PROBLEMS

1. The following information has been extracted from the records of

Haverhill Company:

Sales $400,000
Purchases of direct materials 70,000
Indirect labor 10,000
Indirect materials 4,000
Depreciation of factory equipment 15,000
Depreciation of factory buildings 11,000
Depreciation of administrative building 41,000
Marketing costs 25,000
Direct labor 180,000
Direct materials inventory, 12-31-04 14,000
Work in process, 1-1-04 31,000
Direct materials inventory, 1-1-04 10,000
Work in process, 12-31-04 23,000
Finished goods inventory, 1-1-04 49,000
Finished goods inventory, 12-31-04 44,000

Required:

a. Prepare a statement of cost of goods manufactured.

b. Prepare an income statement for the Haverhill Company for the year ending
December 31, 2004.

17
Chapter Two ♦ Basic Management Accounting Concepts 18

ANS:

a. HAVERHILL COMPANY
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 2004

Direct materials:
   Beginning inventory $10,000
   Add: Purchases  70,000
   Materials available $80,000
   Less: Ending inventory  14,000
   Direct materials used $ 66,000
Direct labor 180,000
Manufacturing overhead:
   Indirect labor $10,000
   Indirect materials 4,000
   Depreciation of factory equipment 15,000
   Depreciation of factory buildings  11,000   40,000
Total manufacturing costs added $286,000
Add: Beginning work in process   31,000
Total manufacturing costs $317,000
Less: Ending work in process   23,000
Cost of goods manufactured $294,000

b. HAVERHILL COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2004

Sales $400,000
Less cost of goods sold:
   Beginning finished goods inventory $ 49,000
   Add: Cost of goods manufactured  294,000
   Cost of goods available for sale $343,000
   Less: Ending finished goods inventory   44,000  299,000
Gross margin $101,000
Less operating expenses:
   Selling expenses $ 25,000
   Administrative expenses   41,000   66,000
Income before income taxes $ 35,000
 Chapter Two ♦ Basic Management Accounting Concepts 19

PROBLEM

2. Enola, Inc., manufactures a product that sells for $400. The variable
costs per unit are as follows:

Direct materials $100

Direct labor 80
Variable manufacturing overhead 50

During the year, the budgeted fixed manufacturing overhead is estimated

to be $500,000, and budgeted fixed selling and administrative costs are
expected to be $250,000. Variable selling costs are $20 per unit.

Required:

a. Determine the break-even point in units.

b. Determine the number of units that must be sold to earn $300,000 in profit
before taxes.
 Chapter Two ♦ Basic Management Accounting Concepts 20

ANS:

a. 5,000 units ($500,000 + $250,000)/[$400 - ($100 + $80 + $50 + $20)]

b. 7,000 units ($750,000 + $300,000)/($400 - $250)

3. Determine the following missing amounts:

Sales $100,000
Total variable costs ?
Contribution margin ?
Total fixed costs $20,000
Net income $12,000
Units sold 10,000
Price ?
Variable cost per unit ?
Contribution margin per unit ?
Contribution margin ratio ?
Break-even point in units ?
 Chapter Two ♦ Basic Management Accounting Concepts 21

ANS:

Sales $100,000
Total variable costs $68,000
Contribution margin $32,000
Total fixed costs $20,000
Net income $12,000
Units sold 10,000
Price ($100,000/10,000) $10
Variable cost per unit $6.80
Contribution margin per unit $3.20
Contribution margin ratio 32%
Break-even point in units ($20,000/$3.20) 6,250 units

4. The Millennium Company produces two types of products: Quality and

Superior. The company expects to sell 1,200 units of Quality and 800
units of Superior.

A projected income statement for the firm as a whole follows:

Sales $400,000
Less: Variable costs  100,000
Contribution margin $300,000
Less: Fixed costs   75,000
Operating income $225,000

Required:

a. Determine the break-even point in terms of sales revenue.

b. Determine the sales revenue necessary to generate a before-tax profit of

$300,000.
 Chapter Two ♦ Basic Management Accounting Concepts 22

ANS:

a. $100,000 $75,000/($300,000/$400,000)
b. $500,000 ($75,000 + $300,000)/75%

5. Chopra Company developed the following income statement using a

contribution margin approach:

CHOPRA COMPANY
PROJECTED INCOME STATEMENT
FOR THE CURRENT YEAR ENDING DECEMBER 31
Sales $240,000

Less variable costs:

   Variable manufacturing costs $60,000
   Variable selling costs  36,000
     Total variable costs   96,000
Contribution margin $144,000

Less fixed costs:

   Fixed manufacturing costs $85,000
   Fixed selling and administrative costs  35,000
      Total fixed costs  120,000
Operating income $ 24,000

The projected income statement was based on sales of 12,000 units.

Chopra has the capacity to produce 15,000 units during the year.

Required:

a. Determine the break-even point in units.

b. The sales manager believes the company could increase sales by 1,000 units
if advertising expenditures were increased by $15,000. Determine the
effect on income if the company increases advertising expenditures.

c. What is the maximum amount the company could pay for advertising if the
advertising would increase sales by 1,000 units?
 Chapter Two ♦ Basic Management Accounting Concepts 23

ANS:

a. 10,000 units $120,000/($20 - $8)

b. $3,000 decrease (1,000 x $12) - $15,000
c. $12,000 1,000 x $12

PROBLEM

6. The Huyden Company builds equipment to customer's specifications. On

March 1, two jobs were in process with the following costs and
information:

Job 43 Job 44
Direct materials $10,200 $34,400
Direct labor 21,000 10,400
Applied overhead*   4,950   7,370
   Total cost $36,150 $52,170

Machine hours 45 67

*Applied on the basis of machine hours

During March, Job 45 was started and Job 44 was completed and delivered
to the customer. Job 43 was missing a part that was backordered and
would be completed in June. The following costs were incurred in March:

Job 43 Job 44 Job 45

Direct materials $2,300 $4,500 $12,700
Direct labor $2,400 $3,300 $4,500
Machine hours 21 11 23

It is Huyden's policy to bill clients at cost plus 40 percent.

Required:

a. Calculate the overhead rate that Huyden is using.

b. Calculate the overhead applied to each job during the month of March.

c. Calculate the balance in work in process on March 31.

d. What was the price of Job 44?

