Accounting Test (19,20)

allocation bases

# of inspection or service calls, lbs of product shipped, batches, machine hours, purchase orders

target price

$ customers willing to pay for product/service

Superior Services, Inc. is a consulting firm that offers optimal legal solutions. It allocates indirect costs using a single predetermined overhead allocation rate with direct labor hours as the allocation base. The estimated indirect costs for this year amount to $160,000. The company is expected to work 8000 direct labor hours during the year. The direct labor rate is $300 per hour. Clients are billed at 120% of direct labor cost. Last month, Superior's consultants spent 180 hours on Xyme, Inc. What is the predetermined overhead allocation rate per direct labor hour?

$20 per hour Est oh/est cost driver Direct labor hours=cost driver

Avia Company sells a product for $160 per unit. Variable costs are $140 per​ unit, and fixed costs are $1,500 per month. The company expects to sell 620 units in September. The unit contribution margin​ is:

$20 per unit 160-140

Clay Earth Company sells ceramic pottery at a wholesale price of $8.00 per unit. The variable cost of manufacture is $2.00 per unit. The fixed costs are $6,700 per month. It sold 5,300 units during this month. Calculate Clay​ Earth's operating income​ (loss) for this month.

$25,100 (8-2)(5300)-6700

Nourishmix, Inc. manufactures food processors. The target sales price is $440 per unit. The company desires a 35​% net profit margin on its products. What is the​ company's target full−product cost per unit using target​ pricing?

$286 =target sales price - desired net profit =440-(440*.35)

The highest value of total cost was $70,000 in June for Acai Beverages, Inc. Its lowest value of total cost was $52,000 in December. The company makes a single product. The production volume in June and December were 13,000 and 7000 units, respectively. What is the variable cost per month?

$3 per unit 70000-52000/13000-7000

McLeod, Inc. incurred fixed costs of $300,000. Total costs, both fixed and variable, are $500,000 when 59,000 units are produced. It sold 35,000 units during the year. Calculate the variable cost per unit

$3.39 y=mx+b total cost=VCx+fixed cost 500000=m(59000)+300000

Choice Creations, Inc. sells hand sewn shirts at $58.00 per shirt. It incurs monthly fixed costs of $8000. The contribution margin ratio is calculated to be 30%. What is the variable cost per shirt?

$40.60 per shirt CM=sales-VC VC=(1-CM)*(sales price =.7*$58

Robusta Coffee Importers sold 6,000 units in October at a sales price of $35 per unit. The variable cost is $25 per unit. The monthly fixed costs are $10,000. What is the operating income earned in​ October?

$50,000 (35-25)(6000)-10000

How much of the account inquiry cost will be assigned to the Midwest Office?

$6166 PR=allocated costs/allocation base PR*hours used by specific office=amount assigned to an office

Boyko, Inc. has fixed costs of $400,000. Total costs, both fixed and variable, are $550,000 when 40,000 units are produced. Calculate the total costs if the volume increases to 64,000 units.

$640,000 Total cost=mx+b 550000=m(40000)+400000 M=3.75=vc per unit 64000*3.75 =240000 TVC 240000+400000 aka TFC

Flasket, Inc. manufactures water bottles for children. Similar water bottles are available in the market for $14. Flasket desires a 30% net profit margin. Flasket's target cost is

$9.80 target cost=target profit-desired profit Tc=tp-desired profit =14-(14*.3)

quality costs

-prevention costs:incurred to avoid poor quality goods or services -employee training, evaluate supplier, preventive maintenance -appraisal costs: incurred to detect poor quality materials, goods, or services -inspection of production and final product, product testing -internal failure costs: to correct g/s before delivery to customers -rejected products, reworking standard product, cause manufacturing to stop -external failure costs: incurred after delivery to the customer has occurred -lost profits from unhappy customers, warranty cost, service costs, returns due to defects

Edmund Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018: The company expects to produce 500 units of each model during the year.

