ESLSCA UNIVERSITY

MBA PROGRAM

ACCOUNTING FOR MANAGERS

MANAGERIAL ACCOUNTING [PART TWO]

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LECTURE ONE: Cost Classifications

1. Dickison Corporation reported the following data for the month of December:

Direct Materials……………………...$71,000
Direct Labor cost……………………..38,000
Manufacturing Overhead…………….69,000
Selling expenses……………………...24,000
Administrative expenses……………..42,000

a. The conversion cost for December was: 38 +69

A. $107,000 B. $142,000
C. $111,000 D. $178,000

b. The prime cost for December was 71 + 38

A. $109,000 B. $111,000
C. $107,000 D. $66,000

2. A partial listing of costs incurred during December at Gagnier Corporation appears

below:
Factory supplies $8,000
Administrative wages and salaries 105,000
Direct materials 153,000
Sales staff salaries 68,000
Factory depreciation 49,000
Corporate headquarters building rent 34,000
Indirect labor 32,000
Marketing 103,000
Direct Labor 83,000

a. The total of the period costs listed above for December is: 310000
A. $89,000 C.310,000
B. $325,000 D.$399,000

b. The total of the manufacturing overhead costs listed above for December is:
A. $325,000 B. $635,000
C. $89,000 D. $40,000

c. The total of the product costs listed above for December is: 325000
A. $310,000 B. $89,000
C. $635,000 D. $325,000

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3. Home work
Lettman Corporation has provided the following partial listing of costs incurred
during November:

Marketing Salaries $45,000

Property taxes factory 9,000
Administrative travel 98,000
Sales commission 48,000
Indirect labor 38,000
Direct material 165,000
Advertising 138,000
Depreciation of production equipment 39,000
Direct labor 87,000

Required
a. What is the total amount of product cost listed above? Show your work.
b. What is the total amount of period cost listed above? Show your work.

4. The following information summarizes the company's cost structure:

Variable cost per unit…………$1.30
Fixed costs per unit………….…..4.5
Total cost per unit………………5.80
Units produced and sold……….48,000 TFC = 4.5 x48000=216000

Required
Estimate the following costs at the 40,000 unit level of activity:
a. Variable cost per unit. 1.3
b. Total variable cost. 40000 x 1.3
c. Total fixed cost. 216000
d. Fixed cost per unit 216000/40000= 5.4
e. Cost/unit 1.3 +5.4 = 6.7

5. Presented below is the production data for the first six months of the year showing
the mixed costs incurred by Eunice Company.

Month Cost Units

January $7,500 4,000
February 13,000 7,500
March 11,500 9,000
April 11,700 11,500
May 13,500 12,000
June 11,850 6,000

VC/ unit = $6000/ 8000 = $ 0.75 /unit

7500 = TVC (0.75 x4000) + TFC ??? TFC = 7500 -3000 =4500

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TC = 4500 + 0.75 Units
July 10,000 units TC (July) = 4500 +(0.75 x 10000) =12000
Eunice Company uses the high-low method to analyze mixed costs. The variable cost
per unit is ________ and the fixed cost is ……………..

A) $0.625 B) $0.75
C) $1.25 D) $1.31

6. Presented below is the production data for six months showing the mixed costs
incurred by Anderson Company.

Month Cost Units

July $5,890 4,100
August $4,012 3,200
September $7,480 6,300
October $9,000 7,500
November $5,800 5,800
December $7,336 6,600
Anderson Company uses the high-low method to analyze mixed costs. The cost
function is ________ where Y= Total Cost and X= Number of units.
A) Y = $440 + $1.12X B) Y = $300 + $1.16X
C) Y = $440 + $1.20X D) Y = $7,850 + $0.132X

7. The management of Harrigill Corporation would like to have a better understanding

of the behavior of its inspection costs. The company has provided the following data:
Direct labor hours Inspection cost
March 5,043 $48,500
April 5,036 48,449
May 5,068 48,677
June 5,066 48,650
July 5,021 48,374
August 4,992 48,202
September 5,078 48,721
October 5,033 48,460
November 4,980 48,125

Management believes that inspection cost is a mixed cost that depends on direct
labor-hours.
Required
Estimate the variable cost per direct labor-hour and the fixed cost per month using the
high-low method. Show your work! Round off all calculations to the nearest whole
cent.
VC/ hour = (48721 - 48125)/ (5078 - 4980) = 596/98= $6.08 /DLH

FT = 48721 – (5078 x 6.08) = 17847

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8. Answer the following questions based on the given data:

Sales price………………………….$160 per unit

Fixed costs
Marketing and administrative…..$20,000 per period
Manufacturing overhead…………$15,000 per period
Variable Costs:
Marketing and Administrative……………...……………$5 per unit
Manufacturing overhead……………………….…………$30 per unit
Direct labor (manufacturing)……………..………………..$10 per unit
Direct materials (manufacturing)………..............................$40 per unit
Number of units produced and sold during the period………1000 units
Required:
a. How much is the variable manufacturing cost per unit? 30+10+40=80
b. How much is the prime cost per unit? DM+DL= 50
c. How much is the conversion cost per unit?
=DL +VOH +FOH= 10+30 +15=55
d. How much is the total manufacturing cost per unit? 15 +30+10+40= 95
e. How much is the total variable cost per unit? 85
f. How much is the contribution margin per unit? SP – VC
Sales 160 – VC 85 =75 TCM =75x 1000=75000
Net income = 75000- TFC 35000 =40000
g. How much is the gross margin (profit)per unit?
Sales – Manufacturing costs= 160 – 95= 65
Gross margin = 65 x 1000= 65000
Net income = 65000 – (20000 +5000)= 40000
h. If the number of units increases from 1000 to 1100, which is with in the
relevant range, what is the fixed manufacturing cost per unit?
15000/1100=13.6
Contribution Approach Traditional Approach
Sales 160000 Sales 160000
- TVC 85000 - COGS 95000
= Total CM 75000 Gross Margin 65000
- TFC (35000) - Period 25000
= Net income 40000 Net income 40000

9. Whitman Corporation, a merchandising company, reported sales of 7,400 units for

May at a selling price of $677 per unit. The cost of goods sold (all variable) was $441
per unit and the variable selling expense was $54 per unit. The total fixed selling
expense was $155,600. The variable administrative expense was $24 per unit and the
total fixed administrative expense was $370,400.

Required:
a. Prepare a contribution format income statement for May.
b. Prepare a traditional format income statement for May.

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b. Traditional Format Income Statement

10. Stewart Company has no beginning and ending inventories, and reports the
following information about its only product:
Direct materials used $29,000
Direct labor $17,000
Variable indirect production $13,000
Fixed indirect production $18,000
Variable selling and administrative expenses $22,000
Fixed selling and administrative expenses $11,000
Units produced and sold 10,000
Selling price per unit $25

Required:
A) Prepare an income statement using the contribution approach.
Sales 250000 – TVC 81000= TCM 169000 – TFC 29000 = NI 140000
B) Prepare an income statement using the traditional approach.
Sales 250000 – COGS77000 = Gross Profit 173000 – 33000= NI 140000

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Answer:
Direct materials used $29,000 DM Cost /unit = 2.9
Direct labor $17,000DL cost/unit = 1.7
Variable indirect production $13,000 Cost /unit = 1.3
Fixed indirect production $18,000= FMOH /unit =1.8
Variable selling and administrative expenses$22,000 per unit = 2.2
Fixed selling and administrative expenses $11,000

Assume that co. produced 10000 units and sold 7500 units
Prepare the two income statement formats
COGS= Beg Inv 0 + Current Production 10000 – Ending Inventory 2500

Contribution Traditional
Sales 7500 x 25= 187500 Sales 7500x25 187500
- Vari (60750) Less: COGS (57750)
able
Costs
DM 2.9 x 7500 DM 2.9 x7500
DL 1.7 DL 1.7
VOH 1.3 VOH 1.3
VSelling 2.2 FOH
1.8x7500=13500
CM 126750 Gross Profit 129750
Less: FC Less: Selling and Adm
FOH 18000 Variable 2.2 x7500
Selling 11000 (29000) Fixed 11000 (27500)
Net Income 97750 Net Income 102250
V S&

11. Honey Corporation, a merchandising company, reported the following results for
January:

Number of units produced 5,800

Selling price per unit $892
Units costs of goods sold $517
Variable selling expense per unit $31
Total fixed selling expense $152,600
Variable administrative expense per unit $48
Total fixed administrative expenses $390,200

Cost of goods sold is a variable cost in this company.

Required:
a. Prepare a traditional format income statement for January.
Sales – Manufacturing costs = Gross profit – Selling and operating cost = net income
Sales 5800 x892 = 5173600
– Manufacturing costs (5800 x517)=2998600
= Gross profit 2175000
– Selling (31x5800) +152600= (332400)
and administrative cost
(48 x5800+390200) (668600)

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= net income 1174000

b. Prepare a contribution format income statement for January.

Sales – Total variable costs = Contribution margin – total fixed costs= net income
Sales 5173600
- Total variable cost
(2998600+ 31x5800 +48 x 5800) (3456800)
Contribution margin 1716800
– total fixed costs 152600 +390200 (542800)
= net income 1174000

Break EVEN ANALYSIS (CVP Analysis)

1.Stefanko Manufacturing has prepared the following income statement:

Sales $450,000
Cost of goods sold 200,000
Gross margin 250,000
Operating expenses 196,000
Operating income $54,000
According to company records, $100,000 of Cost of Goods Sold and $100,000 of
Operating Expenses are fixed.
Prepare a contribution Format Income Statement
Required
Sales 450000 – Variable costs (100,000 +96000)= CM 254000- FC(100K +100K)
=Net Income 54000
A) Compute the contribution margin.
B) Compute the contribution margin ratio. CM/Sales=254000/450000= 0.56 or 56%
C) Compute the break-even point in sales dollars.
FC/ CM%= 200,000/0.56= $357142
D)MOS $ = $450,000- 357142= $ 92858
MOS% = MOS/ Sales=$92858/$450000=20.6%
E)Assume that the co. needs to achieve a target profit of $300,000. What is the sales
revenue (200,000 +300,000)/0.56 =$892857

2. Longiotti Corporation produces and sells a single product. Data concerning that
product appear below:
Selling price per unit ……$150
Variable expense per unit……36
Fixed expense per month…..$159,600

Required:
Determine the monthly break-even in total dollar sales.
Answer:
CM/unit= 150-36=114
BEP in units= 159600/114=1400 units x 150=210,000
Cm%= 114/150=0.76
BE $= 159600/0.76= 210,000

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3. Suppose Lattin Corp.’s breakeven point is revenues of $1,500,000.
Fixed costs are $720,000.
1. Compute the contribution margin percentage.
2. Compute the selling price if variable costs are $13 per unit.
3. Suppose 90,000 units are sold. Compute the margin of safety in units and dollars.

