Examination # 2 Study Guide Solutions

Examination # 2 Study Guide Solutions

Exercise 19-2 (25 minutes)

Part 1

SIMS COMPANY
Variable Costing Income Statement
Sales (70,000 units x $350/unit)...... / $24,500,000
Variable expenses
Var. manuf. expense (70,000 units x 130/unit*)...... / $9,100,000
Var. selling and administrative expense...... / 770,000
Total variable expenses...... / 9,870,000
Contribution margin...... / 14,630,000
Fixed expenses
Fixed manufacturing expenses...... / 7,000,000
Fixed selling and administrative expenses...... / 4,250,000
Total fixed expenses...... / 11,250,000
Net income...... / $ 3,380,000
* Direct materials...... / $ 40 per unit
Direct labor...... / 60 per unit
Variable overhead...... / 30 per unit
Total variable manuf. cost...... / $130 per unit

Part 2

SIMS COMPANY
Absorption Costing Income Statement
Sales (70,000 units x $350 per unit)...... / $24,500,000
Cost of goods sold (70,000 units x $200 per unit*)...... / 14,000,000
Gross profit...... / 10,500,000
Selling and administrative costs ($770,000 + $4,250,000)...... / 5,020,000
Net income...... / $ 5,480,000
*Direct materials...... / $ 40 per unit
Direct labor...... / 60 per unit
Variable overhead ($3,000,000/100,000 units) / 30 per unit
Fixed overhead ($7,000,000/100,000 units).. / 70 per unit
Total absorption cost per unit...... / $200 per unit

Part 3

Absorption costing and variable costing income will be identical if production equals sales and there is no beginning finished goods inventory.

Problem 19-1B (45 minutes)

Part 1

AZULE COMPANY
Variable Costing Income Statements
2012 / 2013
Sales ($35 per unit sold)...... / $1,925,000 / $2,275,000
Variable expenses
Variable production costs ($18 per unit sold*).... / 990,000 / 1,170,000
Variable selling & admin. costs ($3 per unit sold).. / 165,000 / 195,000
Total variable costs...... / 1,155,000 / 1,365,000
Contribution margin...... / 770,000 / 910,000
Fixed expenses
Factory overhead...... / 480,000 / 480,000
Fixed selling & administrative costs...... / 300,000 / 300,000
Total fixed expenses...... / 780,000 / 780,000
Net income (loss)...... / $ (10,000) / $ 130,000
*$4+ $6 + $8 = $18

Part 2

AZULE COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
2012 / 2013
Variable costing income...... / $(10,000) / $130,000
Fixed overhead in ending inventory (5,000 x $8).... / 40,000
Fixed overhead in beginning inventory (5,000 x $8).. / ______ / (40,000)
Absorption costing income...... / $ 30,000 / $ 90,000

Short problem #1:

VITO CORPORATION
Variable Costing Income Statement
Sales / (80,000 * $360) / $ 28,800,000
Variable expenses:
Variable manufacturing expense (1) / $ 10,400,000
Variable selling and administrative expense / 800,000
Total variable expenses / 11,200,000
Contribution margin / 17,600,000
Fixed expenses:
Fixed manufacturing expense / 6,600,000
Fixed selling and administrative expense / 4,500,000
Total fixed expenses / 11,100,000
Net income / $ 6,500,000
1. / Direct materials / $ 35.00
Direct labor / 55.00
Variable overhead ($4.4 million / 110,000) / 40.00
Per unit variable manufacturing cost / $ 130.00
Multiplied by units sold / 80,000
Variable manufacturing expense / $ 10,400,000

Exercise 20-8 (15 minutes)

Electro COMPANY
Production Budget
Second and Third Quarters
Second / Third
Quarter / Quarter
Budgeted ending inventories
Second quarter (20% x 525,000)...... / 105,000
Third quarter (20% x 475,000)...... / 95,000
Add budgeted sales...... / 450,000 / 525,000
Required units of available production...... / 555,000 / 620,000
Less actual or budgeted beginning inventories...... / (75,000) / (105,000)
Units to be produced...... / 480,000 / 515,000

Exercise 20-9 (15 minutes)