1) Compute the toal estimated indirect manufacturing cost: -total estimated overhead costs= predetermined overhead allocation rate* total estimated qty of the allocation base -# of the model*poar*amount of base per model, add this for both models to get materials handling, machine setup, insertion of parts, finishing -add to get total estimated indirect manufacturing cost 2)Prior to 2018​, Edmund used a single plantwide overhead allocation rate system with direct labor hours as the allocation base. Compute the predetermined overhead allocation rate based on direct labor hours for 2018. Use this rate to determine the estimated indirect manufacturing cost per wheel rim for each​ model: -allocation rate= estimated overhead costs (from #1) / estimated qty of the allocation base (total director labor hours per rim* amount of each model, add these for both models) -indirect manufacturing cost per rim: total direct labor hours per rim for one model * allocation rate 3)Compute the estimated ABC indirect manufacturing cost per unit of each model for 2018: -oh cost per rim for each activity= poar*# of allocation base -for machine set up: poar* (# of setups/total setups in the expected data table) -add these for total indirect cost per rim

Splashing Fun expects to sell one individual ticket for every four family tickets. Splashing Fun​'s total fixed costs are $105,000.

1) Compute the​ weighted-average contribution margin per ticket. -Sales price per unit and VC per unit from data table -Sales price per unit-VC per unit=CM per unit -Multiply this by sales mix in units to get contribution margin -add and divide by total units to get weighted average CM per unit 2) Total number of tickets must sell to break even required sales in units= (FC+Target profit)/ Weighted avg. CM per unit 3) Number of tickets in each category must sell to break even Required sales in units * proportion of the sales mix=breakeven sales of tickets for each category

Elkin Company manufactures wheel rims. The company produces two wheel rim​models: standard and deluxe. For 2019​,Elkin's managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2018 using ​activity-based costing. Because of limited machine hour​ capacity, Elkin can produce either ​2,000 standard rims or ​2,000 deluxe rims.

1) If Elkin's managers rely on the ABC unit cost data computed in 2018​, which model will they​ produce? -Sales price, direct materials, direct labor from "view the expected information" -indirect manufacturing costs from ABC costs column of "indirect costs per wheel rim" data -add to get gross profit per unit -whichever has largest gross profit per unit the company will produce 2) If the managers rely on the single plantwide overhead allocation rate cost​ data, which model will they​ produce? -everything the same as #1, but for indirect manufacturing costs use the single-rate costs column in the indirect manufacturing cost per unit data table 3) Activity-based costing data are generally more accurate than single plantwide allocation rate data.

Griffin's Steel Parts produces parts for the automobile industry. The company has monthly fixed costs of $660,000 and a contribution margin of 75% of revenues

1) Required sales in dollars= (FC+target profit)/CM ratio 2)Use contribution margin income statements to compute Griffin's monthly operating income or operating loss if revenues are $540,000 and if they are $1,020,000. Sales Revenue - Variable costs (revenue(1-CM)) =CM -FC =Operating income (loss) 3) Do the results in Requirement 2 make sense given the breakeven sales you computed in Requirement​ 1? The results in Requirement 2 do make sense given the breakeven sales computed in Requirement 1. Given the breakeven point of 880,000, it is logical that sales above the breakeven point will result in a net operating income, and sales below the breakeven point will result in a net operating loss.

Owner Shan Mu is considering franchising her Noodles by Mu restaurant concept. She believes people will pay $10.00 for a large bowl of noodles. Variable costs are $5.00 per bowl. Mu estimates monthly fixed costs for a franchise at $9,000.