1. Compute the contribution margin percentage.

BEP $= TFC/CM%
1500,000= 720,000
CM%
CM%= 720,000/1500,000= 48%

2. Compute the selling price if variable costs are $13 per unit.
CM% =48% VC%=52% VC% =VC/Sp
13 = 52%
SP
Sp= 13/52%=25

SP-VC= 48% SP- 13= 0.48 SP-13=0.48 SP

SP SP

1SP-0.48SP= 13 0.52 SP =13 SP =13/0.52= 25

3. Suppose 90,000 units are sold. Compute the margin of safety in units and
dollars.
90,000 units * 25 = $2250000
MOS $= 2250000-1500000=$750,000
MOS in units= $750,000/25= 30,000 units
MOS%= 30,000/90,000= 33.3
The company is 33% far from the breakeven point. The risk of approaching the
breakeven point could increase by the decrease in company sales or by changes in one
of the parameters used to calculate the breakeven point as increasing costs or
decreases in the selling price could result in higher breakeven point and eventually
lowers the company’s margin of safety.

4. Iron Decor manufactures decorative iron railings. In preparing for next year's
operations, management has developed the following estimates:

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Required:
Compute the following items:
a. Unit contribution margin. SP-VC/unit= 50 – 10 - 2.5- 3.5-5=29
b. Contribution margin ratio. CM /SP= 29/50 =0.58
c. Break-even in dollar sales. TFC /CM%=110,000/ 0.58= $189655
BEP units = 110,000 /29= 3793 BE$ 3793 x 50 =$189655
d. Margin of safety percentage.
MOS= Actual sales – BEP= 20,000- 3793= 16207units/20000= 81%
OR 1000,000 – 189655=810345 MOS%= 810345/1000000= 81%

e. If the sales volume increases by 20% with no change in total fixed expenses, what
will be the change in net operating income?
Sales 20,000 x 50 =1000000 24000x 50= 1200,000
-TVC 20,000 x 21= 420000 24000 x21= 504000
= CM 20,000 x 29 = 580000 116000 24000 x29= 696000
-TFC 110000 110,000
Net income 470000 116000 586000

Increase in net income 4000 x 29=116000

$200,000 x 0.58 = 116000
Assume that the co. is studying the proposal to accept an advertising campaign
for 40000 to increase sales by 20%
Increase in CM by 116000 -40000 = 76000 Accept

f. If the per unit variable production costs increase by 15%, and if fixed selling and
administrative expenses increase by 12%, what will be the new break-even point in
dollar sales?
(10 +2.5 +3.5 )x 1.15=18.4 + 5= 23.4
CM/unit = 50 -23.4= 26.6 CM%= 26.6/50 = 53.2
New FC= 80000 + {30,000x 1.12}= 113600
New BE = 113600/53.2%= 213534

5. Winston Company has variable costs of $5 per unit and a selling price of $10 per
unit. Fixed costs are $100,000. Planned unit sales for 2015 are 25,000 units. Actual
unit sales for 2014 were 22,000 units. What is the margin of safety in units for 2015?
A) 2,000 units B) 3,000 units
C) 5,000 units D) 7,000 units

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Answer: BEP in units = 100,000/ 5= 20,000 units
MOS in units= 25,000-20,000= 5000 (C)

6. If the selling price per unit$100

Variable costs per unit $80
Total fixed costs $80,000
If fixed costs increased by 10% and management wanted to maintain the original
break-even point, then the selling price per unit would have to be increased to
________.
A) $101.00 B) $102.40
C) $102.00 D) $103.00
Answer:
BEP in units = Total fixed costs/ SP-VC
= 80,000 / 20 = 4000 units
Then 4000 = 88000 / SP-80
(SP-80) = 88,000/4,000
SP-80 = 22 SP = 22 + 88= 102

Breakeven and Sales Mix

7. Stanger Inc. produces and sells two products. Data concerning those products for
the most recent month appear below:
Product N16S Product X07D
Sales $14,000 $27,000
Variable expenses $6,720 $12,550
Fixed expenses for the entire company were $17,570.
Required
a. Determine the overall break-even point for the company. Show your work!
b. If the sales mix shifts toward Product N16S with no change in total sales, what will
happen to the break-even point for the company? Explain.
Product N16S Product X07D Total
Sales $14,000 (34.1%) $27,000 (65.9%) 41000
Variable expenses $6,720 $12,550 19270
CM 7280 CM 52% 14450 CM 53.5% 21730
TFC 17570

% of product N in sales mix = 14000/41000 =34.1%

% of product Z = 27000 /41000 = 65.9%
WA of CM% = 21730 /41000 = 0.53
BEP = 17570 /0.53= $33151
BEP N = 33151 x 34.1%= 11304
BEP X = 33151 x 65.9%= 21847
If the sales mix shifted towards product N16S (the lower CM%) the BEP will increase

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8. The following monthly data in contribution format are available for the MN
Company and its only product, Product SD:

The company produced and sold 300 units during the month and had no beginning or
ending inventories.
Required:
a. Without resorting to calculations, what is the total contribution margin at the break-
even point?
b. Management is contemplating the use of plastic gearing rather than metal gearing
in Product SD. This change would reduce variable expenses by $18 per unit. The
company's sales manager predicts that this would reduce the overall quality of the
product and thus would result in a decline in sales to a level of 250 units per month.
Should this change be made?

Sales 250 x 279 = 69759 – VC 91 x250 = 22750 = CM 47009 – 40000 = 7009

c. Assume that MN Company is currently selling 300 units of Product SD per month.
Management wants to increase sales and feels this can be done by cutting the selling
price by $22 per unit and increasing the advertising budget by $20,000 per month.
Management believes that these actions will increase unit sales by 50 percent. Should
these changes be made?
d. Assume that MN Company is currently selling 300 units of Product SD.
Management wants to automate a portion of the production process for Product SD.
The new equipment would reduce direct labor costs by $20 per unit but would result
in a monthly rental cost for the new robotic equipment of $10,000. Management
believes that the new equipment will increase the reliability of Product SD thus
resulting in an increase in monthly sales of 12%. Should these changes be made?

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a. The total contribution margin would be $40,000 since it is equal to the fixed
.expenses at the break-even point

b. The $18 decrease in variable costs will cause the contribution margin per unit to
.increase from $170 to $188

The less costly components should not be used in the manufacture of Product SD. Net
.operating income will decrease by $4,000

c. The decrease in selling price per unit will cause the unit contribution margin to
.decrease from $170 to $148

.The changes should not be made

d. The use of the automated process would affect both fixed and variable costs. Fixed
expenses will increase by $10,000 from $40,000 to $50,000. Variable costs will
decrease by $20 from $109 to $89, and the unit contribution margin will increase
.from $170 to $190

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:Task 9

Penury Company offers two products. At present, the following represents the usual
:results of a month's operations

: Required
.a. Find the break-even point in dollars

CM % = 80,000 / 200,000 =0.4

BEP = 50000 / 0.4= 125000

b. Find the margin of safety in dollars. MOS = 200000 -125000 =75000

c. The company is considering decreasing product K's unit sales to 80,000 and
increasing product L's unit sales to 180,000, leaving unchanged the selling price per
unit, variable expense per unit, and total fixed expenses. Would you advise adopting
this plan? K -20000 x 0.6 = -12000 + 80000 x 0.2 =16000 +4000 income

.d. Refer to (c) above. Under the new plan, find the break-even point in dollars

K L Total
Sales 96000 144000 240000
VC - 48000 108000
CM 48000 36000 84000
TFC )50000(
34000

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CM%= 0.35

New BEP = 50000/0.35= 142857

.e. Under the new plan in (c) above, find the margin of safety in dollars

10. Gulinson Corporation has two divisions: Division A and Division B. Data from
the most recent month appear below:

Total
Division B Division A Company
369,000 $ 222,000 $ 591,000 $Sales
162,360 113,220 275,580 Variable expenses
206,640 108,780 315,420 Contribution margin
129,000 66,000 195,000 Traceable fixed expenses
77,640 $ 42,780 $ 120,420 Segment margin
65,010 Common fixed expenses
55,410 $Net operating income

Required:
Compute the break-even in sales dollars for Division A
CM %for A= 108780 /222000 = 0.49 BEP $= 66000/0.49 = 134693
CM % for B = 0.56 Bep $ =129000/0.56 = 230357
CM%= 315420/591000= 0.533
BEP = (65010 +195000 )/0.533= 487823

11. Combe Corporation has two divisions: Alpha and Beta. Data from the most recent
month appear below:

Beta Alpha
315,000 $ 190,000 $Sales
151,200 $ 58,900 $Variable expenses
107,000 $ 99,000 $Traceable fixed expenses

The company's common fixed expenses total $80,800. The break-even in sales dollars
for Alpha Division
Answer:
Explanation: Alpha Division:

Segment contribution margin = Segment sales − Segment variable expenses

= $190,000 − $58,900 = $131,100

Segment CM ratio = Segment contribution margin ÷ Segment sales

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= $131,100 ÷ $190,000 = 0.69

Dollar sales for a segment to break even = Segment traceable fixed expenses ÷
Segment CM ratio

= $99,000 ÷ 0.69 = $143,478

TASK 11
Delisa Corporation has two divisions: Division L and Division Q. Data from the most
recent month appear below:

Total
Division Q Division L Company
361,000 $ 156,000 $ 517,000 $Sales
173,280 82,680 255,960 Variable expenses
187,720 73,320 261,040 Contribution margin
122,000 49,000 171,000 Traceable fixed expenses
65,720 $ 24,320 $ 90,040 Segment margin
87,890 Common fixed expenses
2,150 $Net operating income

Required: Compute the break-even in sales dollars for Division Q

Answer:
Explanation: Segment CM ratio = Segment contribution margin ÷ Segment sales

= $187,720 ÷ $361,000 = 0.52

Dollar sales for a segment to break even = Segment traceable fixed expenses ÷
Segment CM ratio

= $122,000 ÷ 0.52 = $234,615

TASK 12
. Holts Corporation has two divisions: Xi and Sigma. Data from the most recent
month appear below:

Sigma Xi
346,000 $ 311,000 $Sales
169,540 $ 65,310 $Variable expenses
135,000 $ 176,000 $Traceable fixed expenses

The company's common fixed expenses total $78,840.

Required: Compute the break-even in sales dollars for the company as a whole

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Answer: Explanation:
Total
Sigma Xi Company
346,000 $ 311,000 $ 657,000 $Sales
169,540 65,310 234,850 Variable expenses
176,460 245,690 422,150 Contribution margin
135,000 176,000 311,000 Traceable fixed expenses
41,460 $ 69,690 $ 111,150 Segment margin
78,840 Common fixed expenses
32,310 $Net operating income

Overall CM ratio = Contribution margin ÷ Sales = $422,150 ÷ $657,000 = 0.64

(rounded; the exact value is used in subsequent computations)

Dollar sales for the company to break even = (Traceable fixed expenses + Common
fixed expenses) ÷ CM ratio = ($311,000 + $78,840) ÷ 0.64 = $606,715 (your answer
may differ due to rounding)

LECTURE THREE

Cost flows and income statement presentations for a manufacturing Co.

TASK ONE:
Green Cabinets is a custom cabinet builder. They recently completed a set of kitchen
cabinets (Job Number 1478), as summarized below:

Job Number:1478
Date Started: 4/07/20x8
Date Completed: 4/22/20x8
Cherry kitchen cabinets Description:
Applied
Manufacturing
Direct Labor Direct Materials
Overhead
Amount Rate Hours Amount Hours Ticket Amount Req. No
288 $ 16 128 300 $ 385
426 23 130 225 391
264 12 133 150 395
215 401
978 $ 51 Total 890 $ Total
Cost Summary
890 $Direct Material Cost
978 Direct Labor Cost
612 Applied Manufacturing Overhead
2480 Total Cost

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Green Cabinets applies overhead to jobs at a rate of $12 per direct labor hour
Applied OH = Predetermined OH rate 12 X Actual amount of allocation base 51

a. How much overhead would be applied to Job #1478? 51 x 12= 612

b. What is the total cost of Job #1478?