 Chapter Two ♦ Basic Management Accounting Concepts 24

ANS:

a. Overhead rate = $4,950/45 = $110 per machine hour

b. Job 43: 21 x $110 = $2,310
Job 44: 11 x $110 = $1,210
Job 45: 23 x $110 = $2,530
c. and d.
Job 43 Job 44 Job 45
Previous balance $36,150 $52,170 $ -0-
DM and DL--March 4,700 7,800 17,200
Applied overhead--March   2,310   1,210   2,530
   Total costs--job $43,160 $61,180 $19,730

c. Work in Process, March 31: Job 43 & 45: $43,160 + $19,730 =

$62,890
d. Price of Job 44: $61,180 x 1.40 = $85,652

7. The Dewey Company uses a predetermined overhead rate to apply

manufacturing overhead to production. The rate is based on direct labor
hours. Estimates for the year just ended are as follows:

Estimated manufacturing overhead $240,000

Estimated direct labor hours 40,000

During the year Dewey Company used 37,000 direct labor hours.

At the end of the year, Dewey Company records revealed the following
information:

Raw materials inventory $ 35,000

Work-in-process inventory 60,000
Finished goods inventory 105,000
Cost of goods sold 400,000
Manufacturing overhead costs incurred 210,000

Required:

a. Calculate the predetermined overhead rate for the year.

b. Determine the amount of overhead applied during the year.

c. Determine the amount of underapplied or overapplied manufacturing overhead

for the year.
 Chapter Two ♦ Basic Management Accounting Concepts 25

ANS:

a. $6.00 ($240,000/40,000)
b. $222,000 ($6.00 x 37,000)
c. $12,000 overapplied ($222,000 - $210,000)

8. The Mahoney Company has two producing departments: assembly and

finishing. The company has been using a plantwide predetermined overhead
rate based on direct labor hours. The following estimates were made for
the current year:

Assembly Finishing Total 

Manufacturing overhead $200,000 $100,000 $300,000
Direct labor hours 40,000 35,000 75,000
Machine hours 5,000 16,000 21,000

Mahoney started and completed Job 1512 during the year. The job-order
cost sheet indicated the following:

Materials requisitioned $18,000

Direct labor cost $16,000
Direct labor hours:
   Assembly   1,700 hours
   Finishing   1,300 hours
Machine hours:
   Assembly   1,000 hours
   Finishing     700 hours

A total of 2,000 units were produced on Job 1512.

Required:

a. Assume that Mahoney uses a plantwide predetermined overhead based on

direct labor hours. Calculate the total cost and the unit cost for each
of the 2,000 units produced by Job 1512.

b. Assume that Mahoney uses separate departmental overhead rates based upon
direct labor hours for assembly and upon machine hours for finishing.
Calculate the total cost and the unit cost for each of the 2,000 units
produced by Job 1512.
 Chapter Two ♦ Basic Management Accounting Concepts 26

ANS:

a. Total cost of Job 1512: $46,000 18,000 + 16,000 + (3,000 x $4.00*)

Unit cost of Job 1512: $23.00 $46,000/2,000
                                   *$300,000/75,000 = $4 per DLH

b. Total cost of Job 1512: $46,875 $18,000 + $16,000 + (1,700 x $5)

                                    + (700 x $6.25)
Unit cost of Job 1512: $23.44 $46,875/2,000
   Assembly: $200,000/40,000 = $5.00 per machine hour
   Finishing: $100,000/16,000 = $6.25 per machine hour

9. Brentwood Associates uses a job-order costing system and applies overhead

on the basis of direct labor hours. At the beginning of the year,
management estimated that 26,000 direct labor hours would be worked and
$1,300,000 of manufacturing overhead costs would be incurred.

During the year, the company actually worked 24,000 direct labor hours
and incurred the following manufacturing costs:

Direct materials used in production $1,240,000

Direct labor 1,800,000
Indirect labor 280,000
Indirect materials 220,000
Insurance 150,000
Utilities 190,000
Repairs & maintenance 180,000
Depreciation 320,000

Required:

a. Calculate the predetermined overhead application rate for the year.

b. Determine the amount of manufacturing overhead applied to work in process

during the year.

c. Determine the amount of underapplied or overapplied overhead for the year.

 Chapter Two ♦ Basic Management Accounting Concepts 27

ANS:

a. $50 $1,300,000/26,000
b. $1,200,000 $50 x 24,000
c. $140,000 underapplied  $1,200,000 - ($280,000 + $220,000 + $150,000
                       + $190,000 + $180,000 + $320,000)

PROBLEM

1. The Oakland plant has two categories of overhead: maintenance and

inspection. Costs expected for these categories for the coming year are
as follows:

Maintenance $240,000
Inspection 500,000

The plant currently applies overhead using direct labor hours and
expected capacity of 100,000 direct labor hours. The following data has
been assembled for use in developing a bid for a proposed job. Bid
prices are calculated as full manufacturing cost plus 20 percent markup.

Direct materials $2,800

Direct labor $7,500
Machine hours 900
Number of inspections 8
Direct labor hours 1,100

Total expected machine hours for all jobs during the year is 60,000, and
the total expected number of inspections is 4,000.

Required:

a. Compute the total cost of the potential job using direct labor hours to
assign overhead.

Also determine the bid price for the potential job.

b. Compute the total cost of the job using activity-based costing and the
appropriate cost drivers.

Also determine the bid price if activity-based costing is used.

Chapter Two ♦ Basic Management Accounting Concepts 28

ANS:

a. Direct materials $ 2,800

Direct labor 7,500
Overhead:
  ($740,000/100,000) x 1,100   8,140
Total cost $18,440

Bid price = $18,440 x 120% = $22,128

b. Direct materials $ 2,800

Direct labor 7,500
Overhead:
  ($240,000/60,000) x 900 3,600
  ($500,000/4,000) x 8   1,000
Total cost $14,900

Bid price = $14,900 x 120% = $17,880

 Chapter Two ♦ Basic Management Accounting Concepts 29

2. Holbrook, Inc., has identified the following overhead costs and cost
drivers for next year:

Overhead Item Expected Cost   Cost Driver Expected Quantity

Setup costs $960,000 Number of setups   4,800
Ordering costs  160,000 Number of orders  20,000
Maintenance  640,000 Machine hours  64,000
Power   80,000 Kilowatt hours 200,000

The following are two of the jobs completed during the year:

Job 701 Job 702

Prime costs $25,000 $18,000
Units completed 650 500
Direct labor hours 180 220
Number of setups 12 15
Number of orders 16 30
Machine hours 360 300
Kilowatt hours 180 650

The company's normal activity is 40,000 direct labor hours.