1) Use the contribution margin ratio approach to find a​ franchise's breakeven sales in dollars. Required sales in dollars= (FC +target profit)/CM ratio cm ratio=(10-5)/10 =50%=(net sales revenue per unit-VC per unit)/ net sales revenue 2) Mu believes most locations could generate $61,500 in monthly sales. Is franchising a good idea for Mu if franchisees want a minimum monthly operating income of $21,000? (9000+21000)/50%=60000 3)Is franchising a good idea for Mu if franchisees want a minimum monthly operating income of $21,000​? Since the predicted monthly sales of $61,500 are greater than the amount of sales necessary to generate a minimum monthly operating income of $21,000​, Mu​'s franchising concept is a good idea.

Winslow makes handheld calculators in two models—basic and professional. Winslow estimated $1,149,500 of manufacturing overhead and 605,000 machine hours for the year. The basic model actually consumed 280,000 machine​ hours, and the professional model consumed 325,000 machine hours. The predetermined overhead allocation rate using machine hours as the allocation base is $1.90 per machine​ hour, with the allocated overhead costs split between the basic model and the professional model by $532,000 and $617,500​, respectively.

1) Winslow expects to produce 175,000 basic models and 175,000 professional models. Compute the predetermined overhead allocation rates using​activity-based costing. How much overhead is allocated to the basic​model? To the professional​model? -Predetermined OH allocation rate=estimated overhead costs/estimated qty of the allocation base -est overhead costs= in additional data box in overhead costs row -est quantity of the allocation base= basic model (30 parts per calculator x175000 basic calculators) + professional model (60 parts per calculator X 175,000 professional calculators)= 15,750,000 for materials handling and insertion of parts -for machine setup: add setups for basic and professional calculators=20+35=55 2) How much overhead is allocated to each model? -allocated mfg. overhead costs=predetermined OH allocation rate X actual qty of the allocation base used -actual qty of the allocation base used: -for materials handling and insertion of parts - number of parts per calculator*number of calculators -for machine setup- number of setups -add manufacturing overhead - materials handling, machine setup, insertion of parts to get total manufacturing overhead cost 3)Compare the​ activity-based costing results from Requirement 1 with the​ company's results using a single plantwide rate and using multiple department rates. -single plantwide allocation rate: from the end of the prompt "split between the basic model and the professional model by x and y respectivly" -multiple department allocation rates: from "data using multiple department allocation rates", total manufacturing overhead cost -activity based allocation rates: from #2, total manufacturing overhead cost -per unit is from dividing toal moh by 175000, number of calculators for each model The allocation using activity-based costing is the most accurate because it considers the resources used by each model. Management can now see that compared to the costs allocated using the single plantwide​ rate, the basic model cost less than expected and the professional model cost more than expected to produce.

James Corp. manufactures​ mid-fi and​ hi-fi stereo receivers. The following data have been​ summarized: The company plans to manufacture 150 units of the​ mid-fi receivers and 250 units of the​ hi-fi receivers. Calculate the product cost per unit for both products using​ activity-based costing.

1) allocate overhead (OH) costs: Allocated mfg. overhead costs= actual qty of the allocation base used * predetermined OH allocation rate 2)compute overhead costs allocated and overhead cost per unit: Setup, inspections, machine maintenance= poar*# of base -total overhead costs=all these added together -number of units: provided in problem description -divide these two to get overhead cost per unit 3) Calculate the product cost per unit: -direct materials cost per unit and direct labor cost per unit is provided in problem -indirect manufacturing cost per unit= overhead cost per unit calculated in #2 -total product cost per unit=add all these 3

Develop activity-based costing system

1) identify activities and estimate their total indirect costs 2) identify allocation base for each activity, estimate the toal quantity of allocation base 3) compute poar for each activity 4) allocate indirect costs to cost object -multiply poarXactual quantity. add all activities to find total moh;divide by # of units for moh cost per unit

Ambrosia Foods produces a gourmet condiment that sells for $18 per unit. Variable cost is $6 per​ unit, and fixed costs are $6,000 per month. If Ambrosia expects to sell 2,000 units, compute the margin of safety in units.​

1,500 units Margin of safety in units=expected sales-breakeven sales expected sales=2000 breakeven sales=(FC+target profit)/CM per unit= (6000+0)/(18-6)=500 2000-500=1500

A 15% increase in production volume will result in a

15% increase in total variable costs

He is currently producing 40 flintlock muskets per month. Data are as​ follows: Sales price per unit $800 Variable cost per unit 700 Fixed costs per month 3,000 If Vintage expects to sell 50 units per​ month, how much is his margin of safety expressed in sales​ revenue?