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TASK TWO

The following information applies to the O'Donnell Company for March production. There are only two jobs
(X and Y) in production in March.

Purchased direct materials and

indirect materials with the following Issued direct materials and indirect materials with this summary of
summary of receiving reports: requisitions:
Job X Job Y TOTAL
Material A 16,000 Material A 8,000 16,000 24,000
Material B 12,000 Material B 3,000 8,000 11,000
Indirect Materials 3,000 Subtotal: 11,000 24,000 35,000
TOTAL: 31,000 Indirect Materials 39,000
TOTAL: 74,000

Factory labor incurred is Factory utilities, factory depreciation, and factory insurance incurred is
summarized by these time tickets: summarized by these factory vouchers, invoices, and cost memos:

Job X 22,000 Utilities 3,000

Job Y 15,000 Depreciation 18,000
Indirect Labor 28,000 Insurance 2,500
TOTAL: 65,000 TOTAL: 23,500

Facts and Figures about O"Donnell Company March Jobs:

Predetermined
Machine Hour
Rate: Machine Hours: Status: Ship Date: Gross Margin:
Job X 46 1,100 Completed March 0
Job Y 46 800 In Process NA NA

The company closed the overapplied or underapplied overhead to the Cost of Goods Sold account at
the end of March.

Required

1. Calculate the total manufacturing cost for Job X and Job Y for March
2. Calculate the amount of overapplied or underapplied overhead and state whether the cost of goods
sold account will be increased or decreased by the adjustment.
Cost of Job X = DM 11000 + DL 22000 + Applied OH 46 x 1100 [50600]= 83600
Cost of Job Y = DM 24000+ DL 15000 + Applied OH 46 x800 [36800]= 75800
Total Applied OH 50600 +36800 = 87400
Actual OH = 39000 +28000 + 23500= 90500
Applied 87400 < Actual OH 90500 under applied 3100 to be added to COGS

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TASK THREE
Carlson Company has two departments. Factory overhead costs are applied based on
direct labor cost in Department A and machine hours in Department B. The following
information is available:

Budgeted Costs Dept. A Dept. B

Direct labor cost $150,000 $165,000
Machine hours 51,000 20,000
Factory overhead cost $225,000 $180,000

Actual data for Job #10 are as follows:

Actual Costs Dept. A Dept. B
Direct materials requisitioned $10,000 $16,000
Direct labor cost $11,000 $14,000
Machine hours 5,000 3,000

Required:
A) Compute the budgeted factory overhead rate for Department A.
B) Compute the budgeted factory overhead rate for Department B.
C) What is the total overhead cost for Job #10?
D) If Job #10 consists of 50 units of product, what is the unit cost of this job?
Answer
A) Compute the budgeted factory overhead rate for Department A.
POHR = 225000/150,000 = 1.5/DLcost
B) Compute the budgeted factory overhead rate for Department B
180000/20000 = $9/Mhr.
C) What is the total overhead cost for Job #10?
(1.5x 11000) + (9x 3000) = 43500
D) If Job #10 consists of 50 units of product, what is the unit cost of this job?
DM 26000
+DL cost 25000
+ OH allocated 43500
Total cost 94500
Cost /unit = 94500/ 50= 1890
Assume that co. wants to realize a 10% markup, what is the SP?
1890 x 1.1= $2079

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TASK FOUR
The Lynn Company uses a normal job-costing system at its Minneapolis plant. The
plant has a machining department and an assembly department. Its job-costing system
has two direct-cost categories (direct materials and direct manufacturing labor) and
two manufacturing overhead cost pools (the machining department overhead,
allocated to jobs based on actual machine-hours, and the assembly department
overhead, allocated to jobs based on actual direct manufacturing labor costs). The
2021 budget for the plant is as follows:

Machining Department Assembly

Department
Manufacturing Overhead $1,800,000 3,600,000
Direct Manufacturing labor costs 1,400,000 2,000,000
Direct manufacturing labor hours 100,000 200,000
Machine Hours 50,000 200,000
Compute the budgeted manufacturing overhead rate for each department.
POHR = Estimated MOH/ Estimated Activity
Machining = 1800000/ 50000 = $36 / Machine hour
Assembly = 3600,000/ $ 2000000 = $1.8/ dollar of DL Cost or 180%

2- During February, the job-cost record for Job 494 contained the following:
Machining Department Assembly
Department
Direct Materials Used 45,000 70,000
Direct Manufacturing labor costs 14,000 15,000
Direct manufacturing labor hours 1,000 1,500
Machine Hours 2,000 1,000
Compute the total manufacturing overhead costs allocated to Job 494.
OH cost allocated to Job 494=
Machining= 2000 x 36= 72000 + Assembly = 15000 x 1.8=27000 = 99000

At the end of 2021, the actual manufacturing overhead costs were $2,100,000 in
machining and $3,700,000in assembly. Assume that 55,000 actual machine-hours
were used in machining and that actual direct manufacturing labor costs in assembly
were $2,200,000. Compute the over- or under-allocated manufacturing overhead for
each department.
Machining Actual OH 2100000 > Applied OH 55000 x 36= 1980000 U -120,000
Assembly Actual OH 3700000 < Applied OH 2200000 x1.8= 3960000 O +260000

+ 140000 net overapplied to be deducted from COGS

21
TASK FIVE
Audio Corporation produces two types of audio cassettes, standard and high grade.
The standard cassettes, used primarily in answering machines, are designed for
durability rather than accurate sound reproduction.
The company only recently began producing the higher quality high grade model to
enter the lucrative music recording market. Since the introduction of the new product,
profits have been steadily declining. Management believes that the accounting system
may not be accurately allocating costs to products, particularly since sales of the new
product have been increasing.
Management has asked you to investigate the cost allocation problem. You find that
manufacturing overhead is currently assigned to products based on the direct labor
costs in the products. For your investigation, you have data from the last year. Last
year's manufacturing overhead was $220,000 based on the production of 320,000
standard cassettes and 100,000 high grade cassettes. Direct labor and direct material
costs were as follows:

Standard High grade Total

Direct labor $174,000 $66,000 $240,000

Materials 125,000 114,000 239,000

Management determined that overhead costs are caused by three cost drivers. The
cost drivers and their costs for the last year were as follows:
Activity level
Cost driver Costs Standard High Total
assigned grade
Number of production $100,000 40 10 50 2000/run
runs
Quality tests performed 90,000 12 18 30 3000/test
Shipping orders 30,000 100 50 150 200/order
processed
Total overhead 220,000

Required:
1. How much of the overhead will be assigned to each product if the three cost
drivers are used to allocate overhead? What is the total cost per unit produced
for each product?
Standard= 40 x2000 + 12x3000 + 100x200= 136000
High grade= 10 x2000 + 18x3000 + 50x200= 84000

2. How much of the overhead will be assigned to each product if direct labor
costs had been used to allocate overhead? What is the total cost per unit
produced for each product?
OH rate = 220000/240000== 0.91666666
OH allocated to Job Standard = 0.9166 x 174000= 159500
OH allocated to High grade= 0.9166 x 66000= 60500

22
3. How might results from using activity- based costing in requirement (a) help
management understand Audio's declining profits?

23
 TASK SIX
Automotive Products (AP) designs and produces automotive parts. In 2014, actual
variable manufacturing overhead is $308,600. AP’s simple costing system allocates
variable manufacturing overhead to its three customers based on machine-hours and
prices its contracts based on full costs. One of its customers has regularly complained
of being charged noncompetitive prices, so AP’s controller Devon Smith realizes that
it is time to examine the consumption of overhead resources more closely. He knows
that there are three main departments that consume overhead resources: design,
production, and engineering. Interviews with the department personnel and
examination of time records yield the following detailed information.

Cost driver Variable Usage of cost drivers by customer

Manufacturing contract
OH United Holden Leland
motors motors vehicle
Design CAD design $39,000 110 200 80
hours
Engineering Engineering 29,600 70 60 240
hours
Production Machine 240,000 120 2,800 1,080
hours
Total $ 308,600

Required:
1. Compute the manufacturing overhead allocated to each customer in 2021 using the
simple costing system that uses machine-hours as the allocation base.
2. Compute the manufacturing overhead allocated to each customer in 2021 using
department-based manufacturing overhead rates.
3. Comment on your answers in requirements 1 and 2. Which customer do you think
was complaining about being overcharged in the simple system? If the new
department-based rates are used to price contracts, which customer(s) will be
unhappy? How would you respond to these concerns?

1, Pre-determined overhead allocation rate= $308600/4000= $77.15/ machine hours

Manufacturing overhead allocated to United motors= 120* 77.15=9258
Manufacturing overhead allocated to Holden motors= 2800* 77.15=216020
Manufacturing overhead allocated to Leland vehicles = 1080* 77.15=83322

2. Cost Variable Total Allocation run Activity cost by customer contract

driver Manufactur quantity for each activity
ing of United Holden Leland vehicle Total
allocatio T motors
OH motors
n base
(3)
(1) (2)

24
Design CAD $39,000 390 $100/design 110*100 200*100=2 80*100= 8000 39000
design hour 0000
hours =11000

Engineerin Enginee 29,600 370 $80/engineering 70 *80= 60*80= 240*80= 29600

g ring hour 5600 4800 19200
hours

Production Machine 240,000 4000 $60/machine 120*60= 2,800*60= 1,080*60= 240000

hours hour 168,000
7200 64800

Total $ 308,600 23800 192800 92000 308600

3.
United motors Holden motors Lehland vehicle

Single overhead rate 9258 216020 83322

ABC 23800 192800 92000

Using the above table, it can be noticed that united motors products are under-costed
as its cost using ABC was $23800 although it was 9258 under the single overhead rate
system which is reflected in declining profits for this product. The same applies for
Lehland vehicle On the other hand, the other hand, the holden motors was overcosted
which would result in lower sales

25
TASK SEVEN
The job costing system at Sheri’s Custom Framing has five indirect cost pools
(purchasing, material handling, machine maintenance, product inspection, and
packaging). The company is in the process of bidding on two jobs: Job 215, an order
of 15 intricate personalized frames, and Job 325, an order of 6 standard personalized
frames. The controller wants you to compare overhead allocated under the current
simple job-costing system and a newly designed activity-based job-costing system.
Total budgeted costs in each indirect cost pool and the budgeted quantity of activity
driver are as follows.