Required:

a. Determine the unit cost for each job using direct labor hours to apply
overhead.

b. Determine the unit cost for each job using the four cost drivers. (Round
amounts to two decimal places.)

c. Which method produces the more accurate cost assignment? Why?

Chapter Two ♦ Basic Management Accounting Concepts 30

ANS:

a. Unit cost for Job 701: $51.20

Unit cost for Job 702: $56.24
Job 701
Prime costs $25,000
Overhead assigned:
  $46* x 180   8,280
Total cost $33,280

Unit cost ($33,280/650) $ 51.20

*($960,000 + $160,000 + $640,000 + $80,000)/40,000 = $46 per DLH

Job 702
Prime costs $18,000
Overhead assigned:
  $46 x 220  10,120
Total cost $28,120

Unit cost ($28,120/500) $ 56.24

b. Unit cost for Job 701: $48.00

Unit cost for Job 702: $49.00

Setup: $960,000/4,800 = $200 per setup

Ordering: $160,000/20,000 = $8 per order
Maintenance: $640,000/64,000 = $10 per machine hour
Power: $80,000/200,000 = $0.40 per kilowatt hour

Job 701
Prime costs $25,000
Overhead assigned:
$200 x 12 2,400
$8 x 16 128
$10 x 360 3,600
$0.40 x 180      72
Total cost $31,200

Unit cost ($31,200/650) $ 48.00

Job 702
Prime costs $18,000
Overhead assigned:
$200 x 15 3,000
$8 x 30 240
$10 x 300 3,000
$0.40 x 650     260
Total cost $24,500

Unit cost ($24,500/500) $ 49.00

c. Activity-based costing produces more accurate cost information

because overhead incurrence is often related to many different
 Chapter Two ♦ Basic Management Accounting Concepts 31

activities rather than to a single volume-based cost driver.

4. Baker Manufacturing has four categories of overhead. The four categories
and the expected overhead costs for each category for next year are as
follows:

Maintenance $140,000
Materials handling 60,000
Setups 50,000
Inspection 100,000

Currently, overhead is applied using a predetermined overhead rate based

upon budgeted direct labor hours. For next year, 50,000 direct labor
hours are budgeted.

The company has been asked to submit a bid for a proposed job. The plant
manager feels that obtaining this job would result in new business in
future years. Usually bids are based upon full manufacturing cost plus
30 percent.

Estimates for the proposed job are as follows:

Direct materials $5,000

Direct labor (750 hours) $7,500
Number of materials moves 8
Number of inspections 5
Number of setups 3
Number of machine hours 300

In the past, full manufacturing cost has been calculated by allocating

overhead using a volume-based cost driver--direct labor hours. The plant
manager has heard of a new way of applying overhead that uses cost pools
and cost drivers.

Expected activity for the four activity-based cost drivers that would be
used are as follows:

Machine hours 16,000

Material moves 4,000
Setups 2,000
Quality inspections 8,000

Required:

a. Determine the amount of overhead that would be allocated to the

proposed job if direct labor hours are used as the volume-based
cost driver.

Determine the total cost of the proposed job.

Determine the company's bid if the bid is based upon full

manufacturing cost plus 30 percent.

b. Determine the amount of overhead that would be applied to the

proposed job if activity-based costing is used.

Determine the total cost of the proposed job if activity-based

Chapter Two ♦ Basic Management Accounting Concepts 32

costing is used.

Determine the company's bid if activity-based costing is used and

the bid is based upon full manufacturing cost plus 30 percent.

c. Which product costing method produces the more competitive bid?

 Chapter Two ♦ Basic Management Accounting Concepts 33

ANS:

a. $5,250  ($140,000 + $60,000 + $50,000 + $100,000)/50,000 = $7 per DLH

         $7 x 750 DLH = $5,250
$17,750 $5,000 + $7,500 + $5,250
$23,075 $17,750 x 130%

b. $2,882.50
     Maintenance: $140,000/16,000 = $8.75 per machine hour
     Materials handling: $60,000/4,000 = $15 per move
     Setups: $50,000/2,000 = $25 per setup
     Inspection: $100,000/8,000 = $12.50 per inspection

     Overhead assigned:
        $8.75 x 300 $2,625.00
        $15 x 8 120.00
        $25 x 3 75.00
        $12.50 x 5     62.50
$2,882.50

$15,382.50 $5,000 + $7,500 + $2,882.50

$19,997.25 $15,382.50 x 130%

c. Activity-based costing produces more accurate cost information and a more

competitive bid.

1. Russett Industries produces three products: Product A, Product N, and

Product G. Information for the products for the year is as follows:

Product A Product N Product G

Units produced and sold 10,000  8,000   3,000  
Selling price per unit $16  $20   $25  
Variable expenses per unit $10  $15   $23  

The company's fixed costs totaled $75,000, of which $30,000 can be

avoided if Product A is dropped, $25,000 can be avoided if Product N is
dropped, and $8,000 can be avoided if Product G is dropped.

Required:

a. Determine the segment margin for each product.

b. What would be the effect on the firm's profit if Product A were dropped?
Indicate whether this is an increase or decrease.

c. What would be the effect on the firm's profit if Product N were dropped?
Indicate whether this is an increase or decrease.

d. What would be the effect on the firm's profit if Product G were dropped?
Indicate whether this is an increase or decrease.

e. Which, if any, of the products should the firm drop in order to increase
profits?
Chapter Two ♦ Basic Management Accounting Concepts 34
 Chapter Two ♦ Basic Management Accounting Concepts 35

ANS:

a. Product A Product N Product G Total 

Sales $160,000 $160,000 $75,000  $395,000
Less: Variable expenses  100,000  120,000  69,000   289,000
Contribution margin $ 60,000 $ 40,000 $ 6,000  $106,000
Less: Direct fixed expenses   30,000   25,000   8,000    63,000
Segment margin $ 30,000 $ 15,000 $(2,000) $ 43,000
Less: Common fixed expenses   12,000
Net income $ 31,000

b. $30,000 decrease
c. $15,000 decrease
d. $2,000 increase
e. Based on quantitative factors, Product G should be dropped in order
to increase profits by $2,000.