16,000 -CM per unit=800-700=100 -Breakeven sales in units=(FC+target profit)/CM per unit =(3000+0)/100=30 units -Margin of safety in units=expected sales-breakeven sales=50-30=20 -Margin of safety in $=Margin of safety in units* sales price= 20*800=$16000

The guitars sell for $600​, and the fixed monthly operating costs are as​ follows: Rent and utilities $600 Wages and benefits to luthier 2,500 Other expenses 482 ​Martin's accountant told him about contribution margin​ ratios, and Martin understood clearly that for every dollar of​ sales, ​$0.60 went to cover his fixed​ costs, and anything above that point was profit. Martin wishes to earn $2,500 of operating profit each month. Calculate the number of guitars Martin will need to sell to achieve the target profit.​

17 guitars 2500=Net sales revenue-VC-FC 2500=.6(600)x-(600+2500+482) round up

A cellphone service provider charges $6.00 per month and $0.20 per minute per call. If a​ customer's current bill is $55​, how many minutes did the customer​ use?

245 minutes

Sunshine Blender Company sold 2,000 units in October at a sales price of $40 per unit. The variable cost is $25 per unit. Calculate the total contribution margin.

30,000 -net sales revenue minus VC (40-25)(2000)

Stealth, Inc. produces two types of​ drones, rotary and fixed wing. Stealth estimated $765,000 of manufacturing​ overhead, and 51,000 machine hours for the year. The allocation base for overhead costs is machine hours. The rotary model actually consumed 29,000 machine​ hours, and the fixed wing type consumed 22,000 machine hours. How much overhead is allocated to the fixed wing​ model?

330,000 -allocated overhead=(765000/51000)*22000

Harmony Company sells hand−knit scarves. Each scarf sells for $30. The company pays $65 to rent vending space for one day. The variable costs are $12 per scarf. How many scarves should the company sell each day in order to break​ even?

4 scarves (30-12)x-65=0

Gizmo​ Company, a manufacturer of small​ appliances, had the following​ activities, allocated​ costs, and allocation​ bases: What is the cost per hour for the account inquiry​ activity?

=allocated costs/allocation base =68000/3000 hours=22.67

Calculate the contribution margin ratio Sales price per unit=56 VC per unit=12

CM ratio= (Sales price-VC)/sales price 78.57%= (56-12)/56

Total VC

DL cost, DM cost, Packaging costs

Borsetta, Inc. manufactures two kinds of bags—totes and satchels. The company allocates manufacturing overhead using a single plantwide rate with direct labor cost as the allocation base. Estimated overhead costs for the year are $25,000 Direct materials cost per unit- $33 totes, $44 satchels Direct labor cost per unit-$54, $62 Number of units-540, 370

DL cost=DL per unit*number of units -DL cost ($29,160 totes, $22,940 satchels) -add for both totes and satchels to get total DL cost of $52,100 Direct labor is allocation base pr= est oh/allocation base=25000/521000=.4798 allocated overhead=.4798*22940= $11007

During the current​ year, Dubois, Inc. incurred $6,000 in fixed costs and $20,000 in variable costs. If the number of units produced is halved next​ year, the company will incur 3,000 as fixed costs and $10,000 as variable costs

FALSE

Target cost is calculated by deducting desired gross profit from target sales price

FALSE

Barnes Company sells two​ products, X and Y. For the coming​ year, Barnes predicts sales of 5,000 units of X and 10,000 units of Y. The contribution margins per unit of products X and Y are $5.00 and $6.00​, respectively. The weighted−average contribution margin is $8.50 per unit.