Budgeted Activity driver Budgeted Activity

Overhead quantity of Rate
activity driver
Purchasing $35,000 Purchase orders 2,000 $17.5/PO
produced
Materials 43,750 Material moves 5,000 8.75/Move
handling
Machine 118,650 Machine hours 10,500 11.3/Mhr
Maintenance
Product 9,450 Inspections 1,200 7.9 /ins
inspection
Packaging 19950 Units produced 3,800 5.3/ unit
226,800

Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-level
costs because it uses more types of materials that need to be purchased, moved, and
inspected relative to Job 325.
Job 215 Job 325
Number of purchase orders 25x17.5 8x17.5
Number of material moves 10 x8.75 4x 8.75
Machine-hours 40 x11.3 60 x 11.3
Number of inspections 9 x 7.9 3 x 7.9
Units produced 15x 5.3 6 x 5.3

Required:
1. Compute the total overhead allocated to each job under a simple costing
system, where overhead is allocated based on machine-hours.
POHR = 226800/10500= $21.6 /Mhr
Allocated OH JOB 215= 40 x 21.6 =864
Allocated OH Job 325 = 60 x 21.6= 1296
2. Compute the total overhead allocated to each job under an activity-based
costing system using the appropriate activity drivers.
OH allocated to JOB 215= 1127 simple 864 under costed
OH allocated to JOB 325= 918 simple 1296 overcosted
3. Explain why Sheri’s Custom Framing might favor the ABC job-costing
system over the simple job-costing system, especially in its bidding process.

26
 .Job 215 was under-costed, the ABC revealed higher overhead allocated to this
job. On the other hand, job 325 was over costed and this could reduce the sales for
this product

TASK EIGHT
Fancy Doors, Inc., produces two types of doors, interior and exterior. The company’s
simple costing system has two direct cost categories (materials and labor) and one
indirect cost pool. The simple costing system allocates indirect costs on the basis of
machine-hours.
Recently, the owners of Fancy Doors have been concerned about a decline in the
market share for their interior doors, usually their biggest seller. Information related to
Fancy Doors production for the most recent year follows:

Interior Exterior
Units sold 3,200 1,800
Selling price 250 400
Direct material cost per unit 60 90
Direct manufacturing labor cost per hour 32 32
Direct manufacturing labor hours per unit 1.50 2.25
Production runs 40 85
Materials moves 72 168
Machine setups 45 155
Machine hours 5500 4500
Number of inspections 250 150

The owners have heard of other companies in the industry that are now using an
activity-based costing system and are curious how an ABC system would affect their
product costing decisions. After analyzing the indirect cost pool for Fancy Doors, the
owners identify six activities as generating indirect costs: production scheduling,
material handling, machine setup, assembly, inspection, and marketing. Fancy Doors
collected the following data related to the indirect cost activities:

Activity Activity cost Activity cost driver

Production Scheduling $190,000 Production runs
Materials handling 90,000 Material moves
Machine set up 50,000 Machine set ups
Assembly 120,000 Machine hours
Inspection 16,000 Number of inspections

Required
1. Calculate the cost of an interior door and an exterior door under the existing simple
costing system.
2. Calculate the cost of an interior door and an exterior door under an activity-based
costing system.
3. Compare the costs of the doors in requirements 1 and 2. Why do the simple and
activity-based costing systems differ in the cost of an interior and exterior door?

Answer:
Predetermined overhead =190,000+90,000+ 50000+ 120,000+16,000= $466,000

27
Estimated machine hours= 5500 + 4500= 10,000
Traditional overhead allocation rate= 466,000/10,000= $46.6/ Machine hour

Interior doors Exterior Doors

Direct Materials 60 90
Direct Labor 32*1.5= 48 32*2.25=72
Overhead allocated 46.6* 5500= 46.6*4500=
256300/3200= 209700/1800=
80.09375 116.5
Cost/unit 188.09 278.5
2.
Activity Activity cost Interior Doors Exterior Doors
Production $190,000/125= 1520* 40=60800 1520*85=129200
Scheduling 1520/ production run
Materials 90,000/240= 375*72= 27000 375*168= 63,000
handling 375/ material move
Machine set up 50,000/200= 250*45= 11250 250*155= 38750
250/machine set up
Assembly 120,000/10,000= 12*5500= 66,000 12*4500= 54000
$12/ machine hour
Inspection 16,000/400= 40*250= 10,000 40*150= 6000
$40/inspection
Total overhead 175050 290,950
Overhead per unit 175050/3200= 290950/1800==
54.703 161.63
Direct material 60 90
Direct labor 48 72
Total cost per unit 162.703 323.63
c.

Interior doors Exterior Doors

Traditional 188.09 278.5
ABC 162.703 323.63

Using the traditional costing method, the cost of interior doors were 188.09 and this
cost were reduced under the ABC method to 162.703 which provides a more accurate
measure of overhead costs. This could motivate the company to reduce the selling
price of interior doors to boost sales.

With respect to exterior doors, traditional costing showed a cost of $162.703 and this
cost nearly doubled to $323.63. This information should motivate the company to
reconsider the selling price of exterior doors to raise the profit margin

28
TASK TEN: Product Line Profitability Analysis (Assignment)
Supermart Food Stores (SFS) has experienced net operating losses in its frozen food products line
in the last few periods. Management believes that the store can improve its profitability if SFS
discontinues frozen foods. The operating results from the most recent period are:

Frozen Food Baked Goods Fresh Produce

Sales $120,000 $91,000 $158,175
Cost of goods sold $105,000 $67,000 $110,000

SFS estimates that store support expenses are approximately 20 percent of revenues.
The controller says that not every sales dollar requires or uses the same amount of
store support activities. A preliminary analysis reveals store support activities for these
three product lines are:

Data
Fresh
Description Frozen Foods Baked Goods Produce
Order processing # of purchase orders 10 45 100
Receiving # of delivieries 12 55 120
Shelf-stocking # of hours per delivery 2 0.5 4
Customer Support items sold 30,000 40,000 86,000

Cost Per Item Description

Order processing $80.00 per purchase order
Receiving $110.00 per delivery
Shelf-stocking $15.25 per hour
Customer Support $0.21 per item

Estimated store support costs, as % of revenue = 20.00%

Required

1. Prepare a product-line profitability report for SFS under the current costing system.
2. Prepare a product-line profitability report for SFS using the new information the controller provides.
3. What new insights does the ABC system in requirement 2 privde to SFS managers?

1. Prepare a product-line profitability report for SFS under the

current costing system.
Frozen Baked Goods Fresh Produce
Foods
Sales $120,000 $91,000 $158,175
Cost of Goods $105,000 $67,000 $110,000
Sold
Gross Margin $15,000 $24,000 $48,175
Store Support $24,000 $18,200 $31,635
Operating Income -$9,000 $5,800 $16,540
Operating -7.50% 6.37% 10.46%
Margin

29
2. Prepare a product-line profitability report for SFS using the new
information the controller provides.
(final results are rounded to the
nearest dollar)

Frozen Baked Goods Fresh Produce

Foods
Sales $120,000 $91,000 $
158,175
Cost of Goods $105,000 $67,000 $
Sold 110,000
Gross Margin $15,000 $24,000 $
48,175
Store Support:
Order $800 $3,600 $8,000
processing
Receiving $1,320 $6,050 $13,200
Shelf-stocking $366 $419 $7,320
Customer $6,300 $8,400 $18,060
Support
TOTAL $8,786 $18,469 $46,580
Operating Income $6,214 $5,531 $1,595
Operating 5.18% 6.08% 1.01%
Margin

30
MCQ for Cost Management Exam Type Questions

1.Thomason Corporation has provided the following contribution format income

statement. Assume that the following information is within the relevant range.

40,000 $Sales (1,000 units)

30,000 Variable expenses
10,000 Contribution margin
7,000 Fixed expenses
3,000 $Net operating income

If the variable cost per unit increases by $1, spending on advertising increases by
$2,000, and unit sales increase by 50 units, the net operating income would be closest
to:
A) $450
B) $1,000
C) $2,150
D) $9,450

Answer: A
Explanation:

40 $Selling price per unit ($40,000 ÷ 1,000 units)

30 Variable cost per unit ($30,000 ÷ 1,000 units)
10 $Unit contribution margin

per unit 40 $Selling price

per unit 31 Variable cost per price ($30 per unit + $1 per unit)
per unit 9$ Unit contribution margin (a)
Units 1,050 Unit sales (1,000 units + 50 units) (b)
9,450$ Contribution margin (a) × (b)
9,000 Fixed expenses ($7,000 + $2,000)
450$ Net operating income

2. Stockmaster Corporation has provided the following contribution format income

statement. Assume that the following information is within the relevant range.

31
 320,000 $Sales (8,000 units)
192,000 Variable expenses
128,000 Contribution margin
121,600 Fixed expenses
6,400 $Net operating income

The margin of safety in dollars is closest to:

A) $6,400
B) $16,000
C) $121,600
D) $128,000

Answer: B
Explanation: CM ratio = Contribution margin ÷ Sales = $128,000 ÷ $320,000 = 40%
Dollar sales to break even = Fixed expenses ÷ CM ratio = $121,600 ÷ 40% =
$304,000
Margin of safety in dollars = Total budgeted (or actual) sales − Break-even sales
= $320,000 − $304,000 = $16,000

3. Moyas Corporation sells a single product for $20 per unit. Last year, the company's
sales revenue was $300,000 and its net operating income was $24,000. If fixed
expenses totaled $96,000 for the year, the break-even point in unit sales was:
A) 12,000 units
B) 9,900 units
C) 15,000 units
D) 14,100 units

Answer: A
Explanation: Profit = (Sales – Variable expenses) – Fixed expenses
$24,000 = ($300,000 – Variable expenses) – $96,000
Variable expenses = $300,000 – $96,000 – $24,000 = $180,000
CM ratio = Contribution margin ÷ Sales = ($300,000 – $180,000) ÷ $300,000 = 0.40
Dollar sales to break even = Fixed expenses ÷ CM ratio = $96,000 ÷ 0.40 = $240,000
Unit sales to break even = $240,000 ÷ $20 per unit = 12,000 units

4. Sabv Corporation's break-even-point in sales is $675,000, and its variable expenses

are 75% of sales. If the company lost $24,000 last year, sales must have amounted to:
A) $651,000
B) $579,000
C) $603,000
D) $471,000

Answer: B
Explanation: CM ratio = 1 – Variable expense ratio
CM ratio = 1 – 0.75 = 0.25

32
Dollar sales to break even = Fixed expenses ÷ CM ratio
$675,000 = Fixed expenses ÷ 0.25
Fixed expenses = $675,000 × 0.25 = $168,750
Profit = (CM ratio × Sales) – Fixed expenses
-$24,000 = (0.25 × Sales) – $168,750
Sales = ($168,750 – $24,000) ÷ 0.25 = $579,000

5. Last year Easton Corporation reported sales of $480,000, a contribution margin

ratio of 25% and a net loss of $16,000. Based on this information, the break-even
point was:
A) $435,000
B) $544,000
C) $506,000
D) $600,000

Answer: B
Explanation: Profit = (CM ratio × Sales) – Fixed expenses
–$16,000 = (0.25 × $480,000) – Fixed expenses
Fixed expenses = (0.25 × $480,000) + $16,000 = $136,000
Dollar sales to break even = Fixed expenses ÷ CM ratio = $136,000 ÷ 0.25 =
$544,000

6. Data concerning Dorazio Corporation's single product appear below:

Percent of Sales Per Unit

% 100 160 $Selling price
% 30 48 Variable expenses
% 70 112 $Contribution margin

Fixed expenses are $87,000 per month. The company is currently selling 1,000 units
per month. Management is considering using a new component that would increase
the unit variable cost by $28. Since the new component would increase the features of
the company's product, the marketing manager predicts that monthly sales would
increase by 400 units. What should be the overall effect on the company's monthly net
operating income of this change?
A) increase of $5,600
B) increase of $33,600
C) decrease of $5,600
D) decrease of $33,600