2. Austin Industries has two divisions: Dallas Division and Houston

Division. Information relating to the divisions for the current year is
as follows:

Dallas Houston
Units produced and sold 20,000 15,000
Chapter Two ♦ Basic Management Accounting Concepts 36

Selling price per unit $20 $25

Variable expenses per unit $12 $15
Direct fixed expenses $100,000 $140,000

Fixed expenses that cannot be identified directly with either division

but which are necessary for the operation of the company amounted to
$40,000.

Required:

Prepare income statements segmented by division.

ANS:

AUSTIN INDUSTRIES
SEGMENTED INCOME STATEMENTS
FOR THE CURRENT YEAR ENDED DECEMBER 31
Chapter Two ♦ Basic Management Accounting Concepts 37

Dallas  Houston Total for

Division Division Company 
Sales $400,000 $375,000 $775,000
Less: Variable expenses  240,000  225,000  465,000
Contribution margin $160,000 $150,000 $310,000
Less: Direct fixed expenses  100,000  140,000  240,000
Segment margin $ 60,000 $ 10,000 $ 70,000
Less: Common fixed expenses   40,000
Net income $ 30,000
 Chapter Two ♦ Basic Management Accounting Concepts 38

3. Coral Industries produces three products: Product X, Product Y, and

Product Z. Information for the products for the year is as follows:

Product X Product Y Product Z

Units produced and sold 5,000   9,000   12,000 
Selling price per unit $22   $14   $25 
Variable expenses per unit $16   $10   $19 

The company's fixed costs totaled $106,000, of which $20,000 can be

avoided if Product X is dropped, $40,000 can be avoided if Product Y is
dropped, and $22,000 can be avoided if Product Z is dropped.

Required:

Prepare a memorandum with your recommendation as to whether any of the

products should be dropped. In your supporting calculations, include a
segmented income statement using variable costing.
Chapter Two ♦ Basic Management Accounting Concepts 39

ANS:
The memorandum should contain a recommendation to drop Product Y if the
decision is based on quantitative factors. Coral Industries can increase
profits by $4,000 if it drops Product Y.

Supporting calculations should include the following segmented income

statement:

Product X Product Y  Product Z Total 

Sales $110,000 $126,000  $300,000 $536,000
Less: Variable expenses   80,000   90,000   228,000  398,000
Contribution margin $ 30,000 $ 36,000  $ 72,000 $138,000
Less: Direct fixed expenses   20,000   40,000    22,000   82,000
Product margin $ 10,000 $ (4,000) $ 50,000 $ 56,000
Less: Common fixed expenses   24,000
Net income $ 32,000
 Chapter Two ♦ Basic Management Accounting Concepts 40

4. Solomon Company manufactures 20,000 components per year. The

manufacturing cost per unit of the components is as follows:

Direct materials $10

Direct labor 14
Variable overhead 6
Fixed overhead   8
   Total unit cost $38

Assume that the fixed overhead reflects the cost of Solomon's

manufacturing facility. This facility cannot be used for any other
purpose. An outside supplier has offered to sell the component to
Solomon for $32.

Required:

a. What is the effect on income if Solomon purchases the component from the
outside supplier?

b. Assume that Solomon can avoid $50,000 of the total fixed overhead costs if
it purchases the components. Now what is the effect on income if Solomon
purchases the component from the outside supplier?
Chapter Two ♦ Basic Management Accounting Concepts 41

ANS:

a. $40,000 decrease

Make:
Direct materials (20,000 components x $10) $200,000
Direct labor (20,000 components x $14) 280,000
Variable overhead (20,000 components x $6)  120,000
Total cost to make $600,000

Buy:
Purchase price (20,000 components x $32) $640,000

$640,000 - $600,000 = $40,000 decrease in income

b. $10,000 increase

Make:
Direct materials (20,000 components x $10) $200,000
Direct labor (20,000 components x $14) 280,000
Variable overhead (20,000 components x $6) 120,000
Avoidable fixed overhead   50,000
Total cost to make $650,000

Buy:
Purchase price (20,000 components x $32) $640,000

$640,000 - $650,000 = $10,000 increase in income

 Chapter Two ♦ Basic Management Accounting Concepts 42

5. Mills Inc. manufactures 50,000 components per year. The manufacturing

cost per unit of the components is as follows:

Direct materials $12

Direct labor 13
Variable overhead 5
Fixed overhead  10
   Total unit cost $40

An outside supplier has offered to sell the component to Mills Inc. for
$35.

Required:

a. What is the effect on income if Mills Inc. purchases the component from
the outside supplier?

b. Assume that Mills Inc. can avoid $700,000 of the total fixed overhead
costs if it purchases the components. Now what is the effect on income if
Mills Inc. purchases the component from the outside supplier?
Chapter Two ♦ Basic Management Accounting Concepts 43

ANS:

a. $250,000 decrease

Make:
Direct materials (50,000 components x $12) $ 600,000
Direct labor (50,000 components x $13) 650,000
Variable overhead (50,000 components x $5)    250,000
Total cost to make $1,500,000

Buy:
Purchase price (50,000 components x $35) $1,750,000

$1,750,000 - $1,500,000 = $250,000 decrease in income

b. $450,000 increase

Make:
Direct materials (50,000 components x $12) $ 600,000
Direct labor (50,000 components x $13) 650,000
Variable overhead (50,000 components x $5) 250,000
Avoidable fixed overhead    700,000
Total cost to make $2,200,000

Buy:
Purchase price (50,000 components x $35) $1,750,000

$1,750,000 - $2,200,000 = $450,000 increase in income

 Chapter Two ♦ Basic Management Accounting Concepts 44

6. Vance Company manufactures a product that has the following unit costs:
direct materials, $15; direct labor, $12; variable overhead, $8; and
fixed overhead, $12. Fixed selling costs are $1,500,000 per year.
Variable selling costs of $4 per unit cover the transportation cost.
Although production capacity is 800,000 units per year, the company
expects to produce only 650,000 units next year. The product normally
sells for $70 each. A customer has offered to buy 50,000 units for $45
each. The customer will pay the transportation charge on the units
purchased.

