in total Fixed overhead $3,220,000 in totalNonproduction costs Variable selling and administrative $91,000 in total Fixed selling and administrative $458,000 in total
Chapter 17 – Activity-Based Costing and Analysisa. Prepare 32 Degree’s December 31 income statement for the current year under absorption costing.b. Prepare 32 Degree’s December 31 income statement for the current year under variable costing.
For the six months ended December 31, xxSales (140,000 x $125) $17,500,000Cost of goods sold (140,000 x $57*) 7,980,000Gross margin 9,520,000Selling and administrative expenses($91,000 + $458,000) 549,000 Net income $8,971,000
[Question]152. Materials Corporation sold 12,000 units of its product at a price of $67 per unit. Total variable cost per unit is $54.94, consisting of $45.05 in variable production cost and $9.89 in variable selling and administrative cost. Compute the contribution margin for the company.Answer: $67.00 - $54.94 = $12.06 x 12,000 units = $144,720
[Question]153. Countdown Inc. sold 17,000 units of its product at a price of $81 per unit. Total variable cost per unit is $72.09, consisting of $69.05 in variable production cost and $3.04 in variable selling and administrative cost. Compute the contribution margin for the company.Answer: $81.00 - $72.09 = $8.91 x 17,000 units = $151,470
[Question]154. Heather, Incorporated reports the following annual cost data for its single product:
Normal production and sales level
60,000 units
Direct materials $9.00 per unitDirect labor $6.50 per unitVariable overhead $11.00 per unitFixed overhead $720,000 in total
This product is normally sold for $56 per unit. If Heather increases its production to 80,000 units while sales remain at the current 60,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production.
Answer: $720,000/60,000 units = $12 FOH per unit at 60,000 unit level
Chapter 17 – Activity-Based Costing and Analysis$720,000/80,000 units = $9 FOH per unit at 80,000 unit level$12 – 9 = $3 less FOH cost in each unit sold$3 x 60,000 = $180,000 gross margin increase
[Question]155. Dataport Company reports the following annual cost data for its single product:
Normal production and sales level
89,000 units
Direct materials $14.00 per unitDirect labor $21.00 per unitVariable overhead $27.00 per unitFixed overhead $3,738,000 in total
This product is normally sold for $230 per unit. If Dataport increases its production to 100,000 units, while sales remain at the current 89,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production.Answer: $3,738,000/89,000 units = $42 FOH per unit at 89,000 unit level$3,738,000/100,000 units = $37.38 FOH per unit at 100,000 unit level$42 – 37.38 = $4.62 less FOH cost in each unit sold$4.62 x 89,000 = $411,180 gross margin increase
[Question]157. Anchovy, Inc., a producer of frozen pizzas, began operations this year. During this year, the company produced 16,000 cases of pizza and sold 15,000. At year-end, the company reported the following income statement using absorption costing:
Sales (15,000 x $48) $720,000Cost of goods sold (15,000 x $19) 285,000Gross margin $435,000Selling and administrative expenses
79,000
Net income $356,000
Production costs per case total $19, which consists of $15.50 in variable production costs and $3.50 in fixed production costs (based on the 16,000 units produced). Eight percent of total selling and administrative expenses are variable. Compute net income under variable costing.Answer: $356,000 – ($3.50 x 1,000 units) = $352,500
[Question]158. Toth, Inc. had net income of $950,000 based on variable costing. Beginning and ending inventories were 60,000 units and 56,000 units, respectively. Assume the fixed overhead cost per unit was $.85 for both the beginning and ending inventory. What is net income under absorption costing?Answer: $950,000 + (56,000 units x $.85) – (60,000 x $.85) = $946,600
[Question]159. Fanelli Company had net income of $678,000 based on variable costing. Beginning and ending inventories were 5,000 units and 4,200 units, respectively. Assume the fixed overhead cost per unit was $.50 for both the beginning and ending inventory. What is net income under absorption costing?Answer: $678,000 + (4,200 units x $.50) – (5,000 x $.50) = $677,600
[Question]161. _______________ and _______________ are product costs that can be directly traced to the product.Answer: Direct labor; direct materials (either order)
[Question]167. When excess capacity exists, managers should accept a special order if the special order price exceeds the ________________________.Answer: total variable costs
Blooms Taxonomy: UnderstandAACSB: Analytic AICPA BB: IndustryAICPA FN: MeasurementDifficulty: 2 MediumLearning Objective: 19-C2Topic: Special Order
[Question]168. ________________________ is the exact point where revenues equal expenses.Answer: Break-even
[Question]169. Under variable costing, the product unit cost consists of _______________________,direct materials, and variable overhead.Answer: direct labor
[Question]170. Under absorption costing, the product unit cost consists of direct labor, direct materials, variable overhead, and _______________________.Answer: fixed overhead
[Question]172. _______________________ is the amount remaining from sales revenues after all variable expenses have been deducted.Answer: Contribution margin
[Question]174. Reported income is identical under absorption costing and variable costing when the units produced _______________ the units sold.Answer: equal
[Question]175. _______________________ is the amount remaining from sales revenues after all variable production costs have been deducted.Answer: Manufacturing margin
[Question]177. To convert variable costing net income to absorption costing net income, ____________________ the fixed production cost in ending inventory and _______________________ the fixed production cost in beginning inventory.Answer: add; subtract