ELECTRO COMPANY
Direct Materials Budget
Second Quarter
Units to be produced (from Exercise 20-8)...... / 480,000
Materials requirement per unit...... / x 0.80
Materials needed for production (units)...... / 384,000
Add budgeted ending inventory (units)*...... / 206,000
Total materials requirements (units)...... / 590,000
Deduct beginning inventory (units)**......
Materials to be purchased (units) ......
Material price per unit......
Total cost of direct materials purchases...... / (192,000)
398,000
x $170
$67,660,000

* (515,000 x 0.80) x 50% **384,000 x 50%

Exercise 20-10 (15 minutes)

ELECTRO COMPANY
Direct Labor Budget
Second Quarter
Units to be produced (from Exercise 20-8)...... / 480,000
Labor requirements per unit (hours)...... / x 4
Total labor hours needed...... / 1,920,000
Labor rate (per hour)...... / x $12
Labor dollars...... / $23,040,000

Problem 20-6B (30 minutes)

Part 1

NSA COMPANY
Production Budget (in units)
Second Quarter
Budgeted ending inventory (bats)...... / 6,000
Add budgeted sales...... / 250,000
Required units of available production...... / 256,000
Deduct beginning inventory (bats)...... / (8,000)
Units to be manufactured...... / 248,000

Part 2

NSA COMPANY
Direct Materials Budget (in lbs, except where noted)
Second Quarter
Materials (aluminum) needed for production (248,000 x 3)...... / 744,000
Add budgeted ending inventory (aluminum)...... / 12,000
Total materials (aluminum) requirements...... / 756,000
Deduct beginning inventory (aluminum)...... / (15,000)
Units of materials (aluminum) to be purchased...... / 741,000
Materials cost per pound...... / $4
Total cost of materials purchases (741,000 x $4)...... / $2,964,000

Problem 20-6B (concluded)

Part 3

NSA COMPANY
Direct Labor Budget
Second Quarter
Units to be produced...... / 248,000
Labor requirements per unit (hours)...... / x 0.50
Total labor hours needed...... / 124,000
Labor rate (per hour)...... / x $18
Labor dollars...... / $2,232,000

Part 4

NSA COMPANY
Factory Overhead Budget
Second Quarter
Total labor hours needed...... / 124,000
Variable overhead rate per direct labor hour...... / x $12
Budgeted variable overhead...... / $1,488,000
Budgeted fixed overhead...... / 1,776,000
Budgeted total overhead...... / $3,264,000

Short problem #2:

VOLT COMPANY
Production Budget
Second and Third Quarters
Second / Third
Quarter / Quarter
Budgeted ending inventories / 138,000 / 141,900
Add: budgeted sales / 304,000 / 230,000
Required units available / 442,000 / 371,900
Less: beginning inventories / (44,000) / (138,000)
Units to be produced / 398,000 / 233,900

Short problem #3:

ELECTRO COMPANY
Production Budget
Second Quarter
Budgeted ending inventories / 149,700
Add: budgeted sales / 213,000
Required units available / 362,700
Less: beginning inventories / (37,500)
Units to be produced / 325,200
ELECTRO COMPANY
Direct Labor Budget
Second Quarter
Budgeted production (units) / 325,200
Labor required per unit (hours) X / 2.5 hrs.
Total labor hours needed / 813,000 hrs.
Labor rate per hour X / $ 17.60
Labor dollars / $ 14,308,800

Problem 18-4B (75 minutes)

Part 1Use the equation in Exhibit 18.12

2013 break-even in dollar sales= Fixed costs / Contribution margin ratio

= $200,000 / 20%*

= $1,000,000

*To compute contribution margin ratio

Sales price per unit ($750,000 / 20,000)...... / $37.50
Variable costs per unit ($600,000 / 20,000)...... / $30.00
Contribution margin ratio ($37.50- $30) / $37.50)...... / 20%

Part 2Use equation in Exhibit 18.12 with predicted numbers

2014 break-even in dollar sales= Fixed costs / Contribution margin ratio

= $350,000* / 60%**

= $583,333(rounded to whole dollars)

*To compute predicted fixed costs

2013 fixed costs plus 2014 increase ($200,000 + $150,000)...... / $350,000

**To compute predicted contribution margin ratio

Predicted sales price per unit ($750,000 / 20,000)...... / $37.50
Predicted variable costs per unit [($600,000 x 50%)/ 20,000)...... / $15.00
Predicted contribution margin ratio ($37.50- $15) / $37.50)...... / 60%