Required:

a. What is the incremental cost to Vance Company for the special order?

b. What is the effect on Vance's income if the special order is accepted?

Chapter Two ♦ Basic Management Accounting Concepts 45

ANS:

a. $1,750,000 50,000 units x ($15 + $12 + $8)

b. $500,000 increase

Incremental revenue (50,000 units x $45) $2,250,000

Less: Incremental costs (50,000 units x $35)  1,750,000
Incremental profit $ 500,000
 Chapter Two ♦ Basic Management Accounting Concepts 46

7. Majestic Company manufactures a product that has the following unit

costs: direct materials, $5; direct labor, $7; variable overhead, $3; and
fixed overhead, $5. Fixed selling costs are $200,000 per year. Variable
selling costs of $1 per unit cover the transportation cost. Although
production capacity is 80,000 units per year, the company expects to
produce only 65,000 units next year. The product normally sells for $30
each. A customer has offered to buy 10,000 units for $18 each. The
customer will pay the transportation charge on the units purchased.

Required:

a. What is the incremental cost per unit to Majestic Company for the special
order?

b. What is the effect on Majestic's income if the special order is accepted?

Chapter Two ♦ Basic Management Accounting Concepts 47

ANS:

a. $15 ($5 + $7 + $3)

b. $30,000 increase

Incremental revenue (10,000 units x $18) $180,000

Less: Incremental costs (10,000 units x $15)  150,000
Incremental profit $ 30,000
 Chapter Two ♦ Basic Management Accounting Concepts 48

8. The Dash Company manufactures two products: A and B. Information about

the products is as follows:

Product A Product B
Revenue per unit $150   $125  
Variable costs per unit   80     70  
Contribution margin per unit $ 70   $ 55  

Total demand 15,000 units 12,000 units

Machine hours per unit .5 MH .25 MH

There are 5,000 machine hours available during the quarter.

Required:

a. Which of the products should Dash Company produce if it can only produce
one of the products?

b. Assume that Dash Company uses half of the hours available to produce
Product A and half of the hours available to produce Product B. What is
Dash's total contribution margin?

c. Assume that Dash Company produces the product mix that will maximize
profit. What is Dash's total contribution margin?
 Chapter Two ♦ Basic Management Accounting Concepts 49

ANS:

a. Product B should be the product produced first because it has the

highest contribution margin per machine hour.

  Product A: $70 per unit/.5 MH per unit = $140 per MH

  Product B: $55 per unit/.25 MH per unit = $220 per MH

b. $900,000

  Product A: 2,500 MH => 5,000 units

                         (5,000 x $70) $350,000
  Product B: 2,500 MH => 10,000 units
                         (10,000 x $55)  550,000
  Total contribution margin $900,000

c. $940,000

  From requirement a, produce Product B first.

  12,000 units x .25 MH per unit = 3,000 MH to produce Product B

  Use remaining 2,000 MH available to produce Product A.

  2,000 MH/.5 MH per unit = 4,000 units of Product A

  Product A (4,000 units x $70) $280,000

  Product B (12,000 units x $55)  660,000
  Total contribution margin $940,000

6. Terrazo Corporation produces three kinds of ceramic tile that are used in
home and office construction. Details of each type of tile are as
follows:
Chapter Two ♦ Basic Management Accounting Concepts 50

Type I Type II Type III

Price per unit $40 $60 $100
Unit variable cost $10 $28 $ 48
Machine hours required .2 .5 1.25

Terrazo has 30,000 machine hours available for production.

Required:

Assume that Terrazo can sell all of each type of tile that it produces.

a. Determine the amount of each type of tile that Terrazo should produce.

b. Determine Terrazo's contribution margin using your decision in requirement

a.

c. Assume that the demand for each type of tile is limited to 20,000 units
each. Determine the amount of each type of tile that Terrazo should
produce.

d. Determine Terrazo's contribution margin using your decision in requirement

b.

ANS:
Contribution margin per scarce unit of resource:
Chapter Two ♦ Basic Management Accounting Concepts 51

Type I: ($40 - $10)/.2 = $150 per machine hour

Type II: ($60 - $28)/.5 = $64 per machine hour
Type III: ($100 - $48)/1.25 = $41.60 per machine hour

a. Type I: 150,000 units (30,000 machine hours/.20)

b. $4,500,000 (150,000 units x $30)

c. Type I: 20,000 units

Type II: 20,000 units
Type III: 12,800 units

Type I: 20,000 units x .2 = 4,000 hours

Type II: 20,000 units x .5 = 10,000 hours
Type III: 12,800 units x 1.25 = 16,000 hours
30,000 hours

d. $1,905,600

Type I: 20,000 units x $30 = $ 600,000

Type II: 20,000 units x $32 = 640,000
Type III: 12,800 units x $52 = 665,600
$1,905,600
 Chapter Two ♦ Basic Management Accounting Concepts 52

7. KnitWorks Corporation produces three kinds of yarn. Details of each type

of yarn are as follows:

Type I Type II Type III

Price per unit $200 $250 $100
Unit variable cost $150 $100 $ 60
Machine hours required 0.5 2.0 0.1

KnitWorks has 15,000 machine hours available for production.

Required:

Assume that KnitWorks can sell all of each type of yarn that it produces.

a. Determine the amount of each type of yarn that KnitWorks should produce.

b. Assume that the demand for each type of yarn is limited to 10,000 units
each. Determine the amount of each type of yarn that KnitWorks should
produce.

c. Assume that the demand for each type of yarn is limited to 10,000 units
each. Determine KnitWorks' contribution margin.
Chapter Two ♦ Basic Management Accounting Concepts 53

ANS:

Contribution margin per scarce unit of resource:

Type I: ($200 - $150)/0.5 = $100 per machine hour

Type II: ($250 - $100)/2.0 = $75 per machine hour
Type III: ($100 - $60)/0.1 = $400 per machine hour

a. Type III: 150,000 units (15,000 machine hours/0.1)

b. Type III: 10,000 units

Type I: 10,000 units
Type II: 4,500 units

Type III: 10,000 units x 0.1 =  1,000 hours

Type I: 10,000 units x 0.5 =  5,000 hours
Type II: 4,500 units x 2.0 =  9,000 hours
15,000 hours

c. $1,575,000

Type III: 10,000 units x $40 = $  400,000

Type I: 10,000 units x $50 =    500,000
Type II: 4,500 units x $150 =    675,000
$1,575,000
 Chapter Two ♦ Basic Management Accounting Concepts 54

2.Budgeted sales for the third quarter of the year for Brown Company are as
follows:

Budgeted Sales
July $300,000 
August 375,000
September 450,000

The company normally collects 30 percent in the month of sale and 65

percent in the month following the sale. Five percent of all sales are
uncollectible and are written off in the following month.