Answer: A
Explanation:
Contribution Income Statement
1,400 units 1,000 units

33
 224,000 $ 160,000 $Sales (at $160 per unit)
Variable expenses (at $48 per unit and $76
106,400 48,000 per unit)
117,600 112,000 Contribution margin
87,000 87,000 Fixed expenses
30,600 $ 25,000 $Net operating income

Net operating income would increase by $5,600

7. Gilchrist Corporation bases its predetermined overhead rate on the estimated

machine-hours for the upcoming year. At the beginning of the most recently
completed year, the Corporation estimated the machine-hours for the upcoming year
at 79,000 machine-hours. The estimated variable manufacturing overhead was $7.38
per machine-hour and the estimated total fixed manufacturing overhead was
$2,347,090. The predetermined overhead rate for the recently completed year was
closest to:
A) $37.09 per machine-hour
B) $36.07 per machine-hour
C) $7.38 per machine-hour
D) $29.71 per machine-hour

Answer: A
Explanation: Estimated total manufacturing overhead = $2,347,090 + ($7.38 per
machine-hour × 79,000 machine-hours) = $2,930,110

Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated

total amount of the allocation base = $2,930,110 ÷ 79,000 machine-hours = $37.09
per machine-hour
Difficulty: 2 Medium

8. Valvano Corporation uses a job-order costing system with a single plantwide

predetermined overhead rate based on machine-hours. The company based its
predetermined overhead rate for the current year on total fixed manufacturing
overhead cost of $440,000, variable manufacturing overhead of $2.20 per machine-
hour, and 50,000 machine-hours. The estimated total manufacturing overhead is
closest to:
A) $440,000
B) $110,000
C) $440,002
D) $550,000

Answer: D
Explanation: Estimated total manufacturing overhead cost = Estimated total fixed
manufacturing overhead cost + (Estimated variable overhead cost per unit of the
allocation base × Estimated total amount of the allocation base) = $440,000 + ($2.20
per machine-hour × 50,000 machine-hours) = $440,000 + $110,000 = $550,000
9. Almaraz Corporation has two manufacturing departments--Forming and Finishing.
The company used the following data at the beginning of the year to calculate

34
predetermined overhead rates:

Total Finishing Forming

10,000 3,000 7,000 Estimated total machine-hours (MHs)
48,700 $ 8,100 $ 40,600 $Estimated total fixed manufacturing overhead cost
Estimated variable manufacturing overhead cost per
2.80 $ 1.30 $MH

Assume that the company uses a plantwide predetermined manufacturing overhead

rate based on machine-hours. That predetermined manufacturing overhead rate is
closest to:
A) $6.62
B) $4.87
C) $4.10
D) $7.10

35
Answer: A
Explanation: The first step is to calculate the estimated total overhead costs in the
two departments.

Forming

40,600 $Estimated fixed manufacturing overhead

Estimated variable manufacturing overhead ($1.30 per MH ×
9,100 7,000 MHs)
49,700 $Estimated total manufacturing overhead cost

Finishing

8,100 $Estimated fixed manufacturing overhead

Estimated variable manufacturing overhead ($2.80 per MH ×
8,400 3,000 MHs)
16,500 $Estimated total manufacturing overhead cost

The second step is to combine the estimated manufacturing overhead costs in the two
departments ($49,700 + $16,500 = $66,200) to calculate the plantwide predetermined
overhead rate as follow:

66,200 $Estimated total manufacturing overhead cost

MHs 10,000 Estimated total machine hours
per MH 6.62 $Predetermined overhead rate

10. Beat Corporation uses a job-order costing system with a single plantwide
predetermined overhead rate based on machine-hours. The company based its
predetermined overhead rate for the current year on the following data:

40,000 Total machine-hours

344,000 $Total fixed manufacturing overhead cost
3.90 $Variable manufacturing overhead per machine-hour

Recently, Job M759 was completed. It required 60 machine-hours. The amount of

overhead applied to Job M759 is closest to: (Round your intermediate calculations
to 2 decimal places.)
A) $750
B) $516
C) $984
D) $234

Answer: A
Explanation: Estimated total manufacturing overhead cost = Estimated total fixed
manufacturing overhead cost + (Estimated variable overhead cost per unit of the

36
allocation base × Estimated total amount of the allocation base) = $344,000 + ($3.90
per machine-hour × 40,000 machine-hours) = $344,000 + $156,000 = $500,000

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷

Estimated total amount of the allocation base = $500,000 ÷ 40,000 machine-hours =
$12.50 per machine-hour

Overhead applied to a particular job = Predetermined overhead rate × Amount of the

allocation base incurred by the job = $12.50 per machine-hour × 60 machine-hours =
$750
Difficulty: 1 Easy

11. Tancredi Corporation has two manufacturing departments--Machining and

Customizing. The company used the following data at the beginning of the year to
calculate predetermined overhead rates:
Total Customizing Machining
10,000 5,000 5,000 Estimated total machine-hours (MHs)
33,500 $ 11,500 $ 22,000 $Estimated total fixed manufacturing overhead cost
Estimated variable manufacturing overhead cost
3.00 $ 1.80 $per MH

During the most recent month, the company started and completed two jobs--Job E
and Job J. There were no beginning inventories. Data concerning those two jobs
follow:

Job J Job E
7,000 $ 12,800 $Direct materials
7,700 $ 17,600 $Direct labor cost
1,600 3,400 Machining machine-hours
3,000 2,000 Customizing machine-hours

Assume that the company uses a plantwide predetermined manufacturing overhead

rate based on machine-hours. If both jobs are sold during the month, the company's
cost of goods sold for the month would be closest to: (Round your intermediate
calculations to 2 decimal places.)
A) $61,450
B) $41,150
C) $110,808
D) $102,600

37
Answer: D
Explanation: The first step is to calculate the estimated total overhead costs in the
two departments.

Machining

22,000 $Estimated fixed manufacturing overhead

Estimated variable manufacturing overhead ($1.80 per MH ×
9,000 5,000 MHs)
31,000 $Estimated total manufacturing overhead cost

Customizing

11,500 $Estimated fixed manufacturing overhead

Estimated variable manufacturing overhead ($3.00 per MH ×
15,000 5,000 MHs)
26,500 $Estimated total manufacturing overhead cost

The second step is to combine the estimated manufacturing overhead costs in the two
departments ($31,000 + $26,500 = $57,500) to calculate the plantwide predetermined
overhead rate as follow:

57,500 $Estimated total manufacturing overhead cost

MHs 10,000 Estimated total machine hours
per MH 5.75 $Predetermined overhead rate

The overhead applied to Job E is calculated as follows:

Overhead applied to a particular job = Predetermined overhead rate × Machine-hours
incurred by the job
= $5.75 per MH × (3,400 MHs + 2,000 MHs)
= $5.75 per MH × (5,400 MHs)
= $31,050

Job E's manufacturing cost:

12,800 $Direct materials

17,600 Direct labor cost
31,050 Manufacturing overhead applied
61,450 $Total manufacturing cost

The overhead applied to Job J is calculated as follows:

Overhead applied to a particular job = Predetermined overhead rate × Machine-hours
incurred by the job
= $5.75 per MH × (1,600 MHs + 3,000 MHs)
= $5.75 per MH × (4,600 MHs)= $26,450

Job J's manufacturing cost:

38
 7,000 $Direct materials
7,700 Direct labor cost
26,450 Manufacturing overhead applied
41,150 $Total manufacturing cost

61,450 $Total manufacturing cost assigned to Job E

41,150 Total manufacturing cost assigned to Job J
102,600 $Cost of goods sold

12. Corbel Corporation has two divisions: Division A and Division B. Last month, the
company reported a contribution margin of $60,000 for Division A. Division B had a
contribution margin ratio of 40% and its sales were $300,000. Net operating income
for the company was $40,000 and traceable fixed expenses were $80,000. Corbel
Corporation's common fixed expenses were:
A) $140,000
B) $60,000
C) $100,000
D) $80,000

Answer: B
Explanation:
Total
Division B Division A Company
300,000 $ Sales
Variable expenses
? 60,000 $ Contribution margin
80,000 $Traceable fixed expenses
Segment margin
Common fixed expenses
40,000 $Net operating income

Division B contribution margin = Division B CM ratio × Division B sales

= 0.40 × $300,000 = $120,000

Total
Division B Division A Company
300,000 $ Sales
Variable expenses
120,000 $ 60,000 $ ? Contribution margin
80,000 $Traceable fixed expenses
Segment margin
Common fixed expenses

39
 40,000 $Net operating income

Total contribution margin = Division A contribution margin + Division B contribution

margin

= $60,000 + $120,000 = $180,000

Total
Division B Division A Company
300,000 $ Sales
Variable expenses
120,000 $ 60,000 $ 180,000 $Contribution margin
80,000 $Traceable fixed expenses
? Segment margin
Common fixed expenses
40,000 $Net operating income

Segment margin = Contribution margin − Traceable fixed expenses

= $180,000 − $80,000 = $100,000

LECTURE FOUR

Task One A: Keep or Drop a Product Line

Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following
product-line income data:

The following additional information is available:

* The factory rent of $1,500 assigned to Product C is avoidable if the product were
dropped.

40
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* All supervisors' salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce
monthly expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the
administrative staff; their combined salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.

CM lost -10000 + 1500 +700 +3000 +1000 +3000= -800 NI =6200

Another way : Income Statement of the whole company (A&B) after closing C
CM (A&B) 30000
Less FC
Rent Exp 3500
Dep Exp 6000
Utilities 2000 +500 +800 = 3300
Supervisors salaries 2000
Maintenance 2000
Administrative 3000 +2000 +2000 7000
Net Income 6200

41
Task Two: (Keep or Drop a Product Line)
The most recent monthly income statement for Benner Stores is given below:

Store B Store A Total

$600,000 $400,000 $1,000,000Sales
420,000 160,000 580,000Variable expenses
180,000 240,000 420,000Contribution margin
200,000 100,000 300,000Traceable fixed expenses
(20,000) 140,000 120,000Store segment margin
30,000 20,000 50,000Common fixed expenses
$(50,000) $120,000 $70,000Net operating income

Due to its poor showing, consideration is being given to closing Store B. Studies show
that if Store B is closed, one-fourth of its traceable fixed expenses will continue
unchanged. The studies also show that closing Store B would result in a 10 percent
decrease in sales in Store A. The company allocates common fixed expenses to the
stores on the basis of sales dollars.

Required:
Determine the monthly financial advantage (disadvantage) of closing Store B.

Loss in contribution margin if Store B is closed:

$(180,000)Store B loss
(24,000)Store A loss (10% × $240,000)
(204,000)Total lost contribution margin
150,000Fixed costs avoided if Store B is closed (75% × $200,000)
$(54,000)Financial advantage (disadvantage) of closing Store B

Task Three (Make or Buy Decisions)

Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for
use in one of its products. Data concerning the unit production costs of the B345
gasket follow:

$0.15Direct materials
0.10Direct labor
0.13Variable manufacturing overhead
0.24Fixed manufacturing overhead
$0.62Total manufacturing cost per unit

An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it
requires. If Kirsten Corporation decided to discontinue making the B345 gaskets, 25%
of the above fixed manufacturing overhead costs could be avoided. Assume that direct
labor is a variable cost.