FALSE 5/3 + 6(2/3)=5.66

Traditional costing provides more detailed information on costs of activities and the drivers of these costs than activity−based costing.

False

Direct material costs and direct labor costs cannot be easily traced to products.​ Therefore, they are allocated to products.

False - these are easily traced and assigned to product (cost object) - moh is allocated to product

Gitli Company sells its product for $60 and has variable cost of $35 per unit. The total fixed costs are $26,000. What will be the effect on the breakeven point in units if variable cost increases by $5 due to an increase in the cost of direct materials?

It will increase by 260 units break even point Bep b4=fc/cm = 26000/(60-35) Bep after=26000/(60-40)

The guitars sell for $705​, and the fixed monthly operating costs are as​ follows: Rent and utilities $800 Wages and benefits to luthier 2,500 Other expenses 480 ​Pheonix's accountant told him about contribution margin​ ratios, and Pheonix understood clearly that for every dollar of​ sales, ​$0.60 went to cover his fixed​ costs, and anything above that point was profit. Pheonix is planning to increase the sales price to $760. What impact will the increase in sales price have on the contribution margin​ ratio?

It will increase to approximately 62.89% Contribution margin ratio= (net sales revenue-VC)/net sales revenue -Old CM per unit: 705*.6=423 -New CM: 423+ (760-705)=478 -CM ratio: (478/760)*100=62.89

Mezine Inc. sells a product with a contribution margin of $15 per unit. Fixed costs are $1,800 per month. How many units must Mezine sell to break​even?

Required sales in units= (FC+Target profit)/CM per unit =(1800+0)/15=120

The Circle Clock Company sells a particular clock for $25. The variable costs are $13 per clock and the breakeven point is 250 clocks. The company expects to sell 300 clocks this year. If the company actually sells 400 clocks, what effect would the sale of additional 100 clocks have on operating​ income?

The sale of an additional 100 clocks would increase operating income by the amount of the additional contribution margin. The total effect would amount to $1200 sales price per unit-VC per unit=CM per unit CM *(actual units sold-anticipated units sold) =additional operating income (25-13)(400-300)=1200

Whirlwind Fan Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling fan has 20 separate parts. The direct material cost is $90, and each ceiling fan requires 2.50 hours of machine time to manufacture.

What is the cost of materials handling per ceiling fan? POAR for materials handling is $0.04 and the allocation base is number of parts. Therefore cost of materials handling per fan is .04*20=$0.80

Sensitivity analysis

a special case of what-if analysis, is the study of the impact on other variables when one variable is changed 1) change in sales price: increase -> increasing in CM per unit, decrease in breakeven point -required sales in units=(fc+target profit)/CM ratio -CM ratio=new price-VC 2) Change in VC -increase leads to decrease in CM per unit, increase breakeven point CM ratio=price-new VC 3) Changes in FC -increase has no effect on CM per unit, increases breakeven point -decrease decreases breakeven point

The relevant production range for Challenger Trailers, Inc. is between 130,000 units and 180,000 units per month. If the company produces beyond 180,000 units per month,

both the fixed costs and the variable cost per unit may change

Sales mix (product mix)

combination of products that make up total sales 1) Weighted average contribution margin per unit: sales price per unit-VC per unit=contribution margin per unit contribution margin per unit*sales mix in units= CM -add CM for all products and divide by total sales mix in units=Weighted average CM per unit 2) Breakeven point in units (required sales in units)= (fc+target profit)/(weighted average CM per unit) 3) multiply Breakeven point in units for each product in the sales mix by each product's proportion of the sales mix -breakeven sale of product= package breakeven in units*sales mix fraction -multiply this by the sales price and add them all together to get sales revenue

Which of the following decisions will most likely involve the use of activity-based management?