The balance in accounts receivable at July 1 was $245,000, which

represents 70 percent of June sales.

Required:

Prepare a schedule of cash collections on accounts receivable for the

third quarter.
Chapter Two ♦ Basic Management Accounting Concepts 55

ANS:

July   August  September

Cash collections:
   30% of sales for current month $ 90,000  $112,500 $135,000
   65% of sales for previous month  227,500*  195,000  243,750
      Total cash collections $317,500  $307,500 $378,750

   *$245,000 = .70 X
    June sales = X = $245,000/.7
    X = $350,000
    .65 x $350,000 = $227,500
 Chapter Two ♦ Basic Management Accounting Concepts 56

3.The following budget estimates have been prepared by Clifton Company:

Cash Receipts Cash Payments

May $120,000  $150,000 
June 110,300 150,000

The company likes to maintain a minimum cash balance of $40,000.

Any excess cash is invested in a money market account earning 9 percent

compounded monthly. Interest is reinvested in the money market account.
Any cash deficiencies are covered by a withdrawal from the money market
account. If additional cash is needed, the company has a line of credit
at 12 percent interest with the local bank. Interest is paid monthly.

Assume a cash balance on May 1 of $40,000, a money market account balance

of $0, and a credit line loan balance of $0.

Required:

Prepare a cash budget for May and June.

Chapter Two ♦ Basic Management Accounting Concepts 57

ANS:

May June
Beginning cash balance $ 40,000  $ 40,000 
Add: Cash receipts   120,000    110,300 
Cash available $ 160,000  $ 150,300 
Less: Cash disbursements  (150,000) (150,300)*
Cash surplus (deficiency) $ 10,000  $ 0 
Add: Cash from loans    30,000     40,000 
Ending cash balance $ 40,000  $ 40,000 

*Includes interest on the May loan of $300 ($30,000 x .12 x 1/12)

 Chapter Two ♦ Basic Management Accounting Concepts 58

6.Budgeted sales for the second quarter of the year for Reuben Company are as
follows:

Budgeted Sales
April $400,000 
May 200,000
June 600,000

The company normally collects 60 percent in the month of sale and 30

percent in the month following the sale. Ten percent of all sales are
uncollectible and are written off in the following month.

The balance in accounts receivable at April 1 was $200,000, which

represents 40 percent of March sales.

Required:

Prepare a schedule of cash collections on accounts receivable for the

second quarter.
Chapter Two ♦ Basic Management Accounting Concepts 59

ANS:

April   May   June  

Cash collections:
   60% of sales for current month $240,000  $120,000 $360,000
   30% of sales for previous month  150,000*  120,000   60,000
      Total cash collections $390,000  $240,000 $420,000

  *March sales = $200,000/.4 = $500,000

  $500,000 x .3 = $150,000
 Chapter Two ♦ Basic Management Accounting Concepts 60

7.The following budget estimates have been prepared by Flowers Company:

Cash Receipts Cash Payments

January $220,000  $220,000 
February 380,000 400,000
March 320,000 319,800

The company likes to maintain a minimum cash balance of $50,000.

Any excess cash is invested in a money market account earning 8 percent

compounded monthly. Interest is reinvested in the money market account.
Any cash deficiencies are covered by a withdrawal from the money market
account. If additional cash is needed, the company has a line of credit
at 12 percent interest with the local bank.

Assume a cash balance on January 1 of $50,000, a money market account

balance of $0, and a credit line loan balance of $0.

Required:

Prepare a cash budget for each of the first three months of the year.
Chapter Two ♦ Basic Management Accounting Concepts 61

ANS:

January   February  March

Beginning cash balance $ 50,000  $ 50,000  $ 50,000  
Add: Cash receipts   220,000    380,000    320,000  
Cash available $ 270,000  $ 430,000  $ 370,000  
Less: Cash disbursements  (220,000)  (400,000)  (320,000)*
Cash surplus (deficiency) $ 50,000  $ 30,000  $ 50,000  
Add: Cash from loans       -0-     20,000        -0-  
Ending cash balance $ 50,000  $ 50,000  $ 50,000  

*Includes $200 of interest expense ($20,000 x .12 x 1/12)

 Chapter Two ♦ Basic Management Accounting Concepts 62

PROBLEM

3. Starling Manufacturing has developed the following standards for one of its products.

STANDARD VARIABLE COST CARD

One Unit of Product

Materials: 5 yards x $6 per yard $30.00

Direct labor: 2 hours x $8 per hour 16.00
Variable manufacturing overhead: 2 hours x $5 per hour  10.00
Total standard variable cost per unit $56.00

The following activity occurred during the month of December:

Materials purchased: 5,200 yards costing $29,900

Materials used: 4,750 yards
Units produced: 1,000 units
Direct labor: 2,100 hours costing $17,850

Required:

a. Calculate the direct materials price variance.

b. Calculate the direct materials usage variance.
c. Calculate the direct labor rate variance.
d. Calculate the direct labor efficiency variance.
Chapter Two ♦ Basic Management Accounting Concepts 63

ANS:

a. $1,187.50F ($5.75-$6) x 4750

b. $1,500 F $6 x (4,750 - 5,000)
c. $1,050 U $17,850 - (2,100 x $8)
d. $800 U $8 x (2,100 - 2,000)
Chapter Two ♦ Basic Management Accounting Concepts 64

4. The following standard costs were developed for one of the products of Larry Corporation:

STANDARD COST CARD PER UNIT

Materials: 4 feet x $14 per foot $ 56.00

Direct labor: 8 hours x $10 per hour 80.00
Variable overhead: 8 hours x $8 per hour 64.00
Fixed overhead: 8 hours x $12 per hour   96.00
Total standard cost per unit $296.00

The following information is available regarding the company's operations for the period:

Units produced: 11,000

Materials purchased: 52,000 feet @ $13.70 per foot
Materials used: 40,000 feet
Direct labor: 84,000 hours costing $840,000
Manufacturing overhead incurred:
    Variable $756,000
    Fixed $1,000,000

Budgeted fixed manufacturing overhead for the period is $960,000, and the standard fixed overhead
rate is based on expected capacity of 80,000 direct labor hours.