Required:
a. Assume Kirsten Corporation has no alternative use for the facilities presently
devoted to production of the B345 gaskets. If the outside supplier offers to sell the
gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully

42
support your answer with appropriate calculations.
b. Assume that Kirsten Corporation could use the facilities presently devoted to
production of the B345 gaskets to expand production of another product that would
yield an additional contribution margin of $10,000 annually. What is the maximum
price Kirsten Corporation should be willing to pay the outside supplier for B345
gaskets?
Answer:
a. The analysis of the alternatives follows below:
Buy Make
$0.46 Purchase cost
$0.15Direct materials
0.10Direct labor
0.13Variable manufacturing overhead
0.06Fixed manufacturing overhead*
$0.46 $0.44Total cost
* 25% × $0.24
The company should make the part rather than buy it from the outside supplier
because it costs $0.02 less under that alternative.

b. The maximum acceptable price is $0.54 because that is the cost to the company of
making the part itself when the opportunity cost is included:
$0.44Total cost of making the part internally
0.10Opportunity cost per unit ($10,000 ÷ 100,000)
$0.54Total

Task Four (Special Order Decisions)

Anglen Co. manufactures and sells trophies for winners of athletic and other events.
Its manufacturing plant has the capacity to produce 18,000 trophies each month;
current monthly production is 14,400 trophies. The company normally charges $103
per trophy. Cost data for the current level of production are shown below:

Variable costs:
$460,800Direct materials
$316,800Direct labor
$15,840Selling and administrative
Fixed costs:
$404,640Manufacturing
$74,880Selling and administrative

The company has just received a special one-time order for 900 trophies at $48 each.
For this particular order, no variable selling and administrative costs would be
incurred. This order would also have no effect on fixed costs. Assume that direct labor
is a variable cost.

Required:
Should the company accept this special order? Why?

43
Answer: Only the direct materials and direct labor costs are relevant in this decision.
To make the decision, we must compute the average direct materials and direct labor
cost per unit.

$460,800Direct materials
316,800Direct labor
$777,600Total
14,400Current monthly production
$54Average direct materials and direct labor cost per unit

Because the price on the special order is $48 per trophy and the relevant cost is $54,
the company would suffer a loss of $6 per trophy. Therefore, the special order should
not be accepted.

Task Five (Constrained Resources)

Garson, Inc. produces three products. Data concerning the selling prices and unit costs
of the three products appear below:

Product
H G F
$70 $80 $50Selling price
$55 $50 $40Variable costs
$12 $20 $15Fixed costs
5 2 4Milling machine time (minutes)

Fixed costs are applied to the products on the basis of direct labor hours.
Demand for the three products exceeds the company's productive capacity. The
milling machine is the constraint, with only 2,400 minutes of milling machine time
available this week.

Required:
Given the milling machine constraint, which product should be emphasized? Support
your answer with appropriate calculations.

Answer:
a. The product to emphasize can be determined by computing the contribution margin
per unit of the scarce resource, which in this case is milling machine time.

Product
H G F
$70 $80 $50Selling price
55 50 40Variable costs
$15 $30 $10Contribution margin
5 2 4Milling machine time (minutes)
$3.00 $15.00 $2.50Contribution margin per minute

Product G should be emphasized because it has the greatest contribution margin per
unit of the scarce resource.

44
Task Six (Sell or Further Process)
Ibsen Company makes two products from a common input. Joint processing costs up
to the split-off point total $43,200 a year. The company allocates these costs to the
joint products on the basis of their total sales values at the split-off point. Each
product may be sold at the split-off point or processed further. Data concerning these
products appear below:

Total Product Y Product X

$43,200 $17,600 $25,600Allocated joint processing costs
$54,000 $22,000 $32,000Sales value at split-off point
$33,300 $17,400 $15,900Costs of further processing
$88,300 $40,800 $47,500Sales value after further processing

Required:
a. What is financial advantage (disadvantage) of processing Product X beyond the
split-off point?
b. What is financial advantage (disadvantage) of processing Product Y beyond the
split-off point?
c. What is the minimum amount the company should accept for Product X if it is to be
sold at the split-off point?
d. What is the minimum amount the company should accept for Product Y if it is to be
sold at the split-off point?

Answer:
a. & b.
Product Y Product X
$40,800 $47,500Sales value after further processing
17,400 15,900Costs of further processing
23,400 31,600Benefit of further processing
22,000 32,000Less: Sales value at split-off point
Financial advantage (disadvantage) from
$1,400 $(400)further processing

c. & d.
Product Y Product X
$23,400 $31,600Minimum selling price at split-off

45
 Exercises on Decision Making

1-Hodge Inc. has some material that originally cost $74,600. The material has a scrap
value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for
$54,400. What would be the financial advantage (disadvantage) of reworking and
selling the material rather than selling it as is as scrap?
A) ($79,100)
B) ($21,700)
C) ($4,500)
D) $52,900

Answer: C
Explanation:

54,400 $Sales value of reworked material

1,500 Less: Cost to rework material
52,900 Net sales value
57,400 Current scrap value
Financial advantage (disadvantage) of reworking rather
) (4,500 $
than selling as scrap

2- Lusk Corporation produces and sells 10,000 units of Product X each month. The
selling price of Product X is $40 per unit, and variable expenses are $32 per unit. A
study has been made concerning whether Product X should be discontinued. The
study shows that $70,000 of the $120,000 in monthly fixed expenses charged to
Product X would not be avoidable even if the product was discontinued. If Product X
is discontinued, the annual financial advantage (disadvantage) for the company of
eliminating this product should be:
CM lost -8 x10000= -80000+50000= -30000
A) ($30,000)
B) $30,000
C) $40,000
D) ($40,000)

Answer: A
Explanation:
Drop Product Keep Product
Difference X X
Sales (10,000 units × $40
) (400,000 $ 0 $ 400,000 $
per unit)
Variable expenses (10,000
320,000 0 320,000
units × $32 per unit)
) (80,000 0 80,000 Contribution margin
50,000 70,000 120,000 Fixed expenses
Financial advantage
) (30,000 $) (70,000 $) (40,000 $
(disadvantage)

46
3-The Cook Corporation has two divisions--East and West. The divisions have the
following revenues and expenses:

West East
550,000 $ 500,000 $Sales
275,000 200,000 Variable costs
180,000 150,000 Traceable fixed costs
170,000 135,000 Allocated common corporate costs
) (75,000 $ 15,000 $Net operating income (loss)

The management of Cook is considering the elimination of the West Division. If the
West Division were eliminated, its traceable fixed costs could be avoided. Total
common corporate costs would be unaffected by this decision. Given these data, the
elimination of the West Division would result in an overall company net operating
income (loss) of:
15000-170000= -155000
500,000 – 200,000 = CM 300,000- Traceable 150000- Common 305000= -155000
A) $15,000
B) ($155,000)
C) ($75,000)
D) ($60,000)

Answer: B
Explanation: Effect on net operating income of dropping the West Division:

) (550,000 $Sales
275,000 Variable expenses
) (275,000 Contribution margin
180,000 Traceable fixed expenses
) (95,000 $Effect on net operating income

The company currently has a net operating loss of $60,000—the combined

effect of the apparent $75,000 loss in the West Division and the apparent
$15,000 profit in the East Division. Dropping the West Division would
reduce net operating income by $95,000. Therefore, after dropping the West
Division, the overall company net operating loss would be $155,000 = (−
$60,000 − $95,000).

47
4- Norgaard Corporation makes 8,000 units of part G25 each year. This part is used in
one of the company's products. The company's Accounting Department reports the
following costs of producing the part at this level of activity:

Per Unit
6.70 $Direct materials
8.10 $Direct labor
1.10 $Variable manufacturing overhead
2.00 $Supervisor's salary
4.20 $Depreciation of special equipment
2.10 $Allocated general overhead

DM 6.7 + DL 8.10 +VOH 1.1 + Sal 2 +avoided 0.25 + 2=20.15 Make / Buy 21.20
An outside supplier has offered to make and sell the part to the company for $21.20
each. If this offer is accepted, the supervisor's salary and all of the variable costs,
including direct labor, can be avoided. The special equipment used to make the part
was purchased many years ago and has no salvage value or other use. The allocated
general overhead represents fixed costs of the entire company. If the outside supplier's
offer were accepted, only $2,000 of these allocated general overhead costs would be
avoided. In addition, the space used to produce part G25 would be used to make more
of one of the company's other products, generating an additional segment margin of
$16,000 per year for that product.

The annual financial advantage (disadvantage) for the company as a result of buying
part G25 from the outside supplier should be:
A) ($8,400)
B) $16,000
C) ($8,000)
D) ($40,000)

48
Answer: A
Explanation:
Make
53,600 $Direct materials (8,000 units × $6.70 per unit)
64,800 Direct labor (8,000 units × $8.10 per unit)
8,800 Variable overhead (8,000 units × $1.10 per unit)
16,000 Supervisor's salary (8,000 units × $2.00 per unit)
0 Depreciation of special equipment (not relevant)
2,000 Allocated general overhead (avoidable only)
16,000 Opportunity cost
161,200 $Total relevant cost to make

Make
161,200 $Total relevant cost to make
169,600 Total cost to buy (8,000 units × $21.20 per unit)
8,400 $Higher cost to buy

6-A customer has requested that Lewelling Corporation fill a special order for 9,000
units of product S47 for $20.50 a unit. While the product would be modified slightly
for the special order, product S47's normal unit product cost is $14.40:

3.10 $Direct materials

1.50 Direct labor
6.40 Variable manufacturing overhead
3.40 Fixed manufacturing overhead
14.40 $Unit product cost

Sales (20.5 x9000) – {Extra cost (3.1 +1.5 + 6.4+5x 9000 + FC 36000]
= 184500 – [144000+36000]= 4500
Assume that direct labor is a variable cost. The special order would have no effect on
the company's total fixed manufacturing overhead costs. The customer would like
modifications made to product S47 that would increase the variable costs by $5.00 per
unit and that would require an investment of $36,000 in special molds that would
have no salvage value. This special order would have no effect on the company's
other sales. The company has ample spare capacity for producing the special order.
The annual financial advantage (disadvantage) for the company as a result of
accepting this special order should be:
A) $(9,900)
B) $4,500
C) $54,900
D) $(26,100)

Answer: B
Explanation:

49
 184,500 $Incremental revenue (9,000 units × $20.50 per unit)
Less incremental costs:
27,900 Direct materials (9,000 units × $3.10 per unit)
13,500 Direct labor (9,000 units × $1.50 per unit)
Variable manufacturing overhead
102,600 (9,000 units × ($6.40 per unit + $5.00 per unit))
36,000 Special molds
180,000 Total incremental cost
4,500 $Financial advantage (disadvantage)

7-Banfield Corporation makes three products that use compound W, the current
constrained resource. Data concerning those products appear below:

WX YI VP
505.44 $ 230.66 $ 248.04 $Selling price per unit
388.80 $ 172.14 $ 190.71 $Variable cost per unit
8.10 3.80 3.90 Centiliters of compound W

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be
emphasized. (Round your intermediate calculations to 2 decimal places.)
A) WX, VP, YI
B) YI, VP, WX
C) WX, YI, VP
D) VP, WX, YI

Answer: B
Explanation:
WX YI VP
505.44 $ 230.66 $ 248.04 $Selling price per unit
388.80 $ 172.14 $ 190.71 $Variable cost per unit
116.64 $ 58.52 $ 57.33 $Contribution margin per unit (a)
Amount of the constrained resource
required to
8.10 3.80 3.90 produce one unit (b)
Contribution margin per unit of the
constrained
14.40 $ 15.40 $ 14.70 $resource (a) ÷ (b)
3 1 2 Ranking

50
8- The Freed Corporation produces three products, X, Y, Z, from a single raw
material input. Product Y can be sold at the split-off point for total annual revenues of
$50,000, or it can be processed further at a total annual cost of $16,000 and then sold
for $68,000. Which of the following statements is true concerning Product Y?
A) Product Y should be sold at the split-off point rather than processed further.
B) The annual financial advantage from processing Product Y further is $18,000.
C) The annual financial advantage from processing Product Y further is $68,000.
D) The annual financial advantage from processing Product Y further is $2,000.