Part 3

RIVERA COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2014
Sales (20,000 x $37.50)...... / $750,000
Variable costs (20,000 x $15)...... / 300,000
Contribution margin (20,000 x $22.50)...... / 450,000
Fixed costs...... / 350,000
Net income...... / $100,000

Problem 18-4B (Continued)

Part 4Use equations in Exhibit 18.22 and 18.23 with predicted numbers

(Fixed costs + Pretax income)

Required sales in dollars= Contribution margin ratio

= ($350,000* + $200,000**) / 60%***

= $550,000 / 60%

= $916,667(rounded to the next dollar)

(Fixed costs + Pretax income)

Required sales in units= Contribution margin per unit

= ($350,000* + $200,000**) / $22.50

= 24,445 units (rounded up to next unit)

Alternatively= $916,667† / $37.50 per unit‡

= 24,445 units (rounded up to the next unit)

* 2013 fixed costs plus 2014 increase ($200,000 + $150,000)...... / $350,000
** Target after-tax income (given)...... / $140,000

Pretax target income= After-tax target income / (1 – Tax rate)

= $140,000 / (1 – 0.30) = $200,000

***Predicted contribution margin ratio ($37.50-$15)/$37.50—from part 2...... / 60%
†Taken from “required sales in dollars” above...... / $916,667
‡Taken from part 2...... / $ 37.50

Part 5

RIVERA COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2014
Sales (24,445 units x $37.50)...... / $916,688
Variable costs (24,445 units x $15)...... / 366,675
Contribution margin (24,445 units x $22.50)...... / 550,013
Fixed costs (from part 2)...... / 350,000
Income before income taxes...... / 200,013
Income taxes ($200,013 x 30%)...... / 60,004
Net income*...... / $140,009

*Slightly greater than the targeted $140,000 income due to rounding of units from part 4.

Quick Study 17-5 (5 minutes)

1.Plant-wide overhead rate (based on direct labor hours)

($1,200,000 + $600,000)/(12,000 DLH + 20,000 DLH) = $56.25/DLH

2. Plant-wide overhead rate (based on machine hours)

($1,200,000 + $600,000)/(6,000 MH + 16,000 MH) = $81.82/MH (rounded)

Quick Study 17-7 (10 minutes)

1. Plantwide overhead rate: $2,480,000/125,000 DLH = $19.84/DLH

2. Assign overhead costs to Deluxe and Basic models

Deluxe

Overhead cost25,000 DLH x $19.84/DLH$ 496,000

÷ production volume (units)÷ 10,000

Average overhead cost per unit$49.60/unit

Basic

Overhead cost60,000 DLH x $19.84/DLH$ 1,190,400

÷ production volume (units)÷ 30,000

Average overhead cost per unit$39.68/unit

Quick Study 17-8 (15 minutes)

Expected Activity Activity

Activity Cost Driver Rate

Handling material$ 625,000100,000 parts$6.25/part

Inspecting product 900,0001,500 batches$600/batch

Processing orders 105,000700 orders$150/order

Paying suppliers 175,000500 invoices$350/invoice

Insuring factory 300,00040,000 ft2$7.50/ft2

Designing pkg. 375,00010 models$37,500/model

$2,480,000

Quick Study 17-9 (15 minutes)

Note: Activity rates are from Quick Study 17-8.

Assign overhead to Deluxe and Basic model using ABC

Deluxe

Handling material$6.25/part20,000 parts$ 125,000

Inspecting product$600/batch250 batches150,000

Processing orders$150/order50 orders7,500

Paying suppliers$350/invoice50 invoices17,500

Insuring factory$7.50/sq. ft.10,000 sq. ft.75,000

Designing pkg.$37,500/model1 model 37,500

$ 412,500

÷ production volume (units)÷ 10,000

Average overhead cost per unit$41.25/unit

Problem 17-1B (45 minutes)

1.Plantwide overhead rate:

Engineering support$ 56,250

Electricity 112,500

Setup costs 41,250

Total overhead cost$ 210,000

÷ machine hours÷150,000* MH

Plantwide overhead rate/MH$ 1.40/MH

x machine hours/unitx 3 MH/unit

Overhead cost per unit$ 4.20/unit

*Standard:40,000 units x 3 MH/unit =120,000 MH

Deluxe:10,000 units x 3 MH/unit = 30,000 MH

Total machine hours150,000 MH

StandardDeluxe

Direct materials cost per unit$ 4.00$ 8.00

Direct labor cost per unit

Standard: 4 DLH x $20/DLH 80.00

Deluxe: 5 DLH x $20/DLH 100.00

Overhead cost per unit 4.20 4.20

Manufacturing cost per unit$ 88.20$112.20

Selling price per unit$ 92.00$125.00

Manufacturing cost per unit 88.20 112.20

Gross profit per unit$ 3.80$ 12.80

2.Profit per customerStandardDeluxe

Gross profit per unit$3.80$ 12.80

x units per customer

Standard (40,000 units/1,000 cust.) x 40 units/cust.

Deluxe (10,000 units/1,000 cust.)______x 10 units/cust.

Gross profit per customer$152.00$128.00

Service cost per customer ($250,000/2,000) 125.00 125.00

Profit per customer$ 27.00$ 3.00

This comparison shows that gross profit per customer exceeds service cost per customer for both products. Thus, both products appear to be profitable.

Problem 17-1B (concluded)

3.Eng. support$56,250/(50 + 25) modifications = $750/modification

Electricity$112,500/150,000* machine hours = $0.75/machine hour

Setup $41,250/(175 + 75) batches = $165/batch

* From part 1

Standard / Deluxe
Engineering / 50 mods. x $750 / $37,500 / 25 mods. x $750 / $ 18,750
Electricity / 120,000 MH x $0.75 / 90,000 / 30,000 MH x $0.75 / 22,500
Setups / 175 batches x $165 / 28,875 / 75 batches x $165 / 12,375
Total overhead / $156,375 / $53,625
÷ units / ÷ 40,000 / ÷ 10,000
Overhead/unit / $ 3.91 / $ 5.36
Direct material / 4.00 / 8.00
Direct labor / 80.00 / 100.00
Mfg. cost/unit / $ 87.91 / $ 113.36
Selling price / $ 92.00 / $ 125.00
Mfg. cost/unit / 87.91 / 113.36
Gross profit/unit / $ 4.09 / $ 11.64

4.StandardDeluxe

Gross profit per unit$ 4.09$ 11.64

x units per customer*x 40 unitsx 10 units

Gross profit per customer$ 163.60$ 116.40

Gross profit per customer$ 163.60$ 116.40

Service cost per customer* 125.00 125.00

Profit (loss) per customer$ 38.60$ (8.60)

*From Part 2

This analysis shows that the Standard product is in fact profitable, but the high cost of production and service for the small volume of the Deluxe product is unprofitable.

5.ABC gives more appropriate information to managers because it identifies the resources consumed by each product line, and assigns the costs of these activities accordingly. Using volume-based methods such as the plantwide rate distorts product cost because the focus of these methods is on the number of units of output, which may not be the primary factor causing costs to be incurred.

Problem 17-2B (25 minutes)

1. The major costs of making the boxes are designing the boxes, setting up machines to make the right cuts, cutting the cardboard, printing the boxes, obtaining the cardboard material, labor, and utilities, and shipping the boxes. Some of the costs, such as design and setup, are not related to volume, but are related to number of different products or number of batches. Some of the costs, such as materials and labor, are volume-driven.

2. Midwest has taken on more custom-made boxes for smaller-volume customers.

3.Yes. Midwest’s old customers bought the same type of boxes over and over, so the design costs were spread over many units. The new customers need different boxes for each different need, which means that design and machine configuration costs should be spread over a smaller number of units.

4.Possibly. If ABC had been used rather than a volume-based system, Midwest would have realized that small customers who want custom-designed and custom-made boxes require different activities than than those required by existing large-volume customers. With ABC the costs of activities associated with the special orders would be assigned only to those orders, rather than being shared by all orders. Midwest might have been using inaccurate cost information in setting its selling prices.

5.ABC gives managers information about the activities and the costs of these activities that will help them make strategic decisions and improve the accuracy of cost assignment.