decisions related to the pricing of a product

Product cost

dm+dl+moh

fixed costs

do not change in total over wide range of volume activity -total fixed costs is constant, fixed cost per unit changes with increase in volume -more volume, less fc per unit -rent

poar (pre determined overhead allocation rate)

est moh/est quantity of the allocation base

Treasurers, Inc., a manufacturer of gift articles, uses a single plantwide rate to allocate indirect costs with machine hours as the allocation base. Estimated overhead costs for the year are $6,000,000. Estimated machine hours are 29,000. During the year, the actual machine hours used were 50,000. Calculate the predetermined overhead allocation rate.

est oh/est allocation base $207

Margin of Safety

evaluate risk of current operations, plans for the future -in units: expected sales-breakeven sales -in dollars: margin of safety in units * sales price per unit -ratio: margin of safety in units/ expected sales in units

________ are costs incurred after the company delivers poor-quality goods or services to customers and then has to make things right with the customer.

external failure costs

cost based pricing

full product cost= cost to develop, produce, deliver product =total manufacturing cost+ nonmanufacturing costs (aka operating exxpenses) sales price= desired profit+full product cost target cost=target sales price-desired net profit (priceXprofit %)

mixed costs

have both fixed and variable components -total costs=total FC + total VC -phone plan

When the sales price per unit decreases, the breakeven point

increases

Which of the following would most likely be treated as an activity in an activity-based costing system?

machine processing

target cost

max. cost to develop, produce, and deliver product or service and earn desired profit =target sales price-desired net profit

multiple department rates (different allocation bases)

moh per unit=(moh dept 1+ moh dept 2)/total units

Income statement calssifies costs by behavior (vc and FC)

net sales revenue- VC= contribution margin -FC = operating income -contribution margin=net sales revenue-VC =amount that contributes to covering FC -unit contribution margin=net sales revenue per unit-VC per unit -Contribution margin ratio= contribution margin/net sales revenue =unit contribution margin/net sales revenue per unit

cost structure

of a company is the proportion of FC to VC -operating leverage: predicts the effects that FC will have on changes in operating income when sales volume changes -degree of operating leverage= CM/operating income -1.25 means the % change in operating income will be 1.25 times the % change in sales

CVP assumption

only changes in volume affects total costs, which increase/decrease VC and mixed costs -costs increase more when sales volume is increasing than costs decrease when sales volume is decreasing=cost stickiness

allocated overhead cost

poar X actual quantity of base

variable costs- start of chapter 20

remain constant per unit but change in total as volume changes -more volume, more variable cost -direct and indirect materials

Breakeven point

sales level at which the company does not earn a profit or loss, has operating income of zero -methods to estimate: 1)Equation approach: operating income=net sales revenue-VC-FC -total costs=VC+FC -set operating income=0 2) Contribution Margin approach: required sales in units= (fixed costs+target profit)/contribution margin per unit -prove with: net sales revenue-VC=Contribution margin-FC=operating income=0 3) contribution margin ratio approach: -required sales in terms of sales dollars, not units -CM ratio: contribution margin/net sales revenue -required sales in dollars=(FC+ target profit)/ contribution margin ratio -target profit= operating income resulting when Net sales revenue-VC-FC= management's profit goal

Robusta Coffee Importers sold 7000 units in October at a sales price of $45 per unit. The variable cost is $20 per unit. The monthly fixed costs are $8000. What is the operating income earned in October?

sales-vc=cm cm-fc=operating income $167,000

Single plantwide rate

use predetermined overhead allocation rate allocated moh cost=poar X actual allocation base unit cost=dm per unit+dl per unit+moh per unit

high-low method

used to separate a mixed cost into its fixed and variable components 1) identify highest and lowest levels of activity variable cost per unit = (cost of highest volume-cost of lowest volume)/(highest volume-lowest volume) =change in total cost/change in volume of activity 2) total fc= total mixed costs- (VC per unit*number of units) = total mixed costs - total variable cost 3) total mixed costs= (variable cost per unit*# of units)+total FC