Answer: D
Explanation:

68,000 $Final sales value after further processing

50,000 Less sales value at split-off point
18,000 Incremental revenue from further processing
16,000 Less cost of further processing
2,000 $Financial advantage (disadvantage) from further processing

9- Two products, QI and VH, emerge from a joint process. Product QI has been
allocated $9,600 of the total joint costs of $12,000. A total of 9,000 units of product
QI are produced from the joint process. Product QI can be sold at the split-off point
for $13 per unit, or it can be processed further for an additional total cost of $54,000
and then sold for $18 per unit. If product QI is processed further and sold, what would
be the financial advantage (disadvantage) for the company compared with sale in its
unprocessed form directly after the split-off point?
A) ($18,600)
B) $108,000
C) $600
D) ($9,000)

Answer: D
Explanation:
Product QI
Final sales value after further processing ($18 per unit ×
162,000 $
9,000 units)
Less sales value at split-off point ($13 per unit × 9,000
117,000
units)
45,000 Incremental revenue from further processing
54,000 Less cost of further processing
Financial advantage (disadvantage) from further
) (9,000 $
processing

51
10-Faustina Chemical Corporation manufactures three chemicals (TX14, NJ35, and
KS63) from a joint process. The three chemicals are in industrial grade form at the
split-off point. They can either be sold at that point or processed further into premium
grade. Costs related to each batch of this chemical process is as follows:

KS63 NJ35 TX14

5,000 $ 12,000 $ 16,000 $Sales value at split-off point
6,000 $ 6,000 $ 6,000 $Allocated joint costs
9,000 $ 18,000 $ 20,000 $Sales value after further processing
2,000 $ 3,000 $ 5,000 $Cost of further processing

For which product(s) above would it be more profitable for Faustina to sell at the
split-off point rather than process further?
A) TX14 only
B) KS63 only
C) TX14 and KS63 only
D) NJ35 and KS63 only

Answer: A
Explanation:
KS63 NJ35 TX14
Final sales value after further
9,000 $ 18,000 $ 20,000 $processing
5,000 12,000 16,000 Less sales value at split-off point
Incremental revenue from
4,000 6,000 4,000 further processing
2,000 3,000 5,000 Less cost of further processing
Financial advantage
(disadvantage) from further
2,000 $ 3,000 $) (1,000 $processing

NJ35 and KS63 should be processed further, but TX14 should be sold at the split-off
point.

11-Key Corporation is considering the addition of a new product. The expected cost
and revenue data for the new product are as follows:

units 2,500 Annual sales

304 $Selling price per unit

52
 Variable costs per unit:
125 $Production
49 $Selling
Avoidable fixed costs per year:
50,000 $Production
75,000 $Selling
55,000 $Allocated common fixed corporate costs per year

If the new product is added, the combined contribution margin of the other, existing
products is expected to drop $65,000 per year. Total common fixed corporate costs
would be unaffected by the decision of whether to add the new product.

If the new product is added next year, the financial advantage (disadvantage) resulting
from this decision would be:
A) $325,000
B) $200,000
C) $145,000
D) $135,000

Answer: D
Explanation:

760,000 $Sales (2,500 units × $304 per unit)

Less costs:
312,500 Variable production costs (2,500 units × $125 per unit)
122,500 Variable selling costs (2,500 units × $49 per unit)
50,000 Avoidable fixed production costs
75,000 Avoidable fixed selling costs
65,000 Decline in existing product line contribution margin
625,000 Total cost
135,000 $Financial advantage (disadvantage)

53
LECTURE FOUR

Task One A: Keep or Drop a Product Line

Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following
product-line income data:

The following additional information is available:

* The factory rent of $1,500 assigned to Product C is avoidable if the product were
dropped.
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* All supervisors' salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce
monthly expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the
administrative staff; their combined salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.

CM lost -10000 + 1500 +700 +3000 +1000 +3000= -800 NI =6200

Another way : Income Statement of the whole company (A&B) after closing C
CM (A&B) 30000
Less FC
Rent Exp 3500
Dep Exp 6000
Utilities 2000 +500 +800 = 3300
Supervisors salaries 2000
Maintenance 2000
Administrative 3000 +2000 +2000 7000
Net Income 6200

54
Task Two: (Keep or Drop a Product Line)
The most recent monthly income statement for Benner Stores is given below:

Store B Store A Total

$600,000 $400,000 $1,000,000Sales
420,000 160,000 580,000Variable expenses
180,000 240,000 420,000Contribution margin
200,000 100,000 300,000Traceable fixed expenses
(20,000) 140,000 120,000Store segment margin
30,000 20,000 50,000Common fixed expenses
$(50,000) $120,000 $70,000Net operating income

Due to its poor showing, consideration is being given to closing Store B. Studies show
that if Store B is closed, one-fourth of its traceable fixed expenses will continue
unchanged. The studies also show that closing Store B would result in a 10 percent
decrease in sales in Store A. The company allocates common fixed expenses to the
stores on the basis of sales dollars.

Required:
Determine the monthly financial advantage (disadvantage) of closing Store B.

Loss in contribution margin if Store B is closed:

$(180,000)Store B loss
(24,000)Store A loss (10% × $240,000)
(204,000)Total lost contribution margin
150,000Fixed costs avoided if Store B is closed (75% × $200,000)
$(54,000)Financial advantage (disadvantage) of closing Store B

Task Three (Make or Buy Decisions)

Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for
use in one of its products. Data concerning the unit production costs of the B345
gasket follow:

$0.15Direct materials
0.10Direct labor
0.13Variable manufacturing overhead
0.24Fixed manufacturing overhead
$0.62Total manufacturing cost per unit

An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it
requires. If Kirsten Corporation decided to discontinue making the B345 gaskets, 25%
of the above fixed manufacturing overhead costs could be avoided. Assume that direct
labor is a variable cost.

Required:
a. Assume Kirsten Corporation has no alternative use for the facilities presently
devoted to production of the B345 gaskets. If the outside supplier offers to sell the
gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully

55
support your answer with appropriate calculations.
b. Assume that Kirsten Corporation could use the facilities presently devoted to
production of the B345 gaskets to expand production of another product that would
yield an additional contribution margin of $10,000 annually. What is the maximum
price Kirsten Corporation should be willing to pay the outside supplier for B345
gaskets?
Answer:
a. The analysis of the alternatives follows below:
Buy Make
$0.46 Purchase cost
$0.15Direct materials
0.10Direct labor
0.13Variable manufacturing overhead
0.06Fixed manufacturing overhead*
$0.46 $0.44Total cost
* 25% × $0.24
The company should make the part rather than buy it from the outside supplier
because it costs $0.02 less under that alternative.

b. The maximum acceptable price is $0.54 because that is the cost to the company of
making the part itself when the opportunity cost is included:
$0.44Total cost of making the part internally
0.10Opportunity cost per unit ($10,000 ÷ 100,000)
$0.54Total

Task Four (Special Order Decisions)

Anglen Co. manufactures and sells trophies for winners of athletic and other events.
Its manufacturing plant has the capacity to produce 18,000 trophies each month;
current monthly production is 14,400 trophies. The company normally charges $103
per trophy. Cost data for the current level of production are shown below:

Variable costs:
$460,800Direct materials
$316,800Direct labor
$15,840Selling and administrative
Fixed costs:
$404,640Manufacturing
$74,880Selling and administrative

The company has just received a special one-time order for 900 trophies at $48 each.
For this particular order, no variable selling and administrative costs would be
incurred. This order would also have no effect on fixed costs. Assume that direct labor
is a variable cost.

Required:
Should the company accept this special order? Why?

56
Answer: Only the direct materials and direct labor costs are relevant in this decision.
To make the decision, we must compute the average direct materials and direct labor
cost per unit.

$460,800Direct materials
316,800Direct labor
$777,600Total
14,400Current monthly production
$54Average direct materials and direct labor cost per unit

Because the price on the special order is $48 per trophy and the relevant cost is $54,
the company would suffer a loss of $6 per trophy. Therefore, the special order should
not be accepted.

Task Five (Constrained Resources)

Garson, Inc. produces three products. Data concerning the selling prices and unit costs
of the three products appear below:

Product
H G F
$70 $80 $50Selling price
$55 $50 $40Variable costs
$12 $20 $15Fixed costs
5 2 4Milling machine time (minutes)

Fixed costs are applied to the products on the basis of direct labor hours.
Demand for the three products exceeds the company's productive capacity. The
milling machine is the constraint, with only 2,400 minutes of milling machine time
available this week.

Required:
a. Given the milling machine constraint, which product should be emphasized?
Support your answer with appropriate calculations.
b. Assuming that there is still unfilled demand for the product that the company
should emphasize in part (a) above, up to how much should the company be willing to
pay for an additional hour of milling machine time?

Answer:
a. The product to emphasize can be determined by computing the contribution margin
per unit of the scarce resource, which in this case is milling machine time.

Product
H G F
$70 $80 $50Selling price
55 50 40Variable costs
$15 $30 $10Contribution margin
5 2 4Milling machine time (minutes)
$3.00 $15.00 $2.50Contribution margin per minute

57
Product G should be emphasized because it has the greatest contribution margin per
unit of the scarce resource.

b. If additional milling machine time would be used to produce more of Product G,

the time would be worth 60 minutes per hour × $15 per minute = $900 per hour.

Task Six (Sell or Further Process)

Ibsen Company makes two products from a common input. Joint processing costs up
to the split-off point total $43,200 a year. The company allocates these costs to the
joint products on the basis of their total sales values at the split-off point. Each
product may be sold at the split-off point or processed further. Data concerning these
products appear below:

Total Product Y Product X

$43,200 $17,600 $25,600Allocated joint processing costs
$54,000 $22,000 $32,000Sales value at split-off point
$33,300 $17,400 $15,900Costs of further processing
$88,300 $40,800 $47,500Sales value after further processing

Required:
a. What is financial advantage (disadvantage) of processing Product X beyond the
split-off point?
b. What is financial advantage (disadvantage) of processing Product Y beyond the
split-off point?