Required:

a. Calculate the materials price variance.

b. Calculate the materials usage variance.
c. Calculate the direct labor rate variance.
d. Calculate the direct labor efficiency variance.
e. Calculate the variable manufacturing overhead spending variance.
f. Calculate the variable manufacturing overhead efficiency variance.
Chapter Two ♦ Basic Management Accounting Concepts 65

ANS:

a. $12,000 F ($13.70 - $14.00) x 40,000

b. $56,000 F (40,000 x $14) - (11,000 x 4 x $14)
c. $-0- $840,000 - (84,000 x $10)
d. $40,000 F (84,000 x $10) - (11,000 x 8 x $10)
e. $84,000 U $756,000 - (84,000 x $8)
f. $32,000 F (84,000 x $8) - (11,000 x 8 x $8)
Chapter Two ♦ Basic Management Accounting Concepts 66

5. Barker Production Company has developed the following standards for one of its products.

STANDARD VARIABLE COST CARD

One Unit of Product

Materials: 30 square feet x $5 per square foot $150.00

Direct labor: 16 hours x $7 per hour 112.00
Variable manufacturing overhead: 16 hours x $5 per hour   80.00
Total standard variable cost per unit $342.00

The following activity occurred during the month of April:

Materials purchased: 80,000 sq. feet at $5.30 per sq. foot

Materials used: 74,000 square feet
Units produced: 2,500 units
Direct labor: 42,000 hours at $6.70 per hour

Actual variable manufacturing overhead: $228,000

Required:

a. Calculate the direct materials price variance.

b. Calculate the direct materials usage variance.
c. Calculate the direct labor rate variance.
d. Calculate the direct labor efficiency variance.
e. Calculate the variable overhead spending variance.
f. Calculate the variable overhead efficiency variance.
Chapter Two ♦ Basic Management Accounting Concepts 67

ANS:

a. $22,200 U ($5.30 - $5.00) x 74,000

b. $5,000 F $5 x (74,000 - 75,000)
c. $12,600 F 42,000 x ($6.70 - $7.00)
d. $14,000 U $7 x (42,000 - 40,000)
e. $18,000 U $228,000 - (42,000 x $5)
f. $10,000 U $5 x (42,000 - 40,000)
Chapter Two ♦ Basic Management Accounting Concepts 68

7. Hansenko Company manufactures 100-pound bags of fertilizer that have the following unit
standard costs for direct materials and direct labor:

Direct materials (100 lbs. @ $1.00 per lb.) $100.00

Direct labor (0.5 hours at $24 per hour)   12.00
Total standard direct cost per 100 lb. bag $112.00

The following activities were recorded for October:

• 1,000 bags were manufactured.

• 95,000 lbs. of materials costing $76,000 were purchased.
• 102,500 lbs. of materials were used.
• $12,000 was paid for 475 hours of direct labor.

There were no beginning or ending work-in-process inventories.

Required:

a. Compute the direct materials variances.

b. Compute the direct labor variances.
c. Give possible reasons for the occurrence of each of the preceding variances.
Chapter Two ♦ Basic Management Accounting Concepts 69

ANS:

a. Material price variance:

(.80 - $1.00) x 102,500 = $20,500 F

Material usage variance

[102,500 - 1,000(100)] x 1.00 = $2,500 U

b. Labor rate variance

[$12,000 - (475 hrs. x $24)] = $600 U

Labor efficiency variance

[(0.5 x 1,000) - 475 hrs.]$24 = 600 F

c. All of the material price variances could be caused by out-of-date or inappropriate standards.
Other potential reasons could be that the firm could be purchasing in larger quantities (larger
quantity discounts), purchasing lower grade materials, or that the supplier could be forced to
offer a lower price due to the economics of their product.

Material usage variance:

Low-quality materials; lower skilled workers; less efficient machines; low employee morale.

Labor rate variance:

Higher skilled workers; longer tenured workers with higher wages.

Labor efficiency variance:

The firm could be using a more experienced work force than desired.
 Chapter Two ♦ Basic Management Accounting Concepts 70

Performance Evaluation in the Decentralized Firm

PROBLEM

1. The following results for the current year are for the Grundy Division of
Salmon Enterprises:

Sales $700,000
Variable costs  260,000
Contribution margin $440,000
Fixed expenses  300,000
Divisional income $140,000

Average operating assets are $1,400,000. The firm's minimum required

rate of return is 8 percent. The weighted average cost of capital is 6
percent. The division's tax rate is 30 percent.

Required:

a. Calculate profit margin for the division.

b. Calculate asset turnover for the division.

c. Calculate return on investment (ROI) for the division.

d. Calculate economic value added (EVA) for the division.

 Chapter Two ♦ Basic Management Accounting Concepts 71

ANS:

a. 20% $140,000/$700,000
b. 50% $700,000/$1,400,000
c. 10% $140,000/$1,400,000
d. $14,000 [$140,000 x (1 - .3)] - ($1,400,000 x 6%)

2. The manager of the recently formed Oak Division of Parkes, Incorporated,

is evaluating the following four investment opportunities available to
the division. Parkes, Incorporated, requires a minimum return of 10
percent.

Investment
Opportunity Income Investment
1 $ 91,000     $650,000 
2 63,000     700,000
3 59,400     540,000
4 117,600     980,000

Required:

a. Calculate the return on investment (ROI) for each investment opportunity.

b. If only one investment opportunity can be funded and the division is

evaluated based on ROI, which investment opportunity would be accepted?

c. If Parkes, Incorporated, can fund all of the projects and wishes to

achieve the best possible performance, which investments would be
accepted?
 Chapter Two ♦ Basic Management Accounting Concepts 72

ANS:

a. Project 1: 14% $91,000/$650,000

Project 2: 9% $63,000/$700,000
Project 3: 11% $59,400/$540,000
Project 4: 12% $117,600/$980,000
b. Project 1, because it has the highest ROI
c. Projects 1, 3, and 4; their ROIs exceed the minimum return of 10 percent.