Answer:
a. & b.
Product Y Product X
$40,800 $47,500Sales value after further processing
17,400 15,900Costs of further processing
23,400 31,600Benefit of further processing
22,000 32,000Less: Sales value at split-off point
Financial advantage (disadvantage) from
$1,400 $(400)further processing

58
 Exercises on Decision Making

1-Hodge Inc. has some material that originally cost $74,600. The material has a scrap
value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for
$54,400. What would be the financial advantage (disadvantage) of reworking and
selling the material rather than selling it as is as scrap?
A) ($79,100)
B) ($21,700)
C) ($4,500)
D) $52,900

Answer: C
Explanation:

54,400 $Sales value of reworked material

1,500 Less: Cost to rework material
52,900 Net sales value
57,400 Current scrap value
Financial advantage (disadvantage) of reworking rather
) (4,500 $
than selling as scrap

2- Lusk Corporation produces and sells 10,000 units of Product X each month. The
selling price of Product X is $40 per unit, and variable expenses are $32 per unit. A
study has been made concerning whether Product X should be discontinued. The
study shows that $70,000 of the $120,000 in monthly fixed expenses charged to
Product X would not be avoidable even if the product was discontinued. If Product X
is discontinued, the annual financial advantage (disadvantage) for the company of
eliminating this product should be:
CM lost -8 x10000= -80000+50000= -30000
A) ($30,000)
B) $30,000
C) $40,000
D) ($40,000)

Answer: A
Explanation:
Drop Product Keep Product
Difference X X
Sales (10,000 units × $40
) (400,000 $ 0 $ 400,000 $
per unit)
Variable expenses (10,000
320,000 0 320,000
units × $32 per unit)
) (80,000 0 80,000 Contribution margin
50,000 70,000 120,000 Fixed expenses
Financial advantage
) (30,000 $) (70,000 $) (40,000 $
(disadvantage)

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3-The Cook Corporation has two divisions--East and West. The divisions have the
following revenues and expenses:

West East
550,000 $ 500,000 $Sales
275,000 200,000 Variable costs
180,000 150,000 Traceable fixed costs
170,000 135,000 Allocated common corporate costs
) (75,000 $ 15,000 $Net operating income (loss)

The management of Cook is considering the elimination of the West Division. If the
West Division were eliminated, its traceable fixed costs could be avoided. Total
common corporate costs would be unaffected by this decision. Given these data, the
elimination of the West Division would result in an overall company net operating
income (loss) of:
15000-170000= -155000
500,000 – 200,000 = CM 300,000- Traceable 150000- Common 305000= -155000
A) $15,000
B) ($155,000)
C) ($75,000)
D) ($60,000)

Answer: B
Explanation: Effect on net operating income of dropping the West Division:

) (550,000 $Sales
275,000 Variable expenses
) (275,000 Contribution margin
180,000 Traceable fixed expenses
) (95,000 $Effect on net operating income

The company currently has a net operating loss of $60,000—the combined

effect of the apparent $75,000 loss in the West Division and the apparent
$15,000 profit in the East Division. Dropping the West Division would
reduce net operating income by $95,000. Therefore, after dropping the West
Division, the overall company net operating loss would be $155,000 = (−
$60,000 − $95,000).

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4- Norgaard Corporation makes 8,000 units of part G25 each year. This part is used in
one of the company's products. The company's Accounting Department reports the
following costs of producing the part at this level of activity:

Per Unit
6.70 $Direct materials
8.10 $Direct labor
1.10 $Variable manufacturing overhead
2.00 $Supervisor's salary
4.20 $Depreciation of special equipment
2.10 $Allocated general overhead

DM 6.7 + DL 8.10 +VOH 1.1 + Sal 2 +avoided 0.25 + 2=20.15 Make / Buy 21.20
An outside supplier has offered to make and sell the part to the company for $21.20
each. If this offer is accepted, the supervisor's salary and all of the variable costs,
including direct labor, can be avoided. The special equipment used to make the part
was purchased many years ago and has no salvage value or other use. The allocated
general overhead represents fixed costs of the entire company. If the outside supplier's
offer were accepted, only $2,000 of these allocated general overhead costs would be
avoided. In addition, the space used to produce part G25 would be used to make more
of one of the company's other products, generating an additional segment margin of
$16,000 per year for that product.

The annual financial advantage (disadvantage) for the company as a result of buying
part G25 from the outside supplier should be:
A) ($8,400)
B) $16,000
C) ($8,000)
D) ($40,000)

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Answer: A
Explanation:
Make
53,600 $Direct materials (8,000 units × $6.70 per unit)
64,800 Direct labor (8,000 units × $8.10 per unit)
8,800 Variable overhead (8,000 units × $1.10 per unit)
16,000 Supervisor's salary (8,000 units × $2.00 per unit)
0 Depreciation of special equipment (not relevant)
2,000 Allocated general overhead (avoidable only)
16,000 Opportunity cost
161,200 $Total relevant cost to make

Make
161,200 $Total relevant cost to make
169,600 Total cost to buy (8,000 units × $21.20 per unit)
8,400 $Higher cost to buy

6-A customer has requested that Lewelling Corporation fill a special order for 9,000
units of product S47 for $20.50 a unit. While the product would be modified slightly
for the special order, product S47's normal unit product cost is $14.40:

3.10 $Direct materials

1.50 Direct labor
6.40 Variable manufacturing overhead
3.40 Fixed manufacturing overhead
14.40 $Unit product cost

Sales (20.5 x9000) – {Extra cost (3.1 +1.5 + 6.4+5x 9000 + FC 36000]
= 184500 – [144000+36000]= 4500
Assume that direct labor is a variable cost. The special order would have no effect on
the company's total fixed manufacturing overhead costs. The customer would like
modifications made to product S47 that would increase the variable costs by $5.00 per
unit and that would require an investment of $36,000 in special molds that would
have no salvage value. This special order would have no effect on the company's
other sales. The company has ample spare capacity for producing the special order.
The annual financial advantage (disadvantage) for the company as a result of
accepting this special order should be:
A) $(9,900)
B) $4,500
C) $54,900
D) $(26,100)

Answer: B
Explanation:

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 184,500 $Incremental revenue (9,000 units × $20.50 per unit)
Less incremental costs:
27,900 Direct materials (9,000 units × $3.10 per unit)
13,500 Direct labor (9,000 units × $1.50 per unit)
Variable manufacturing overhead
102,600 (9,000 units × ($6.40 per unit + $5.00 per unit))
36,000 Special molds
180,000 Total incremental cost
4,500 $Financial advantage (disadvantage)

7-Banfield Corporation makes three products that use compound W, the current
constrained resource. Data concerning those products appear below:

WX YI VP
505.44 $ 230.66 $ 248.04 $Selling price per unit
388.80 $ 172.14 $ 190.71 $Variable cost per unit
8.10 3.80 3.90 Centiliters of compound W

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be
emphasized. (Round your intermediate calculations to 2 decimal places.)
A) WX, VP, YI
B) YI, VP, WX
C) WX, YI, VP
D) VP, WX, YI

Answer: B
Explanation:
WX YI VP
505.44 $ 230.66 $ 248.04 $Selling price per unit
388.80 $ 172.14 $ 190.71 $Variable cost per unit
116.64 $ 58.52 $ 57.33 $Contribution margin per unit (a)
Amount of the constrained resource
required to
8.10 3.80 3.90 produce one unit (b)
Contribution margin per unit of the
constrained
14.40 $ 15.40 $ 14.70 $resource (a) ÷ (b)
3 1 2 Ranking

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8- The Freed Corporation produces three products, X, Y, Z, from a single raw
material input. Product Y can be sold at the split-off point for total annual revenues of
$50,000, or it can be processed further at a total annual cost of $16,000 and then sold
for $68,000. Which of the following statements is true concerning Product Y?
A) Product Y should be sold at the split-off point rather than processed further.
B) The annual financial advantage from processing Product Y further is $18,000.
C) The annual financial advantage from processing Product Y further is $68,000.
D) The annual financial advantage from processing Product Y further is $2,000.

Answer: D
Explanation:

68,000 $Final sales value after further processing

50,000 Less sales value at split-off point
18,000 Incremental revenue from further processing
16,000 Less cost of further processing
2,000 $Financial advantage (disadvantage) from further processing

9- Two products, QI and VH, emerge from a joint process. Product QI has been
allocated $9,600 of the total joint costs of $12,000. A total of 9,000 units of product
QI are produced from the joint process. Product QI can be sold at the split-off point
for $13 per unit, or it can be processed further for an additional total cost of $54,000
and then sold for $18 per unit. If product QI is processed further and sold, what would
be the financial advantage (disadvantage) for the company compared with sale in its
unprocessed form directly after the split-off point?
A) ($18,600)
B) $108,000
C) $600
D) ($9,000)

Answer: D
Explanation:
Product QI
Final sales value after further processing ($18 per unit ×
162,000 $
9,000 units)
Less sales value at split-off point ($13 per unit × 9,000
117,000
units)
45,000 Incremental revenue from further processing
54,000 Less cost of further processing
Financial advantage (disadvantage) from further
) (9,000 $
processing

64
10-Faustina Chemical Corporation manufactures three chemicals (TX14, NJ35, and
KS63) from a joint process. The three chemicals are in industrial grade form at the
split-off point. They can either be sold at that point or processed further into premium
grade. Costs related to each batch of this chemical process is as follows:

KS63 NJ35 TX14

5,000 $ 12,000 $ 16,000 $Sales value at split-off point
6,000 $ 6,000 $ 6,000 $Allocated joint costs
9,000 $ 18,000 $ 20,000 $Sales value after further processing
2,000 $ 3,000 $ 5,000 $Cost of further processing

For which product(s) above would it be more profitable for Faustina to sell at the
split-off point rather than process further?
A) TX14 only
B) KS63 only
C) TX14 and KS63 only
D) NJ35 and KS63 only

Answer: A
Explanation:
KS63 NJ35 TX14
Final sales value after further
9,000 $ 18,000 $ 20,000 $processing
5,000 12,000 16,000 Less sales value at split-off point
Incremental revenue from
4,000 6,000 4,000 further processing
2,000 3,000 5,000 Less cost of further processing
Financial advantage
(disadvantage) from further
2,000 $ 3,000 $) (1,000 $processing

NJ35 and KS63 should be processed further, but TX14 should be sold at the split-off
point.

11-Key Corporation is considering the addition of a new product. The expected cost
and revenue data for the new product are as follows:

units 2,500 Annual sales

304 $Selling price per unit

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 Variable costs per unit:
125 $Production
49 $Selling
Avoidable fixed costs per year:
50,000 $Production
75,000 $Selling
55,000 $Allocated common fixed corporate costs per year

If the new product is added, the combined contribution margin of the other, existing
products is expected to drop $65,000 per year. Total common fixed corporate costs
would be unaffected by the decision of whether to add the new product.

If the new product is added next year, the financial advantage (disadvantage) resulting
from this decision would be:
A) $325,000
B) $200,000
C) $145,000
D) $135,000

Answer: D
Explanation:

760,000 $Sales (2,500 units × $304 per unit)

Less costs:
312,500 Variable production costs (2,500 units × $125 per unit)
122,500 Variable selling costs (2,500 units × $49 per unit)
50,000 Avoidable fixed production costs
75,000 Avoidable fixed selling costs
65,000 Decline in existing product line contribution margin
625,000 Total cost
135,000 $Financial advantage (disadvantage)

66