3. TotToys Corporation recently made $2,000,000 of capital available to its

Toddler Division. The manager of the Toddler Division is evaluating the
possibility of investing the additional funds in two new toys.
Information about the two new toys is as follows:

Toy #1  Toy #2 

Projected investment $900,000 $750,000
Expected operating income 144,000 90,000

Any funds not invested in a project will be invested to earn the

company's required minimum return of 10 percent. Without the additional
investment, the Toddler Division's average operating assets would have
been $10,000,000, and its operating income would have been $1,400,000.

Required:

a. Compute the Toddler Division's operating income and ROI, assuming that the
division manager rejects both projects.

b. Compute the Toddler Division's operating income and ROI, assuming that the
division manager accepts only the Toy #1 project.

c. Compute the Toddler Division's operating income and ROI, assuming that the
division manager accepts only the Toy #2 project.

d. Compute the Toddler Division's operating income and ROI, assuming that the
division manager accepts both projects.

(Round all computations to the nearest two decimal places.)

Chapter Two ♦ Basic Management Accounting Concepts 73

ANS:

a. $1,600,000 $1,400,000 + ($2,000,000 x 10%)

13.33% $1,600,000/($10,000,000 + $2,000,000)

b. $1,654,000 $1,400,000 + $144,000 + [($2,000,000 - $900,000) x 10%]

13.78% $1,654,000/($10,000,000 + $2,000,000)

c. $1,615,000 $1,400,000 + $90,000 + [($2,000,000 - $750,000) x 10%]

13.46% $1,615,000/($10,000,000 + $2,000,000)

d. $1,669,000 $1,400,000 + $144,000 + $90,000 +

[($2,000,000 - $900,000 - $750,000) x 10%]
13.91% $1,669,000/($10,000,000 + $2,000,000)
 Chapter Two ♦ Basic Management Accounting Concepts 74

4. The following results for the current year are for the Calvin Division of
Stinson Enterprises:

Sales $400,000
Variable costs  180,000
Contribution margin $220,000
Fixed expenses  160,000
Divisional income $ 60,000

Average operating assets are $500,000. The firm's minimum required rate
of return is 10 percent, the weighted average cost of capital is 8
percent, and the tax rate is 30 percent.

Required:

a. Calculate profit margin for the division.

b. Calculate asset turnover for the division.

c. Calculate return on investment (ROI) for the division.

d. Calculate economic value added (EVA) for the division.

 Chapter Two ♦ Basic Management Accounting Concepts 75

ANS:

a. 15% $60,000/$400,000
b. 80% $400,000/$500,000
c. 12% $60,000/$500,000
d. $2,000 [$60,000 x (1 - .3)] - ($500,000 x 8%)

5. Brothers, Incorporated, has just formed a new division, and the following
four investment opportunities are available to the division. The firm
requires a minimum return of 8 percent.

Investment
Opportunity Income Investment
1 $57,600  $ 640,000    
2 75,000 600,000    
3 60,000 1,000,000    
4 59,500 850,000    

Required:

a. Calculate the return on investment (ROI) for each investment opportunity.

b. If you were the division manager and you were evaluated based on ROI,
which investment opportunity would you accept?

c. If you were president of Brothers, Incorporated, which projects would you

want the division to accept?
 Chapter Two ♦ Basic Management Accounting Concepts 76

ANS:

a. Project 1: 9% $57,600/$640,000
Project 2: 12.5% $75,000/$600,000
Project 3: 6% $60,000/$1,000,000
Project 4: 7% $59,500/$850,000
b. Project 2, because it has the highest ROI
c. Projects 1 and 2

6. Ritter Company reported the following information during 2006.

Sales revenue $400,000

Operating income $16,000
Average operating assets ?
Return on investment ?
Margin 4%
Turnover 2

Required:

1) Determine average operating assets

2) Determine return on investment

 Chapter Two ♦ Basic Management Accounting Concepts 77

ANS:
1) $400,000/x = 2, x = $200,000

2) Margin x turnover = 8%

7. Reses Company reported the following information during 2006.

Sales revenue ?
Operating income $20,000
Average operating assets $200,000
Return on investment 10%
Margin 4%
Turnover ?

Required:

1) Determine sales revenue.

2) Determine turnover.
 Chapter Two ♦ Basic Management Accounting Concepts 78

ANS:
1) $20,000/x = .04, x = $500,000

2) ROI = Margin x Turnover, 10% = 4% x ?, ? = 2.5

8. Brown Industries has two divisions: the Hank Division and the Murray
Division. Information about a component that the Hank Division produces
is as follows:

Sales $150 per unit

Variable manufacturing costs $60 per unit
Fixed manufacturing overhead $40 per unit
Expected sales in units 20,000 units

The Hank Division can produce up to 22,000 components per year. The
Murray Division needs 1,000 units of the component for a product it
manufactures.

Required:

a. Determine the minimum transfer price that the selling division would be
willing to accept.

b. Determine the maximum transfer price that the buying division would be
willing to pay.

c. If the Hank Division did not have excess capacity, what would be the
correct transfer price?
Chapter Two ♦ Basic Management Accounting Concepts 79

ANS:

a. $60 The variable manufacturing costs per unit

b. $150 The market price
c. $150 The market price

9. Chantilly Industries has two divisions: the Triangle Division and

the Square Division. The Triangle Division produces a component that is
used by the Square Division. Information about that component is as
follows:

Sales $200 per unit

Variable manufacturing costs $80 per unit
Fixed manufacturing overhead $50 per unit
Expected sales in units 12,000 units

The Triangle Division can produce up to 15,000 components per year. The
Square Division needs 1,500 units of the component for a product it
manufactures.

Required:

a. Determine the minimum transfer price that the Triangle Division would
accept.

b. Determine the maximum transfer price that the Square Division would pay.

c. If the Triangle Division produces and sells 15,000 units in a highly

competitive market, what would be the correct transfer price?
Chapter Two ♦ Basic Management Accounting Concepts 80

ANS:

a. $80 The variable manufacturing costs

b. $200 The market price
c. $200 The market price